CALIFORNIA MUNI FUND, 485BPOS, 1998-05-01

CALIFORNIA MUNI FUND
485BPOS, 1998-05-01

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AS FILED VIA EDGAR WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MAY 1, 1998.

FILE NO. 2-82143
ICA NO. 811-3674

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

PRE-EFFECTIVE AMENDMENT NO. _____

POST-EFFECTIVE AMENDMENT NO. 15 [X]

AND

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]

AMENDMENT NO. 18 [X]

THE CALIFORNIA MUNI FUND
------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

90 WASHINGTON STREET
19TH FLOOR
NEW YORK, NEW YORK 10006
------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

(212) 635-3000
--------------
(AREA CODE AND TELEPHONE NUMBER)

COPIES TO:
VINCENT J. MALANGA CARL FRISCHLING, ESQ.
90 WASHINGTON STREET KRAMER, LEVIN, NAFTALIS & FRANKEL
19TH FLOOR 919 THIRD AVENUE
NEW YORK, NEW YORK 10006 NEW YORK, NEW YORK 10022

- --------------------------------------------------------------------------------
(NAME AND ADDRESS OF AGENT FOR SERVICE)

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:

|X| Immediately upon filing pursuant to | | on ( ) pursuant to
paragraph (b) paragraph (b)

| | 60 days after filing pursuant to | | on ( ) pursuant to
paragraph (a)(1) paragraph (a)(1)

| | 75 days after filing pursuant to | | on ( ) pursuant to
paragraph (a)(2) of paragraph (a)(2) rule 485.

IF APPROPRIATE, CHECK THE FOLLOWING BOX:

| | THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST- EFFECTIVE AMENDMENT.

<PAGE>

THE CALIFORNIA MUNI FUND
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET

Form N-1A
Item Number
- -----------

Part A Prospectus Caption
- ------ ------------------

1. Cover Page
2. Highlights; Fee Table
3. Financial Highlights
4. Investment Objective and Policies;
Investment Strategies; Special
Consideration; General Information
5.(a) Management
(b) Management
(c) *
(d) General Information
(e) Management
(f) *
6.(a) General Information
(b) *
(c) *
(d) *
(e) Cover Page; General Information
(f) Dividends and Tax Status
(g) Dividends and Tax Status
7.(a) *
(b) Determination of Net Asset Value
(c) Purchase of Shares - Exchange Privilege
(d) Purchase of Shares
(e) *
(f) Distribution Expenses
8. Redemption of Shares
9. *

<PAGE>

Part B. Statement Caption
- ------- -----------------

10. Cover Page
11. Table of Contents
12. *
13. Investment Objective and Policies;
Investment Restrictions; additional
Information Relating to Municipal
Obligations; Information With
Respect to California State and
Municipal Finances
14. Management of the Fund
15. *
16.(a) Management of the Fund
(b) Management of the Fund
(c) *
(d) *
(e) *
(f) Distribution Plan
(g) *
(h) Custodian Agreement and Independent
Accountants
(i) *
17.(a) Portfolio Transactions
(b) *
(c) Portfolio Transactions
(d) *
(e) *
18. See prospectus under General Information; Additional
Information about the Organization of the Fund
19.(a) See prospectus under Purchase of Shares
(b) See prospectus under Determination of Net
Asset Value
(c) *
20. Taxes
21. *
22. Calculation of Yield
23. Financial Statements

Part C Information required to be included in Part C is
set forth under the appropriate Item, so numbered in
Part C to this Registration Statement.

- ---------------------
* Not Applicable

<PAGE>
THE CALIFORNIA MUNI FUND

90 Washington St. * New York, New York 10006 * 1-800-225-6864

PROSPECTUS

MAY 1, 1998

The California Muni Fund (the "Fund") seeks to provide investors with 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. Of course, there can be no assurance that the
Fund's investment objective will be achieved.

The Fund intends to achieve its objective by investing in municipal bonds,
municipal notes and municipal commercial paper, the interest from which is
excluded from gross income for Federal income tax purposes and exempt from
California personal income tax. The Fund will limit its investments to (1)
municipal bonds that are rated within the four highest quality grades as
determined by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps,
Inc. ("Duff") or, if unrated, are judged by Fund management to be of comparable
quality, and (2) municipal notes and municipal commercial paper that are rated
within the three highest quality grades as determined by Moody's for municipal
notes, or within the three highest quality grades as determined by Moody's or
S&P for municipal commercial paper or, if unrated, are (i) obligations of
issuers having an issue of bonds rated within the four highest quality grades as
determined by Moody's, S&P, Fitch or Duff or (ii) guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities. While the
obligations in which the Fund may invest are generally deemed to have adequate
to very strong protection of principal and interest, those rated within the
lowest of the Fund's selected quality grades may have speculative
characteristics as well.

This Prospectus sets forth concisely the information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information containing additional information about the
Fund has been filed with the Securities and Exchange Commission. You may obtain
a copy of the Fund's Statement without charge by writing to the Fund at the
address listed above, or by calling (800) 322-6864. Shareholder inquiries may
also be placed through this number.

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

THE STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1998 IS HEREBY
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.

<PAGE>

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

TABLE OF CONTENTS

Highlights 2

Fee Table ................................................................ 3

Financial Highlights ..................................................... 4

Investment Objective and Policies ........................................ 5

Investment Strategies .................................................... 7

Special Considerations ................................................... 9

Calculation of Yield and Performance Data ................................ 10

Purchase of Shares ....................................................... 11

Redemption of Shares ..................................................... 13

Determination of Net Asset Value ......................................... 16

Distribution Expenses .................................................... 16

Management ............................................................... 17

Dividends and Tax Matters ................................................ 20

General Information ...................................................... 22

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

HIGHLIGHTS

What is The California Muni Fund?

The California Muni Fund is a non-diversified, open-end, management
investment company which seeks to provide investors with 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. There is no assurance, however, that the Fund will
achieve its stated objective. See "Investment Objective and Policies".

To achieve this objective, the Fund will invest only in municipal bonds,
municipal notes and municipal commercial paper which meet the Fund's specific
quality criteria (see "Investment Objective and Policies") and which generate
interest that is excluded for Federal income tax purposes and exempt from
California personal income tax.

Management

The Fund is a member of the Fundamental Family of Funds, a group of five
investment companies. Fundamental Portfolio Advisors, Inc. (the "Manager") is
the Fund's investment manager.

The Manager supervises and manages the Fund's investment portfolio and
directs the purchase and sales of its investment securities. The Manager
utilizes an investment committee to manage the assets of the Fund. See
"Management".

Tax-Free Income

The Fund is designed as a convenient investment vehicle for both large and
small investors who are subject to California income tax and who wish to keep
fully invested at competitive tax-free yields while maintaining liquidity of
their investment. Through the purchase of shares of the Fund, investors are able
to combine their investments into a portfolio that is professionally managed and
more varied than they could obtain individually. However, investors should bear
in mind that there are risk considerations associated with certain investment
policies of, and strategies employed by, the Fund, such as those relating to
investments in variable rate bonds, zero coupon bonds and lower quality
municipal obligations, and there can be no assurance that the investment
objective of the Fund will be achieved (see "Special Considerations").

How to Buy and Sell Shares of the Fund?

Shares of the Fund are offered for sale on a continuous basis without any
sales charge at the next determined net asset value per share (see "Purchase of
Shares" and "Determination of Net Asset Value"). Your purchase order becomes
effective immediately if it is received before 4:00 P.M. on any business day.
You may be charged a fee for effecting transactions in the Fund's shares through
securities dealers, banks or other financial institutions.

Shares are redeemable (may be sold) at your option without charge at the
next determined net asset value per share (see "Redemption of Shares"). The Fund
reserves the right, however, to liquidate an account with a value of less than
$100 on 60 days' notice.

2
<PAGE>

Shareholder Services and Privileges

For your convenience, the Fund provides certain services and privileges
which we have suited to your particular needs, including the Automatic
Investment Program and the Exchange, Check Redemption, Telephone Redemption and
Expedited Redemption Privileges (see "Purchase of Shares" and "Redemption of
Shares").

Monthly Dividends

The Fund declares dividends daily and pays them on a monthly basis,
eliminating the need for you to hold your shares until quarter-end to receive
dividend income. Dividends are automatically reinvested at net asset value in
additional Fund shares without any charge. You may elect, however, to receive
them in cash (see "Dividends and Tax Matters").

Management and the Fundamental Family of Funds

Fundamental Portfolio Advisors, Inc., 90 Washington Street, New York, New
York 10006, the Fund's investment manager (the "Manager") determines overall
investment strategy for the Fund, subject to the supervision of the Fund's
trustees (see "Management").

The Manager also acts as investment manager to several other mutual fund
portfolios in the Fundamental Family of Funds, including the New York Muni Fund
Series of Fundamental Funds, Inc., and the High-Yield Municipal Bond Series, the
Tax-Free Money Market Series and the Fundamental U.S. Government Strategic
Income Fund Series of Fundamental Fixed-Income Fund. Shares of such funds are
exchangeable for shares of the Fund (minimum $1,000 value) at the respective net
asset values per share without any charge and may be exchanged by telephone if
you have previously established this procedure with Firstar Trust Company (see
"Purchase of Shares").

FEE TABLE

Shareholder Transaction Expense

Sales Commission on Purchases ....................................... None
Sales Commission on Reinvested Dividends ............................ None
Redemption Fees ..................................................... None
Exchange Fees ....................................................... None

Annual Fund Operating Expenses
(as a percentage of average net assets)

Management Fees ..................................................... .50%
12b-1 Fees1 ......................................................... .50%
Other Expenses, net of reimbursement
Interest ........................................................ .42%
Other ........................................................... 1.95%
-----
Total Fund Operating Expenses (after waiver and/or reimbursement) ... 3.37%
Expenses Waived and/or Reimbursed ................................... .03%
-----
Total Fund Operating Expenses (before waivers and/or reimbursement .. 3.40%
-----
- ------------
1As a result of distribution fees of .50% per annum of the Fund's average daily
net assets, a long-term shareholder may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the Rules of the National
Association of Securities Dealers, Inc.

Example: You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:

1 year 3 years 5 years 10 years
$34 $104 $175 $366

The purpose of the foregoing table is to assist you in understanding the
various costs and expenses that you will bear directly and indirectly. (For more
complete descriptions of the various costs and expenses, see "Management",
"Distribution Expenses", and the Financial Statements included at the end of the
Fund's Statement of Additional Information.) The expenses and example appearing
in the preceding table have been restated to reflect current fees and operating
expenses. The example shown in the table should not be considered a
representation of past or future expenses, and actual expenses may be greater or
less than those shown.

3
<PAGE>

FINANCIAL HIGHLIGHTS

The following selected per share data and ratios for each of the years in
the ten-year period ended December 31, 1997 has been audited by McGladrey &
Pullen, LLP, independent certified public accountants, whose report on the
Financial Statements and the related notes appear at the end of the Fund's
Statement of Additional Information.

Year Ended December 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net Asset Value, Beginning of Period ...... $ 7.79 $ 8.91 $ 7.10 $ 9.49 $ 8.81 $ 8.80 $ 8.64 $ 8.82 $ 8.87 $ 8.52
Income from investment operations:
Net investment income ..................... 0.376 0.409 0.419 0.553 0.563 0.604 0.571 0.553 0.535 0.603
Net realized and unrealized gain (losses)
on investments .......................... 0.480 (1.120) 1.810 (2.390) 0.876 0.010 0.160 (0.180) 0.167 0.400
Total from investment operations ...... 0.856 (.711) 2.229 (1.837) 1.439 0.614 0.731 0.373 0.702 1.003
Less Distributions
Dividends from net investment income ...... (0.376) (0.409) (0.419) (0.553) (0.563) (0.604) (0.571) (0.533) (0.535) (0.603)
Dividends from net realized gains ......... - - - - (0.196) - - - (0.216) (0.051)
Total distributions ................... (0.376) (0.409) (0.419) (0.553) (0.759) (0.604) (0.571) (0.553) (0.751) (0.654)
Net Asset Value, End of Year .............. 8.27 $ 7.79 $ 8.91 $ 7.10 $ 9.49 $ 8.81 $ 8.80 $ 8.64 $ 8.82 $ 8.87
Total Return .............................. 11.33% (8.01%) 32.02% (19.89%) 16.80% 7.23% 8.75% 4.39% 5.53% 12.18%

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000) ............. 13,832 16,252 12,622 10,558 16,280 11,549 9,669 9,849 10,766 10,298
Ratios to Average Net Assets:
Interest expense ........................ 0.42% 0.45% 0.39% 0.98% 0.39% 0.16% 0.14% 0.21% 0.19% 0.15%
Operating expenses(1) ................... 2.95% 2.81% 2.81% 2.50% 1.77% 1.47% 2.24% 2.27% 2.30% 1.40%
Total expenses ........................ 3.37% 3.26% 3.20% 3.48% 2.16% 1.63% 2.38% 2.48% 2.49% 1.55%
Net investment income ................... 4.55% 4.88% 5.02% 6.80% 6.04% 6.87% 6.58% 6.36% 5.95% 6.88%
Portfolio turnover rate ................... 70.86% 89.83% 53.27% 15.88% 51.26% 18.91% 47.34% 42.61% 86.38% 57.62%

BANK LOANS
Amount outstanding at end of period
(000 omitted) ........................... $ 275 $ 0 $ 0 $1,292 $3,714 $ 0 $ 645 $ 12 $ 151 $ 20
Average number of bank loans outstanding
during the period (000 omitted) ......... $ 664 $ 823 $ 642 $1,620 $ 958 $ 274 $155T $ 112T $ 146T $ 84T
Average number of shares outstanding
during the period (000 omitted) ......... $1,609 $1,768 $1,635 $1,711 $1,517 $1,214 $1,115T $1,192T $1,183T $1,089T
Average amount of debt per share during
the period .............................. $ 0.41 $ 0.47 $ 0.39 $ 0.95 $ 0.68 $ 0.25 $ 0.14 $ 0.18 $ 0.12 $0.08

<FN>
- ------------
T Monthly Average.

(1) The Manager and others assumed certain expenses of the Fund during the years ended December 31, 1988, 1989, 1990, 1991, 1992,
1993 and 1997. Had such expenses not been so assumed, the ratio of operating expenses, excluding interest expense, would have
been 4.13%, 2.55%, 2.81%, 2.70%, 2.13%, 2.66% and %, respectively.
</FN>
</TABLE>

4
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The Fund's objective is to provide you with 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. To achieve this objective, the Fund invests only in municipal bonds,
municipal notes and municipal commercial paper (hereinafter collectively
referred to as "municipal obligations") which generate interest that is, in the
opinion of counsel to the issuer, excluded for Federal income tax purposes and
exempt from California personal income tax, and which meet the following quality
criteria (subject, of course, to the Fund's permissible "Investment Strategies"
described below).

The Fund's investment objective and policies and the investment strategy
with respect to the borrowing activities described below, unless otherwise
noted, are fundamental policies that cannot be changed without the approval of
the holders of a majority of the Fund's outstanding shares. A more detailed
explanation of certain investment policies and the Fund's fundamental investment
restrictions is contained in the Fund's Statement of Additional Information. A
non-fundamental investment restriction of the Fund is that it may not invest
more than 10% of its total assets in municipal obligations of California issuers
that are illiquid or have limited marketability.

As used in this Prospectus (excepting the specific reference in the second
paragraph under the caption "General Information"), the phrase "majority of the
Fund's outstanding shares" means the vote of the lesser of (1) 67% of the Fund's
shares present at a meeting of shareholders if the holders of more than 50% of
the outstanding shares are present in person or by proxy at such a meeting or
(2) more than 50% of the Fund's outstanding shares.

With respect to municipal bonds, the Fund will only invest in those issues
which are rated within the four highest quality grades as determined by Moody's,
S&P, Fitch or Duff or which, if unrated, are judged by Fund management to be of
comparable quality. With respect to municipal notes and municipal commercial
paper, the Fund will only invest in those issues which are rated within the
three highest quality grades as determined by Moody's for municipal notes, or
within the three highest quality grades as determined by Moody's or S&P for
municipal commercial paper or which, if unrated, are (i) obligations of issuers
having an issue of bonds rated within the four highest quality grades as
determined by Moody's, S&P, Fitch or Duff or (ii) guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities. There can be
no assurance that the Fund's objective will be achieved. The Fund's ability to
achieve its objective is subject to the continuing ability of the issuers of
municipal obligations to meet their principal and interest payments, and is
further subject to fluctuations in interest rates as well as other factors.

While the municipal obligations in which the Fund may invest are generally
deemed to have adequate to very strong protection of principal and interest,
certain of the obligations rated within the lowest of the quality grades
described above (i.e., those rated by Moody's as Baa for municipal bonds, MIG-3
for municipal notes and Prime-3 for municipal commercial paper, or those rated
by S&P, Fitch or Duff as BBB for municipal bonds, or those rated by S&P as A-3
for municipal commercial paper) may have speculative characteristics as well.
For example, obligations rated Baa by Moody's have been determined by Moody's to
be neither highly protected nor poorly secured, and although interest payments
and principal security appear adequate for the present, certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Similarly, obligations rated BBB by S&P, Fitch or Duff are
regarded by S&P, Fitch and Duff as having adequate capacity to pay interest and
repay principal, and while such obligations normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
obligations in this category than in higher rated categories.

It should be noted that ratings are general and not absolute standards of
quality or guarantees of the creditworthiness of an issuer. Subsequent to its
purchase by the Fund, an issue may cease to be rated or the rating may be
reduced. Such an event would not require the Fund to dispose of the issue, but
Fund management would consider such an event in determining whether the Fund
should continue to hold the issue in its portfolio. (See "Special
Considerations-Special Risk Factors Relating to Lower Rated Securities, Zero
Coupon Bonds and Pay-in-Kind Bonds" for a discussion on downgraded securities
that are retained by the Fund.) The purchase of unrated securities is subject to
guidelines that may be set for Fund management from time to time by the Fund's
Board of Trustees. A description of the ratings of municipal obligations as
determined by Moody's, S&P, Fitch and Duff is included in the Fund's Statement
of Additional Information.

5
<PAGE>

As a non-diversified investment company, the Fund could conceivably invest
all of its assets in one issuer. However, in order to qualify as a "regulated
investment company" for Federal income tax purposes, the Fund must comply with
the provisions of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), which limit the aggregate value of all holdings (except U.S.
Government and cash items, as defined in the Code), each of which exceeds 5% of
the Fund's total assets, to an aggregate amount of 50% of such assets, and which
further limit the holdings of a single issuer (with the same exceptions) to 25%
of the Fund's total assets. Therefore, for our purposes, non-diversification
means that, with regard to the Fund's total assets, 50% of such assets may be
invested in as few as two single issuers. (These limits are measured at the end
of each quarter.) In the event of decline of creditworthiness or default on the
obligations of one or more such issuers exceeding 5%, an investment in the Fund
will involve greater risk than in a fund that has a policy of diversification.

Municipal Obligations

Municipal obligations include debt obligations of states, territories and
possessions of the United States and of any political subdivisions thereof, such
as counties, cities, towns, districts and authorities. Municipal obligations are
issued to raise funds for a variety of purposes, including construction of a
wide range of public facilities, refunding of outstanding obligations, obtaining
funds for general operating expenses, and lending to other public institutions
and facilities. In addition, certain types of qualified private activity bonds
are issued by, or on behalf of, public authorities to obtain funds for privately
operated facilities.

Also included within the definition of municipal obligations are short-term,
tax-exempt debt obligations, known as municipal notes, which are generally
issued in anticipation of receipt by the issuer of revenues from taxes, the
issuance of longer term bonds, or other sources. States, municipalities, and
other issuers of tax-exempt securities may also issue short-term debt, often for
general purposes, known as "municipal commercial paper". All of these
obligations are included within the term "municipal obligations", as used in
this Prospectus, if their interest payments are excluded for Federal income tax
purposes.

Yields on municipal obligations depend on a variety of factors, including
the general condition of the money and municipal securities markets, the size of
a particular offering, the maturity of the obligation and the rating of the
issue. Unlike other types of securities, municipal obligations have
traditionally not been subject to regulation by, or registration with, the
Securities and Exchange Commission.

The two principal classifications of municipal obligations are general
obligation bonds and revenue bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from only the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source. Qualified
private activity bonds that are municipal obligations are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of the
issuer of such bonds. The credit quality of qualified private activity bonds is
usually related to the credit standing of the industrial user involved. The Fund
reserves the right to make unlimited investments in qualified private activity
bonds, if such bonds meet the Fund's investment criteria. This policy, however,
may cause the Fund to be an inappropriate investment for entities that are
"substantial users" (or related persons thereof) of facilities financed by such
bonds (see "Dividends and Tax Status" herein for more details).

Other types of municipal obligations include municipal lease obligations
which are issued by a state or local government or authority to acquire land and
a wide variety of equipment and facilities. These obligations typically are not
fully backed by the municipality's credit, and their interest may become taxable
if the lease is assigned. If the funds are not available for the following
years' lease payments the lease may terminate, with the possibility of default
on the lease obligation and significant loss to the Fund. Certificates of
participation in municipal lease obligations or installment sales contracts
entitle the holder to a proportionate interest in the lease-purchase payments
made.

There are also a variety of hybrid and special types of municipal
obligations as well as numerous differences in the security of municipal
obligations, both within and between the two principal classifications described
above (see the Fund's Statement of Additional Information for greater details).

6
<PAGE>

Portfolio Transactions and Turnover

The Manager provides the Fund with investment advice and recommendations for
the purchase and sale of portfolio securities. All orders for the purchase and
sale of portfolio securities are placed by the Manager, subject to the general
control of the Fund's trustees.

In seeking to achieve the Fund's objective, the Manager will adjust the
maturity distribution of the Fund's portfolio in anticipation of movements in
interest rates. Longer term securities have historically yielded more than
shorter term securities, but from time to time, the normal yield relationships
between longer and shorter term securities have been reversed. Furthermore,
longer term securities have historically been subject to greater and more rapid
price fluctuations. In periods of rising interest rates, the market value of
municipal obligations generally declines in order to bring the current yield in
line with prevailing interest rates. Conversely, in periods of declining
interest rates, the market value of municipal obligations generally rises.
Although fluctuating interest rates affect the market value of all municipal
obligations, short-term obligations are generally less sensitive to such factors
than long-term obligations. The Manager will attempt to take advantage of price
variability between different sectors of the market, i.e., long, intermediate,
or short or general obligation versus revenue bonds, in order to increase the
Fund's yield by making appropriate purchases and sales of portfolio securities.

Securities with the same general quality rating and maturity, but having
different purposes for issuance, often tend to trade at different yields.
Similarly, securities issued for similar purposes and with the same general
maturity characteristics, but which vary according to the creditworthiness of
their respective issuers, tend to trade at different yields. These yield
differentials tend to fluctuate in response to political and economic
developments as well as temporary imbalances in normal supply and demand
relationships. The Manager monitors these fluctuations closely and will adjust
the Fund's portfolio to take advantage of disparities that may arise. The
Manager may also engage in short-term trading when it believes it is consistent
with the Fund's investment objective.

The frequency of portfolio transactions-the Fund's turnover rates-will vary
from year to year depending upon market conditions. While it is impossible to
predict the number of transactions that will be effected by the Fund, it is
anticipated that the Fund's portfolio turnover rate will not exceed 300%.
However, when Fund management deems it appropriate due to market or other
conditions, the Fund's turnover rate may be greater than anticipated. Because a
high turnover rate increases transaction costs and the possibility of taxable
short-term gains (see "Dividends and Tax Matters"), the Manager weighs the added
costs of short-term investment against anticipated gains.

INVESTMENT STRATEGIES

In seeking to achieve its investment objective, the Fund utilizes certain
investment strategies, such as borrowing to purchase additional securities,
investing in participation interests and variable rate instruments and
purchasing municipal obligations that are offered on a "when-issued" basis.

When-lssued Purchases

Municipal securities are frequently offered on a "when-issued" basis. When
so offered, the price and coupon rate are fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued securities take
place at a later date. Normally, the settlement date occurs between 15-45 days
from the date of purchase. During the period between purchase and settlement, no
interest accrues to the purchase. The price that the Fund would be required to
pay may be in excess of the market value of the security on the settlement date.
While securities may be sold prior to the settlement date, the Fund intends to
purchase such securities for the purpose of actually acquiring them unless a
sale becomes desirable for investment reasons. At the time the Fund makes a
commitment to purchase a municipal security on a when-issued basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. That value may fluctuate from day to day in the same manner as
values of other

7
<PAGE>

municipal securities held by the Fund. The Fund will establish a segregated
account with its custodian bank in which it will maintain cash or liquid debt
securities determined daily to be equal in value to its commitments for
when-issued securities. Generally, both the when-issued securities and the
securities held in the segregated account will tend to experience appreciation
when interest rates decline and depreciation when interest rates increase.
Accordingly, the purchase of when-issued securities may increase the volatility
of the Fund's net asset value. The Fund may invest in when-issued securities
without limitation.

At such time as the Fund is required to pay for when-issued securities, it
will meet its obligation from then-available cash flow, sale of the securities
held in the separate account, sale of other securities, or (although it would
not normally expect to do so) from the sale of the when-issued securities
themselves (which may have a market value greater or less than the Fund's
payment obligation). Sale of securities to meet such obligations carries with it
a greater potential for the realization of capital gains, which are not excluded
from gross income for Federal, state or local income tax purposes.

Participation Interests, Variable and Inverse Floating Rate Instruments

The Fund may purchase participation interests from financial institutions.
These participation interests give the purchaser an undivided interest in one or
more underlying municipal obligations.

The Fund may also invest in municipal obligations which have variable
interest rates that are readjusted periodically. Such readjustment may be based
either upon a predetermined standard, such as a bank prime rate or the U.S.
Treasury bill rate, or upon prevailing market conditions. Many variable rate
instruments are subject to redemption or repurchase at par on demand by the Fund
(usually upon no more than seven days' notice). All variable rate instruments
must meet the quality standards of the Fund. The Manager will monitor the
pricing, quality and liquidity of the variable rate municipal obligations held
by the Fund.

The Fund may purchase inverse floaters which are instruments whose interest
rates bear an inverse relationship to the interest rate on another security or
the value of an index. Changes in the interest rate on the other security or
index inversely affect the residual interest rate paid on the inverse floater,
with the result that the inverse floater's price will be considerably more
volatile than that of a fixed-rate bond. For example, a municipal issuer may
decide to issue two variable rate instruments instead of a single long-term,
fixed-rate bond. The interest rate on one instrument reflects short-term
interest rates, while the interest rate on the other instrument (the inverse
floater) reflects the approximate rate the issuer would have paid on a
fixed-rate bond, multiplied by two, minus the interest rate paid on the
short-term instrument. Depending on market availability, the two portions may be
recombined to form a fixed-rate municipal bond. (See "Special Risk Factors
Relating to Inverse Floating Rate Instruments").

The Fund may invest in municipal securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or "cap." The
amount of such an additional interest payment typically is calculated under a
formula based on a short-term interest rate index multiplied by a designated
factor.

Borrowing For Investment

The Fund may borrow money to purchase additional portfolio securities but
only from banks in amounts up to 20% of its total assets. The Fund is also
permitted to pledge up to 10% of the value of its total assets to secure such
borrowings. Borrowing for investment increases both investment opportunity and
investment risk. Such borrowings in no way affect the Federal or California
State tax status of the Fund or its dividends. If the investment income on
securities purchased with borrowed money exceeds the interest paid on the
borrowing, the net asset value of the Fund's shares will rise faster than would
otherwise be the case. On the other hand, if the investment income fails to
cover the Fund's costs, including the interest on borrowings or if there are
losses, the net asset value of the Fund's shares will decrease faster than would
otherwise be the case. This is the speculative factor known as leverage.

The Investment Company Act of 1940 (the "1940 Act") requires the Fund to
maintain asset coverage of at least 300% for all such borrowings, and should
such asset coverage at any time fall below 300%, the Fund would be required to
reduce its borrowings within

8
<PAGE>

three days to the extent necessary to meet the requirements of the 1940 Act. To
reduce its borrowings, the Fund might be required to sell securities at a time
when it would be disadvantageous to do so.

In addition, because interest on money borrowed is a Fund expense that it
would not otherwise incur, the Fund may have less net investment income during
periods when its borrowings are substantial. The interest paid by the Fund on
borrowings may be more or less than the yield on the securities purchased with
borrowed funds, depending on prevailing market conditions.

SPECIAL CONSIDERATIONS

Special Risk Factors Relating to California Issuers

Because the Fund intends to limit its investments to municipal obligations
which generate interest that is excluded for Federal income tax purposes and
exempt from California personal income tax, you should carefully consider the
special risks inherent in the investment of municipal obligations of California
issuers. Between October 1991 and July 1994 the State of California's bond
ratings were lowered from AAA to A by S&P, from AAA to A by Fitch and from Aaa
to A1 by Moody's. From mid-1990 to late 1993, California experienced its deepest
recession since the 1930's. As a consequence of large budget imbalances, the
State of California has depleted its available cash resources and has had to use
a series of external borrowings to meet its cash needs. Risks also result from
certain amendments to the California Constitution and other statutes that limit
the taxing and spending authority of California governmental entities, as well
as from the general financial condition of the State of California. These
circumstances may have the effect of impairing the ability of California issuers
to pay interest on, or repay the principal of, their municipal obligations. A
more detailed discussion of this subject is contained in the Fund's Statement of
Additional Information. If in the future an adequate supply of municipal
obligations of California issuers ceased to be available, the Fund's Board of
Trustees would consider recommending alternatives to shareholders, such as
changing the Fund's investment objective or liquidating the Fund. The Manager
does not believe that the current economic conditions in California will have a
significant adverse effect on the Fund's ability to invest in municipal
obligations.

Special Risk Factors Relating to Lower Rated Securities,
Zero Coupon Bonds and Pay-in-Kind Bonds

You should carefully consider the relative risks of the Fund's retaining
downgraded securities in its investment portfolio. These are bonds such as those
rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff. They
generally are not meant for short-term investing and may be subject to certain
risks with respect to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated fixed-income securities. Bonds rated Ba by
Moody's are judged to have speculative elements; their future cannot be
considered as well assured and often the protection of interest and principal
payments may be very moderate. Bonds rated BB by S&P, Fitch or Duff are regarded
as having predominantly speculative characteristics and, while such obligations
have less near-term vulnerability to default than other speculative grade debt,
they face major ongoing uncertainties or exposure to adverse business, financial
or economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. Bonds rated CC by S&P, Fitch or Duff are
regarded as having the highest degree of speculation; while such bonds may have
some small degree of quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated as low as Caa by Moody's may be in default or may present elements
of danger with respect to principal or interest.

Retention of downgraded bonds rated Ba or lower by Moody's and BB or lower
by S&P, Fitch or Duff, while generally providing greater income and opportunity
for gain than investments in higher rated bonds, usually entail greater risk of
principal and income (including the possibility of default or bankruptcy of the
issuers of such bonds), and may involve greater volatility of price (especially
during periods of economic uncertainty or change) than investments in higher
rated bonds. However, since yields may vary over time, no specific level of
income can ever be assured. These lower rated, high yielding securities
generally tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates. These lower
rated securities will also be affected by the market's perception of their

9
<PAGE>

credit quality (especially during times of adverse publicity) and the outlook
for economic growth. In the past, economic downturns or an increase in interest
rates have under certain circumstances caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. The prices for these securities may be
affected by legislative and regulatory developments. For example, new Federal
rules require that savings and loan associations gradually reduce their holdings
of high-yield securities. An effect of such legislation may be to significantly
depress the prices of outstanding lower rated high yielding fixed income
securities. Factors adversely affecting the market price and yield of these
securities will adversely affect the Fund's net asset value. In addition, the
retail secondary market for these securities may be less liquid than that of
higher rated bonds; adverse conditions could make it difficult at times for the
Fund to sell certain securities or could result in lower prices than those used
in calculating the Fund's net asset value. Therefore, judgment may at times play
a greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during certain
adverse market conditions to sell these lower rated securities at their fair
value to meet redemption requests or to respond to changes in the market.

The Fund may invest in zero coupon securities and pay-in-kind bonds (bonds
which pay interest through the issuance of additional bonds), which involve
special considerations. These securities may be subject to greater fluctuations
in value due to changes in interest rates than interest-bearing securities and
thus may be considered more speculative than comparably rated interest-bearing
securities. In addition, current Federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
Federal income taxes, the Fund may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. Fund management anticipates that investments in zero
coupon securities and pay-in-kind bonds will not ordinarily exceed 25% of the
value of the Fund's total assets. (See "Additional Information Relating to Lower
Rated Securities" in the Statement of Additional Information.)

Special Risk Factors Relating to Inverse Floating Rate Instruments

Changes in interest rates inversely affect the rate paid on inverse floating
rate instruments ("inverse floaters"). The inverse floater's price will be more
volatile than that of a fixed rate bond. Additionally, some inverse floater's
contain a "leverage factor" whereby the interest rate moves inversely by a
"factor" to the benchmark. 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
inverse floaters. These instruments are designed to be highly sensitive to
interest rate changes and may subject the holders thereof to extreme reductions
of yield and possibly loss of principal.

Other Considerations

Because the Fund intends to be as fully invested as practicable in municipal
obligations of California issuers and will not invest in taxable obligations,
there may be occasions when the Fund may hold cash that is not earning income.
In addition, there may be occasions when in order to raise cash to meet
redemptions, the Fund might be required to sell securities at a loss.

The Fund's portfolio is non-diversified (see "Investment Objective and
Policies") and may have greater risk than a diversified portfolio.

It is expected that a substantial portion of the assets of the Fund will be
derived from professional money managers and investors who intend to invest in
the Fund as part of an asset-allocation or market-timing investment strategy.
These investors are likely to redeem or exchange their Fund shares frequently to
take advantage of anticipated changes in market conditions. The strategies
employed by investors in the Fund may result in considerable assets moving in
and out of the Fund. Consequently, the Trust expects that the Fund will
generally experience significant portfolio turnover, which will likely cause
higher expenses and additional costs.

CALCULATlON OF YIELD AND PERFORMANCE DATA

The Fund may from time to time include yield information in advertisements
or information furnished to existing or proposed shareholders. The Fund's yield
is computed by dividing the Fund's net investment income per share during a base
period of 30 days, or one month, by the net asset value per share of the Fund on
the last day of such base period. The resulting 30-day yield is then

10
<PAGE>

annualized pursuant to the bond equivalent annualization method described below.
The Fund's net investment income per share is determined by dividing the Fund's
net investment income during the base period by the average number of shares of
the Fund entitled to receive dividends during the base period. The Fund's 30-day
yield (computed as described above) is then annualized by a computation that
assumes the Fund's net investment income is earned and reinvested for a
six-month period at the same rate as during the 30-day base period and that the
resulting six-month income will again be generated over an additional period of
six months.

The Fund may also advertise from time to time its taxable equivalent yield.
The Fund's taxable equivalent yield is determined by dividing that portion of
the Fund's yield (calculated as described above) that is tax-exempt by one minus
the stated marginal Federal income tax rate and adding the product to that
portion, if any, of the Fund's yield that is not tax-exempt.

The Fund may also furnish to existing or prospective shareholders
information concerning the average annual total return on an investment in the
Fund for a designated period of time. The average annual total return quotation
for a given period is computed by determining the average annual compounded rate
of return that would cause a hypothetical investment made on the first day of
the designated period (assuming all dividends and distributions are reinvested)
to equal the resulting net asset value of such hypothetical investment on the
last day of the designated period.

The yield and average annual total return quotations of the Fund do not take
into account any required payments for Federal or state income taxes.

The Fund's yield and average annual total return will vary from time to time
depending on market conditions, the composition of the Fund's portfolio, and the
Fund's operating expenses. These factors and possible differences in the methods
used in calculating yields and returns should be considered when comparing the
Fund's performance information to information published with respect to other
investment companies and other investment vehicles. Yield and return quotations
should also be considered relative to changes in the value of the Fund's shares
and the risks associated with the Fund's investment objective and policies. At
anytime in the future, yield and return quotations may be higher or lower than
past yield or return quotations, and there can be no assurance that any
historical yield or return quotation will continue in the future.

The Fund may also include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include data
from Lipper Analytical Services, Inc. and Morningstar, Inc., or other industry
publications.

For more information regarding the computation of yield or average annual
total return quotations, see the Fund's Statement of Additional Information.

PURCHASE OF SHARES

You may purchase shares directly from the Fund without a sales charge on any
day the New York Stock Exchange is open for business. The public offering price
for shares purchased is the net asset value per share of the Fund next
determined after a purchase order becomes effective. Orders for the purchase of
Fund shares become effective (i) immediately, if received prior to 4:00 P.M. New
York time on any business day. Shares being purchased will begin accruing
dividends on the day following the date of purchase and continue to earn
dividends until the date of redemption. Information regarding transmittal of
funds by bank wire and procurement of a Federal Reserve Draft may be obtained
from your bank. All payments (including checks from individual investors) must
be in U.S. dollars. If your check does not clear, Firstar Trust Company will
cancel your purchase and charge you a $20 fee. Moreover, you could be liable for
any losses incurred.

The minimum initial purchase is $1,000 and the minimum subsequent purchase
is $100. Subsequent investments are made in the same manner as an initial
purchase is made.

All shares purchased are confirmed to you and credited to your account at
the net asset value determined as described herein under the heading
"Determination of Net Asset Value". Share certificates are issued only on
written request by you to Fundamental Family of Funds, c/o Firstar Trust
Company, P.O. Box 701, Milwaukee, WI 53201-0701. There is no charge for share
certificates.

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<PAGE>

Certificates are not issued for fractional shares. Certificates will only be
issued in amounts of 1,000 or more shares. The issuance of certificates may be
discontinued at any time without prior notice. The Fund reserves the right to
reject any purchase order. The Fund reserves the right to limit the number of
checks processed at any one time and will notify investors prior to exercising
this right.

Although shares of the Fund may be purchased without a sales charge if you
purchase them directly from the Fund, you may be charged a fee for effecting
transactions in the Fund's shares through securities dealers, banks, or other
financial institutions.

The Fundamental Automatic Investment Program offers a simple way to maintain
a regular investment program. The Fund has waived the initial investment minimum
for you when you open a new account and invest $100 or more per month through
the Fundamental Automatic Investment Program. The Fundamental Automatic
Investment Program allows you to purchase shares (minimum of $50 per
transaction) at regular intervals. Investments are made by transferring funds
directly from your checking, or bank money market account. At your option
investments can be made, once a month on either the fifth or the twentieth day,
or twice a month on both days.

To establish a Fundamental Automatic Investment Program, or to add this
option to your existing account simply complete an authorization form, which can
be obtained by calling 1-800-322-6864. You may cancel this privilege or change
the amount you invest at any time. Initial Program setup and any modifications
may take up to ten days to take effect. There is currently no charge for this
service, and the Fund may terminate or modify this privilege at any time.

Methods of Payment

Payment by Wire: An expeditious method of investing in the Fund is through
the transmittal of Federal funds by bank wire to Firstar Trust Company (the
"Bank"). Federal funds transmitted by bank wire to the Bank and received by it
prior to 4:00 P.M. New York time are priced at the net asset value determined on
such day. Federal funds received after 4:00 P.M. New York time will be available
on the next business day. Funds other than Federal funds transmitted by bank
wire may or may not be converted into Federal funds on the day received by the
Bank depending upon the time the funds are received and the bank wiring the
funds. We encourage you to make payment by wire in Federal funds. The Fund will
not be responsible for delays in the wiring system.

To purchase shares by wiring funds, instruct a commercial bank to wire your
money to:

. Instructions for new accounts should
specify the name, address, and social security number of each person in whose
name the shares are to be registered and the name of the Fund. If you are an
existing shareholder, you need only furnish your account number and the name of
the Fund. Failure to submit required information may delay investment.

Payment by Mail: Purchase orders for which remittance is to be made by check
may be submitted directly by mail or otherwise to Fundamental Family of Funds,
c/o Firstar Trust Company, P.O. Box 701, Milwaukee, WI 53201-0701. Checks should
be made payable to Fundamental Family of Funds.

When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from a monthly account statement you have received or otherwise
indicate your account number and the name of the Fund.

Personal Delivery: For personal delivery instructions, please call the Fund
at (800) 322-6864.

Exchange for Municipal Securities: If you own municipal obligations meeting
the criteria for investment by the Fund, you may exchange such securities for
shares of the Fund. All such exchanges are discretionary with the Fund. If you
desire to make such an exchange, you should contact the Fund prior to delivering
any securities in order to establish that the securities are acceptable for
exchange, to determine what transaction charges, if any, may be imposed and to
obtain delivery instructions for such securities. The value of the securities
being exchanged will be determined in the same manner as the value of the Fund's
portfolio securities is determined (see "Determination of Net Asset Value"); the
specific method of determining the value will be provided to you on request. The
Fund reserves the right to refuse any such exchange, even if the securities
offered by an investor meet the general investment

12
<PAGE>

criteria of the Fund. An investor may recognize capital gain or loss for Federal
income tax purposes upon such exchange. Maturing bonds or detached coupons
submitted within five (5) business days of the payment date are credited on the
payment date.

Exchange Privilege: For your convenience, the Exchange Privilege permits you
to purchase shares in any of the other funds for which Fundamental Portfolio
Advisors, Inc. acts as the investment manager in exchange for shares of the Fund
at respective net asset values per share. Exchange instructions must be given in
writing to Fundamental Family of Funds, c/o Firstar Trust Company, P.O. Box 701,
Milwaukee, WI 53201-0701, the Fund's transfer agent, and must specify the number
of shares of the Fund to be exchanged (such shares must have a current value of
at least $1,000) and the fund into which the exchange is being made. If you have
previously established a Telephone Exchange Privilege, you may telephone
exchange instructions by calling Firstar Trust Company. However, there are other
considerations with respect to losses resulting from unauthorized telephone
transactions. For more detail, see "Redemption of Shares-Telephone Redemption
Privilege." Before any exchange, you must obtain, and should review, a copy of
the current prospectus of the fund into which your exchange is being made.
Prospectuses may be obtained by calling or writing the Fund.

The Exchange Privilege is only available in those states where such exchange
can legally be made and exchanges may only be made between accounts with
identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may realize a capital
gain or loss for Federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund at any time without
notice.

REDEMPTION OF SHARES

Shares of the Fund are redeemable at your option without charge at the next
determined net asset value following receipt by Firstar Trust Company of a
redemption request in proper order. To effect a redemption, you may utilize the
Check Redemption Privilege, the Telephone Redemption Privilege, the Expedited
Redemption Privilege, or the regular redemption procedure. Due to the cost of
maintaining an account, the Fund reserves the right to redeem an account
involuntarily, on not less than 60 days' written notice, at any time an investor
has reduced his or her account to less than $100. During the 60-day period, a
shareholder may increase his or her holdings to $100 or more, and thereby avoid
an involuntary redemption.

When redemption requests are received by Firstar Trust Company by 4:00 P.M.
New York time on any day during which the net asset value is determined (see
"Determination of Net Asset Value"), the redemption will be effective on such
day, and payment will be made on the next business day based on the net asset
value next determined after receipt of the redemption instruction. If a
redemption notice is received after 4:00 P.M. New York time, the redemption will
be effective on the next business day, and payment will be made thereafter on
the second business day. In the event you wish to liquidate your holdings, you
will be entitled to all dividends declared through the date of redemption. At
times, the Fund may be requested to redeem shares for which it has not yet
received good payment. The Fund may delay, or cause to be delayed, the mailing
of a redemption check until such time as it has assured itself that good payment
has been received from the purchase of such shares, which may take up to 15
days. In the case of payment by check, the determination of whether the check
has been paid by the paying institution generally takes up to seven days, but
may take longer. You may avoid this delay by purchasing shares by wire or by
using a certified or official bank check drawn on a U.S. bank. In the event of
delays in payment of redemption proceeds, the Fund will take all available steps
to expedite collection of the investment check. If shares were purchased by
check, you may write checks against such shares only after 15 days from the date
the purchase was executed. Shareholders who draw against shares purchased fewer
than 15 days from the date of original purchase, will be charged usual and
customary bank fees. The Fund reserves the right to suspend the right of
redemption or postpone the day of payment (1) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), (2) when the trading markets normally used by the Fund are restricted
or an emergency exists as determined by the Securities and Exchange Commission
(the "Commission") as to make the disposal of the Fund's investments or
determination of its net asset value unreasonably impracticable, or (3) for such
other periods as the Commission by order may permit to protect the Fund's
shareholders.

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<PAGE>

You may realize a taxable capital gain or loss when shares are redeemed,
depending on their net asset value. On all redemption requests (including
redemption checks) for joint accounts, the signatures of all joint owners are
required unless shareholders have designated otherwise.

Check Redemption Privilege

You may request that the Fund provide you with redemption checks ("Checks")
drawn on the Fund's account by either (i) completing the appropriate section of
the application order form or (ii) subsequent written request to the Fund. These
Checks will be sent only to the individuals in whose name the account is
registered and only to the address of record with the Fund. You may use the
Checks in any lawful manner and make them payable to the order of any person or
company in an amount of $100 or more. Dividends continue to be earned until the
Check clears the Fund account and is paid by Firstar Trust Company. The Fund may
delay, or cause to be delayed, payment of redemption proceeds until such time as
it or Firstar Trust Company has assured itself that good payment has been
collected for the purchase of such shares. In addition, the Fund reserves the
right not to honor Check redemption requests if the shares to be redeemed have
been purchased by check within seven days prior to the date the redemption
request is received by Firstar Trust Company unless the check used for
investment has been cleared for payment by your bank. You will be subject to the
same rules and regulations that the Bank applies to checking accounts in
general. There is currently no charge to you for the use of Checks, except that
a fee may be imposed by Firstar Trust Company if an investor requests that it
stop payment of a Check or if it cannot honor a Check due to insufficient funds
or other valid reasons.

When a Check is presented to Firstar Trust Company for payment, Firstar
Trust Company, as your agent, will cause the Fund to redeem a sufficient number
of shares in your account to cover the amount of the Check. Shares for which
certificates have been issued may not be redeemed by Check. Since the net asset
value of the Fund's shares changes daily, you should make certain that the total
value of your account is sufficient to cover the amount of your Check.
Otherwise, the Check will be returned marked insufficient funds. Checks may not
be used to close an account. The Check Redemption Privilege may be modified or
terminated at any time by either the Fund or Firstar Trust Company.

Telephone Redemption Privilege

You may direct redemptions of up to $150,000 worth of shares per day by
telephone by either (i) completing the appropriate section of the application
form or (ii) subsequent signature guaranteed* written request. Telephone calls
may be recorded. Firstar Trust Company will act on instructions that it
reasonably believes to be genuine. The proceeds of the redemption will only be
mailed to the address of record with the Fund, provided that your account
registration has not changed within the last 30 days. The Fund reserves the
right to refuse a telephone redemption and may limit the amount and frequency.
The Telephone Redemption Privilege may be modified or terminated at any time by
either the Fund or Firstar Trust Company.

Neither the Fund nor its transfer agent will be liable for following
instructions that they reasonably believe to be genuine. It is the Fund's policy
to provide that a written confirmation statement of all telephone call
transactions be mailed to shareholders at their address of record within three
business days after the telephone call transaction. You should verify the
accuracy of telephone call transactions immediately upon receipt of your
confirmation statement. As a result of this policy, you will bear the risk of
loss in the event of a fraudulent telephone exchange or redemption transaction.

- ----------
*A signature guarantee must be from an eligible guarantor institution approved
by Firstar Trust Company. Signature guarantees in proper form generally will be
accepted from domestic banks, a member of a national securities exchange, credit
unions and savings associations, as well as from participants in the Securities
Transfer Agents Municipal Program ("STAMP"). If you have any questions with
respect to signature guarantees, please call the transfer agent at (800)
322-6864.

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<PAGE>

Expedited Redemption Privilege

Requests for expedited redemption may be made by wire, letter or telephone
if you have previously filed with Firstar Trust Company a signed telephone
authorization form available from the Fund. If the request is for more than
$5,000, proceeds of the expedited redemption will be transferred by Federal
Reserve wire to the bank specified in the authorization form or to a
correspondent bank if your bank is not a member of the Federal Reserve System.
Firstar Trust Company charges a $12 service fee for each payment of redemption
proceeds made by Federal wire. This fee will be deducted from your account. If
the correspondent bank fails to notify your bank immediately, there could be a
delay in crediting the funds to your bank account. Proceeds of less than $5,000
will be mailed to your address. The Fund reserves the right to refuse an
expedited redemption and may limit the amount and frequency. This procedure may
be modified or terminated at any time without prior notice by either the Fund or
Firstar Trust Company. Any time funds are wired by the Bank, the proceeds of
redemption may be subject to the deduction of the Bank's usual and customary
charges for wiring funds.

In order to qualify to use the Expedited Redemption Privilege, you must
complete the appropriate portion of the new account application and your initial
payment for purchase of the Fund's shares must be drawn on, and redemption
proceeds paid to, the same bank and account as designated on the application.

In order to change the commercial bank or account designated to receive the
redemption proceeds, you must send a written request to Fundamental Family of
Funds, c/o Firstar Trust Company, P.O. Box 701, Milwaukee, WI 53201-0701. Such
request must be signed by each shareholder with each signature guaranteed by an
eligible guarantor (see above).

Regular Redemption Procedure

You may redeem your shares by sending a written request, together with duly
endorsed share certificates, if any, to Fundamental Family of Funds, c/o Firstar
Trust Company, P.O. Box 701, Milwaukee, WI 53201-0701. All certificates and all
written requests for redemption must be endorsed by you. For redemptions
exceeding $50,000 (and for all written redemption requests, regardless of
amount, made within 30 days following any change in account registration), your
endorsement must be signature guaranteed, as described above. Firstar Trust
Company may, at its option, request further documentation from corporations,
executors, administrators, trustees or guardians. If requested, redemption
proceeds of more than $5,000 will be wired into any member bank of the Federal
Reserve System. However, such transaction may be subject to a deduction of the
Bank's usual and customary charges for wiring funds. The Fund will accept other
suitable verification arrangements for foreign investors. Redemptions by mail
will not become effective until all documents in the form required have been
received by Firstar Trust Company.

How to Transfer Shares

Shares may be transferred from one person to another by sending to Firstar
Trust Company a written request for such transfer, signed by the registered
owner(s) exactly as the account is registered with each signature guaranteed as
described above, with (i) the name(s) of the new registered owner(s), (ii) the
social security number or taxpayer identification number for the new
registration, and (iii) the redemption option elected. If the shares being
transferred are represented by certificates in the possession of the investor,
such certificates, properly signed with signature guarantees, must also be
forwarded to Firstar Trust Company. In addition, Firstar Trust Company reserves
the right to request any additional documents that may be required for transfer
by corporations, executors, administrators, trustees, and guardians.

Reopening an Account

You may reopen an account with a minimum investment of $100 or more without
filing a new application form during the year in which your account was closed
or during the following calendar year, provided that the information on your
original form is still applicable. The Fund may require you to file a statement
that all information on the original account application form remains
applicable.

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<PAGE>

DETERMINATION OF NET ASSET VALUE

The net asset value per share is determined as of the close of trading on
the New York Stock Exchange (currently 4:00 p.m., New York time) on each day
that both the New York Stock Exchange and the Fund's custodian bank are open for
business and on any other day during which there is a sufficient degree of
trading in the Fund's portfolio securities that the Fund's net asset value might
be materially affected by changes in the value of its portfolio securities,
unless there have been no shares tendered for redemption or orders to purchase
shares received. The net asset value per share is computed by taking the value
of all assets of the Fund, subtracting the liabilities of the Fund, and dividing
by the number of outstanding shares. For purposes of determining net asset
value, expenses of the Fund are accrued daily and taken into account.

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 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. 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 trustees
using methods which the trustees believe accurately reflects fair value. The
prices realized from the sale of these securities could be less than those
originally paid by the Fund or less than what may be considered the fair value
of such securities.

Included in the portfolio securities of the Fund in determining net asset
value is the value of all when-issued securities that the Fund has committed
itself to purchase. However, the Fund's ability to purchase such securities
remains constant (see "Investment Objective and Policies").

DISTRIBUTION EXPENSES

The Board of Trustees and shareholders of the Fund have approved a plan of
distribution under Rule 12b-1 of the 1940 Act (the "Plan"). Pursuant to the
Plan, 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 processing orders for the purchase or
redemption of Fund shares, and for furnishing other shareholder services.

The Fund's Board of Trustees approved the continuance of the Fund's Plan for
a period of sixty days following the date of its expiration in contemplation of
a transaction pursuant to which Tocqueville Asset Management L.P. would assume
management of the assets of the Fund. Otherwise, the Plan would have expired on
April 1, 1998. See ("Management").

Payments by the Fund shall not, in the aggregate, in any fiscal year of the
Fund, exceed one-half of 1% of daily net assets of the Fund for expenses
incurred in distributing and promoting the Fund's shares. The Plan will make
payments only for expenses actually incurred by such dealers and financial
institutions. The Plan will not carry over expenses from year to year, and if
the Plan is terminated in accordance with its terms, the obligation of the Fund
to make payments pursuant to the Plan will cease and the Fund will not be
required to make any payments for expenses incurred after the date the Plan
terminates. The Fund may enter into shareholder processing and service
agreements ("Shareholder Service Agreements") with any securities dealer who is
registered under the Securities Exchange Act of 1934 and is a member in good
standing of the National Association of Securities Dealers, Inc., and with banks
and other financial institutions that may wish to establish accounts or
sub-accounts on behalf of their customers ("Shareholder Service Agents"). The
Fund may pay such Shareholder Service Agents for their services, and to cover
expenses in connection with advertising, sales literature and other promotional
materials on behalf of the Fund, and the fees payable therefor will be reviewed
quarterly by the Fund's Board of Trustees. See "Distribution Plan" in the Fund's
Statement of Additional Information for more details.

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<PAGE>

On April 16, 1987, the Board of Trustees of the Fund, including a majority
of the disinterested trustees who have no direct or indirect financial interest
in the operation of the Plan or any agreements relating thereto, authorized the
Fund to enter into an agreement with Fundamental Service Corporation, a Delaware
corporation, under the Plan. The agreement provides that the Fund may pay the
usual and customary agency's commission to Fundamental Service Corporation for
producing and placing Fund advertising in newspapers, magazines, or other
periodicals or on radio or television. In addition to the foregoing, the Fund
may pay Fundamental Service Corporation for marketing research and promotional
services specifically relating to the distribution of Fund shares, including
employment expenses of personnel primarily responsible for responding to
inquiries from prospective investors.

The Plan shall continue each year if specifically approved annually by the
Board of Trustees of the Fund and the affirmative vote of a majority of the
trustees who are not interested persons of the Fund, and with no direct or
indirect financial interest in the Plan, by votes cast in person at a meeting
called for such purpose. The Plan may not be amended to increase the maximum
amount of payments by the Fund without shareholder approval, and all material
amendments to the provisions of the Plan must be approved by a vote of the Board
of Trustees and the trustees who have no direct or indirect interest in the
Plan, cast in person at a meeting called for the purpose of such vote.

The Plan provides that Fund management shall provide, and the independent
trustees shall review, quarterly reports setting forth the amounts expended
pursuant to the Plan and the purpose for which the amounts were expended. It
further provides that while the Plan is in effect, the selection and nomination
of those trustees of the Fund who are not interested persons of the Fund, is
committed to the discretion of the independent trustees. During the year ended
December 31, 1997, the Fund incurred expenses amounting to $44,731 under the
Plan, including approximately $39,200 paid to Fundamental Service Corporation
under the Plan.

NASD Regulation, Inc. ("NASDR") entered into a Letter of Acceptance, Waiver
and Consent with Fundamental Service Corporation that imposed a total of
$125,000 in fines and other stipulated sanctions on Fundamental Service
Corporation and two of its officers for distributing advertising materials for
Fundamental U.S. Government Strategic Income Fund that NASDR deemed to be false
and misleading. Fundamental Service Corporation neither admitted nor denied the
allegations and filed a Mitigation Statement in response to the Letter of
Acceptance, Waiver and Consent.

The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit Federally chartered or supervised banks from engaging in the
business of underwriting, selling, or distributing securities. Accordingly, the
Fund will engage banks as Shareholder Service Agents to perform only
administrative and shareholder servicing functions. While the matter is not free
from doubt, Fund management believes that such laws should not preclude a bank
from acting as a Shareholder Service Agent performing the above-referenced
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either Federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries or affiliates, could prevent a bank
from continuing to perform all or part of its servicing activities. If a bank
were prohibited from so acting, shareholder clients would be permitted to remain
as Fund shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Fund might occur, and shareholders serviced by such bank might no longer be able
to avail themselves of services then being provided by such a bank. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.

MANAGEMENT

The Original Management Agreement appointing Fundamental Portfolio Advisors,
Inc. as the investment manager of the Fund was approved by the Fund's Board of
Trustees on October 1, 1986, and approved by shareholders on January 26, 1987.
Acting pursuant to the current investment management agreement adopted by the
Board of Trustees of the Fund on November 10, 1988, which is substantially
identical to the Original Agreement, Fundamental Portfolio Advisors, Inc. (the
"Manager") serves as the investment manager of the Fund. Its principal place of
business is 90 Washington Street, New York, NY 10006. The Manager has been
providing investment advisory services to the Fundamental Family of Funds since
it was founded in 1986.

17
<PAGE>

The Fund's Board of Trustees approved the continuance of the Fund's current
Management Agreement for a period of sixty days following the date of its
expiration in contemplation of the consummation of a transaction pursuant to
which Tocqueville Asset Management L.P. ("Tocqueville") would assume management
of the assets of the Fund. Otherwise, the Management Agreement would have
expired on April 1, 1998. Tocqueville is the investment adviser to the
Tocqueville Funds.

It is anticipated that shareholders of the Fund will be asked to consider
and approve an Agreement and Plan of Reorganization providing for the transfer
of the Fund's assets to a separate, newly-created Tocqueville Fund having the
same investment policies and objectives as those of the Fund at a special
meeting of shareholders scheduled to be held in late Spring. Subsequent to the
filing with the Securities and Exchange Commission of preliminary proxy
solicitation materials seeking shareholder approval of the Agreement and Plan of
Reorganization at the special meeting of shareholders, the Manager filed two
preliminary proxy statements with the Securities and Exchange Commission, one
opposing the transaction pursuant to which Tocqueville would assume management
of the assets of the Fund; the second, proposing to replace the two independent
Board Members of the Fundamental Funds and the election of six new nominees to
the Fund's Board (in addition to Vincent J. Malanga, a current Board Member).

The Manager manages and supervises the Fund's investment portfolio and
directs the purchase and sales of its investment securities. The Manager
utilizes an investment committee to manage the assets of the Fund. The committee
is currently composed of the following members: Vincent J. Malanga, a portfolio
strategist affiliated with the Manager and Jane Tubis, a trading assistant
affiliated with the Manager.

Vincent J. Malanga is, and has been for more than the past five years,
Chairman of the Board, Chief Executive Officer, President and Treasurer of the
Fundamental Family of Funds. He is, and has been for more than the past five
years, President, Treasurer, and a Director of the Manager, Executive Vice
President, Secretary and a Director of Fundamental Service Corporation (the
Distributor for certain of the Fundamental Family of Funds) and President of
LaSalle Economics, Inc., an economic consulting firm, and a managing director of
LaSalle Portfolio Management, Inc., a commodity trading adviser.

Jane Tubis is, and has been for more than the past five years, a trading
assistant with the Manager.

The Current Agreement between the Fund and the Manager provides that the
Manager shall, at its own expense, furnish to the Fund office space in the
offices of the Manager or in such other place as may be agreed upon from time to
time, and all necessary office facilities, equipment and personnel for managing
the affairs and investments and supervising the keeping of the Fund's books and
shall arrange, if desired by the Fund, for all directors and executive officers
of the Manager's organization to serve as officers or trustees of the Fund.
Under the terms of the Current Agreement, the Manager assumes and shall pay or
reimburse the Fund for (1) the compensation (if any) of the trustees of the Fund
who are affiliated with, or "interested persons" of, the Manager and all
officers of the Fund as such; and (2) all expenses not specifically assumed by
the Fund where such expenses are incurred by the Manager or by the Fund in
connection with the management of the investment and reinvestment of the assets
of the Fund, and the management of the affairs of the Fund.

Under the terms of the Current Agreement, the following expenses, among
others, incurred in the operation of the Fund, will be borne by the Fund: (1)
charges and expenses for determining from time to time the value of the net
assets of the Fund and the keeping of its books and records; (2) charges and
expenses of auditors; (3) charges and expenses of any custodian, transfer agent,
plan agent, dividend-disbursing agent, and registrar appointed by the Fund; (4)
brokers' commissions, and issue and transfer taxes, chargeable to the Fund in
connection with securities transactions to which the Fund is a party; (5)
insurance premiums, interest charges, dues and fees for membership in trade
associations, and all taxes and fees payable by the Fund to Federal, state, or
other governmental agencies; (6) the cost of share certificates representing
shares of the Fund; (7) fees and expenses involved in registering and
maintaining registrations of the Fund and of its shares with the Commission,
including the preparation of prospectuses for filing with the Commission and any
application for exemption whether or not relating to, or directed toward, the
sale of the Fund's shares; (8) all expenses of shareholders' and trustees'
meetings and of preparing, printing, and distributing notices, proxy statements,
and all reports to shareholders and to governmental agencies; (9) charges and
expenses of legal counsel to the Fund; (10) compensation of those trustees of
the Fund as such who are not affiliated with or "interested persons" of the
Manager or the Fund (other than as trustees); (11) fees and expenses incurred
pursuant to a plan adopted pursuant to Rule 12b-1 under the 1940 Act; and (12)
such nonrecurring or extraordinary expenses as may arise, including litigation
affecting the Fund and any indemnification by the Fund of its trustees,
officers, employees, or agents with respect thereto.

Pursuant to the Current Agreement, the Manager will provide the Fund with
advice and recommendations in the choice of investments and will execute the
Fund's security transactions. These services will be under the supervision of
Mr. Vincent J. Malanga,

18
<PAGE>

as trustee, president-treasurer, and chief executive officer of the Fund. The
Current Agreement provides that the Manager shall, subject to the supervision of
the Board of Trustees of the Fund, generally attend, direct, and manage the
affairs of the Fund. In consideration for such services, the Fund has agreed to
pay the Manager an annual fee, accrued daily and paid monthly, at the following
rate on the average daily closing net asset value of the Fund:

Net Asset Value Annual Rate
-----------------------------------------------------------------------
For assets up to $100,000,000 50/100 of 1%

For assets in excess of $100,000,000 up to $200,000,000 48/100 of 1%

For assets in excess of $200,000,000 up to $300,000,000 46/100 of 1%

For assets in excess of $300,000,000 up to $400,000,000 44/100 of 1%

For assets in excess of $400,000,000 up to $500,000,000 42/100 of 1%

For assets in excess of $500,000,000 40/100 of 1%

The Current Agreement terminates upon assignment and may be terminated
without penalty on 60 days' written notice by a vote of the majority of the
Fund's Board of Trustees or by the holders of a majority of the Fund's
outstanding shares. Unless earlier terminated as described above, the Current
Agreement will continue in effect from year to year if its continuance is
approved at least annually (1) by the Board of Trustees of the Fund or the vote
of the holders of a majority of the outstanding shares of the Fund and (2) in
either event, by a majority of the trustees of the Fund who are not parties to
the Current Agreement or "interested persons" of any such party, by votes cast
in person at a meeting called for the purpose of voting on such approval.

On September 30, 1997, the Securities and Exchange Commission (the
"Commission") instituted administrative proceedings against the Manager,
Fundamental Service Corporation, and Drs. Lance M. Brofman and Vincent J.
Malanga (the "Parties"). The Commission's Order instituting the proceedings
alleges, among other things, certain violations of the federal securities laws,
including the antifraud provisions, for failing to disclose the risks associated
with investments in inverse floating rate notes made on behalf of the
Fundamental U.S. Government Strategic Income Fund (the "Government Fund") in
1993 and 1994, marketing the Government Fund in a way that was contrary to the
administration of the Government Fund, exceeding the Government Fund's portfolio
duration of three years or less as stated in its prospectus, and failing to
disclose the Manager's soft dollar practices to the Fundamental Fund Boards. A
hearing has been scheduled to determine whether the allegations against the
Parties are true, and if so, whether remedial action is appropriate. Counsel to
the Parties have indicated that the Parties intend to vigorously contest the
charges. The Manager has indicated that the institution of the proceedings
against the Parties has not adversely affected the ability of the Manager or
Fundamental Service Corporation to continue to perform the day-to-day affairs of
the Fundamental Funds.

The Manager and Fundamental Service Corporation (on behalf of certain of
their directors, officers, shareholders, employees and control persons) (the
"Indemnitees") received payments during the fiscal year ended December 31, 1997
from three of the Fundamental Funds for attorneys' fees incurred by them in
defending certain proceedings. The payments were as follows: Fundamental U.S.
Government Strategic Income Fund (approximately $232,500); New York Muni Fund
(approximately $50,000); and the California Muni Fund (approximately $4,000).
Upon learning of the payments, the independent Board Members of the Fundamental
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.

On April 30, 1998, the Indemnitees placed $106,863 into an escrow account
pending clarification of certain legal issues. The Manager and Fundamental
Service Corporation have asserted that they waived fees during the year ended
December 31, 1997 and that the amount placed in escrow should be net of any
reimbursements already made to the Funds in the form of fees forgone. Upon
learning that $106,863 was placed into an escrow account on behalf of the Funds,
the independent Board Members referred the Manager and Fundamental Service
Corporation to their prior directive and asked that the entire amount of all
payments received by such entities ($286,500) be placed into said escrow
account. For further information, see Notes to the December 31, 1997 Financial
Statements of Fundamental U.S. Government Strategic Income Fund, New York Muni
Fund and the California Muni Fund, attached to the Statement of Additional
Information.

For further information concerning the management of the Fund, see the
Fund's Statement of Additional Information under the caption "Management of the
Fund."

Portfolio Brokerage

It is the Fund's policy to seek execution of its purchases and sales at the
most favorable prices through responsible broker-dealers and in agency
transactions, at competitive commission rates. The Fund's brokerage allocation
policy may permit the Fund to pay a broker-dealer which furnishes research
services a higher commission than that which might be charged by another
broker-

19
<PAGE>

dealer which does not furnish research services, provided that such commission
is deemed reasonable in relation to the value of the services provided by such
broker-dealer (see the Fund's Statement of Additional Information for a complete
discussion of the Fund's brokerage allocation policy). It is not the Fund's
practice to allocate principal business on the basis of sales of Fund shares
which may be made through brokers or dealers, although broker-dealers effecting
purchases of Fund shares for their customers may participate in principal
transactions or brokerage allocation. The Fund may, however, allocate principal
business or brokerage to obtain for the benefit of the Fund services that the
Fund would otherwise have to pay for directly.

DIVIDENDS AND TAX MATTERS

Dividends and Distributions

All of the Fund's net investment income, consisting of interest income
accrued less all expenses, is calculated daily and declared as a dividend to
shareholders of record of the Fund at the close of business on the previous day.
Dividends are distributed monthly. Net capital gains, if any, will normally be
distributed annually, before the close of the Fund's tax year and prior to
filing the Fund's tax return.

Dividends and capital gains distributions are normally paid in additional
shares of the Fund. If you wish to receive dividends or distributions in cash,
you must file an election with Firstar Trust Company, which election will remain
in effect until Firstar Trust Company is notified by you in writing to change
the election, at least ten (10) days prior to payment date.

Tax Matters

The Fund intends to qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Code, including requirements with
respect to diversification of assets, distribution of income and sources of
income. It is the Fund's policy to distribute to shareholders all of its
investment income (net of expenses) and any capital gains (net of capital
losses) in accordance with the timing requirements imposed by the Code, so that
the Fund will satisfy the distribution requirement of Subchapter M and will not
be subject to Federal income tax or the 4% excise tax.

If the Fund fails to satisfy any of the Code requirements for qualification
as a regulated investment company, it will be taxed at regular corporate tax
rates on all its taxable income (including capital gains) without any deduction
for distributions to shareholders, and distributions to shareholders will be
taxable as ordinary dividends (even if derived from the Fund's net long-term
capital gains) to the extent of the Fund's current and accumulated earnings and
profits.

Distributions by the Fund of its tax-exempt interest income are designated
as exempt-interest dividends, which are excludable from gross income for Federal
income tax purposes. However, shareholders are required to report the receipt of
exempt-interest dividends, together with other tax-exempt interest, on their
Federal income tax returns. In addition, these exempt-interest dividends may be
subject to the Federal alternative minimum tax and will be taken into account in
determining the portion, if any, of Social Security benefits received which must
be included in gross income for Federal income tax purposes. Further, interest
or indebtedness incurred or continued to purchase or carry shares of the Fund
(which indebtedness likely need not be directly traceable to the purchase or
carrying of such shares) will not be deductible for Federal income tax purposes.
Finally, a shareholder who is (or is related to) a "substantial user" of a
facility financed by industrial development bonds held by the Fund will likely
be subject to tax on dividends paid by the Fund that are derived from interest
on such bonds.

A small portion of the Fund's net investment income may under certain
circumstances be taxable, and distributions thereof, as well as distributions of
any net capital gain will be taxable to shareholders. Distributions by the Fund
of its taxable net investment income and the excess, if any, of its net
short-term capital gain over its net long-term capital loss are taxable to
shareholders as ordinary income. Such distributions are treated as dividends for
Federal income tax purposes but do not qualify for the 70% dividends-received
deduction for corporate shareholders. Distributions by the Fund of the excess,
if any, of its net long-term capital gain over its

20
<PAGE>

net short-term capital loss are designated as capital gains dividends and are
taxable to shareholders as long-term capital gains, regardless of the length of
time shareholders have held their shares.

Tax-exempt interest on specified private activity bonds issued after August
7, 1986, is treated as a tax preference item for purposes of the Federal
alternative minimum tax ("AMT"). Thus, corporate and individual shareholders may
incur an AMT liability as a result of receiving exempt-interest dividends from
the Fund to the extent such dividends are attributable to interest from such
private activity bonds. In addition, because all exempt-interest dividends are
included in a corporate shareholder's adjusted current earnings (which is used
in computing a separate preference item for corporations), corporate
shareholders may incur an AMT liability as a result of receiving any
exempt-interest dividends from the Fund.

Distributions to shareholders will be treated in the same manner for Federal
income tax purposes whether received in cash or reinvested in additional shares
of the Fund. In general, distributions by the Fund are taken into account by the
shareholders in the year in which they are made. However, certain distributions
made during January will be treated as having been paid by the Fund and received
by the shareholders on December 31 of the preceding year.

Investors should carefully consider the tax implications of purchasing
shares just prior to the record date of any ordinary income dividend or capital
gain dividend. Those investors purchasing shares just prior to an ordinary
income orcapital gain dividend will be taxed on the entire amount of the
dividend received, even though the net asset value per share on the date of such
purchase reflected the amount of such dividend and such dividend economically
constitutes a return of capital to such investors.

A shareholder will recognize gain or loss upon the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
Any loss realized upon a taxable disposition of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any capital gain dividends received on such shares. All or a portion
of any loss realized upon a taxable disposition of shares of the Fund may be
disallowed if other shares of the Fund are purchased within 30 days before or
after such disposition.

If a shareholder is a non-resident alien or foreign entity shareholder,
ordinary income dividends paid to such shareholder generally will be subject to
United States withholding tax at a rate of 30% (or lower rate under an
applicable treaty). We urge non-United States shareholders to consult their own
tax adviser concerning the applicability of the United States withholding tax.

Under the backup withholding rules of the Code, certain shareholders may be
subject to 31% withholding of Federal income tax on ordinary income dividends
paid by the Fund. In order to avoid this backup withholding, a shareholder must
provide the Fund with a correct taxpayer identification number (which for most
individuals is his or her Social Security number) or certify that it is a
corporation or otherwise exempt from or not subject to backup withholding.

The exclusion from gross income for Federal income tax purposes of
exempt-interest dividends does not necessarily result in exclusion under the
income or other tax laws of any state or local taxing authority. However, to the
extent that exempt-interest dividends are derived from interest received by the
Fund on obligations of the State of California, its political subdivisions or
its duly constituted authorities, they will be exempt from California personal
income taxes for a California resident shareholder and for estates and trusts
subject to the California personal income tax, such as private or probate
trusts, but not business or commercial trusts). Exempt-interest dividends will
not be excluded in determining California franchise taxes applicable to
corporations or financial institutions.

Statements regarding the tax status of distributions by the Fund will be
mailed annually by Firstar Trust Company. In the event that a distribution may
not be wholly excludable from gross income for Federal income tax purposes or
exempt from the State of California personal income taxes, the statement will
provide information about the tax-exempt percentage, which may vary from
distribution to distribution.

The foregoing discussion of Federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information

21
<PAGE>

only, a prospective shareholder should also review the more detailed discussion
of Federal income tax considerations relevant to the Fund that is contained in
the Statement of Additional Information. In addition, each prospective
shareholder should consult with his own tax adviser as to the tax consequences
of investments in the Fund, including the application of state and local taxes
which may differ from the Federal income tax consequences described above.

GENERAL INFORMATION

Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares) and may vote to elect trustees and on
the other matters submitted to meetings of shareholders. Annual meetings of
shareholders are not contemplated by the Fund, but shareholder meetings may be
called and held when necessary and desirable. The Fund's shareholders have the
right, on declaration in writing or vote of more than two-thirds of the Fund's
outstanding shares, to remove a trustee. The Fund's trustees will call a meeting
of shareholders to vote on removing a trustee on the written request of the
record holders of 10% of the Fund's shares. In addition, ten (10) shareholders
of the Fund holding the lesser of $25,000 worth or 1% of the Fund's shares may
advise the trustees in writing that they wish to communicate with other
shareholders for the purpose of requesting a meeting to remove a trustee. The
trustees will then either give the applicants access to the shareholder list or,
if requested by the applicants, mail at the applicants' expense the applicants'
communication to all other shareholders.

No amendment may be made to the Fund's Declaration of Trust without the
affirmative vote of the holders of a majority of the Fund's outstanding shares.
The holders of shares have no preemptive or conversion rights. Shares, when
issued, are fully paid and non-assessable except as set forth in the Fund's
Statement of Additional Information under the caption "Additional Information
about the Organization of the Fund." The Trust may be terminated on the sale of
its assets to another issuer if such sale is approved by the vote of the holders
of a majority of the outstanding shares or on liquidation and distribution of
the Fund's assets, if approved by the holders of a majority of the outstanding
shares. If not so terminated, the Trust will continue indefinitely. (As used in
this paragraph, "a majority of the outstanding shares" means an actual majority
of such shares, which differs from a majority shareholder vote as previously
defined.)

The Fund is a Massachusetts business trust and, subject to their fiduciary
duties arising in connection therewith, trustees of the Fund are responsible for
overall management of the business and affairs of the Fund. The Fund's governing
instrument, the Declaration of Trust, provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in such
document protects a trustee against any liability to which he or she would
otherwise be subject to by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duties involved in the conduct of his or
her office.

Annual and semi-annual reports of the Fund, together with the list of
securities held by the Fund in its portfolio, are mailed to each shareholder.

The Code of Ethics of Fundamental Portfolio Advisors, Inc. and the Fund
prohibits all affiliated personnel from engaging in personal investment
activities which compete with or attempt to take advantage of the Fund's planned
portfolio transactions. The objective of the Code of Ethics of both the Fund and
Fundamental Portfolio Advisors, Inc. is that their operations be carried out for
the exclusive benefit of the Fund's shareholders. Both organizations maintain
careful monitoring of compliance with the Code of Ethics.

The custodian for the assets of the Fund is Firstar Trust Company. Firstar
Trust Company also performs all services in connection with the transfer of the
shares of the Fund. Shareholder inquiries should be directed to Firstar Trust
Company by calling (800) 322-6864.

This Prospectus omits certain information contained in the Fund's
Registration Statement, filed with the Securities and Exchange Commission.
Copies of the Registration Statement, including items omitted herein, may be
obtained from the Commission by paying the charges prescribed under its rules
and regulations. The Fund's Statement of Additional Information included in such
Registration Statement may be obtained without charge from the Fund.

22
<PAGE>

(LEFT COLUMN)

THE CALIFORNIA MUNI FUND
90 Washington Street
New York NY 10006
1-800-225-6864

Transfer Agent
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
1-800-322-6864

Counsel to the Fund
Kramer, Levin, Naftalis &Frankel
New York, New York

Independent Auditors
McGladrey & Pullen, LLP
New York, New York

No person has been authorized to give any information or
to make any representations other than those contained in
this Prospectus and in the Fund's official sales literature in
connection with the offer of the Fund's shares, and, if
given or made, such other information or representations
must not be relied upon as having been authorized by the
Fund. This Prospectus does not constitute an offer in any
State in which, or to any person to whom, such offering
may not lawfully be made.

(RIGHT COLUMN)

THE CALIFORNIA MUNI FUND

Prospectus
May 1, 1998

THE CALIFORNIA (logo) MUNI FUND

(logo) FUNDAMENTAL
Family of Funds

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

THE CALIFORNIA MUNI FUND

90 Washington Street
New York, New York 10006

(800) 322-6864

This Statement of Additional Information is not a Prospectus and should be read
in conjunction with a Prospectus which may be obtained by writing to the Fund at
the above address, or by calling the Fund at the above telephone number.
Shareholder inquiries may also be placed through this number.

THIS STATEMENT IS DATED MAY 1, 1998
AND SUPPLEMENTS THE FUND'S PROSPECTUS OF THE SAME DATE.

<PAGE>

TABLE OF CONTENTS

INTRODUCTION................................................................. 3

INVESTMENT OBJECTIVE AND POLICIES............................................ 3

INVESTMENT RESTRICTIONS...................................................... 4

ADDITIONAL INFORMATION RELATING TO
MUNICIPAL OBLIGATIONS...................................................... 6

ADDITIONAL INFORMATION RELATING TO
LOWER RATED SECURITIES..................................................... 8

MANAGEMENT OF THE FUND....................................................... 10

DISTRIBUTION PLAN............................................................ 13

CALCULATION OF YIELD......................................................... 15

CUSTODIAN AGREEMENT AND INDEPENDENT ACCOUNTANTS.............................. 19

TAXES........................................................................ 19

PORTFOLIO TRANSACTIONS....................................................... 25

ADDITIONAL INFORMATION ABOUT THE ORGANIZATION
OF THE FUND................................................................ 27

INFORMATION WITH RESPECT TO CALIFORNIA STATE
AND MUNICIPAL FINANCES..................................................... 28

OTHER INFORMATION............................................................ 43

FINANCIAL STATEMENTS......................................................... 40

INFORMATION WITH RESPECT TO SECURITIES RATINGS.............................. A-1

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<PAGE>

INTRODUCTION

The California Muni Fund (the "Fund") is a mutual fund. The
rules and regulations of the United States Securities and Exchange Commission
(the "SEC") require all mutual funds to furnish prospective investors certain
information concerning the activities of the company being considered for
investment. This information is included in a Prospectus dated the same date as
this Statement, which may be obtained without charge from the Fund by writing to
or telephoning the Fund as indicated on the front page of this Statement of
Additional Information. Some of the information required to be in this Statement
of Additional Information is also included in the Fund's Prospectus and, in
order to avoid repetition, reference will be made to sections of the Prospectus.
Additionally, the Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the SEC.
Copies of the registration statement, including items omitted from the Fund's
Prospectus and this Statement of Additional Information, may be obtained from
the SEC by paying the charges prescribed under its rules and regulations.

INVESTMENT OBJECTIVE AND POLICIES

The objective of the Fund is to provide investors with 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. There can be no assurance that the Fund will
achieve this objective. In attempting to achieve this objective, the Fund will,
as a fundamental policy, invest only in (1) municipal bonds that are rated
within the four highest quality grades (as determined by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Fitch
Investors Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff"), the
nationally recognized statistical rating organizations currently rating
instruments of the type the Fund may purchase), or, if unrated, are judged by
Fund management to be of comparable quality, and (2) municipal notes and
municipal commercial paper that are rated within the three highest quality
grades as determined by Moody's for municipal notes, or within the three highest
quality grades as determined by Moody's or S&P for municipal commercial paper
or, if unrated, are (i) obligations of issuers having an issue of bonds rated
within the four highest quality grades as determined by Moody's, S&P, Fitch or
Duff or (ii) guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities. Fundamental policies of the Fund can be changed
only by a majority vote of the shareholders of the Fund (as defined in the
Prospectus). (A "majority shareholder vote" means, in the Prospectus, the
affirmative vote of the holders

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<PAGE>

of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2)
67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.) See
"Additional Information Relating to Municipal Obligations" contained herein for
more detailed descriptions of the various types of municipal obligations.

The Fund may invest up to 100% of its assets in qualified
private activity bonds, and accordingly, the Fund's shares may not be an
appropriate investment for "substantial users" of facilities financed by
industrial development bonds or for investors who are "related persons" with
respect to such users. Generally, an individual will not be a "related person"
under the Internal Revenue Code of 1986, as amended (the "Code") unless he or
his immediate family (spouse, brothers, sisters, ancestors and lineal
descendants) own directly or indirectly in the aggregate more than (i) 50% in
value of the outstanding stock of a corporation or (ii) 50% of the capital or
profits interest in a partnership which is a "substantial user" of a facility
financed from the proceeds of industrial development bonds. A "Substantial user"
of such facilities is defined generally in Section 1.103-11(b) of the Treasury
Regulations as a "nonexempt person who regularly uses a part of [a] facility"
financed from the proceeds of a qualified private activity bond in his trade or
business.

For more detailed information concerning the Investment
Objective and Investment Policies of the Fund, see the Fund's Prospectus at
"Investment Objective and Policies".

INVESTMENT RESTRICTIONS

The following investment restrictions have been adopted
by the Fund as fundamental policies, which means they can be
changed for the Fund only by a majority shareholder vote. The Fund
may not:

(1) Invest in securities other than the municipal obligations
described in the Fund's Prospectus under "Investment Objective and Policies".

(2) Make short sales of securities or purchase securities on
margin, except that the Fund may obtain such short-term credits as are necessary
for the clearance of purchases and sales of portfolio securities.

(3) Borrow money, except from banks, and only in an amount not
to exceed 20% of the Fund's total assets, with such value determined at the time
of borrowing, excluding the amount borrowed.

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<PAGE>

(4) Pledge, assign or otherwise encumber its assets, except
that the Fund may pledge securities having a market value determined at the time
of pledge of up to 10% of the value of its total assets for the purpose of
securing the borrowings referred to in restriction (3) above.

(5) Underwrite securities, except to the extent that the
purchase of municipal obligations directly from an issuer may be deemed to be an
underwriting, or purchase any securities as to which registration under the
Securities Act of 1933 would be required for resale to the public.

(6) Make loans of money or securities, except that the
purchase of a portion of an issue of publicly-distributed debt securities is not
considered the making of a loan.

(7) Invest for the purpose of exercising control or management
of another company.

(8) Purchase securities of other investment companies, except
in connection with a merger, consolidation, reorganization or acquisition of
assets.

(9) Write puts, calls or combinations thereof, or purchase or
sell commodities or commodity futures contracts.

(10) Purchase or sell real estate, although the Fund may
purchase municipal obligations secured by interest in real estate.

(11) Purchase industrial revenue bonds if, as a result, more
than 5% of the Fund's total assets would be invested in industrial revenue bonds
where payment of principal and interest would be the responsibility of companies
with less than three years of operating history.

(12) Purchase or retain the securities of any one issuer if
officers or Trustees of the Fund or the Fund's investment adviser beneficially
owning more than 1/2 of the 1% of the securities of the issuer together
beneficially own more than 5% of the securities of the issuer.

(13) Issue senior securities, as defined in the Investment
Company Act of 1940, except to the extent the Fund may be deemed to have issued
securities by reason of any borrowings permitted by restriction (3) or by
purchasing securities on a when-issued or delayed delivery basis.

(14) Invest 25% or more of the value of its respective total
assets in securities of nongovernmental issuers in the same industry. The
identification of the issuer of the municipal obligations depends on the terms
and conditions of the obligation.

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<PAGE>

If the assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government creating the
subdivision and the obligation is backed only by the assets and revenues of the
subdivision, such subdivision is regarded as the sole issuer. Similarly, in the
case of an industrial development revenue bond or pollution control bond, if the
bond is backed only by the assets and revenues of the nongovernmental user, the
nongovernmental user is regarded as the sole issuer. If in either case the
creating government or another entity guarantees an obligation, the guaranty is
regarded as a separate security and treated as an issue of such guarantor.

Although it is not a fundamental policy, the Fund may not
invest more than 10% of its total assets in municipal obligations of California
issuers which are illiquid or which have limited marketability.

ADDITIONAL INFORMATION RELATING TO MUNICIPAL OBLIGATIONS

MUNICIPAL BONDS

Municipal bonds are long-term debt obligations, generally with
a maturity at the time of issuance of greater than three years, of states and
their political subdivisions issued to obtain funds for various public purposes,
including construction of a wide range of public facilities, such as airports,
bridges, highways, housing, hospital, mass transportation, schools, streets and
water and sewer works. Other purposes for which municipal bonds may be issued
include refunding outstanding obligations; obtaining funds for general operating
expenses; or obtaining funds to lend to public or private institutions for
construction of such facilities as educational, hospital and housing facilities.
In addition, certain types of bonds may be issued by public authorities to
finance privately operated housing facilities, sports facilities, convention or
trade show facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. Other types of qualified private
activity bonds, the proceeds of which are used for the construction, equipment,
repair or improvement of privately operated industrial or commercial facilities,
may constitute municipal bonds, although current Federal tax laws place
substantial limitations on the size of such issues.

The two principal classifications of municipal bonds are
general obligation and revenue bonds. General obligation bonds are secured by
the issuer's pledge of faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from only revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a

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<PAGE>

special excise tax or other specific revenue sources such as from the user of
the facility being financed. Qualified private activity bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of such bonds. The payment of the principal and interest on
such bonds depends solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such payment.

MUNICIPAL NOTES

Municipal notes are short-term obligations, generally with a
maturity at the time of issuance of from six months to three years. The
principal types of municipal notes include tax anticipation notes, bond
anticipation notes, revenue anticipation notes, and project notes. Tax
anticipation notes are sold to provide working capital to states and
municipalities in anticipation of collection of taxes. Bond anticipation notes
are issued to provide funds temporarily in anticipation of a bond sale. Revenue
anticipation notes are sold in expectation of receipt of other revenues, such as
funds under the Federal Revenue Sharing Program. Project notes are issued by
local agencies in connection with such programs as construction of low-income
housing in order to provide construction financing prior to permanent financing.
Project notes are guaranteed by the U.S. Department of Housing and Urban
Development and consequently are secured by the full faith and credit of the
United States. Municipal notes also include obligations issued at a discount,
frequently referred to as municipal commercial paper, which are likely to be
issued to meet seasonal working capital needs of a municipality or to provide
interim construction financing and are to be paid from general revenues of the
municipality or refinanced with long-term debt. In most cases, municipal
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements, or other credit facility agreements offered by banks or
other institutions. The Fund would be able to draw on these agreements on a
default under the terms of the documents of the security.

VARIABLE RATE INSTRUMENTS

Municipal bonds and notes are sometimes issued with a variable
interest rate ("variable rate instruments"). The interest rate on variable rate
instruments is usually tied to an objective standard, such as the 90-day
Treasury Bill rate or the prime rate of a bank involved in the financing. Prime
rates can change daily; the auction for 90-day Treasury Bill rates is held
weekly. In addition to having a variable interest rate, any such instruments are
subject to repayment of principal on demand by the Fund,

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<PAGE>

usually in not more than five business days. Both the variable rate feature and
the principal repayment on demand feature tend to reduce fluctuations in the
price of variable rate instruments; these instruments are generally of interest
and sold to institutional investors. Also available are participation interests
in loans to municipal issuers, which are similar except that these loan
participations are made available through a commercial bank that arranges the
tax-exempt loan. Participation interests are frequently backed by an irrevocable
bank letter of credit or a guarantee by a financial institution and give the
Fund the right to demand, on short notice (usually not more than seven days),
payment of all or any part of the principal amount and accrued interest. The
Board of Trustees will determine that the participation interest in the
municipal securities meets the Fund's prescribed quality standards. The Fund's
management has been instructed by the Board of Trustees to monitor the pricing,
quality and liquidity of any variable rate demand instruments held, including
participation interests supported by letters of credit or guarantee, on the
basis of published financial information and reports of the rating agencies and
other analytical sources. The Fund's management will also monitor the
creditworthiness of the guarantor. Banks retain fees for their role in an amount
equal to the excess of the interest paid on the municipal securities over the
negotiated yield at which the participation interests were purchased. In the
event that the participation interest that the Fund acquires includes the right
to demand payment of principal and accrued interest from the issuer of the
participation interest pursuant to a letter of credit or other commitment, the
maturity will be deemed to be equal to the time remaining until the principal
amount can be recovered from the issuer through demand, although the stated
maturity may be in excess of one year. To the extent that variable rate
instruments and loan participations may lack liquidity (unless payable on demand
or within seven days), they are subject to the restriction on illiquid
securities, described herein under the caption "Investment Restrictions".

ADDITIONAL INFORMATION RELATING TO
LOWER RATED SECURITIES

Downgraded securities (i.e., those rated lower than Baa by
Moody's or BBB by S&P, Fitch or Duff or determined by Fund management to be a
comparable quality if unrated) that are retained in the Fund's investment
portfolio generally produce a higher current yield than do securities of higher
ratings. However, these obligations are considered speculative because they
involve greater price volatility and risk than do higher rated securities and
the yields on these securities will tend to fluctuate over time. Although the
market value of all fixed-income securities varies as a result of changes in
prevailing interest rates (e.g., when

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<PAGE>

interest rates rise, the market value of fixed-income securities can be expected
to decline), values of lower rated securities tend to react differently than the
values of higher rated securities. The prices of lower rated securities are less
sensitive to changes in interest rates than higher rated securities. Conversely,
lower rated securities also involve a greater risk of default by the issuer in
the payment of principal and income and are more sensitive to economic downturns
and recessions than higher rated securities. The financial stress resulting from
an economic downturn could have a greater negative effect on the ability of
issuers of lower rated securities to service their principal and interest
payments, to meet projected business goals and to obtain additional financing
than on more creditworthy issuers. In the event of an issuer's default in
payment of principal or interest on such securities, or any other securities in
the Fund's portfolio, the net asset value of the Fund will be negatively
affected. Moreover, as the market for lower rated securities is a relatively new
one which has not yet been tested through a recession, a severe economic
downturn might increase the number of defaults, thereby adversely affecting the
value of all outstanding lower rated municipal bonds and disrupting the market
for such securities. Securities purchased by the Fund as part of an initial
underwriting present an additional risk due to their lack of market history.
These risks are exacerbated with respect to securities rated CCC or lower by
S&P, Fitch or Duff Caa or lower by Moody's. Unrated securities generally carry
the same risks as do lower rated securities.

The Fund may continue to hold lower rated securities that are
structured as zero coupon or pay-in-kind bonds. Such securities may be more
speculative and subject to greater fluctuation in value due to changes in
interest rates than lower rated, income-bearing securities. In addition, zero
coupon and pay-in-kind securities are also subject to the risk that in the event
of a default, a fund may realize no return on its investment, because these
securities do not pay cash interest. Zero coupon, or deferred interest,
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and therefore are issued
and traded at a discount from their face amounts or par value. Pay-in-kind
securities are securities that pay interest through the issuance of additional
securities. Holders of zero coupon securities are considered to receive each
year the portion of the original issue discount on such securities that accrues
that year and must include such amount in gross income, even though the holders
receive no cash payments during the year. Consequently, as a fund is accruing
original issue discount on these securities prior to the receipt of cash
payment, it is still subject to the requirement that it distribute substantially
all of its income to its shareholders in order to qualify as a "regulated
investment

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<PAGE>

company" under applicable tax law. Therefore, such fund may have to dispose of
its portfolio securities under disadvantageous circumstances or leverage itself
by borrowing to generate the cash necessary to satisfy its distribution
requirements.

Lower rated securities are typically traded among a smaller
number of broker-dealers rather than in a broad secondary market. Purchasers of
lower rated securities tend to be institutions, rather than individuals, a
factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many lower rated securities may not
be as liquid as Treasury and investment grade securities. The ability of the
Fund to sell lower rated securities will be adversely affected to the extent
that such securities are thinly traded or illiquid. Moreover, the ability of the
Fund to value lower rated securities becomes more difficult, and judgment plays
a greater role in valuation, as there is less reliable, objective data available
with respect to such securities that are thinly traded or illiquid.

Because investors may perceive that there are greater risks
associated with the medium to lower rated securities, the yields and prices of
such securities may tend to fluctuate more than those for securities with a
higher rating. Changes in perception of issuers' creditworthiness tend to occur
more frequently and in a more pronounced manner in the lower quality segments of
the fixed-income securities market than do changes in higher quality segments of
such market, resulting in greater yield and price volatility.

The general legislative environment has included discussions
and legislative proposals relating to the tax treatment of high-yield
securities. Any or a combination of such proposals, if enacted into law, could
negatively affect the value of any high-yield securities in the Fund's
portfolio. The likelihood of any such legislation being enacted is uncertain.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

Trustees and officers of the Fund, together with information
as to their principal business occupations for at least the last five years, are
shown below. Each Trustee who is considered to be an "interested person" of the
Fund, as defined in the Investment Company Act of 1940 (the "1940 Act"), is
indicated by an asterisk (*).

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<PAGE>

James C. Armstrong: Director of the Fund. Mr. Armstrong is a
management consultant. He was formerly a partner in Armstrong/Seltzer
Communications Inc., a New York management, consulting and public relations
firm. Earlier he served as Executive Director, Global Public Affairs Institute
at New York University and Professor, Bell of Pennsylvania Chair in
Telecommunications, Temple University. He was with American Telephone and
Telegraph Company for 15 years. His last position with AT&T was Director,
Corporate Policy Analysis. Mr. Armstrong previously held positions at the
Institute for Defense Analysis, the Office of the Postmaster General, and on the
faculty of the University of Maryland. He has been a consultant to government,
academic and business organizations, and has served on various
government-industry task forces and committees. Mr. Armstrong was an Officer in
the United States Navy and holds a Ph.D. in nuclear physics. Mr. Armstrong's
address is 70 North Ravenwood Drive, Cape May Court House, New Jersey 08210.

L. Greg Ferrone: Trustee of the Fund. Mr. Ferrone is a
consultant with IntraNet, Inc., a provider of computer systems to the domestic
and international banking industry. Previously he was the Director of Sales &
Marketing for RAV Communications Inc., Vice President/Regional Manager with
National Westminster Bank USA and an officer at Security Pacific Bank. Mr.
Ferrone received a Bachelor of Science degree from Rensselaer Polytechnic
Institute in 1972 and studied at the Stonier Graduate School of Banking. Mr.
Ferrone's address is 83 Ronald Court, Ramsey, New Jersey 07446.

*Vincent J. Malanga: Chairman of the Board, Chief Executive
Officer, President and Treasurer of the Fund, New York Muni Fund, Inc., and
Fundamental Fixed Income Fund. Mr. Malanga is President, Treasurer and a
Director of Fundamental Portfolio Advisors, Inc., Executive Vice President,
Secretary and a Director of Fundamental Service Corporation, and President,
LaSalle Economics Inc., an economic consulting firm. Prior thereto, Mr. Malanga,
who holds a Ph.D. in Economics from Fordham University, was an Economist at the
Federal Reserve Bank of New York. Mr. Malanga's address is 90 Washington Street,
19th Floor, New York, New York 10006.

All of the Trustees of the Fund are also Directors of
Fundamental Funds, Inc. and Trustees of Fundamental Fixed-Income Fund. Dr.
Malanga, an officer of the Fund , holds similar offices with Fundamental Funds,
Inc. and Fundamental Fixed-Income Fund.

For services and attendance at board meetings and meetings of
committees which are common to the Fund, Fundamental Fixed-Income Fund and
Fundamental Funds, Inc. (other affiliated mutual funds for which the Fund's
investment manager acts as the

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investment adviser), each Trustee of the Fund who is not affiliated with the
Fund's investment manager is compensated at the rate of $6,500 per quarter
prorated among the three funds based on their respective average net assets.
Each such Trustee is also reimbursed by the three funds, on the same basis, for
actual out-of-pocket expenses relating to his attendance at meetings. Some
Trustees received additional compensation at a rate of $125 per hour for
services related to serving on the Portfolio Review Committee. For the fiscal
year ended December 31, 1997, Trustees' fees totalling $______ were paid by the
Fund to the Trustees and to former Trustees as a group. As of the date of this
Statement of Additional Information, Trustees and officers of the Fund as a
group owned beneficially less than 1% of the Fund's outstanding shares.

COMPENSATION TABLE

(FOR EACH CURRENT BOARD MEMBER
RECEIVING COMPENSATION FROM
A FUNDAMENTAL FUND FOR THE
MOST RECENTLY COMPLETED FISCAL YEAR)

AGGREGATE COMPENSATION FROM FUND

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PAID BY ALL
FUNDS MANAGED
BY
HIGH-YIELD TAX-FREE U.S. GOV'T FUNDAMENTAL
CALIFORNIA MUNICIPAL MONEY STRATEGIC PORTFOLIO
NAME NY MUNI MUNI BOND MARKET INCOME ADVISORS, INC.

<S> <C> <C> <C> <C> <C> <C>
JAMES C. ARMSTRONG $29,684 $3,044 $496 $2,919 $2,207 $38,350

L. GREG FERRONE $20,124 $2,064 $336 $1,979 $1,497 $26,000
</TABLE>

INVESTMENT MANAGEMENT

Pursuant to a proposal to externalize the portfolio management
of the Fund, the Fund's Board of Trustees on October 1, 1986, approved the
appointment of Fundamental Portfolio Advisors, Inc. as investment manager of the
Fund. At a meeting of shareholders of the Fund held on January 26, 1987,
shareholders

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approved a Management Agreement (the "Original Agreement") with Fundamental
Portfolio Advisors, Inc. (the "Manager"). A new Management Agreement, which is
substantially identical to the Original Agreement and was adopted by the Board
of Trustees on November 10, 1988, was approved by shareholders on April 27,
1989. The Board of Trustees last approved the continuation of the Management
Agreement on March 25, 1998 for a period of sixty days following March 31, 1998.
Vincent J. Malanga, Chairman of the Board, Chief Executive Officer, President
and Treasurer of the Fund, and Dr. Lance M. Brofman, each own approximately
48.5% of the outstanding shares of the voting capital stock of the Manager.

The Manager has agreed that it will notify the Fund's Board of
Trustees before engaging any new clients of material significance; that, if
requested, each Trustee will receive a weekly portfolio transaction statement
from the Manager in order to review all trades made by the Manager; and that if
at anytime three or more Trustees who are "non-interested persons" of the Fund
desire to purchase or sell any security for or of the Fund, the Manager, at the
direction of the "non-interested" Trustees will immediately purchase or sell
such security, as the case may be, at the expense and risk of the Fund.

ADMINISTRATOR, TRANSFER AGENT,
CUSTODIAN AND ACCOUNTING AGENT

Firstar Trust Company, P. O. Box 701, Milwaukee, WI 53201-0701
currently acts as Administrator, Transfer Agent, Custodian and Accounting Agent
of the Fund.

Fundamental Shareholder Services, Inc., P.O. Box 1013, Bowling
Green Station, New York, New York 10274-1013, an affiliate of Fundamental
Portfolio Advisors, Inc. and Fundamental Service Corporation, previously
performed all services in connection with the transfer of shares of the Fund,
acted as its dividend disbursing agent, and as administrator of the exchange,
check redemption, telephone redemption and expedited redemption privileges of
the Fund . During the fiscal year ended December 31, 1997, fees paid to
Fundamental Shareholder Services, Inc. by the Fund amounted to $28,066.

DISTRIBUTION PLAN

The Board of Trustees of the Fund has approved a plan of
distribution under Rule 12b-1 of the 1940 Act (the "Plan"). The Plan was
approved by the shareholders of the Fund at the January 26, 1987 Meeting of
Shareholders. Pursuant to the Plan, the Fund may pay certain promotional and
advertising expenses and compensate certain registered securities dealers and
financial institutions for services provided in connection with the processing
of orders

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<PAGE>

for purchase or redemption of the shares of the Fund and furnishing other
shareholder services.

Payments by the Fund shall not in the aggregate in any fiscal
year of the Fund exceed 1/2 of 1% of daily net assets of the Fund for expenses
incurred in the distribution and promotion of the Fund's shares. The Plan will
only make payments for expenses actually incurred by such dealers and financial
institutions. The Plan will not carry over expenses from year to year and if the
Plan is terminated in accordance with its terms, the obligations of the Fund to
make payments pursuant to the Plan will cease and the Fund will not be required
to make any payments for expenses incurred after the date the Plan terminates.
The Fund may enter into shareholder processing and service agreements (the
"Shareholder Service Agreements") with any securities dealer who is registered
under the Securities Exchange Act of 1934 and a member in good standing of the
National Association of Securities Dealers, Inc., and with banks and other
financial institutions, who may wish to establish accounts or sub-accounts on
behalf of their customers ("Shareholder Service Agents").

The fees payable to Shareholder Service Agents under
Shareholder Service Agreements will be negotiated by the Fund's management. The
Fund's management will report quarterly to the Board of Trustees on the rate to
be paid under each such agreement and the amounts paid or payable under such
agreements. It will be based upon an analysis of (1) the contribution that the
Shareholder Service Agent makes to a Fund by increasing Fund assets and reducing
expense ratios; (2) the nature, quality and scope of services being provided by
the Shareholder Service Agent; (3) the cost to the Fund if shareholder services
were provided directly by the Fund or other authorized persons; (4) the costs
incurred by the Shareholder Service Agent in connection with providing services
to the shareholders; and (5) the need to respond to competitive offers of others
which could result in assets being withdrawn from the Fund and an increase in
the expense ratio for the Fund.

On April 16, 1987, the Board of Trustees of the Fund,
including a majority of the "disinterested" Trustees who have no direct or
indirect financial interest in the operation of the Plan or any agreements
relating thereto, authorized the Fund to enter into an agreement with
Fundamental Service Corporation, a Delaware corporation, under the Plan. The
agreement provides that the Fund may pay the usual and customary agency's
commission to Fundamental Service Corporation for producing and placing Fund
advertising in newspapers, magazines or other periodicals, or on radio or
television. In addition to the foregoing, the Fund may pay Fundamental Service
Corporation for marketing research and promotional services specifically
relating to the distribution of Fund shares, including employment expenses of
personnel primarily responsible for responding to inquiries from prospective
investors. The following persons own of record 5% or more of the outstanding

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<PAGE>

shares of voting stock of Fundamental Service Corporation: Mr. Vincent J.
Malanga (43.71%); Mr. Thomas W. Buckingham (43.71%); and Dr. Lance M. Brofman
(9.90%).

The Plan has been renewed to continue in effect for a period
of sixty days following March 31, 1998. The Plan will continue in effect from
year to year if specifically approved at least annually by the Board of Trustees
and the affirmative vote of a majority of the Trustees who are not parties to
any Shareholder Service Agreement or "interested persons" of any such party by
votes cast in person at a meeting called for such purpose. In approving the
Plan, the Trustees determined, in the exercise of their business judgment and in
light of their fiduciary duties as Trustees of the Fund, that there was a
reasonable likelihood that the Plan would benefit the Fund and its shareholders.
The Plan may only be renewed if the Trustees make a similar determination for
each subsequent year. The Plan may not be amended to increase the maximum amount
of payments by the Fund to its Shareholder Service Agents without shareholder
approval, and all material amendments to the provisions of the Plan must be
approved by a vote of the Board of Trustees and of the Trustees who have no
direct or indirect interest in the Plan, cast in person at a meeting called for
the purpose of such vote.

The Plan provides that the Fund's management shall provide,
and that the independent Trustees shall review, quarterly reports setting forth
the amounts expended pursuant to the Plan and the purpose for which the amounts
were expended. It further provides that while the Plan is in effect, the
selection and nomination of those Trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of the independent
Trustees. This does not prevent the involvement of others in such selection and
nomination if the final decision on any such selection and nomination is
approved by a majority of such disinterested Trustees.

During the year ended December 31, 1997, amounts incurred by
the Fund under the Plan aggregated $44,731, including expenses for: advertising
- -- $5,021; printing and mailing of Prospectuses to other than current
shareholders -- $510 and sales and shareholder servicing support services --
$39,200. Of the amount paid on behalf of the Fund during last year, $39,200 was
paid to Fundamental Service Corporation for expenses incurred and services
rendered by it pursuant to the Plan.

CALCULATION OF YIELD

The Fund's yield quotations and average annual total return
quotations as they appear in the Prospectus, this Statement of Additional
Information or in advertising and sales material, are

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<PAGE>

calculated by standard methods prescribed by the Securities and Exchange
Commission.

The Fund's yield is computed by dividing the Fund's net
investment income per share during a base period of 30 days, or one month, by
the net asset value per share of the Fund on the last day of such base period in
accordance with the following formula:

a-b ^6
Yield =[(----- + 1) - 1]
cd

Where: a = dividends and interest earned during the
period

b = expenses accrued for the period (net of
reimbursements)

c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends

d = the maximum offering price per share on the
last day of the period.

For purposes of calculating interest earned on debt obligations as provided in
item "a" above:

(1) The yield to maturity of each obligation held by the Fund
is computed based on the market value of the obligation (including actual
accrued interest, if any) at the close of business on the last day of each
month, or, with respect to obligations purchased during the month, the purchase
price (plus actual accrued interest, if any).

(2) The yield to maturity of each obligation is then divided
by 360 and the resulting quotient is multiplied by the market value of the
obligation (including actual accrued interest, if any) to determine the interest
income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For these purposes, it is assumed that each
month has 30 days.

(3) Interest earned on all debt obligations during the 30-day
or one-month period is then totaled.

(4) The maturity of an obligation with a call provision(s) is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.

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<PAGE>

(5) In the case of a tax-exempt obligation issued without
original issue discount and having a current market discount, the coupon rate of
interest of the obligation is used in lieu of yield to maturity to determine
interest income earned on the obligation.

In the case of a tax-exempt obligation with original issue
discount where the discount based on the current market value of the obligation
exceeds the then remaining portion of original issue discount (i.e. market
discount), the yield to maturity used to determine interest income earned on the
obligation is the imputed rate based on the original issue discount calculation.
In the case of a tax-exempt obligation with original issue discount where the
discount based on the current market value of the obligation is less than the
then remaining portion of the original issue discount (market premium), the
yield to maturity used to determine interest income earned on the obligation is
based on the market value of the obligation.

With respect to the treatment of discount and premium on
mortgage or other receivables-backed obligations which are expected to be
subject to monthly payments of principal and interest ("pay downs"), the Fund
accounts for gain or loss attributable to actual monthly pay downs as an
increase or decrease to interest income during the period. In addition, the Fund
may elect (1) to amortize the discount or premium on a remaining security, based
on the cost of the security, to the weighted average maturity date, if such
information is available, or to the remaining term of the security, if the
weighted average maturity date is not available, or (2) not to amortize the
discount or premium on a remaining security.

For the purpose of computing yield, dividend income is
recognized by accruing 1/360 of the stated dividend rate of each obligation in
the Fund's portfolio each day that the obligation is in the portfolio. The Fund
does not use equalization accounting in the calculation of yield. Expenses
accrued during any base period, if any, pursuant to the Plan are included among
the expenses accrued during the base period. Any reimbursement accrued pursuant
to the Plan during a base period, if any, will reduce expenses accrued pursuant
to such plan, but only to the extent the reimbursement does not exceed the
accrued expenses for the base period.

The Fund's yield for the one-month period ended December 31,
1997 determined in accordance with the above formula was ____%.

Average annual total return quotations are computed by finding
the average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period (assuming all dividends
and distributions are reinvested) to equal the ending redeemable value of such

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<PAGE>

hypothetical investment on the last day of the designated period in accordance
with the following formula:

P(1+T)^n = ERV

Where: P = a hypothetical initial payment of $1000

T = average annual total return

n = number of years

ERV = ending redeemable value of a hypothetical $1000
payment made at the end of a designated period (or
fractional portion thereof)

For purposes of the above computation, it is assumed that all dividends and
distributions made by the Fund are reinvested at net asset value during the
designated period. The average annual return quotation is determined to the
nearest 1/100 of 1%. The average annual total return for the year ended December
31, 1997 was _____%. For the five-year period ended December 31, 1997, the
average annual total return was ____%. The average annual total return was ____%
for the ten-year period ended December 31,
1997.

In determining the average annual total return (calculated as
provided above), recurring fees, if any, that are charged to all shareholder
accounts are taken into consideration. For any account fees that vary with the
size of the account, the account fee used for purposes of the above computation
is assumed to be the fee that would be charged to the Fund's mean account size.

The Fund may also from time to time advertise its taxable
equivalent yield. The Fund's taxable equivalent yield is determined by dividing
that portion of the Fund's yield (calculated as described above) that is
tax-exempt by one minus the stated marginal Federal income tax rate and adding
the product to that portion, if any, of the yield of the Fund that is not
tax-exempt. The taxable equivalent yield of the Fund for the one-month period
ended December 31, 1997 was ____% for a taxpayer whose income was subject to the
then highest combined Federal and California State income tax rate of _____%.

The Fund's yield and average annual total return will vary
from time to time depending on market conditions, the composition of the Fund's
portfolio and operating expenses of the Fund. These factors and possible
differences in the methods used in calculating yields and returns should be
considered when comparing performance information regarding the Fund to
information published for other investment companies and other investment
vehicles. Yields and return quotations should also be considered

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<PAGE>

relative to changes in the value of the Fund's shares and the risks associated
with the Fund's investment objective and policies. At any time in the future,
yields and return quotations may be higher or lower than past yields or return
quotations and there can be no assurance that any historical yield or return
quotation will continue in the future.

CUSTODIAN AGREEMENT AND INDEPENDENT ACCOUNTANTS

Firstar Trust Company (the "Bank"), 615 East Michigan Street,
Milwaukee, WI, acts as Custodian of the Fund's cash and securities. The Bank
also acts as transfer agent and bookkeeping agent for the Fund, and, as
bookkeeping agent, monitors the Fund's accounting records and calculates its net
asset value.

McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York,
acts as independent public accountants for the Fund, performing an annual audit
of the Fund's financial statements and preparing its tax return.

TAXES

The following is only a summary of certain additional federal
income tax considerations generally affecting the Fund and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.

Qualification as a Regulated Investment Company

The Fund has elected to be taxed as a regulated investment
company for federal income tax purposes under Subchapter M of the Code. As a
regulated investment company, the Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable

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<PAGE>

year, will be considered distributions of income and gains of the taxable year
and will therefore count toward satisfaction of the Distribution Requirement.

In addition to satisfying the Distribution Requirement, a
regulated investment company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement").

In general, gain or loss recognized by the Fund on the
disposition of an asset will be a capital gain or loss. However, gain recognized
on the disposition of a debt obligation (including municipal obligations)
purchased by the Fund at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the Fund
held the debt obligation.

Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss incurred
after October 31 as if it had been incurred in the succeeding year.

In addition to satisfying the requirements described above,
the Fund must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Fund's taxable year, at least 50% of the value of the Fund's assets must
consist of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to each of
which the Fund has not invested more than 5% of the value of the its total
assets in securities of such issuer and does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.

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<PAGE>

If for any taxable year the Fund does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of corporate
shareholders.

Excise Tax on Regulated Investment Companies

A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). (Tax-exempt interest on municipal obligations is not subject to the
excise tax.) The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.

For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).

The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.

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<PAGE>

Fund Distributions

The Fund anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but will not qualify for the 70% dividends-received
deduction for corporate shareholders.

The Fund may either retain or distribute to shareholders its
net capital gain for each taxable year. The Fund currently intends to distribute
any such amounts. Net capital gain that is distributed and designated as a
capital gain dividend will be taxable to shareholders as long-term capital gain,
regardless of the length of time a shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.

The Fund intends to qualify to pay exempt-interest dividends
by satisfying the requirement that at the close of each quarter of the Fund's
taxable year at least 50% of the Fund's total assets consists of tax-exempt
municipal obligations. Distributions from the Fund will constitute
exempt-interest dividends to the extent of the Fund's tax-exempt interest income
(net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of the Fund are excluded by them from gross income
for federal income tax purposes. However, shareholders required to file federal
income tax returns will be required to report the receipt of exempt-interest
dividends on their returns. Moreover, while exempt-interest dividends are
excluded from gross income for federal income tax purposes, they may be subject
to alternative minimum tax ("AMT") in certain circumstances and may have other
collateral tax consequences discussed below. Distributions by the Fund of any
investment company taxable income or of any net capital gain will be taxable to
shareholders as discussed above.

AMT is imposed in addition to, but only to the extent it
exceeds, the regular tax and is computed -- at a maximum marginal rate of 28%
for noncorporate taxpayers and 20% for corporate taxpayers -- on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. Exempt-interest dividends derived from certain "private activity"
municipal obligations issued after August 7, 1986 generally will constitute an
item of tax preference includable in AMTI for both corporate and noncorporate
taxpayers. In addition, exempt-interest dividends derived from all municipal
obligations, regardless of the date of issue, must be included in adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.

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<PAGE>

Exempt-interest dividends must be taken into account in
computing the portion, if any, of social security or railroad retirement
benefits that must be included in an individual shareholder's gross income and
subject to federal income tax. Further, a shareholder of the Fund is denied a
deduction for interest on indebtedness incurred or continued to purchase or
carry shares of the Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds held
by the Fund will likely be subject to tax on dividends paid by the Fund which
are derived from interest on such bonds. Receipt of exempt-interest dividends
may result in other collateral federal income tax consequences to certain
taxpayers, including financial institutions, property and casualty insurance
companies and foreign corporations engaged in a trade or business in the United
States. Prospective investors should consult their own tax advisers as to such
consequences.

Distributions by the Fund that do not constitute ordinary
income dividends, exempt-interest dividends or capital gain dividends will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his shares; any excess will be treated as gain
realized from a sale of the shares, as discussed below.

Distributions by the Fund will be treated in the manner
described above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Fund (or of another fund). Shareholders
receiving a distribution in the form of additional shares will be treated as
receiving a distribution in an amount equal to the fair market value of the
shares received, determined as of the reinvestment date. In addition, if the net
asset value at the time a shareholder purchases shares of the Fund reflects
realized but undistributed income or gain, or unrealized appreciation in the
value of assets held by the Fund, a subsequent distribution of such amounts will
be taxable to the shareholder in the manner described above, although it
economically constitutes a return of capital.

Ordinarily, shareholders are required to take distributions by
the Fund into account in the year in which they are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year provided such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.

The Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of ordinary income and capital gain dividends,
and the proceeds of redemption of shares, paid to

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<PAGE>

any shareholder who (1) has failed to provide a correct taxpayer identification
number , (2) is subject to backup withholding for failure properly to report the
receipt of interest or dividend income , or (3) has failed to certify to the
Fund that it is not subject to backup withholding or that it is an "exempt
recipient" (such as a corporation).

Sale or Redemption of Shares

A shareholder will recognize gain or loss on the sale or
redemption of shares of the Fund in an amount equal to the difference between
the proceeds of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be disallowed if
the shareholder purchases other shares of the Fund within 30 days before or
after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of the Fund will be
considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. Long-term capital gain recognized
by an individual shareholder will be taxed at the lowest rates applicable to
capital gains if the holder has held such shares for more than 18 months at the
time of the sale. However, any capital loss arising from the sale or redemption
of shares held for six months or less will be disallowed to the extent of the
amount of exempt-interest dividends received on such shares and (to the extent
not disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) generally will
apply in determining the holding period of shares. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

Foreign Shareholders

Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.

If the income from the Fund is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to the shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) on the gross amount of the
dividend. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale or redemption of shares of

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<PAGE>

the Fund, capital gain dividends and exempt-interest dividends and amounts
retained by the Fund that are designated as undistributed capital gains.

If the income from the Fund is effectively connected with a
U.S. trade or business carried on by a foreign shareholder, then ordinary income
and capital gain dividends received in respect of, and any gains realized on the
sale of, shares of the Fund will be subject to U.S. federal income tax at the
rates applicable to U.S. taxpayers.

In the case of a foreign noncorporate shareholder, the Fund
may be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding (or subject to
withholding at a reduced treaty rate), unless the shareholder furnishes the Fund
with proper notification of its foreign status.

The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund, including the applicability of foreign taxes.

Effect of Future Legislation; Local Tax Considerations

The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, perhaps with retroactive effect.

Rules of state and local taxation of ordinary income
dividends, exempt-interest dividends and capital gain dividends from regulated
investment companies may differ from the rules for U.S. federal income taxation
described above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the Fund.

PORTFOLIO TRANSACTIONS

The Fund's management provides the Fund with investment advice
and recommendations for the purchase and sale of portfolio securities. Newly
issued securities are usually purchased from the issuer or an underwriter, at
prices including underwriting fees; other purchases and sales are usually placed
with those dealers from whom it appears that the best price or execution will be
obtained. All orders for the purchase and sale of portfolio

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<PAGE>

securities are placed by the Fund's management, subject to the general control
of the Fund's Trustees. The Fund's management may sell portfolio securities
prior to their maturity if market conditions and other considerations indicate,
in the opinion of the Fund's management, that such sale would be advisable. In
addition, the Fund's management may engage in short-term trading when it
believes it is consistent with the Fund's investment objective. Also, a security
may be sold and another of comparable quality may be simultaneously purchased to
take advantage of what the Fund's management believes to be a temporary
disparity in the normal yield relationship of two securities. The frequency of
portfolio transactions -- the Fund's turnover rates -- will vary from year to
year depending upon market conditions. For the years ended December 31, 1997 and
1996 , the Fund's annual rate of portfolio turnover was approximately 70.86% and
89.83% , respectively. Because a high turnover rate increases transaction costs
and the possibility of taxable short-term gains (see "Dividends and Tax Status"
in the Fund's Prospectus), the Fund's management weighs the added costs of
short-term investment against anticipated gains. The Fund's management is
generally responsible for the implementation, or supervision of the
implementation, of investment decisions, including the allocation of principal
business and portfolio brokerage, and the negotiation of commissions.

It is the Fund's policy to seek execution of its purchases and
sales at the most favorable prices through responsible broker-dealers and, in
agency transactions, at competitive commission rates. When considering
broker-dealers, the Fund will take into account such factors as the price of the
security, the size and difficulty of the order, the rate of commission, if any,
the reliability, financial condition, integrity and general execution and
operational capabilities of competing broker-dealers, and the brokerage and
research services which they provide to the Fund's management. During the years
1986 through 1993, no brokerage commissions were paid by the Fund; all portfolio
transactions were conducted with dealers acting as principal.

The Board of Trustees of the Fund is authorized to adopt a
brokerage allocation policy pursuant to the Securities Exchange Act of 1934
which would permit the Fund to pay a broker-dealer which does not furnish
research services, or which furnishes research brokerage and research services
provided by the broker-dealer.

Section 28(e)(3) of the Securities and Exchange Act of 1934
defines "Brokerage and Research Services" as including, among other things,
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, the availability of securities or purchasers
or sellers of securities, furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and
performance of accounts, and effecting securities transactions and

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<PAGE>

performing functions incidental thereto (such as clearance and settlement).

It will not be the Fund's practice to allocate principal
business or brokerage on the basis of sales of Fund shares which may be made
through brokers and dealers, although broker-dealers effecting purchases of Fund
shares for their customers may participate in principal transactions or
brokerage allocation as described above.

From January 1, 1990 to January 31, 1996, the Manager directed
syndicate designations in the aggregate dollar amount of $858,094 to Capital
Institutional Services, Inc. ("CIS") in connection with the Fundamental Funds'
bond purchases through underwriting syndicates. The Manager has represented that
CIS, a third-party research provider, at the Manager's direction, paid portions
of such syndicate designations to approximately 30 different firms that provided
research services used by the Manager in managing the Fundamental Funds,
including Capital Market Services, Inc. ("CMS"). Further, that CMS was paid by
CIS $115,000 for research provided to the Manager. The $115,000 dollar amount
paid by CIS to CMS for the following fiscal years of the Fund was: $35,000 in
1995; $55,000 in 1994; and $25,000 in 1993. The Manager has also represented
that it learned in 1996 that at all times during the years 1993, 1994 and 1995,
CMS was 100% owned by Mr. Donald E. Newell's wife. Mr. Vincent J. Malanga and
Mr. Donald E. Newell are each executive officers and 50% shareholders of LaSalle
Portfolio Management, Inc. In order to remove any appearance of impropriety
concerning all of the payments made by CIS to CMS in return for research the
Manager obtained from CMS, the Manager reimbursed Fundamental U. S. Government
Strategic Income Fund (the beneficiary of the research) $115,000 out of its own
resources.

ADDITIONAL INFORMATION ABOUT THE ORGANIZATION OF THE FUND

The Fund's Declaration of Trust contains an express disclaimer
of shareholder liability for the Fund's acts and oblig ations and requires the
Fund to give notice of such disclaimer in each agreement, obligation or
instrument entered into by the Fund or its Trustees. The Declaration of Trust
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereof. Thus, while Massachusetts laws permit a shareholder of a
trust such as this to be held personally liable under certain circumstances, the
risk of a shareholder incurring financial loss on account of shareholder
liability is highly unlikely and is limited to the highly remote circumstances
in which the Fund would be unable to meet its obligations.

The Fund's Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of a single class and to
divide or combine the shares into a greater or lesser

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<PAGE>

number of shares without thereby changing the proportionate beneficial interests
in the Fund. Each share represents an interest in the Fund proportionately equal
to the interest of each other share. Certificates representing the shares of the
Fund will not be issued. Upon liquidation of the Fund, all shareholders of the
Fund would share pro rata in the net assets of the Fund available for
distribution to shareholders. If they deem it advisable and in the best interest
of shareholders, the Board of Trustees of the Fund may create additional classes
of shares which may be different from each other only as to dividends or each of
which may have separate assets and liabilities (in which case any such class
would have a designation including the word "Series"). If additional classes
designated as Series were created, shares of each Series would be entitled to
vote as a Series only to the extent required by the 1940 Act or as permitted by
the Board of Trustees. Rule 18f-2 under the 1940 Act provides that any matter
required by the provisions of the 1940 Act or applicable state law, or
otherwise, to be submitted to the holders of the outstanding voting securities
of an investment company such as the Fund, shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Series affected by such matter. Rule 18f-2 further
provides that a Series shall be deemed to be affected by a matter unless it is
clear that the interests of each Series in the matter are substantially
identical or that the matter does not significantly affect any interest of such
Series. An example of a matter that would be voted on by each Series is approval
of an investment advisory agreement. However, the Rule exempts the selection of
independent public accountants, the approval of contracts with principal
underwriters and the election of Trustees from the separate voting requirements
of the Rule. Income, direct liabilities and expenses of the Fund not directly
allocable to a particular series would be allocated among the Series in
proportion to the relative net assets of each Series by the Board of Trustees.
Allocations would be made as often as necessary to comply with Rule 2a-4 under
the 1940 Act.

INFORMATION WITH RESPECT TO CALIFORNIA STATE
AND MUNICIPAL FINANCES

Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations, and voter initiatives,
as discussed below, could adversely affect the market values and marketability
of, or result in default of, existing obligations, including obligations that
may be held by a fund. Obligations of the state or local governments may also be
affected by budgetary pressures affecting the State of California (the State)
and economic conditions in the State. Interest income to a fund could also be
adversely affected. The following discussion highlights only some of the more
significant financial trends and problems, and is based on

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information drawn from official statements and prospectuses relating to
securities offerings of the State , its agencies, or instrumentalities, as
available as of the date of this SAI. The Fund has not independently verified
any of the information contained in such official statements and other publicly
available documents, but is not aware of any fact which would render such
information inaccurate.

ECONOMY. The State's economy is the largest among the 50
states and one of the largest in the world. The State's population grew by 27%
in the 1980s and, at over 32 million, it now represents over 12% of the total
U.S. population. Total personal income in the State, at an estimated $810
billion in 1996, accounts for more than 12% of all personal income in the
nation. Total employment in 1995 was over 14 million, the majority of which is
in the service, trade, and manufacturing sectors. In mid-1990 to late 1993, the
State suffered a recession with the worst economic, fiscal and budget conditions
since the 1930s. Construction, manufacturing (especially aerospace), and
financial services, among others, were all severely affected, particularly in
Southern California. Job losses were the worst of any post-war recession.
Employment levels stabilized by late 1993 and steady growth has occurred since
the start of 1994; pre-recession job levels were reached in early 1996.
Unemployment, while higher than the national average, came down significantly
from the January 1994 peak of 10%. Economic indicators show a steady recovery
underway in California since the start of 1994 particularly in export-related
industries, high technology manufacturing and services, construction,
entertainment and tourism. The Asian economic difficulties may have some
dampening effect on the state's economy. Any delay or reversal of the economic
recovery may cause a recurrence of revenue shortfalls for the State.

OBLIGATIONS OF THE STATE OF CALIFORNIA. As of
January 1, 1998, the State had approximately $18.6 billion of general obligation
bonds outstanding (including $986 million of commercial paper notes which were
intended to be refinanced by future bond sales), and $6.9 billion remained
authorized but unissued. In addition, the State had outstanding lease-purchase
obligations, payable from the State's General Fund, of approximately $6.4
billion, and $1.4 billion authorized and unissued. State voters approved about
$6.4 billion of new bonds in two elections in 1996. Of the State's outstanding
general obligation debt, approximately 21% is presently self-liquidating (for
which program revenues are anticipated to be sufficient to reimburse the General
Fund for debt service payments). In fiscal year 1996-97, debt service on general
obligation bonds and lease-purchase debt was approximately 5.0% of General Fund
revenues. The State has paid the principal of and interest on its general
obligation bonds, lease-purchase debt, and short-term obligations when due.

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RECENT STATE FINANCIAL RESULTS. The principal sources of State
General Fund revenues in 1996-97 were the California personal income tax (47% of
total revenues), the sales tax (34%), bank and corporation taxes (12%), and the
gross premium tax on insurance (2%). The State maintains a Special Fund for
Economic Uncertainties (the SFEU), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, but which is required to be
replenished as soon as sufficient revenues are available. Year-end balances in
the SFEU are included for financial reporting purposes in the General Fund
balance. Because of the recession starting in 1990-91, the SFEU has not had a
significant positive balance in this decade until the 1996-97 Fiscal Year. It is
projected to be less than one-half of one percent of General Fund revenues in
1997-98 and 1998-99.

Throughout the 1980s, State spending increased rapidly as the
State population and economy also grew rapidly, including many assistance
programs to local governments, which were constrained by Proposition 13 and
other laws. The largest State program is assistance to local public school
districts. In 1988, an initiative (Proposition 98) was enacted which (subject to
suspension by a 2/3 vote of the Legislature and the Governor) guarantees local
school districts and community college districts a minimum share of State
General Fund revenues (currently about 35%). Since the start of fiscal year
1990-91 until fiscal year 1995-96, the State faced adverse economic, fiscal, and
budget conditions. The economic recession seriously affected State tax revenues.
It also caused increased expenditures for health and welfare programs. The State
is also facing a structural imbalance in its budget with the largest programs
supported by the General Fund (education, health, welfare and corrections)
growing at rates significantly higher than the growth rates for the principal
revenue sources of the General Fund. These structural concerns will continue in
future years; in particular, it is anticipated that there will be a need to
increase capital and operating costs of the correctional system in response to a
"Three Strikes" law enacted in 1994 which mandates life imprisonment for certain
felony offenders.

RECENT BUDGETS. As a result of these factors, among others,
from the late 1980s until 1992-93 the State had a period of nearly chronic
budget imbalance, with expenditures exceeding revenues in four out of six years,
and the State accumulated and sustained a budget deficit in the SFEU approaching
$2.8 billion at its peak at June 30, 1993. For several years, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance and to close large "budget gaps" which were
identified. The Legislature and Governor eventually agreed on a number of
different steps to produce Budget Acts in the years 1991-92 to 1994-95,
(although not all these actions were taken in each year): significant cuts in
health and welfare program expenditures; transfers of program responsibilities
and some funding sources from the State to local governments, coupled with

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some reduction in mandates on local government; transfer of about $3.6 billion
in annual local property tax revenues from cities, counties, redevelopment
agencies and some other districts to local school districts, thereby reducing
state funding for schools; reduction in growth of support for higher education
programs, coupled with increases in student fees; revenue increases
(particularly in the fiscal year 1991-92 budget), most of which were for a short
duration; increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and various one-time adjustment
and accounting changes.

The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993, finally led to the
restoration of positive financial results, with revenues equaling or exceeding
expenditures starting in fiscal year 1992-1993. As a result, the accumulated
budget deficit of about $2.8 billion was eliminated by June 30, 1997, when the
State showed a positive balance of about $408 million, on a budgetary basis, in
the SFEU.

A consequence of the accumulated budget deficits in the early
1990's, together with other factors such as disbursement of funds to local
school districts "borrowed" from future fiscal years and hence not shown in the
annual budget, was to significantly reduce the State's cash resources available
to pay its ongoing obligations. The State's cash condition became so serious
that from late spring 1992 until 1995, the State had to rely on issuance of
short term notes which matured in a subsequent fiscal year to finance its
ongoing deficit, and pay current obligations. For a two-month period in the
summer of 1992, pending adoption of the annual Budget Act, the State was forced
to issue registered warrants (IOUs) to some of its suppliers, employees and
other creditors. The last of these deficit notes was repaid in April, 1996.

The 1995-96 and 1996-97 Budget Acts reflected significantly
improved financial conditions, as the State's economy recovered and tax revenues
soared above projections. Over the two years, revenues averaged about $2 billion
higher than initially estimated. Most of the additional revenues were allocated
to school funding, as required by Proposition 98, and to make up shortfalls in
federal aid for health and welfare costs and costs of illegal aliens. The
budgets for both these years showed strong increases in funding for K-14 public
education, including implementation of initiatives to reduce class sizes for
lower elementary grades to not more than 20 pupils. Higher education funding
also increased. Spending for health and welfare programs was kept in check, as
previously-implemented cuts in benefit levels were retained.

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The final results for fiscal year 1996-97 showed General Fund
revenues of $49.2 billion and expenditures of $48.9 billion. The improved
revenues allowed the repayment of the last of the recession-induced budget
deficits; the SFEU had a balance of $408 million on a budgetary basis ($281
million on a cash basis) as of June 30, 1997, the first significant positive
balance in the decade. In 1996-97, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes which matured on June 30, 1997, and did not require any external borrowing
over the end of the fiscal year.

Fiscal Year 1997-98 Budget. With continued strong economic
recovery and surging tax receipts, the State entered the 1997-98 Fiscal Year in
the strongest financial position in the decade. However, in May 1997, the
California Supreme Court ruled that the State had acted illegally in 1993 and
1994 by using a deferral of payments to the Public Employees Retirement Fund to
help balance earlier budgets. In response to this court decision, the Governor
ordered an immediate repayment to the Retirement Fund of about $1.235 billion,
which was made in late July, 1997, and substantially "used up" the expected
additional revenues for the fiscal year.

On August 18, 1997, the Governor signed the 1997-98 Budget
Act. The Budget Act assumes General Fund revenues and transfers of $52.5
billion, and contains expenditures of $52.8 billion. As a result, the budget
reserve (SFEU) is reduced to an estimated $112 million at June 30, 1998. The
Budget Act also contains $14.4 million of Special Fund expenditures. Following
enactment of the Budget Act, the State plans to carry out its normal annual cash
flow borrowing, totaling $3.0 billion to mature June 30, 1998.

The 1997-98 Budget Act provides another year of rapidly
increasing funding for K-14 public education. Total General Fund support will
reach $5,150 per pupil, more than 20% higher than the recession-period levels
which were in effect as late as fiscal year 1993-94. The $1.75 billion in new
funding will be spent on class size reduction and other initiatives, as well as
fully funding growth and cost of living increases. Support for higher education
units in the State also increased by about 6 percent. Because of the pension
payment, most other State programs were funded at levels consistent with prior
years, and several initiatives had to be dropped. These included additional
assistance to local governments, state employee raises, and funding of a bond
bank.

Part of the 1997-98 Budget Act was completion of State welfare
reform legislation to implement the new federal law passed in 1996. The new
State program, called "CalWORKs," to become effective January 1, 1998, will
emphasize programs to bring aid recipients into the workforce. As required by
federal law, new time

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limits will be placed on receipt of welfare aid. Grant levels for 1997-98 remain
at the reduced, prior years' levels.

Although, as noted, the 1997-98 Budget Act projects a budget
reserve in the SFEU of $112 million on June 30, 1998, the General Fund balance
on that date also reflects $1.25 billion of "loans" which the General Fund made
to local schools in the recession years, representing cash outlays above the
mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1997-98 Budget Act contained a $200 million
appropriation from the General Fund toward this settlement.

Updated figures from the Department of Finance, released in
early January, 1998, project both revenues and expenditures will be higher in
1997-98 than estimated when the Budget Act was passed, reflecting continued
strong economic activity. The Department projects the SFEU at June 30, 1998 will
be approximately $329 million.

PROPOSED 1998-99 FISCAL YEAR BUDGET. The Governor released his
proposed FY 1998-99 Budget on January 9, 1998. It projected General Fund
revenues and transfers of $55.4 billion, an increase of almost 5% over 1997-98.
Revenue losses due to tax cuts enacted in late 1997 were expected to be offset
by higher capital gains realizations. The Governor proposed expenditures of
$55.4 billion, also an almost 5% increase from the prior year. The Governor's
Budget proposes significant additional funding for K-12 schools under
Proposition 98, as well as additional funding for higher education, with a
proposed reduction of college student fees. State and federal funds will be used
in the new CalWORKS welfare program, with projections of a fourth consecutive
year of caseload decline. The Governor has proposed a large capital expenditure
program, focusing on schools and universities, but also including corrections,
environmental and general government projects. These proposals would require
approval of almost $10 billion of new general obligation bonds over the next six
years. All of the Governor's proposals will be reviewed by the Legislature as
part of the annual budget process. The State's financial difficulties for the
past budget years and other factors noted above will result in continued
pressure upon almost all local governments, especially those which depend on
State aid, such as school districts and counties. While recent budgets included
both permanent tax increases and actions to reduce costs of state government
over the longer term, the Governor and other analysts have noted that structural
imbalances still exist, and there can be no assurance that the State will not
face budget gaps in the future.

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The ratings on California's long-term general obligation bonds
were reduced in the early 1990's from "AAA" levels which had existed prior to
the recession. In 1996, Fitch and Standard & Poor's raised their ratings of
California's general obligation bonds, which are currently assigned ratings of
"A+" from Standard & Poor's, "A1" from Moody's and "AA-" from Fitch. There can
be no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to creditworthiness of obligations issued by the state
of California, and that there is no obligation on the part of the state to make
payment on such local obligations in the event of default.

OBLIGATIONS OF OTHER CALIFORNIA ISSUERS

STATE ASSISTANCE. Property tax revenues received by local
governments declined more than 50% following passage of Proposition 13.
Subsequently, the State's Legislature enacted measures to provide for the
redistribution of the State's General Fund surplus to local agencies; the
reallocation of certain State revenues to local agencies; and the assumption of
certain governmental functions by the State to assist municipal issuers to raise
revenues. Total local assistance from the State's General Fund totaled
approximately $36.6 billion in fiscal year 1996-97 (over 70% of General Fund
expenditures) and has been budgeted at $38.8 billion for fiscal year 1997-98,
including the effect of implementing reductions in certain aid programs. To
reduce State General Fund support for school districts, the 1992-93 and 1993-94
Budget Acts caused local governments to transfer $3.8 billion of annual property
tax revenues to school districts, representing reversal of the post-Proposition
13 "bailout" aid.

Legislation enacted in late 1997 provides for the State to
take over financial responsibility for funding trial courts throughout the
State. This is estimated to save counties and cities a total of over $350
million annually.

To the extent the State should be constrained by its Article
XIIIB appropriations limit, or its obligation to conform to Proposition 98, or
other considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. A number of counties both
rural and urban, have indicated that their budgetary condition is extremely
serious. At the start of fiscal year 1995-96, Los Angeles County ("L.A. County")
the largest county in the State, was forced to impose significant cuts in
services and personnel, particularly in the health care system, in order to
balance its budget. L.A. County's debt was downgraded by Moody's and S&P in the
summer of 1995. Orange

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County, which recently emerged from federal bankruptcy protection, has
substantially reduced services and personnel in order to live within much
reduced means. A school district (Richmond Unified) filed for protection under
bankruptcy laws several years ago, but the petition was later dismissed; other
school districts have indicated financial stress, although none has threatened
bankruptcy.

Counties and cities may face further budgetary pressures as a
result of changes in welfare and public assistance programs, which were enacted
in August, 1997 in order to comply with the federal welfare reform law.
Generally, counties play a large role in the new system, and are given
substantial flexibility to develop and administer programs to bring aid
recipients into the workforce. Counties are also given financial incentives if
either at the county or statewide level, the "Welfare-to-Work" programs exceed
minimum targets; counties are also subject to financial penalties for failure to
meet such targets. Counties remain responsible to provide "general assistance"
for able-bodied indigents who are ineligible for other welfare programs. The
long-term financial impact of the new CalWORKS system on local governments is
still unknown.

ASSESSMENT BONDS. Municipal obligations which are assessment
bonds or Mello-Roos bonds may be adversely affected by a general decline in real
estate values or a slowdown in real estate sales activity. In many cases, such
bonds are secured by land which is undeveloped at the time of issuance but
anticipated to be developed within a few years after issuance. In the event of
such reduction or slowdown, such development may not occur or may be delayed,
thereby increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal liability of the
owners of the property assessed, the lien on the property is the only security
for the bonds. Moreover, in most cases the issuer of these bonds is not required
to make payments on the bonds in the event of delinquency in the payment of
assessments or taxes, except from amounts, if any, in a reserve fund established
for the bonds.

CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain State
long-term lease obligations, though typically payable from the General Fund of
the municipality, are subject to "abatement" in the event the facility being
leased is unavailable for beneficial use and occupancy by the municipality
during the term of the lease. Abatement is not a default, and there may be no
remedies available to the holders of the certificates evidencing the lease
obligation in the event abatement occurs. The most common causes of abatement
are failure to complete construction of the facility before the end of the
period during which lease payments have been capitalized and uninsured casualty
losses to the facility (e.g., due to earthquake). In the event abatement occurs
with respect to a lease obligation, lease payments may be

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interrupted (if all available insurance proceeds and reserves are exhausted) and
the certificates may not be paid when due.

Several years ago the Richmond Unified School District
(District) entered into a lease transaction in which certain existing properties
of the District were sold and leased back in order to obtain funds to cover
operating deficits. Following a fiscal crisis in which the District's finances
were taken over by a State receiver (including a brief period under bankruptcy
court protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders. One of the defenses raised in answer to this lawsuit was the invalidity
of the original lease transaction. The trial court upheld the validity of the
District's lease, and the case has been settled. However, any future judgment in
a similar case against the position taken by the Trustee may have implications
for lease transactions of a similar nature by other State entities.

CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHANGES AND
APPROPRIATIONS LIMITATION ON PROPERTY TAXES. Certain obligations held by the
funds may be obligations of issuers that rely in whole or in part, directly or
indirectly, on AD VALOREM property taxes as a source of revenue. The taxing
powers of local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Proposition 13 limits to 1% of full cash value the
rate of AD VALOREM property taxes on real property and generally restricts the
increase in taxes upon reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise AD VALOREM taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness. Under Article XIIIA, the basic 1%
AD VALOREM tax levy is applied against the assessed value of property as of the
owner's date of acquisition (or as of March 1, 1975 if acquired earlier),
subject to certain adjustments. This system has resulted in widely varying
amounts of tax on similarly situated properties. Several lawsuits were filed
challenging the acquisition-based assessment system of Proposition 13, but on
June 18, 1992, the U.S. Supreme Court announced a decision upholding Proposition
13.

Article XIIIA prohibits local governments from raising
revenues through AD VALOREM property taxes above the 1% limit; it also requires
voters of any government unit to give 2/3 approval to levy any "special tax."
However, court decisions allowed non-voter-approved levies of "general taxes"
which were not dedicated to a specific use.

LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5,
1996, the voters of the State approved Proposition

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218, called the "Right to Vote on Taxes Act." Proposition 218 added Articles
XIIIC and XIIID to the State Constitution, which contain a number of provisions
affecting the ability of local agencies to levy and collect both existing and
future taxes, assessments, fees and charges.

Article XIIIC requires that all new or increased local taxes
be submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994, must be
approved by a majority vote within two years.

Article XIIID contains several new provisions making it
generally more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. Article XIIID also contains several new
provisions affecting "fees" and "charges," defined for purposes of Article XIIID
to mean "any levy other than an ad valorem tax, a special tax, or an assessment,
imposed by a local government upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property-related
service." All new and existing property-related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property-related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property-related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property-related"
for purposes of Article XIIID), no property-related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.

In addition to the provisions described above, Article XIIIC
removes limitations on the initiative power in matters of local taxes,
assessments, fees and charges. Consequently, local voters could, by future
initiative, repeal, reduce or prohibit the future imposition or increase of any
local tax, assessment, fee or charge. It is unclear how this right of local
initiative may be used in cases where taxes or charges have been or will be
specifically pledged to secure debt issues.

The interpretation and application of Proposition 218 will
ultimately be determined by the courts with respect to a number of matters, and
it is not possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of

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local governments, and for this reason, some ratings of California cities and
counties have been, and others may be, reduced.

APPROPRIATIONS LIMITS. The State and its local governments are
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges , or other fees to the
extent that such proceeds exceed the cost of providing the product or service;
but " proceeds of taxes" for local governments exclude most State subventions.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees and certain other non-tax funds,
including bond proceeds. Among the expenditures not included in the Article
XIIIB appropriations limit are: (1) the debt service cost of bonds issued or
authorized prior to January 1, 1979, or subsequently authorized by the voters;
(2) appropriations arising from certain emergencies declared by the Governor;
(3) appropriations for certain capital outlay projects; and (4) appropriations
by the State of post-1989 increases in gasoline taxes and vehicle weight fees.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service responsibilities
between government units. The definitions for such adjustments were liberalized
by Proposition 111 to follow more closely growth in the State's economy. For the
1990-91 fiscal year, each unit of government has recalculated its appropriations
limit by taking the actual 1986-87 limit and applying the Proposition 111 annual
adjustments forward to 1990-91. This was expected to raise the limit in most
cases.

Under Proposition 111, "excess" revenues are measured over a
two-year cycle. With respect to local governments, excess revenues must be
returned by a revision of tax rates or fee schedules within the two subsequent
fiscal years. The appropriations limit for a local government may be overridden
by referendum under certain conditions for up to four years at a time. With
respect to the State, 50% of any excess revenues is to be distributed to K-12
school and community college districts (collectively, K-14 districts) and the
other 50% is to be refunded to taxpayers. In the years immediately following
enactment, very few California governmental entities operated near their
appropriations limit. In the mid-to-late 1980's, many entities were at or
approaching their limit, and several successfully obtained voter approval for
four-year

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waivers of the limit. Since Proposition 111, the appropriations limit has again
ceased to be a practical limit on California governments, but this condition may
change in the future. During fiscal year 1986-87, State receipts from proceeds
of taxes exceeded its appropriations limit by $1.138 billion, which was returned
to taxpayers. Since that time, appropriations subject to limitation were under
the State limit. The 1996-97 Budget provided for State appropriations more than
$7.0 billion under the limit for fiscal year 1996-97.

OTHER CONSIDERATIONS. The repayment of Industrial Development
Securities secured by real property may be affected by State laws limiting
foreclosure rights of creditors. Health Care and Hospital Securities may be
affected by changes in State regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect "tax
allocation" bonds issued by State redevelopment agencies. Such bonds are secured
solely by the increase in assessed valuation of a redevelopment project area
after the start of redevelopment activity. In the event that assessed values in
the redevelopment project decline (for example, because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on State tax allocation bonds after the enactment of Articles
XIIIA and XIIIB, and only resumed such ratings on a selective basis. Proposition
87, approved by State voters in 1988, requires that all revenues produced by a
tax rate increase go directly to the taxing entity which increased such tax rate
to repay that entity's general obligation indebtedness. As a result,
redevelopment agencies (which, typically, are the issuers of Tax Allocation
Securities) no longer receive an increase in tax increment when taxes on
property in the project area are increased to repay voter-approved bonded
indebtedness. Substantially all of the State is within an active geologic region
subject to major seismic activity. Any California municipal obligation held by
the fund could be affected by an interruption of revenues because of damaged
facilities or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the federal
or State government to appropriate sufficient funds within their respective
budget limitations. Because of the complex nature of Articles XIIIA, XIIIB,
XIIIC and XIIID of the California Constitution (described briefly above), the
ambiguities and possible inconsistencies in their terms, and the impossibility
of predicting future appropriations or changes in population and the

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cost of living, and the probability of continuing legal challenges, it is not
currently possible to determine fully the impact of these provisions, or the
outcome of any pending litigation with respect to those provisions on State
obligations held by the fund or on the ability of the State or local governments
to pay debt service on such obligations. Legislation has been or may be
introduced (either in the State Legislature or by initiative) which would modify
existing taxes or other revenue-raising measures or which either would further
limit or, alternatively, would increase the abilities of State and local
governments to impose new taxes or increase existing taxes. It is not presently
possible to predict the extent to which any such legislation will be enacted, or
if enacted, how it would affect California municipal obligations. It is also not
presently possible to predict the extent of future allocations of State revenues
to local governments or the abilities of State or local governments to pay the
interest on, or repay the principal of, such California municipal obligations in
light of future fiscal circumstances.

OTHER INFORMATION

As of March 31, 1998, the Trustees and Officers of the Fund as
a group beneficially owned less than 1% of the outstanding shares of the Fund.
As of such date, the following person was known by Fund management to have owned
beneficially, directly or indirectly, 5% or more of the outstanding shares of
the Fund:

NUMBER OF SHARES PERCENTAGE OF
NAME & ADDRESS OWNED OUTSTANDING SHARES
- -------------- ----- ------------------

Eugene L. Lessner (Trustee) 100,519.349 5.56%
Lessner Revocable Living Trust
U/A DTD Nov. 17, 1986
3244 San Amadeo, Unit 3A
Laguna Hills, CA 92653-3076

FINANCIAL STATEMENTS

Audited financial statements of the Fund for the year ended
December 31, 1997 are attached hereto.

-40-

<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 > 15 years) (includes long zero coupons)
FCSI -- Short or Intermediate (maturity < 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 > 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 > 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.

<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 by 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) ............ $ 275 $ 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.

26
<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

(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 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
=========

<PAGE>

(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>

INFORMATION WITH RESPECT TO SECURITIES RATINGS*

Standard & Poor's Corporation.

A description of the applicable Standard & Poor's Corporation rating
symbols and their meanings follows:

S&P's corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.

The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.

The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.

The ratings are based, in varying degrees, on the following
considerations.

(1) Likelihood of default--capacity and willingness of the obligor
as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation.

(2) Nature and provisions of the obligation.

(3) Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangements under the laws of bankruptcy and other laws
affecting creditors' rights.

AAA--This is the highest rating assigned by S&P to a debt obligation.
Capacity to pay interest and repay principal is extremely strong.

AA--Bonds rated AA have a very strong capacity to pay interest and
repay principal, and differ from the highest rated issue only in small degree.

- --------
* As published by the rating companies.

A-1

<PAGE>

A--Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.

BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.

Plus(+) or Minus(-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.

Provisional Ratings: the letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. Accordingly, the investor should exercise his own judgment with
respect to such likelihood and risk.

MOODY'S INVESTORS SERVICE, INC.

A brief description of the applicable Moody's Investors Service, Inc.
rating symbols and their meanings follows:

Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large, or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Their safety is so
absolute that, with the occasional exception of oversupply in a few specific
instances, characteristically, their market value is affected solely by money
market fluctuations.

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

A-2

<PAGE>

somewhat larger than in Aaa securities. Their market value is virtually immune
to all but money market influences, with the occasional exception of oversupply
in a few specific instances.

A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future. The
market value of A-rated bonds may be influenced to some degree by economic
performance during a sustained period of depressed business conditions, but,
during periods of normalcy, A-rated bonds frequently move in parallel with Aaa
and Aa obligations, with the occasional exception of oversupply in a few
specific instances.

Baa--Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. The market
value of Baa-rated bonds is more sensitive to changes in economic circumstances,
and aside from occasional speculative factors applying to some bonds of this
class, Baa market valuations move in parallel with Aaa, Aa and A obligations
during periods of economic normalcy, except in instances of oversupply.

Moody's bond rating symbols may contain numerical modifiers of a
generic rating classification. The modifier 1 indicates that the bond ranks at
the high end of its category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

Con. (---)--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (1) earnings of projects under construction, (2) earnings of
projects unseasoned in operation experience, (3) rentals which begin when
facilities are completed, or (4) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of condition.

A-3

<PAGE>

FITCH

Ratings

A brief description of the applicable Fitch Investors Service, Inc.
rating symbols and their meanings is as follows:

AAA

Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.

Bonds rated AA are considered to be investment grade and of the very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.

Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.

BBB

Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.

Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.

A-4

<PAGE>

Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.

CCC

Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.

Bonds rated C are in imminent default in payment of interest or
principal.

DDD, DD AND D

Bonds rated DDD, DD and D are in actual or imminent default of interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for recovery.

Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA Category covering 12-36 months or the
DDD, DD or D categories.

A-5

<PAGE>

DUFF & PHELPS, INC.

RATING
SCALE DEFINITION

AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA+ High credit quality. Protection factors are strong.
AA- Risk is AA modest but may vary slightly from time to time
AA- because of economic conditions.

A+ Protection factors are average but adequate. However,
A risk factors are more variable and greater in periods of
A- economic stress.

BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.

BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective financial
BB- protection factors fluctuate according to industry
conditions or company fortunes. Overall quality may move up
or down frequently within this category.

B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into
a higher or lower rating grade.

CCC Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.

DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.

DP Preferred stock with dividend arrearages.

A-6

<PAGE>

RATING
SCALE DEFINITION

HIGH GRADE

Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations.

Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.

Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.

GOOD GRADE

Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.

SATISFACTORY GRADE

Duff 3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.

NON-INVESTMENT GRADE

Duff 4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.

DEFAULT

Issuer failed to meet scheduled principal and/or
interest payments.

MUNICIPAL NOTE RATINGS

The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3
and MIG 4. Notes bearing the designation MIG 1 are judged to be of the best
quality, enjoying strong protection from

A-7

<PAGE>

cash flows of funds for their servicing or form established and broad-based
access to the market for refinancing, or both. Notes bearing the designation MIG
2 are judged to be of high quality, with margins of protection ample although
not so large as in the preceding group. Notes bearing the designation MIG 3 are
judged to be of favorable quality, with all security elements accounted for, but
lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established. Notes bearing
the designation MIG 4 are judged to be of adequate quality, carrying specific
risk but having protection commonly regarded as required of an investment
security and not distinctly or predominantly speculative.

SHORT-TERM RATINGS

FITCH

Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.

Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.

F-1+

Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.

Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.

F-1

Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.

F-2

Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the margin of safety
is not as great as the F-1+ and F-1 categories.

A-8

<PAGE>

MUNICIPAL COMMERCIAL PAPER RATINGS

Moody's and S&P's ratings grades for commercial paper, set forth
below, are applied to municipal commercial paper as well as taxable commercial
paper.

Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime-1, Highest Quality; Prime-2, Higher
Quality; and Prime-3, High Quality.

S&P's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues assigned A ratings are
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety. The "A-2" designation indicates that the degree of
safety regarding timely payment is very strong. The "A-2" designation indicates
that capacity for timely payment is strong. However, the relative degree of
safety is not as overwhelming as for issues designated "A-1". The "A-3"
designation indicates that the capacity for timely payment is satisfactory. Such
issues, however, are somewhat more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations. Issues rated
"B" are regarded as having only an adequate capacity for timely payment and such
capacity may be impaired by changing conditions or short-term adversities.

A-9

<PAGE>

PART C. OTHER INFORMATION

ITEM 24. Financial Highlights

(A) FINANCIAL STATEMENTS:
IN PART A:
(1) Financial Highlights

IN PART B:
(1) Auditor's Report

(2) Statement of Assets and Liabilities
as of December 31, 1997.
(3) Statements of Changes in Net Assets for
the years ended December 31, 1997 and
1996.
(4) Statement of Operations for the year
ended December 31, 1997.
(5) Statement of Investments as of
December 31, 1997.

(B) EXHIBITS:
(1) Declaration of Trust of Registrant
[incorporated by reference to
Exhibit 1 to Registrant's
Registration Statement on Form N-l,
dated March 1, 1983.]
(2) By-Laws of Registrant [incorporated
by reference to Exhibit 2 to
Registrant's Registration Statement
on Form N-l, dated March 1, 1983.]
(3) Inapplicable
(4) Inapplicable
(5) Investment Management Agreement between
Registrant and Fundamental Portfolio
Advisors, Inc. [incorporated by reference
to Exhibit 5 to Registrant's
Post-Effective Amendment No. 6 on Form
N-lA, dated March 1, 1989.]
(6) Inapplicable
(7) Inapplicable
(8) Form of Custody Agreement with
Registrant's Custodian [incorporated by
reference to Exhibit 8 to Registrant's
Post-Effective Amendment No. 7 on Form
N-lA, dated April 27, 1990.]
(9) Inapplicable
(10) (a) Opinion of Counsel [incorporated
by reference to Exhibit 10 to
Registrant's Pre-Effective Amendment
No. 2 on Form N-l, dated December
20, 1983.]
(11) (a) Consent of Kramer, Levin,
Naftalis & Frankel* (b) Consent of
McGladrey & Pullen*
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable

C-1

<PAGE>

(15) Rule 12b-1 Plan of Distribution of
Registrant's shares [incorporated by
reference to exhibit 15 to
Registrant's Post-Effective
Amendment No. 3 on Form N-lA, dated
November 12, 1986.]
(16) Schedule for Computation of
Performance Quotations (unaudited)
[incorporated by reference to
Exhibit 16 to Registrant's
Post-Effective Amendment No. 4 on
Form N-lA, dated April 25, 1988.]
(17) Financial Data Schedule. *
- ---------------------------------
* Filed as part of this document.

ITEM 25. Persons Controlled by or under Common Control with
Registrant

None

ITEM 26. Number of Holders of securities

As of March 31, 1998, there were 457 record holders of
Registrant's only class of outstanding securities.

ITEM 27. Indemnification

Reference is made to subdivision (c) of section 12 of Article SEVENTH
of Registrant's Declaration of Trust previously filed.

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

C-2

<PAGE>

ITEM 28. Business and Other Connections of Investment Advisor

Fundamental Portfolio Advisors, Inc. is the investment advisor of
Registrant. For information as to the business, profession, vocation or
employment of a substantial nature of Fundamental Portfolio Advisors, Inc., its
directors and its officers, reference is made to Part I of this Registration
Statement and to Form ADV filed under the Investment Advisers Act of 1940 by
Fundamental Portfolio Advisors, Inc.

ITEM 29. Principal Underwriters

Registrant has no principal underwriter.

ITEM 30. Location of Accounts and Records

The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Registrant, 90 Washington Street, l9th
Floor, New York, N.Y.and Firstar Trust Company, 615 East Michigan Street,
Milwaukee, WI 53202, the Registrant's Transfer Agent, Accounting Agent and
Custodian.

ITEM 31. Management Services

Inapplicable.

ITEM 32. Undertakings.

Registrant undertakes to furnish to each person to whom a prospectus
relating to The California Muni Fund is delivered, a copy of the Fund's latest
annual report to shareholders, upon request and without charge.

C-3

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485 (b) under the Securities Act of 1933 and has duly caused this
Registration Statement or Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York on the 30th day of April, 1998.

Registrant: THE CALIFORNIA MUNI FUND

By: /s/Vincent J. Malanga
---------------------
Vincent J. Malanga, Chairman
and Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----

<S> <C> <C>
/s/Vincent J. Malanga Trustee, Principal April 30, 1998
- --------------------- Executive Officer and
Vincent J. Malanga Principal Financial and
Accounting Officer

* Trustee April 30, 1998
- ------------------------
James C. Armstrong

* Trustee April 30, 1998
- ------------------------
L. Gregg Ferrone

</TABLE>

*By: /s/Jules Buchwald
-----------------
Jules Buchwald, Attorney-in-Fact,
pursuant to powers of attorney
dated April 24, 1991, previously
filed with the Securities and
Exchange Commission

[LETTERHEAD OF KRAMER, LEVIN, NAFTALIS & FRANKEL]

April 30, 1998

The California Muni Fund
90 Washington Street
New York, New York 10006

Re: Registration No. 2-82143
------------------------

Gentlemen:

We hereby consent to the reference to our firm as counsel in
Post-Effective Amendment No. 15 to Registration Statement No. 2-82143.

Very truly yours,

/s/ Kramer, Levin, Naftalis & Frankel
-------------------------------------

[LETTERHEAD OF MCGLADREY & PULLEN, LLP]

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our report dated March 2, 1998 (except for Note 8 as to
which the date is April 30, 1998) on the financial statements of The California
Muni Fund referred to therein, in Post-Effective Amendment No. 15 to the
Registration Statement on Form N-1A, file No. 2- 82143, as filed with the
Securities and Exchange Commission.

We also consent to the reference to our Firm in the Statement of Additional
Information under the caption "Custodian Agreement and Independent Accountants."
We also consent to the reference to our Firm in Part 1 of the Prospectus under
the caption "Financial Highlights."

/s/McGladrey & Pullen, LLP
--------------------------
McGladrey & Pullen, LLP

New York, New York
April 30, 1998

<ARTICLE> 6
<CIK> 0000715756
<NAME> CALIFORNIA MUNI FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8,918
<INVESTMENTS-AT-VALUE> 9,184
<RECEIVABLES> 5,214
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,398
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 503
<OTHER-ITEMS-LIABILITIES> 63
<TOTAL-LIABILITIES> 566
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,345
<SHARES-COMMON-STOCK> 1,673
<SHARES-COMMON-PRIOR> 2,087
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 221
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 266
<NET-ASSETS> 13,832
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,009
<OTHER-INCOME> 0
<EXPENSES-NET> 429
<NET-INVESTMENT-INCOME> 580
<REALIZED-GAINS-CURRENT> 493
<APPREC-INCREASE-CURRENT> 375
<NET-CHANGE-FROM-OPS> 1,448
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 580
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 32,632
<NUMBER-OF-SHARES-REDEEMED> 33,097
<SHARES-REINVESTED> 51
<NET-CHANGE-IN-ASSETS> (2,420)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (273)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64
<INTEREST-EXPENSE> 53
<GROSS-EXPENSE> 432
<AVERAGE-NET-ASSETS> 12,735
<PER-SHARE-NAV-BEGIN> 7.79
<PER-SHARE-NII> 0.376
<PER-SHARE-GAIN-APPREC> 0.48
<PER-SHARE-DIVIDEND> 0.376
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.27
<EXPENSE-RATIO> 3.37
<AVG-DEBT-OUTSTANDING> 664
<AVG-DEBT-PER-SHARE> 0.41

</TABLE>