FIRST UNION FUNDS/, N-30D, 1995-02-27

FIRST UNION FUNDS/
N-30D, 1995-02-27

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1994 ANNUAL REPORT

[INSERT PHOTO HERE]

INCOME FUNDS

A SHARES. B SHARES. C SHARES. Y SHARES

[LOGO]
FIRST UNION FUNDS

FIRST UNION INCOME FUNDS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
President's Message.................................. 1
A Review of 1994
and Prospects for 1995............................... 2
- -----------------------------------------------------------------------------------------------
[LOGO] FIXED INCOME A Report From Your Portfolio Manager................. 4
FUND Results to Date
Class A Shares.................................... 5
Class B Shares.................................... 6
Class C Shares.................................... 7
Y Shares.......................................... 8
Portfolio of Investments............................. 9
Statement of Assets and Liabilities.................. 13
Statement of Operations.............................. 14
Statement of Changes in Net Assets................... 15
Financial Highlights................................. 16
- -----------------------------------------------------------------------------------------------
[LOGO] MANAGED BOND A Report From Your Portfolio Manager................. 19
FUND Results to Date
Y Shares.......................................... 20
Portfolio of Investments............................. 21
Statement of Assets and Liabilities.................. 24
Statement of Operations.............................. 25
Statement of Changes in Net Assets................... 26
Financial Highlights................................. 27
- -----------------------------------------------------------------------------------------------
[LOGO] U.S. GOVERNMENT A Report From Your Portfolio Manager................. 28
FUND Results to Date
Class A Shares.................................... 29
Class B Shares.................................... 30
Class C Shares.................................... 31
Y Shares.......................................... 32
Portfolio of Investments............................. 33
Statement of Assets and Liabilities.................. 35
Statement of Operations.............................. 36
Statement of Changes in Net Assets................... 37
Financial Highlights................................. 38
- -----------------------------------------------------------------------------------------------
Combined Notes to Financial Statements............... 39
Independent Auditors' Report......................... 47
Trustees and Officers................................ 48
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
by Edward C. Gonzales
[Insert Photo Here]
- ------------------------------
<TABLE>
<CAPTION>
EXISTING NEW SALES
CLASS DESIGNATION CHARGE
-------- ----------- ----------
<S> <C> <C>
Trust Y None
B A Front-End
C B Back-End
D C Level Load
</TABLE>
- ------------------------------
Dear Investor:

I am pleased to present you with the Annual Report for the fiscal year ended
December 31, 1994. It contains complete financial information for the First
Union Funds' (the "Trust") Income Funds--the First Union Fixed Income Fund, the
First Union Managed Bond Fund and the First Union U.S. Government Fund.
As you can see, this Report features a new design and format that makes it
easier for you to read and find fund information. It's part of the Trust's com-
mitment to provide you with information that is both comprehensive and clear.
In addition, this Report reflects a re-designation of the Trust's classes of
shares. In response to requests from both brokers and customers, we are stan-
dardizing our class designations to bring them in line with the rest of the mu-
tual fund industry. For instance, the front-end load class, currently called
"Class B Investment Shares," will be called "Class A Investment Shares." These
common class designations should help enhance consumer understanding and reduce
the potential for confusion.
The chart above shows how the Trust's classes will be re-designated.
I also want to inform you that it is presently contemplated that, in July, the
name of the First Union Funds will change to the Evergreen Funds. You'll be
hearing more about this change as we move closer to the transition date.
If you desire more complete information about any of the First Union Funds,
please call 1-800-326-3241,
or see your First Union Brokerage Services Personal Investment Counselor and
ask for a prospectus. The prospectus includes more complete information on
charges and expenses. Please read it carefully before you invest or send money.
I encourage you to review this Report carefully. I hope you're pleased with
the changes and, as always, I welcome any questions, comments, and suggestions
you may have.

Edward C. Gonzales

February 15, 1995

- --------------------------------------------------------------------------------
Good news on Main Street, bad news on Wall Street
- --------------------------------------------------------------------------------
A REVIEW OF 1994 AND
PROSPECTS FOR 1995
by William Hackney,
Chief Investment Officer
[Insert Photo Here]
1994 confirmed the old adage, "Good news on Main Street is often bad news on
Wall Street."
After sputtering and lurching through 1991-1993, the United States economy be-
gan firing on all cylinders in 1994. Consumer confidence improved as the unem-
ployment rate dropped. Industrial production and retail sales surged.
When 1994 began, most investors expected just an uneventful year in the econo-
my. But as the year progressed, it became increasingly clear that it would rank
among the best years for growth in recent history. There were more than 3.5
million new jobs created in 1994, the largest increase in a decade. Real gross
domestic product (the inflation-adjusted value of goods and services produced
in the U.S.) advanced a healthy 4%, which was also the largest increase in a
decade.
Although the type of strong economic growth that we experienced last year of-
ten leads to higher inflation, this failed to happen in 1994. Inflation re-
mained strangely calm, despite sharp price increases in key industrial commodi-
ties like steel, copper, aluminum, cotton, paperboard and a variety of chemi-
cals. The Consumer Price Index* rose 2.7% in 1994, which mirrored

"WHEN 1994 BEGAN, MOST INVESTORS EXPECTED JUST AN UNEVENTFUL YEAR IN THE ECONO-
MY. BUT AS THE YEAR PROGRESSED, IT BECAME INCREASINGLY CLEAR THAT IT WOULD RANK
AMONG THE BEST YEARS FOR GROWTH IN RECENT HISTORY."
- --------------------------------------------------------------------------------
the slight increase of the previous year.

THE DIM PERSPECTIVE FROM WALL STREET
Solid economic growth with low inflation might seem like an ideal investment
environment. This, however, was not true in 1994.
At the beginning of 1994, interest rates were hovering near 30-year lows. One-
year Treasury bills were yielding 3.5% while 30-year Treasury bonds were yield-
ing 6.4%. By year-end, one-year Treasury bill yields had doubled to 7% and 30-
year Treasury bond yields rose 1.5% to 7.9%.
As a consequence, bond prices fell sharply, while stock prices fluctuated
wildly, making little upside progress.

TROUBLING TIMES IN THE BOND MARKET
High interest rates made for troubling times in the bond market. The typical
long-term Treasury bond fell almost 15% in price during 1994, and yielded a to-
tal return (price decline plus income) of negative 7.7%. Even short-term, seem-
ingly lower risk, two-and three-year Treasury notes dropped in price last year.
All in all, it was the worst year for bond investors since the mid-1960's.
What sparked the bond market debacle? Principally, it resulted from stronger
than expected economic growth coupled with the fear of higher inflation.
Investors have historically associated strong economic growth and rising in-
dustrial commodity prices with an eventual upturn in consumer prices. So does
the Federal Reserve Board (the "Fed"). The Fed raised short-term interest rates
six times in 1994, in an attempt to head off higher inflation, which it per-
ceived to be right around the corner.
Yet, it would be wrong to blame all of the bond markets' woes on the Fed. Many
institutions and investors sold bonds in a panic last year, helping to force
prices down and interest rates up.
- --------------------------------------------------------------------------------

continued
*This index is unmanaged.

Both capital spending by business and export demand from Asia, Latin America
and Europe, however, should keep the economy and corporate profits humming
along. U.S. manufacturers are becoming increasingly competitive in world mar-
kets while intense global price competition is helping to hold down inflation.
This suggests that the ongoing U.S. economic expansion may be lengthy and in-
flation may remain modest.

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
[LOGO] Defense strategies for a troubled bond market
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by Thomas Ellis
[Insert Photo Here]
After three years of steady declines, interest rates bottomed out in late
1993, only to rise sharply throughout 1994 as the economy gained momentum.
These conditions created the worst returns bond investors have experienced in
more than 50 years, as declines in bond prices more than offset interest earn-
ings.
In the midst of this very difficult climate, the First Union Fixed Income
Portfolio (the "Fund") performed well, compared to its peers, as a result of
several defensive strategies we used during the year. First, as interest rates
rose, we shortened the Fund's average maturity to just under four years (pri-
marily by reducing the Fund's exposure to one and three-year maturities which
exhibited the greatest risk as interest rates did not rise uniformly in all ma-
turities). In addition, during the year
we increased the Fund's overall portfolio credit quality as we reduced our al-
location of corporate bonds in favor of U.S. Treasuries and mortgages.
Although we expect to see further pressure on short-term rates in 1995, we be-
lieve yields are high enough to provide a cushion against those rate increases,
which may result in positive returns during 1995. Additionally, we are looking
for a slower economy and lower interest rates during the second half of 1995.
Our strategy is to extend the Fund's portfolio maturities in the first half by
adding back the one to three-year maturities we avoided in 1994.
We believe fixed income investments are attractive today, given our expecta-
tions of a slowing economy, relatively modest inflation and today's reasonably
attractive interest rates. The Fund is well positioned to pursue solid results
in this environment.
TOP HOLDINGS BY MARKET VALUE*

<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
U.S. Treasury Notes 16.7%
- --------------------------------------------------------------------------------
U.S. Dept.-Veteran Affairs 8.3%
- --------------------------------------------------------------------------------
Fed. Housing Administration 4.4%
- --------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc. 3.2%
- --------------------------------------------------------------------------------
Fleetwood Credit Grantor Trust______________________________________________2.9%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS*
$382,289,118
- --------------------------------------------------------------------------------
</TABLE>
*As of December 31, 1994

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION FIXED INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Fixed Income Fund--Class A Shares (the "Fund") from January 31, 1989
(start of performance) to December 31, 1994, compared to the Lehman Brothers
Intermediate Government/Corporate Bond Index (the "LBIG/CBI").

"Graphic representation 'A' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they may
be worth more or less than their original cost. Mutual funds are not obliga-
tions of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the reinvest-
ment of all dividends and distributions. The LBIG/CBI has been adjusted to re-
flect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A
Shares, after deducting the current maximum sales charge of 4.75% (effective
9/1/94) ($10,000 investment minus $475 sales charge = $9,525). The Fund's per-
formance assumes the reinvestment of all dividends and distributions. The
LBIG/CBI has been adjusted to reflect reinvestment of dividends on securities
in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBIG/CBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS B SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION FIXED INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Fixed Income Fund--Class B Shares (the "Fund") from January 25, 1993
(start of performance) to December 31, 1994, compared to the Lehman Brothers
Intermediate Government/Corporate Bond Index (the "LBIG/CBI").

"Graphic representation 'AA' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years from
the purchase date. The Fund's performance assumes the reinvestment of all divi-
dends and distributions. The LBIG/CBI has been adjusted to reflect reinvestment
of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 4.00% contingent deferred sales
charge (effective 9/1/94) on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The LBIG/CBI has been adjusted to reflect
reinvestment of dividends on securities in the index. Redemptions less than 1
year from the purchase date are subject to a maximum 5.00% contingent deferred
sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBIG/CBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS C SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION FIXED INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Fixed Income Fund--Class C Shares (the "Fund") from September 2, 1994
(start of performance) to December 31, 1994, compared to the Lehman Brothers
Intermediate Government/Corporate Bond Index (the "LBIG/CBI").

"Graphic representation 'AAA' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class C Shares.
The ending value of the Fund reflects a 1.00% contingent deferred sales charge
on any redemption less than 1 year from the purchase date. The Fund's perfor-
mance assumes the reinvestment of all dividends and distributions. The LBIG/CBI
has been adjusted to reflect reinvestment of dividends on securities in the in-
dex.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBIG/CBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
Y SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION FIXED INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Fixed Income Fund--Y Shares (the "Fund") from December 31, 1990 (start of
performance) to December 31, 1994, compared to the Lehman Brothers Intermediate
Government/Corporate Bond Index (the "LBIG/CBI").

"Graphic representation 'AAAA' omitted. See Appendix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBIG/CBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBIG/CBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
ASSET-BACKED SECURITIES -- 10.9%
$ 1,262,070 BW TR, 9.50%, 2/15/2005...................... $ 1,274,399
2,273,117 CIT Group Holdings, 4.70%, 6/15/2018......... 2,180,395
1,585,183 Chemical Grantor Trust, 8.90%, 12/15/96...... 1,590,793
7,282,735 FCC Grantor Trust, 9.00%, 7/15/97............ 7,340,552
4,335,503 Fleet Financial Home Equity Trust, 6.70%,
1/16/2006-10/16/2006........................ 4,259,377
11,836,083 Fleetwood Credit Grantor Trust, 4.95%,
8/15/2008................................... 11,074,538
646,143 General Motors Acceptance Corp. Grantor
Trust, 5.05%, 1/15/97....................... 641,703
7,500,000 Household Affinity Credit Card Master Trust,
7.20%, 12/15/99............................. 7,294,418
6,000,000 Household Credit Card Trust, 6.70%, 7/15/97.. 5,970,414
------------
Total Asset-Backed Securities (identified
cost, $42,922,802)...................... 41,626,589
------------
CORPORATE BONDS -- 26.6%
Automotive -- 2.7%
10,000,000 Chrysler Buildings, 9.125%, 5/1/99........... 10,248,320
------------
Banking -- 5.2%
2,000,000 Citicorp, 7.57%, 2/24/95..................... 2,006,418
6,000,000 First Chicago Corp., 9.00%-9.20%, 6/15/99-
12/17/2001.................................. 6,128,810
5,000,000 First Security Corp., 6.40%, 2/10/2003....... 4,369,205
1,500,000 J.P. Morgan & Co., Inc., 9.625%, 12/15/98.... 1,524,975
1,000,000 National Bank of Canada, 8.125%, 8/15/2004 .. 960,900
5,000,000 NationsBank Corp., 6.50%, 8/15/2003.......... 4,329,160
</TABLE>

continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
Banking -- continued
$ 500,000 Security Pacific Corp., 10.45%, 5/8/2001..... $ 546,065
------------
Total..................................... 19,865,533
------------
Basic Industry -- 1.2%
5,000,000 Hanson, PLC, 7.375%, 1/15/2003............... 4,699,675
------------
Finance -- 9.3%
3,000,000 *Cenfed Financial Corp., 11.17%, 12/15/2001.. 3,013,705
5,000,000 Ford Motor Credit Company, 9.85%, 5/3/96..... 5,113,195
12,500,000 Lehman Brothers Holdings, Inc., 7.00%-8.875%,
5/15/97-3/1/2002............................ 12,013,778
3,675,000 Mony Funding, Inc., 8.25%, 10/29/96.......... 3,663,516
1,000,000 Morgan Stanley Group, Inc., 9.40%, 3/5/98 ... 1,030,559
10,800,000 Salomon Brothers, Inc., 8.57%-9.01%, 3/10/97-
5/1/97...................................... 10,843,911
------------
Total..................................... 35,678,664
------------
Insurance -- 5.5%
2,000,000 *Associated P&C Holdings, Inc., 6.75%,
7/15/2003................................... 1,792,500
6,000,000 First Colony Corp., 6.625%, 8/1/2003......... 5,315,292
10,000,000 *Metropolitan Life Insurance Co., 6.30%,
11/3/2003................................... 8,432,760
6,000,000 Progressive Corp., Ohio, 6.60%, 1/15/2004.... 5,228,370
------------
Total..................................... 20,768,922
------------
</TABLE>

continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
International Industrial Building Products -- 1.3%
$5,000,000 Boral Limited Australia Co., 7.90%,
11/19/99............................... $ 4,879,785
--------------
Sovereign Government -- 1.4%
5,000,000 Canadian National RY Co., 7.00%,
3/15/2004.............................. 4,549,665
900,000 New Brunswick Province CDA, 7.125%,
10/1/2002.............................. 835,987
--------------
Total................................ 5,385,652
--------------
Total Corporate Bonds (identified
cost, $109,524,368)................ 101,526,551
--------------
MORTGAGE-BACKED SECURITIES -- 33.2%
3,969,403 CMC Securities Corp., 10.00%, 7/25/2023. 4,080,558
9,500,000 CWMBS, Inc., 7.00%, 5/25/2024........... 8,678,962
10,907,944 Federal Home Loan Mortgage Corporation,
7.40%-10.50%,
10/15/2005-9/1/2015.................... 10,581,524
5,058,386 Federal National Mortgage Association,
7.00%-14.00%, 6/1/2011-7/25/2020....... 4,614,109
17,438,912 Federal Housing Administration, 7.43%-
8.43%, 2/1/2020-3/1/2024............... 16,671,293
4,156,403 GCC Second Mortgage Trust, 10.00%,
7/15/2005.............................. 4,253,243
4,211,405 GMAC 56, 7.43% (FHA Insured), 11/1/2022. 3,932,947
5,947,138 Green Tree Financial Corp., 4.60%-4.90%,
4/15/2018-10/15/2018................... 5,817,493
3,672,689 Merrill Lynch Mortgage Investments,
6.85%, 4/15/2012....................... 3,646,867
9,053,566 Prudential Home Mortgage Securities Co.,
6.30%-7.50%, 5/25/99-1/25/2023......... 8,452,104
</TABLE>

continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- CONTINUED
$11,125,975 Resolution Trust Corp., 5.92%-8.35%,
2/15/2004-6/25/2029........................ $ 11,018,911
8,481,730 Saxon Mortgage Securities Corp., 7.375%,
9/25/2023.................................. 7,930,112
711,090 Shawmut National Trust, 9.15%, 8/15/2005.... 713,969
5,511,633 USGI, 7.43% (FHA Insured), 7/1/2022......... 5,108,016
35,280,000 U.S. Department of Veteran Affairs, 6.50%-
6.75%, 11/15/2009-1/15/2017................ 31,588,012
------------
Total Mortgage-Backed Securities
(identified cost, $135,895,084)....... 127,088,120
------------
U.S. TREASURY OBLIGATIONS -- 16.5%
62,900,000 U.S. Treasury Notes, 6.25%-8.875%, 1/15/98-
2/15/2003 (identified cost, $69,841,656)... 63,141,367
------------
**REPURCHASE AGREEMENT -- 11.8%
44,925,000 Donaldson, Lufkin & Jenrette Securities
Corp., 5.875%, dated 12/30/94, due 1/3/95.. 44,925,000
------------
Total Investments (identified cost,
$403,108,910)......................... $378,307,627+
------------
</TABLE>

*RESTRICTED SECURITY, WHICH REPRESENTS AN INVESTMENT IN SECURITIES NOT REGIS-
TERED UNDER THE SECURITIES ACT OF 1933. AT THE END OF THE PERIOD, THESE SECU-
RITIES AMOUNTED TO 3.5% OF NET ASSETS.

**THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICE AT THE DATE OF THE PORTFOLIO.

+THE COST FOR FEDERAL TAX PURPOSES AMOUNTS TO $403,115,072. THE NET UNREALIZED
DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO $24,807,445,
WHICH IS COMPRISED OF $76,593 APPRECIATION AND $24,884,038 DEPRECIATION AT DE-
CEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($382,289,118) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATION IS USED IN THIS PORTFOLIO:

FHA -- FEDERAL HOUSING ADMINISTRATION

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994

<TABLE>
<S> <C>
Assets:
Investment in repurchase agreement .......................... $ 44,925,000
Investment in securities .................................... 333,382,627
------------
Total investments, at amortized cost and value (identified
cost, $403,108,910, tax cost $403,115,072) 378,307,627
Cash......................................................... 528
Interest receivable.......................................... 5,477,155
Receivable for Fund shares sold.............................. 119,101
------------
TOTAL ASSETS............................................ 383,904,411
Liabilities:
Payable for Fund shares redeemed............................. $ 1,568,646
Accrued expenses............................................. 46,647
------------
TOTAL LIABILITIES....................................... 1,615,293
Net Assets:
for 40,148,124 shares of beneficial interest outstanding..... $382,289,118
Net Assets Consist of:
Paid-in capital.............................................. $412,844,774
Unrealized appreciation (depreciation) of investments........ (24,801,283)
Accumulated net realized gain (loss) on investments.......... (5,974,370)
Undistributed net investment income.......................... 219,997
------------
TOTAL NET ASSETS........................................ $382,289,118
Net Asset Value:
Class A Investment Shares ($19,126,757 / 2,009,397 shares
of beneficial interest outstanding)......................... $9.52
Class B Investment Shares ($17,624,970 / 1,846,547 shares
of beneficial interest outstanding)......................... $9.54
Class C Investment Shares ($512,570 / 53,685 shares
of beneficial interest outstanding)......................... $9.55
Y Shares ($345,024,821 / 36,238,495 shares of beneficial
interest outstanding)....................................... $9.52
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $9.52)*.............. $9.99
Class B Investment Shares.................................... $9.54
Class C Investment Shares.................................... $9.55
Y Shares..................................................... $9.52
Redemption Proceeds Per Share:
Class A Investment Shares.................................... $9.52
Class B Investment Shares (95/100 of $9.54)**................ $9.06
Class C Investment Shares (99/100 of $9.55)**................ $9.45
Y Shares..................................................... $9.52
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended
December 31, 1994
<TABLE>
<S> <C> <C>
Investment Income:
Interest Income............................................... $ 29,194,972
Expenses:
Investment advisory fee........................... $2,022,773
Trustees' fees.................................... 5,588
Administrative personnel and services fees........ 341,243
Custodian and portfolio accounting fees........... 127,576
Transfer and dividend disbursing agent fees
and expenses..................................... 49,198
Distribution services fee --
Class A Investment Shares........................ 21,676
Distribution services fee --
Class B Investment Shares........................ 108,896
Distribution services fee --
Class C Investment Shares........................ 918
Shareholder services fee --
Class B Investment Shares........................ 14,697
Shareholder services fee --
Class C Investment Shares........................ 306
Fund share registration costs..................... 27,992
Auditing fees..................................... 13,116
Legal fees........................................ 9,682
Printing and postage.............................. 26,592
Insurance premiums................................ 8,712
Miscellaneous..................................... 2,050
----------
Total expenses............................................ 2,781,015
------------
Net investment income................................... 26,413,957
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments
(identified cost basis)...................................... (6,020,616)
Net change in unrealized appreciation (depreciation)
on investments............................................... (31,162,934)
------------
Net realized and unrealized gain (loss) on investments.... (37,183,550)
------------
Change in net assets resulting from operations............ ($10,769,593)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income............................ $ 26,413,957 $ 24,189,981
Net realized gain (loss) on investments
($6,014,454 net loss and $7,077,185 net
gain, respectively, as computed for
federal tax purposes)........................... (6,020,616) 7,077,185
Net change in unrealized appreciation
(depreciation) on investments................... (31,162,934) (1,395,348)
------------ ------------
Change in net assets resulting
from operations................................. (10,769,593) 29,871,818
------------ ------------
Distributions to shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares........................ (1,390,210) (1,355,584)
Class B Investment Shares........................ (813,680) (211,451)
Class C Investment Shares........................ (6,924) --
Y Shares......................................... (24,026,300) (22,495,149)
Distributions to shareholders from net
realized gain on investment transactions:
Class A Investment Shares........................ (1,063) (398,665)
Class B Investment Shares........................ (679) (149,979)
Class C Investment Shares........................ -- --
Y Shares......................................... (17,637) (6,674,235)
------------ ------------
Change in net assets from
distributions to shareholders................... (26,256,493) (31,285,063)
------------ ------------
Fund Share (Principal) Transactions
Proceeds from sale of shares..................... 122,135,053 123,610,609
Net asset value of shares issued
to shareholders in payment of
dividends declared.............................. 24,252,420 29,893,794
Cost of shares redeemed.......................... (135,258,457) (89,461,179)
------------ ------------
Change in net assets from Fund
share transactions.............................. 11,129,016 64,043,224
------------ ------------
Change in net assets............................... (25,897,070) 62,629,979
------------ ------------
Net Assets:
Beginning of period.............................. 408,186,188 345,556,209
------------ ------------
End of period (including undistributed net
investment income of $219,997 and $43,154,
respectively).................................... $382,289,118 $408,186,188
------------ ------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31, or March 31,
[LOGO]
- --------------------------------------------------------------------------------
(For a share outstanding
throughout each period)

<TABLE>
<CAPTION>
CLASS A INVESTMENT SHARES
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90* 3/31/90 3/31/89**
-------- -------- -------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period...... $10.42 $10.41 $10.54 $ 9.99 $ 9.72 $ 9.50 $ 9.70
Income from investment
operations
Net investment income. 0.65 0.65 0.71 0.73 0.55 0.79 0.10
Net realized and
unrealized gain
(loss) on
investments.......... (0.91) 0.19 (0.06) 0.60 0.24 0.20 (0.14)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations........... (0.26) 0.84 0.65 1.33 0.79 0.99 (0.04)
------ ------ ------ ------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income.... (0.64) (0.65) (0.67) (0.70) (0.52) (0.77) (0.16)
Distributions to
shareholders from net
realized gain on
investment
transactions......... -- (0.18) (0.11) (0.07) -- -- --
Distributions in
excess of net
investment income.... -- -- -- (0.01)(c) -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions... (0.64) (0.83) (0.78) (0.78) (0.52) (0.77) (0.16)
------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period................... $ 9.52 $10.42 $10.41 $10.54 $ 9.99 $ 9.72 $ 9.50
------ ------ ------ ------ ------ ------ ------
Total return+.......... (2.57%) 8.29% 6.39% 13.74% 8.31% 10.51% (0.31%)
Ratios to Average Net
Assets
Expenses.............. 0.75% 0.93% 0.90% 0.80% 1.01%(b) 1.00% 1.78%(b)
Net investment income. 6.46% 6.15% 6.79% 7.30% 7.53%(b) 7.57% 6.10%(b)
Expense waiver/
reimbursement (a).... -- -- -- 0.09% 0.81%(b) 0.50% --
Supplemental Data
Net assets, end of
period
(000 omitted)........ $19,127 $22,865 $21,488 $17,680 $11,765 $6,496 $11,580
Portfolio turnover
rate.................. 48% 73% 66% 53% 27% 32% 18%
</TABLE>

* NINE MONTHS ENDED DECEMBER 31, 1990.

**REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 28, 1989 (COMMENCEMENT OF
OPERATIONS) TO MARCH 31, 1989.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A)THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B)COMPUTED ON AN ANNUALIZED BASIS.

(C) DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME FOR THE YEAR ENDED DECEM-
BER 31, 1991 WERE A RESULT OF CERTAIN BOOK AND TAX TIMING DIFFERENCES.
THESE DISTRIBUTIONS DID NOT REPRESENT A RETURN OF CAPITAL FOR FEDERAL IN-
COME TAX PURPOSES FOR THE YEAR ENDED DECEMBER 31, 1991.
(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION FIXED INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31,
[LOGO]
- --------------------------------------------------------------------------------
(For a share outstanding
throughout each period)

<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES SHARES
12/31/94 12/31/93* 12/31/94**
-------- --------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.44 $10.57 $ 9.85
Income from investment operations
Net investment income............... 0.58 0.58 0.18
Net realized and unrealized gain
(loss) on investments.............. (0.92) 0.05 (0.30)
------ ------ ------
Total from investment operations.... (0.34) 0.63 (0.12)
------ ------ ------
Less distributions
Dividends to shareholders from net
investment income.................. (0.56) (0.58) (0.18)
Dividends to shareholders from net
realized gain on investment
transactions....................... -- (0.18) --
------ ------ ------
Total distributions................. (0.56) (0.76) (0.18)
------ ------ ------
Net Asset Value, End of Period......... $ 9.54 $10.44 $ 9.55
------ ------ ------
Total return+........................ (3.33%) 6.08% (1.27%)
Ratios to Average Net Assets
Expenses............................ 1.50% 1.57%(a) 1.65%(a)
Net investment income............... 5.75% 5.42%(a) 5.87%(a)
Supplemental Data
Net assets, end of period (000
omitted)........................... $17,625 $8,876 $512
Portfolio turnover rate............. 48% 73% 48%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 25, 1993 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1993.

** REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A)COMPUTED ON AN ANNUALIZED BASIS.
(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

<TABLE>
<CAPTION>
Y SHARES
12/31/94 12/31/93 12/31/92 12/31/91*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.43 $10.41 $10.54 $10.06
Income from investment operations
Net investment income............... 0.65 0.69 0.70 0.71
Net realized and unrealized gain
(loss) on investments.............. (0.91) 0.19 (0.02) 0.56
------ ------ ------ ------
Total from investment operations.... (0.26) 0.88 0.68 1.27
------ ------ ------ ------
Less distributions
Dividends to shareholders from net
investment income.................. (0.65) (0.68) (0.70) (0.71)
Distributions to shareholders from
net realized gain
on investment transactions......... -- (0.18) (0.11) (0.07)
Distributions in excess of net
investment income.................. -- -- -- (0.01)(c)
------ ------ ------ ------
Total distributions................. (0.65) (0.86) (0.81) (0.79)
------ ------ ------ ------
Net Asset Value, End of Period......... $ 9.52 $10.43 $10.41 $10.54
------ ------ ------ ------
Total return+........................ (2.55%) 8.67% 6.64% 13.80%
Ratios to Average Net Assets
Expenses............................ 0.65% 0.66% 0.69% 0.69%(b)
Net investment income............... 6.56% 6.41% 6.67% 7.12%(b)
Expense waiver/reimbursement (a).... -- -- -- 0.07%(b)
Supplemental Data
Net assets, end of period (000
omitted)........................... $345,025 $376,445 $324,068 $256,254
Portfolio turnover rate............. 48% 73% 66% 55%
</TABLE>

*REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 4, 1991 (COMMENCEMENT OF OP-
ERATIONS) TO DECEMBER 31, 1991.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A)THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B)COMPUTED ON AN ANNUALIZED BASIS.

FIRST UNION MANAGED BOND FUND
- --------------------------------------------------------------------------------
[LOGO] Defensive strategies for a rising rate environment
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by Glen Insley
[Insert Photo Here]

For bond investors, 1994 was a very difficult year. Interest rates rose sig-
nificantly at every maturity, causing price declines that more than offset in-
terest earned in all but the shortest of maturities.
The Managed Bond Portfolio's (the "Fund") performance benefited from a large
corporate bond position at the beginning of 1994. We gradually reduced the
Fund's exposure 74% in January to 48% at year end, as relative price advantages
increased. Higher coupon mortgage pass throughs also benefited from the rise in
rates as fewer homeowners prepaid their mortgages.
We expect interest rates to remain volatile over the first half of 1995, as
investors sort through conflicting evidence to assess the level of economic
growth and the
prospects for future infla-
tion. We believe that the Federal Reserve Board will continue to raise short-
term rates--probably higher than consensus estimates--toward 7 to 7.5%. We be-
lieve this will cause the economy to slow later in the year, and we look for
longer-term rates to decline to 7% by year end.
Currently, the Fund's portfolio is structured somewhat defensively, but we ex-
pect to extend the Fund's portfolio maturities, as the
market experiences volatile trading patterns. We are maintaining a higher aver-
age quality for the Fund, with a greater emphasis on U.S. Treasuries than in
previous years.
We believe fixed income investments are attractive today, given our expecta-
tions of a slowing economy, relatively modest inflation and today's reasonably
attractive rates. The Fund is well positioned to pursue solid results in this
environment.

TOP HOLDINGS BY MARKET VALUE*
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
U.S. Treasury Notes 5.125-8.875% 20.1%
- --------------------------------------------------------------------------------
Gov't Nat. Mort. Assoc. 7.50-9.50% 9.5%
- --------------------------------------------------------------------------------
Fed. Home Loan Bank 7.70% 6.0%
- --------------------------------------------------------------------------------
U.S. Treasury Bonds 7.125-8.875% 4.5%
- --------------------------------------------------------------------------------
ICI Wilmington, Inc. 7.625% 3.3%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS*
$90,318,255
- --------------------------------------------------------------------------------
</TABLE>
*As of December 31, 1994

FIRST UNION MANAGED BOND FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
Y SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION MANAGED BOND FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Managed Bond Fund--Y Shares (the "Fund") from April 1, 1991 (start of
performance) to December 31, 1994, compared to the Lehman Brothers Intermediate
Government/Corporate Bond Index (the "LBIG/CBI").

"Graphic representation 'B' omitted. See Appendix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBIG/CBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBIG/CBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

FIRST UNION MANAGED BOND FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- 48.3%
Banking -- 4.9%
$3,000,000 Comercia, Inc., 7.125%, 12/1/2013.............. $ 2,502,594
2,000,000 NationsBank Corp., 8.125%, 6/15/2002........... 1,934,028
-----------
Total....................................... 4,436,622
-----------
Chemicals -- 6.5%
3,000,000 DuPont (E.I.) de Nemours & Co., 8.25%,
1/15/2022..................................... 2,874,057
3,000,000 ICI Wilmington, Inc., 7.625%, 3/15/97.......... 2,958,627
-----------
Total....................................... 5,832,684
-----------
Drug -- 2.3%
2,000,000 Baxter International, Inc., 9.25%, 12/15/99.... 2,068,250
-----------
Finance and Insurance -- 8.0%
500,000 **Cenfed Financial Corp., 11.17%, 12/15/2001.. 502,284
1,500,000 First Colony Corp., 6.625%, 8/1/2003........... 1,328,823
1,000,000 **Goldman Sachs Group, 6.375%, 6/15/2000...... 900,130
1,500,000 Household Finance Corp., 9.625%, 3/11/96....... 1,531,439
3,000,000 Lehman Brothers, Inc., 8.375%, 4/1/97.......... 2,949,597
-----------
Total....................................... 7,212,273
-----------
Food and Beverage -- 3.1%
3,000,000 Grand Metro Investment Corp., 6.50%, 9/15/99... 2,790,276
-----------
Foreign -- 7.3%
2,000,000 Canadian National Realty Co., 7.00%, 3/15/2004. 1,819,866
2,000,000 Manitoba Province, 8.00%, 4/15/2002............ 1,961,992
3,000,000 Ontario Province, 5.70%, 10/1/97............... 2,828,196
-----------
Total....................................... 6,610,054
-----------
</TABLE>

continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
Forest Products -- 3.3%
$3,000,000 International Paper Co., 8.02%, 4/1/99......... $ 2,958,057
-----------
Industrial -- 2.2%
2,000,000 **Jet Equipment Trust, 9.41%, 6/15/2010....... 1,995,000
-----------
Retail -- 1.9%
2,000,000 Dillon Read Structured Finance, 8.375%,
8/15/2015..................................... 1,757,500
-----------
Tele-Communications -- 2.8%
3,100,000 ALLTEL Corp., 6.50%, 11/1/2013................. 2,483,289
-----------
Utilities -- 6.0%
2,000,000 Carolina Power & Light Co., 8.625%, 9/15/2021.. 1,965,782
1,500,000 Duke Power, 6.50%, 12/15/95.................... 1,486,205
2,000,000 Progress Capital Holdings, 8.17%, 9/13/96...... 1,996,544
-----------
Total....................................... 5,448,531
-----------
Total Corporate Bonds (identified cost,
$46,184,899).............................. 43,592,536
-----------
U.S. GOVERNMENT OBLIGATIONS -- 42.5%
U.S. Treasury Bonds -- 4.4%
2,000,000 7.125%, 2/15/2023.............................. 1,819,372
2,000,000 8.875%, 8/15/2017.............................. 2,177,500
-----------
Total U.S. Treasury Bonds................... 3,996,872
-----------
U.S. Treasury Notes -- 19.8%
2,000,000 5.125%, 12/31/98............................... 1,816,872
3,000,000 6.25%, 12/15/2003.............................. 2,713,125
1,500,000 7.875%, 7/31/96................................ 1,506,563
4,500,000 8.25%, 7/15/98................................. 4,554,837
2,000,000 8.50%, 11/15/2000.............................. 2,063,122
3,000,000 8.875%, 2/15/99................................ 3,105,000
2,000,000 8.875%, 5/15/2000.............................. 2,092,500
-----------
Total U.S. Treasury Notes................... 17,852,019
-----------
</TABLE>

continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS -- CONTINUED
Government Agency -- 18.3%
$5,500,000 Federal Home Loan Bank, 7.70%, 9/20/2004...... $ 5,327,652
2,865,505 Federal Home Loan Mortgage Corp., 7.50%,
5/1/2009..................................... 2,745,511
1,504,918 Government National Mortgage Association,
7.50%, 9/15/2023............................. 1,397,222
4,073,977 Government National Mortgage Association,
8.00%, 10/15/2024............................ 3,898,287
1,247,526 Government National Mortgage Association,
9.00%, 4/15/2020............................. 1,260,001
815,145 Government National Mortgage Association,
9.00%, 8/15/2021............................. 823,296
1,015,464 Government National Mortgage Association,
9.50%, 2/15/2021............................. 1,049,418
-----------
Total Government Agency.................... 16,501,387
-----------
Total U.S. Government Obligations
(identified
cost, $41,162,053)....................... 38,350,278
-----------
*REPURCHASE AGREEMENT -- 7.4%
6,699,000 Donaldson, Lufkin & Jenrette Securities Corp.,
5.875%, dated 12/30/94, due 1/3/95 (at
amortized cost).............................. 6,699,000
-----------
Total Investments (identified cost,
$94,045,952)............................. $88,641,814+
-----------
</TABLE>

*THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

**RESTRICTED SECURITY, WHICH REPRESENTS AN INVESTMENT IN SECURITIES NOT REGIS-
TERED UNDER THE SECURITIES ACT OF 1933. AT THE END OF THE PERIOD, THESE SECU-
RITIES AMOUNTED TO 3.8% OF NET ASSETS.

+THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $94,045,952. THE
NET UNREALIZED DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$5,404,138, WHICH IS COMPRISED OF $2,284 APPRECIATION AND $5,406,422 DEPRECIA-
TION AT DECEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($90,318,255) AT DECEMBER 31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified and tax cost, $94,045,952).......................... $88,641,814
Cash............................................................. 500
Interest receivable.............................................. 1,685,202
Receivable for Fund shares sold.................................. 1,484
Deferred expenses................................................ 9,232
-----------
TOTAL ASSETS................................................ 90,338,232
Liabilities:
Payable for Fund shares redeemed................................. $ 17,091
Accrued expenses................................................. 2,886
-----------
TOTAL LIABILITIES........................................... 19,977
Net Assets:
for 9,656,565 shares of beneficial interest outstanding.......... $90,318,255
Net Assets Consist of:
Paid-in capital.................................................. $97,083,445
Net unrealized appreciation (depreciation) of investments........ (5,404,138)
Accumulated net realized gain (loss) on investments.............. (1,447,263)
Undistributed net investment income.............................. 86,211
-----------
TOTAL NET ASSETS............................................ $90,318,255
Net Asset Value:
Offering Price and Redemption Proceeds Per Share:
($90,318,255 / 9,656,565 shares
of beneficial interest outstanding)............................. $9.35
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<CAPTION>
Investment Income:
<S> <C> <C>
Interest Income................................................ $ 7,723,172
Expenses:
Investment advisory fee.............................. $523,270
Trustees' fees....................................... 1,470
Administrative personnel and services fee............ 88,279
Custodian and portfolio accounting fees.............. 49,266
Transfer and dividend disbursing agent fees
and expenses........................................ 12,626
Fund share registration costs........................ 19,368
Auditing fees........................................ 12,488
Legal fees........................................... 3,245
Printing and postage................................. 17,315
Insurance premiums................................... 7,229
Miscellaneous........................................ 7,276
--------
Total expenses.................................... 741,832
Deduct -- Waiver of administrative personnel and
services fee........................................ 10,687
--------
Net expenses............................................... 731,145
-----------
Net investment income.................................... 6,992,027
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments
(identified cost basis)....................................... (1,440,454)
Net change in unrealized appreciation (depreciation)
on investments................................................ (10,390,618)
-----------
Net realized and unrealized gain (loss) on investments..... (11,831,072)
-----------
Change in net assets resulting from operations............. ($4,839,045)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1933
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income............................. $ 6,992,027 $ 6,944,724
Net realized gain (loss) on investments
and futures contracts ($1,440,454 net loss and
$3,267,650 net gain, respectively, as computed
for federal tax purposes)........................ (1,440,454) 3,267,650
Net change in unrealized appreciation
(depreciation) on investments.................... (10,390,618) 1,457,883
----------- ------------
Change in net assets resulting
from operations.................................. (4,839,045) 11,670,257
----------- ------------
Distributions to Shareholders
Dividends to shareholders from net
investment income................................ (6,989,831) (6,916,373)
Distributions to shareholders from net realized
gain on investment transactions.................. -- (3,268,117)
----------- ------------
Change in net assets from
distributions to shareholders.................... (6,989,831) (10,184,490)
----------- ------------
Fund Share (Principal) Transactions
Proceeds from sale of shares...................... 22,423,717 30,558,683
Net asset value of shares issued
to shareholders in payment of
dividends declared............................... 6,700,837 10,049,698
Cost of shares redeemed........................... (36,044,493) (54,682,139)
----------- ------------
Change in net assets from Fund
share transactions............................... (6,919,939) (14,073,758)
----------- ------------
Change in net assets................................ (18,748,815) (12,587,991)
----------- ------------
Net Assets:
Beginning of period............................... 109,067,070 121,655,061
----------- ------------
End of period (including undistributed net
investment income of $86,211 and $84,015,
respectively).................................... $90,318,255 $109,067,070
----------- ------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION MANAGED BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31,
[LOGO]
- --------------------------------------------------------------------------------
(For a share outstanding
throughout each period)

<TABLE>
<CAPTION>
Y SHARES (A)
12/31/94 12/31/93 12/31/92 12/31/91*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $10.46 $10.34 $10.60 $10.00
Income from investment operations
Net investment income................ 0.66 0.65 0.66 0.49
Net realized and unrealized gain
(loss) on investments............... (1.11) 0.43 (0.08) 0.63
------ ------ ------ ------
Total from investment operations..... (0.45) 1.08 0.58 1.12
------ ------ ------ ------
Less distributions
Dividends to shareholders from net
investment income................... (0.66) (0.65) (0.66) (0.49)
Distributions to shareholders from
net realized gain
on investment transactions.......... (0.00) (0.31) (0.18) (0.03)
------ ------ ------ ------
Total distributions.................. (0.66) (0.96) (0.84) (0.52)
------ ------ ------ ------
Net Asset Value, End of Period.......... $ 9.35 $10.46 $10.34 $10.60
------ ------ ------ ------
Total return+......................... (4.40%) 10.59% 5.65% 11.63%
Ratios to Average Net Assets
Expenses............................. 0.70% 0.70% 0.70% 0.70%(c)
Net investment income................ 6.68% 6.02% 6.30% 6.57%(c)
Expense waiver/reimbursement (b)..... 0.01% 0.03% 0.05% 0.00%
Supplemental Data
Net assets, end of period (000
omitted)............................ $90,318 $109,067 $121,655 $112,984
Portfolio turnover rate.............. 32% 53% 56% 17%
</TABLE>

*REFLECTS OPERATIONS FOR THE PERIOD FROM APRIL 1, 1991 (COMMENCEMENT OF OPERA-
TIONS) TO DECEMBER 31, 1991.

+BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTINGENT
DEFERRED SALES CHARGE, IF APPLICABLE.

(A) CLASS A, CLASS B, AND CLASS C INVESTMENT SHARES WERE NOT BEING OFFERED AS
OF DECEMBER 31, 1994. ACCORDINGLY, THERE ARE NO FINANCIAL HIGHLIGHTS FOR
SUCH SHARES. THE FINANCIAL HIGHLIGHTS PRESENTED ABOVE ARE HISTORICAL IN-
FORMATION FOR Y SHARES.

(B) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

FIRST UNION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
[LOGO] Doing relatively well despite difficult times
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by Rollin Williams
[Insert Photo Here]

With interest rates rising sharply at every maturity, 1994 was the most diffi-
cult year for bond investors in over 50 years. This caused bond values to de-
cline, more than offsetting the interest earned during the year for all but the
shortest of maturities.
In this extremely difficult environment, the First Union U.S. Government Fund
(the "Fund") performed well compared to its peers. Two contributing factors to
the Fund's success were the Fund's shorter maturity and its strategy of pursu-
ing opportunities in government-backed mortgage securities.
At year end, the Fund had a weighted average life of 8.26 years and a duration
of 4.85 years. The sector composition was 46% in U.S. government securities
(down from 54% in September) and 53% in mort-
gage-backed securities (up from 43% in September).
Mortgages outperformed the government and corporate sectors, both in the
fourth quarter and for the full year. The high mortgage prepayment levels wit-
nessed in the fourth quarter of 1993--as consumers refinanced mortgages to take
advantage of extremely low interest rates--gave way to very low prepayment lev-
els in the fourth quarter of 1994. As a result, mortgage-backed securities con-
tinued to offer good values.
We believe fixed income investments are attractive today, given our expecta-
tion of a slowing economy, relatively modest inflation and today's reasonably
attractive rates. The Fund is well positioned to pursue solid results in this
environment.

TOP HOLDINGS BY MARKET VALUE*
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Gov't Nat. Mort. Assn. 7.00-10.00% 32.4%
- --------------------------------------------------------------------------------
U.S. Treasury Notes 7.875-9.375% 28.0%
- --------------------------------------------------------------------------------
U.S. Treasury Bonds 8.125-8.875% 18.5%
- --------------------------------------------------------------------------------
Fed. Home Loan Mort. Corp. 8.00-10.50% 14.1%
- --------------------------------------------------------------------------------
Fed. Nat. Mort. Assn. 6.50-9.50% 6.6%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS*
$235,137,544
- --------------------------------------------------------------------------------
</TABLE>
*As of December 31, 1994

FIRST UNION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION U.S. GOVERNMENT FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union U.S. Government Fund--Class A Shares (the "Fund") from January 12, 1993
(start of performance) to December 31, 1994, compared to the Lehman Brothers
Intermediate Government Bond Index ("LBIGBI").

"Graphic representation 'C' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares,
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the reinvest-
ment of all dividends and distributions. The LBIGBI has been adjusted to re-
flect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A
Shares, after deducting the current maximum sales charge of 4.75% (effective
9/1/94) ($10,000 investment minus $475 sales charge = $9,525). The Fund's per-
formance assumes the reinvestment of all dividends and distributions. The
LBIGBI has been adjusted to reflect reinvestment of dividends on securities in
the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBIGBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS B SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION U.S. GOVERNMENT FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union U.S. Government Fund--Class B Shares (the "Fund") from January 12, 1993
(start of performance) to December 31, 1994, compared to the Lehman Brothers
Intermediate Government Bond Index ("LBIGBI").

"Graphic representation 'CC' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years from
the purchase date. The Fund's performance assumes the reinvestment of all divi-
dends and distributions. The LBIGBI has been adjusted to reflect reinvestment
of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 4.00% contingent deferred sales
charge (effective 9/1/94) on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The LBIGBI has been adjusted to reflect re-
investment of dividends on securities in the index. Redemptions less than 1
year from the purchase date are subject to a maximum 5.00% contingent deferred
sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBIGBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS C SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION U.S. GOVERNMENT FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union U.S. Government Fund--Class C Shares (the "Fund") from September 2, 1994
(start of performance) to December 31, 1994, compared to the Lehman Brothers
Intermediate Government Bond Index ("LBIGBI").

"Graphic representation 'CCC' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class C Shares.
The ending value of the Fund reflects a 1.00% contingent deferred sales charge
on any redemption less than 1 year from the purchase date. The Fund's perfor-
mance assumes the reinvestment of all dividends and distributions. The LBIGBI
has been adjusted to reflect reinvestment of dividends on securities in the in-
dex.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBIGBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
Y SHARES
PERFORMANCE OF $10,000 INVESTED IN FIRST UNION U.S. GOVERNMENT FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union U.S. Government Fund--Y Shares (the "Fund") from August 25, 1993 (start
of performance) to December 31, 1994, compared to the Lehman Brothers Interme-
diate Government Bond Index ("LBIGBI").

"Graphic representation 'CCCC' omitted. See Appendix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBIGBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBIGBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 52.5%
$32,447,332 Federal Home Loan Mortgage Corporation, PC
8.00%-10.50%,
11/1/96-4/1/2022............................ $ 32,776,484
16,446,265 Federal National Mortgage Association, 6.50%-
9.50%,
6/1/2022-1/1/2024........................... 15,328,913
78,431,722 Government National Mortgage Association,
7.00%-10.00%, 12/15/2018-8/15/2024.......... 75,452,077
------------
Total U.S. Government Agency Obligations
(identified cost, $132,914,964)........ 123,557,474
------------
U.S. TREASURY OBLIGATIONS -- 46.1%
U.S. Treasury Bonds -- 18.4%
41,080,000 8.125%-8.875%, 8/15/2008-8/15/2019........... 43,148,137
------------
U.S. Treasury Notes -- 27.7%
63,850,000 7.875%-9.375%, 4/15/96-8/15/98............... 65,204,615
------------
Total U.S. Treasury Obligations
(identified cost, $123,202,669)........ 108,352,752
------------
</TABLE>

continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
*REPURCHASE AGREEMENT -- 0.5%
$1,162,000 Donaldson, Lufkin & Jenrette Securities
Corp., 5.875%, dated 12/30/94, due 1/3/95
(at amortized cost)........................ $ 1,162,000
-------------
Total Investments (identified cost,
$257,279,633)......................... $233,072,226+
-------------
</TABLE>

*THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATION BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

+THE COST FOR FEDERAL TAX PURPOSES AMOUNTS TO $257,279,633. THE NET UNREALIZED
DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO $24,207,407, ALL
OF WHICH IS COMPRISED OF DEPRECIATION AT DECEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($235,137,544) AT DECEMBER 31, 1994.
THE FOLLOWING ABBREVIATION IS USED IN THIS PORTFOLIO:

PC -- PARTICIPATION CERTIFICATE

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994

<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified and tax cost, $257,279,633)........................ $233,072,226
Cash............................................................ 16,548
Interest receivable............................................. 3,668,413
Receivable for Fund shares sold................................. 106,314
Deferred expenses............................................... 91,138
------------
TOTAL ASSETS............................................... 236,954,639
Liabilities:
Payable for Fund shares redeemed................................ $ 967,230
Dividends payable............................................... 650,385
Accrued expenses................................................ 199,480
------------
TOTAL LIABILITIES.......................................... 1,817,095
Net Assets:
for 25,928,238 shares of beneficial interest outstanding........ $235,137,544
Net Assets Consist of:
Paid-in capital................................................. $266,791,733
Unrealized appreciation (depreciation) of investments........... (24,207,407)
Accumulated net realized gain (loss) on investments............. (7,446,782)
------------
TOTAL NET ASSETS........................................... $235,137,544
Net Asset Value:
Class A Investment Shares ($23,705,652 / 2,613,820 shares
of beneficial interest outstanding)............................ $9.07
Class B Investment Shares ($195,570,908 / 21,565,544 shares of
beneficial interest outstanding)............................... $9.07
Class C Investment Shares ($265,962 / 29,324 shares
of beneficial interest outstanding)............................ $9.07
Y Shares ($15,595,022 / 1,719,550 shares of beneficial
interest outstanding).......................................... $9.07
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $9.07)*................. $9.52
Class B Investment Shares....................................... $9.07
Class C Investment Shares....................................... $9.07
Y Shares........................................................ $9.07
Redemption Proceeds Per Share:
Class A Investment Shares....................................... $9.07
Class B Investment Shares (95/100 of $9.07)**................... $8.62
Class C Investment Shares (99/100 of $9.07)**................... $8.98
Y Shares........................................................ $9.07
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.
**SEE "REDEEMING SHARES" IN THE PROSPECTUS.
(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended
December 31, 1994
<TABLE>
<CAPTION>
Investment Income:
<S> <C> <C>
Interest Income............................................... $ 21,549,057
Expenses:
Investment advisory fee........................... $1,355,420
Trustees' fees.................................... 3,381
Administrative personnel and services fee......... 228,590
Custodian and portfolio accounting fees........... 93,566
Transfer and dividend disbursing agent fees
and expenses..................................... 215,944
Distribution services fee --
Class A Investment Shares........................ 79,158
Distribution services fee --
Class B Investment Shares........................ 1,683,141
Distribution services fee --
Class C Investment Shares........................ 313
Shareholder services fee --
Class B Investment Shares........................ 174,961
Shareholder services fee --
Class C Investment Shares........................ 104
Fund share registration costs..................... 58,021
Auditing fees..................................... 11,676
Legal fees........................................ 7,829
Printing and postage.............................. 27,579
Insurance premiums................................ 8,875
Miscellaneous..................................... 12,830
----------
Total expenses................................. 3,961,388
Deduct -- Waiver of investment
advisory fee..................................... 105,523
----------
Net expenses.............................................. 3,855,865
------------
Net investment income................................... 17,693,192
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments
(identified cost basis)...................................... (5,468,380)
Net change in unrealized appreciation (depreciation)
on investments............................................... (23,253,985)
------------
Net realized and unrealized gain (loss) on investments..... (28,722,365)
------------
Change in net assets resulting from operations............. ($11,029,173)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1993*
<TABLE>
<CAPTION>
1994 1993*
------------ ------------
<S> <C> <C>
Increase (Decrease) in
Net Assets:
Operations
Net investment income. $ 17,693,192 $ 10,464,592
Net realized gain
(loss) on investments
($5,468,380 net loss
and $1,978,402 net
loss, respectively,
as computed for
federal tax
purposes)............. (5,468,380) (1,978,402)
Net change in
unrealized
appreciation
(depreciation) on
investments........... (23,253,985) (953,422)
------------ ------------
Change in net assets
resulting from
operations........... (11,029,173) 7,532,768
------------ ------------
Distributions to
shareholders
Dividends to
shareholders from net
investment income:
Class A Investment
Shares................ (2,207,479) (1,599,495)
Class B Investment
Shares................ (14,400,952) (8,671,548)
Class C Investment
Shares................ (2,793) --
Y Shares.............. (1,081,968) (193,549)
------------ ------------
Change in net assets
from distributions to
shareholders.......... (17,693,192) (10,464,592)
------------ ------------
Fund Share (Principal)
Transactions
Proceeds from sale of
shares................ 56,989,583 319,579,907
Net asset value of
shares issued
to shareholders in
payment of
dividends declared... 9,194,886 5,610,882
Cost of shares
redeemed.............. (92,357,668) (32,225,857)
------------ ------------
Change in net assets
from Fund
share transactions... (26,173,199) 292,964,932
------------ ------------
Change in net assets.... (54,895,564) 290,033,108
------------ ------------
Net Assets:
Beginning of period... 290,033,108 --
------------ ------------
End of period......... $235,137,544 $290,033,108
------------ ------------
</TABLE>

*FOR PERIOD FROM JANUARY 11, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1993.
(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31,
[LOGO]
- --------------------------------------------------------------------------------
(For a share outstanding
throughout each period)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
INVESTMENT SHARES INVESTMENT SHARES INVESTMENT SHARES Y SHARES
12/31/94 12/31/93* 12/31/94 12/31/93* 12/31/94** 12/31/94 12/31/93***
-------- --------- -------- --------- ----------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $10.05 $10.00 $10.05 $10.00 $ 9.39 $10.05 $10.25
Income from investment
operations
Net investment income... 0.66 0.68 0.61 0.63 0.20 0.69 0.25
Net realized and
unrealized gain (loss)
on investments......... (0.98) 0.05 (0.98) 0.05 (0.32) (0.98) (0.20)
------- ------- -------- -------- ------ ------- -------
Total from investment
operations............. (0.32) 0.73 (0.37) 0.68 (0.12) (0.29) 0.05
------- ------- -------- -------- ------ ------- -------
Less distributions
Dividends to
shareholders from net
investment income...... (0.66) (0.68) (0.61) (0.63) (0.20) (0.69) (0.25)
------- ------- -------- -------- ------ ------- -------
Net Asset Value, End of
Period..................... $ 9.07 $10.05 $ 9.07 $10.05 $ 9.07 $ 9.07 $10.05
------- ------- -------- -------- ------ ------- -------
Total return+............ (3.18%) 7.43% (3.75%) 6.91% (1.30%) (2.94%) 0.49%
Ratios to Average Net
Assets
Expenses................ 0.96% 0.68%(b) 1.54% 1.19%(b) 1.71%(b) 0.71% 0.48%(b)
Net investment income... 6.97% 6.93%(b) 6.42% 6.44%(b) 6.70%(b) 7.27% 7.20%(b)
Expense
waiver/reimbursement
(a).................... 0.04% 0.31%(b) 0.04% 0.31%(b) 0.04%(b) 0.04% 0.31%(b)
Supplemental Data
Net assets, end of
period (000 omitted)... $23,706 $38,851 $195,571 $236,696 $266 $15,595 $14,486
Portfolio turnover rate. 19% 39% 19% 39% 19% 19% 39%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 11, 1993 (COMMENCEMENT OF OP-
ERATIONS) TO DECEMBER 31, 1993.

** REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

*** REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 2, 1993 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1993.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTINGENT
DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.
(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
(1) ORGANIZATION
First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end management investment company.
The Trust consists of seventeen portfolios (individually referred to as the
"Fund," or collectively as the "Funds"). The Board of Trustees (the "Trustees")
has established four classes of shares. Effective March 1, 1995, the classes
established by the Trust will be designated as follows: Class A Investment
Shares (formerly Class B Investment Shares), Class B Investment Shares (for-
merly Class C Investment Shares), Class C Investment Shares (formerly Class D
Investment Shares), and Y Shares (formerly Trust Shares), for: First Union Bal-
anced Port- folio, First Union Emerging Markets Growth Portfolio, First Union
Fixed Income Portfolio, First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union International Equity Portfolio, First Union Managed Bond Port-
folio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, First
Union Tax Free Money Market Portfolio, First Union Treasury Money Market Port-
folio, First Union U.S. Government Portfolio, First Union Utility Portfolio,
First Union Value Portfolio, and First Union Virginia Municipal Bond Portfolio.
(All references herein and in the financial statements are to the new class
designations.) As of December 31, 1994, each of the Funds was offering the
Class A Investment Shares, Class B Investment Shares, Class C Investment Shares
and Y Shares, except for: First Union Managed Bond Portfolio, which was only
offering Y Shares; First Union Tax Free Money Market Portfolio and First Union
Treasury Money Market Portfolio, which were only offering Class A Investment
Shares and Y Shares; and First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, and First
Union Virginia Municipal Bond Portfolio, which were only offering Class A In-
vestment Shares, Class B Investment Shares and Y Shares.

The assets of each Fund are segregated, and a shareholder's interest is limited
to the Fund in which shares are held. The financial statements included herein
are only those of First Union Fixed Income Portfolio ("Fixed Income"), First
Union U.S. Government Portfolio ("U.S. Government"), and First Union Managed
Bond Portfolio ("Managed Bond"). The financial statements of the other Funds
are presented separately.

(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently fol-
lowed by the Funds in the preparation of their financial statements. These pol-
icies are in conformity with generally accepted accounting principles.

A. Investment Valuations--U.S. government obligations are generally valued
at the mean between the over-the-counter bid and asked prices as
furnished by an independent pricing service. Corporate bonds (and other
fixed income and asset- backed securities) are valued at the last sale
price reported on national securities exchanges on that day, if
available. Otherwise, corporate bonds (and other fixed income and asset-
backed securities) and short-term obligations are valued at the prices
provided by an independent pricing service. Short-term securities with
remaining maturities of sixty days or less may be stated at amortized cost,
which approximates value.

Combined Notes to Financial Statements Continued

B. Repurchase Agreements--It is the policy of the Funds to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Funds to monitor, on a daily basis, the market value
of each repurchase agreement's underlying collateral to ensure that the
value of collateral at least equals the principal amount of the
repurchase agreement, including accrued interest.

The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential inability
of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Funds could receive less than the repurchase price on the
sale of collateral securities.

C. Investment Income, Expenses and Distributions--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Distributions to shareholders are recorded on the ex-dividend
date.

At December 31, 1994, Fixed Income, U.S. Government and Managed Bond, for
federal tax purposes, had a capital loss carryforward of $6,020,616,
$7,446,782 and $1,440,454, respectively, which will reduce each Fund's
taxable income arising from future net realized gain on investments, if
any, to the extent permitted by the Code, and thus will reduce the amount
of the distributions to shareholders which would otherwise be necessary to
relieve each Fund of any liability for federal tax. Pursuant to the Code,
such capital loss carryforward will expire in the year 2002 ($6,020,616)
for Fixed Income, 2001 ($1,978,402) and 2002 ($5,468,380) for U.S.
Government and 2002 ($1,440,454) for Managed Bond.

E. When-Issued and Delayed Delivery Transactions--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-
issued securities on the trade date and maintain security positions such
that sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on
the settlement date.

F. Deferred Expenses--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the
initial expense of registering the shares, have been deferred and are
being amortized using the straight-line method not to exceed a period of
five years from the Funds' commencement dates.

Combined Notes to Financial Statements Continued

G. Restricted Securities--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale,
at the issuer's expense, either upon demand by the Fund or in connection
with another registered offering of the securities. Many restricted
securities may be resold in the secondary market in transactions exempt
from registration. Such restricted securities may be determined to be
liquid under criteria established by the Trustees. The Fund will not
incur any registration costs upon such resales. The Funds' restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by the Funds' pricing committee. Additional information on
each restricted security held at December 31, 1994, is as follows:

<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
FUND SECURITY DATE COST
---- ------------------------------- ----------- -----------
<S> <C> <C> <C>
Managed Bond CenFed Financial Corp. 12/15/94 $ 500,000
Managed Bond Goldman Sachs Group 7/8/94 922,280
Managed Bond Jet Equipment Trust 12/9/94 2,000,000
Fixed Income Associated P&C Holdings, Inc. 7/15/93 1,989,220
Fixed Income Metropolitan Life Insurance Co. 10/28/93 9,973,000
Fixed Income CenFed Financial Corp. 12/15/94 3,000,000
</TABLE>

H. Other--Investment transactions are accounted for on the trade date.

(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:

<TABLE>
<CAPTION>
FIXED INCOME
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold....................... 496,948 $4,961,246 481,694 $5,143,194
Shares issued to shareholders
in payment of dividends declared. 116,076 1,147,740 144,232 1,529,307
Shares redeemed................... (797,380) (7,868,277) (495,713) (5,294,878)
-------- ----------- -------- ----------
Net change resulting from Class A
Investment Share transactions.... (184,356) ($1,759,291) 130,213 $1,377,623
-------- ----------- -------- ----------
</TABLE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars

Combined Notes to Financial Statements Continued
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold.................. 593,469 $ 5,756,511 4,717,613 $47,917,982
Shares issued to shareholders
in payment of dividends
declared.................... 113,604 1,074,852 85,591 869,493
Shares redeemed.............. (1,959,939) (18,532,284) (936,518) (9,556,254)
---------- ------------ --------- -----------
Net change resulting from
Class A Investment Share
transactions................ (1,252,866) ($11,700,921) 3,866,686 $39,231,221
---------- ------------ --------- -----------
</TABLE>

<TABLE>
<CAPTION>
FIXED INCOME
Year Ended December 31,
1994 1993(b)
Shares Dollars Shares Dollars
--------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold....................... 1,377,400 $13,751,501 876,785 $9,419,506
Shares issued to shareholders
in payment of dividends
declared......................... 58,604 577,589 25,320 268,072
Shares redeemed................... (439,397) (4,302,673) (52,164) (601,263)
--------- ----------- ------- ----------
Net change resulting from Class B
Investment Share transactions.... 996,607 $10,026,417 849,941 $9,086,315
--------- ----------- ------- ----------
</TABLE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold................ 4,261,379 $41,201,748 24,115,682 $244,699,849
Shares issued to
shareholders
in payment of dividends
declared.................. 765,338 7,211,358 451,760 4,588,421
Shares redeemed............ (7,017,488) (65,776,073) (1,011,127) (10,259,387)
---------- ------------ ---------- ------------
Net change resulting from
Class B Investment Share
transactions.............. (1,990,771) ($17,362,967) 23,556,315 $239,028,883
---------- ------------ ---------- ------------
</TABLE>

(a) For the period from January 11, 1993 (commencement of operations) to Decem-
ber 31, 1993.

(b) For the period from January 25, 1993 (commencement of operations) to Decem-
ber 31, 1993.

Combined Notes to Financial Statements Continued

FIXED INCOME
Year Ended December 31,
1994(a)
Shares Dollars
----------- ------------
<S> <C> <C>
Class C Investment Shares:
Shares sold..................... 54,641 $ 531,864
Shares issued to shareholders in
payment of
dividends declared............. 287 2,756
Shares redeemed................. (1,243) (11,934)
---------- ------------
Net change resulting from Class
C Investment
Share transactions............. 53,685 $ 522,686
---------- ------------
</TABLE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT
Year Ended December 31,
1994(b)
Shares Dollars
-----------------------
<S> <C> <C>
Class C Investment Shares:
Shares sold..................... 29,225 $ 267,749
Shares issued to shareholders in
payment of
dividends declared............. 99 895
Shares redeemed................. -- --
---------- ------------
Net change resulting from Class
C Investment
Share transactions............. 29,324 $268,644
---------- ------------
</TABLE>

<TABLE>
<CAPTION>
FIXED INCOME
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Y Shares:
Shares sold............... 10,329,803 $102,890,442 10,175,682 $109,047,909
Shares issued to
shareholders in payment
of dividends declared.... 2,279,195 22,524,335 2,632,696 28,096,415
Shares redeemed........... (12,477,326) (123,075,573) (7,821,815) (83,565,038)
----------- ------------ ---------- ------------
Net change resulting from
Y Share transactions..... 131,672 $ 2,339,204 4,986,563 $ 53,579,286
----------- ------------ ---------- ------------
</TABLE>

(a) For the period from September 6, 1994 (commencement of operations) to De-
cember 31, 1994.

(b) For the period from September 2, 1994 (commencement of operations) to De-
cember 31, 1994.

Combined Notes to Financial Statements Continued

U.S. GOVERNMENT
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold................... 1,020,057 $ 9,763,575 2,640,585 $26,962,076
Shares issued to shareholders
in payment of dividends
declared..................... 96,545 907,781 15,175 152,968
Shares redeemed............... (838,664) (8,049,311) (1,214,148) (12,410,216)
--------- ----------- ---------- -----------
Net change resulting from Y
Share transactions........... 277,938 $ 2,622,045 1,441,612 $14,704,828
--------- ----------- ---------- -----------
</TABLE>

<TABLE>
<CAPTION>
MANAGED BOND
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold............ 2,292,625 $22,423,717 2,814,758 $30,558,683
Shares issued to
shareholders
in payment of
dividends declared.... 687,702 6,700,837 941,085 10,049,698
Shares redeemed........ (3,747,274) (36,044,493) (5,102,996) (54,682,139)
---------- ------------ ---------- ------------
Net change resulting
from Y Share transac-
tions................. (766,947) ($ 6,919,939) (1,347,153) ($14,073,758)
---------- ------------ ---------- ------------
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Total net change
resulting from Fixed
Income share
transactions.......... 997,608 $11,129,016 5,966,717 $ 64,043,224
Total net change
resulting from U.S.
Government shares
transactions.......... (2,936,375) (26,173,199) 28,864,613 292,964,932
Total net change
resulting from Managed
Bond share
transactions.......... (766,947) (6,919,939) (1,347,153) (14,073,758)
---------- ------------ ---------- ------------
(2,705,714) ($21,964,122) 33,484,177 $342,934,398
---------- ------------ ---------- ------------
</TABLE>

(a) For the period from September 2, 1993 (commencement of operations) to De-
cember 31, 1993.

Combined Notes to Financial Statements Continued

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Advisory Fee--First Union National Bank of North Carolina, the
Trust's investment adviser (the "Adviser"), receives for its services an annual
investment advisory fee based on a percentage of each Fund's average daily net
assets (see below). The Adviser may voluntarily choose to waive a portion of
its fee. The Adviser can modify or terminate this voluntary waiver at any time
at its sole discretion.

<TABLE>
<CAPTION>
FUND ANNUAL RATE
- ---- -----------
<S> <C>
Fixed Income........................................................ 0.50%
U.S. Government..................................................... 0.50%
Managed Bond........................................................ 0.50%
</TABLE>

Administrative Fee--Federated Administrative Services ("FAS") provides each
Fund with certain administrative personnel and services. The FAS fee is based
on the level of average aggregate net assets of the Trust for the period. FAS
may voluntarily choose to waive a portion of its fee.

Distribution and Shareholder Services Fee--The Trust has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Trust will compensate Federated Securities Corp. ("FSC"), the princi-
pal distributor, from the net assets of the Funds to finance activities in-
tended to result in the sale of the Funds' Class A, Class B and Class C Invest-
ment Shares. The Plan provides that the Funds may incur distribution expenses
up to 0.75 of 1% of the average daily net assets of the Class A, Class B and
Class C Investment Shares, annually, to compensate FSC. For the foreseeable fu-
ture, FSC intends to limit its fees to 0.25 of 1% of the Class A Investment
Shares' average daily net assets for U.S. Government, and to 0.10 of 1% of the
Class A Investment Shares' average daily net assets for Fixed Income. Managed
Bond does not offer Investment Shares to which the Plan relates and therefore,
no payments were made by Managed Bond to FSC. FSC may voluntarily choose to
waive a portion of its fee. FSC can modify or terminate this voluntary waiver
at any time at its sole discretion.

Under the terms of a Shareholder Services Agreement with First Union Brokerage
Services ("FUBS"), the Funds will pay FUBS up to 0.25 of 1% of average net as-
sets of the Funds' Class B and Class C Investment Shares for the period. This
fee is designed to obtain certain services for shareholders and to maintain the
shareholder accounts.

Transfer and Dividend Disbursing Agent Fee--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Trust. The
FServ fee is based on the size, type, and number of accounts and transactions
made by shareholders.

Organizational Expenses--Organizational expenses were borne initially by FAS.
U.S. Government has agreed to reimburse FAS for the organizational expenses
during the five year period following December 28, 1992, the date the Fund
first became effective. Managed Bond has agreed to reimburse FAS, at an annual
rate of .005 of 1% of average daily net assets, until expenses initially borne
by FAS are fully reimbursed, or the expiration of five years after January 2,
1991, the date the Fund first became effective. Pursuant to these arrangements,
for the fiscal year ended December 31, 1994, the Funds have paid FAS as
follows:

Combined Notes to Financial Statements Continued

INITIAL ORGANIZATIONAL
ORGANIZATIONAL EXPENSES
FUND EXPENSES REIMBURSED
- ---- -------------- --------------
<S> <C> <C>
U.S. Government................................... $40,000 $8,889
Managed Bond...................................... 32,513 5,321
</TABLE>

Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of FAS, FSC, and FServ.

(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Fixed Income.......................................... $179,036,621 $201,697,428
U.S. Government....................................... 50,329,555 73,301,137
Managed Bond.......................................... 30,936,241 43,279,183
</TABLE>

INDEPENDENT AUDITORS' REPORT

Year Ended December 31, 1994
The Trustees and Shareholders of
FIRST UNION FUNDS:

We have audited the statement of assets and liabilities, including the portfo-
lios of investments, for First Union Fund portfolios, listed below, as of De-
cember 31, 1994, and the related statements of operations, and changes in net
assets, and the financial highlights for each of the years or periods listed
below:

First Union Fixed Income Portfolio -- statement of operations for the year
ended December 31, 1994, statements of changes in net assets for the years
ended December 31, 1994 and December 31, 1993, and the financial
highlights for the years or periods from January 28, 1989 (commencement of
operations) to December 31, 1994.

First Union Managed Bond Portfolio -- statement of operations for the year
ended December 31, 1994, statements of changes in net assets for the years
ended December 31, 1994 and December 31, 1993, and the financial
highlights for the years or periods from April 1, 1991 (commencement of
operations) to December 31, 1994.

First Union U.S. Government Portfolio -- statement of operations for the
year ended December 31, 1994, statements of changes in net assets for the
year or period ended December 31, 1994 and December 31, 1993, and the
financial highlights for the years or periods from January 11, 1993
(commencement of operations) to December 31, 1994.

These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these fi-
nancial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to gain rea-
sonable assurance about whether the financial statements and financial high-
lights 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 De-
cember 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Union Fixed Income Portfolio, First Union Managed Bond Portfolio, and First
Union U.S. Government Portfolio as of December 31, 1994, and the results of
their operations, changes in their net assets, and the financial highlights for
each of the periods listed above, in conformity with generally accepted ac-
counting principles.
KPMG Peat Marwick LLP

Pittsburgh, Pennsylvania February 13, 1995

TRUSTEES AND
OFFICERS
TRUSTEES:
Edward C. Gonzales
James S. Howell, Chairman
Gerald M. McDonnell
Thomas L. McVerry
William Walt Pettit
Russell A. Salton, III, M.D.
Michael S. Scofield

OFFICERS:
Edward C. Gonzales, President and Treasurer
Joseph S. Machi, Vice President and Assistant Treasurer
Peter J. Germain, Secretary
Mark A. Sheehan, Assistant Secretary

This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectuses which contain facts concern-
ing their objectives and policies, management fees, expenses and other informa-
tion.

INVESTMENTS IN THE FIRST UNION FUNDS ARE NOT ENDORSED OR GUARANTEED BY FIRST
UNION, ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF FIRST UNION, ARE NOT INSURED OR
OTHERWISE PROTECTED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERN-
MENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.

[LOGO]

Federated Securities Corp., Distributor
535683 (10/PKG.)
G00851-03 (2/95)

1994 ANNUAL REPORT

[INSERT PHOTO HERE]

GROWTH & INCOME FUNDS

A SHARES . B SHARES . C SHARES . Y SHARES

[LOGO]
FIRST UNION FUNDS

FIRST UNION GROWTH & INCOME FUNDS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
President's Message.................................. 1
A Review of 1994
and Prospects for 1995............................... 2
- -----------------------------------------------------------------------------------------------
[LOGO] UTILITY A Report From Your Portfolio Manager................. 4
FUND Results to Date
Class A Shares.................................... 6
Class B Shares.................................... 7
Class C Shares.................................... 8
Y Shares.......................................... 9
Portfolio of Investments............................. 10
Statement of Assets and Liabilities.................. 13
Statement of Operations.............................. 14
Statement of Changes in Net Assets................... 15
Financial Highlights................................. 16
- -----------------------------------------------------------------------------------------------
[LOGO] BALANCED A Report From Your Portfolio Manager................. 17
FUND Results to Date
Class A Shares.................................... 18
Class B Shares.................................... 19
Class C Shares.................................... 20
Y Shares.......................................... 21
Portfolio of Investments............................. 22
Statement of Assets and Liabilities.................. 30
Statement of Operations.............................. 31
Statement of Changes in Net Assets................... 32
Financial Highlights................................. 33
- -----------------------------------------------------------------------------------------------
[LOGO] VALUE A Report From Your Portfolio Manager................. 35
FUND Results to Date
Class A Shares.................................... 37
Class B Shares.................................... 38
Class C Shares.................................... 39
Y Shares.......................................... 40
Portfolio of Investments............................. 41
Statement of Assets and Liabilities.................. 44
Statement of Operations.............................. 45
Statement of Changes in Net Assets................... 46
Financial Highlights................................. 47
- -----------------------------------------------------------------------------------------------
Combined Notes to Financial Statements............... 51
Independent Auditors' Report......................... 60
Trustees and Officers................................ 61
</TABLE>

- ------------------------------
<TABLE>
<CAPTION>
EXISTING NEW SALES
CLASS DESIGNATION CHARGE
-------- ----------- ----------
<S> <C> <C>
Trust Y None
B A Front-End
C B Back-End
D C Level Load
</TABLE>
- ------------------------------
Dear Investor:

As you can see, this Report features a new design and format that make it
easier for you to read and find fund information. It's part of the Trust's
commitment to providing you with information that is both comprehensive and
clear.

In addition, this Report reflects a re-designation of the Trust's classes of
shares. In response to requests from both brokers and customers, we are
standardizing the Trust's class designations to bring them in line with the
rest of the mutual fund industry. For instance, the front-end load class,
currently called "Class B Investment Shares," will be called "Class A
Investment Shares." These common class designations should help enhance
consumer understanding and reduce the potential for confusion.

The chart above shows how the First Union Funds classes will be re-designated.

I also want to inform you that it is presently contemplated that, in July, the
name of the First Union Funds will change to the Evergreen Funds. You'll be
hearing more about this change as we move closer to the transition date.

If you desire more complete information about any of the First Union Funds,
please call 1-800-326-3241, or see your First Union Brokerage Services Personal
Investment Counselor and ask for a prospectus. The prospectus includes more
complete information on charges and expenses. Please read it carefully before
you invest or send money.

I encourage you to review this Report carefully. I hope you're pleased with
the changes and, as always, I welcome any questions, comments, and suggestions
you may have.

Edward C. Gonzales

February 15, 1995

[INSERT PHOTO HERE]

1994 confirmed the old adage, "Good news on Main Street is often bad news on
Wall Street."

After sputtering and lurching through 1991-1993, the United States' economy
began firing on all cylinders in 1994. Consumer confidence improved as the un-
employment rate dropped. Industrial production and retail sales surged.

When 1994 began, most investors expected just an uneventful year in the econo-
my. But as the year progressed, it became increasingly clear that it would rank
among the best years for growth in recent history. There were more than 3.5
million new jobs created in 1994, the largest increase in a decade. Real gross
domestic product (the inflation-adjusted value of goods and services produced
in the U.S.) advanced a healthy 4%, which was also the largest increase in a
decade.

Although strong economic growth like we witnessed last year often leads to
higher inflation, this failed to happen in 1994. Inflation remained strangely
calm despite sharp price increases in key industrial commodities like steel,
copper, aluminum, cotton, paperboard and a variety of chemicals. The Consumer
Price Index rose 2.7%* in 1994, which mirrored the slight increase of the pre-
vious year.

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

THE DIM PERSPECTIVE FROM WALL STREET

Solid economic growth with low inflation might seem like an ideal investment
environment. This, however, was not true in 1994.

At the beginning of the year, interest rates were hovering near 30-year lows.
One-year Treasury bills were yielding 3.5% while 30-year Treasury bonds were
yielding 6.4%. By year-end, one-year Treasury bill yields had doubled to 7% and
30-year Treasury bond yields rose 1.5% to 7.9%.

As a consequence, bond prices fell sharply while stock prices fluctuated wild-
ly, making little upside progress.

TOUGH TIMES FOR THE STOCK MARKET

Stocks generally fared better than bonds in 1994. A strong rise in corporate
earnings helped offset the negative effects of higher interest rates. The Stan-
dard and Poor's 500 Stock Index ("S&P 500")* declined slightly in price during
1994, but was able to record a positive total return of 1.3 percent with divi-
dends taken into account.

Dominated by large-capitalization stocks, however, the S&P 500 doesn't tell
the complete story for equities. About two out of every three stocks on the New
York Stock Exchange suffered declines of 20% or more last year. Smaller-capi-
talization indices like the NASDAQ Composite Index* declined 3% or more with
dividends. Interest sensitive stocks--electric utilities, telephones and finan-
cial services--were among the worst performing group in 1994. By contrast, con-
sumer staples and technology stocks were market leaders.

THE OUTLOOK FOR 1995

In the near future, high short-term interest rates might keep a lid on stock
prices. But we believe as the year progresses, higher profits and lower inter-
est rates may propel the major

*This index is unmanaged. continued

In our view, the investment climate for 1995 is improving. The rapid run-up of
interest rates in 1994 seemed to fully compensate investors for the anticipated
slight increase in the Consumer Price Index during 1995. We doubt consumer
price inflation, now below 3%, will exceed 4% this year.

Recently, we have observed signs that the economy may indeed be slowing from
last year's robust pace. Housing starts and auto sales, for example, have begun
to weaken. We believe restrained inflation and a slower pace of growth may per-
mit interest rates to decline gradually over the next 12 to 18 months. If this
happens, bond prices should increase as well.

We don't expect that an economic slowdown in 1995 will lead to a recession in
the near future. We believe interest sensitive, early-cycle industries (such as
housing and autos) will likely have uneventful years.

Both capital spending by business and export demand from Asia, Latin America
and Europe, however, should keep the economy and corporate profits humming
along. U.S. manufacturers are becoming increasingly competitve in world
markets, while intense global price competition is helping to hold down
inflation. This suggests that the ongoing U.S. economic expansion may be
lengthy and inflation may remain modest.

FIRST UNION UTILITY FUND
- --------------------------------------------------------------------------------
[LOGO] A dark environment for utilities
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by Bradley Donovan

[INSERT PHOTO HERE]

Investors in utility issues experienced a difficult time in 1994. The price of
the average utility stock fell 13% during the year, with electric utility
stocks--down 19% in price--experiencing the worst performance in recorded his-
tory.

Several factors accounted for the decline in the price of utility stocks, in-
cluding:

. a persistent rise in interest rates, driven by a non-accomodative Federal Re-
serve Board;

. moves by several state public utility commissions to address deregulation and
competition in the electric utility industry;

. six dividend decreases by electric utility companies during the year;

. the potential for passage of legislation aimed at deregulating the telephone
industry and promoting increased competition; and

. falling natural gas prices due to mild weather.

ON THE DEFENSIVE

Each of these factors affected the industry during the year and led to a se-
vere decline in utilities overall through the third quarter of 1994. Up to that
point, the First Union Utility Portfolio (the "Fund") had been
underweighted in the elec-
tric utility sector. With the electric sector down nearly 24% in price near the
end of the third quarter, we felt many of the concerns were already reflected
in the stock prices. Accordingly, the Fund began increasing it's exposure to
the group. We've focused on the higher quality companies which we are hopeful
will exhibit favorable earnings and dividend streams.

During the year, the Fund also maintained an underweighted position in the
telephone industry. Congress attempted to pass legislation designed to deregu-
late and increase competitive forces in the telephone industry. While no such
legislation was ultimately passed, the prospect put pressure on the stock
prices of the regional Bell holding companies. We expect that Congress will
again attempt
to pass telephone legislation in 1995, and we are maintaining an underweighted
position in the sector until we receive a clearer indication of the final de-
tails of such a bill.

While the outlook for the domestic electric utility and telephone sectors re-
mains unclear, we believe foreign utilities--such as Shandong Huaneng Power De-
velopment Co.--have the potential for double-digit earnings and dividend growth
compared to the predicted 1-3% growth potential in the domestic market. We have
invested approximately 10% of the Fund's portfolio in foreign securities, and
look to maintain that level in the future.

Finally, as a matter of investment policy, the Fund can invest up to 35% of
the assets in non-utility investments. During the year, the Fund maintained a
10-15%

TOP HOLDINGS BY MARKET VALUE*
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
U.S. West, Inc. 4.3%
- --------------------------------------------------------------------------------
GTE Corp. 4.3%
- --------------------------------------------------------------------------------
Bell Atlantic Corp. 3.7%
- --------------------------------------------------------------------------------
Pacific Telesis Group 3.5%
- --------------------------------------------------------------------------------
BellSouth Corp. 3.5%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS*
$38,311,726
- --------------------------------------------------------------------------------
</TABLE>
*As of December 31, 1994

FIRST UNION UTILITY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
continued

investment in higher yielding, non-utility investments and many of these posi-
tions--such as Bristol Myers Squib and American Brands--were among the best-
performing investments in the portfolio.* Again, considering the significant
changes facing the domestic electric and telephone utility industries, we ex-
pect to maintain this level of exposure until the regulatory environment stabi-
lizes.

A BRIGHTER OUTLOOK

While the last 12 months have proven to be a difficult period for utility in-
vestors, the Fund has maintained a quality focus in its portfolio and concen-
trated on preserving capital. Rising interest rates have played an important
role in the decline of the group, and regulatory changes and dividend cuts have
also contributed to its poor performance.

Going forward, we believe many of the negative issues facing this sector to be
resolved, pursuing a period of stronger performance for the group. Short-term
selectivity will continue to be the primary focus of the Fund. In the long-
term, the transformation from regulation to competition may provide for many
profitable opportunities.

*As of December 31, 1994.

FIRST UNION UTILITY FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION UTILITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Utility Fund--Class A Shares (the "Fund") from January 4, 1994 (start of
performance) to December 31, 1994, compared to the Standard & Poor's Utility
Index ("SPUI").

[GRAPHIC REPRESENTATION 'D' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate, so that when shares are
redeemed, they may be worth more or less than their original cost. Mutual
funds are not obligations of, or guaranteed by, any bank and are not
federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000
investment minus $400 sales charge = $9,600). The Fund's performance assumes
the reinvestment of all dividends and distributions. The SPUI has been
adjusted to reflect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A
Shares, after deducting the current maximum sales charge of 4.75% (effective
9/1/94) ($10,000 investment minus $475 sales charge = $9,525). The Fund's
performance assumes the reinvestment of all dividends and distributions.
The SPUI has been adjusted to reflect reinvestment of dividends on
securities in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The SPUI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION UTILITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Utility Fund--Class B Shares (the "Fund") from January 4, 1994 (start of
performance) to December 31, 1994, compared to the Standard & Poor's Utility
Index ("SPUI").

[GRAPHIC REPRESENTATION 'DD' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are
not obligations of, or guaranteed by, any bank and are not federally
insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 4.00% contingent deferred
sales charge on any redemption made less than 1 year from the purchase date.
The Fund's performance assumes the reinvestment of all dividends and
distributions. The SPUI has been adjusted to reflect reinvestment of
dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value in the Fund reflects a 5.00% contingent deferred
sales charge (effective 9/1/94) on any redemption made less than 1 year from
the purchase date. The Fund's performance assumes the reinvestment of all
dividends and distributions. The SPUI has been adjusted to reflect
reinvestment of dividends on securities in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The SPUI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION UTILITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Utility Fund--Class C Shares (the "Fund") from September 2, 1994 (start
of performance) to December 31, 1994, compared to the Standard & Poor's Utility
Index ("SPUI").

[GRAPHIC REPRESENTATION 'DDD' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are not
obligations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class C Shares.
The ending value of the Fund reflects a 1.00% contingent deferred sales
charge on any redemption less than 1 year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions. The
SPUI has been adjusted to reflect reinvestment of dividends on securities in
the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The SPUI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION UTILITY FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has grown
- --------------------------------------------------------------------------------
RESULTS TO DATE
Y SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION UTILITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Utility Fund--Y Shares (the "Fund") from February 28, 1994 (start of per-
formance), to December 31, 1994, compared to the Standard & Poor's Utility In-
dex ("SPUI").

[GRAPHIC REPRESENTATION 'DDDD' OMITTED. SEE APPRENDIX]

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The SPUI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The SPUI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION UTILITY FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 87.8%
Utilities -- 74.7%
25,100 *Airtouch Communications, Inc......................... $ 731,037
17,100 American Electric Power Co., Inc...................... 562,162
8,400 American Water Works, Inc............................. 226,800
24,800 Ameritech Corp........................................ 1,001,300
11,400 Atlanta Gas & Light Co................................ 342,000
28,800 Bell Atlantic Corp.................................... 1,432,800
24,800 BellSouth Corp........................................ 1,342,300
8,400 British Telecommunications, Inc. ADR.................. 505,050
30,100 Carolina Power & Light Co............................. 801,412
7,161 CINERGY Corp.......................................... 167,388
7,200 Consolidated Natural Gas Co........................... 255,600
22,900 DQE, Inc.............................................. 678,413
10,200 Dominion Resources, Inc............................... 364,650
15,000 Duke Power Co......................................... 571,875
24,200 Eastern Enterprises................................... 635,250
8,000 Empresa Nacional de Electricidad S.A. ADR............. 324,000
7,600 Enron Corp............................................ 231,800
22,000 FPL Group, Inc........................................ 772,750
10,400 Florida Progress Corp................................. 312,000
53,700 GTE Corp.............................................. 1,631,138
41,300 General Public Utilities Corp......................... 1,084,125
16,300 Nacional Financiera, S.N.C. PRIDES.................... 676,450
15,600 NICOR, Inc............................................ 354,900
28,000 NIPSCO Industries, Inc................................ 833,000
8,000 North Carolina Natural Gas Corp....................... 173,000
21,000 NYNEX Corp............................................ 771,750
47,600 Pacific Telesis Group................................. 1,356,600
38,500 Pacificorp............................................ 697,813
12,500 Piedmont Natural Gas, Inc............................. 235,938
12,800 SCANA Corp............................................ 539,200
47,000 *Shandong Huaneng Power Development S.A. ADR.......... 452,375
60,000 Southern Co........................................... 1,200,000
15,000 Southwest Gas Corp.................................... 211,875
30,000 Southwestern Bell Corp................................ 1,211,250
50,200 Teco Energy, Inc...................................... 1,010,275
7,000 Telefonica de Argentina S.A. ADR...................... 371,000
12,000 Telefonica de Espana S.A. ADR......................... 421,500
</TABLE>

continued
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Utilities -- continued
10,300 Telefonos de Mexico S.A. ADR....................... $ 422,300
24,500 Union Electric Co.................................. 866,688
46,800 U. S. West, Inc.................................... 1,667,250
46,000 Wisconsin Energy Corp.............................. 1,190,250
-----------
Total........................................... 28,637,264
-----------
Basic Industry -- 0.9%
20,200 Hanson PLC ADR..................................... 363,600
-----------
Chemicals -- 1.1%
9,100 Imperial Chemical Industries PLC ADR............... 423,150
-----------
Commercial Services -- 1.0%
6,800 Dun & Bradstreet Corp.............................. 374,000
-----------
Consumer Non-Durables -- 1.8%
18,000 American Brands Inc................................ 675,000
-----------
Energy -- 2.1%
4,100 Atlantic Richfield Co.............................. 417,175
6,300 Exxon Corp......................................... 382,725
-----------
Total........................................... 799,900
-----------
Finance -- 1.6%
23,200 National City Corp................................. 600,300
-----------
Food & Beverage -- 1.8%
37,000 International Multifoods Corp...................... 679,875
-----------
Health Technology -- 0.9%
6,000 Bristol-Myers Squibb Co............................ 347,250
-----------
Real Estate Investment Trust -- 1.9%
11,600 HealthCare REIT, Inc............................... 243,600
13,400 Highwoods Properties, Inc.......................... 289,775
10,500 JDN Realty Trust Corp.............................. 210,000
-----------
Total........................................... 743,375
-----------
Total Common Stocks
(identified cost, $35,731,283)................ 33,643,714
-----------
CORPORATE BONDS -- 5.0%
Utilities -- 5.0%
220,000 Carolina Power & Light Co., 9.14%, 4/1/95.......... 220,990
</TABLE>

continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
Utilities -- Continued
$ 175,000 Florida Power Corp., 8.625%, 11/1/2021.......... $ 171,450
210,000 Madison Gas & Electric Co., 7.70%, 2/15/2028.... 186,423
25,000 New England Power Co., 8.00%, 8/1/2022.......... 22,907
1,000,000 Norsk Hydro, 7.75%, 6/15/2023................... 888,075
55,000 Pacific Gas & Electric Co., 8.375%, 5/1/2025.... 52,011
350,000 Pennsylvania Power & Light Co., 9.25%,
10/1/2019...................................... 355,035
-----------
Total........................................ 1,896,891
-----------
Total Corporate Bonds (identified cost,
$2,189,186)................................ 1,896,891
-----------
U.S. TREASURY OBLIGATIONS -- 0.6%
210,000 United States Treasury Notes, 9.50%, 11/15/95... 214,069
-----------
Total U.S. Treasury Obligations
(identified cost, $230,475)................. 214,069
-----------
**REPURCHASE AGREEMENT -- 6.7%
2,578,000 Donaldson, Lufkin & Jenrette Securities Corp.,
5.87%, dated 12/30/94 due 1/3/95 (at amortized
cost).......................................... 2,578,000
-----------
Total Investments (identified cost,
$40,728,944)............................... $38,332,674+
-----------
</TABLE>

* NON-INCOME PRODUCING SECURITIES.

** THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. TREASURY OBLIGA-
TIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

+ THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $40,780,166. THE
NET UNREALIZED DEPRECIATION ON A FEDERAL TAX BASIS AMOUNTS TO $2,447,492,
WHICH IS COMPRISED OF $485,493 APPRECIATION AND $2,932,985 DEPRECIATION AT
DECEMBER 31, 1994.

NOTE: THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($38,311,726) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:
ADR-- AMERICAN DEPOSITORY RECEIPTS
PRIDES-- PROVISIONALLY REDEEMABLE INCOME DEBT EXCHANGEABLE FOR STOCK

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at amortized cost and value
(identified cost $40,728,944 and tax cost $40,780,166)........ $38,332,674
Cash........................................................... 18,489
Dividends and interest receivable.............................. 168,156
Receivable for Fund shares sold................................ 131,022
Deferred expenses.............................................. 17,351
-----------
TOTAL ASSETS.............................................. 38,667,692
Liabilities:
Payable for Fund shares redeemed............................... $ 208,260
Accrued expenses............................................... 147,706
-----------
TOTAL LIABILITIES......................................... 355,966
Net Assets:
for 4,255,423 shares of beneficial interest outstanding........ $38,311,726
Net Assets Consist of:
Paid-in capital................................................ $40,781,719
Unrealized appreciation (depreciation) of investments.......... (2,396,270)
Accumulated net realized gain (loss) on investments ........... (93,656)
Undistributed net investment income............................ 19,933
-----------
TOTAL NET ASSETS.......................................... $38,311,726
Net Asset Value:
Class A Investment Shares ($4,190,305 / 465,691 shares of
beneficial interest outstanding)............................... $9.00
Class B Investment Shares ($28,792,123 / 3,197,871 shares of
beneficial interest outstanding)............................... $9.00
Class C Investment Shares ($127,883 / 14,199 shares of
beneficial interest outstanding).............................. $9.01
Y Shares ($5,201,415 / 577,662 shares of beneficial interest
outstanding)................................................... $9.00
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $9.00)*................ $9.45
Class B Investment Shares...................................... $9.00
Class C Investment Shares...................................... $9.01
Y Shares....................................................... $9.00
Redemption Proceeds Per Share:
Class A Investment Shares...................................... $9.00
Class B Investment Shares (95/100 of $9.00)**.................. $8.55
Class C Investment Shares (99/100 of $9.01)**.................. $8.92
Y Shares....................................................... $9.00
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994*
<TABLE>
<S> <C> <C> <C> <C>
Investment Income:
Dividend income (net of foreign taxes withheld of
$9,442)................................................ $1,413,163
Interest income........................................ 261,177
-----------
Total income....................................... 1,674,340
Expenses:
Investment advisory fee..................... $153,458
Trustees' fees.............................. 189
Administrative personnel and services fees.. 104,384
Custodian and portfolio accounting fees..... 54,078
Transfer and dividend disbursing agent fees
and expenses............................... 38,489
Distribution services fee--
Class A Investment Shares.................. 9,658
Distribution services fee--
Class B Investment Shares.................. 169,007
Distribution services fee--
Class C Investment Shares.................. 232
Shareholder services fee--
Class B Investment Shares.................. 24,141
Shareholder services fee--
Class C Investment Shares.................. 77
Legal fees.................................. 1,704
Printing and postage........................ 14,474
Insurance premiums.......................... 7,164
Miscellaneous............................... 5,753
---------
Total expenses........................... 582,808
Deduct--
Waiver of investment advisory
fee........................... $ 152,038
Waiver of administrative
personnel and services fees... 104,384
Waiver of distribution services
fee--Class A Investment
Shares........................ 2,573 258,995
---------- ---------
Net expenses....................................... 323,813
-----------
Net investment income............................. 1,350,527
Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments (identified
cost basis)............................................ (93,656)
Net change in unrealized appreciation (depreciation)
on investments........................................ (2,396,270)
-----------
Net realized and unrealized gain (loss) on
investments....................................... (2,489,926)
-----------
Change in net assets resulting from operations..... ($1,139,399)
</TABLE>

*FOR THE PERIOD FROM JANUARY 4, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994*
<TABLE>
<CAPTION>
1994*
-----------
<S> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income............................................ $ 1,350,527
Net realized gain (loss) on investments ($42,434
net loss as computed for federal tax purposes).................. (93,656)
Net change in unrealized appreciation (depreciation)
on investments.................................................. (2,396,270)
-----------
Change in net assets resulting from operations................... (1,139,399)
-----------
Distributions to Shareholders
Dividends to shareholders from net investment income:
Class A Investment Shares........................................ (191,065)
Class B Investment Shares........................................ (922,823)
Class C Investment Shares........................................ (1,182)
Y Shares......................................................... (210,047)
Distributions in excess of net investment income:
Class A Investment Shares........................................ --
Class B Investment Shares........................................ --
Class C Investment Shares........................................ --
Y Shares......................................................... (5,477)
-----------
Change in net assets from distributions to shareholders.......... (1,330,594)
-----------
Fund Share (Principal) Transactions
Proceeds from sale of shares..................................... 49,288,964
Net asset value of shares issued to shareholders in payment
of dividends declared........................................... 1,133,996
Cost of shares redeemed.......................................... (9,641,241)
-----------
Change in net assets from Fund share transactions................ 40,781,719
-----------
Change in net assets............................................... 38,311,726
-----------
Net Assets:
Beginning of period.............................................. --
-----------
End of period (including undistributed net investment
income of $19,933).............................................. $38,311,726
-----------
</TABLE>

*FOR THE PERIOD FROM JANUARY 4, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION UTILITY FUND
- --------------------------------------------------------------------------------
[LOGO] FINANCIAL HIGHLIGHTS
Year Ended December 31, 1994
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
INVESTMENT INVESTMENT INVESTMENT
SHARES SHARES SHARES Y SHARES
12/31/94** 12/31/94** 12/31/94*** 12/31/94*
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................. $10.00 $10.00 $9.33 $9.51
Income from investment
operations
Net investment income.. 0.45 0.39 0.12 0.37
Net realized and
unrealized gain (loss)
on investments......... (1.01) (1.01) (0.33) (0.50)
------ ------ ----- -----
Total from investment
operations............. (0.56) (0.62) (0.21) (0.13)
------ ------ ----- -----
Less distributions
Dividends to
shareholders from net
investment income...... (0.44) (0.38) (0.11) (0.37)
Distributions in excess
of net investment
income ................ -- -- -- (0.01)(c)
------ ------ ----- -----
Total distributions.... (0.44) (0.38) (0.11) (0.38)
------ ------ ----- -----
Net Asset Value, End of
Period.................... $ 9.00 $ 9.00 $9.01 $9.00
------ ------ ----- -----
Total return+........... (5.60%) (6.24%) (2.22%) (1.55%)
Ratios to Average Net
Assets
Expenses............... 0.53%(b) 1.27%(b) 1.94%(b) 0.40%(b)
Net investment income.. 5.07%(b) 4.19%(b) 3.96%(b) 4.93%(b)
Expense
waiver/reimbursement
(a).................... 0.90%(b) 0.84%(b) 0.84%(b) 0.84%(b)
Supplemental Data
Net assets, end of
period (000 omitted)... $4,190 $28,792 $128 $5,201
Portfolio turnover
rate................... 23% 23% 23% 23%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

** REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 4, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

*** REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(C) DISTRIBUTIONS ARE DETERMINED IN ACCORDANCE WITH INCOME TAX REGULATIONS
WHICH MAY DIFFER FROM GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. THESE DIS-
TRIBUTIONS DO NOT REPRESENT A RETURN OF CAPITAL FOR FEDERAL INCOME TAX
PURPOSES.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION BALANCED FUND
- --------------------------------------------------------------------------------
[LOGO] Expecting the economy to come around
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by Dean Hawes
[INSERT PHOTO HERE]
Throughout 1994, the stock market experienced a number of volatile trading
swings. When the year ended, however, the Standard & Poor's 500 Index* finished
up 1.3%, while most broad market averages produced negative returns for the
year.

For bond investors, 1994 was the most difficult year in over 50 years, as in-
terest rates rose sharply at every maturity. In this difficult environment, the
First Union Balanced Portfolio (the "Fund") performed relatively well compared
to its peer group.

Believing that the Federal Reserve Board has not yet finished raising short-
term interest rates in its quest to preempt inflation, the Fund's strategy has
been to structure the equity portion of the portfolio defensively. Adding elec-
tric utility stocks, which have already corrected to their lowest price levels
since 1988, is an example of this strategy.

Also, the Fund modestly reduced it's exposure to economically sensitive stocks
in favor of more consumer-oriented companies. Investor preference typically
shifts to companies with secure or visible earnings streams during periods when
economic growth is perceived to be slowing. Selling the Fund's position in
British Airways and adding to our existing position in Philip Morris is such an
example.

TOP HOLDINGS BY MARKET VALUE**
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
U.S. Treasury Bonds 7.625-9.125% 10.3%
- --------------------------------------------------------------------------------
U.S. Treasury Notes 6.375-8.875% 3.4%
- --------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith,
Inc. 5.40%-7.00% 3.1%
- --------------------------------------------------------------------------------
Gov't Nat. Mort. Assn. 8.50-9.50% 2.5%
- --------------------------------------------------------------------------------
Chrysler Financial Corp. 10.34% 1.4%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS**
$919,913,361
- --------------------------------------------------------------------------------
</TABLE>
**As of December 31, 1994

As 1995 progresses, we
believe the dramatic rise in interest rates should begin to slow the economy.
We remain comfortable with our long-term focus on multinational stocks, which
derive a significant portion of their sales and profits from abroad. There ap-
pears to be superior growth potential for many foreign economies compared to
the U.S. over the next several years. Investments held in such companies as
Westinghouse Electric and Compaq Computer are examples of this strategy. Also,
the dollar has declined to levels where the U.S. economy is at a competitive
advantage, and U.S. corporations are the low-cost producer in many world mar-
kets. The technology, capital equipment and basic industry sectors may benefit
from this fact.

From a bond market perspective, our view is that 1995 will likely be a dra-
matic improvement compared to the abysmal year bondholders endured in 1994.
Even if cyclical pressure pushes inflation up to between 4 and 4.5% this year,
current rates are relatively attractive by historic standards. Our posture re-
mains one of near-term neutrality.

Should interest rates spike up, however, we would view it as an opportunity to
lengthen maturities modestly from the 8.57 year average maturity held at year-
end. Finally, until spreads widen further between corporate issues and Treasur-
ies, we will continue to favor Treasuries.

The current asset allocation of the Fund is 55% stocks, 40% bonds, and 5% cash
equivalents. The Fund's portfolio is positioned to respond to the slower eco-
nomic growth anticipated in mid-1995, which should provide a climate more fa-
vorable to stock and bond investors.

* This index is unmanaged.

FIRST UNION BALANCED FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION BALANCED FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Balanced Fund--Class A Shares (the "Fund") from June 6, 1991 (start of
performance) to December 31, 1994, compared to the Standard & Poor's 500 Index
("S&P 500") and the Lehman Brothers Government/Corporate Bond Index
("LBG/CBI").

[GRAPHIC REPRESENTATION 'EEE' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment
re- turn and principal value will fluctuate, so that when shares are
redeemed, they may be worth more or less than their original cost. Mutual
funds are not obli- gations of, or guaranteed by, any bank and are not
federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000
investment minus $400 sales charge = $9,600). The Fund's performance assumes
the reinvestment of all dividends and distributions. The S&P 500 and the
LBG/CBI have been adjusted to reflect reinvestment of dividends on
securities in the indices.

** Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the current maximum sales charge of 4.75% (effective 9/1/94)
($10,000 investment minus $475 sales charge = $9,525). The Fund's
performance assumes the reinvestment of all dividends and distributions. The
S&P 500 and the LBG/CBI has been adjusted to reflect reinvestment of
dividends on securities in the indices.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The S&P 500 and LBG/CBI are not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Fund's
performance. These indices are unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION BALANCED FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Balanced Fund--Class B Shares (the "Fund") from January 25, 1993 (start
of performance) to December 31, 1994, compared to the Standard & Poor's 500 In-
dex ("S&P 500") and the Lehman Brothers Government/Corporate Bond Index
("LBG/CBI").

[GRAPHIC REPRESENTATION 'EEEE' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are
not obligations of, or guaranteed by, any bank and are not federally
insured.

* Represents a hypothetical investment of $10,000 in the Fund's
Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years
from the purchase date. The Fund's performance assumes the reinvestment of
all dividends and distributions. The S&P 500 and the LBG/CBI have been
adjusted to reflect reinvestment on dividends on securities in the indices.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 4.00% contingent deferred
sales charge (effective 9/1/94) on any redemption greater than 1 year but
less than 2 years from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The S&P 500 and the LBG/CBI
have been adjusted to reflect reinvestment of dividends on securities in the
indices. Redemptions less than 1 year from the purchase date are subject to
a maximum 5.00% contingent deferred sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The S&P 500 and LBG/CBI are not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Fund's
performance. These indices are unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION BALANCED FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Balanced Fund--Class C Shares (the "Fund") from September 2, 1994 (start
of performance) to December 31, 1994, compared to the Standard & Poor's 500 In-
dex ("S&P 500") and the Lehman Brothers Government/Corporate Bond Index
("LBG/CBI").

[INSERT GRAPH HERE]

Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are not
obligations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class C Shares.
The ending value of the Fund reflects a 1.00% contingent deferred sales
charge on any redemption less than 1 year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions. The
S&P 500 and the LBG/CBI have been adjusted to reflect reinvestment of
dividends on se- curities in the indices.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The S&P 500 and LBG/CBI are not adjusted to reflect sales loads, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
These indices are unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION BALANCED FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Balanced Fund--Y Shares (the "Fund") from April 1, 1991 (start of perfor-
mance) to December 31, 1994, compared to the Standard and Poor's 500 Index
("S&P 500") and the Lehman Brothers Government/Corporate Bond Index
("LBG/CBI").

[INSERT GRAPH HERE]

Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are not
obligations of, or guaranteed by, any bank and are not federally insured.

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 and the LBG/CBI have been adjusted to reflect
reinvestment of dividends on securities in the indices.

** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The S&P 500 and the LBG/CBI are not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. These indices are unmanaged.

FIRST UNION BALANCED FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 55.4%
Banking & Finance -- 4.5%
120,000 BankAmerica Corp.................................. $ 4,740,000
267,000 Boatmen's Bancshares, Inc......................... 7,242,375
65,000 Central Fidelity Banks, Inc....................... 1,576,250
140,000 Corestates Financial Corp......................... 3,640,000
97,400 First Virginia Banks, Inc......................... 3,116,800
200,000 NBD Bancorp, Inc.................................. 5,475,000
254,400 National City Corp................................ 6,582,600
150,000 NationsBank Corp.................................. 6,768,750
50,000 Suntrust Banks.................................... 2,387,500
------------
Total........................................... 41,529,275
------------
Basic Industry -- 2.7%
50,000 Alcan Aluminum, LTD............................... 1,268,750
350,000 Hanson PLC-ADR.................................... 6,300,000
115,000 International Paper Co............................ 8,668,125
130,000 Phelps Dodge Corp................................. 8,043,750
------------
Total........................................... 24,280,625
------------
Building Materials -- 0.5%
200,000 Pulte Corp........................................ 4,600,000
------------
Capital Goods -- 1.6%
150,000 Boeing Co......................................... 7,012,500
125,000 Raytheon Co....................................... 7,984,375
------------
Total........................................... 14,996,875
------------
Chemicals -- 4.5%
150,000 Air Products & Chemicals, Inc..................... 6,693,750
105,000 Dow Chemical Co................................... 7,061,250
140,000 DuPont (E.I.) de Nemours & Co..................... 7,875,000
175,000 Imperial Chemical Industries, PLC-ADR............. 8,137,500
100,000 Monsanto Co....................................... 7,050,000
75,000 Rohm & Haas Co.................................... 4,284,375
------------
Total........................................... 41,101,875
------------
Conglomerate/Diversified-- 0.8%
150,000 Textron, Inc...................................... 7,556,250
------------
Consumer Durables -- 1.1%
125,000 General Motors Corp............................... 5,281,250
</TABLE>

Continued
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Consumer Durables -- continued
150,000 Goodyear Tire and Rubber.......................... $ 5,043,750
------------
Total........................................... 10,325,000
------------
Consumer Products -- 0.9%
175,000 Nestle SA-ADR..................................... 8,337,717
------------
Data Processing -- 1.8%
250,000 *COMPAQ Computer Corp............................. 9,875,000
175,000 Sun Guard Data Systems............................ 6,737,500
------------
Total........................................... 16,612,500
------------
Drugs -- 1.1%
130,000 Schering-Plough Corp.............................. 9,620,000
------------
Electronics -- 1.7%
95,000 Harris Corp....................................... 4,037,500
100,000 Hewlett-Packard Co................................ 9,987,500
120,000 E G & G, Inc...................................... 1,695,000
------------
Total........................................... 15,720,000
------------
Energy -- 4.8%
182,000 Chevron Corp...................................... 8,121,750
125,000 Exxon Corp........................................ 7,593,750
125,000 Mobil Corp........................................ 10,531,250
90,000 Royal Dutch Petroleum Co.......................... 9,675,000
140,000 Texaco, Inc....................................... 8,382,500
------------
Total........................................... 44,304,250
------------
Finance -- 1.0%
220,000 Beneficial Corp................................... 8,580,000
------------
Financial Services -- 0.7%
85,000 Federal National Mortgage Association............. 6,194,375
------------
Food & Beverage -- 1.8%
122,500 CPC International, Inc............................ 6,523,125
300,000 McDonalds Corp.................................... 8,775,000
50,000 Seagram Co, LTD................................... 1,475,000
------------
Total........................................... 16,773,125
------------
Foreign -- 0.5%
120,000 Telefonos de Mexico SA-ADR........................ 4,920,000
------------
</TABLE>

Continued
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Forest Products -- 1.0%
250,000 Weyerhaeuser Co................................... $ 9,375,000
------------
Healthcare & Cosmetics-- 0.9%
550,000 *National Medical Enterprises..................... 7,768,750
------------
Insurance -- 2.0%
188,200 American General Corp............................. 5,316,650
195,000 Travelers, Inc.................................... 6,337,500
220,000 Providian Corp.................................... 6,792,500
------------
Total........................................... 18,446,650
------------
Machinery--Diversified-- 0.5%
150,000 Ingersoll Rand Co................................. 4,725,000
------------
Manufacturing/Distributing-- 1.0%
260,000 Avnet Inc......................................... 9,620,000
------------
Miscellaneous -- 0.5%
100,000 Eastman Kodak Co.................................. 4,775,000
------------
Multi-Industry -- 5.2%
150,000 Emerson Electric Co............................... 9,375,000
180,000 General Electric Co............................... 9,180,000
105,000 ITT Corp.......................................... 9,305,625
110,000 Temple Inland, Inc................................ 4,963,750
145,000 United Technologies Corp.......................... 9,116,875
500,000 Westinghouse Electric Corp........................ 6,125,000
------------
Total........................................... 48,066,250
------------
Office Equipment & Supplies -- 1.5%
180,000 Pitney Bowes, Inc................................. 5,715,000
78,000 Xerox Corp........................................ 7,722,000
------------
Total........................................... 13,437,000
------------
Oil & Gas -- 1.1%
75,000 Atlantic Richfield Co............................. 7,631,250
100,000 Unocal Corp....................................... 2,725,000
------------
Total........................................... 10,356,250
------------
REIT -- 1.0%
396,800 HealthCare REIT, Inc.............................. 8,332,800
40,500 Highwood Properties, Inc.......................... 875,812
------------
Total........................................... 9,208,612
------------
</TABLE>

Continued
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Retail & Apparel -- 1.8%
100,000 Dayton Hudson Corp........................... $ 7,075,000
150,000 Dillard Department Stores, Inc............... 4,012,500
150,000 May Department Stores Co..................... 5,062,500
------------
Total...................................... 16,150,000
------------
Steel--Iron -- 0.4%
195,000 Birmingham Steel Corp........................ 3,900,000
------------
Telephone -- 2.1%
148,000 Bell Atlantic Corp........................... 7,363,000
160,000 Southwestern Bell Corp....................... 6,460,000
150,000 U.S. West, Inc............................... 5,343,750
------------
Total...................................... 19,166,750
------------
Tobacco -- 1.8%
200,000 American Brands, Inc......................... 7,500,000
150,000 Philip Morris Cos. Inc....................... 8,625,000
------------
Total...................................... 16,125,000
------------
Transportation -- 2.7%
75,000 British Airways PLC-ADR...................... 4,246,875
150,000 Conrail, Inc................................. 7,575,000
100,000 Norfolk Southern Corp........................ 6,062,500
157,400 Union Pacific Corp........................... 7,181,375
------------
Total...................................... 25,065,750
------------
Utilities -- 1.9%
215,000 GTE Corp..................................... 6,530,625
250,000 Southern Co.................................. 5,000,000
170,000 Union Electric Co............................ 6,013,750
------------
Total...................................... 17,544,375
------------
Total Common Stocks (identified cost,
$474,684,129)............................ 509,182,254
------------
CORPORATE BONDS -- 19.6%
Asset-Backed Securities-- 1.2%
$ 2,084,598 Fleet Financial Home Equity Trust, 6.70%,
1/16/2006................................... 2,051,528
</TABLE>

Continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
Asset-Backed Securities -- continued
$10,000,017 Resolution Trust Corporation, 7.50%,
9/25/2022................................... $ 9,414,716
------------
Total...................................... 11,466,244
------------
Banking -- 1.8%
3,000,000 Boatmen's Bancshares, Inc., 6.75%,
3/15/2003................................... 2,676,225
1,740,000 DR Structured Finance Corp., 8.375%,
8/15/2015.................................... 1,529,025
5,000,000 First Chicago Corp., 9.875%, 8/15/2000...... 5,295,360
7,000,000 Wells Fargo, 5.65%, 8/21/95.................. 6,925,933
------------
Total...................................... 16,426,543
------------
Chemicals -- 0.5%
5,000,000 Dow Chemical Co., 8.625%, 4/1/2006.......... 5,036,215
------------
Consumer Products -- 1.3%
5,000,000 General Mills, Inc., 9.00%, 12/20/2002...... 5,159,595
6,405,000 Philip Morris Cos., Inc., 8.65%- 8.75%,
12/1/96-5/15/98.............................. 6,439,784
------------
Total...................................... 11,599,379
------------
Energy -- 1.2%
4,000,000 Atlantic Richfield Co., 9.00%, 4/1/2021..... 4,118,364
2,000,000 BP North America, Inc., 9.875%, 3/15/2004... 2,195,530
4,400,000 Texaco Capital Corp., 7.90%, 2/13/97........ 4,386,342
------------
Total...................................... 10,700,236
------------
Finance and Insurance -- 8.5%
505,137 CIT Group Securitization Corp., 4.70%,
6/15/2018.................................... 484,532
12,550,000 Chrysler Financial Corp., 10.34%, 5/15/2008. 12,898,463
</TABLE>

Continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
Finance and Insurance -- continued
$ 5,500,000 Dean Witter, Discover & Co., 6.75%,
10/15/2013.................................. $ 4,422,919
5,500,000 General Electric Capital Corp., 8.75%,
3/14/2003.................................... 5,607,866
2,750,000 International Bank for Reconstruction &
Development Co., 7.95%, 5/15/2016........... 2,644,202
5,000,000 International Lease Finance Co., 6.00%,
1/15/95...................................... 4,999,650
30,000,000 Merrill Lynch, Pierce, Fenner & Smith, Inc.,
5.40%-7.00%, 1/12/95-4/27/2008.............. 28,953,980
4,250,000 Norwest Financial, Inc., 7.10%, 11/15/96.... 4,179,718
10,000,000 Salomon, Inc., 4.83%, 11/23/95............... 9,716,390
5,000,000 Smith Barney Holdings, Inc., 5.50%, 1/15/99. 4,483,685
------------
Total...................................... 78,391,405
------------
Food and Beverage -- 1.1%
5,500,000 Coca Cola Enterprises, 8.35%, 6/20/95....... 5,539,677
4,250,000 Pepsico, Inc., 7.625%, 11/1/98............... 4,163,938
------------
Total...................................... 9,703,615
------------
Hardware & Tools -- 0.4%
4,300,000 Stanley Works, 7.375%, 12/15/2002............ 4,065,125
------------
Medical Equipment -- 0.5%
5,000,000 Baxter International, Inc., 7.25%,
2/15/2008................................... 4,445,135
------------
Miscellaneous -- 1.3%
5,000,000 General American Transportation Corp.,
9.30%, 8/1/95................................ 5,058,495
7,000,000 ++Jet Equipment Trust, 9.41%, 6/15/2010..... 6,982,500
------------
Total...................................... 12,040,995
------------
</TABLE>

Continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
Pollution Control -- 0.2%
$ 1,400,000 Waste Management, 8.75%, 5/1/2018........... $ 1,396,308
------------
Sovereign Government -- 0.5%
5,000,000 Ontario Province CDA, 7.75%, 6/4/2002....... 4,832,745
------------
Utilities -- 1.1%
7,000,000 Indianapolis Power & Light, 8.00%,
10/15/2006.................................. 6,799,989
3,600,000 Union Electric Co., 8.00%, 12/15/2022....... 3,334,763
------------
Total...................................... 10,134,752
------------
Total Corporate Bonds (identified cost,
$186,583,677)............................ 180,238,697
------------
GOVERNMENT BONDS -- 16.3%
3,046,392 Government National Mortgage Association,
9.50%, 2/15/2021............................ 3,148,254
5,295,347 Government National Mortgage Association,
9.00%, 10/15/2021........................... 5,348,301
3,098,908 Government National Mortgage Association,
9.00%, 9/15/2021............................ 3,129,897
5,181,435 Government National Mortgage Association,
8.50%, 6/15/2022............................ 5,093,998
2,791,566 Government National Mortgage Association,
8.50%, 7/15/2021............................ 2,744,458
3,570,072 Government National Mortgage Association,
8.50%, 5/15/2021............................ 3,509,827
215,000 U.S. Treasury Bills, 3/2/95.................. 213,129
900,000 U.S. Treasury Bills, 2/16/95................. 894,697
15,000,000 U.S. Treasury Bond, 9.125%, 5/15/2018........ 16,748,415
32,400,000 U.S. Treasury Bond, 8.875%, 8/15/2017........ 35,275,500
20,000,000 U.S. Treasury Bond, 8.75%, 5/15/2017......... 21,518,720
1,900,000 U.S. Treasury Bond, 7.875%, 2/15/2000........ 1,904,750
</TABLE>

Continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
GOVERNMENT BONDS -- CONTINUED
$20,000,000 U.S. Treasury Bond, 7.625%, 2/15/2007....... $ 19,418,720
3,500,000 U.S. Treasury Note, 8.875%, 11/15/98........ 3,620,313
10,000,000 U.S. Treasury Note, 8.50%, 5/15/95.......... 10,075,000
10,000,000 U.S. Treasury Note, 8.125%, 2/15/98......... 10,078,120
8,000,000 U.S. Treasury Note, 6.375%, 7/15/99......... 7,557,488
------------
Total Government Bonds
(identified cost, $161,027,443)............ 150,279,587
------------
**COMMERCIAL PAPER -- 4.1%
25,000,000 Dean Witter, Discover & Co., 5.05%, 1/3/95.. 24,992,986
13,000,000 Prime Asset Vehicle, 0.99%, 2/10/95......... 12,818,000
------------
Total Commercial Paper
(identified cost, $37,910,653)............. 37,810,986
------------
***REPURCHASE AGREEMENT -- 5.0%
46,139,000 Donaldson, Lufkin & Jenrette Securities
Corp., 5.87%, dated 12/30/94, due 1/3/95
(at amortized cost)........................ 46,139,000
------------
Total Investments
(identified cost, $906,344,902)............ $923,650,524+
------------
</TABLE>

* NON-INCOME PRODUCING SECURITY.

** EACH ISSUE SHOWS THE RATE OF DISCOUNT AT THE TIME OF PURCHASE FOR DISCOUNT
ISSUES, OR THE COUPON FOR INTEREST BEARING SECURITIES.

*** REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

+ THE COST FOR FEDERAL TAX PURPOSES AMOUNTS TO $906,344,902. THE NET
UNREALIZED APPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$17,305,622, WHICH IS COMPRISED OF $59,505,638 APPRECIATION AND
$42,200,016 DEPRECIATION AT DECEMBER 31, 1994.

++ RESTRICTED SECURITY WHICH REPRESENTS AN INVESTMENT IN A SECURITY NOT REGIS-
TERED UNDER THE SECURITIES ACT OF 1933. AT THE END OF THE PERIOD THIS SECU-
RITY AMOUNTED TO 0.80% OF NET ASSETS.

NOTE: THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($919,913,361) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THIS PORTFOLIO:

ADR--AMERICAN DEPOSITARY RECEIPTS
REIT--REAL ESTATE INVESTMENT TRUST

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at amortized cost and value
(identified and tax cost $906,344,902)....................... $923,650,524
Interest receivable........................................... 5,378,500
Dividends receivable.......................................... 1,200,239
Receivable for Fund shares sold............................... 843,212
Deferred expenses............................................. 28,949
------------
TOTAL ASSETS............................................. 931,101,424
Liabilities:
Payable for Fund shares redeemed.............................. $ 7,639,532
Payable for investments purchased............................. 3,397,140
Interest and tax withholding liability........................ 24,384
Accrued expenses.............................................. 127,007
------------
TOTAL LIABILITIES........................................ 11,188,063
Net Assets:
for 82,338,497 shares of beneficial interest outstanding...... $919,913,361
Net Assets Consist of:
Paid-in capital............................................... $902,497,045
Net unrealized appreciation (depreciation) of investments..... 17,305,622
Accumulated net realized gain (loss) on investments and
futures contracts............................................ (384,920)
Undistributed net investment income........................... 495,614
------------
TOTAL NET ASSETS......................................... $919,913,361
Net Asset Value:
Class A Investment Shares ($41,009,712 / 3,671,118 shares of
beneficial interest outstanding).............................. $11.17
Class B Investment Shares ($100,051,739 / 8,947,916 shares of
beneficial interest outstanding).............................. $11.18
Class C Investment Shares ($195,200 / 17,479 shares of
beneficial interest outstanding)............................. $11.17
Y Shares ($778,656,710 / 69,701,984 shares of beneficial
interest outstanding)........................................ $11.17
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $11.17)*.............. $11.73
Class B Investment Shares..................................... $11.18
Class C Investment Shares..................................... $11.17
Y Shares...................................................... $11.17
Redemption Proceeds Per Share:
Class A Investment Shares..................................... $11.17
Class B Investment Shares (95/100 of $11.18)**................ $10.62
Class C Investment Shares..................................... $11.17
Y Shares...................................................... $11.17
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................... $25,575,851
Dividend income........................... 16,691,618
------------
Total income.......................... 42,267,469
Expenses:
Investment advisory fee...... $4,621,512
Trustees' fees............... 11,527
Administrative personnel and
services fee................. 779,584
Custodian and portfolio
accounting fees.............. 216,205
Transfer and dividend
disbursing agent fees and
expenses..................... 147,905
Distribution services fee--
Class A investment shares... 102,621
Distribution services fee--
Class B investment shares... 670,202
Distribution services fee--
Class C investment shares... 310
Shareholder services fee--
Class B investment shares... 83,641
Shareholder services fee--
Class C investment shares... 103
Fund share registration
costs........................ 61,584
Auditing fees................ 12,856
Legal fees................... 17,147
Printing and postage......... 28,659
Insurance premiums........... 17,949
Miscellaneous................ 3,048
-----------
Total expenses........................ 6,774,853
------------
Net investment income................. 35,492,616
Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on investments
and futures
contracts (identified cost basis)........ 15,321,171
Net change in unrealized appreciation
(depreciation)
on investments........................... (72,298,630)
------------
Net realized and unrealized gain
(loss) on investments................. (56,977,459)
------------
Change in net assets resulting from
operations............................ ($21,484,843)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income............................ $ 35,492,616 $ 26,157,736
Net realized gain (loss) on investments
and futures contracts ($15,321,171 and
$6,403,838 net gains, respectively, as computed
for federal tax purposes)........................ 15,321,171 6,403,838
Net change in unrealized appreciation
(depreciation) on investments................... (72,298,630) 36,471,303
------------ ------------
Change in net assets resulting from operations.. (21,484,843) 69,032,877
------------ ------------
Distributions to Shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares........................ (1,519,114) (954,537)
Class B Investment Shares........................ (2,795,862) (945,268)
Class C Investment Shares........................ (1,794) --
Y Shares......................................... (31,021,065) (24,091,006)
Distributions to shareholders from net
realized gain on investment transactions:
Class A Investment Shares........................ (699,327) (260,072)
Class B Investment Shares........................ (1,691,363) (477,731)
Class C Investment Shares........................ (3,132) --
Y Shares......................................... (13,311,813) (5,667,426)
Distributions in excess of net investment
income:
Class A Investment Shares........................ -- (13,448)
Class B Investment Shares........................ -- (106,237)
Class C Investment Shares........................ -- --
Y Shares......................................... -- --
------------ ------------
Change in net assets from distributions
to shareholders................................. (51,043,470) (32,515,725)
------------ ------------
Fund Share (Principal) Transactions
Proceeds from sale of shares..................... 306,060,376 363,660,154
Net asset value of shares issued
to shareholders in payment of
dividends declared.............................. 49,902,518 31,675,975
Cost of shares redeemed.......................... (224,174,850) (108,839,064)
------------ ------------
Change in net assets from Fund
share transactions.............................. 131,788,044 286,497,065
------------ ------------
Change in net assets............................... 59,259,731 323,014,217
------------ ------------
Net Assets:
Beginning of period.............................. 860,653,630 537,639,413
------------ ------------
End of period (including undistributed net
investment income of $495,614 and $340,833,
respectively).................................... $919,913,361 $860,653,630
------------ ------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION BALANCED FUND
- --------------------------------------------------------------------------------
[LOGO] FINANCIAL HIGHLIGHTS
Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS B INVESTMENT
CLASS A INVESTMENT SHARES SHARES
12/31/94 12/31/93 12/31/92 12/31/91* 12/31/94 12/31/93**
-------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $12.07 $11.41 $11.02 $10.00 $12.08 $11.54
Income from investment
operations
Net investment
income............... 0.43 0.419 0.42 0.30 0.36 0.34
Net realized and
unrealized gain
(loss)
on investments...... (0.71) 0.755 0.43 1.08 (0.71) 0.65
------ ------- ------ ------ ------ ------
Total from investment
operations........... (0.28) 1.174 0.85 1.38 (0.35) 0.99
------ ------- ------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income... (0.43) (0.419) (0.42) (0.35) (0.36) (0.34)
Distributions to
shareholders from net
realized gain on
investment
transactions........ (0.19) (0.091) (0.04) (0.01) (0.19) (0.09)
Distributions in
excess of net
investment income... -- (0.004)(a) -- -- -- (0.02)(a)
------ ------- ------ ------ ------ ------
Total distributions.. (0.62) (0.514) (0.46) (0.36) (0.55) (0.45)
------ ------- ------ ------ ------ ------
Net Asset Value, End of
Period.................. $11.17 $12.07 $11.41 $11.02 $11.18 $12.08
------ ------- ------ ------ ------ ------
Total return+......... (2.41%) 10.41% 7.94% 11.75% (2.99%) 8.72%
Ratios to Average Net
Assets
Expenses............. 0.89% 0.91% 0.91% 0.92%(b) 1.48% 1.41%(b)
Net investment
income............... 3.69% 3.61% 3.93% 4.38%(b) 3.12% 3.09%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $41,010 $35,032 $17,408 $334 $100,052 $65,475
Portfolio turnover
rate................. 35% 19% 12% 19% 35% 19%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JUNE 10, 1991 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1991.

**REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 26, 1993 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1993.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME FOR THE YEAR ENDED DECEM-
BER 31, 1993 WERE THE RESULT OF CERTAIN BOOK AND TAX DIFFERENCES. THESE
DIFFERENCES DID NOT REPRESENT A RETURN OF CAPITAL FOR FEDERAL INCOME TAX
PURPOSES FOR THE YEAR ENDED DECEMBER 31, 1993.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES Y SHARES
12/31/94* 12/31/94 12/31/93 12/31/92 12/31/91**
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $12.00 $12.07 $11.41 $11.02 $10.00
Income from investment
operations
Net investment
income............... 0.18 0.46 0.45 0.46 0.36
Net realized and
unrealized gain
(loss)
on investments...... (0.61) (0.71) 0.75 0.42 1.03
------ ------ ------ ------ ------
Total from investment
operations........... (0.43) (0.25) 1.20 0.88 1.39
------ ------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income... (0.21) (0.46) (0.45) (0.45) (0.36)
Distributions to
shareholders from net
realized gain on
investment
transactions......... (0.19) (0.19) (0.09) (0.04) (0.01)
Distributions in
excess of net
investment income.... -- -- -- -- --
------ ------ ------ ------ ------
Total distributions.. (0.40) (0.65) (0.54) (0.49) (0.37)
------ ------ ------ ------ ------
Net Asset Value, End of
Period.................. $11.17 $11.17 $12.07 $11.41 $11.02
------ ------ ------ ------ ------
Total return+......... (3.58%) (2.15%) 10.68% 8.21% 15.02%
Ratios to Average Net
Assets
Expenses............. 1.64%(b) 0.64% 0.66% 0.66% 0.68%(b)
Net investment
income............... 3.23%(b) 3.93% 3.86% 4.20% 4.86%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $195 $778,657 $760,147 $520,232 $247,472
Portfolio turnover
rate................. 35% 35% 19% 12% 19%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

** REFLECTS OPERATIONS FOR THE PERIOD FROM APRIL 1, 1991 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1991.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION VALUE FUND
- --------------------------------------------------------------------------------
[LOGO] Anticipating slower economic growth
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by William Davis
[INSERT PHOTO HERE]

The stock market's performance during 1994, while not strong, was still some-
what healthy, as the Standard & Poor's 500 Index (the "S&P 500")* managed to
record 1.3% gain in the face of a rapid-fire series of six rate increases by
the Federal Reserve Board. Broader averages declined throughout the year with
most stocks off more than 10% from their highs.

The First Union Value Portfolio (the "Fund") became more defensive early in
1994, and, as a result, the Fund performed relatively well compared to its
peers in a difficult market environment. The Fund significantly reduced its po-
sition in basic industry stocks, such as Phelps Dodge and Temple Inland, both
of which were strong performers during the last quarter of 1993. In addition,
the Fund nearly doubled its utility weighting from 6% to 10.5% by early spring,
after utility stocks had fallen over 25% off from their September 1993 highs.
In December, the Fund began to shift its portfolio strategy away from "late
cycle/defensive" toward "early cycle/more aggressive." Consumer staples were
reduced, primarily due to excessive valuations, and retail holdings were sub-
stantially increased.

Retail stocks had been extremely poor performers during the correction of
1994, but have historically performed very well in the early stages of a recov-
ery. We believe financial stocks, especially banks, are also typically good-
early-cycle stocks and appeared to be good values, having fallen 15% from June
through November.

Another area of portfolio emphasis is energy stocks. These stocks have gener-
ally under-performed the market since August 1990, and now represent an over-
looked, almost forgotten group. They trade at relative valuation levels seen
only briefly in 1972 and 1986, and relative dividend yields are at record
highs.

The Fund has been structured to benefit from a slower rate of growth in the
economy. Interest-sensitive stocks--utilities and financials--are emphasized
with positions in Southern Company and American General. Cyclicals are still
being de-emphasized, since it does not appear that slower growth has been fac-
tored into earnings estimates for these companies. When evidence of slower
growth becomes more conclusive, good buying opportunities could develop in
these stocks.

TOP HOLDINGS BY MARKET VALUE**
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
American Brands, Inc. 3.5%
- --------------------------------------------------------------------------------
American General Corp. 3.4%
- --------------------------------------------------------------------------------
General Public Utilities Corp. 3.3%
- --------------------------------------------------------------------------------
American Stores Co. 3.3%
- --------------------------------------------------------------------------------
Schering-Plough Corp. 3.3%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS**
$800,616,773
- --------------------------------------------------------------------------------
</TABLE>
**As of December 31, 1994

*This index is unmanaged. continued

FIRST UNION VALUE FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
continued

The Fund's value characteristics remain intact. The price/earnings multiples
on estimated 1995 earnings average 11.5% versus 14.6% for the S&P 500.* Yet
projections for estimated growth in earnings during 1995 have averaged 13%,
versus 10% for the S&P 500.* The Fund's yield** during the period was 3.7%, 33%
above the S&P 500's* 2.8%. Finally, the Fund has targeted an average Standard &
Poor's Ratings Group quality rating for the Fund's portfolio of A- (above aver-
age).

* This index is unmanaged.
** Performance quoted represents past performance. Investment return and prin-
cipal value will fluctuate, so that an investor's shares when redeemed, may
be worth more or less than this original cost.

FIRST UNION VALUE FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION VALUE FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Value Fund--Class A Shares (the "Fund") from April 12, 1985 (start of
performance) to December 31, 1994, compared to the Standard & Poor's 500 Index
("S&P 500").

[GRAPHIC REPRESENTATION 'F' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are
not obligations of, or guaranteed by, any bank and are not federally
insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000
investment minus $400 sales charge = $9,600). The Fund's performance assumes
the reinvestment of all dividends and distributions. The S&P 500 has been
adjusted to reflect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the current maximum sales charge of 4.75% (effective 9/1/94)
($10,000 investment minus $475 sales charge = $9,525). The Fund's
performance assumes the reinvestment of all dividends and distributions. The
S&P 500 has been adjusted to reflect reinvestment of dividends on securities
in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION VALUE FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Value Fund--Class B Shares (the "Fund") from January 25, 1993 (start of
performance) to December 31, 1994, compared to the Standard & Poor's 500 Index
("S&P 500").

[GRAPHIC REPRESENTATION 'FF' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so that when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not obli-
gations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects the original 3.00% contingent
deferred sales charge on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The S&P 500 has been
adjusted to reflect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 4.00% contingent deferred
sales charge (effective 9/1/94) on any redemption greater than 1 year but
less than 2 years from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The S&P 500 has been
adjusted to reflect reinvestment of dividends on securities in the index.
Redemptions less than 1 year from the purchase date are subject to a maximum
5.00% contingent deferred sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION VALUE FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Value Fund--Class C Shares (the "Fund") from September 2, 1994 (start of
performance) to December 31, 1994, compared to the Standard & Poor's 500 Index
("S&P 500").

[GRAPHIC REPRESENTATION 'FFF' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are not
obli- gations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class C Shares.
The ending value of the Fund reflects a 1.00% contingent deferred sales
charge on any redemption less than 1 year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions.
The S&P 500 has been adjusted to reflect reinvestment of dividends on
securities in the indices.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION VALUE FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Value Fund--Y Shares (the "Fund") from December 31, 1990 (start of per-
formance) to December 31, 1994, compared to the Standard & Poor's 500 Index
("S&P 500").

[GRAPHIC REPRESENTATION 'FFFF' OMITTED. SEE APPRENDIX]

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so that when shares are redeemed,
they may be worth more or less than their original cost. Mutual funds are not
obli- gations of, or guaranteed by, any bank and are not federally insured.

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 has been adjusted to reflect reinvestment of
dividends on securities in the index.

** Total return quoted represents all applicable sales charges and contingent
deferred sales charges.

The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.

FIRST UNION VALUE FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 97.1%
Banking & Finance -- 6.3%
575,000 Boatmen's Bancshares, Inc......................... $ 15,596,875
505,000 Central Fidelity Banks, Inc....................... 12,246,250
310,000 First Tennessee National Corp..................... 12,632,500
375,100 National City Corp................................ 9,705,713
------------
Total........................................... 50,181,338
------------
Capital Goods -- 6.4%
285,000 Boeing Co......................................... 13,323,750
210,000 *FMC Corp......................................... 12,127,500
400,000 Raytheon Co....................................... 25,550,000
------------
Total........................................... 51,001,250
------------
Chemicals/Plastics -- 1.7%
305,000 Air Products & Chemicals, Inc..................... 13,596,500
------------
Communication -- 1.7%
320,000 Harris Corp....................................... 13,600,000
------------
Consumer Durables -- 3.4%
600,000 Black & Decker Corp............................... 14,250,000
450,000 Ford Motor Co..................................... 12,600,000
------------
Total........................................... 26,850,000
------------
Consumer Products -- 6.5%
750,000 American Brands, Inc.............................. 28,125,000
420,000 Philip Morris Cos., Inc........................... 24,150,000
------------
Total........................................... 52,275,000
------------
Electronics -- 1.5%
860,000 EG & G, Inc....................................... 12,147,500
------------
Energy -- 12.3%
235,000 Atlantic Richfield Co............................. 23,911,250
585,000 Chevron Corp...................................... 26,105,625
410,000 Exxon Corp........................................ 24,907,500
410,000 Texaco, Inc....................................... 24,548,750
------------
Total........................................... 99,473,125
------------
Food & Beverage -- 4.6%
510,000 Anheuser Busch Cos., Inc.......................... 25,946,250
203,150 CPC International, Inc............................ 10,817,737
------------
Total........................................... 36,763,987
------------
</TABLE>

Continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Healthcare & Cosmetics-- 6.4%
215,000 Bristol Meyers Squibb Co........................... $12,443,125
355,000 Schering-Plough Corp............................... 26,270,000
160,000 Warner Lambert Co.................................. 12,320,000
-----------
Total............................................ 51,033,125
-----------
Insurance -- 6.6%
980,000 American General Corp.............................. 27,685,000
820,000 Providian Corp..................................... 25,317,500
-----------
Total............................................ 53,002,500
-----------
Multi-Industry -- 4.6%
255,000 General Electric Co................................ 13,005,000
270,000 ITT Corp........................................... 23,928,750
-----------
Total............................................ 36,933,750
-----------
Office Equipment -- 3.4%
790,000 Pitney Bowes, Inc.................................. 25,082,500
20,000 Xerox Corp......................................... 1,980,000
-----------
Total............................................ 27,062,500
-----------
Paper & Forest Products-- 0.9%
160,000 Temple Inland, Inc................................. 7,220,000
-----------
Process Industries -- 0.6%
150,000 Ball Corp.......................................... 4,725,000
-----------
Producer Manufacturing-- 3.3%
520,000 Textron, Inc....................................... 26,195,000
-----------
Retail & Apparel -- 9.4%
990,000 American Stores Co................................. 26,606,250
480,000 Dillard Department Stores, Inc..................... 12,840,000
830,000 Melville Corp...................................... 25,626,250
225,000 Sears Roebuck & Co................................. 10,350,000
-----------
Total............................................ 75,422,500
-----------
Transportation -- 6.3%
415,000 Norfolk Southern Corp.............................. 25,159,375
555,000 Union Pacific Corp................................. 25,321,875
-----------
Total............................................ 50,481,250
-----------
</TABLE>

Continued
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Utilities -- 11.2%
1,015,000 General Public Utilities Corp............... $ 26,643,750
825,000 GTE Corp.................................... 25,059,375
1,120,000 NICOR, Inc.................................. 25,480,000
630,000 Southern Co................................. 12,600,000
------------
Total..................................... 89,783,125
------------
Total Common Stocks
(identified cost, $772,397,383).......... 777,747,450
------------
U.S. TREASURY SECURITIES -- 1.2%
$10,000,000 U.S. Treasury Notes, 6.50%, 11/30/96
(identified cost, $9,885,156)............. 9,796,860
------------
**REPURCHASE AGREEMENT -- 2.5%
20,090,000 Donaldson, Lufkin & Jenrette Securities
Corp., 5.875%, dated 12/30/94, due 1/3/95
(at amortized cost)........................ 20,090,000
------------
Total investments (identified cost,
$802,372,539)............................ $807,634,310+
------------
</TABLE>

*NON-INCOME PRODUCING SECURITY.

**THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

+THE COST FOR FEDERAL TAX PURPOSES AMOUNTS TO $803,426,930. THE NET UNREALIZED
APPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO $4,207,380,
WHICH IS COMPRISED OF $47,513,359 APPRECIATION AND $43,305,979 DEPRECIATION AT
DECEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($800,616,773) AT DECEMBER 31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at amortized cost and value
(identified cost $802,372,539 and tax cost $803,426,930)..... $807,634,310
Cash.......................................................... 743
Dividends and interest receivable............................. 2,751,133
Receivable for Fund shares sold............................... 1,483,414
------------
TOTAL ASSETS............................................. 811,869,600
Liabilities:
Payable for Fund shares redeemed.............................. $ 7,052,362
Payable for investments purchased............................. 3,938,539
Accrued expenses.............................................. 261,926
------------
TOTAL LIABILITIES........................................ 11,252,827
Net Assets:
for 48,179,590 shares of beneficial interest outstanding...... $800,616,773
Net Assets Consist of:
Paid-in capital............................................... $796,232,544
Net unrealized appreciation (depreciation) of investments..... 5,261,771
Accumulated net realized gain (loss) on investments and
futures contracts............................................ (443,010)
Accumulated distributions in excess of net
investment income............................................ (434,532)
------------
TOTAL NET ASSETS......................................... $800,616,773
Net Asset Value:
Class A Investment Shares ($188,807,184 / 11,360,202 shares
of beneficial interest outstanding)........................... $16.62
Class B Investment Shares ($104,298,562 / 6,274,003 shares of
beneficial interest outstanding).............................. $16.62
Class C Investment Shares ($485,037 / 29,207 shares of
beneficial interest outstanding)............................. $16.61
Y Shares ($507,025,990 / 30,516,178 shares of beneficial
interest outstanding)........................................ $16.61
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $16.62)*.............. $17.45
Class B Investment Shares..................................... $16.62
Class C Investment Shares..................................... $16.61
Y Shares...................................................... $16.61
Redemption Proceeds Per Share:
Class A Investment Shares..................................... $16.62
Class B Investment Shares (95/100 of 16.62)**................. $15.79
Class C Investment Shares (99/100 of $16.61)**................ $16.44
Y Shares...................................................... $16.61
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
Investment Income:
Dividends............................... $27,496,851
Interest................................ 2,443,286
-----------
Total income........................ 29,940,137
Expenses:
Investment advisory fee.... $3,850,673
Trustees' fees............. 9,831
Administrative personnel
and services fee........... 649,487
Custodian and portfolio
accounting fees............ 189,647
Transfer and dividend
disbursing agent fees and
expenses................... 337,207
Distribution services fee--
Class A Investment Shares. 473,347
Distribution services fee
Class B Investment Shares. 621,330
Distribution services fee--
Class C Investment Shares. 716
Shareholder services fee
Class B Investment Shares. 83,225
Shareholder services fee--
Class C Investment Shares. 239
Fund share registration
costs...................... 106,255
Legal fees................. 12,124
Auditing fees.............. 12,406
Printing and postage....... 15,525
Insurance premiums......... 16,923
Miscellaneous.............. 5,310
------- -----------
Total expenses...................... 6,384,245
-----------
Net investment income............. 23,555,892
Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments
(identified cost basis)................ 37,989,054
Net change in unrealized appreciation
(depreciation)
on investments......................... (46,787,958)
-----------
Net realized and unrealized gain
(loss) on investments.............. (8,798,904)
-----------
Change in net assets resulting from
operations.......................... $14,756,988
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income............................ $ 23,555,892 $ 17,077,167
Net realized gain (loss) on investments
($38,377,587 net gain and $23,232,747 net gain,
respectively, as computed for federal tax
purposes)........................................ 37,989,054 23,032,837
Net change in unrealized appreciation
(depreciation) of investments................... (46,787,958) 16,353,921
------------ ------------
Change in net assets resulting from operations.. 14,756,988 56,463,925
------------ ------------
Distributions to Shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares........................ (5,495,722) (4,784,997)
Class B Investment Shares........................ (1,952,154) (669,485)
Class C Investment Shares........................ (2,060) --
Y Shares......................................... (15,879,870) (11,619,935)
Distributions to shareholders from net
realized gain on investment transactions:
Class A Investment Shares........................ (8,939,524) (6,052,200)
Class B Investment Shares........................ (4,906,369) (1,881,290)
Class C Investment Shares........................ (22,671) --
Y Shares......................................... (24,431,670) (15,175,212)
Distributions in excess of net investment
income:
Class A Investment Shares........................ -- (62,803)
Class B Investment Shares........................ (24,340) (123,293)
Class C Investment Shares........................ (951) --
Y Shares......................................... -- (330,302)
------------ ------------
Change in net assets from distributions
to shareholders................................. (61,655,331) (40,699,517)
------------ ------------
Fund Share (Principal) Transactions
Proceeds from sale of shares..................... 270,641,999 305,551,019
Net asset value of shares issued
to shareholders in payment of
dividends declared.............................. 57,894,547 38,928,569
Cost of shares redeemed.......................... (194,045,034) (142,685,153)
------------ ------------
Change in net assets from Fund
share transactions.............................. 134,491,512 201,794,435
------------ ------------
Change in net assets............................... 87,593,169 217,558,843
------------ ------------
Net Assets:
Beginning of period.............................. 713,023,604 495,464,761
------------ ------------
End of period.................................... $800,616,773 $713,023,604
------------ ------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION VALUE FUND
- --------------------------------------------------------------------------------
[LOGO] FINANCIAL HIGHLIGHTS
Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS A INVESTMENT SHARES
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $17.63 $17.11 $17.08 $14.61 $15.12
Income from investment
operations
Net investment income..... 0.52 0.47 0.44 0.46 0.36
Net realized and
unrealized gain (loss) on
investments............... (0.20) 1.10 0.89 3.17 (0.44)
------ ------ ------ ------ ------
Total from investment
operations................ 0.32 1.57 1.33 3.63 (0.08)
------ ------ ------ ------ ------
Less distributions
Dividends to shareholders
from net investment
income.................... (0.51) (0.47) (0.43) (0.43) (0.36)
Distributions to
shareholders from net
realized gain
on investment
transactions.............. (0.82) (0.58) (0.87) (0.73) (0.02)
Distributions in excess of
net investment income..... -- -- -- -- (0.05)(c)
------ ------ ------ ------ ------
Total distributions....... (1.33) (1.05) (1.30) (1.16) (0.43)
------ ------ ------ ------ ------
Net Asset Value, End of
Period....................... $16.62 $17.63 $17.11 $17.08 $14.61
------ ------ ------ ------ ------
Total return+.............. 1.86% 9.31% 7.96% 25.11% (0.51%)
Ratios to Average Net
Assets
Expenses.................. 0.93% 0.99% 1.01% 0.96% 1.39%(b)
Net investment income..... 2.96% 2.63% 2.37% 2.78% 3.28%(b)
Expense
waiver/reimbursement (a).. -- -- 0.01% 0.09% --
Supplemental Data
Net assets, end of period
(000 omitted)............. $188,807 $189,983 $169,310 $135,565 $104,637
Portfolio turnover rate++. 70% 46% 56% 69% 13%
</TABLE>

* FOR THE NINE MONTHS ENDED DECEMBER 31, 1990.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

++ PORTFOLIO TURNOVER RATE FOR PERIODS ENDING ON OR AFTER DECEMBER 31, 1990
INCLUDE CERTAIN U.S. GOVERNMENT OBLIGATIONS.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(C) DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME FOR THE PERIOD ENDED DE-
CEMBER 31, 1990 WERE A RESULT OF CERTAIN BOOK AND TAX TIMING DIFFERENCES.
THESE DISTRIBUTIONS DID NOT REPRESENT A RETURN OF CAPITAL FOR FEDERAL IN-
COME TAX PURPOSES FOR THE YEAR ENDED DECEMBER 31, 1990.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION VALUE FUND
- --------------------------------------------------------------------------------
[LOGO] FINANCIAL HIGHLIGHTS
Year Ended March 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS A INVESTMENT SHARES
3/31/90 3/31/89 3/31/88 3/31/87 3/31/86 3/31/85*
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $14.45 $12.83 $14.66 $12.35 $10.04 $10.00
Income from investment
operations
Net investment
income............... 0.54 0.36 0.26 0.15 0.19 0.04
Net realized and
unrealized gain
(loss) on
investments......... 1.70 2.11 (1.30) 2.38 2.32 0.00
------ ------ ------ ------ ------ ------
Total from investment
operations........... 2.24 2.47 (1.04) 2.53 2.51 0.04
------ ------ ------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income... (0.57) (0.38) (0.26) (0.13) (0.20) --
Distributions to
shareholders from net
realized
gain on investment
transactions......... (1.00) (0.47) (0.53) (0.09) -- --
Distributions in
excess of net
investment income.... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions.. (1.57) (0.85) (0.79) (0.22) (0.20) 0.00
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period.................. $15.12 $14.45 $12.83 $14.66 $12.35 $10.04
------ ------ ------ ------ ------ ------
Total return+......... 15.54% 19.73% (7.14%) 20.81% 25.29% (0.40%)
Ratios to Average Net
Assets
Expenses............. 1.55% 1.71% 1.74% 1.97% 2.00% 2.00%(b)
Net investment
income............... 3.42% 2.72% 1.92% 1.41% 2.34% 6.47%(b)
Expense
waiver/reimbursement
(a).................. -- -- -- -- -- --
Supplemental Data
Net assets, end of
period (000 omitted). $95,995 $83,121 $21,914 $23,221 $5,595 $100
Portfolio turnover
rate++............... 11% 24% 24% 20% 20% 0%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM AUGUST 30, 1984 (COMMENCEMENT OF
OPERATIONS) TO MARCH 31, 1985.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

++ PORTFOLIO TURNOVER RATE FOR PERIODS ENDING ON OR AFTER MARCH 31, 1986
INCLUDE CERTAIN U.S. GOVERNMENT OBLIGATIONS.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

<TABLE>
<CAPTION>
CLASS C
CLASS B INVESTMENT
INVESTMENT SHARES SHARES
12/31/94 12/31/93** 12/31/94*
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.... $17.63 $17.24 $18.28
Income from investment operations
Net investment income................ 0.42 0.35 0.19
Net realized and unrealized gain
(loss) on investments................ (0.20) 1.01 (0.81)
------ ------ ------
Total from investment operations..... 0.22 1.36 (0.62)
------ ------ ------
Less distributions
Dividends to shareholders from net
investment income.................... (0.41) (0.35) (0.19)
Distributions to shareholders from
net realized gain on investment
transactions......................... (0.82) (0.58) (0.82)
Distributions in excess of net
investment income.................... -- (0.04)(b) (0.04)(b)
------ ------ ------
Total distributions.................. (1.23) (0.97) (1.05)
------ ------ ------
Net Asset Value, End of Period.......... $16.62 $17.63 $16.61
------ ------ ------
Total return+......................... 1.26% 7.98% (3.41%)
Ratios to Average Net Assets
Expenses............................. 1.53% 1.48%(a) 1.68%(a)
Net investment income................ 2.36% 2.09%(a) 2.16%(a)
Supplemental Data
Net assets, end of period (000
omitted)............................. $104,297 $59,953 $485
Portfolio turnover rate.............. 70% 46% 70%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

** REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 2, 1993 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1993.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) COMPUTED ON AN ANNUALIZED BASIS.

(B) DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME FOR THE CLASS B INVESTMENT
SHARES, FOR THE PERIOD ENDED DECEMBER 31, 1993, AND FOR THE CLASS C INVEST-
MENT SHARES, FOR THE PERIOD ENDED DECEMBER 31, 1994, WERE A RESULT OF CER-
TAIN BOOK AND TAX TIMING DIFFERENCES. THESE DISTRIBUTIONS DID NOT REPRESENT
A RETURN OF CAPITAL FOR FEDERAL INCOME TAX PURPOSES FOR THE YEARS ENDED DE-
CEMBER 31, 1993 AND DECEMBER 31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

<TABLE>
<CAPTION>
Y SHARES
12/31/94 12/31/93 12/31/92 12/31/91*
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $17.63 $17.11 $17.08 $14.28
Income from investment
operations
Net investment income....... 0.56 0.52 0.49 0.47
Net realized and unrealized
gain (loss) on investments.. (0.20) 1.12 0.90 3.53
------ ------ ------ ------
Total from investment
operations.................. 0.36 1.64 1.39 4.00
------ ------ ------ ------
Less distributions
Dividends to shareholders
from net investment income.. (0.56) (0.52) (0.49) (0.47)
Distributions to
shareholders from net
realized gain on investment
transactions............... (0.82) (0.58) (0.87) (0.73)
Distributions in excess of
net investment income....... -- (0.02)(c) -- --
------ ------ ------ ------
Total distributions......... (1.38) (1.12) (1.36) (1.20)
------ ------ ------ ------
Net Asset Value, End of Period. $16.61 $17.63 $17.11 $17.08
------ ------ ------ ------
Total return+................ 2.07% 9.71% 8.31% 25.41%
Ratios to Average Net Assets
Expenses.................... 0.68% 0.65% 0.68% 0.69%(b)
Net investment income....... 3.21% 2.98% 2.90% 3.04%(b)
Expense waiver/reimbursement
(a)......................... -- -- 0.01% 0.08%(b)
Supplemental Data
Net assets, end of period
(000 omitted)............... $507,028 $463,087 $326,154 $271,391
Portfolio turnover rate..... 70% 46% 56% 69%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 3, 1991 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1991.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(C) DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME FOR THE PERIOD ENDED DE-
CEMBER 31, 1993 WERE A RESULT OF CERTAIN BOOK AND TAX TIMING DIFFERENCES.
THESE DISTRIBUTIONS DID NOT REPRESENT A RETURN OF CAPITAL FOR FEDERAL IN-
COME TAX PURPOSES FOR THE YEAR ENDED DECEMBER 31, 1993.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
(1) ORGANIZATION

First Union Funds (the "Trust') is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of seventeen portfolios (individually referred to as the
"Fund", or collectively as the "Funds"). The Board of Trustees (the "Trustees")
has established four classes of shares. Effective March 1, 1995, the classes
established by the Trust will be designated as follows: Class A Investment
Shares (formerly Class B Investment Shares), Class B Investment Shares (for-
merly Class C Investment Shares), Class C Investment Shares (formerly Class D
Investment Shares), and Y Shares (formerly Trust Shares), for: First Union Bal-
anced Port-folio, First Union Emerging Markets Growth Portfolio, First Union
Fixed Income Portfolio, First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union International Equity Portfolio, First Union Managed Bond Port-
folio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, First
Union Tax Free Money Market Portfolio, First Union Treasury Money Market Port-
folio, First Union U.S. Government Portfolio, First Union Utility Portfolio,
First Union Value Portfolio, and First Union Virginia Municipal Bond Portfolio.
(All references herein and in the financial statements are to the new class
designations.) As of December 31, 1994, each of the Funds was offering the
Class A Investment Shares, Class B Investment Shares, Class C Investment Shares
and Y Shares, except for: First Union Managed Bond Portfolio, which was only
offering Y Shares; First Union Tax Free Money Market Portfolio and First Union
Treasury Money Market Portfolio, which were only offering Class A Investment
Shares and Y Shares; and First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, and First
Union Virginia Municipal Bond Portfolio, which were only offering Class A In-
vestment Shares, Class B Investment Shares and Y Shares.

The assets of each Fund are segregated and a shareholder's interest is limited
to the Fund in which shares are held. The financial statements included herein
are only those of First Union Balanced Portfolio ("Balanced"), First Union
Utility Portfolio ("Utility"), and First Union Value Portfolio ("Value"). The
financial statements of the other Funds are presented separately.

(2) SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently fol-
lowed by the Funds in the preparation of their financial statements. These pol-
icies are in conformity with generally accepted accounting principles.

A. Investment Valuations--Listed equity securities, corporate bonds and
other fixed income securities are valued at the last sale price reported
on national securities exchanges. Unlisted securities and bonds are
generally valued at the price provided by an independent pricing service.
U.S. government obligations are generally valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less may be stated at amortized cost, which approximates value.

continued
B. Repurchase Agreements--It is the policy of the Funds to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Funds to monitor, on a daily basis, the market value
of each repurchase agreement's underlying collateral to ensure that the
value of collateral at least equals the principal amount of the
repurchase agreement, including accrued interest.

The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are
deemed by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential inability
of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Funds could receive less than the repurchase price on the
sale of collateral securities.

C. Investment Income, Expenses and Distributions--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and
discount, if applicable, are amortized as required by the Internal
Revenue Code, as amended (the "Code"). Distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These distributions do not represent a
return of capital for federal income tax purposes.

At December 31, 1994, Utility, for federal tax purposes, had a capital
loss carryforward of $42,434, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the
extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to
relieve the Fund of any liability for federal tax. Pursuant to the Code,
such capital loss carryforward will expire in 2002.

G. Other--Investment transactions are accounted for on the trade date.

continued

H. Futures Contracts--Balanced may enter into futures contracts as necessary
to hedge against changes in interest or exchange rates or security
prices. Balanced sells futures contracts to offset a possible decline in
the profit on its securities or currencies and buys futures contracts
when the value of the underlying securities are anticipated to increase.
Risks may arise from the potential inability of counterparties to meet
the terms of the agreement. Risks of entering into futures contracts
include the possibility that a change in the value of the contract may
not correlate with changes in the value of the underlying securities.
Upon entering into a futures contract with a broker, Balanced is required
to deposit in a segregated account an amount ("initial margin") of cash
or U.S. government securities equal to a percentage of the contract
value. Balanced agrees to receive from or pay to the broker an amount of
cash equal to a specific dollar amount times the difference between the
closing value and the price at which the contract was made. On a daily
basis the value of the futures contract is determined and any difference
between such value and the original futures contract value is reflected
in the "daily variation margin" account. Daily variation margin
adjustments, arising from this "marking to market" process, are recorded
by Balanced as unrealized gains or losses. Balanced may decide to close
its position on a contract at any time prior to the contract's
expiration. When a contract is closed, Balanced recognizes a realized
gain or loss. For the fiscal year ended December 31, 1994, Balanced had a
realized gain (loss) of ($942,525) on futures contracts. At December 31,
1994, Balanced did not have any outstanding futures contracts.

I. Restricted Securities--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale,
at the issuer's expense, either upon demand by Balanced or in connection
with another registered offering of the securities. Many restricted
securities may be resold in the secondary market in transactions exempt
from registration. Such restricted securities may be determined to be
liquid under criteria established by the Trustees. Balanced will not
incur any registration costs upon such resales. Balanced's restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by the Balanced's pricing committee. Additional information on
the restricted security held by Balanced at December 31, 1994 is as
follows:

<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
-------- ----------- -----------
<S> <C> <C>
Jet Equipment Trust 12/20/94 $7,000,000
</TABLE>

continued

(3) SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:

<TABLE>
<CAPTION>
BALANCED
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold............... 1,428,629 $ 17,003,092 15,852,202 $18,730,505
Shares issued to
shareholders
in payment of dividends
declared................. 186,207 2,147,984 99,375 1,185,158
Shares redeemed........... (845,164) (9,900,621) (306,407) (3,630,320)
---------- ------------ ----------- ------------
Net change resulting from
Class A Investment Share
transactions............. 769,672 $ 9,250,455 15,645,170 $ 16,285,343
---------- ------------ ----------- ------------
<CAPTION>
UTILITY
Year Ended December 31,
1994(a)
Shares Dollars
---------- ------------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold............... 1,050,103 $ 10,216,835
Shares issued to share-
holders
in payment of dividends
declared................. 17,247 160,044
Shares redeemed........... (601,659) (5,692,851)
---------- ------------
Net change resulting from
Class A Investment Share
transactions............. 465,691 $ 4,684,028
---------- ------------
</TABLE>

(a) For the period from January 4, 1994 (commencement of operations) to December
31, 1994.

continued
<TABLE>
<CAPTION>
VALUE
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold................ 1,358,029 $ 23,876,719 1,670,336 $29,146,008
Shares issued to sharehold-
ers
in payment of dividends
declared.................. 839,511 14,241,623 612,728 10,927,661
Shares redeemed............ (1,612,008) (28,379,135) (1,404,525) (24,783,785)
---------- ------------ ---------- ------------
Net change resulting from
Class A Investment Share
transactions.............. 585,532 $ 9,739,207 878,539 $ 15,289,884
---------- ------------ ---------- ------------
<CAPTION>
BALANCED
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold................ 4,255,156 $ 50,429,083 5,420,941 $ 64,347,220
Shares issued to
shareholders
in payment of dividends
declared.................. 374,859 4,311,708 111,109 1,330,890
Shares redeemed............ (1,102,578) (12,868,198) (111,571) (1,334,779)
---------- ------------ ---------- ------------
Net change resulting from
Class B Investment Share
transactions.............. 3,527,437 $41,872,593 5,420,479 $64,343,331
---------- ------------ ---------- ------------
<CAPTION>
UTILITY
Year Ended December 31,
1994(b)
Shares Dollars
---------- ------------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold................ 3,519,138 $ 33,433,097
Shares issued to sharehold-
ers
in payment of dividends
declared.................. 85,030 784,986
Shares redeemed............ (406,297) (3,732,308)
---------- ------------
Net change resulting from
Class B Investment Share
transactions.............. 3,197,871 $ 30,485,775
---------- ------------
</TABLE>

(a) For the period from January 26, 1993 (commencement of operations) to
December 31, 1993.

(b) For the period from January 4, 1994 (commencement of operations) to December
31, 1994.

continued
<TABLE>
<CAPTION>
VALUE
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold.................... 3,054,952 $53,734,405 3,381,196 $59,423,618
Shares issued to shareholders
in payment of dividends
declared...................... 393,979 6,650,920 147,332 2,593,366
Shares redeemed................ (575,508) (10,093,747) (127,948) (2,272,549)
--------- ----------- --------- -----------
Net change resulting from
Class B Investment Share
transactions.................. 2,873,423 $50,291,578 3,400,580 $59,744,435
--------- ----------- --------- -----------
<CAPTION>
BALANCED
Year Ended
December 31,
1994(b)
Shares Dollars
--------- -----------
<S> <C> <C> <C> <C>
Class C Investment Shares:
Shares sold.................... 17,041 $ 196,697
Shares issued to shareholders
in payment of dividends
declared...................... 438 4,924
Shares redeemed................ -- --
--------- -----------
Net change resulting from
Class C Investment Share
transactions.................. 17,479 $ 201,621
--------- -----------
<CAPTION>
UTILITY
Year Ended
December 31,
1994(b)
Shares Dollars
--------- -----------
<S> <C> <C> <C> <C>
Class C Investment Shares:
Shares sold.................... 14,069 $ 129,494
Shares issued to shareholders
in payment of dividends
declared...................... 130 1,182
Shares redeemed................ -- --
--------- -----------
Net change resulting from
Class C Investment Share
transactions.................. 14,199 $ 130,676
--------- -----------
</TABLE>

(a) For the period from February 2, 1993 (commencement of operations) to
December 31, 1993.
(b) For the period from September 2, 1994 (commencement of operations) to
December 31, 1994.

continued

<TABLE>
<CAPTION>
VALUE
Year Ended
December 31,
1994(a)
Shares Dollars
----------- -------------
<S> <C> <C> <C> <C>
Class C Investment Shares:
Shares sold............... 27,701 $ 488,315
Shares issued to share-
holders in payment of
dividends declared....... 1,540 25,674
Shares redeemed........... (34) (589)
----------- -------------
Net change resulting from
Class C Investment Share
transactions............. 29,207 $ 513,400
----------- -------------
<CAPTION>
BALANCED
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Y Shares:
Shares sold............... 20,165,185 $ 238,431,504 23,651,918 $280,582,429
Shares issued to
shareholders in payment
of dividends declared.... 3,761,875 43,437,902 2,447,097 29,159,927
Shares redeemed........... (17,187,695) (201,406,031) (8,749,448) (103,873,965)
----------- ------------- ---------- ------------
Net change resulting from
Y Share transactions..... 6,739,365 $ 80,463,375 17,349,567 $205,868,391
----------- ------------- ---------- ------------
<CAPTION>
UTILITY
Year Ended
December 31,
1994(b)
Shares Dollars
----------- -------------
<S> <C> <C> <C> <C>
Y Shares:
Shares sold............... 580,992 $ 5,509,538
Shares issued to share-
holders in payment of
dividends declared....... 20,357 187,784
Shares redeemed........... (23,687) (216,082)
----------- -------------
Net change resulting from
Y Share transactions..... 577,662 $ 5,481,240
----------- -------------
</TABLE>

(a) For the period from September 2, 1994 (commencement of operations) to
December 31, 1994.

(b) For the period from February 28, 1994 (commencement of operations) to
December 31, 1994.

continued
<TABLE>
<CAPTION>
VALUE
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Y Shares:
Shares sold............... 10,949,430 $192,542,560 12,354,825 $216,981,393
Shares issued to share-
holders in payment of
dividends declared....... 2,177,091 36,976,330 1,415,290 25,407,542
Shares redeemed........... (8,880,310) (155,571,563) (6,561,135) (115,628,819)
---------- ------------ ----------- ------------
Net change resulting from
Y Share transactions..... 4,246,211 $ 73,947,327 7,208,980 $126,760,116
---------- ------------ ----------- ------------
<CAPTION>
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Total net change resulting
from Balanced share
transactions............. 11,053,953 $131,788,044 38,415,216 $286,497,065
---------- ------------ ----------- ------------
Total net change resulting
from Utility share
transactions............. 4,255,423 40,781,719 -- --
---------- ------------ ----------- ------------
Total net change resulting
from Value share
transactions............. 7,734,373 $134,491,512 111,488,099 $201,794,435
---------- ------------ ----------- ------------
</TABLE>

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

Investment Advisory Fee--First Union National Bank of North Carolina, the
Trust's investment adviser (the "Adviser"), receives for its services an annual
investment advisory fee based on a percentage of each Fund's average daily net
assets (see below). The Adviser may voluntarily choose to waive a portion of
its fee. The Adviser can modify or terminate this voluntary waiver at any time
at its sole discretion.

<TABLE>
<CAPTION>
Fund Annual Rate
- ---- -----------
<S> <C>
Balanced............................................................ 0.50%
Utility............................................................. 0.50%
Value............................................................... 0.50%
</TABLE>

continued

Distribution and Shareholder Services Fee--The Trust has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Trust will compensate Federated Securities Corp. ("FSC"), the princi-
pal distributor, from the net assets of the Funds to finance activities in-
tended to result in the sale of the Funds' Class A, Class B and Class C Invest-
ment Shares. The Plan provides that the Funds may incur distribution expenses
up to 0.75 of 1% of the average daily net assets of the Class A, Class B and
Class C Investment Shares, annually, to compensate FSC. For the foreseeable fu-
ture, FSC intends to limit its fees to 0.25 of 1% of the Class A Investment
Shares' average daily net assets. FSC may voluntarily choose to waive a portion
of its fee. FSC can modify or terminate this voluntary waiver at any time at
its sole discretion.

Under the terms of a Shareholder Services Agreement with First Union Brokerage
Services ("FUBS"), the Funds will pay FUBS up to 0.25 of 1% of average net as-
sets of the Funds' Class B and Class C Investment Shares for the period. This
fee is intended to obtain certain services for shareholders and to maintain the
shareholder accounts.

Organizational Expenses--Organizational expenses incurred by Utility of $50,000
were initially borne by FAS. The Fund has agreed to reimburse FAS for the orga-
nizational expenses during the five year period following January 1, 1994 (the
date the Fund first became effective). For the period ended December 31, 1994,
Utility paid $3,333 pursuant to this agreement.

Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of FAS, FSC, and FServ.

(5) INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Balanced.............................................. $361,711,399 $302,786,165
Utility............................................... 45,161,102 6,916,501
Value................................................. 605,225,854 524,434,157
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS REPORT

Year Ended December 31, 1994
The Trustees and Shareholders of
FIRST UNION FUNDS:

We have audited the statement of assets and liabilities, including the portfo-
lios of investments, for First Union Fund portfolios, listed below, as of De-
cember 31, 1994, and the related statements of operations and, changes in net
assets, and the financial highlights for each of the years or periods listed
below:

First Union Utility Portfolio -- statements of operations and changes in
net assets and the financial highlights for the period from January 4,
1994 (commencement of operations) to December 31, 1994.

First Union Balanced Portfolio -- statement of operations for the year
ended December 31, 1994, statements of changes in net assets for the years
ended December 31, 1994 and December 31, 1993, and the financial
highlights for the years or period from April 1, 1991 (commencement of
operations) to December 31, 1994.

First Union Value Portfolio -- statement of operations for the year ended
December 31, 1994, statements of changes in net assets for the years ended
December 31, 1994 and December 31, 1993, and the financial highlights for
the years or period from August 30, 1984 (commencement of operations) to
December 31, 1994.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Union Utility Portfolio, First Union Balanced Portfolio, and First Union Value
Portfolio as of December 31, 1994, and the results of their operations, changes
in their net assets, and the financial highlights for each of the periods
listed above, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Pittsburgh, Pennsylvania
February 13, 1995

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS

TRUSTEES:
Edward C. Gonzales
James S. Howell, Chairman
Gerald M. McDonnell
Thomas L. McVerry
William Walt Pettit
Russell A. Salton, III, M.D.
Michael S. Scofield

OFFICERS:
Edward C. Gonzales, President and Treasurer
Joseph S. Machi, Vice President and Assistant Treasurer
Peter J. Germain, Secretary
Mark A. Sheehan, Assistant Secretary

[LOGO]

Federated Securities Corp., Distributor
535682 (10/PKG.)
G00851-04 (2/95)

1994 ANNUAL REPORT

[INSERT PHOTO HERE]

TAX-FREE FUNDS

A SHARE. B SHARES. Y SHARES

[LOGO]
FIRST UNION FUNDS

FIRST UNION TAX-FREE FUNDS
================================================================================
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
President's Message.................................. 2
A Review of 1994
and Prospects for 1995............................... 3
A Report From Your Portfolio Managers................ 5
- ---------------------------------------------------------------------------------------------
[LOGO] FLORIDA MUNICIPAL Results to Date
BOND FUND Class A Shares.................................... 6
Class B Shares.................................... 7
Y Shares.......................................... 8
Portfolio of Investments............................. 9
Statement of Assets and Liabilities.................. 16
Statement of Operations.............................. 17
Statement of Changes in Net Assets................... 18
Financial Highlights................................. 19
- ---------------------------------------------------------------------------------------------
[LOGO] GEORGIA MUNICIPAL Results To Date
BOND FUND Class A Shares.................................... 20
Class B Shares.................................... 21
Y Shares.......................................... 22
Portfolio of Investments............................. 23
Statement of Assets and Liabilities.................. 28
Statement of Operations.............................. 29
Statement of Changes in Net Assets................... 30
Financial Highlights................................. 31
- ---------------------------------------------------------------------------------------------
[LOGO] HIGH GRADE Results To Date
TAX FREE FUND Class A Shares.................................... 32
Class B Shares.................................... 33
Y Shares.......................................... 34
Portfolio of Investments............................. 35
Statement of Assets and Liabilities.................. 43
Statement of Operations.............................. 44
Statement of Changes in Net Assets................... 45
Financial Highlights................................. 46
</TABLE>

FIRST UNION TAX-FREE FUNDS
================================================================================
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------
[LOGO] NORTH CAROLINA Results To Date
MUNICIPAL BOND Class A Shares.................................... 47
FUND Class B Shares.................................... 48
Y Shares.......................................... 49
Portfolio of Investments............................. 50
Statement of Assets and Liabilities.................. 55
Statement of Operations.............................. 56
Statement of Changes in Net Assets................... 57
Financial Highlights................................. 58
- ------------------------------------------------------------------------------------------
[LOGO] SOUTH CAROLINA Results To Date
MUNICIPAL BOND Class A Shares.................................... 59
FUND Class B Shares.................................... 60
Y Shares.......................................... 61
Portfolio of Investments............................. 62
Statement of Assets and Liabilities.................. 66
Statement of Operations.............................. 67
Statement of Changes in Net Assets................... 68
Financial Highlights................................. 69
- ------------------------------------------------------------------------------------------
[LOGO] VIRGINIA Results To Date
MUNICIPAL Class A Shares.................................... 70
BOND FUND Class B Shares.................................... 71
Y Shares.......................................... 72
Portfolio of Investments............................. 73
Statement of Assets and Liabilities.................. 78
Statement of Operations.............................. 79
Statement of Changes in Net Assets................... 80
Financial Highlights................................. 81
- ------------------------------------------------------------------------------------------
Combined Notes to Financial Statements............... 82
Independent Auditors' Report......................... 91
Trustees and Officers................................ 93
</TABLE>

================================================================================
PRESIDENT'S MESSAGE
by Edward C. Gonzales
[Insert Photo Here]

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
EXISTING NEW SALES
CLASS DESIGNATION CHARGE
-------- ----------- ----------
<S> <C> <C>
Trust Y None
B A Front-End
C B Back-End
D C Level Load
- ---------------------------------------------------------------------------------------------------
</TABLE>
Dear Investor:

I am pleased to present you with the Annual Report for the fiscal year ended
December 31, 1994. It contains complete financial information for the First
Union Funds' (the "Trust") Tax-Free Funds--the First Union Single State Munici-
pal Bond Funds (Florida, Georgia, North Carolina, South Carolina and Virginia)
and the First Union High Grade Tax Free Fund.
As you can see, this Report features a new design and format that make it eas-
ier for you to read and find fund information. It's part of the Trust's commit-
ment to providing you with information that is both comprehensive and clear.
In addition, this Report reflects a re-designation of the Trust's classes of
shares. In response to requests from both brokers and customers, we are stan-
dardizing our class designations to bring them in line with the rest of the mu-
tual fund industry.
For instance, the front-end load class, currently called "Class B Investment
Shares", will be called "Class A Investment Shares". These common class desig-
nations should help enhance consumer understanding and reduce the potential for
confusion.
The chart above shows how the Trust's classes will be re-designated.
I also want to inform you that it is presently contemplated that, in July, the
name of the First Union Funds will change to the Evergreen Funds. You'll be
hearing more about this change as we move closer to the transition date.
If you desire more complete information about any of the First Union Funds,
please call 1-800-326-3241, or see your First Union Brokerage Services Personal
Investment Counselor and ask for a prospectus. The prospectus includes more
complete information on charges and expenses. Please read it carefully before
you invest or send money.
I encourage you to review this Report carefully. I hope you're pleased with
the changes and, as always, I welcome any questions, comments, and suggestions
you may have.

Edward C. Gonzales

February 15, 1995

- --------------------------------------------------------------------------------
Good news on Main Street, bad news on Wall Street
- --------------------------------------------------------------------------------
A REVIEW OF 1994 AND PROSPECTS FOR 1995
by William Hackney,
Chief Investment Officer,
[Insert Photo Here]
1994 confirmed the old adage, "Good news on Main Street is often bad news on
Wall Street."
After sputtering and lurching through 1991-1993, the United States' economy
began firing on all cylinders in 1994. Consumer confidence improved as the un-
employment rate dropped. Industrial production and retail sales surged.
When 1994 began, most investors expected just an uneventful year in the econo-
my. But as the year progressed, it became increasingly clear that it would rank
among the best years for growth in recent history. There were more than 3.5
million new jobs created in 1994, the largest increase in a decade. Real gross
domestic product (the inflation-adjusted value of goods and services produced
in the U.S.) advanced a healthy 4%, which was also the largest increase in a
decade.
Although the type of strong economic growth that we experienced last year of-
ten leads to higher inflation, this failed to happen in 1994. Inflation re-
mained strangely calm, despite sharp price increases in key industrial commodi-
ties like steel, copper, aluminum, cotton, paperboard and a variety of chemi-
cals. The Consumer Price Index* rose 2.7% in
1994, which mirrored the slight increase of the previous year.

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

THE DIM PERSPECTIVE FROM WALL STREET
Solid economic growth with low inflation might seem like an ideal investment
environment. This, however, was not true in 1994.
At the beginning of 1994, interest rates were hovering near 30-year lows. One-
year Treasury bills were yielding 3.5% while 30-year Treasury bonds were yield-
ing 6.4%. By year-end, one-year Treasury bill yields had doubled to 7% and 30-
year Treasury bond yields rose 1.5% to 7.9%.
As a consequence, bond prices fell sharply while stock prices fluctuated wild-
ly, making little upside progress.

CHAOS IN THE MUNICIPAL MARKETS
Trends in the tax-free municipal bond market during 1994 generally reflected
trends in the taxable fixed income markets, but with increased volatility. In-
terest rates rose, so bond prices fell. But the biggest story in the municipal
marketplace was the near panic selling of shares in bond mutual funds by indi-
vidual investors.
The municipal bond market, unlike the taxable corporate and treasury markets,
is dominated by individual investors who more often take a shorter term view
than institutional investors.
When interest rates began to rise in early 1994, a massive liquidation of tax-
free bond funds began. This adversely affected municipal bond prices during the
April-November period, but largely dissipated by year-end.
For 1994, the Lehman Brothers one-year Municipal Bond Index* returned 2.2%
while the Lehman Brothers 20-year Index* returned a negative 7.3% which mir-
rored comparable-maturity treasuries.

THE OUTLOOK FOR 1995
In our view, the investment climate for 1995 is improving. The rapid run-up of
interest rates in 1994 seemed to fully compensate
investors for the anticipated

*This index is unmanaged. continued

================================================================================
A REVIEW OF 1994 AND
PROSPECTS FOR 1995
continued

slight increase in the Consumer Price Index during 1995. We doubt consumer
price inflation, now below 3%, will exceed 4% this year.
Recently, we have observed signs that the economy may indeed be slowing from
last year's robust pace. Housing starts and auto sales, for example, have be-
gun to weaken. We believe restrained inflation and a slower pace of growth may

permit interest rates to decline gradually over the next 12 to 18 months. If
this happens, bond prices should increase as well.
We don't expect that an economic slowdown in 1995 will lead to a recession in
the near future. We believe interest sensitive, early-cycle industries, (such
as housing and autos) will likely have uneventful years.
Both capital spending by business and export demand

from Asia, Latin America
and Europe, however, should keep the economy and corporate profits humming
along. U.S. manufacturers are becoming increasingly competitive in world mar-
kets, while intense global price competition is helping to hold down inflation.
This suggests that the ongoing U.S. economic expansion may be lengthy and in-
flation may remain modest.

- --------------------------------------------------------------------------------
The worst appears to be over
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGERS

[PHOTO APPEARS HERE]
Robert Drye

[PHOTO APPEARS HERE]
Charles Jeanne,

[PHOTO APPEARS HERE]
Richard Marrone

After three years of steady declines, interest rates reached their lowest lev-
els in late 1993 and then rose sharply throughout 1994, as the economy gained
momentum. These conditions created the worst returns bond investors have expe-
rienced in over 50 years as bond prices declined, more than offsetting the in-
terest earnings.

The First Union Municipal Bond Portfolios--Florida, Georgia, North Carolina,
South Carolina and Virginia as well as the High Grade Tax Free Portfolio (the
"Funds")--are invested to pursue a relatively reliable stream of tax-exempt in-
come. Yet, even these Funds were unable to avoid the impact of 1994's highly
unusual conditions.

Invested in high quality intermediate and long-term municipal bonds, Fund val-
ues declined as interest rates rose sharply despite the protective actions that
were taken. Among these actions, we shortened the average maturity of the Funds
to reduce their sensitivity to rising interest rates and we increased the aver-
age coupon rate in the Funds, which further reduced price fluctuations.

- --------------------------------------------------------------------------------
"DESPITE THE EXTREMELY DIFFICULT CLIMATE WHICH EXISTED FOR MUNICIPAL BOND IN-
VESTORS IN 1994, WE ARE HIGHLY OPTIMISTIC ABOUT PROSPECTS FOR THE FUTURE."
- --------------------------------------------------------------------------------

These defensive actions were beneficial to the Funds in October and November,
the two worst months municipal bonds have produced since their returns were
first recorded in the mid-'80s. There were several factors that contributed to
the weakness in the municipal market. We believe the primary reason, however,
was that all participants in this market--mutual fund managers, investors and
broker/dealers--all reacted negatively to the market at the same time. When
this occurred, prices fell quickly and no one was willing to step in to support
the market.

Despite the extremely difficult climate which existed for municipal bond in-
vestors in 1994, we are highly optimistic about prospects for the future.

First, the Funds are invested in high quality bonds which should continue to
produce a relatively reliable stream of tax-exempt income. Additionally, based
on today's yields, municipal bonds are attractive on a historical basis which
partially explains the strong rally which took place in late November and early
December of last year.

In our view, the worst is over for municipal bond investors. We look for the
economy to begin to slow in mid-1995, allowing intermediate and long-term in-
terest rates to decline. This, along with a significant reduction in the supply
of municipal bonds, investors should recoup some of their losses from 1994.

We believe the Funds are well positioned to take advantage of the 1995 envi-
ronment. We hope this unsettled period won't deter investors from maintaining
and even adding to their municipal investments.

FIRST UNION FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION FLORIDA MUNICIPAL BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union Florida Municipal Bond Fund--Class A Shares (the "Fund") from July 5,
1993 (start of performance) to December 31, 1994 compared to the Lehman Broth-
ers Florida Municipal Bond Index ("LBFMBI").

"Graphic representation 'G' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares,
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the reinvest-
ment of all dividends and distributions. The LBFMBI has been adjusted to re-
flect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A
Shares, after deducting the current maximum sales charge of 4.75% (effective
9/1/94) ($10,000 investment minus $475 sales charge = $9,525 ). The Fund's per-
formance assumes the reinvestment of all dividends and distributions. The
LBFMBI has been adjusted to reflect reinvestment of dividends on securities in
the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBFMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION FLORIDA MUNICIPAL BOND FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Florida Municipal Bond Fund--Class B Shares (the "Fund") from July 1,
1993 to December 31, 1994 compared to the Lehman Brothers Florida Municipal
Bond Index ("LBFMBI").

"Graphic representation 'GG' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years from
the purchase date. The Fund's performance assumes the reinvestment of all divi-
dends and distributions. The LBFMBI has been adjusted to reflect reinvestment
of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value in the Fund reflects a 4.00% contingent deferred sales
charge (effective 9/1/94) on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The LBFMBI has been adjusted to reflect re-
investment of dividends on securities in the index. Redemptions less than 1
year from the purchase date are subject to a maximum 5.00% contingent deferred
sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBFMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION FLORIDA MUNICIPAL BOND FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Florida Municipal Bond Fund--Y Shares (the "Fund") from February 28, 1994
(start of performance) to December 31, 1994 compared to the Lehman Brothers
Florida Municipal Bond Index ("LBFMBI").

"Graphic representation 'GGG' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate so, when shares are redeemed, they may
be worth more or less than their original cost. Mutual funds are not obliga-
tions of, or guaranteed by, any bank and are not federally insured.

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBFMBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBFMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------

PORTFOLIO OF
INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 96.9%
Florida -- 90.1%
$1,300,000 Brevard County, FL, 5.75% Sales Tax
Revenue Bonds, (Callable 12/1/2004
@ 101)/(MBIA Insured)/ (Original Issue
Discount: 5.85%), 12/1/2010............. AAA $ 1,210,188
1,500,000 Brevard County, FL, 5.25% Utility Revenue
Refunding Bonds, (Callable 3/1/2003
@ 102)/(AMBAC Insured)/ (Original Issue
Discount: 5.67%), 3/1/2014.............. AAA 1,277,060
1,000,000 Casselberry, FL, 5.125% Utility System
Revenue Refunding Bonds, (Callable
10/1/1002 @ 102)/(FGIC
Insured)/(Original Issue Discount:
5.25%), 10/1/2010....................... AAA 853,657
1,000,000 Coconut Creek, FL, 5.90% Capital
Improvement Revenue Refunding Bonds,
(Callable 10/1/2004
@ 102)/(MBIA Insured), 10/1/2014........ AAA 920,131
500,000 Collier County, FL, 7.00% Health
Facilities Authority Revenue Refunding
Bonds, (The Moorings, Inc.
Project)/(Callable 12/1/2004 @ 102),
12/1/2019............................... BBB+ 487,887
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Florida -- continued
$2,000,000 Dade County, FL, Educational Facilities
Authority, 6.00% Revenue Refunding
Bonds, (St. Thomas University)/
(Callable 1/1/2004 @ 102)/ (Sun Bank
Miami LOC)/ (Original Issue Discount:
6.15%), 1/1/2014....................... AA- $ 1,858,866
1,250,000 Dade County, FL, Professional Sports
Franchise Facilities, 6.00% Tax Revenue
Bonds, (Series B)/(Callable 10/1/2002
@ 101.50)/(FGIC Insured)/ (Original
Issue Discount: 6.208%), 10/1/2017..... AAA 1,162,145
1,720,000 Dade County, FL, Special Obligations,
6.25% Revenue Bonds, (Courthouse Center
Project)/(Callable 4/1/2004
@ 102)/(Original Issue Discount:
6.328%), 4/1/2009...................... A 1,664,719
3,000,000 Escambia County, FL, 5.875% Pollution
Control Revenue Bonds, (Champion
International Corp. Project)/(Callable
12/1/2003 @ 102)/(Subject to
AMT)/(Original Issue Discount: 5.939%),
6/1/2022............................... BBB 2,410,998
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Florida -- continued
$1,500,000 Gainesville, FL, 5.50% Utilities System
Revenue Refunding Bonds, (Series
B)/(Callable 10/1/2003
@ 102)/(Original Issue Discount:
5.83%), 10/1/2013..................... AA $ 1,328,223
1,235,000 Hialeah, FL, 5.50% Capital Improvement
Revenue Bonds, (Callable 10/1/2003 @
102)/(Original Issue Discount: 5.75%),
10/1/2013............................. Baa-1 1,011,876
1,000,000 Hillsborough County, FL, 5.75% IDA
Revenue Refunding Bonds, (University
Community Hospital)/(Callable
8/15/2004 @ 102)/(MBIA
Insured)/(Original Issue Discount:
5.85%), 8/15/2010..................... AAA 929,777
2,000,000 Hillsborough County, FL, 6.50% IDA
Revenue Refunding Bonds, (University
Community Hospital)/(MBIA Insured),
8/15/2019............................. AAA 1,975,620
1,000,000 Hillsborough County, FL, 6.625% Capital
Improvement Program Revenue Bonds,
(Callable 8/1/2004 @ 101)/(FGIC
Insured)/(Original Issue Discount:
6.70%), 8/1/2012...................... AAA 1,009,005
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Florida -- continued
$1,000,000 Jacksonville, FL, 5.50% Electric
Authority Revenue Refunding Bonds, (St.
Johns River-Issue 2)/(Series
8)/(Callable 10/1/2002
@ 101)/(Original Issue Discount:
5.582%), 10/1/2013...................... AA $ 882,539
1,000,000 Kissimmee, FL, Utility Authority, 5.50%
Electric System Revenue Refunding Bonds,
(Callable 10/1/2003 @ 102)/(FGIC
Insured)/ (Original Issue Discount:
5.65%), 10/1/2015....................... AAA 871,445
1,700,000 Lake County, FL, 5.85%, Resource Recovery
Revenue Refunding Bonds, (Series
1993A)/(Callable 10/1/2003 @
102)/(Subject to AMT), 10/1/2009........ BBB+ 1,471,073
1,375,000 Lake County, FL, 5.95% Resource Recovery
Revenue Refunding Bonds, (Series
1993A)/(Callable 10/1/2003 @
102)/(Subject to AMT), 10/1/2013........ BBB+ 1,153,599
1,000,000 Okaloosa County, FL, 6.00% Water & Sewer
Revenue Bonds, (AMBAC Insured)/
(Original Issue Discount: 6.05%),
7/1/2011................................ AAA 952,753
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Florida -- continued
$1,000,000 Orlando, FL, Utilities, 6.75% Common
Water & Electric Revenue Refunding
Bonds, (Sub-Series D)/(Original Issue
Discount: 6.85%), 10/1/2017............. AA- $ 1,018,588
1,000,000 Orlando & Orange County Expressway
Authority, FL, 5.50% Senior Lien Revenue
Refunding Bonds, (Callable 7/1/2003
@ 102)/(FGIC Insured)/ (Original Issue
Discount: 5.719%), 7/1/2018............. AAA 862,112
1,000,000 Port Everglades, FL, 7.125% Port
Authority Revenue Bonds, (Escrowed to
Maturity)/(Original Issue Discount:
7.588%), 11/1/2016...................... AAA 1,063,180
1,500,000 Reedy Creek, FL, Import Distribution,
5.00% Utility Revenue Refunding Bonds,
(Series 1)/(Callable 4/1/2004 @
101)/(MBIA Insured)/(Original Issue
Discount: 5.30%), 10/1/2019............. AAA 1,193,723
1,000,000 St. Petersburg, FL, 5.60% Public Utility
Revenue Bonds, (Callable 10/1/2003 @
102), 10/1/2015......................... AA- 885,687
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Florida -- continued
$ 500,000 Sarasota County, FL, 5.625% Solid Waste
System Revenue Refunding Bonds,
(Callable 10/1/2003
@ 102)/(Original Issue Discount:
5.70%), 10/1/2013..................... A $ 432,707
1,000,000 Sarasota County, FL, 6.50% Utility
System Revenue Bonds, (Callable
10/1/2004 @ 102)/(FGIC
Insured)/(Original Issue Discount:
6.682%), 10/1/2014.................... AAA 998,766
1,035,000 Sebastian, FL, 5.40% Utility System
Revenue Bonds, (Callable 10/1/2003
@ 102)/(MBIA Insured), 10/1/2013...... AAA 899,382
1,000,000 Tampa, FL, 5.75% Revenue Refunding
Bonds, (Allegheny Health System-St.
Mary's Hospital)/ (Callable 12/1/2003
@ 102)/(MBIA Insured), 12/1/2007...... AAA 950,963
-----------
Total............................... 31,736,669
-----------
Puerto Rico -- 6.8%
1,230,000 Puerto Rico Commonwealth, 6.25% GO UT
Refunding Bonds, (Series A)/(Callable
7/1/2002 @ 101.50), 7/1/2010.......... A 1,178,265
</TABLE>

PORTFOLIO OF
INVESTMENTS

*PLEASE REFER TO THE APPENDIX OF THE STATEMENT OF ADDITIONAL INFORMATION FOR
AN EXPLANATION OF THE CREDIT RATINGS (UNAUDITED).

+THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $36,767,689. THE
NET UNREALIZED DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$2,645,817, WHICH IS COMPRISED OF $99,404 APPRECIATION AND $2,745,221 DEPRECIA-
TION AT DECEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($35,209,282) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:

AMBAC-- AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION
AMT-- ALTERNATIVE MINIMUM TAX
FGIC-- FINANCIAL GUARANTY INSURANCE COMPANY
FSA-- FINANCIAL SECURITY ASSURANCE
GO-- GENERAL OBLIGATION
IDA-- INDUSTRIAL DEVELOPMENT AUTHORITY
LOC-- LETTER OF CREDIT
MBIA-- MUNICIPAL BOND INVESTORS ASSURANCE
UT-- UNLIMITED TAX

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified and tax cost,
$36,767,689).................................................. $34,121,872
Cash........................................................... 234,240
Receivable for investments sold................................ 2,033,751
Interest receivable............................................ 667,506
Receivable for Fund shares sold................................ 105,012
Deferred expenses.............................................. 16,289
-----------
TOTAL ASSETS.............................................. 37,178,670
Liabilities:
Payable for investments purchased.............................. $ 1,204,682
Payable for Fund shares redeemed............................... 657,374
Dividends payable.............................................. 80,173
Accrued expenses............................................... 27,159
-----------
TOTAL LIABILITIES......................................... 1,969,388
Net Assets:
for 3,947,600 shares of beneficial interest outstanding........ $35,209,282
Net Assets Consist of:
Paid-in capital................................................ $39,922,184
Net unrealized appreciation (depreciation) of investments...... (2,645,817)
Accumulated net realized gain (loss) on investments............ (2,067,085)
-----------
TOTAL NET ASSETS.......................................... $35,209,282
Net Asset Value:
Class A Investment Shares ($8,689,087 / 974,131 shares of
beneficial interest outstanding).............................. $8.92
Class B Investment Shares ($24,756,282 / 2,775,663 shares of
beneficial interest outstanding)............................... $8.92
Y Shares ($1,763,913 / 197,806 shares of beneficial interest
outstanding).................................................. $8.92
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $8.92)*................ $9.36
Class B Investment Shares...................................... $8.92
Y Shares....................................................... $8.92
Redemption Proceeds Per Share:
Class A Investment Shares...................................... $8.92
Class B Investment Shares (95/100 of $8.92)**.................. $8.47
Y Shares....................................................... $8.92
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<S> <C> <C> <C> <C>
Investment Income:
Interest income........................................ $2,002,836
Expenses:
Investment advisory fee...................... $171,732
Administrative personnel and services fee.... 75,397
Custodian and portfolio accounting fees...... 52,298
Transfer and dividend disbursing agent fees
and expenses................................ 28,573
Distribution services fee
Class A Investment Shares................... 23,034
Distribution services fee--
Class B Investment Shares................... 178,862
Shareholder services fee--
Class B Investment Shares................... 19,489
Fund share registration costs................ 24,849
Auditing fees................................ 12,134
Legal fees................................... 1,784
Printing and postage......................... 19,929
Insurance premiums........................... 5,146
Miscellaneous................................ 4,184
--------
Total expenses............................ 617,411
Deduct--
Waiver of investment advisory fee... $171,732
Waiver of administrative personnel
and services fee................... 75,397
Reimbursement of other operating
expenses by Adviser................ 14,821 261,950
-------- --------
Net expenses....................................... 355,461
-----------
Net investment income.............................. 1,647,375
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments
(identified cost basis)............................... (2,059,403)
Net change in unrealized appreciation (depreciation)
on investments........................................ (3,012,525)
-----------
Net realized and unrealized gain (loss) on
investments........................................ (5,071,928)
-----------
Change in net assets resulting from operations..... ($3,424,553)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1993*
<TABLE>
<CAPTION>
1994 1993*
----------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income.............................. $ 1,647,375 $ 291,407
Net realized gain (loss) on investments
($2,059,403 and $7,682 net loss, respectively, as
computed for federal tax purposes)................ (2,059,403) (7,682)
Net change in unrealized appreciation
(depreciation) on investments..................... (3,012,525) 366,708
----------- -----------
Change in net assets resulting from operations..... (3,424,553) 650,433
----------- -----------
Distributions to Shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares.......................... (478,019) (77,073)
Class B Investment Shares.......................... (1,098,233) (214,334)
Y Shares........................................... (71,123) --
----------- -----------
Change in net assets from
distributions to shareholders..................... (1,647,375) (291,407)
----------- -----------
Fund Share (Principal) Transactions
Proceeds from sale of shares....................... 25,409,953 26,324,308
Net asset value of shares issued
to shareholders in payment of
dividends declared................................ 836,762 150,806
Cost of shares redeemed............................ (12,458,987) (340,658)
----------- -----------
Change in net assets from Fund
share transactions................................ 13,787,728 26,134,456
----------- -----------
Change in net assets................................. 8,715,800 26,493,482
----------- -----------
Net Assets:
Beginning of period................................ 26,493,482 --
----------- -----------
End of period...................................... $35,209,282 $26,493,482
----------- -----------
</TABLE>

*FOR THE PERIOD FROM JULY 2, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1993.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS A CLASS B Y
INVESTMENT SHARES INVESTMENT SHARES SHARES
12/31/94 12/31/93* 12/31/94 12/31/93** 12/31/94***
-------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $10.34 $10.00 $10.34 $10.00 $ 9.99
Income from investment
operations
Net investment
income............... 0.49 0.22 0.43 0.20 0.42
Net realized and
unrealized gain
(loss)
on investments...... (1.42) 0.34 (1.42) 0.34 (1.07)
------ ------ ------ ------ ------
Total from investment
operations........... (0.93) 0.56 (0.99) 0.54 (0.65)
------ ------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income... (0.49) (0.22) (0.43) (0.20) (0.42)
------ ------ ------ ------ ------
Net Asset Value, End of
Period.................. $ 8.92 $10.34 $ 8.92 $10.34 $ 8.92
------ ------ ------ ------ ------
Total return+......... (9.14%) 5.63% (9.66%) 5.40% (6.54%)
Ratios to Average Net
Assets
Expenses............. 0.64% 0.25%(b) 1.22% 0.75%(b) 0.39%(b)
Net investment
income............... 5.19% 4.92%(b) 4.61% 4.46%(b) 5.54%(b)
Expense
waiver/reimbursement
(a).................. 0.76% 1.58%(b) 0.76% 1.58%(b) 0.76%(b)
Supplemental Data
<CAPTION>
Net assets, end of
period (000 omitted). $8,689 $8,110 24,756 $18,383 $1,764
<S> <C> <C> <C> <C> <C> <C>
Portfolio turnover
rate................. 72% 3% 72% 3% 72%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JULY 6, 1993 (COMMENCEMENT OF OPERA-
TIONS) TO DECEMBER 31, 1993.

** REFLECTS OPERATIONS FOR THE PERIOD FROM JULY 2, 1993 (COMMENCEMENT OF OPERA-
TIONS) TO DECEMBER 31, 1993.

*** REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION GEORGIA MUNICIPAL BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union Georgia Municipal Bond Fund--Class A Shares (the "Fund") from July 1,
1993 (start of performance) to December 31, 1994, compared to the Lehman Broth-
ers Georgia Municipal Bond Index ("LBGMBI").

"Graphic representation 'H' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the reinvest-
ment of all dividends and distributions. The LBGMBI has been adjusted to re-
flect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the current maximum sales charge of 4.75% (effective 9/1/94)
($10,000 investment minus $475 sales charge = $9,525). The Fund's performance
assumes the reinvestment of all dividends and distributions. The LBGMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBGMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION GEORGIA MUNICIPAL BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union Georgia Municipal Bond Fund--Class B Shares (the "Fund") from July 1,
1993 (start of performance) to December 31, 1994, compared to the Lehman Broth-
ers Georgia Municipal Bond Index ("LBGMBI").

"Graphic representation 'HH' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years from
the purchase date. The Fund's performance assumes the reinvestment of all divi-
dends and distributions. The LBGMBI has been adjusted to reflect reinvestment
of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 4.00% contingent deferred sales
charge (effective 9/1/94) on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The LBGMBI has been adjusted to reflect re-
investment of dividends on securities in the index. Redemptions less than 1
year from the purchase date are subject to a maximum 5.00% contingent deferred
sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
The LBGMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION GEORGIA MUNICIPAL BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union Georgia Municipal Bond Fund--Y Shares (the "Fund") from February 28, 1994
(start of performance) to December 31, 1994, compared to the Lehman Brothers
Georgia Municipal Bond Index ("LBGMBI").

"Graphic representation 'HHH' omitted. See Appendix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBGMBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBGMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
LOGO
- --------------------------------------------------------------------------------

PORTFOLIO OF
INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 92.0%
Georgia -- 92.0%
$500,000 Appling County, GA Development Authority,
7.15% Pollution Control Revenue Refunding
Bonds, (Oglethorpe Power Corp./ Hatch
PJ)/(Callable 1/1/2004 @ 101)/(MBIA
Insured), 1/1/2021........................ AAA $ 512,550
500,000 Butts County, GA, 6.75% Certificate
Participation, (Callable 12/1/2004
@ 102)/(MBIA Insured)/ (Original Issue
Discount: 7.05%), 12/1/2014............... AAA 508,148
120,000 Cartersville, GA, 6.70% GO UT Bonds,
1/1/2012.................................. A 120,849
500,000 Clayton County, GA, 7.125% Housing
Authority Mortgage Revenue Refunding
Bonds, (Multi-Family Mortgage)/ (Callable
12/1/2004 @ 102)/ (FNMA/FHA Insured),
12/1/2025................................. Aaa 501,949
400,000 Conyers, GA, 6.45% Water & Sewer Revenue
Bonds, (Series A)/(Callable 7/1/2004 @
102)/ (AMBAC Insured)/(Original Issue
Discount: 6.55%), 7/1/2010................ AAA 398,063
200,000 DeKalb County School District, GA, 6.25% GO
UT Bonds, (Series A), 7/1/2011............ AA 195,181
</TABLE>

FIRST UNION GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Georgia -- continued
$345,000 Douglasville County, GA, 5.625% Water &
Sewer Authority Revenue Refunding Bonds,
(AMBAC Insured)/ (Original Issue Discount:
5.70%), 6/1/2015.......................... AAA $ 306,296
200,000 East Point, GA Building Authority, 6.00%
Revenue Refunding Bonds, (Callable
2/1/2004 @ 102)/(FGIC Insured)/(Original
Issue Discount: 6.10%), 2/1/2010.......... AAA 191,388
400,000 Forsyth County, GA, 6.30% Water & Sewer
Revenue Bonds, (Callable 1/1/2005
@ 102)/(FGIC Insured)/ (Original Issue
Discount: 6.375%), 1/1/2015............... AAA 385,918
300,000 Fulton County, GA, 6.00% Development
Authority Revenue Refunding Bonds,
(Callable 6/1/2004 @ 102)/ (NationsBank of
GA LOC)/ (Original Issue Discount: 6.15%),
6/1/2009.................................. A1 282,074
300,000 Georgia Municipal Gas Authority, 6.40% Gas
Revenue Bonds, (Southern Storage Gas
Project)/(Callable 7/1/2004 @
102)/(Original Issue Discount: 6.55%),
7/1/2014.................................. A- 281,914
400,000 Georgia State, 6.70% GO UT Bonds, (Series
D), 8/1/2010.............................. AA+ 416,922
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Georgia -- continued
$300,000 Georgia State, 6.50% Housing & Finance
Authority Revenue Refunding Bonds,
(Single Family Mortgage)/(Series
A)/(Callable 6/1/2004
@ 102)/(Subject to AMT)/ (FHA/VA
Insured), 12/1/2017.................... AA+ $ 284,283
300,000 Georgia State, 7.00% Housing & Finance
Authority Revenue Bonds, (Single Family
Mortgage)/(Series C)/(Callable
12/1/2004 @ 102)/(Subject to
AMT)/(FHA/VA Insured), 12/1/2015....... AA+ 302,872
250,000 Georgia Municipal Electric Power
Authority, 6.60% Revenue Refunding
Bonds, (Series V)/(GO of Participants
Insured), 1/1/2018..................... A+ 245,078
400,000 Georgia Municipal Electric Power
Authority, 7.25% Revenue Refunding
Bonds, (Series EE)/(AMBAC Insured),
1/1/2024............................... AAA 429,054
400,000 Gwinnett County, GA, 6.00% GO UT
Refunding Bonds,
(Callable 1/1/2003 @ 102)/ (Original
Issue Discount: 6.15%), 1/1/2011....... AA+ 380,284
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Georgia -- continued
$500,000 Hall County School District, GA, 6.70% GO
UT Bonds, (Callable 12/1/2004 @ 102)/
(AMBAC Insured)/(Original Issue
Discount: 6.80%), 12/1/2014............. AAA $ 504,455
500,000 Oconee County, GA, 6.50% Water & Sewer
Revenue Bonds, (Callable 9/1/2004
@ 102)/(Original Issue Discount: 6.70%),
9/1/2017................................ A 478,281
405,000 Private Colleges & Universities
Authority, GA, 5.50% Revenue Refunding
Bonds, (Agnes Scott College Project)/
(Callable 6/1/2003 @ 102)/ (Original
Issue Discount: 5.55%), 6/1/2013........ AA- 353,984
500,000 Putnam County School District, GA, 6.90%
GO UT Bonds, (Callable 2/1/2005 @ 102)/
(AMBAC Insured)/(Original Issue
Discount: 6.922%), 2/1/2014............. AAA 511,064
300,000 Washington County School District, GA,
6.875% GO UT Bonds, (Callable 1/1/2005
@ 102)/(AMBAC Insured)/ (State Aid
Withholding)/ (Original Issue Discount:
6.945%), 1/1/2014....................... AAA 307,142
----------
Total Long-Term Municipal Securities
(identified cost, $8,048,666)....... 7,897,749
----------
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
SHARES OR S&P* VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C>
MUTUAL FUND SHARES -- 1.7%
147,000 Lehman Municipal Money Market Fund (at
net asset value)........................ NR $ 147,000
----------
Total Investments (identified cost,
$8,195,666)......................... $8,044,749+
----------
</TABLE>

*PLEASE REFER TO THE APPENDIX OF THE STATEMENT OF ADDITIONAL INFORMATION FOR AN
EXPLANATION OF THE CREDIT RATINGS (UNAUDITED).

+THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $8,195,666. THE
NET UNREALIZED DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$150,917, WHICH IS COMPRISED OF $82,031 APPRECIATION AND $232,948 DEPRECIATION
AT DECEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($8,582,611) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:

AMBAC -- AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION
AMT -- ALTERNATIVE MINIMUM TAX
FGIC -- FINANCIAL GUARANTY INSURANCE COMPANY
FHA/VA -- FEDERAL HOUSING AUTHORITY/VETERANS ADMINISTRATION
FNMA/FHA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION/FEDERAL HOUSING AUTHORITY
GO -- GENERAL OBLIGATION
LOC -- LETTER OF CREDIT
MBIA -- MUNICIPAL BOND INVESTORS ASSURANCE
UT -- UNLIMITED TAX

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified and tax cost
$8,195,666).................................................... $8,044,749
Cash............................................................ 70,752
Receivable for investments sold................................. 259,840
Receivable for Fund shares sold................................. 140,211
Interest receivable............................................. 133,045
Deferred expenses............................................... 10,686
----------
TOTAL ASSETS............................................... 8,659,283
Liabilities:
Payable for Fund shares redeemed................................ $ 53,880
Accrued expenses................................................ 9,740
Dividends payable............................................... 13,052
----------
TOTAL LIABILITIES.......................................... 76,672
Net Assets:
for 982,066 shares of beneficial interest outstanding........... $8,582,611
Net Assets Consist of:
Paid-in capital................................................. $9,620,985
Unrealized appreciation (depreciation) of investments........... (150,917)
Accumulated net realized gain (loss) on investments............. (887,457)
----------
TOTAL NET ASSETS........................................... $8,582,611
Net Asset Value:
Class A Investment Shares ($1,386,598 / 158,671 shares of
beneficial interest outstanding)............................... $8.74
Class B Investment Shares ($6,911,706 / 790,862 shares of
beneficial interest outstanding)............................... $8.74
Y Shares ($284,307 / 32,533 shares of beneficial interest
outstanding)................................................... $8.74
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $8.74)*................. $9.18
Class B Investment Shares....................................... $8.74
Y Shares........................................................ $8.74
Redemption Proceeds Per Share:
Class A Investment Shares....................................... $8.74
Class B Investment Shares (95/100 of 8.74)**.................... $8.30
Y Shares........................................................ $8.74
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended
December 31, 1994
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest Income............................................... $ 425,227
Expenses:
Investment advisory fee............................ $ 36,674
Trustees' fees..................................... 63
Administrative personnel and services fee.......... 75,479
Custodian and portfolio accounting fees............ 44,191
Transfer and dividend disbursing agent fees and
expenses.......................................... 31,643
Distribution services fee--
Class A Investment Shares......................... 3,045
Distribution services fee--
Class B Investment Shares......................... 44,866
Shareholder services fee--
Class B Investment Shares......................... 5,407
Fund share registration costs...................... 20,123
Auditing fees...................................... 12,367
Legal fees......................................... 452
Printing and postage............................... 16,671
Insurance premiums................................. 6,462
Miscellaneous...................................... 3,374
---------
Total expenses.................................. 300,817
Deduct--
Waiver of investment advisory fee........ $ 36,674
Waiver of administrative personnel and
services fee............................. 75,479
Reimbursement of other operating
expenses by Adviser..................... 114,267 226,420
--------- ---------
Net expenses.............................................. 74,397
-----------
Net investment income..................................... 350,830
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments (identified cost
basis)........................................................ (887,457)
Net change in unrealized appreciation (depreciation) on
investments.................................................. (185,649)
-----------
Net realized and unrealized gain (loss) on investments.... (1,073,106)
-----------
Change in net assets resulting from operations............ ($ 722,276)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1993*
<TABLE>
<CAPTION>
1994 1993*
---------- ----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income................................ $ 350,830 $ 45,877
Net realized gain (loss) on investments
($887,457 net loss and $1,437 net gain,
respectively, as computed for federal tax
purposes)........................................... (887,457) 1,437
Net change in unrealized appreciation (depreciation)
on investments....................................... (185,649) 34,728
---------- ----------
Change in net assets resulting from operations....... (722,276) 82,042
---------- ----------
Distributions to shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares............................ (64,118) (7,930)
Class B Investment Shares............................ (278,937) (37,947)
Y Shares............................................. (7,775) --
Distributions to shareholders from net realized gain
on investment transactions:
Class A Investment Shares............................ -- (255)
Class B Investment Shares............................ -- (1,182)
---------- ----------
Change in net assets from
distributions to shareholders....................... (350,830) (47,314)
---------- ----------
Fund Share (Principal) Transactions
Proceeds from sale of shares......................... 6,753,905 4,449,992
Net asset value of shares issued
to shareholders in payment of
dividends declared.................................. 253,659 36,136
Cost of shares redeemed.............................. (1,860,821) (11,882)
---------- ----------
Change in net assets from Fund
share transactions.................................. 5,146,743 4,474,246
---------- ----------
Change in net assets................................... 4,073,637 4,508,974
---------- ----------
Net Assets:
Beginning of period.................................. 4,508,974 --
---------- ----------
End of period........................................ $8,582,611 $4,508,974
---------- ----------
</TABLE>

*FOR THE PERIOD FROM JULY 2, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1993.
(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS A CLASS B Y
INVESTMENT SHARES INVESTMENT SHARES SHARES
12/31/94 12/31/93* 12/31/94 12/31/93* 12/31/94**
-------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $10.19 $10.00 $10.19 $10.00 $ 9.83
Income from investment
operations
Net investment
income............... 0.48 0.201 0.43 0.179 0.42
Net realized and
unrealized gain
(loss)
on investments...... (1.45) 0.193 (1.45) 0.193 (1.09)
------ ------- ------ ------- ------
Total from investment
operations........... (0.97) 0.394 (1.02) 0.372 (0.67)
------ ------- ------ ------- ------
Less distributions
Dividends to
shareholders from net
investment income... (0.48) (0.201) (0.43) (0.179) (0.42)
Distributions to
shareholders from net
realized
gain on investment
transactions......... -- (0.003) -- (0.003) --
------ ------- ------ ------- ------
Total distributions.. (0.48) (0.204) (0.43) (0.182) (0.42)
------ ------- ------ ------- ------
Net Asset Value, End of
Period.................. $ 8.74 $10.19 $ 8.74 $10.19 $ 8.74
------ ------- ------ ------- ------
Total return+......... (9.64%) 3.96% (10.15%) 3.74% (6.87%)
Ratios to Average Net
Assets
Expenses............. 0.53% 0.25%(b) 1.13% 0.75%(b) 0.31%(b)
Net investment
income............... 5.26% 4.71%(b) 4.66% 4.15%(b) 5.68%(b)
Expense
waiver/reimbursement
(a).................. 3.08% 6.57%(b) 3.08% 6.57%(b) 3.08%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $1,387 $817 $6,912 $3,692 $284
Portfolio turnover
rate................. 147% 15% 147% 15% 147%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JULY 2, 1993 (COMMENCEMENT OF OPERA-
TIONS) TO DECEMBER 31, 1993.

** REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION HIGH GRADE TAX FREE FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION HIGH GRADE TAX FREE FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union High Grade Tax Free Fund--Class A Shares (the "Fund") from February 25,
1992 (start of performance) to December 31, 1994 compared to the Lehman Broth-
ers Insured Bond Index ("LBIBI").

"Graphic representation 'I' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the
reinvestment of all dividends and distributions. The LBIBI has been adjusted
to reflect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the current maximum sales charge of 4.75% (effective 9/1/94)
($10,000 investment minus $475 sales charge = $9,525). The Fund's performance
assumes the reinvestment of all dividends and distributions. The LBIBI has
been adjusted to reflect reinvestment of dividends on securities in the
index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBIBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION HIGH GRADE TAX FREE FUND
- --------------------------------------------------------------------------------
How a $10,000 investment in the Fund has performed
[LOGO]
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS B SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION HIGH GRADE TAX FREE FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union High Grade Tax Free Fund--Class B Shares (the "Fund") from January 12,
1993 (start of performance) to December 31, 1994 compared to the Lehman Broth-
ers Insured Bond Index ("LBIBI").

"Graphic representation 'II' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, when shares are redeemed, they may be
worth more or less than their original cost. Mutual funds are not obligations
of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years from
the purchase date. The Fund's performance assumes the reinvestment of all divi-
dends and distributions. The LBIBI has been adjusted to reflect reinvestment of
dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 4.00% contingent deferred sales
charge (effective 9/1/94) on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The LBIBI has been adjusted to reflect re-
investment of dividends on securities in the index. Redemptions less than 1
year from the purchase date are subject to a maximum 5.00% contingent deferred
sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
The LBIBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION HIGH GRADE TAX FREE FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union High Grade Tax Free Fund--Y Shares (the "Fund") from February 28, 1994
(start of performance) to December 31, 1994 compared to the Lehman Brothers In-
sured Bond Index "(LBIBI").

"Graphic representation 'III' omitted. See Appendix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBIBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBIBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION HIGH GRADE TAX FREE FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------

PORTFOLIO OF
INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 96.4%
California -- 4.7%
$1,700,000 California State, 6.80% GO Bonds
(Callable 11/1/2004 @ 102), (FGIC
Insured), 11/1/2009.............. AAA $ 1,747,112
3,000,000 San Jose, CA, 6.00% Redevelopment
Tax Allocation Bonds (MBIA
Insured), 8/1/2015............... AAA 2,742,123
-----------
Total.......................... 4,489,235
-----------
District of Columbia -- 3.1%
3,250,000 District of Columbia, 5.50% GO
Refunding Bonds (Series B)/ (FSA
Insured)/(Original Issue
Discount: 5.70%), 6/1/2010....... AAA 2,892,734
-----------
Florida -- 3.3%
1,000,000 Hillsborough County, FL,
Industrial Development Authority,
6.50% IDA Revenue Bonds
(University Community
Hospital)/(MBIA Insured),
8/15/2019........................ AAA 987,810
2,250,000 Orange County, FL, Water and Waste
Authority, 6.25% Revenue
Refunding Bonds (AMBAC Insured),
10/1/2017........................ AAA 2,139,869
-----------
Total.......................... 3,127,679
-----------
Georgia -- 10.5%
7,000,000 Atlanta, GA, 6.00% Airport
Facilities Revenue Bonds (Series
B)/(AMBAC Insured)/(Original
Issue Discount: 6.35%)/ (Subject
to AMT), 1/1/2021................ AAA 6,212,703
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Georgia -- continued
$1,500,000 Brunswick, GA, 6.10% Water & Sewer
Revenue Bonds (MBIA
Insured)/(Original Issue
Discount: 6.27%), 10/1/2019...... AAA $ 1,415,916
2,400,000 Georgia Municipal Electric
Authority, 6.50% Special
Obligation Bonds (Fifth Crossover
Project 1)/(MBIA Insured),
1/1/2017......................... AAA 2,305,224
-----------
Total.......................... 9,933,843
-----------
Illinois -- 8.0%
2,000,000 Chicago, IL, 5.75% Revenue Bonds,
Public Building (Chicago Bank
District)/(FGIC Insured),
1/1/2010......................... AAA 1,828,984
1,500,000 Chicago, IL, 5.60% GO Bonds
(Emergency Telephone System)/
(FGIC Insured)/(Original Issue
Discount: 5.62%), 1/1/2010....... AAA 1,345,352
3,000,000 Illinois Development Finance
Authority, 7.25% PCR Bonds
(Commonwealth Edison Co.
Project)/ (MBIA Insured),
6/1/2011......................... AAA 3,108,528
1,400,000 Illinois Health Facilities
Authority, 6.25% Revenue Bonds
(Children's Memorial
Hospital)/(MBIA Insured),
8/15/2013........................ AAA 1,310,814
-----------
Total.......................... 7,593,678
-----------
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Indiana -- 3.9%
$2,300,000 Indiana Municipal Power Supply
System, 6.125% Revenue Bonds
(Series A)/(MBIA Insured),
1/1/2019......................... AAA $ 2,116,193
1,500,000 Lawrence Township, IN,
Metropolitan School District,
6.875% First Mortgage Revenue
Bonds (MBIA Insured), 7/5/2011... AAA 1,546,447
-----------
Total.......................... 3,662,640
-----------
Iowa -- 1.6%
1,750,000 Salix, IA, 5.90% PCR Bonds
(Northwestern Public Service
Co.)/(MBIA Insured), 6/1/2023.... AAA 1,515,713
-----------
Louisiana -- 2.7%
2,500,000 Jefferson, LA, 6.75% Sales Tax
Revenue Bonds (Series A)/ (FGIC
Insured), 12/1/2006.............. AAA 2,584,855
-----------
Nevada -- 7.1%
2,500,000 Clark County School District, NV,
6.75% GO Bonds (Series A)/ (MBIA
Insured), 3/1/2007............... AAA 2,557,890
1,575,000 Clark County, NV, 6.50% GO Bonds
(Series A)/(AMBAC
Insured)/(Original Issue
Discount: 6.52%), 6/1/2017....... AAA 1,531,489
1,000,000 Las Vegas Library District, NV,
6.00% GO Bonds (FGIC Insured),
2/1/2012......................... AAA 930,295
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Nevada -- continued
$2,000,000 Washoe County, NV, 5.70% GO Bonds
(Series A)/(FGIC Insured),
7/1/2017......................... AAA $ 1,731,832
-----------
Total.......................... 6,751,506
-----------
North Carolina -- 0.6%
570,000 North Carolina Municipal Power
Agency No. 1, 6.50% Revenue Bonds
(MBIA Insured)/ (Escrowed to
Maturity), 1/1/2010.............. AAA 570,000
-----------
Oklahoma -- 1.3%
1,250,000 Enid, OK, Municipal Authority Tax
and Utility, 6.20% Revenue Bonds
(FGIC Insured), 2/1/2012......... AAA 1,186,878
-----------
Rhode Island -- 1.9%
2,000,000 Rhode Island Depositors Economic
Protection, 5.80% Revenue
Refunding Bonds (MBIA Insured),
8/1/2012......................... AAA 1,813,596
-----------
South Carolina -- 3.7%
3,500,000 South Carolina Port Authority,
6.625% Revenue Bonds (AMBAC
Insured)/(Subject to AMT),
7/1/2011......................... AAA 3,451,697
-----------
South Dakota -- 7.1%
3,500,000 Heartland Consumers Power
District, SD, 6.00% Electric
Revenue Bonds (FSA Insured)/
(Original Issue Discount: 6.40%),
1/1/2017......................... AAA 3,197,625
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
South Dakota -- continued
$3,500,000 South Dakota State Health and
Education Facilities Authority,
6.625% Revenue Bonds (MBIA
Insured), 7/1/2011............... AAA $ 3,479,178
-----------
Total.......................... 6,676,803
-----------
Tennessee -- 7.0%
1,200,000 Bristol, TN, Health & Educational
Facilities, 6.75% Revenue Bonds
(Bristol Memorial Hospital)/
(FGIC Insured), 9/1/2007......... AAA 1,234,888
1,700,000 Knox County, TN, Health,
Educational & Housing Facilities
Board, 6.25% Hospital Facilities
Revenue Bonds (Fort Sanders
Alliance)/(Series B)/ (MBIA
Insured), 1/1/2013............... AAA 1,634,395
4,100,000 Knox County, TN, Health,
Educational & Housing Facilities
Board, 5.75% Hospital Facilities
Revenue Bonds (Fort Sanders
Alliance)/(Series C)/ (MBIA
Insured), 1/1/2014............... AAA 3,701,086
-----------
Total.......................... 6,570,369
-----------
Texas -- 6.6%
2,000,000 Dallas-Fort Worth, TX, Regional
Airport, 7.80% Revenue Bonds
(FGIC Insured), 11/1/2007........ AAA 2,234,496
2,000,000 Harris County, TX, 5.30%, Revenue
Toll Roads, Senior Lien Bonds
(AMBAC Insured)/ (Original Issue
Discount: 5.40%), 8/15/2013...... AAA 1,687,494
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ----------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Texas -- continued
$2,290,000 Southland Oaks, TX, Municipal
Utility District, 6.50% Revenue
Bonds (City of Austin)/(FGIC
Insured) 11/15/2009.............. AAA $ 2,306,147
-----------
Total.......................... 6,228,137
-----------
Utah -- 6.4%
2,500,000 Iron County School District, UT,
6.40% GO Bonds (MBIA
Insured)/(Original Issue
Discount: 6.45%), 1/15/2012...... AAA 2,444,200
1,000,000 Salt Lake City, UT, 6.00% Revenue
Bonds, Utah Airport Authority
(FGIC Insured), 12/1/2012........ AAA 914,884
3,000,000 Salt Lake City, UT, 5.875% Revenue
Refunding Bonds, Utah Airport
Authority (FGIC Insured),
12/1/2018........................ AAA 2,672,385
-----------
Total.......................... 6,031,469
-----------
Washington -- 8.4%
3,965,000 Seattle, WA, Metropolitan Seattle
Sewer, 6.25% Revenue Bonds (MBIA
Insured), 1/1/2021............... AAA 3,691,542
1,000,000 Spokane, WA, Regional Solid Waste
Management System, 6.25% Revenue
Bonds (AMBAC Insured), 12/1/2011. AAA 942,268
3,500,000 Tacoma, WA, Electric System, 6.25%
Revenue Bonds, (FGIC
Insured)/(Original Issue
Discount: 6.45%), 1/1/2015....... AAA 3,313,103
-----------
Total.......................... 7,946,913
-----------
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ----------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
West Virginia -- 1.6%
$1,500,000 Harrison County, WV, Board of
Education, 6.30% GO Bonds (FGIC
Insured), 5/1/2005............... AAA $ 1,516,865
-----------
Wisconsin -- 6.9%
4,500,000 Superior, WS, 6.90% Ltd
Obligations Revenue Bonds
(Midwest Energy)/(Series E)/
(FGIC Insured), 8/1/2021......... AAA 4,549,068
2,000,000 Wisconsin State Health and
Education Facilities Authority,
6.625% Revenue Bonds (Wausau
Hospital)/(AMBAC Insured),
8/15/2011........................ AAA 1,964,266
-----------
Total.......................... 6,513,334
-----------
Total Long-Term Municipal
Securities (identified cost,
$95,034,485)................. 91,057,944
-----------
MUTUAL FUND SHARES -- 1.8%
1,595,103 Lehman Municipal Money Market
Fund............................. 1,595,103
61,616 Lehman Tax-Free Money Market Fund. 61,616
-----------
Total Mutual Fund Shares
(at net asset value)......... 1,656,719
-----------
Total Investments (identified
cost, $96,691,204)........... $92,714,663+
-----------
</TABLE>

*PLEASE REFER TO THE APPENDIX OF THE STATEMENT OF ADDITIONAL INFORMATION FOR AN
EXPLANATION OF THE CREDIT RATINGS (UNAUDITED).

+THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $96,691,204. THE
NET UNREALIZED DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$3,976,541 WHICH CONSISTS OF $363,587 APPRECIATION AND $4,340,128 DEPRECIATION,
AT DECEMBER 31, 1994.

FIRST UNION HIGH GRADE TAX FREE FUND
- --------------------------------------------------------------------------------
LOGO
- --------------------------------------------------------------------------------

PORTFOLIO OF
INVESTMENTS

continued

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($94,429,680) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:

AMBAC-- AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION
AMT-- ALTERNATIVE MINIMUM TAX
FGIC-- FINANCIAL GUARANTY INSURANCE CO.
FSA-- FINANCIAL SECURITY ASSURANCE
GO-- GENERAL OBLIGATION
IDA-- INDUSTRIAL DEVELOPMENT AUTHORITY
MBIA-- MUNICIPAL BOND INVESTORS ASSURANCE
PCR-- POLLUTION CONTROL REVENUE

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at amortized cost and value
(identified and tax cost, $96,691,204)........................ $92,714,663
Cash........................................................... 5,829
Interest receivable............................................ 2,388,442
Receivable for investments sold................................ 1,039,313
Receivable for Fund shares sold................................ 355,046
Deferred expenses.............................................. 4,003
-----------
TOTAL ASSETS.............................................. 96,507,296
Liabilities:
Payable for investments purchased.............................. $ 1,440,086
Payable for Fund shares redeemed............................... 417,468
Dividends payable.............................................. 175,084
Accrued expenses............................................... 44,978
-----------
TOTAL LIABILITIES......................................... 2,077,616
Net Assets:
for 9,640,722 shares of beneficial interest outstanding........ $94,429,680
Net Assets Consist of:
Paid-in capital................................................ $99,317,449
Net unrealized appreciation (depreciation) of investments...... (3,976,541)
Accumulated net realized gain (loss) on investments............ (911,228)
-----------
TOTAL NET ASSETS.......................................... $94,429,680
Net Asset Value:
Class A Investment Shares ($57,676,448 / 5,888,392 shares
of beneficial interest outstanding)........................... $9.79
Class B Investment Shares ($32,434,792 / 3,311,416 shares
of beneficial interest outstanding)........................... $9.79
Y Shares ($4,318,440 / 440,914 shares of beneficial interest
outstanding).................................................. $9.79
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $9.79)*................ $10.28
Class B Investment Shares...................................... $9.79
Y Shares....................................................... $9.79
Redemption Proceeds Per Share:
Class A Investment Shares...................................... $9.79
Class B Investment Shares (95/100 of $9.79)**.................. $9.30
Y Shares....................................................... $9.79
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended
December 31, 1994
<TABLE>
<CAPTION>
Investment Income:
<S> <C> <C>
Interest Income.............................................. $ 7,261,577
Expenses:
Investment advisory fee.......................... $ 599,854
Trustees' fees................................... 1,879
Administrative personnel and services fees....... 101,004
Custodian and portfolio accounting fees.......... 75,807
Transfer and dividend disbursing agent fees
and expenses.................................... 64,729
Distribution services fee --
Class A Investment Shares....................... 197,562
Distribution services fee --
Class B Investment Shares....................... 287,858
Shareholder service fee --
Class B Investment Shares....................... 26,443
Fund share registration costs.................... 20,228
Auditing fees.................................... 12,000
Legal fees....................................... 3,154
Printing and postage............................. 31,364
Insurance premiums............................... 8,336
Miscellaneous.................................... 7,711
----------
Total expenses................................ 1,437,929
Deduct--Waiver of investment advisory fee........ 16,090
----------
Net expenses............................................. 1,421,839
------------
Net investment income.................................. 5,839,738
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments (identified cost
basis)....................................................... (912,236)
Net change in unrealized appreciation (depreciation)
on investments.............................................. (15,618,845)
------------
Net realized and unrealized gain (loss) on investments... (16,531,081)
------------
Change in net assets resulting from operations........... ($10,691,343)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations
Net investment income.............................. $ 5,839,738 $ 6,284,149
Net realized gain (loss) on investments
($912,236 net loss and $889,675 net
gain, respectively, as computed for
federal tax purposes)............................. (912,236) 889,675
Net change in unrealized appreciation
(depreciation) on investments..................... (15,618,845) 8,186,978
------------ ------------
Change in net assets resulting from operations..... (10,691,343) 15,360,802
------------ ------------
Distributions to shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares.......................... (3,977,507) (5,090,122)
Class B Investment Shares.......................... (1,722,197) (1,194,027)
Y Shares........................................... (140,034) --
Distributions to shareholders from net
realized gain on investment transactions:
Class A Investment Shares.......................... -- (610,162)
Class B Investment Shares.......................... -- (244,709)
------------ ------------
Change in net assets from
distributions to shareholders..................... (5,839,738) (7,139,020)
------------ ------------
Fund Share (Principal) Transactions
Proceeds from sale of shares....................... 18,114,792 67,975,587
Net asset value of shares issued
to shareholders in payment of
dividends declared................................ 3,537,923 4,602,576
Cost of shares redeemed............................ (53,074,378) (29,155,897)
------------ ------------
Change in net assets from Fund
share transactions................................ (31,421,663) 43,422,266
------------ ------------
Change in net assets................................. (47,952,744) 51,644,048
------------ ------------
Net Assets:
Beginning of period................................ 142,382,424 90,738,376
------------ ------------
End of period...................................... $ 94,429,680 $142,382,424
------------ ------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION HIGH GRADE TAX FREE FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31,
- --------------------------------------------------------------------------------

(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS B
CLASS A INVESTMENT SHARES INVESTMENT SHARES Y SHARES
12/31/94 12/31/93 12/31/92* 12/31/94 12/31/93** 12/31/94***
-------- -------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $11.16 $10.42 $10.00 $11.16 $10.42 $10.93
Income from investment
operations
Net investment
income............... 0.52 0.54 0.51 0.46 0.47 0.46
Net realized and
unrealized gain
(loss) on
investments.......... (1.37) 0.81 0.42 (1.37) 0.81 (1.14)
------ ------ ------ ------ ------ ------
Total from investment
operations........... (0.85) 1.35 0.93 (0.91) 1.28 (0.68)
------ ------ ------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income... (0.52) (0.54) (0.51) (0.46) (0.47) (0.46)
Distributions to
shareholders from
net realized gain on
investment
transactions........ -- (0.07) -- -- (0.07) --
------ ------ ------ ------ ------ ------
Total distributions.. (0.52) (0.61) (0.51) (0.46) (0.54) (0.46)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period.................. $ 9.79 $11.16 $10.42 $ 9.79 $11.16 $ 9.79
------ ------ ------ ------ ------ ------
Total return+......... (7.71%) 13.25% 9.37% (8.24%) 12.41% (6.31%)
Ratios to Average Net
Assets
Expenses............. 1.01% 0.85% 0.49%(b) 1.58% 1.35%(b) 0.76%(b)
Net investment
income............... 5.04% 4.99% 5.79%(b) 4.47% 4.44%(b) 5.46%(b)
Expense
waiver/reimbursement
(a).................. 0.01% 0.22% 0.62%(b) 0.01% 0.22%(b) 0.01%(b)
Supplemental Data
Net assets, end of
period
(000 omitted)....... $57,676 $101,352 $90,738 $32,435 $41,030 $4,318
Portfolio turnover
rate................. 53% 14% 7% 53% 14% 53%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 21, 1992 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1992.

** REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 11, 1993 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1993.

*** REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION NORTH CAROLINA MUNICIPAL
BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the
First Union North Carolina Municipal Bond Fund--Class A Shares (the "Fund")
from January 12, 1993 (start of performance) to December 31, 1994 compared to
the Lehman Brothers State General Obligation Bond Index ("LBSGOBI").

"Graphic representation 'J' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not ob-
ligations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the rein-
vestment of all dividends and distributions. The LBSGOBI has been adjusted to
reflect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class Shares
after deducting the current maximum sales charge of 4.75% (effective 9/1/94)
($10,000 investment minus $475 sales charge = $9,525 ). The Fund's performance
assumes the reinvestment of all dividends and distributions. The LBSGOBI has
been adjusted to reflect reinvestment of dividends on securities in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBSGOBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION NORTH CAROLINA MUNICIPAL BOND
FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union North Carolina Municipal Bond Fund--Class B Shares (the "Fund") from Jan-
uary 12, 1993 (start of performance) to December 31, 1994, compared to the Leh-
man Brothers State General Obligation Bond Index ("LBSGOBI").

"Graphic representation 'JJ' omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years from
the purchase date. The Fund's performance assumes the reinvestment of all divi-
dends and distributions. The LBSGOBI has been adjusted to reflect reinvestment
of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value in the Fund reflects a 4.00% contingent deferred sales
charge (effective 9/1/94) on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The LBSGOBI has been adjusted to reflect
reinvestment of dividends on securities in the index. Redemptions less than 1
year from the purchase date are subject to a maximum 5.00% contingent deferred
sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBSGOBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION NORTH CAROLINA MUNICIPAL
BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union North Carolina Municipal Bond Fund--Y Shares (the "Fund") from February
28, 1994 (start of performance) to December 31, 1994, compared to the Lehman
Brothers State General Obligation Bond Index ("LBSGOBI").

"Graphic representation 'JJJ' omitted. See Appendix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBSGOBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBSGOBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

FIRST UNION NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------

PORTFOLIO OF
INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 105.3%
North Carolina -- 101.0%
$1,300,000 Chapel Hill, NC, 6.35%, Parking
Facility Refinancing Package,
12/1/2018........................ A+ $ 1,243,059
1,900,000 Charlotte-Mecklenberg Hospital
Authority, NC, 5.75%, Health Care
System Revenue Refunding Bonds,
1/1/2012......................... AA 1,738,230
1,000,000 Charlotte, NC, 8.50%, Airport
Revenue, 7/1/2007................ A 1,079,396
1,245,000 Charlotte, NC, 6.00%, Stadium
Parking Facility Project Bonds,
(Series C), 6/1/2010............. AA 1,187,193
500,000 Coastal Regional Solid Waste
Management Authority, 6.50%,
Solid Waste Disposal System
Revenue Refunding Bonds,
6/1/2008......................... A 494,246
1,500,000 Concord, NC, 5.75% Utilities
System Revenue Bonds, (Callable
12/1/2002
@ 102)/(MBIA Insured), 12/1/2017. AAA 1,358,521
1,460,000 Durham County, NC, 5.875%,
Hospital and Office Facility
Project, (Callable 5/1/2004
@ 102), 5/1/2009................. AA 1,395,852
700,000 Durham County, NC, 6.00%, Hospital
and Office Facility Project,
(Callable 5/1/2004
@ 102), 5/1/2014................. AA 655,143
1,000,000 Durham County, NC, 5.20%,
2/1/2008......................... AAA 907,025
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
North Carolina -- 101.0%
$2,000,000 Fayetteville, NC, 4.80%, Public
Works Commission Revenue
Refunding Bonds (FGIC Insured),
3/1/2007......................... AAA $ 1,739,780
875,000 Forsythe County, NC, 4.90%,
(Series A), 3/1/2010............. AA+ 738,166
985,000 Fremont, NC, Housing Development
Corp., 6.75% Revenue Refunding
Bonds (Torhunta Apartments),
7/15/2022........................ AAA 958,576
1,300,000 Gastonia, NC, 6.00% Combined
Utility System Revenue Bonds
(MBIA Insured), 5/1/2014......... AAA 1,215,349
1,140,000 Gastonia, NC, Housing Corp., 6.25%
Revenue Bonds (Golfview/Village
Square Apartments)/(Series A),
7/1/2010......................... A- 1,077,365
1,000,000 Greenville, NC, 6.00%, 9/1/2010... A+ 945,572
1,000,000 Harnett County, NC, 6.40%,
12/1/2014........................ AAA 976,857
1,000,000 Lower Cape Fear Water & Sewer,
5.50% Revenue Bonds, (Subject to
AMT), 3/1/2008 .................. A 909,017
4,750,000 Martin County, NC, Individual
Facilities Authority, 6.80%
(Solid Waste Weyerhauser Co.),
5/1/2024......................... A 4,614,449
860,000 Monroe, NC, Combined Enterprise
System, 6.00%, 3/1/2014.......... A 792,846
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
North Carolina -- continued
$ 500,000 North Carolina Medical Care
Community, 6.875% Health Care
Facility Revenue Refunding Bonds,
10/1/2009........................ NR $ 480,262
4,000,000 North Carolina Eastern Municipal
Power Agency, 5.00%
(Series A)/(Callable 1/1/2003
@ 102), 1/1/2021................. A 3,251,844
1,500,000 North Carolina Eastern Municipal
Power Agency, 7.25% Power System
Revenue Refunding Bonds (Series
B), 1/1/2007..................... A 1,563,528
3,500,000 North Carolina Eastern Municipal
Power Agency, 5.75% Power System
Revenue Refunding Bonds (Series
A)/(FSA Insured), 1/1/2019....... AAA 3,060,663
1,750,000 North Carolina Eastern Municipal
Power Agency, 7.00% Power System
Revenue Refunding Bonds (Series
C), 1/1/2013..................... A 1,737,626
1,340,000 North Carolina Housing Finance
Agency, 6.60% Refunding Bonds
(Series F), 7/1/2017............. AA 1,295,876
1,050,000 North Carolina Housing Finance
Agency, 5.90% Multi-family
Revenue Refunding Bonds,
(Callable 1/1/2003 @ 102),
7/1/2026......................... AA 906,241
2,950,000 North Carolina Medical Care
Commission for Rex Hospital, NC,
6.125%-6.25% Hospital Revenue
Bonds, (Callable 6/1/2003 @ 102),
6/1/2010-6/1/2017................ A+ 2,772,091
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
North Carolina -- continued
$2,300,000 North Carolina Medical Care
Commission Hospital Revenue, NC,
5.50% Revenue Refunding Bonds
(Presbyterian Health Service),
10/1/2020........................ AA $ 1,943,495
1,250,000 North Carolina Medical Care
Commission Hospital Revenue, NC,
5.50% (Memorial Mission
Hospital)/(Series 1993),
10/1/2018........................ AAA 1,062,294
1,500,000 North Carolina Catawba Municipal
Power Agency #1, 6.00%, Revenue
Refunding Bonds (MBIA Insured),
1/1/2010......................... AAA 1,412,390
5,500,000 North Carolina Catawba Municipal
Power Agency #1, 5.50%-7.25%,
Revenue Refunding Bonds,
1/1/2007-1/1/2017................ A 5,343,519
645,000 North Carolina Catawba Municipal
Power Agency #1, 5.50% Revenue
Refunding Bonds (FSA Insured),
1/1/2013......................... AAA 577,138
4,200,000 North Carolina State, 4.75%
(Series 1994 A), 2/1/2012........ AAA 3,418,111
1,000,000 Onslow City, NC, 6.00% Combined
Enterprise System Revenue Bonds
(Series 1994)/ (MBIA Insured),
6/1/2015......................... AAA 924,745
-----------
Total.......................... 53,776,465
-----------
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ----------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Puerto Rico -- 4.3%
$2,500,000 Puerto Rico Electric Power
Authority, 6.00% Revenue Bonds
(Series S), 7/1/2015............. A- $ 2,314,280
-----------
Total Long-Term Municipal
Securities (identified cost,
$58,054,613)................. $56,090,745+
-----------
</TABLE>

*PLEASE REFER TO THE APPENDIX OF THE STATEMENT OF ADDITIONAL INFORMATION FOR AN
EXPLANATION OF THE CREDIT RATINGS. CURRENT CREDIT RATINGS ARE UNAUDITED.

+THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $58,054,613. THE
NET UNREALIZED DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$1,963,868, WHICH CONSISTS OF $190,446 APPRECIATION AND $2,154,314 DEPRECIA-
TION, AT DECEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($53,236,930) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:

AMT -- ALTERNATIVE MINIMUM TAX
FGIC -- FINANCIAL GUARANTY INSURANCE COMPANY
FSA -- FINANCIAL SECURITY ASSURANCE
MBIA -- MUNICIPAL BOND INVESTORS ASSURANCE

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified and tax cost,
$58,054,613).................................................. $56,090,745
Interest receivable............................................ 1,306,316
Receivable for Fund shares sold................................ 89,225
Deferred expenses.............................................. 28,487
-----------
TOTAL ASSETS.............................................. 57,514,773
Liabilities:
Payable for investments purchased.............................. $ 3,501,210
Payable to bank................................................ 389,402
Payable for Fund shares redeemed............................... 284,373
Dividends payable.............................................. 62,553
Accrued expenses............................................... 40,305
-----------
TOTAL LIABILITIES......................................... 4,277,843
Net Assets:
for 5,813,375 shares of beneficial interest outstanding........ $53,236,930
Net Assets Consist of:
Paid-in-capital................................................ $60,114,254
Net unrealized appreciation (depreciation) of investments...... (1,963,868)
Accumulated net realized gain (loss) on investments............ (4,913,456)
-----------
TOTAL NET ASSETS.......................................... $53,236,930
Net Asset Value:
Class A Investment Shares ($7,978,824 / 871,144 shares of
beneficial interest outstanding).............................. $9.16
Class B Investment Shares ($44,615,693 / 4,872,069 shares
of beneficial interest outstanding)........................... $9.16
Y Shares ($642,413 / 70,162 shares of beneficial interest
outstanding).................................................. $9.16
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $9.16)*................ $9.62
Class B Investment Shares...................................... $9.16
Y Shares....................................................... $9.16
Redemption Proceeds Per Share:
Class A Investment Shares...................................... $9.16
Class B Investment Shares (95/100 of $9.16)**.................. $8.70
Y Shares....................................................... $9.16
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest income............................................... $ 3,392,113
Expenses:
Investment advisory fee............................ $287,040
Trustees' fees..................................... 797
Administrative personnel and services fees......... 75,476
Custodian and portfolio accounting fees............ 61,492
Transfer and dividend disbursing agent fees and
expenses........................................... 45,822
Distribution services fee--
Class A Investment Shares......................... 24,761
Distribution services fee--
Class B Investment Shares......................... 353,880
Shareholder services fee--
Class B Investment Shares......................... 35,677
Fund share registration costs...................... 28,984
Auditing fees...................................... 13,500
Legal fees......................................... 202
Printing and postage............................... 4,718
Insurance premiums................................. 9,282
Miscellaneous...................................... 6,334
---------
Total expenses.................................. 947,965
Deduct--
Waiver of investment advisory fee........ $193,158
Waiver of administrative personnel and
services fee............................. 28,121 221,279
--------- ---------
Net expenses.............................................. 726,686
-----------
Net investment income..................................... 2,665,427
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments
(identified cost basis)...................................... (4,913,456)
Net change in unrealized appreciation (depreciation)
on investments............................................... (3,925,063)
-----------
Net realized and unrealized gain (loss) on investments.... (8,838,519)
-----------
Change in net assets resulting from operations............ ($6,173,092)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended December 31, 1994 and 1993*
<TABLE>
<S> <C> <C>
1994 1993*
------------ -----------
Increase (Decrease) in Net Assets:
Operations:
Net investment income............................. $ 2,665,427 $ 1,557,587
Net realized gain (loss) on investments
($4,913,456 net loss and $186,359 net
gain, respectively, as computed for
federal tax purposes)............................ (4,913,456) 186,359
Net change in unrealized appreciation
(depreciation) of investments.................... (3,925,063) 1,961,195
------------ -----------
Change in net assets resulting from operations.... (6,173,092) 3,705,141
------------ -----------
Distributions to Shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares......................... (503,283) (381,265)
Class B Investment Shares......................... (2,144,310) (1,176,322)
Y Shares.......................................... (17,834) --
Distributions to shareholders from net
realized gain on investment transactions:
Class A Investment Shares......................... -- (40,911)
Class B Investment Shares......................... -- (145,448)
------------ -----------
Change in net assets from
distributions to shareholders.................... (2,665,427) (1,743,946)
------------ -----------
Fund Share (Principal) Transactions
Proceeds from sale of shares...................... 20,561,838 59,880,096
Net asset value of shares issued
to shareholders in payment of
dividends declared............................... 1,917,225 1,139,374
Cost of shares redeemed........................... (18,310,260) (5,074,019)
------------ -----------
Change in net assets from Fund
share transactions............................... 4,168,803 55,945,451
------------ -----------
Change in net assets................................ (4,669,716) 57,906,646
------------ -----------
Net Assets:
Beginning of period............................... 57,906,646 --
------------ -----------
End of period..................................... $53,236,930 $57,906,646
------------ -----------
</TABLE>

*FOR THE PERIOD FROM JANUARY 11, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1993.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31
- --------------------------------------------------------------------------------

(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
CLASS A CLASS B
INVESTMENT SHARES INVESTMENT SHARES Y SHARES
12/31/94 12/31/93* 12/31/94 12/31/93* 12/31/94**
-------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $10.61 $10.00 $10.61 $10.00 $10.31
Income from investment
operations
Net investment
income............... 0.49 0.46 0.44 0.42 0.43
Net realized and
unrealized gain
(loss) on
investments......... (1.45) 0.64 (1.45) 0.64 (1.15)
------ ------ ------ ------ ------
Total from investment
operations........... (0.96) 1.10 (1.01) 1.06 (0.72)
------ ------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income... (0.49) (0.46) (0.44) (0.42) (0.43)
Distributions to
shareholders from net
realized gain on
investment
transactions......... -- (0.03) -- (0.03) --
------ ------ ------ ------ ------
Total distributions.. (0.49) (0.49) (0.44) (0.45) (0.43)
------ ------ ------ ------ ------
Net Asset Value, End of
Period.................. $ 9.16 $10.61 $ 9.16 $10.61 $ 9.16
------ ------ ------ ------ ------
Total return+......... (9.12%) 11.28% (9.64%) 10.80% (7.03%)
Ratios to Average Net
Assets
Expenses............. 0.79% 0.32%(b) 1.37% 0.79%(b) 0.59%(b)
Net investment
income............... 5.11% 4.91%(b) 4.53% 4.47%(b) 5.58%(b)
Expense
waiver/reimbursement
(a).................. 0.39% 0.93%(b) 0.39% 0.95%(b) 0.39%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $7,979 $12,739 $44,616 $45,168 $642
Portfolio turnover
rate................. 126% 57% 126% 57% 126%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 11, 1993 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1993.

** REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION SOUTH CAROLINA MUNICIPAL
BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union South Carolina Municipal Bond Fund--Class A Shares (the "Fund") from Jan-
uary 3, 1994 (start of performance) to December 31, 1994 compared to the Lehman
Brothers South Carolina Municipal Bond Index ("LBSCMBI").

"Graphic representation 'K' ommited. See Appenix."

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the reinvest-
ment of all dividends and distributions. The LBSCMBI has been adjusted to re-
flect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the current maximum sales charge of 4.75% (effective 9/1/94)
($10,000 investment minus $475 sales charge = $9,525). The Fund's performance
assumes the reinvestment of all dividends and distributions. The LBSCMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBSCMBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION SOUTH CAROLINA MUNICIPAL BOND
FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union South Carolina Municipal Bond Fund--Class B Shares (the "Fund") from Jan-
uary 3, 1994 (start of performance) to December 31, 1994 compared to the Lehman
Brothers South Carolina Municipal Bond Index ("LBSCMBI").

"Graphic representation 'KK' ommited. See Appenix."

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 4.00% contingent deferred
sales charge on any redemption less than 1 year from the purchase date. The
Fund's performance assumes the reinvestment of all dividends and distributions.
The LBSCMBI has been adjusted to reflect reinvestment of dividends on securi-
ties in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value of the Fund reflects a 5.00% contingent deferred sales
charge (effective 9/1/94) on any redemption less than 1 year from the purchase
date. The Fund's performance assumes the reinvestment of all dividends and dis-
tributions. The LBSCMBI has been adjusted to reflect reinvestment of dividends
on securities in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBSCMBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION SOUTH CAROLINA MUNICIPAL
BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union South Carolina Municipal Bond Fund--Y Shares (the "Fund") from February
28, 1994 (start of performance) to December 31, 1994 compared to the Lehman
Brothers South Carolina Municipal Bond Index ("LBSCMBI").

"Graphic representation 'KKK' ommited. See Appenix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBSCMBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBSCMBI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.

FIRST UNION SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------

PORTFOLIO OF INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ----------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 98.5%
Puerto Rico -- 4.4%
$ 50,000 Puerto Rico Commonwealth, 5.25%,
Highway & Transportation Authority,
7/1/2021............................ A $ 40,696
100,000 Puerto Rico Commonwealth, 5.50%,
Public Buildings Authority,
7/1/2021............................ A 83,917
----------
Total............................. 124,613
----------
South Carolina -- 94.1%
200,000 Bennettsville, SC, 6.00% Combined
Utility System Revenue Bonds (Series
B)/(MBIA Insured), 7/1/2009......... AAA 189,621
50,000 Berkeley County, SC, 6.25%, School
District (AMBAC Insured), 2/1/2012.. AAA 47,435
100,000 Charleston, SC, 5.60% GO Bonds,
7/1/2008............................ AA 93,181
50,000 Charleston County, SC, 5.50% Hospital
Facilities Revenue Bonds (Medical
Society Health Project)/ (MBIA
Insured), 10/1/2019................. AAA 41,434
50,000 Charleston County, SC, 5.625%
Hospital Facilities Revenue Bonds
(Bon Secours Project)/(FSA Insured),
8/15/2025........................... AAA 41,772
100,000 Coastal Carolina University Revenue
Bonds, SC, 6.80% (MBIA Insured),
6/1/2019............................ AAA 100,386
100,000 Colleton, SC, 5.60% GO Bonds,
3/1/2009............................ BBB 87,290
70,000 Columbia, SC, 6.05% (Series B),
1/1/2000............................ AA 71,053
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
South Carolina -- continued
$ 60,000 Columbia, SC, 5.75% Parking
Facilities Refunding Revenue Bonds
(Series 1994)/(AMBAC Insured),
12/1/2009.......................... AAA $ 55,685
100,000 Columbia, SC, 5.70% Water & Sewer
Revenue Bonds, 2/1/2010............ AA 90,152
100,000 Darlington County, SC, 5.75%
Industrial Development Revenue
Bonds (Nucor Corp. Project),
8/1/2023........................... AA- 80,989
100,000 Edgefield County, SC, 6.40% School
District (FSA Insured), 2/1/2006... AAA 102,153
50,000 Gaffney, SC, 5.00% Utility System
Revenue Bonds, 3/1/2009............ A 42,133
100,000 Grand Strand, SC, 6.375% Water &
Sewer Authority (MBIA Insured),
6/1/2006........................... AAA 101,193
50,000 Greenville Hospital System, SC,
5.50% Hospital Facilities Revenue
Refunding Bonds (Series C),
5/1/2016........................... AA- 41,270
200,000 James Island, SC, 5.75% PSD Revenue
Bonds (FGIC Insured), 6/1/2018..... AAA 175,555
200,000 Lancaster County, SC, 5.25% Water &
Sewer District Revenue Bonds (FGIC
Insured), 5/1/2021................. AAA 160,167
100,000 Mount Pleasant, SC, 6.00% Water &
Sewer Revenue Bonds (AMBAC
Insured), 12/1/2012................ AAA 93,246
100,000 Myrtle Beach, SC, 6.40% Tax
Increment Revenue Bonds (MBIA
Insured), 3/1/2009................. AAA 99,437
</TABLE>

PORTFOLIO OF INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
South Carolina -- continued
$100,000 Myrtle Beach, SC, 5.20% Water &
Sewer Revenue Bonds (MBIA Insured),
3/1/2005........................... AAA $ 92,105
255,000 Oconee County, SC, 5.80% Pollution
Control Revenue Bonds (Duke Power),
4/1/2014........................... AA 225,576
50,000 Oconee County School District, SC,
5.10% (MBIA Insured), 1/1/2010..... AAA 42,883
100,000 Piedmont Municipal Power Agency, SC,
5.50% (MBIA Insured), 1/1/2012..... AAA 87,838
50,000 Richland County, SC, 5.50% Sewer
System GO Bonds, 3/1/2018.......... AA 41,957
50,000 Richland County, SC, 7.125% Solid
Waste Revenue Bonds (Union Camp
Corp. Project), 9/1/2021........... A- 49,580
50,000 South Carolina State, 5.25%,
3/1/2007........................... AAA 45,342
70,000 South Carolina State, 6.05% Housing
Finance and Development Authority
Multi-Family Revenue Bonds,
7/1/2027........................... AA 62,000
100,000 South Carolina State, 5.50% Public
Service Authority Revenue Bonds
(MBIA Insured), 7/1/2021........... AAA 84,024
50,000 Sumter County, SC, 6.625% Hospital
Facilities Revenue Bonds (Tuomey
Regional)/(MBIA Insured),
11/15/2003......................... AAA 52,035
100,000 Sumter County School District #2,
SC, 5.75% (MBIA Insured), 2/1/2011. AAA 91,092
100,000 York County, SC, 6.50%, 6/1/2000.... A 103,256
----------
Total............................ 2,691,840
----------
Total Long-Term Municipal
Securities (identified cost,
$3,036,234).................... 2,816,453
----------
</TABLE>

PORTFOLIO OF INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
SHARES OR S&P* VALUE
- ----------------------------------------------------------------------
<C> <S> <C> <C>
MUTUAL FUND SHARES -- 1.7%
20,150 Lehman Municipal Money Market Fund..... NR $ 20,150
29,000 Lehman Tax Free Money Market Fund...... NR 29,000
----------
Total Mutual Fund Shares
(at net asset value).............. 49,150
----------
Total Investments
(identified cost, $3,085,384)..... $2,865,603+
----------
</TABLE>

*PLEASE REFER TO THE APPENDIX OF THE STATEMENT OF ADDITIONAL INFORMATION FOR AN
EXPLANATION OF CREDIT RATINGS. CURRENT CREDIT RATINGS ARE UNAUDITED.

+THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $3,085,384. THE
NET UNREALIZED DEPRECIATION ON A FEDERAL TAX BASIS AMOUNTS TO $219,781, WHICH
IS COMPRISED OF $3,007 APPRECIATION AND $222,788 DEPRECIATION AT DECEMBER 31,
1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($2,860,740) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:

AMBAC-- AMERICAN MUNICIPAL BOND ASSURANCE CORP.
FGIC-- FINANCIAL GUARANTY INSURANCE CO.
FSA-- FINANCIAL SECURITY ASSURANCE
GO-- GENERAL OBLIGATION
MBIA-- MUNICIPAL BOND INVESTORS ASSURANCE
PSD-- PUBLIC SERVICE DISTRICT

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified and tax cost
$3,085,384).................................................... $2,865,603
Cash............................................................ 703
Interest receivable............................................. 55,538
Deferred expenses............................................... 6,311
----------
TOTAL ASSETS............................................... 2,928,155
Liabilities:
Payable for Fund shares redeemed................................ $ 24,977
Dividends payable............................................... 4,714
Accrued expenses................................................ 37,724
----------
TOTAL LIABILITIES.......................................... 67,415
Net Assets:
for 331,808 shares of beneficial interest outstanding........... $2,860,740
Net Assets Consist of:
Paid-in capital................................................. $3,113,930
Net unrealized appreciation (depreciation) of investments....... (219,781)
Accumulated net realized gain (loss) on investments............. (33,409)
----------
TOTAL NET ASSETS........................................... $2,860,740
Net Asset Value:
Class A Investment Shares ($312,283 / 36,221 shares of
beneficial interest outstanding)............................... $8.62
Class B Investment Shares ($2,456,224 / 284,889 shares of
beneficial interest outstanding)............................... $8.62
Y Shares ($92,233 / 10,698 shares of beneficial
interest outstanding).......................................... $8.62
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $8.62)*................. $9.05
Class B Investment Shares....................................... $8.62
Y Shares........................................................ $8.62
Redemption Proceeds Per Share:
Class A Investment Shares....................................... $8.62
Class B Investment Shares (95/100 of $8.62)**................... $8.19
Y Shares........................................................ $8.62
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Period Ended December 31, 1994*
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest Income........................................ $ 102,498
Expenses:
Investment advisory fee...................... $ 8,905
Administrative personnel and services fee.... 104,356
Custodian and portfolio accounting fees...... 31,120
Transfer and dividend disbursing agent fees
and expenses................................ 19,810
Distribution services fee--
Class A Investment Shares................... 393
Distribution services fee--
Class B Investment Shares................... 11,793
Shareholder services fee--
Class B Investment Shares................... 1,833
Legal fees................................... 2,095
Printing and postage......................... 8,250
Insurance premiums........................... 7,666
Miscellaneous................................ 4,090
--------
Total expenses............................ 200,311
Deduct--
Waiver of investment advisory
fee.............................. $ 8,905
Waiver of administrative
personnel and services fee...... 104,356
Reimbursement of other operating
expenses by Adviser............. 73,031 186,292
--------- --------
Net expenses....................................... 14,019
----------
Net investment income.............................. 88,479
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments
(identified cost basis)............................... (33,409)
Net change in unrealized appreciation (depreciation)
on investments........................................ (219,781)
----------
Net realized and unrealized gain (loss) on
investments........................................ (253,190)
----------
Change in net assets resulting from operations..... ($164,711)
</TABLE>

*FOR THE PERIOD FROM JANUARY 3, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Period Ended December 31, 1994*
<TABLE>
<S> <C>
1994*
----------
Increase (Decrease) in Net Assets:
Operations
Net investment income............................................. $ 88,479
Net realized gain (loss) on investments ($33,409 net loss
as computed for federal tax purposes)............................ (33,409)
Net change in unrealized appreciation (depreciation)
on investments................................................... (219,781)
----------
Change in net assets from operations.............................. (164,711)
----------
Distributions to shareholders
Dividends to shareholders from net investment income:
Class A Investment Shares......................................... (9,315)
Class B Investment Shares......................................... (76,164)
Y Shares.......................................................... (3,000)
----------
Change in net assets from distributions to shareholders........... (88,479)
----------
Fund Share (Principal) Transactions
Proceeds from sale of shares...................................... 3,326,606
Net asset value of shares issued to shareholders in payment
of dividends declared............................................ 57,330
Cost of shares redeemed........................................... (270,006)
----------
Change in net assets from Fund share transactions................. 3,113,930
----------
Change in net assets................................................ 2,860,740
----------
Net Assets:
Beginning of period............................................... --
----------
End of period..................................................... $2,860,740
----------
</TABLE>

*FOR THE PERIOD FROM JANUARY 3, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31, 1994
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
CLASS A CLASS B
INVESTMENT INVESTMENT
SHARES SHARES Y SHARES
12/31/94* 12/31/94* 12/31/94**
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.00 $10.00 $9.74
Income from investment operations
Net investment income............... 0.46 0.41 0.43
Net realized and unrealized gain
(loss) on investments............... (1.38) (1.38) (1.12)
------ ------ -----
Total from investment operations.... (0.92) (0.97) (0.69)
------ ------ -----
Less distributions
Dividends to shareholders from net
investment income................... (0.46) (0.41) (0.43)
------ ------ -----
Net Asset Value, End of Period......... $ 8.62 $ 8.62 $8.62
------ ------ -----
Total return+........................ (9.32%) (9.83%) (7.14%)
Ratios to Average Net Assets
Expenses............................ 0.25%(b) 0.87%(b) 0.00%(b)
Net investment income............... 5.57%(b) 4.88%(b) 5.92%(b)
Expense waiver/reimbursement (a).... 10.46%(b) 10.46%(b) 10.46%(b)
Supplemental Data
Net assets, end of period (000
omitted)............................. $312 $2,456 $92
Portfolio turnover rate............. 23% 23% 23%
</TABLE>

*REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 3, 1994 (COMMENCEMENT OF OPER-
ATIONS) TO DECEMBER 31, 1994.

**REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.
SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION VIRGINIA MUNICIPAL BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union Virginia Municipal Bond Fund Class A Shares (the "Fund") from July 7,
1993 (start of performance) to December 31, 1994 compared to the Lehman Broth-
ers Virginia Municipal Bond Index ("LBVMBI").

"Graphic representation 'L' ommited. See Appenix."

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the original maximum sales charge of 4.00% ($10,000 investment
minus $400 sales charge = $9,600). The Fund's performance assumes the reinvest-
ment of all dividends and distributions. The LBVMBI has been adjusted to re-
flect reinvestment of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the current maximum sales charge of 4.75% (effective 9/1/94)
($10,000 investment minus $475 sales charge = $9,525). The Fund's performance
assumes the reinvestment of all dividends and distributions. The LBVMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBVMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION VIRGINIA MUNICIPAL BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union Virginia Municipal Bond Fund--Class B Shares (the "Fund") from July 1,
1993 to December 31, 1994, compared to the Lehman Brothers Virginia Municipal
Bond Index ("LBVMBI").

"Graphic representation 'LL' ommited. See Appenix."

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects the original 3.00% contingent deferred
sales charge on any redemption greater than 1 year but less than 2 years from
the purchase date. The Fund's performance assumes the reinvestment of all divi-
dends and distributions. The LBVMBI has been adjusted to reflect reinvestment
of dividends on securities in the index.

** Represents a hypothetical investment of $10,000 in the Fund's Class B
Shares. The ending value in the Fund reflects a 4.00% contingent deferred sales
charge (effective 9/1/94) on any redemption greater than 1 year but less than 2
years from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The LBVMBI has been adjusted to reflect re-
investment of dividends on securities in the index. Redemptions less than 1
year from the purchase date are subject to a maximum 5.00% contingent deferred
sales charge.

*** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

The LBVMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

PERFORMANCE OF $10,000 INVESTED IN THE FIRST UNION VIRGINIA MUNICIPAL BOND FUND

The graph below illustrates the hypothetical investment of $10,000 in the First
Union Virginia Municipal Bond Fund--Y Shares (the "Fund") from February 28,
1994 (start of performance) to December 31, 1994, compared to the Lehman Broth-
ers Virginia Municipal Bond Index ("LBVMBI").

"Graphic representation 'LLL' ommited. See Appenix."

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The LBVMBI has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The LBVMBI is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. This index is un-
managed.

FIRST UNION VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------

PORTFOLIO OF
INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 98.2%
Puerto Rico -- 4.4%
$ 50,000 Puerto Rico Commonwealth, 5.375% GO
Bonds, 7/1/2006.................... BAA-1/A $ 45,661
150,000 Puerto Rico Commonwealth, 6.45%,
7/1/2017........................... BAA/A 145,335
65,000 Puerto Rico Commonwealth, 6.625%
Highway & Transportation Authority,
7/1/2018........................... BAA-1/A 64,970
----------
Total............................ 255,966
----------
Virginia -- 92.3%
250,000 Arlington County, VA, 6.00% UT GO
Bonds, 8/1/2011, (Callable
@ 102, 8/1/2004)................... AAA 241,835
100,000 Arlington County, VA, 5.30% IDA
Hospital, 9/1/2015................. A-1 82,033
300,000 Chesapeake, VA, 5.90% , 5/1/2009.... AA 288,476
100,000 Chesapeake, VA, Hospital, 5.25%
(MBIA Insured), 7/1/2018........... AAA 81,739
100,000 Danville, VA, 5.70%, 4/1/2012....... A 90,039
100,000 Fairfax County, VA, 5.15% Water
Authority, 4/1/2011, (Callable
@ 102, 4/1/2004)................... AA 84,782
100,000 Fairfax County, VA, 5.00% Water
Authority, 4/1/2008................ AA- 85,762
100,000 Hampton Roads Sanitation District,
VA, 5.20% Wastewater Revenue
Refunding Bonds, 10/1/2011......... AA 85,834
200,000 Henrico County, VA, 7.00% IDA,
8/1/2013, (Callable @ 102,
8/1/2005).......................... AA 205,203
100,000 Isle Wight County, VA, 5.10%,
8/1/2009........................... A 84,914
</TABLE>

PORTFOLIO OF INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 98.2%
Virginia -- continued
$100,000 James Madison University, VA, 5.25%,
Revenue Refunding Bonds (AMBAC
Insured), 6/1/2013................. AAA $ 84,875
150,000 Loudoun County, VA, 6.25% Water &
Sewer Authority (FGIC Insured),
1/1/2010, (Callable @ 102,
1/1/2003).......................... AAA 144,633
75,000 Loudoun County, VA, 6.25% Water &
Sewer Authority (FGIC Insured),
1/1/2016........................... AAA 71,549
100,000 Prince William County, VA, 5.00% PSA
(FGIC Insured), 7/1/2013........... AAA 82,399
300,000 Prince William County, VA, 6.20% UT
GO Public Improvements Refunding
Bonds (Series A), 12/1/2011,
(Callable @ 102, 12/1/2000)........ AA 293,531
250,000 Prince William County, VA, 6.875%
Park Authority Revenue Bonds,
10/15/2016, (Callable @ 102,
10/15/2004)........................ A- 246,907
100,000 Richmond, VA, 5.50% GO Bonds,
1/15/2022.......................... AA 83,477
200,000 Richmond, VA, 6.50% UT GO Bonds
(Series A), 7/15/2021,
Pre-Refunding Bond, 7/15/2002,
(Callable @ 102, 7/15/2002)........ AA 209,668
100,000 Roanoke County, VA, 5.125% Water
System Revenue Bonds (FGIC
Insured), 7/1/2013................. AAA 83,384
200,000 Roanoke County, VA, 5.00% UT GO
Refunding & Public Improvements
Bonds, 6/1/2021, (Callable @ 100,
6/1/2003).......................... AA 157,317
</TABLE>

PORTFOLIO OF INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Virginia -- continued
$100,000 Roanoke County, VA, 5.25%, 8/1/2019. AA $ 82,426
100,000 Roanoke County, VA, 6.375%,
8/1/2010........................... AA 98,827
65,000 Southeastern, 7.00% PSA (BIGI
Insured), 7/1/2013................. AAA 69,565
200,000 University of Virginia, 5.20%,
6/1/2012........................... AA 171,438
150,000 University of Virginia, 5.20%,
6/1/2015........................... AA 126,032
200,000 Virginia Beach, VA, 5.45%,
7/15/2010.......................... AA 177,137
100,000 Virginia Beach, VA, 6.00% Virginia
Beach General Hospital Authority,
2/15/2012.......................... A1 94,379
100,000 Virginia College Building Authority,
VA, 5.75% Revenue Refunding Bonds
(Hampton University Project),
4/1/2014, (Callable
@ 102, 4/1/2003)................... A+ 88,029
100,000 Virginia Educational Loan Authority,
VA, 5.75%, 9/1/2010................ A 89,697
100,000 Virginia State, 6.00% GO Bonds,
6/1/2015........................... AAA 94,925
300,000 Virginia State, 6.35% Housing and
Development Authority
Multi-Family Revenue Bonds (Series
H), 11/1/2011,
(Callable @ 102, 11/1/2004)........ AA+ 283,968
100,000 Virginia State, 6.95% Housing and
Development Authority Commonwealth
Meeting Bonds (Series A), 1/1/2010,
(Callable
@ 102, 1/1/2000)................... AA+ 100,604
</TABLE>

PORTFOLIO OF INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------------------------------------------------------------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
Virginia -- continued
$100,000 Virginia State, 7.10% Housing and
Development Authority Commonwealth
Meeting Bonds (Series A), 1/1/2017,
(Callable
@ 102, 1/1/2002)................... AA+ $ 101,124
100,000 Virginia State, 5.40% Public
Building Authority, 8/1/2013....... AA 86,577
100,000 Virginia State, 5.75% Public
Building Authority, 8/1/2012....... AA 91,322
150,000 Virginia State, 6.125% Public School
Authority, 8/1/2010................ AA 144,314
200,000 Virginia State, 6.20% Public School
Authority, 8/1/2014................ AA 190,630
100,000 Virginia State, 6.50% Public School
Authority (Series B)/ (State Aid
Withholding), 8/1/2015, (Callable @
102, 8/1/2004)..................... AA 98,104
75,000 Virginia State, 5.125% Water
Resource Authority, 5/1/2013....... AA 61,425
200,000 Virginia State, 6.00% Transportation
Board Revenue Bonds, 5/15/2019..... AA 183,950
100,000 Virginia State, 6.50% Transportation
Board Revenue Bonds (Route 28
Project), 4/1/2018, (Callable
@ 102, 4/1/2002)................... AA 97,646
----------
Total............................ 5,320,476
----------
Washington, D.C. -- 1.5%
100,000 Washington, D.C., 5.375%
Metropolitan Airport Authority,
General Airport Revenue Refunding
Bonds (MBIA Insured), 10/1/2013.... AAA 83,752
----------
Total Long-Term Municipal
Securities (identified cost,
$6,069,787).................... 5,660,194
----------
</TABLE>

PORTFOLIO OF INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
PRINCIPAL RATING:
AMOUNT MOODY'S
OR SHARES OR S&P* VALUE
- ----------------------------------------------------------------------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- 0.9%
$ 50,000 Virginia State, 6.00% Public School
Authority (Series B), 1/1/95....... AA
Total Short-Term Municipal
Securities (identified cost,
$50,076)....................... $ 50,002
----------
MUTUAL FUND SHARES -- 3.6%
208,380 Lehman Tax-Free Money Market Fund
(at net asset value)............... NR 208,380
----------
Total Investments (identified
cost, $6,328,243).............. $5,918,576+
----------
</TABLE>

*PLEASE REFER TO THE APPENDIX OF THE STATEMENT OF ADDITIONAL INFORMATION FOR AN
EXPLANATION OF THE CREDIT RATINGS (UNAUDITED).

+THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $6,328,243. THE
NET UNREALIZED DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$409,667, WHICH IS COMPRISED OF $14,092 APPRECIATION $423,759 DEPRECIATION AT
DECEMBER 31, 1994.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($5,766,841) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:

AMBAC-- AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION
BIGI-- BOND INVESTORS GUARANTY, INC.
FGIC-- FINANCIAL GUARANTY INSURANCE CO.
GO-- GENERAL OBLIGATIONS
IDA-- INDUSTRIAL DEVELOPMENT AUTHORITY
MBIA-- MUNICIPAL BOND INVESTORS ASSURANCE
PSA -- PUBLIC SERVICE AUTHORITY
UT-- UNLIMITED TAX

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified and tax cost, $6,328,243).......................... $5,918,576
Interest receivable............................................. 117,073
Receivable for Fund shares sold................................. 11,850
Deferred expenses............................................... 11,176
----------
TOTAL ASSETS............................................... 6,058,675
Liabilities:
Payable for investments purchased............................... $ 247,561
Payable for Fund shares redeemed................................ 28,087
Dividends payable............................................... 4,801
Accrued expenses................................................ 11,385
----------
TOTAL LIABILITIES.......................................... 291,834
Net Assets:
for 651,950 shares of beneficial interest outstanding........... $5,766,841
Net Assets Consist of:
Paid-in capital................................................. $6,435,061
Unrealized appreciation (depreciation) of investments........... (409,667)
Accumulated net realized gain (loss) on investments............. (258,553)
----------
TOTAL NET ASSETS........................................... $5,766,841
Net Asset Value:
Class A Investment Shares ($1,605,460 / 181,494 shares of
beneficial interest outstanding................................ $8.85
Class B Investment Shares ($3,817,255 / 431,550 shares of
beneficial interest outstanding................................ $8.85
Y Shares ($344,126 / 38,906 shares of
beneficial interest outstanding)............................... $8.85
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $8.85)*................. $9.29
Class B Investment Shares....................................... $8.85
Y Shares........................................................ $8.85
Redemption Proceeds Per Share:
Class A Investment Shares....................................... $8.85
Class B Investment Shares (95/100 of $8.85)**................... $8.41
Y Shares........................................................ $8.85
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest Income............................................... $282,191
Expenses:
Investment advisory fee............................ $ 24,942
Trustees' fees..................................... 47
Administrative personnel and services fee.......... 75,479
Custodian and portfolio accounting fees............ 48,152
Transfer and dividend disbursing agent fees and
expenses.......................................... 31,473
Distribution services fee--
Class A Investment Shares......................... 4,028
Distribution services fee--
Class B Investment Shares......................... 24,447
Shareholder services fee--
Class B Investment Shares......................... 2,897
Fund share registration costs...................... 19,585
Auditing fees...................................... 12,395
Legal fees......................................... 84
Printing and postage............................... 20,978
Insurance premiums................................. 7,012
Miscellaneous...................................... 3,775
---------
Total expenses.................................. 275,294
Deduct--
Waiver of investment advisory fee....... $ 24,942
Waiver of administrative personnel and
services fee............................ 75,479
Reimbursement of other operating
expenses by Adviser.................... 129,594 230,015
---------- ---------
Net expenses.............................................. 45,279
---------
Net investment income..................................... 236,912
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments
(identified cost basis)...................................... (258,553)
Net change in unrealized appreciation (depreciation)
on investments............................................... (435,700)
---------
Net realized and unrealized gain (loss) on investments.... (694,253)
---------
Change in net assets resulting from operations............ ($457,341)
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended December 31, 1994 and 1993*
<TABLE>
<S> <C> <C>
1994 1993*
----------- ----------
Increase (Decrease) in Net Assets:
Operations
Net investment income................................ $ 236,912 $ 37,825
Net realized gain (loss) on investments
($258,553 net loss and $0, respectively,
as computed for federal tax purposes)............... (258,553) --
Net change in unrealized appreciation
(depreciation) on investments....................... (435,700) 26,033
----------- ----------
Change in net assets from operations................. (457,341) 63,858
----------- ----------
Distributions to shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares............................ (82,301) (16,985)
Class B Investment Shares............................ (148,091) (20,840)
Y Shares............................................. (6,520) --
----------- ----------
Change in net assets from
distributions to shareholders....................... (236,912) (37,825)
----------- ----------
Fund Share (Principal) Transactions
Proceeds from sale of shares......................... 3,657,110 3,778,173
Net asset value of shares issued
to shareholders in payment of
dividends declared.................................. 190,012 33,132
Cost of shares redeemed.............................. (926,664) (296,702)
----------- ----------
Change in net assets from Fund
share transactions.................................. 2,920,458 3,514,603
----------- ----------
Change in net assets................................... 2,226,205 3,540,636
----------- ----------
Net Assets:
Beginning of period.................................. 3,540,636 --
----------- ----------
End of period........................................ $ 5,766,841 $3,540,636
----------- ----------
</TABLE>

*FOR THE PERIOD FROM JULY 2, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1993.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS A CLASS B
INVESTMENT SHARES INVESTMENT SHARES Y SHARES
12/31/94 12/31/93* 12/31/94 12/31/93* 12/31/94**
-------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $10.19 $10.00 $10.19 $10.00 $9.83
Income from investment
operations
Net investment
income............... 0.47 0.20 0.42 0.17 0.41
Net realized and
unrealized gain
(loss) on
investments......... (1.34) 0.19 (1.34) 0.19 (0.98)
------ ------ ------ ------ -----
Total from investment
operations........... (0.87) 0.39 (0.92) 0.36 (0.57)
------ ------ ------ ------ -----
Less distributions
Dividends to
shareholders from net
investment income... (0.47) (0.20) (0.42) (0.17) (0.41)
------ ------ ------ ------ -----
Net Asset Value, End of
Period.................. $ 8.85 $10.19 $ 8.85 $10.19 $8.85
------ ------ ------ ------ -----
Total return+......... (8.60%) 3.89% (9.13%) 3.66% (5.82%)
Ratios to Average Net
Assets
Expenses............. 0.53% 0.25%(b) 1.12% 0.75%(b) 0.28%(b)
Net investment
income............... 5.11% 4.64%(b) 4.54% 4.25%(b) 5.54%(b)
Expense
waiver/reimbursement
(a).................. 4.61% 7.50%(b) 4.61% 7.50%(b) 4.61%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $1,606 $1,306 $3,817 $2,235 $344
Portfolio turnover
rate................. 59% 0% 59% 0% 59%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM JULY 2, 1993 (COMMENCEMENT OF OPERA-
TIONS) TO DECEMBER 31, 1993.

** REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

Year Ended December 31, 1994
(1) ORGANIZATION

First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of seventeen portfolios (individually referred to as the
"Fund", or collectively as the "Funds"). The Board of Trustees (the "Trustees")
has established four classes of shares. Effective March 1, 1995, the classes
established by the Trust will be designated as follows: Class A Investment
Shares (formerly Class B Investment Shares), Class B Investment Shares (for-
merly Class C Investment Shares), Class C Investment Shares (formerly Class D
Investment Shares), and Y Shares (formerly Trust Shares), for: First Union Bal-
anced Portfolio, First Union Emerging Markets Growth Portfolio, First Union
Fixed Income Portfolio, First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax-Free Portfo-
lio, First Union International Equity Port- folio, First Union Managed Bond
Portfolio, First Union Money Market Portfolio, First Union North Carolina Mu-
nicipal Bond Portfolio, First Union South Carolina Municipal Bond Portfolio,
First Union Tax-Free Money Market Portfolio, First Union Treasury Money Market
Portfolio, First Union U.S. Government Portfolio, First Union Utility Portfo-
lio, First Union Value Portfolio, and First Union Virginia Municipal Bond Port-
folio. (All references herein and in the financial statements are to the new
class designations.) As of December 31, 1994, each of the Funds were offering
the Class A Investment Shares, Class B Investment Shares, Class C Investment
Shares and Y Shares, except for: First Union Managed Bond Portfolio, which was
only offering Y Shares; First Union Tax-Free Money Market Portfolio and First
Union Treasury Money Market Portfolio, which were only offering Class A Invest-
ment Shares and Y Shares; and First Union Florida Municipal Bond Portfolio,
First Union Georgia Municipal Bond Portfolio, First Union High Grade Tax- Free
Portfolio, First Union Money Market Portfolio, First Union North Carolina Mu-
nicipal Bond Portfolio, First Union South Carolina Municipal Bond Portfolio,
and First Union Virginia Municipal Bond Portfolio, which were only offering
Class A Investment Shares, Class B Investment Shares and Y Shares.

The assets of each Fund are segregated, and a shareholder's interest is limited
to the portfolio in which shares are held. The financial statements included
herein are only those of First Union Florida Municipal Bond Portfolio ("Flori-
da"), First Union Georgia Municipal Bond Portfolio ("Georgia"), First Union
High Grade Tax-Free Portfolio ("High Grade Tax-Free"), First Union North Caro-
lina Municipal Bond Portfolio ("North Carolina"), First Union South Carolina
Bond Portfolio ("South Carolina"), and First Union Virginia Municipal Bond
Portfolio ("Virginia"). The financial statements of the other portfolios are
presented separately.

(2) SIGNIFICANT ACCOUNTING POLICIES

A. Investment Valuations--Municipal bonds are valued by an independent
pricing service taking into consideration yield, liquidity, risk,
credit/quality, coupon, maturity, type of issue, and any other factors or
market data it deems relevant in determining valuations for normal
institutional size trading units of debt securities. The independent
pricing service does not rely exclusively on quoted

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued

prices. Short-term securities with remaining maturities of sixty days or
less may be stated at amortized cost, which approximates value.

B. Investment Income, Expenses and Distributions--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Distributions to shareholders are recorded on the ex-dividend
date. Distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These distributions do not represent a return of capital for
federal income tax purposes.

C. Federal Taxes--It is the policy of the Funds to comply with the
provisions of the Code applicable to regulated investment companies and
to distribute to shareholders each year substantially all of their tax-
exempt income. Accordingly, no provisions for federal tax are necessary.

At December 31, 1994, Florida, Georgia, High Grade Tax Free, North
Carolina, South Carolina and Virginia, for federal tax purposes, had a
capital loss carryforward of, $2,067,085, $887,457, $912,236, $4,913,455,
$33,409 and $258,553, respectively, which will reduce each Fund's taxable
income arising from future net realized gain on investments, if any, to
the extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to
relieve the Funds of any liability for federal tax. Pursuant to the Code,
such capital loss carryforwards will expire in, 2001 ($7,682) and 2002
($2,059,403), 2002, 2002, 2002, 2002 and 2002 respectively.

D. When-Issued and Delayed Delivery Transactions--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-
issued securities on the trade date and maintain security positions such
that sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on
the settlement date.

E. Deferred Expenses--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the
initial expense of registering the shares, have been deferred and are
being amortized using the straight-line method not to exceed a period of
five years from each Fund's commencement date.

F. Other--Investment transactions are accounted for on the trade date.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued

<TABLE>
<CAPTION>
FLORIDA
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
Class A Investment Shares:
<S> <C> <C> <C> <C>
Shares sold................ 769,573 $ 7,389,725 792,567 $ 8,099,364
Shares issued to
shareholders
in payment of dividends
declared.................. 26,991 251,755 4,610 47,316
Shares redeemed............ (606,508) (5,616,311) (13,102) (133,968)
---------- ------------ ---------- ------------
Net change resulting from
Class A Investment
Share transactions........ 190,056 $ 2,025,169 784,075 $ 8,012,712
---------- ------------ ---------- ------------
<CAPTION>
GEORGIA
Year Ended December 31,
1994 1993(b)
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold................ 100,861 $ 940,685 79,679 $ 806,248
Shares issued to sharehold-
ers
in payment of dividends
declared.................. 5,104 46,518 627 6,358
Shares redeemed............ (27,500) (247,702) (100) (1,013)
---------- ------------ ---------- ------------
Net change resulting from
Class A Investment
Share transactions........ 78,465 $ 739,501 80,206 $ 811,593
---------- ------------ ---------- ------------
<CAPTION>
HIGH GRADE TAX FREE
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold................ 555,825 $ 6,063,674 2,372,549 $ 25,481,548
Shares issued to sharehold-
ers
in payment of dividends
declared.................. 238,904 2,470,837 338,294 3,700,973
Shares redeemed............ (3,992,062) (41,107,207) (2,331,329) (25,357,024)
---------- ------------ ---------- ------------
Net change resulting from
Class A Investment
Share transactions........ (3,197,333) ($32,572,696) 379,514 $ 3,825,497
---------- ------------ ---------- ------------
</TABLE>

(a) For the period from July 6, 1993 (commencement of operations) to December
31, 1993.

(b) For the period from July 2, 1993 (commencement of operations) to December
31, 1993.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued

<TABLE>
<CAPTION>
NORTH CAROLINA
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
----------- ------------- --------- -----------
Class A Investment Shares:
<S> <C> <C> <C> <C>
Shares sold................. 417,470 $ 4,151,733 1,519,411 $15,643,890
Shares issued to
shareholders
in payment of dividends
declared................... 36,125 349,098 27,953 291,429
Shares redeemed............. (782,865) (7,703,364) (346,949) (3,632,402)
---------- ------------- --------- -----------
Net change resulting from
Class A Investment
Share transactions......... (329,270) ($3,202,533) 1,200,415 $12,302,917
---------- ------------- --------- -----------
<CAPTION>
SOUTH CAROLINA
Year Ended December 31,
1994(b)
Shares Dollars
----------- -------------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold................. 41,168 $ 382,655
Shares issued to sharehold-
ers
in payment of dividends
declared................... 246 2,190
Shares redeemed............. (5,193) (48,887)
---------- -------------
Net change resulting from
Class A Investment
Share transactions......... 36,221 $ 335,958
---------- -------------
<CAPTION>
VIRGINIA
Year Ended December 31,
1994 1993(c)
Shares Dollars Shares Dollars
----------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold................. 86,681 $ 821,129 152,762 $ 1,544,349
Shares issued to sharehold-
ers
in payment of dividends
declared................... 7,518 68,995 1,492 15,096
Shares redeemed............. (40,827) (366,090) (26,132) (262,837)
---------- ------------- --------- -----------
Net change resulting from
Class A Investment
Share transactions......... 53,372 $ 524,034 128,122 $ 1,296,608
---------- ------------- --------- -----------
</TABLE>

(a) For the period from January 11, 1993 (commencement of operations) to Decem-
ber 31, 1993.

(b) For the period from January 3, 1994 (commencement of operations) to Decem-
ber 31, 1994.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued

<TABLE>
<CAPTION>
FLORIDA
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
---------- ----------- --------- -----------
Class B Investment Shares:
<S> <C> <C> <C> <C>
Shares sold................... 1,596,854 $15,356,189 1,787,845 $18,224,944
Shares issued to shareholders
in payment of dividends
declared..................... 62,035 576,605 10,087 103,490
Shares redeemed............... (661,049) (6,032,300) (20,109) (206,690)
---------- ----------- --------- -----------
Net change resulting from
Class B Investment
Share transactions........... 997,840 $ 9,900,494 1,777,823 $18,121,744
---------- ----------- --------- -----------
<CAPTION>
GEORGIA
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold................... 586,440 $ 5,520,982 360,422 $ 3,643,744
Shares issued to shareholders
in payment of dividends
declared..................... 22,504 204,561 2,856 29,778
Shares redeemed............... (180,297) (1,612,750) (1,063) (10,869)
---------- ----------- --------- -----------
Net change resulting from
Class B Investment
Share transactions........... 428,647 $ 4,112,793 362,215 $ 3,662,653
---------- ----------- --------- -----------
<CAPTION>
HIGH GRADE TAX FREE
Year Ended December 31,
1994 1993(b)
Shares Dollars Shares Dollars
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold................... 619,543 $ 6,598,572 3,967,806 $42,494,039
Shares issued to shareholders
in payment of dividends
declared..................... 102,516 1,054,230 81,800 901,603
Shares redeemed............... (1,088,820) (11,052,338) (371,428) (3,798,873)
---------- ----------- --------- -----------
Net change resulting from
Class B Investment
Share transactions........... (366,761) ($3,399,536) 3,678,178 $39,596,769
---------- ----------- --------- -----------
</TABLE>

(a) For the period from July 2, 1993 (commencement of operations) to December
31, 1993.

(b) For the period from January 11, 1993 (commencement of operations) to Decem-
ber 31, 1993.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued

<TABLE>
<CAPTION>
NORTH CAROLINA
Year Ended December 31,
1994 1993(a)
Shares Dollars Shares Dollars
---------- ------------ --------- -----------
Class B Investment Shares:
<S> <C> <C> <C> <C>
Shares sold.................. 1,588,728 $ 15,705,181 4,313,146 $44,236,206
Shares issued to shareholders
in payment of dividends
declared.................... 163,431 1,564,184 81,273 847,945
Shares redeemed.............. (1,136,420) (10,565,842) (138,089) (1,441,617)
---------- ------------ --------- -----------
Net change resulting from
Class B Investment
Share transactions.......... 615,739 $ 6,703,523 4,256,330 $43,642,534
---------- ------------ --------- -----------
<CAPTION>
SOUTH CAROLINA
Year Ended
December 31,
1994(b)
Shares Dollars
---------- ------------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold.................. 304,136 $ 2,846,537
Shares issued to shareholders
in payment of dividends
declared.................... 6,194 55,132
Shares redeemed.............. (25,441) (220,905)
---------- ------------
Net change resulting from
Class B Investment
Share transactions.......... 284,889 $ 2,680,764
---------- ------------
<CAPTION>
VIRGINIA
Year Ended December 31,
1994 1993(c)
Shares Dollars Shares Dollars
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold.................. 259,308 $ 2,456,021 220,937 $ 2,233,824
Shares issued to shareholders
in payment of dividends
declared.................... 13,100 120,183 1,782 18,036
Shares redeemed.............. (60,204) (530,916) (3,373) (33,865)
---------- ------------ --------- -----------
Net change resulting from
Class B Investment
Share transactions.......... 212,204 $ 2,045,288 219,346 $ 2,217,995
---------- ------------ --------- -----------
</TABLE>

(a) For the period from January 11, 1993 (commencement of operations) to Decem-
ber 31, 1993.

(b) For the period from January 3, 1994 (commencement of operations) to Decem-
ber 31, 1994.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued

<TABLE>
<CAPTION>
FLORIDA GEORGIA
Year Ended Year Ended
December 31, December 31,
1994(a) 1994(a)
Shares Dollars Shares Dollars
-------- ---------- ------ --------
Y Shares:
<S> <C> <C> <C> <C>
Shares sold............................. 287,077 $2,664,039 32,285 $292,238
Shares issued to shareholders
in payment of dividends declared....... 930 8,402 289 2,580
Shares redeemed......................... (90,201) (810,376) (41) (369)
-------- ---------- ------ --------
Net change resulting from Y
Share transactions..................... 197,806 $1,862,065 32,533 $294,449
-------- ---------- ------ --------
<CAPTION>
HIGH GRADE TAX FREE NORTH CAROLINA
Year Ended Year Ended
December 31, December 31,
1994(a) 1994(a)
Shares Dollars Shares Dollars
-------- ---------- ------ --------
Y Shares:
<S> <C> <C> <C> <C>
Shares sold............................. 532,658 $5,452,546 74,100 $704,924
Shares issued to shareholders
in payment of dividends declared....... 1,287 12,856 420 3,943
Shares redeemed......................... (93,031) (914,833) (4,358) (41,054)
-------- ---------- ------ --------
Net change resulting from Y
Share transactions..................... 440,914 $4,550,569 70,162 $667,813
-------- ---------- ------ --------
<CAPTION>
SOUTH CAROLINA VIRGINIA
Year Ended Year Ended
December 31, December 31,
1994(a) 1994(a)
Shares Dollars Shares Dollars
-------- ---------- ------ --------
Y Shares:
<S> <C> <C> <C> <C>
Shares sold............................. 10,721 $ 97,414 42,022 $379,970
Shares issued to shareholders
in payment of dividends declared....... 1 7 93 824
Shares redeemed......................... (24) (214) (3,209) (29,658)
-------- ---------- ------ --------
Net change resulting from Y
Share transactions..................... 10,698 $ 97,207 38,906 $351,136
-------- ---------- ------ --------
</TABLE>

(a) For the period from February 28, 1994 (commencement of operations) to De-
cember 31, 1994.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993
Shares Dollars Shares Dollars
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Total net change resulting from
Florida share transactions..... 1,385,702 $13,787,728 2,561,898 $26,134,456
Total net change resulting from
Georgia share transactions..... 539,645 5,146,743 442,421 4,474,246
Total net change resulting from
High Grade Tax Free share
transactions................... (3,123,180) (31,421,663) 4,057,692 43,422,266
Total net change resulting from
North Carolina share
transactions................... 356,631 4,168,803 5,456,745 55,945,451
Total net change resulting from
South Carolina share
transactions................... 331,808 3,113,929 -- --
Total net change resulting from
Virginia share transactions.... 304,482 2,920,458 347,468 3,514,603
</TABLE>

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

Investment Advisory Fee--First Union National Bank of North Carolina, the
Trust's investment adviser (the "Adviser"), receives for its services an annual
investment advisory fee based on a percentage of each Fund's average daily net
assets (see below). The Adviser may voluntarily choose to waive a portion of
its fee and reimburse certain operating expenses of the Funds. The Adviser can
modify or terminate this voluntary waiver and reimbursement at any time at its
sole discretion.

<TABLE>
<CAPTION>
Fund Annual Rate
- ---- -----------
<S> <C>
Florida............................................................. 0.50%
Georgia............................................................. 0.50%
High Grade Tax Free................................................. 0.50%
North Carolina...................................................... 0.50%
South Carolina...................................................... 0.50%
Virginia............................................................ 0.50%
</TABLE>

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

continued

Under the terms of a Shareholder Services Agreement with First Union Brokerage
Services ("FUBS"), the Funds will pay FUBS up to 0.25 of 1% of average net as-
sets of the Funds' Class B Investment Shares for the period. This fee is to ob-
tain certain services for share- holders and to maintain the shareholder ac-
counts.

Organizational Expenses--Organizational expenses were borne initially by FAS.
The Funds have agreed to reimburse FAS for the organizational expenses during
the five year period following the dates the Funds became effective. For the
year ended December 31, 1994, pursuant to this agreement, the Funds paid FAS as
follows:

<TABLE>
<CAPTION>
Initial Organizational
Organizational Expenses
Fund Effective Date Expenses Reimbursed
- ---- -------------- -------------- --------------
<S> <C> <C> <C>
Florida............................ 6/14/93 $40,000 3,771
Georgia............................ 6/14/93 40,000 3,581
High Grade Tax Free................ 1/15/92 75,393 6,367
North Carolina..................... 12/28/92 60,000 10,228
South Carolina..................... 1/1/94 89,722 6,315
Virginia........................... 6/14/93 40,000 3,188
</TABLE>

Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of FAS, FSC, and FServ.

(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
Florida................................................. $38,401,322 $23,572,728
Georgia................................................. 15,136,130 10,277,569
High Grade Tax Free..................................... 60,828,569 89,752,480
North Carolina.......................................... 77,588,517 70,363,119
South Carolina.......................................... 3,480,997 410,344
Virginia................................................ 5,909,770 2,802,257
</TABLE>

(6) CONCENTRATION OF CREDIT RISK
Since Florida, Georgia, North Carolina, South Carolina and Virginia invest a
substantial portion of their assets in issuers located in a single state, the
Funds will be more susceptible to factors adversely affecting issuers of that
state than would be a comparable general tax-exempt mutual fund. In order to
reduce the risk associated with such factors, at December 31, 1994, 56.1%,
67.4%, 18.3%, 57.9%, and 12.0% of the securities in the portfolio of invest-
ments of Florida, Georgia, North Carolina, South Carolina and Virginia, respec-
tively, were backed by letters of credit or bond insurance of various financial
institutions and financial guaranty assurance agencies. The aggregate percent-
ages by financial institutions ranged from 3.5% to 23.7%, 3.5% to 30.5%, 3.1%
to 8.8%, 5.0% to 34.3%, and 1.2% to 6.5% of total investments, respectively,
for Florida, Georgia, North Carolina, South Carolina and Virginia.

================================================================================
INDEPENDENT AUDITORS' REPORT

Year Ended December 31, 1994

The Trustees and Shareholders of FIRST UNION FUNDS:

First Union Florida Municipal Bond Portfolio -- statement of operations
for the year ended December 31, 1994, statements of changes in net assets
for the year or period ended December 31, 1994 and December 31, 1993, and
the financial highlights for the years or periods from July 2, 1993
(commencement of operations) to December 31, 1994.

First Union Georgia Municipal Bond Portfolio -- statement of operations
for the year ended December 31, 1994, statements of changes in net assets
for the year or period ended December 31, 1994 and December 31, 1993, and
the financial highlights for the years or periods from July 2, 1993
(commencement of operations) to December 31, 1994.

First Union High Grade Tax Free Portfolio -- statement of operations for
the year ended December 31, 1994, statements of changes in net assets for
the years ended December 31, 1994 and December 31, 1993, and the financial
highlights for the years or periods from February 21, 1992 (commencement
of operations) to December 31, 1994.

First Union North Carolina Municipal Bond Portfolio -- statement of
operations for the year ended December 31, 1994, statements of changes in
net assets for the year or period ended December 31, 1994 and December 31,
1993, and the financial highlights for the years or periods from January
11, 1993 (commencement of operations) to December 31, 1994.

First Union South Carolina Municipal Bond Portfolio -- statement of
operations and changes in net assets and the financial highlights for the
periods from January 3, 1994 (commencement of operations) to December 31,
1994.

First Union Virginia Municipal Bond Portfolio -- statement of operations
for the year ended December 31, 1994, statements of changes in net assets
for the year or periods ended December 31, 1994 and December 31, 1993, and
the financial highlights for the years or period from July 2, 1993
(commencement of operations) to December 31, 1994.

================================================================================
INDEPENDENT AUDITORS' REPORT

continued

We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to gain rea-
sonable assurance about whether the financial statements and financial high-
lights 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 De-
cember 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Union Florida Municipal Bond Portfolio, First Union Georgia Municipal Bond
Portfolio, First Union High Grade Tax Free Portfolio, First Union North Caro-
lina Municipal Bond Portfolio, First Union South Carolina Municipal Bond Port-
folio and First Union Virginia Municipal Bond Portfolio as of December 31,
1994, and the results of their operations, changes in their net assets, and the
financial highlights for each of the periods listed above, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Pittsburgh, Pennsylvania February 13, 1995

================================================================================
TRUSTEES AND OFFICERS

TRUSTEES:
Edward C. Gonzales
James S. Howell, Chairman
Gerald M. McDonnell
Thomas L. McVerry
William Walt Pettit
Russell A. Salton, III, M.D.
Michael S. Scofield

OFFICERS:
Edward C. Gonzales, President and Treasurer
Joseph S. Machi, Vice President and Assistant Treasurer
Peter J. Germain, Secretary
Mark A. Sheehan, Assistant Secretary

[LOGO]

Federated Securities Corp., Distributor
535684 (10/PKG.)
G00851-02 (2/95)

1994 ANNUAL REPORT

[INSERT PHOTO HERE]

MONEY MARKET FUNDS

A SHARES . B SHARES . Y SHARES

[LOGO]
FIRST UNION FUNDS

FIRST UNION MONEY MARKET FUNDS
================================================================================
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
President's Message.................................. 1
A Review of 1994
and Prospects for 1995............................... 2
- -----------------------------------------------------------------------------------------------
[LOGO] MONEY MARKET A Report From Your Portfolio Manager................. 4
FUND
Portfolio of Investments............................. 5
Statement of Assets and Liabilities.................. 8
Statement of Operations.............................. 9
Statement of Changes in Net Assets................... 10
Financial Highlights................................. 11
- -----------------------------------------------------------------------------------------------
[LOGO] TAX-FREE MONEY A Report From Your Portfolio Manager................. 13
MARKET FUND
Portfolio of Investments............................. 14
Statement of Assets and Liabilities.................. 32
Statement of Operations.............................. 33
Statement of Changes in Net Assets................... 34
Financial Highlights................................. 35
- -----------------------------------------------------------------------------------------------
[LOGO] TREASURY MONEY A Report From Your Portfolio Manager................. 37
MARKET FUND
Portfolio of Investments............................. 38
Statement of Assets and Liabilities.................. 40
Statement of Operations.............................. 41
Statement of Changes in Net Assets................... 42
Financial Highlights................................. 43
- -----------------------------------------------------------------------------------------------
Combined Notes to Financial Statements............... 44
Independent Auditors' Report......................... 49
Trustees and Officers................................ 50
</TABLE>

================================================================================
PRESIDENT'S MESSAGE
by Edward C. Gonzales

- ------------------------------
<TABLE>
<CAPTION>
EXISTING NEW SALES
CLASS DESIGNATION CHARGE
-------- ----------- --------
<S> <C> <C>
Trust Y None
B A None
C B Back-End
</TABLE>
- ------------------------------
Dear Investor:

I am pleased to present you with the Annual Report for the fiscal year ended
December 31, 1994. It contains complete financial information for the First
Union Funds' (the "Trust") Money Market Funds--the First Union Money Market
Fund, the First Union Tax-Free Money Market Fund and the First Union Treasury
Money Market Fund.
As you can see, this Report features a new design and format that make it
easier for you to read and find fund information. It's part of the Trust's
commitment to providing you with information that is both comprehensive and
clear.
In addition, this Report reflects a re-designation of the First Union Funds'
classes of shares. In response to requests from both brokers and customers, we
are standardizing our class designations to bring them in line with the rest of
the mutual fund industry. For instance, the back-end load class, currently
called Class C Investment Shares, will be called "Class B Investment Shares."
These common class designations should help enhance consumer understanding and
reduce the potential for confusion.
The chart above shows how the First Union Funds' classes will be re-
designated.
I also want to inform you that it is presently contemplated that, in July, the
name of the First Union Funds will change to the Evergreen Funds. You'll be
hearing more about this change as we move closer to the transition date.
If you desire more complete information about any of the First Union Funds,
please call 1-800-326-3241, or see your First Union Brokerage Services Personal
Investment Counselor and ask for a prospectus. The prospectus includes more
complete information on charges and expenses. Please read it carefully before
you invest or send money.
I encourage you to review this Report carefully. I hope you're pleased with
the changes and, as always, I welcome any questions, comments, and suggestions
you may have.

[LOGO]

Edward C. Gonzales
February 15, 1995

A REVIEW OF 1994 AND PROSPECTS FOR 1995
by William Hackney,
Chief Investment Officer

1994 confirmed the old adage, "Good news on Main Street is often bad news on
Wall Street."
After sputtering and lurching through 1991-1993, the United States' economy
began firing on all cylinders in 1994. Consumer confidence improved as the un-
employment rate dropped. Industrial production and retail sales surged.
When 1994 began, most investors expected just an uneventful year in the econo-
my. But as the year progressed, it became increasingly clear that it would rank
among the best years for growth in recent history. There were more than 3.5
million new jobs created in 1994, the largest increase in a decade. Real gross
domestic product (the inflation-adjusted value of goods and services produced
in the U.S.) advanced a healthy 4%, which was also the largest increase in a
decade.
Although the type of strong economic growth that we experienced last year of-
ten leads to higher inflation, this failed to happen in 1994. Inflation re-
mained strangely calm, despite sharp price increases in key industrial commodi-
ties like steel, copper, aluminum, cotton, paperboard and a variety of chemi-
cals. The Consumer Price Index* rose 2.7% in 1994, which mirrored the
slight increase of the previous year.

- --------------------------------------------------------------------------------
"WHEN 1994 BEGAN, MOST INVESTORS EXPECTED JUST AN UNEVENTFUL YEAR IN THE ECONO-
MY. BUT AS THE YEAR PROGRESSED, IT BECAME INCREASINGLY CLEAR THAT IT WOULD RANK
AMONG THE BEST YEARS FOR GROWTH IN RECENT HISTORY."
- --------------------------------------------------------------------------------

THE DIM PERSPECTIVE FROM WALL STREET
Solid economic growth with low inflation might seem like an ideal investment
environment. This, however, was not true in 1994.
At the beginning of 1994, interest rates were hovering near 30-year lows. One-
year Treasury bills were yielding 3.5% while 30-year Treasury bonds were yield-
ing 6.4%. By year-end, one-year Treasury bill yields had doubled to 7% and 30-
year Treasury bond yields rose 1.5% to 7.9%.
As a consequence, bond prices fell sharply while stock prices fluctuated
wildly, making little upside progress.

TROUBLING TIMES IN THE BOND MARKET
High interest rates made for troubling times in the bond market. The typical
long-term Treasury bond fell almost 15% in price during 1994, and yielded a
negative total return (price decline plus income) of (7.7%). Even short-term,
seemingly lower risk, two-and three-year Treasury notes dropped in price last
year. All in all, it was the worst year for bond investors since the mid-
1960's.
What sparked the bond market debacle? Principally it resulted from stronger
than expected economic growth coupled with the fear of higher inflation.
Investors have historically associated strong economic growth and rising in-
dustrial commodity prices with an eventual upturn in consumer prices. So does
the Federal Reserve Board (the "Fed"). The Fed raised short-term interest rates
six times in 1994 in an attempt to head off higher inflation which it perceived
to be right around the corner. Yet, it would be wrong to blame all of the bond
markets' woes on the Fed. Many institutions and investors sold bonds in a panic
last year, helping to force prices down and interest rates up.

*This index is unmanaged. continued

================================================================================
A REVIEW OF 1994 AND
PROSPECTS FOR 1995
continued

THE OUTLOOK FOR 1995
In our view, the investment climate for 1995 is improving. The rapid run-up of
interest rates in 1994 seemed to fully compensate investors for the anticipated
slight increase in the Consumer Price Index during 1995. We doubt consumer
price inflation, now below 3%, will exceed 4% this year.
Recently, we have observed signs that the economy may indeed be slowing from
last year's robust pace. Housing starts and auto
sales, for example, have begun to weaken. We believe restrained inflation and a
slower pace of growth may permit interest rates to decline gradually over the
next 12 to 18 months. If this happens, bond prices should increase as well.
We don't expect that an economic slowdown in 1995 will lead to a recession in
the near future. We believe interest sensitive, early-cycle industries (such as
housing and autos) will likely have uneventful years.
Both capital spending by business and export demand from Asia, Latin America
and Europe, however, should keep the economy and corporate profits humming
along. U.S. manufacturers are becoming increasingly competitive in world mar-
kets while intense global price competition is helping to hold down inflation.
This suggests that the ongoing U.S. economic expansion may be lengthy and in-
flation may remain modest.

FIRST UNION MONEY MARKET FUND
- --------------------------------------------------------------------------------
[LOGO] Using short-term maturities in a rising rate environment
- --------------------------------------------------------------------------------

A REPORT FROM YOUR
PORTFOLIO MANAGER
by Kellie Allen,
First Union National Bank
of North Carolina

<TABLE>
<CAPTION>
TOP HOLDINGS BY MARKET VALUE*
<S> <C>
- --------------------------------------------------------------------------------
First Alabama Bank 4.2%
- --------------------------------------------------------------------------------
First Boston Group, Inc. 4.2%
- --------------------------------------------------------------------------------
General Electric Capital Corp. 4.2%
- --------------------------------------------------------------------------------
Sapphire Funding Corp. 4.2%
- --------------------------------------------------------------------------------
Vesey STR Short Term Income 4.2%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS*
$117,884,570
- --------------------------------------------------------------------------------
*As of December 31, 1994
</TABLE>

On November 15, the Federal Reserve Board (the "Fed") raised interest rates
for the sixth time in 1994, from 4.75% to 5.50%. Until the Fed sees signs that
the economy is starting to slow, we believe it will maintain its current inter-
est rate policy.
In light of this environment and in anticipation of short-term rates trending
higher through 1995, we have established and will continue to maintain shorter-
than-average maturities in the First Union Money Market Portfolio (the "Fund")
so that we will have frequent reinvestment opportunities.
The Fund continues to be well diversified and concentrated in high quality
money market instruments. With an average maturity of 33 days, the Fund is well
positioned to take advantage of the higher short-term rates we expect in 1995.

FIRST UNION MONEY MARKET FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CERTIFICATE OF DEPOSIT -- 4.2%
$5,000,000 First Alabama Bank Ltd., 6.00%, 1/24/95....... $ 5,000,000
------------
*COMMERCIAL PAPER -- 60.2%
Finance -- 18.6%
4,000,000 Allianz of America Finance Corp., 5.12%,
2/13/95...................................... 3,975,538
5,000,000 American Honda Finance Corp., 6.00%, 1/24/95.. 4,980,833
4,000,000 Beta Finance, Inc., 5.80%, 9/7/95............. 3,998,633
4,000,000 Orix America, Inc., 5.52%, 1/12/95............ 3,993,253
5,000,000 Vesey STR Short Term Income, 5.50%, 1/6/95.... 4,996,181
------------
Total......................................... 21,944,438
------------
Funding Corporations -- 29.0%
2,465,000 Alloman Funding Corp., 5.50%, 1/10/95......... 2,461,611
2,500,000 Alloman Funding Corp., 5.78%, 2/3/95.......... 2,486,754
4,347,000 Dynamic Funding Corp., 6.17%, 2/6/95.......... 4,320,179
5,000,000 Enterprise Funding Corp., 5.48%, 1/9/95....... 4,993,911
5,000,000 Nicollet Funding Corp., 6.11%, 1/6/95......... 4,995,757
5,000,000 PNC Funding Corp., 5.60%, 4/17/95............. 4,917,556
5,000,000 Ranger Funding Corp., 5.80%, 2/15/95.......... 4,963,750
5,000,000 Sapphire Funding Corp., 6.08%, 1/4/95......... 4,997,467
------------
Total......................................... 34,136,985
------------
Healthcare -- 4.2%
5,000,000 American Home Products Corp., 6.20%, 5/22/95.. 4,878,583
------------
Securities -- 4.2%
5,000,000 Merrill Lynch & Co., Inc., 5.40%, 1/17/95..... 4,988,000
------------
</TABLE>

continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
COMMERCIAL PAPER -- CONTINUED
Travel and Tourism -- 4.2%
$5,000,000 Accor S A Banque of Paris,
5.52%, 1/23/95................................ $ 4,983,133
-----------
Total Commercial Paper......................... 70,931,139
-----------
VARIABLE RATE ISSUES -- 20.4%
3,000,000 Bank One Milwaukee, NA, WI,
5.82%, 3/22/95................................ 2,999,641
4,000,000 CIT Group Holdings Inc., 5.70%,
9/18/95....................................... 3,996,256
3,000,000 FCC National Bank Wilmington,
DEL, 6.53%, 1/6/95............................ 3,000,000
5,000,000 First Boston Group, Inc., 5.83%,
8/25/95....................................... 5,000,000
5,000,000 General Electric Capital Corp.,
5.84%, 11/21/95............................... 4,999,112
4,000,000 Salomon Brothers, Inc. 6.20%,
6/12/95....................................... 4,000,000
-----------
Total Variable Rate Issues..................... 23,995,009
-----------
NOTES -- 9.3%
2,000,000 American Express Co., 11.95%,
1/15/95....................................... 2,006,019
1,000,000 American General Finance Corp.,
6.25%, 4/14/95................................ 1,002,982
3,000,000 Citicorp, 7.20%, 2/15/95....................... 3,006,895
2,000,000 Morgan (J.P.) & Co., Inc., 5.375%,
1/21/95....................................... 1,998,182
3,000,000 Super Value Store, 5.875%, 11/15/95............ 2,954,080
-----------
Total Notes.................................... 10,968,158
-----------
SHORT-TERM MUNICIPAL SECURITY -- 3.4%
4,000,000 Metrocrest Hospital Authority, 6.118% (Series
A), 1/20/95................................... 3,987,084
-----------
</TABLE>

continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
**REPURCHASE AGREEMENT -- 0.6%
$ 750,000 Donaldson, Lufkin & Jenrette Securities
Corp., 5.875%, dated 12/30/94, due 1/3/95
(at amortized cost)......................... $ 750,000
------------
MUTUAL FUND SHARES -- 1.5%
1,717,556 Lehman Prime Value (at net asset value)...... 1,717,556
------------
Total Investments, at amortized cost
and value................................... $117,348,946+
------------
</TABLE>

* EACH ISSUE SHOWS THE RATE OF DISCOUNT AT THE TIME OF PURCHASE FOR DISCOUNT
ISSUES, OR THE COUPON FOR INTEREST BEARING ISSUES.

** THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

+ ALSO REPRESENTS COST FOR FEDERAL TAX PURPOSES.

NOTE: THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($117,884,570) AT DECEMBER 31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at amortized cost and value.......... $117,348,946
Cash............................................................ 266,050
Interest receivable............................................. 491,940
Receivable for Fund shares sold................................. 282,401
------------
TOTAL ASSETS............................................... 118,389,337
Liabilities:
Payable for Fund shares redeemed................................ $ 334,115
Dividends payable............................................... 134,444
Accrued expenses................................................ 36,208
------------
TOTAL LIABILITIES.......................................... 504,767
Net Assets:
for 117,884,570 shares of beneficial interest outstanding....... $117,884,570
Net Asset Value and Offering Price Per Share:
Class A Investment Shares ($95,759,773/95,759,773
shares of beneficial interest outstanding)..................... $1.00
Class B Investment Shares ($11,721,779 /11,721,779
shares of beneficial interest outstanding)..................... $1.00
Y Shares ($10,403,018/10,403,018
shares of beneficial interest outstanding)..................... $1.00
Redemption Proceeds Per Share:
Class A Investment Shares....................................... $1.00
Class B Investment Shares (95/100 of $1.00)*.................... $0.95
Y Shares........................................................ $1.00
</TABLE>

*SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest Income................................................... $4,704,152
Expenses:
Investment advisory fee................................ $372,483
Trustees' fees......................................... 1,679
Administrative personnel and services fees............. 89,751
Custodian and portfolio accounting fees................ 71,257
Transfer and dividend disbursing agent fees
and expenses.......................................... 121,282
Distribution services fee--
Class A Investment Shares............................. 278,313
Distribution services fee--
Class B Investment Shares............................. 32,226
Shareholder service fee--
Class B Investment Shares............................. 5,830
Fund share registration costs.......................... 27,151
Auditing fees.......................................... 11,469
Legal fees............................................. 594
Printing and postage................................... 10,670
Insurance premiums..................................... 7,259
Miscellaneous.......................................... 5,491
---------
Total expenses....................................... 1,035,455
Deduct--
Waiver of investment advisory fee........... $283,063
Waiver of distribution services fee--Class A
Investment Shares.......................... 92,772 375,835
-------- ---------
Net expenses................................................... 659,620
----------
Net investment income.......................................... $4,044,532
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1993
<TABLE>
<S> <C> <C>
Increase (Decrease) in Net Assets: 1994 1993
------------- -------------
Operations
Net investment income........................... $ 4,044,532 $ 2,679,270
------------- -------------
Distributions to Shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares....................... (3,515,478) (2,429,592)
Class B Investment Shares....................... (156,072) --
Y Shares........................................ (372,982) (249,678)
------------- -------------
Change in net assets from
distributions to shareholders.................. (4,044,532) (2,679,270)
------------- -------------
Fund Share (Principal) Transactions
Proceeds from sale of shares.................... 432,879,341 397,777,259
Net asset value of shares issued
to shareholders in payment of
dividends declared............................. 3,364,954 2,464,947
Cost of shares redeemed......................... (415,646,017) (376,993,301)
------------- -------------
Change in net assets from Fund
share transactions............................. 20,598,278 23,248,905
------------- -------------
Change in net assets.............................. 20,598,278 23,248,905
------------- -------------
Net Assets:
Beginning of period............................. 97,286,292 74,037,387
------------- -------------
End of period................................... $117,884,570 $ 97,286,292
------------- -------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION MONEY MARKET FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31, or March 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)

* NINE MONTHS ENDED DECEMBER 31, 1990.

** REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 3, 1989 (COMMENCEMENT OF OP-
ERATIONS) TO MARCH 31, 1989.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET IN-
VESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION MONEY MARKET FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
CLASS B
INVESTMENT
SHARES Y SHARES
12/31/94* 12/31/94 12/31/93 12/31/92 12/31/91**
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................. $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment
operations
Net investment income.... 0.03 0.04 0.03 0.03 0.06
----- ----- ----- ----- -----
Less distributions
Dividends to shareholders
from net investment
income.................. (0.03) (0.04) (0.03) (0.03) (0.06)
----- ----- ----- ----- -----
Net Asset Value, End of
Period.................... $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Total return+.............. 2.79% 4.02% 2.99% 3.43% 5.91%
Ratios to Average Net
Assets
Expenses................. 1.30%(b) 0.41% 0.47% 0.64% 0.58%(b)
Net investment income.... 3.63%(b) 3.99% 2.96% 3.34% 5.24%(b)
Expense
waiver/reimbursement
(a)..................... 0.26%(b) 0.27% 0.24% 0.11% 0.26%(b)
Supplemental Data
Net assets, end of period
(000 omitted)........... $11,722 $10,403 $9,115 $9,243 $5,550
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

** REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 3, 1991 (COMMENCEMENT OF OP-
ERATIONS) TO DECEMBER 31, 1991.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET IN-
VESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
[LOGO] A relatively good year for tax-free money markets
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A REPORT FROM YOUR
PORTFOLIO MANAGER
by Richard K. Marrone

<TABLE>
<CAPTION>
TOP HOLDINGS BY MARKET VALUE**
<S> <C>
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Maricopa County, AZ, Wkly VRDN, Rev Bonds Ref 7.1%
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Orange County, CA, Mthly VRDN, PC 6.7%
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Irvine, CA, Mthly VRDN, GO UT Rev Bonds 4.7%
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New York, NY, UT GO, Mnthly VRDN 4.7%
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Eagle Tax-Exempt Trust, PC Wkly VRDN 3.7%
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TOTAL NET ASSETS**
$416,247,973
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**As of December 31, 1994
</TABLE>

Although 1994 turned out to be the worst bond market in the past 50 years, it
was actually a good time for shareholders of First Union Tax-Free Money Market
Portfolio (the "Fund").
As investors saw the prices of their long-term investments decline in value,
they moved a great deal of that money into the safe haven (and rising yields)
of taxable and tax-free money market funds.
As a result, assets in the Fund soared from $281 million at the end of 1993 to
more than $400 million at the end of 1994.
When money began to flow into tax-free money market funds, yields began to de-
cline as prices increased, and the gap between tax-free and taxable yields in-
creased further.
Nevertheless, the Fund's Y Shares achieved favorable returns, with a top three
return ranking of 125 tax-free money market funds for the year ended December
31, 1994, according to Lipper Analytical Services.* In addition, the Fund also
offers another class of shares called Class A Investment Shares which are sub-
ject to a 12b-1 fee of up to 0.35 of 1%. Total operating expenses for Class A
Shares are higher than Y Shares, which results in a lower total return for
Class A Shares.
More recently, tax-free money market yields began to rise at the time when Or-
ange County, California, filed for bankruptcy protection in early December
1994, due to highly publicized investment difficulties. This rise was welcome
because tax-free money market yields were unattractive compared to taxable
money market yields.
We look forward to pursuing the same competitive tax-free return in 1995 that
investors have earned from the Fund in 1994.

*Past performance does not guarantee future results. Lipper rankings are based
on total return and do not include the effect of sales charges. For the year
ended December 31, 1994, the investment adviser waived fees. Otherwise, total
return would have been lower.

FIRST UNION TAX-FREE MONEY MARKET FUND
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[LOGO]
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PORTFOLIO OF
INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- 102.6%
Alabama -- 3.3%
$ 9,000,000 Jefferson County, AL, Weekly VRDN
(Special Obligation)/(Columbus Bank &
Trust Co. LOC)......................... A+ $ 9,000,000
1,100,000 Livingston, AL, IDB Weekly VRDN (Series
1989/Toin Corp. U.S.A. Project)/
(Subject to AMT)/ (Industrial Bank of
Japan LOC)............................. AA 1,100,000
3,500,000 Mobile County, AL, IDB Weekly VRDN
(Sherman International Corp.).......... A+ 3,500,000
------------
Total................................ 13,600,000
------------
Arizona -- 7.5%
900,000 Chandler County, AZ, IDA Monthly VRDN
(Series 1983)/(Parsons Municipal
Services).............................. AA 900,000
18,200,000 Maricopa County, AZ, Weekly VRDN,
Revenue Bonds Refunding (El Paso
Electric Co.)/(Citibank LOC)........... P-1 18,200,000
12,000,000 Maricopa County, AZ, Weekly VRDN,
Revenue Bonds Refunding (El Paso
Electric Co.)/(Credit Suisse LOC)...... P-1 12,000,000
200,000 Maricopa County, AZ, IDA Weekly VRDN
(McLane County)/(Barclays Bank PLC
LOC)................................... P-1 200,000
------------
Total................................ 31,300,000
------------
</TABLE>

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continued
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RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
California -- 32.1%
$ 1,400,000 Barstow, CA, Weekly VRDN (Multi-Family
Housing Revenue Bond)/ (Series 1988A)/
(Rimrock Village Apartment Project)/
(Mercury Savings & Loan LOC)........... AAA $ 1,400,000
9,000,000 California State, Monthly VRDN, Libor
Index Notes............................ MIG-1 9,000,000
1,000,000 California State, 3.10%, PCR Bonds,
(Chevron USA Inc. Project)/(Callable
5/15/95 @ 100), 5/15/02................ AA 995,853
8,800,000 Fresno, CA, Weekly VRDN (Housing
Heritage Apartments)/(Series 1985B)/
(Western Federal Savings & Loan LOC)... AAA 8,800,000
3,900,000 Fresno, CA, Weekly VRDN (Housing Sanger
Project)/ (Series 1985B)/(Western
Federal Savings & Loan LOC)............ AAA 3,900,000
1,500,000 Hemet, CA, Weekly VRDN (Mercury Savings
& Loan LOC)............................ AAA 1,500,000
20,000,000 Irvine, CA, Monthly VRDN, GO UT Revenue
Bonds (Bank of America LOC)............ A+ 20,000,000
2,500,000 Irvine, CA, Monthly VRDN, Revenue Bonds
Refunding (Series A)/(Bank of America
LOC)................................... A+ 2,500,000
</TABLE>

PORTFOLIO OF
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continued
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CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
California -- continued
$13,200,000 Irvine, CA, Monthly VRDN, PC (Capital
Improvement Project)/(Morgan Guaranty
Trust LOC)............................. VMIG-1 $ 13,200,000
6,260,000 Northern California Power Agency, 9.75%
Public Refunding Revenue Bonds,
(Northern California Geothermal Project
No. 3)/ (Series A)/(U.S. Government
Securities Prerefunded), 7/1/95........ AAA 6,563,162
8,525,000 Oceanside, CA, Weekly VRDN (Community
Development Multi-Family Revenue
Bond)/(Parcwood Apartments Project)/
Western Federal Savings & Loan LOC).... AAA 8,525,000
14,000,000* Orange County, CA, 4.50%, UT GO TRANs
(Series A), (First Union Corporation
PUT), 7/19/95++........................ SP-1 14,055,058
22,600,000 Orange County, CA, Monthly VRDN, PC
(National Westminster LOC)............. CC 22,600,000
6,000,000 Orange County, CA, Monthly VRDN, PC
(Series C)/ (FGIC Insured)............. CC 6,000,000
2,650,000 Redwood City, CA, Public Facilities,
8.20%, (U.S. Government Securities
Prerefunded), 6/1/95................... AAA 2,743,957
</TABLE>

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continued
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PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
California -- continued
$ 4,500,000 San Diego, CA, Housing Authority, Weekly
VRDN (Multi-Family Housing Revenue
Bonds)/(Oro Vista Apartments
Project)/(Series 1987A)/(Mercury
Savings & Loan LOC).................... AAA $ 4,500,000
2,000,000 San Francisco, CA, 9.00%, Sales Tax
Revenue Bonds (Bay Area Rapid Transit)/
(U.S. Government Securities
Prerefunded), 7/1/95................... AAA 2,108,444
5,000,000 Santa Ana, CA, Housing Authority, Weekly
VRDN (Multi-Family Housing Revenue
Bonds)/(Villa Verde Apartments)/(Series
1985B)/(Mercury Savings & Loan LOC).... AAA 5,000,000
------------
Total................................ 133,391,474
------------
District of Columbia -- 1.1%
4,600,000 District of Columbia, 4.05%,
Supplemental Student Loan Revenue
(Mitsubishi Bank LOC), 7/1/95.......... VMIG-1 4,600,000
------------
Florida -- 1.3%
1,050,000 Alachua County, FL, 4.45%, Health
Facilities Authority Revenue Bonds
(Academic Research Building Project)/
(Barnette Bank LOC), 2/1/95............ VMIG-1 1,050,000
</TABLE>

PORTFOLIO OF
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continued
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CREDIT
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PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Florida -- continued
$ 4,500,000 Florida Housing Finance Agency, 5.00%,
Revenue Bonds (Continental Casualty
Surety Bond Insured), 12/1/95........ AA- $ 4,494,854
------------
Total.............................. 5,544,854
------------
Georgia -- 3.3%
1,000,000 Albany Dougherty County Hospital, GA,
Weekly VRDN (Series 1984A)........... AAA 1,000,000
490,000** Columbus, GA, IDA Weekly VRDN, (R. P.
Real Estate Project)/(Series A)/
(Columbus Bank and Trust Co. LOC).... A-1 490,000
2,000,000 Columbus, GA, IDR Weekly VRDN (B & G
Realty Inc.)/(Bankers Trust LOC)..... Aa2 2,000,000
2,455,000 Fulton County, GA, Weekly VRDN (Series
1993)/ (Fulton County, GA, Housing
Authority)/(Federal Home Loan,
Atlanta LOC)......................... AAA 2,455,000
4,000,000 Georgia Municipal Electric Authority,
9.875%, Revenue Bonds, 1/1/95........ A-1 4,080,000
1,800,000 Municipal Electric Authority, GA,
3.85% (Series A)/ (Morgan Guaranty
Trust Bank LOC), 6/1/95.............. VMIG-1 1,800,000
</TABLE>

PORTFOLIO OF
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continued
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CREDIT
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PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Georgia -- continued
$ 2,000,000 Polk, GA, Weekly VRDN (Series
1985)/(Kimoto Tech, Inc.)/(Industrial
Bank of Japan, NY LOC)............... AA2 $ 2,000,000
------------
Total.............................. 13,825,000
------------
Illinois -- 4.3%
1,000,000 Illinois Development Finance
Authority, Weekly VRDN (Camcraft Inc.
Project)/ (American National, Chicago
LOC)................................. A+ 1,000,000
6,800,000 Illinois Development Finance
Authority, 4.15%, Revenue Bonds
(General Accident Insurance Company),
3/1/95............................... A-1+ 6,800,000
3,500,000 Illinois Economic Development Review,
Weekly VRDN (MTI Corporate Project)/
(Industrial Bank of Japan
LOC)/(Subject to AMT)................ VMIG-1 3,500,000
3,400,000 Illinois Development Finance
Authority, Weekly VRDN (Randolph
Pickle Corp.)/
(American National Chicago LOC)...... A-1 3,400,000
3,075,119** LaSalle National Bank, Weekly VRDN
(Series 1993A)/ (LaSalle National
Bank LOC)............................ A-1+ 3,075,119
------------
Total.............................. 17,775,119
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</TABLE>

PORTFOLIO OF
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continued
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<CAPTION>
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RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Indiana -- 0.9%
$ 750,000 Avilla, IN, EDR Weekly VRDN (G & P
Partners Partnership)/(Credit Lyonnaise
LOC)/(Subject to AMT).................. VMIG-1 $ 750,000
300,000 Indiana State Employment Development
Commission, Weekly VRDN (Griner
Engineering Co.)/(Credit Lyonnaise
LOC)/(Subject to AMT).................. VMIG-1 300,000
2,750,000 Hammond, IN, Economic Development
Revenue, Monthly VRDN (Lear Seating
Corporation Project)/(Chemical Bank
LOC)................................... A+ 2,750,000
------------
Total................................ 3,800,000
------------
Kansas -- 1.2%
4,800,000 Osage, KS, Weekly VRDN, Industrial
Revenue Bonds.......................... NR 4,800,000
------------
Kentucky -- 2.3%
9,500,000 Pendleton County, KY, 3.70%, Multi-
County Lease Revenue Bonds (Kentucky
Association Counties Leasing Program)/
(Commonwealth Bank of Australia LOC),
2/1/95................................. AA 9,500,000
------------
</TABLE>

PORTFOLIO OF
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continued
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<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Maryland -- 1.3%
$ 700,000 Anne Arundel County, MD, 3.70%, Revenue
Refunding Bonds (Baltimore Gas & Electric
Company)/ (Chemical Bank LOC), 2/1/95.... A $ 700,000
4,800,000 Northeast, MD, 3.40%, Reserve Recovery
Revenue Bond (Waste Disposal
Authority)/(Long Option Period Refunding
CR-120)/ (MBIA Insured), 1/1/95.......... AAA 4,800,000
-----------
Total.................................. 5,500,000
-----------
Massachusetts -- 1.2%
5,000,000 Massachusetts State, 5.00%, UT GO (Series
A), 6/15/95.............................. MIG-1 5,017,627
-----------
Michigan -- 1.2%
800,000 Meridian, MI, EDC, IDR Weekly VRDN (Series
1984)/(Hanna Technology & Research
Center)/
(Barclays Bank LOC)...................... AA 800,000
2,380,000 Michigan State Building Authority, 5.40%,
Revenue Bonds (Series 1987I)/ (University
of Michigan)/ (U.S. Government Securities
ETM), 3/1/95............................. AAA 2,388,481
</TABLE>

PORTFOLIO OF
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continued
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<CAPTION>
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RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Michigan -- continued
$ 2,000,000 Van Buren TWP, MI, Weekly VRDN,
Revenue Bonds (Daikin Clutch USA
Incorporated Project)/ (Sanwa Bank
Chicago LOC)......................... Aa3 $ 2,000,000
------------
Total.............................. 5,188,481
------------
Minnesota -- 1.0%
4,000,000** Eagle Tax-Exempt Trust, PC Weekly VRDN
(Class A)/(Harris County, TX, Highway
and Flood Control)/(Citibank LOC) AA 4,000,000
------------
Mississippi -- 0.3%
1,305,000 Mississippi Housing Finance
Corporation, 4.75%, Revenue Bonds,
(Citibank, NY LOC)/(Callable 2/13/95
@ 103), 9/15/95...................... AA- 1,305,000
------------
Missouri -- 1.6%
2,000,000 St. Louis, MO, IDA, Weekly VRDN
(Schmuck Markets, Inc.)/(Bankers
Trust LOC)........................... P-1 2,000,000
4,500,000 Missouri State Finance Board, IDR,
Weekly VRDN (Cook Composites Company
Project)/(Societe Generale LOC)...... AA 4,500,000
------------
Total.............................. 6,500,000
------------
</TABLE>

PORTFOLIO OF
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continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Montana -- 0.8%
$ 3,300,000 Montana State Board Investment Resource
Recovery, Weekly VRDN (Coalstrip
Project)/(Fuji Bank Ltd. LOC)/(Subject
to AMT)................................ P-1 $ 3,300,000
------------
New Mexico -- 2.7%
1,000,000 Albuquerque, NM, 9.25%, Revenue
Refunding Bonds (Series B)/(MBIA
Insured)/ (Callable 8/1/95 @ 102),
8/1/12................................. AAA 1,041,311
10,000,000 Farmington, NM, Monthly VRDN, Revenue
Refunding Bonds (El Paso Electric
Company)/(Series A)/ (Citibank, NY
LOC)................................... A-1 10,000,000
------------
Total................................ 11,041,311
------------
New York -- 4.8%
20,000,000 New York, NY, UT GO, Monthly VRDN....... MIG-1 20,000,000
------------
North Carolina -- 2.0%
7,700,000 Columbus County, NC, Industrial
Facilities & PCR Weekly VRDN (Solid
Waste Disposal Revenue Bonds)/(Federal
Paper Board Co., Inc. Project)/ (Series
1992)/(Dai-Ichi Kango Bank
LOC)/(Subject to AMT).................. A-1 7,700,000
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
North Carolina -- continued
$ 500,000 North Carolina Eastern Municipal Power,
10.00%, Revenue Bonds (U.S. Government
Securities Prerefunded), 1/1/95.......... MIG-1 $ 505,000
-----------
Total.................................. 8,205,000
-----------
Oklahoma -- 0.3%
1,225,000 Oklahoma Housing Finance Agency, 4.25%,
SFM, Revenue Refunding Bonds (Callable
8/1/95 @ 100), 3/1/16.................... VMIG-1 1,225,000
-----------
Oregon -- 0.2%
1,000,000 Metropolitan Service District, OR, Weekly
VRDN Revenue Refunding Bonds (Ridel
Oregon Compost Co.)/(U.S. National Bank,
Portland LOC)............................ A+ 1,000,000
-----------
Pennsylvania -- 0.7%
2,945,000 Westmoreland County, PA, IDA 4.63%,
Revenue Bond (White Consolidated
Industries, Inc. Project)/ (Chemical Bank
LOC), 6/1/95............................. P-1 2,945,000
-----------
South Carolina -- 3.7%
1,370,000 Anderson County, SC, IDR 3.25% (Kravit
Fabrics, Inc.)/(South Carolina National
Bank LOC), 3/1/95........................ AA2 1,370,000
</TABLE>

PORTFOLIO OF
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continued
<TABLE>
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RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
South Carolina -- continued
$ 850,000 South Carolina Jobs, EDA Weekly VRDN
(Harvin Choice Meats)/(Bank of Tokyo Ltd.
LOC)/(Subject to AMT).................... A+ $ 850,000
850,000 South Carolina Jobs, EDA Weekly VRDN
(Tuttle Co.)/(Series A)/(Credit Lyonnaise
LOC)/(Subject to AMT).................... VMIG-1 850,000
700,000 South Carolina Jobs, EDA Daily VRDN
(Series 1989B)/(Ridge Pallets,
Inc.)/(Credit Lyonnaise LOC)/(Subject to
AMT)..................................... P-1 700,000
300,000 South Carolina Jobs, EDR Weekly VRDN (Kent
Manufacturing Project)/ (Series A)/
(Credit Lyonnaise LOC)/(Subject to AMT).. VMIG-1 300,000
150,000 South Carolina Jobs, EDR Weekly VRDN
(Sudan Co. and Delta Properties)/(Series
A)/(Credit Lyonnaise LOC)/(Subject to
AMT)..................................... VMIG-1 150,000
1,200,000 South Carolina Jobs, EDA Weekly VRDN
(Regal Beloit Corp. Project)/(Series A)/
(Credit Lyonnaise LOC)/ (Subject to AMT). VMIG-1 1,200,000
2,700,000 South Carolina Jobs, EDA Weekly VRDN
(Roller Bearing Company)/(Series
A)/(Heller Finance LOC)/ (Subject to
AMT)..................................... A-1 2,700,000
</TABLE>

PORTFOLIO OF
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continued
<TABLE>
<CAPTION>
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RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
South Carolina --continued
$ 5,049,000** State of South Carolina, Weekly VRDN
(Capital Import Bonds)/(Series V-BTP-
27)/ (Class A Certificates)/(ADP
Investment LOC)...................... NR $ 5,049,000
2,400,000 Sumter County, SC, Weekly VRDN (Bendix
Corporation)/(Sumitomo Bank LOC)..... NR 2,400,000
------------
Total.............................. 15,569,000
------------
Tennessee -- 5.4%
1,000,000 Blount, TN, IDR Weekly VRDN (Series
1988)/ (Advanced Crystal,
Inc.)/(Industrial Bank of Japan
LOC)/(Subject to AMT)................ AA 1,000,000
3,540,000** Knoxville, TN, Weekly VRDN (Waste
Water System Revenue Refunding
Improvement Bonds)/(Series 1993BTP-
57)/(ADP Investment LOC)............. NR 3,540,000
4,665,000** Memphis, TN, Weekly VRDN (Electric
System Revenue Refunding
Bonds)/(Series 1992)/ (Series BTP-
28)/ (Class A Certificates).......... NR 4,665,000
3,760,000 Metropolitan Government, Nashville and
Davidson County, TN, Weekly VRDN,
Revenue Bonds (Perimeter Two LTD).... A+ 3,760,000
</TABLE>

PORTFOLIO OF
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continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Tennessee -- continued
$ 3,700,000 Rutherford County, TN, Weekly VRDN,
IDR (Outboard Marine Corp.)/ (Royal
Bank of Canada LOC).................. Aa3 $ 3,700,000
5,960,000 Tennessee Housing Development Agency,
3.40% (Series F-CR 5I)/ (FSA
Insured)............................. AAA 5,960,000
------------
Total.............................. 22,625,000
------------
Texas -- 6.1%
15,600,000** Eagle Tax-Exempt Trust, PC Weekly VRDN
(Series 1994E)/(Class A)/(Harris
County, TX, Highway and Flood
Control)/(Citibank LOC).............. AA 15,600,000
3,455,000** Houston, TX, Weekly VRDN (Houston, TX,
Water & Sewer System)/(Series BT)
54)/(MBIA Insured)................... AAA 3,455,000
500,000 El Paso, TX, 5.875%, GO (Public
Property Finance Contractual
Obligation), 8/15/95................. AA 504,050
1,420,000 San Antonio, TX, 3.90%, Revenue
Refunding Bond, (San Antonio
Airport)/ (AMBAC insured), 4/1/95.... AAA 1,420,000
</TABLE>

PORTFOLIO OF
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continued
<TABLE>
<CAPTION>
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RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Texas -- continued
$ 4,380,000 Tarrant County, TX, Weekly VRDN
(Housing Finance Corporation)/(Multi-
Family Housing Revenue)/(Lincoln
Meadows Project)/(Series
1988)/(Continental Casualty Surety
Bond)................................ AAA $ 4,380,000
------------
Total.............................. 25,359,050
------------
Utah -- 2.9%
6,783,000** Intermountain Power Agency, Variable
Rate Trust Certificates XVII, Weekly
VRDN (Payment Guaranteed)............ Aa 6,783,000
3,065,000 Intermountain Power Agency, 10.375%,
OID Revenue Refunding Bonds (Series
1985A)/(Callable 7/1/95
@ 102.5), 7/1/16..................... AA 3,220,146
1,000,000 Intermountain Power Agency, 9.00%, OID
Revenue Refunding Bonds (Series I)/
(Callable 7/1/95
@ 101.5), 7/1/19..................... AA 1,035,223
1,000,000 Intermountain Power Agency, 9.375%,
OID Revenue Refunding Bonds (Series
1985B)/(Callable 7/1/95
@ 102), 7/1/01....................... AAA 1,044,773
------------
Total.............................. 12,083,142
------------
</TABLE>

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continued
<TABLE>
<CAPTION>
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RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Virginia -- 5.1%
$ 6,900,000 Amelia County, VA, IDA Weekly VRDN
(Chambers Waste Systems)/ (NationsBank
LOC)/ (Subject to AMT)................. VMIG-1 $ 6,900,000
6,900,000 Alexandria, VA Redevelopment & Housing
Authority Monthly VRDN Revenue
Refunding Bond (Multi-Family Housing
Revenue)/ (Crystal City Apartments
Project)/(Series A).................... AAA 6,900,000
1,100,000 Charles County & City, VA, IDA Weekly
VRDN Exempt Facility Revenue (Chambers
Development)/
(NationsBank LOC)/
(Subject to AMT)....................... VMIG-1 1,100,000
3,400,000 Charles County & City, VA, IDA Weekly
VRDN, Exempt Facility Revenue (Chambers
Development)/
(NCNB National Bank LOC)/(Subject to
AMT)................................... VMIG-1 3,400,000
3,000,000 Virginia State Housing Development
Authority, 4.40%, Revenue Bonds (Series
B)/(Mandatory Put Date 7/12/95 @ 100),
7/1/22................................. VMIG-1 3,000,000
------------
Total................................ 21,300,000
------------
</TABLE>

PORTFOLIO OF
INVESTMENTS

continued
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P*** VALUE
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<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- CONTINUED
Washington -- 1.6%
$ 747,000 Pilchuck Development Public
Corporation, Weekly VRDN (Crystal
Creek Lot # 11)/(Mitsubishi Bank Ltd.
LOC)................................. AA $ 747,000
1,000,000 Seattle, WA, Weekly VRDN (Industrial
Development Corp.)/(Northwestern
Industrial Project)/
(Industrial Bank of
Japan LOC)........................... AAA 1,000,000
5,035,000** Washington State, Weekly VRDN
(Washington State Public Power
Supply).............................. NR 5,035,000
------------
Total.............................. 6,782,000
------------
Wisconsin -- 2.4%
10,000,000** Eagle Tax-Exempt Trust, PC Weekly VRDN AA 10,000,000
------------
Total investments
(at amortized cost and value).... $427,082,058+
------------
</TABLE>

*NON-INCOME PRODUCING SECURITY.

**RESTRICTED SECURITY, WHICH REPRESENTS AN INVESTMENT IN SECURITIES NOT REGIS-
TERED UNDER THE SECURITIES ACT OF 1933. AT THE END OF THE PERIOD THESE
SECURITIES AMOUNTED TO 14.8% OF NET ASSETS OF WHICH 9.6% WERE DETERMINED
LIQUID BY THE BOARD (SEE NOTE 2) AND 5.2% WERE ILLIQUID.

***THESE CREDIT RATINGS ARE UNAUDITED.

+ALSO REPRESENTS COST FOR FEDERAL TAX PURPOSES.

++THIS ISSUE IS BACKED BY A PUT OPTION ISSUED BY FIRST UNION CORPORATION. THE
COST OF THE PUT OPTION ON THE DATE OF ISSUANCE (DECEMBER 7, 1994) WAS
$32,700. THE MARKET VALUE OF THE PUT OPTION AT DECEMBER 31, 1994 IS
$1,330,000.

NOTE:THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($416,247,973) AT DECEMBER 31, 1994.

PORTFOLIO OF
INVESTMENTS

continued
THE FOLLOWING ABBREVIATIONS ARE USED IN THIS PORTFOLIO:

AMBAC-- AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION
AMT-- ALTERNATIVE MINIMUM TAX
EDA-- ECONOMIC DEVELOPMENT AUTHORITY
EDC-- ECONOMIC DEVELOPMENT COMMISSION
EDR-- ECONOMIC DEVELOPMENT REVENUE
ETM-- ESCROWED TO MATURITY
FGIC-- FINANCIAL GUARANTY INSURANCE CO.
FSA-- FINANCIAL SECURITY ASSURANCE
GO-- GENERAL OBLIGATION
IDA-- INDUSTRIAL DEVELOPMENT AUTHORITY
IDB-- INDUSTRIAL DEVELOPMENT BOND
IDR-- INDUSTRIAL DEVELOPMENT REVENUE
LOC-- LETTER OF CREDIT
MBIA-- MUNICIPAL BOND INVESTORS ASSURANCE
OID-- ORIGINAL ISSUE DISCOUNT
PC-- PARTICIPATION CERTIFICATE
PCR-- POLLUTION CONTROL REVENUE
SFM-- SINGLE FAMILY MORTGAGE
TRANS-- TAX AND REVENUE ANTICIPATION NOTES
UT-- UNLIMITED TAX
VRDN-- VARIABLE RATE DEMAND NOTES

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at amortized cost and value ......... $427,082,058
Interest receivable............................................. 4,105,022
Receivable for Fund shares sold................................. 140,639
------------
TOTAL ASSETS............................................... 431,327,719
Liabilities:
Payable for investments purchased............................... $ 13,102,038
Dividends payable............................................... 1,151,392
Payable to Bank................................................. 694,608
Accrued expenses................................................ 131,708
------------
TOTAL LIABILITIES.......................................... 15,079,746
Net Assets:
for 416,247,973 shares of beneficial interest outstanding....... $416,247,973
Net Asset Value:
Offering Price, and Redemption Proceeds Per Share:
Class A Investment Shares ($395,611,690 / 395,611,690 shares of
beneficial interest outstanding)................................ $1.00
Y Shares ($20,636,283 / 20,636,283 shares of beneficial interest
outstanding)................................................... $1.00
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
Investment Income:
Interest Income................................................... $14,334,342
Expenses:
Investment advisory fee.............................. $1,580,216
Trustees' fees....................................... 6,267
Administrative personnel and services fees........... 380,693
Custodian and portfolio accounting fees.............. 130,533
Transfer and dividend disbursing agent fees and
expenses............................................ 51,390
Distribution services fee--
Class A Investment Shares........................... 1,204,943
Fund share registration costs........................ 19,952
Auditing fees........................................ 13,561
Legal fees........................................... 6,578
Printing and postage................................. 18,586
Insurance premiums................................... 11,974
Miscellaneous........................................ 4,689
----------
Total expenses.................................... 3,429,382
Deduct--waiver of investment advisory fee............ 803,519
----------
Net expenses.................................................. 2,625,863
-----------
Net investment income......................................... $11,708,479
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended December 31, 1994 and 1993
<TABLE>
<S> <C> <C>
Increase (Decrease) in Net Assets: 1994 1993
--------------- ---------------
Operations
Net investment income........................ $ 11,708,479 $ 6,989,442
--------------- ---------------
Distributions to shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares.................... (10,293,582) (5,828,807)
Y Shares..................................... (1,414,897) (1,160,635)
--------------- ---------------
Change in net assets from
distributions to shareholders............... (11,708,479) (6,989,442)
--------------- ---------------
Fund Share (Principal) Transactions
Proceeds from sales of shares................ 1,473,217,500 1,830,901,913
Net asset value of shares issued
to shareholders in payment of
dividends declared.......................... 2,788,151 2,181,449
Cost of shares redeemed...................... (1,341,586,427) (1,752,549,719)
--------------- ---------------
Change in net assets from fund
share transactions.......................... 134,419,224 80,533,643
--------------- ---------------
Change in net assets........................... 134,419,224 80,533,643
--------------- ---------------
Net Assets:
Beginning of period.......................... 281,828,749 201,295,106
--------------- ---------------
End of period................................ $ 416,247,973 $ 281,828,749
--------------- ---------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
[LOGO] FINANCIAL HIGHLIGHTS
Year Ended December 31, or March 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)

*NINE MONTHS ENDED DECEMBER 31, 1990.

**REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 3, 1989 (COMMENCEMENT OF OP-
ERATIONS) TO MARCH 31, 1989.

+BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET IN-
VESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
Y SHARES
12/31/94 12/31/93 12/31/92 12/31/91*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $1.00 $1.00 $1.00 $1.00
Income from investment operations
Net investment income................. 0.03 0.02 0.03 0.01
----- ----- ----- -----
Less distributions
Dividends to shareholders from net
investment income.................... (0.03) (0.02) (0.03) (0.01)
----- ----- ----- -----
Net Asset Value, End of Period......... $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Total return+.......................... 2.91% 2.38% 2.78% 4.49%
Ratios to Average Net Assets
Expenses.............................. 0.31% 0.29% 0.51% 0.63%(b)
Net investment income................. 2.90% 2.37% 2.76% 4.30%(b)
Expense waiver/reimbursement (a)...... 0.18% 0.24% 0.09% 0.22%(b)
Supplemental Data
Net assets, end of period (000
omitted)............................. $20,636 $3,377 $17,084 $37,346
</TABLE>

*REFLECTS OPERATIONS FOR THE PERIOD FROM JANUARY 3, 1991 (COMMENCEMENT OF OP-
ERATIONS) TO DECEMBER 31, 1991.

+BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET IN-
VESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
[LOGO] Developing defensive strategies for escalating interest rates
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by Kellie Allen

<TABLE>
<CAPTION>
TOP HOLDINGS BY MARKET VALUE*
<S> <C>
- --------------------------------------------------------------------------------
United States Treasury Notes 28.7%
- --------------------------------------------------------------------------------
Dean Witter Reynolds, Inc. 8.2%
- --------------------------------------------------------------------------------
Fuji Securities, Inc. 8.2%
- --------------------------------------------------------------------------------
Lehman Brothers, Inc. 7.6%
- --------------------------------------------------------------------------------
NationsBank 7.6%
- --------------------------------------------------------------------------------
Nikko Securities Co. International, Inc. 7.6%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS*
$917,970,857
- --------------------------------------------------------------------------------
*As of December 31, 1994
</TABLE>

On November 15, the Federal Reserve Board (the "Fed") raised interest rates
for the sixth time in 1994, from 4.75% to 5.50%. Until the Fed sees signs that
the economy is starting to slow, we believe it will maintain its current inter-
est rate policy.
In light of this environment and in anticipation of short-term rates trending
higher through 1995, we have established and will continue to maintain shorter-
than-average maturities in the Treasury Money
Market Portfolio (the "Fund") so that we will have frequent reinvestment oppor-
tunities. Within the Fund, in order to provide the highest possible return,
holdings fall into two categories. The first invests 29% in U.S. Treasury notes
maturing in six months to one year. The second has 71% invested in overnight
repurchase agreements which are secured with U.S. government obligations with
an average maturity of 36 days.
We believe the Fund is very well positioned to take advantage of the higher
short-term interest rates we expect in 1995.

FIRST UNION TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS

December 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY NOTES -- 28.7%
$25,000,000 3.875%, 3/31/95.............................. $ 24,920,355
25,000,000 4.125%, 5/31/95.............................. 24,882,256
40,000,000 4.25%, 1/31/95-7/31/95....................... 39,722,340
40,000,000 5.50%, 2/15/95............................... 40,006,860
40,000,000 5.875%, 5/15/95.............................. 40,031,308
33,000,000 7.75%, 2/15/95............................... 33,096,110
40,000,000 8.50%, 5/15/95............................... 40,440,106
20,000,000 10.50%, 8/15/95.............................. 20,486,740
------------
Total U.S. Treasury Notes.................... 263,586,075
------------
*REPURCHASE AGREEMENTS -- 71.1%
45,000,000 Barclays Bank PLC, 5.60%, dated 12/29/94, due
1/3/95...................................... 45,000,000
75,000,000 Dean Witter Reynolds, Inc., 6.10%, dated
12/27/94, due 1/3/95........................ 75,000,000
32,791,000 Donaldson, Lufkin & Jenrette Securities
Corp., 5.875%, dated 12/30/94, due 1/3/95... 32,791,000
75,000,000 Fuji Securities, Inc., 5.80%, dated 12/27/94,
due 1/3/95.................................. 75,000,000
45,000,000 Goldman, Sachs & Co., 5.50%, dated 12/29/94,
due 1/3/95.................................. 45,000,000
45,000,000 HSBC Securities, Inc., 5.50%, dated 12/29/94,
due 1/3/95.................................. 45,000,000
70,000,000 Lehman Brothers, Inc., 5.68%, dated 12/29/94,
due 1/3/95.................................. 70,000,000
35,000,000 Merrill Lynch, Pierce, Fenner & Smith, Inc.,
5.35%, dated 12/29/94, due 1/3/95........... 35,000,000
45,000,000 Morgan Guaranty Trust Co. of New York,
5.625%, dated 12/29/94, due 1/3/95.......... 45,000,000
70,000,000 NationsBank, 5.75%, dated 12/29/94, due
1/3/95...................................... 70,000,000
70,000,000 Nikko Securities Co. International, Inc.,
5.75%, dated 12/27/94, due 1/3/95........... 70,000,000
</TABLE>

PORTFOLIO OF INVESTMENTS

continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
*REPURCHASE AGREEMENTS -- CONTINUED
$45,000,000 State Street Bank, 5.30%, 12/29/94,
due 1/3/95................................. $ 45,000,000
------------
Total Repurchase Agreements................. 652,791,000
------------
MUTUAL FUND SHARES -- 0.4%
3,529,506 Fidelity U.S. Treasury, Inc. Portfolio...... 3,529,506
------------
Total Mutual Fund Shares,
at net asset value......................... 3,529,506
------------
Total Investments, at amortized costs and
value...................................... $919,906,581+
------------
</TABLE>

*REPURCHASE AGREEMENTS ARE FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

+ALSO REPRESENTS COST FOR FEDERAL TAX PURPOSES.

NOTE: THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($917,970,857) AT DECEMBER 31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in repurchase agreements............................. $652,791,000
Investments in securities........................................ 267,115,581
------------
TOTAL INVESTMENTS, AT AMORTIZED COST AND VALUE................ 919,906,581
Interest receivable.............................................. 4,728,315
Deferred expenses................................................ 25,088
------------
TOTAL ASSETS................................................ 924,659,984
Liabilities:
Dividends payable................................................ $ 3,386,098
Payable to bank.................................................. 2,692,305
Payable for Fund shares redeemed................................. 468,093
Accrued expenses................................................. 142,631
------------
TOTAL LIABILITIES........................................... 6,689,127
Net Assets:
for 917,970,857 shares of beneficial interest outstanding........ $917,970,857
Net Asset Value, Offering Price,
and Redemption Proceeds Per Share:
Class A Investment Shares ($755,050,277/755,050,277 shares of
beneficial interest outstanding)................................ $1.00
Y Shares ($162,920,580/162,920,580 shares of beneficial interest
outstanding).................................................... $1.00
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Year Ended
December 31, 1994
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest Income................................................... $31,059,144
Expenses:
Investment advisory fee............................... $2,549,955
Trustees' fees........................................ 8,928
Administrative personnel and services fees............ 613,889
Custodian and portfolio accounting fees............... 166,131
Transfer and dividend disbursing
agent fees and expenses.............................. 53,549
Distribution services fee............................. 1,451,396
Fund share registration costs......................... 53,169
Auditing fees......................................... 12,629
Legal fees............................................ 2,227
Printing and postage.................................. 11,979
Insurance premiums.................................... 14,382
Miscellaneous......................................... 7,607
----------
Total expenses..................................... 4,945,841
Deduct--
Waiver of investment advisory fee......... 1,948,237
Waiver of administrative personnel
and services fees........................ 111,107 2,059,344
--------- ----------
Net expenses................................................... 2,886,497
-----------
Net investment income......................................... $28,172,647
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Years Ended
December 31, 1994
and 1993
<TABLE>
<S> <C> <C>
Increase (Decrease) in Net Assets: 1994 1993
--------------- ---------------
Operations
Net investment income...................... $ 28,172,647 $ 16,203,545
--------------- ---------------
Distributions to shareholders
Dividends to shareholders from net
investment income:
Class A Investment Shares.................. (18,913,691) (6,814,308)
Y Shares................................... (9,258,956) (9,389,237)
--------------- ---------------
Change in net assets from distributions to
shareholders.............................. (28,172,647) (16,203,545)
--------------- ---------------
Fund Share (Principal) Transactions
Proceeds from sales of shares.............. 2,812,355,925 2,533,728,363
Net asset value of shares issued
to shareholders in payment of
dividends declared........................ 4,558,410 3,678,413
Cost of shares redeemed.................... (2,526,526,774) (2,404,845,463)
--------------- ---------------
Change in net assets from fund
share transactions........................ 290,387,561 132,561,313
--------------- ---------------
Change in net assets......................... 290,387,561 132,561,313
--------------- ---------------
Net Assets:
Beginning of period........................ 627,583,296 495,021,983
--------------- ---------------
End of period.............................. $ 917,970,857 $ 627,583,296
--------------- ---------------
</TABLE>

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[LOGO] Year Ended December 31,
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
CLASS A INVESTMENT SHARES Y SHARES
12/31/94 12/31/93 12/31/92 12/31/91* 12/31/94 12/31/93 12/31/92 12/31/91*
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment
operations
Net investment income. 0.04 0.03 0.03 0.04 0.04 0.03 0.04 0.05
----- ----- ----- ----- ----- ----- ----- -----
Less distributions
Dividends to share-
holders from net
investment
income............... (0.04) (0.03) (0.03) (0.04) (0.04) (0.03) (0.04) (0.05)
----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of
Period................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- -----
Total return+........... 3.75% 2.73% 3.36% 4.46% 4.06% 3.04% 3.67% 4.66%
Ratios to Average Net
Assets
Expenses.............. 0.50% 0.48% 0.48% 0.47%(b) 0.20% 0.18% 0.17% 0.20%(b)
Net investment income. 3.91% 2.70% 3.22% 4.95%(b) 3.78% 3.00% 3.61% 5.53%(b)
Expense waiver/
reimbursement (a).... 0.28% 0.34% 0.34% 0.61%(b) 0.28% 0.34% 0.35% 0.32%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $755,050 $261,475 $208,792 $99,549 $162,921 $366,109 $286,230 $265,109
</TABLE>

*REFLECTS OPERATIONS FOR THE PERIOD FROM MARCH 6, 1991 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1991.

+BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET IN-
VESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

================================================================================
COMBINED NOTES
TO FINANCIAL
STATEMENTS

Year Ended
December 31, 1994

(1) ORGANIZATION
First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of seventeen portfolios (individually referred to as the
"Fund," or collectively as the "Funds"). The Board of Trustees (the "Trustees")
has established four classes of shares. Effective March 1, 1995, the classes
established by the Trust will be designated as follows: Class A Investment
Shares (formerly Class B Investment Shares), Class B Investment Shares (for-
merly Class C Investment Shares), Class C Investment Shares (formerly Class D
Investment Shares), and Y Shares (formerly Trust Shares), for: First Union Bal-
anced Portfolio, First Union Emerging Markets Growth Portfolio, First Union
Fixed Income Portfolio, First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union International Equity Portfolio, First Union Managed Bond Port-
folio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, First
Union Tax Free Money Market Portfolio, First Union Treasury Money Market Port-
folio, First Union U.S. Government Portfolio, First Union Utility Portfolio,
First Union Value Portfolio, and First Union Virginia Municipal Bond Portfolio.
(All references herein and in the financial statements are to the new class
designations.) As of December 31, 1994, each of the Funds was offering the
Class A Investment Shares, Class B Investment Shares, Class C Investment Shares
and Y Shares, except for: First Union Managed Bond Portfolio, which was only
offering Y Shares; First Union Tax Free Money Market Portfolio and First Union
Treasury Money Market Portfolio, which were only offering Class A Investment
Shares and Y Shares; and First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, and First
Union Virginia Municipal Bond Portfolio, which were only offering Class A In-
vestment Shares, Class B Investment Shares and Y Shares.

The assets of each Fund are segregated and a shareholder's interest is limited
to the Fund in which shares are held. The financial statements included herein
are only those of First Union Money Market Portfolio ("Money Market"), First
Union Tax Free Money Market Portfolio ("Tax Free Money Market"), and First
Union Treasury Money Market Portfolio ("Treasury Money Market"). The financial
statements of the other Funds are presented separately.

A. Investment Valuations--The Funds' use of the amortized cost method to
value their portfolio securities is in accordance with Rule 2a-7 under
the Act. Investments in other regulated investment companies are valued
at net asset value.

================================================================================
COMBINED NOTES
TO FINANCIAL
STATEMENTS

Continued

procedures have been established by the Funds to monitor, on a daily basis,
the market value of each repurchase agreement's underlying collateral to
ensure that the value of collateral at least equals the principal amount of
the repurchase agreement, including accrued interest.

The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are
deemed by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential inability
of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Funds could receive less than the repurchase price on the
sale of collateral securities.

G. Restricted Securities--Restricted securities are securities that may only
be resold upon registration under Federal securities laws or in
transactions exempt from such registration. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. In some cases, the restricted securities may be resold
without registration upon exercise of a demand feature. Such restricted
securities may be determined to be liquid under criteria established by
the Board of Trustees. The Tax Free Money Market will not incur any
registration costs upon such resales. Restricted securities are valued at
amortized
cost in accordance with Rule 2a-7 under the Investment Company Act of 1940.
Additional information on each restricted security held at December 31,
1994, is as follows:

================================================================================
COMBINED NOTES
TO FINANCIAL
STATEMENTS

Continued

<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
DATE COST
----------- -----------
<S> <C> <C>
Development Authority of Columbus,
GA, R.P. Real Estate............................. 3/29/93 $ 490,000
Eagle Tax-Exempt Trust (TX)....................... 12/30/93 15,600,000
Eagle Tax-Exempt Trust (MN)....................... 4/4/94 4,000,000
Eagle Tax-Exempt Trust (WI)....................... 11/11/94 10,000,000
Intermountain Power Agency--NTP 50................ 4/20/94 6,783,000
LaSalle BUSTOPS................................... 3/12/93 1,954,636
LaSalle BUSTOPS................................... 11/8/93 1,120,483
Houston, TX Wtr & Swr--BTP 54 (ADP)............... 1/26/94 3,455,000
Knoxville, TN Wtr & Swr--BTP 57 (ADP)............. 12/20/93 3,540,000
Memphis, TN Elec Sys Rev--BTP 28 (ADP)............ 11/19/93 4,665,000
South Carolina State--BTP 27 (ADP)................ 11/23/93 5,049,000
Washington St Pub Pwr Sys--BTP-61 (ADP)........... 5/16/94 5,035,000
</TABLE>

H. Other--Investment transactions are accounted for on the trade date.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

Continued
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At De-
cember 31, 1994, capital paid-in for Money Market, Tax Free Money Market and
Treasury Money Market Funds aggregated $117,884,570, $416,247,973 and
$917,970,857, respectively. Transactions in Fund shares were as follows:

<TABLE>
<CAPTION>
MONEY MARKET TAX FREE MONEY MARKET TREASURY MONEY MARKET
Year Ended December 31, Year Ended December 31, Year Ended December 31,
1994 1993 1994 1993* 1994 1993
Shares Shares Shares Shares Shares Shares
------------ ------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold.............. 397,451,193 390,039,358 1,267,792,072 1,715,543,145 2,181,392,175 1,612,728,750
Shares issued to
shareholders in payment
of dividends declared.... 3,171,491 2,215,425 2,788,151 2,181,449 4,558,410 3,678,413
Shares redeemed.......... (393,034,505) (368,877,898) (1,153,437,562) (1,623,484,621) (1,692,374,918) (1,563,724,945)
------------ ------------ -------------- -------------- -------------- --------------
Net change resulting from
Class A Investment Share
transactions............. 7,588,179 23,376,885 117,142,661 94,239,973 493,575,667 52,682,218
------------ ------------ -------------- -------------- -------------- --------------
<CAPTION>
MONEY MARKET
Year Ended December 31,
1994**
Shares
------
<S> <C>
Class B Investment Shares:
Shares sold.............. 17,229,258
Shares issued to
shareholders in payment
of dividends declared.... 122,553
Shares redeemed.......... (5,630,031)
----------
Net change resulting from
Class B Investment Share 11,721,780
transactions............. ----------
<CAPTION>
MONEY MARKET TAX FREE MONEY MARKET TREASURY MONEY MARKET
Year Ended December 31, Year Ended December 31, Year Ended December 31,
1994 1993 1994 1993 1994 1993
Shares Shares Shares Shares Shares Shares
------------ ------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Y Shares:
Shares sold.............. 18,198,890 7,737,901 205,425,428 115,358,768 630,963,750 920,999,613
Shares issued to
shareholders in payment
of dividends declared.... 70,910 249,522 -- -- -- --
Shares redeemed.......... (16,981,481) (8,115,403) (188,148,865) (129,065,098) (834,151,856) (841,120,518)
------------ ------------ -------------- -------------- -------------- --------------
Net change resulting from
Y Share transactions..... 1,288,319 (127,980) 17,276,563 (13,706,330) (203,188,106) 79,879,095
------------ ------------ -------------- -------------- -------------- --------------
Total net change
resulting from Fund Share
transactions............. 20,598,278 23,248,905 134,419,224 80,533,643 290,387,561 132,561,313
</TABLE>

*For the year ended December 31, 1993, which is inclusive of a reclassifica-
tion to paid-in capital of ($41,726).

**For the period from February 28, 1994 (commencement of operations) to Decem-
ber 31, 1994.

================================================================================
COMBINED NOTES TO FINANCIAL STATEMENTS

Continued
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Advisory Fee--First Union National Bank of North Carolina, the
Trust's investment adviser (the "Adviser"), receives for its services an annual
investment advisory fee based on a percentage of each Fund's average daily net
assets (see below). The Adviser may voluntarily choose to waive a portion of
its fee. The Adviser can modify or terminate this voluntary waiver at any time
at its sole discretion.
<TABLE>
<CAPTION>
Annual
FUND Rate
- ---- ------
<S> <C>
Money Market............................................................. 0.35%
Tax Free Money Market.................................................... 0.35%
Treasury Money Market.................................................... 0.35%
</TABLE>

Capital Contribution--A capital contribution in the amount of $32,700 was made
by First Union Corporation to Tax-Free Money Market during the fiscal year
ended December 31, 1994. This contribution represents the cost of a PUT Option
to support the value of the $14,000,000 par, Orange County, CA GO, TRANs in the
Fund's Portfolio of Investments. This PUT Option guarantees the security up to
its par value and expires March 7, 1995.

Distribution And Shareholder Services Fee--The Trust has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Trust will compensate Federated Securities Corp. ("FSC"), the princi-
pal distributor, from the net assets of the Funds to finance activities in-
tended to result in the sale of the Funds' Class A and Class B Investment
Shares. The Plan provides that the Funds may incur distribution expenses up to
0.35 of 1% of the average daily net assets of the Class A Investment Shares for
Money Market, Tax Free Money Market, and Treasury Money Market, and 0.75 of 1%
of the average daily net assets of the Class B Investment Shares for Money Mar-
ket, annually, to compensate FSC. For the foreseeable future, FSC intends to
limit its fees to 0.30 of 1% of the Class A Investment Shares' average daily
net assets for the Funds. FSC may voluntarily choose to waive a portion of its
fee. FSC can modify or terminate this voluntary waiver at any time at its sole
discretion.

Under the terms of a Shareholder Services Agreement with First Union Brokerage
Services ("FUBS"), Money Market will pay FUBS up to 0.25 of 1% of average net
assets of the Fund's Class B Investment Shares for the period. The fee is to
obtain certain services for shareholders and to maintain the shareholder ac-
counts.

Organizational Expenses--Organizational expenses of $17,588 for Money Market
were borne initially by FAS. The Fund has agreed to reimburse FAS at an annual
rate of .005 of 1% of average daily net assets for the organizational expenses,
respectively, until expenses initially borne by FAS are fully reimbursed, or
the expiration of five years after October 15, 1990, the date the Fund first
became effective, whichever occurs earlier. For the year ended December 31,
1994, the Fund paid $5,261 pursuant to this agreement.

Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of FAS, FSC, and FServ.

================================================================================
INDEPENDENT
AUDITORS REPORT

Year Ended
December 31, 1994

The Trustees and Shareholders of FIRST UNION FUNDS:

We have audited the statement of assets and liabilities, including the portfo-
lio of investments, for First Union Fund portfolios, listed below, as of Decem-
ber 31, 1994, and the related statements of operations, and changes in net as-
sets, and the financial highlights for each of the years or periods listed be-
low:

First Union Money Market Portfolio--statement of operations for the year
ended December 31, 1994, statements of changes in net assets for the years
ended December 31, 1994 and December 31, 1993, and the financial
highlights for the years or period from January 3, 1989 (commencement of
operations) to December 31, 1994.

First Union Tax Free Money Market Portfolio--statement of operations for
the year ended December 31, 1994, statements of changes in net assets for
the years ended December 31, 1994 and December 31, 1993, and the financial
highlights for the years or period from January 3, 1989 (commencement of
operations) to December 31, 1994.

First Union Treasury Money Market Portfolio--statement of operations for
the year ended December 31, 1994, statements of changes in net assets for
the years ended December 31, 1994 and December 31, 1993, and the financial
highlights for the years or period from March 6, 1991 (commencement of
operations) to December 31, 1994.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Union Money Market Portfolio, First Union Tax Free Money Market Portfolio, and
First Union Treasury Money Market Portfolio as of December 31, 1994, and the
results of their operations, changes in their net assets, and the financial
highlights for each of the periods listed above, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP

Pittsburgh, Pennsylvania February 13, 1995

================================================================================
TRUSTEES AND
OFFICERS
TRUSTEES:
Edward C. Gonzales
James S. Howell, Chairman
Gerald M. McDonnell
Thomas L. McVerry
William Walt Pettit
Russell A. Salton, III, M.D.
Michael S. Scofield

OFFICERS:
Edward C. Gonzales, President and Treasurer
Joseph S. Machi, Vice President and Assistant Treasurer
Peter J. Germain, Secretary
Mark A. Sheehan, Assistant Secretary

Although money market funds seek to maintain a stable net asset value of $1.00
per share, there is no assurance that they will be able to do so.

INVESTMENTS IN THE FIRST UNION FUNDS ARE NOT ENDORSED OR GUARANTEED BY FIRST
UNION, ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF FIRST UNION, ARE NOT
INSURED OR OTHERWISE PROTECTED BY THE FDIC, THE FEDERAL
RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.

[LOGO]

Federated Securities Corp., Distributor
535680 (10/PKG.)
G00851-01 (2/95)

1994 ANNUAL REPORT

[INSERT PHOTO HERE]

GROWTH FUNDS

A SHARES . B SHARES . C SHARES . Y SHARES

[LOGO]
FIRST UNION FUNDS

FIRST UNION GROWTH FUNDS
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
President's Message.................................. 1
A Review of 1994
and Prospects for 1995............................... 2
- ---------------------------------------------------------------------------------------------
[LOGO] INTERNATIONAL A Report From Your Portfolio Manager................. 4
EQUITY FUND Results to Date
Class A Shares.................................... 6
Class B Shares.................................... 7
Class C Shares.................................... 8
Y Shares.......................................... 9
Portfolio of Investments............................. 10
Statement of Assets and Liabilities.................. 26
Statement of Operations.............................. 27
Statement of Changes in Net Assets................... 28
Financial Highlights................................. 29
- ---------------------------------------------------------------------------------------------
EMERGING MARKETS A Report From Your Portfolio Manager................. 30
GROWTH FUND Results to Date
Class A Shares.................................... 32
Class B Shares.................................... 33
Class C Shares.................................... 34
Y Shares.......................................... 35
Portfolio of Investments............................. 36
Statement of Assets and Liabilities.................. 42
Statement of Operations.............................. 43
Statement of Changes in Net Assets................... 44
Financial Highlights................................. 45
- ---------------------------------------------------------------------------------------------
Combined Notes to Financial Statements............... 46
Independent Auditors' Report......................... 54
Trustees and Officers................................ 55
</TABLE>

- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
PRESIDENT'S MESSAGE
by Edward C. Gonzales
[Insert Photo Here]
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXISTING NEW SALES
CLASS DESIGNATION CHARGE
-------- ----------- ----------
<S> <C> <C>
Trust Y None
B A Front-End
C B Back-End
D C Level Load
</TABLE>
- ------------------------------------------------------------------------------

Dear Investor:

I am pleased to present you with the Annual Report for the year ended December
31, 1994. It contains complete financial information for the First Union Funds'
(the "Trust") Growth Funds--the First Union Emerging Markets Growth Fund and
the First Union International Equity Fund.

As you can see, this Report features a new design and format that make it eas-
ier for you to read and find fund information. It's part of the Trust's commit-
ment to providing you with information that is both comprehensive and clear.

In addition, this Report reflects a re-designation of the Trust's classes of
shares. In response to requests from both brokers and customers, we are stan-
dardizing our class designations to bring them in line with the rest of the mu-
tual fund industry. For instance, the front-end load class, currently called
"Class B Investment Shares," will be called "Class A Investment Shares." These
common class designations will help enhance consumer understanding and reduce
the potential for confusion.

The chart shows how the Trust's classes will be re- designated.
I also want to inform you that it is presently contemplated that, in July, the
name of the First Union Funds will change to the Evergreen Funds. You'll be
hearing more about this change as we move closer to the transition date.

I encourage you to review this Report carefully. I hope you're pleased with
the changes and, as always, I welcome any questions, comments, and suggestions
you may have.

Edward C. Gonzales

February 15, 1995

[INSERT PHOTO HERE]

1994 confirmed the old adage, "Good news on Main Street is often bad news on
Wall Street."

When 1994 began, most investors expected just an uneventful year in the econo-
my. But as the year progressed, it became increasingly clear that it would rank
among the best years for growth in recent history. There were more than 3.5
million new jobs created in 1994, the largest increase in a decade. Real gross
domestic product (the inflation- adjusted value of goods and services produced
in the U.S.) advanced a healthy 4%, which was also the largest increase in a
decade.

Although the type of strong economic growth that we experienced last year of-
ten leads to higher inflation, this failed to happen in 1994. Inflation re-
mained strangely calm, despite sharp price increases in key industrial commodi-
ties like steel, copper, aluminum, cotton, paperboard and a variety of chemi-
cals. The Consumer Price Index* rose 2.7% in
1994, which mirrored the slight increase of the previous year.

THE DIM PERSPECTIVE FROM WALL STREET

Solid economic growth with low inflation might seem like an ideal investment
environment. This, however, was not true in 1994.

As a consequence, bond prices fell sharply while stock prices fluctuated wild-
ly, making little upside progress.

THE INTERNATIONAL MARKETPLACE

The phrase "synchronized global expansion" best describes the tone and trend
of the world economy in 1994. For the first time in many years, no developed
country was in a recession. All nations were experiencing at least some degree
of real growth in goods and services (gross domestic product, or "GDP").

The U.S. economy--in its fourth year of recovery
from the short, sharp
1990/1991 recession-- recorded a 10-year high in real GDP growth of 4%. The
economies of Europe and Japan, which languished in a recession throughout much
of 1992 and 1993, turned the corner in 1994, surprising many experts with a ro-
bust rebound instead of a widely expected anemic recovery. The smaller emerging
market economies of Latin America and Asia continued to grow rapidly as well.

This "best-case scenario" for the world economic environment was not to last.
This synchronized global expansion--call it a boom--forced up interest rates
around the world and cracks began to appear in this portrait of prosperity.

THE PLUMMETING PESO

Mexico, which had borrowed heavily on world credit markets to finance its
large trade deficit, was the most notable casualty. Higher worldwide interest
rates made it impossible for Mexico to maintain the value of the peso on world
currency markets.

The Mexican government was forced to reduce the value of the peso against the
U.S. dollar and to let its currency "float." Of course, instead of floating,
the peso sank. Currently, the peso is worth about 60% less than a year ago. The
result is that

*This index is unmanaged. continued

Mexico will probably experience a recession and higher inflation during 1995.

Rising U.S. interest rates also affected the rapidly growing emerging market
economies of the Pacific Rim countries. Since the currencies in this region are
largely U.S. dollar-dominated, any monetary tightening by the Federal Reserve
Board affects these countries as well.

The worldwide rise in interest rates during 1994, will likely result in slower
economic growth in 1995 for most countries. With the exception of Mexico, how-
ever, we don't anticipate a recession developing in any major economy.

THE REST OF THE WORLD

Given the recent direction of interest rates, it's not surprising that returns
from international equities were much less in 1994, than the banner year of
1993. The Morgan Stanley Europe, Australia and Far East Index* (the "EAFE In-
dex")--a broad-based index representing stocks from 20 developed countries--
turned in a respectable 7.8% return in U.S. dollars. Japan, the stock market
that many international investors love to hate, represents 46% of the EAFE and
turned in a whopping 21.4% gain in U.S. dollar terms. The
Nordic markets also recorded strong gains.

For the fourth quarter of 1994, EAFE declined 1.4% in U.S. dollar terms. While
many EAFE markets showed respectable gains, sharp declines in the Hong Kong,
Malaysia, and Italian markets pushed the Index into negative territory.

Developing country stock markets generally took a drubbing in 1994. Following
a gain of 65% in 1993, the MSCI Emerging Market Stock Index* produced a nega-
tive total return of 8.7% last year.

The Emerging Market Index* plunged in the first quarter, rallied sharply in
the middle part of the year, then plunged again, down to 14.7% in the fourth
quarter, as the Mexican peso crisis sent investors dashing to the sidelines.
Indonesia, Argentina, Mexico and Turkey were weakest of the emerging markets,
declining 25% in 1994. Markets up 20% or more included Korea, Brazil and Chile.

THE OUTLOOK FOR 1995

We don't expect that an economic slowdown in 1995 will lead to a recession in
the near future. We believe interest sensitive, early-cycle industries, (like
housing and autos) will likely have uneventful years.

Capital spending by business and export demand from Asia, Latin America and
Europe, however, should keep the economy and corporate profits humming along.
U.S. manufacturers are becoming increasingly competitive in world markets,
while intense global price competition is helping to hold down inflation. This
suggests that the ongoing U.S. economic expansion may be lengthy and inflation
may remain modest.

*This index is unmanaged.

FIRST UNION INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
[LOGO] Focusing on long-term growth

- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by William Hackney

TOP HOLDINGS BY MARKET VALUE***
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
Den Danske Bank 1.6%
- --------------------------------------------------------------------------------
Zurich Versicherun 1.6%
- --------------------------------------------------------------------------------
Volkswagen AG 1.5%
- --------------------------------------------------------------------------------
ABN-AMRO Holdings NV 1.4%
- --------------------------------------------------------------------------------
Nissan Motor Co. 1.3%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS***
$32,139,527
- -------------------------------------------------------------------------------
</TABLE>
***As of December 31, 1994

The First Union International Equity Portfolio (the "Fund") began operation on
September 2, 1994. The goal of the Fund's manager and sub-adviser, Boston In-
ternational Advisors, Inc., is to outperform the Morgan Stanley, Europe, Aus-
tralia, and Far East Index* (the "EAFE Index") by 1 to 2% annually over a five-
year period.

At the end of 1994, the Fund held 214 securities representing all 20 countries
in the EAFE Index. In addition, the Fund held 11 emerging market mutual funds
representing 2.1% of the portfolio's total value. The largest country repre-
sented in the portfolio is Japan with 51 securities accounting for 23% of the
Fund's value.

To achieve attractive long-term returns, we select stocks with value charac-
teristics, such as low price-to-book-value ratios and above-average dividend
yields. At year-end, the portfolio had an average price-to-book-value ratio of
1.1 times, substantially below the 2.1 ratio for the EAFE Index. The current
dividend on the portfolio is 2.7% compared with 2.1% for the EAFE Index.

While each country in EAFE is represented in the portfolio, a proprietary
country-weighting strategy which establishes fixed country portfolio weights
(re-balanced annually) employed in the Fund differs substantially from the EAFE
Index. For example, Japanese stocks represent 23% of the portfolio compared
with 46% of the EAFE Index.

In the future, the Fund will build positions in emerging markets countries up
to 10% of portfolio value. Currently, however, less than 5% of Fund assets are
represented by these countries.

THE IMPORTANCE OF A LONG-TERM OUTLOOK

From inception to the end of 1994, the Fund's Y Shares, Class A, Class B, and
Class C Investment Shares produced total returns of (5.02%), (9.60%), (9.89%),
and (6.09%), respectively,** compared to an EAFE Index* return of (4.10%).
While value characteristics like those exhibited by the Fund performed well in
1994 and prior years, they tended to under-perform the EAFE Index during the
fourth quarter. Of course, the Fund is managed as a long-term investment.
Short-term fluctuations in return are typical.

Looking ahead, we remain convinced that international equities will pursue
competitive returns for investors over the balance of the decade. We believe
that we will be able to enhance the Fund's returns by pursuing three distinct
investment strategies.

continued
* This index is unmanaged.
** Performance quoted represents past performance, Investment return and prin-
cipal value will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.

FIRST UNION INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
continued

First, a disciplined, value oriented stock selection methodology should result
in the addition of above- average stocks to the Fund's portfolio. Second, the
fixed country-weighting strategy, referred to above, should permit the Fund to
benefit from the volatility inherent in the international markets. And third,
the prudent use of emerging market
equities--up to 10% of the total Fund value-- should allow the Fund to benefit
from rapidly growing non-EAFE Index markets.

FIRST UNION INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION INTERNATIONAL EQUITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union International Equity Fund--Class A Shares (the "Fund") from September 2,
1994 (start of performance) to December 31, 1994, compared to the Morgan Stan-
ley, Europe, Australia, and Far East Index (the "EAFE Index").

"Graphic representation 'M' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obligations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares,
after deducting the maximum sales charge of 4.75% ($10,000 investment minus
$475 sales charge = $9,525). The Fund's performance assumes the reinvestment
of all dividends and distributions. The EAFE Index has been adjusted to
reflect reinvestment of dividends on securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The EAFE Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION INTERNATIONAL EQUITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union International Equity Fund--Class B Shares (the "Fund") from September 2,
1994 (start of performance) to December 31, 1994, compared to the Morgan Stan-
ley, Europe, Australia, and Far East Index (the "EAFE Index").

"Graphic representation 'MM' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obligations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects a 5.00% contingent deferred sales
charge on any redemption less than 1 year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions. The
EAFE Index has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The EAFE Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION INTERNATIONAL EQUITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union International Equity Fund--Class C Shares (the "Fund") from September 2,
1994 (start of performance) to December 31, 1994, compared to the Morgan Stan-
ley, Europe, Australia, and Far East Index (the "EAFE Index").

"Graphic representation 'MMM' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obliga- tions of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class C Shares.
The ending value of the Fund reflects a 1.00% contingent deferred sales
charge on any redemption less than 1 year from the purchase date. The Fund's
perfor- mance assumes the reinvestment of all dividends and distributions.
The EAFE In- dex has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The EAFE Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION INTERNATIONAL EQUITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union International Equity Fund--Y Shares (the "Fund") from September 2, 1994
(start of performance) to December 31, 1994, compared to the Morgan Stanley,
Europe, Australia, and Far East Index (the "EAFE Index").

"Graphic representation 'MMMM' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obliga- tions of, or guaranteed by, any bank and are not federally insured.

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The EAFE Index has been adjusted to reflect reinvestment of
dividends on securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The EAFE Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

FIRST UNION INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF
INVESTMENTS

December 31, 1994

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 91.5%
Australia -- 6.4%
Banking -- 1.7%
54,400 Australian & New Zealand Bank Group.............. $ 179,239
22,200 Commonwealth Bank of Australia................... 136,825
66,300 Westpac Bank Corp................................ 223,073
----------
Total......................................... 539,137
----------
Broadcasting & Publishing -- 0.6%
48,100 News Corporation Ltd............................. 188,313
700 Publishing & Broadcasting........................ 1,959
----------
Total......................................... 190,272
----------
Building Materials -- 0.8%
78,200 Adelaide Brighton Cement......................... 93,362
39,100 Hardie (James) Industries Ltd.................... 69,719
33,000 Pioneer International Ltd........................ 81,867
----------
Total......................................... 244,948
----------
Energy Sources -- 1.5%
28,700 Ampolex Ltd...................................... 77,429
128,900 Caltex Australia................................. 344,759
45,500 Pancontinental Mining Ltd........................ 59,260
----------
Total......................................... 481,448
----------
Food & Household Products -- 0.0%
22,200 Goodman Fielder Ltd.............................. 19,620
----------
Gold Mines -- 0.2%
246,500 Dominion Mining.................................. 59,241
6,600 Normandy Poseidon................................ 9,619
----------
Total......................................... 68,860
----------
Multi-Industry -- 0.2%
17,900 CSR Ltd.......................................... 61,753
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Australia -- continued
Real Estate -- 1.4%
46,600 General Property Trust..................... $ 259,127
55,400 Schroders Property Fund.................... 89,334
59,800 Westfield Trust............................ 104,310
----------
Total................................... 452,771
----------
Total Australia......................... 2,058,809
----------
Austria -- 1.9%
Banking -- 0.8%
1,000 Bank Austria AG............................ 81,595
3,050 Creditanstalt Bank......................... 180,078
----------
Total................................... 261,673
----------
Energy Sources -- 1.1%
4,250 OMV AG..................................... 360,027
----------
Total Austria........................... 621,700
----------
Belgium -- 2.7%
Banking -- 0.7%
200 Banque Nationale de Belgique............... 234,675
----------
Metals--Steel -- 0.8%
1,667 Arbed SA................................... 250,495
----------
Multi-Industry -- 1.2%
5,434 Societe Generale de Belgique............... 368,986
----------
Total Belgium........................... 854,156
----------
Denmark -- 2.3%
Banking -- 2.3%
9,650 Den Danske Bank............................ 526,551
5,900 Unidanmark................................. 226,904
----------
Total Denmark........................... 753,455
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Finland -- 1.1%
Banking -- 1.0%
109,680 Kansallis Osake Pankki.......................... $ 128,025
72,600 Unitas.......................................... 186,955
----------
Total........................................ 314,980
----------
Forest Products & Paper-- 0.1%
3,600 Enso Gutzeit OY................................. 31,155
----------
Total Finland................................ 346,135
----------
France -- 6.8%
Aerospace & Military Technology -- 0.6%
6,750 C.S.F. (Thompson)............................... 202,108
----------
Automobiles -- 0.6%
1,350 Peugot SA....................................... 185,160
----------
Banking -- 3.2%
2,950 Banque Nationale de Paris....................... 135,699
6,550 Cie de Suez..................................... 300,684
3,100 Cie Fin Paribas................................. 206,202
2,350 Credit Lyonnais................................. 194,622
1,800 Societe Generale................................ 189,207
----------
Total........................................ 1,026,414
----------
Beverages & Tobacco -- 0.2%
333 LVMH Moet Hennessy Louis........................ 52,599
----------
Energy Sources -- 1.0%
3,850 Societe Elf Aquitaine........................... 271,166
1,000 Total........................................... 58,123
----------
Total........................................ 329,289
----------
Financial Services -- 0.8%
1,160 Compagnie Bancaire.............................. 111,936
450 EuraFrance...................................... 138,196
----------
Total........................................ 250,132
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
France -- continued
Food & Household Products -- 0.1%
200 Erindania Beghin SA............................. $ 26,307
----------
Insurance -- 0.1%
800 Gan GRP......................................... 40,922
----------
Multi-Industry -- 0.2%
102 Gaz Et Eaux..................................... 32,490
333 Christian Dior.................................. 26,081
----------
Total........................................ 58,571
----------
Total France................................. 2,171,502
----------
Germany -- 6.3%
Automobile -- 0.4%
530 Volkswagen AG................................... 145,712
----------
Banking -- 2.6%
460 Bankgesellschaft Berlin......................... 106,428
990 Bayer Vereinsbk................................. 285,595
410 BHF Bank........................................ 100,019
1,380 Commerzbank AG.................................. 293,011
190 Dresdner Bank AG................................ 49,906
----------
Total........................................ 834,959
----------
Chemicals -- 1.5%
1,830 BASF AG......................................... 377,338
410 Bayer AG........................................ 96,050
----------
Total........................................ 473,388
----------
Machinery & Engineering-- 0.5%
1,510 Bremer Vulkan Verbundag......................... 91,701
190 GEA AG.......................................... 71,120
----------
Total........................................ 162,821
----------
Utilities -- 1.3%
2,160 Berliner Kraft and Light........................ 404,259
----------
Total Germany................................ 2,021,139
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Great Britain -- 7.0%
Beverages & Tobacco -- 0.7%
14,300 Bass............................................. $ 115,247
11,000 Whitbread........................................ 97,353
----------
Total......................................... 212,600
----------
Energy Sources -- 0.3%
4,700 British Petroleum................................ 31,326
6,800 Shell Transportation & Trading................... 74,242
----------
Total......................................... 105,568
----------
Insurance -- 0.6%
10,600 General Accident................................. 83,020
24,900 Royal Insurance.................................. 109,211
----------
Total......................................... 192,231
----------
Leisure & Tourism -- 1.3%
80,200 Forte............................................ 302,760
40,800 Ladbroke Group................................... 108,647
----------
Total......................................... 411,407
----------
Merchandising -- 0.2%
14,400 Tesco............................................ 56,165
----------
Metals--Steel -- 0.9%
125,700 British Steel.................................... 303,224
----------
Multi-Industry -- 0.0%
1,000 BAT Industries................................... 6,751
----------
Real Estate -- 1.3%
16,800 British Land Co.................................. 100,921
26,100 Land Securities.................................. 244,074
11,100 MEPC............................................. 66,593
----------
Total......................................... 411,588
----------
Telecommunications -- 0.7%
41,000 British Telecom.................................. 242,442
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Great Britain -- continued
Utilities--Electrical & Gas -- 1.0%
9,500 Anglian Water.................................... $ 76,265
17,400 Severn Trent..................................... 144,727
10,200 Southern Water................................... 92,989
----------
Total......................................... 313,981
----------
Total Great Britain........................... 2,255,957
----------
Hong Kong -- 5.2%
Business & Public Services-- 1.2%
118,000 Wharf Holdings................................... 398,010
----------
Leisure & Tourism -- 0.5%
38,000 Harbour Centre Dev............................... 43,215
36,000 Miramar Hotel & Inv.............................. 78,160
130,000 Regal Hotels International....................... 27,888
----------
Total......................................... 149,263
----------
Multi-Industry -- 1.7%
131,000 HongKong & Shang Hotel........................... 151,518
13,000 Jardine Strategic................................ 42,673
17,500 Swire Pacific.................................... 109,008
154,000 Wheelock & Co.................................... 255,738
----------
Total......................................... 558,937
----------
Real Estate -- 1.8%
134,000 Chinese Estates Holdings......................... 107,366
351,000 Great Eagle Holdings............................. 140,618
63,000 Hong Kong Land Holdings.......................... 122,939
59,000 Hopewell Holdings................................ 48,798
64,000 Hysan Development................................ 126,958
10,000 New World Development Co......................... 26,686
----------
Total......................................... 573,365
----------
Total Hong Kong............................... 1,679,575
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Ireland -- 1.5%
Banking -- 0.6%
45,800 Bank of Ireland..................................... $ 213,747
----------
Food & Household Products -- 0.3%
21,000 Crean (James)....................................... 89,244
----------
Forest Products & Paper-- 0.6%
32,200 Smurfit (Jefferson)................................. 189,090
----------
Total Ireland.................................... 492,081
----------
Italy -- 1.7%
Aerospace & Military Technology -- 0.3%
113,200 Finneccanica SPA.................................... 103,712
----------
Banking -- 0.5%
102,000 BCO di Roma......................................... 103,432
42,400 Credito Italiano SPA................................ 43,780
10,200 Credito Italiano.................................... 10,419
----------
Total............................................ 157,631
----------
Chemicals -- 0.0%
5,000 Montefibre.......................................... 3,111
----------
Construction & Housing-- 0.2%
60,800 Grassetto SPA....................................... 59,102
----------
Financial Services -- 0.1%
78,100 GAIC................................................ 34,706
----------
Multi-Industry -- 0.6%
156,300 CIR Compagnie Industries............................ 106,981
180,500 Cofide.............................................. 96,140
----------
Total............................................ 203,121
----------
Total Italy...................................... 561,383
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Japan -- 23.2%
Appliances & Household Durables -- 1.7%
15,000 Matsushita Electric Industries.................. $ 246,617
25,000 Sanyo Electric Co............................... 143,609
3,000 Sony Corp....................................... 169,925
-----------
Total........................................ 560,151
-----------
Automobiles -- 3.5%
11,000 Honda Motor Corp. .............................. 195,188
17,000 Mazda Motor Corp................................ 95,098
53,000 Nissan Motor Co. ............................... 437,283
19,000 Toyota Motor Corp. ............................. 400,000
-----------
Total........................................ 1,127,569
-----------
Broadcasting & Publishing -- 0.3%
11,000 Gakken Co....................................... 83,589
-----------
Building Materials -- 0.7%
9,000 Inax Corp....................................... 93,835
25,000 Nichiei Co...................................... 128,571
-----------
Total........................................ 222,406
-----------
Chemicals -- 0.7%
21,000 Asahi Denka Kogyo............................... 173,053
12,000 Daicel Chemical Industries...................... 67,609
-----------
Total........................................ 240,662
-----------
Construction & Housing-- 2.5%
22,000 Aoki Corp....................................... 95,940
38,000 Haseko Corp..................................... 224,762
53,000 Kumagai Gumi Corp............................... 275,228
19,000 Sekisui House................................... 211,429
-----------
Total........................................ 807,359
-----------
Data Processing & Reproduction -- 1.1%
29,000 Fujitsu......................................... 293,634
5,000 Ricoh Co........................................ 49,624
-----------
Total........................................ 343,258
-----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- CONTINUED
Japan -- continued
Electrical & Electronics -- 1.1%
25,000 Hitachi.......................... $ 247,870
13,000 Mitsubishi Electric Corp......... 92,140
----------
Total......................... 340,010
----------
Electronic Components -- 0.2%
1,000 TDK Corp......................... 48,421
----------
Energy Sources -- 0.8%
41,000 Nippon Oil Co.................... 272,511
----------
Financial Services -- 1.1%
4,000 Nomura Securities................ 83,008
34,000 Yamaichi Securities Co........... 257,003
----------
Total......................... 340,011
----------
Food & Household Products -- 0.4%
16,000 Marudai Food Co.................. 125,754
----------
Forest Products & Paper -- 0.3%
23,000 Settsu Corp...................... 92,922
----------
Health & Personal Care -- 0.4%
10,000 Shiseido Co...................... 118,296
----------
Industrial Components -- 0.7%
8,000 Aisin Seiki Co................... 111,479
11,000 Koyo Seiko Co.................... 110,055
----------
Total......................... 221,534
----------
Japanese City Banks -- 0.8%
46,000 Hokkaido Takushoku Bank.......... 195,068
4,000 Tokai Bank....................... 48,120
----------
Total......................... 243,188
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- CONTINUED
Japan -- continued
Japanese Regional Banks -- 0.6%
3,000 Chugoku Bank............................. $ 52,030
25,000 Hokkaido Bank............................ 96,491
18,000 Hyogo Bank............................... 55,038
----------
Total................................. 203,559
----------
Japanese Trust Banks -- 0.4%
6,000 Nitsui Trust & Banking Co................ 62,556
8,000 Yasuda Trust & Banking Co................ 63,679
----------
Total................................. 126,235
----------
Leisure & Tourism -- 0.3%
7,000 Royal Co................................. 107,368
----------
Machinery & Engineering -- 1.0%
6,000 Aida Engineering......................... 52,932
15,000 Amada Co................................. 187,970
9,000 Komatsu.................................. 81,203
----------
Total................................. 322,105
----------
Metals--Steel -- 0.3%
34,000 Sumitomo Metal Industries................ 110,095
----------
Real Estate -- 0.3%
18,000 Sumitomo Realty & Development............ 106,466
----------
Recreation & Other Consumer Goods -- 1.1%
6,000 Fuji Photo Film Co....................... 138,947
11,000 Hitachi Maxell........................... 206,216
----------
Total................................. 345,163
----------
Textiles & Apparel -- 1.1%
17,000 Nisshinbo Industries, Inc................ 195,990
33,000 Renown, Inc.............................. 147,880
----------
Total................................. 343,870
----------
Transportation--Road & Rail -- 0.3%
6,000 Seino Transportation..................... 109,474
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Japan -- continued
Utilities--Electrical & Gas -- 0.2%
3,000 Chubu Electrical Power........................... $ 73,083
----------
Wholesale & International Trade -- 1.3%
17,000 Hanwa Co......................................... 66,807
18,000 Marubeni Corp.................................... 99,248
26,000 Sumitomo Corp.................................... 265,865
----------
Total......................................... 431,920
----------
Total Japan................................... 7,466,979
----------
Malaysia -- 5.5%
Food & Household Products -- 0.2%
43,000 Highlands & Lowlands Berhad...................... 75,442
1,000 Malaysian Mosaics................................ 1,496
----------
Total......................................... 76,938
----------
Leisure & Tourism -- 0.1%
43,000 Faber Group Berhad............................... 37,552
----------
Metals--Non Ferrous -- 0.5%
83,000 Malaysia Mining Corp. Berhad..................... 152,121
----------
Miscellaneous Materials-- 0.9%
86,000 Golden Hope Plants............................... 156,945
47,000 Kuala Lumpur Kepg................................ 125,162
----------
Total......................................... 282,107
----------
Multi-Industry -- 1.5%
62,000 Berjaya Group Berhad............................. 74,784
64,000 Malayan United Industries........................ 100,255
44,000 Perlis Plantations............................... 144,743
83,000 Renong Berhad.................................... 102,714
20,400 Sime Darby Berhad................................ 46,736
----------
Total......................................... 469,232
----------
Telecommunications -- 0.0%
3,000 Telekom Malaysia Berhad.......................... 20,325
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Malaysia -- continued
Transportation--Airlines-- 1.0%
104,000 Malay Airline Systems............................ $ 311,572
----------
Transportation--Shipping-- 0.3%
39,000 Malaysian International Shipping................. 111,494
----------
Utilities--Electrical & Gas -- 1.0%
81,000 Tenaga Nasional.................................. 320,384
----------
Total Malaysia................................ 1,781,725
----------
Netherlands -- 2.2%
Banking -- 1.5%
13,250 ABN-AMRO Holdings NV............................. 460,557
----------
Insurance -- 0.7%
4,900 Internationale Nederlande........................ 231,612
----------
Total Netherlands............................. 692,169
----------
New Zealand -- 1.4%
Forest Products & Paper-- 1.0%
129,900 Fletcher Challenge............................... 305,187
----------
Multi-Industry -- 0.4%
68,100 Carter Holt Harvey Ltd........................... 139,505
----------
Total New Zealand............................. 444,692
----------
Norway -- 2.0%
Forest Products & Paper-- 0.8%
9,920 Norske Skogsindust............................... 278,569
----------
Multi-Industry -- 1.2%
14,120 Aker AS.......................................... 167,996
5,440 Orkla A/S........................................ 198,593
----------
Total......................................... 366,589
----------
Total Norway.................................. 645,158
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Singapore -- 5.7%
Automobile -- 0.6%
84,000 WBL Corp. Ltd.................................... $ 198,189
----------
Banking -- 0.2%
6,000 Development Bank of Singapore.................... 61,728
----------
Beverages & Tobacco -- 0.1%
5,000 Fraser & Neave................................... 51,783
----------
Broadcasting & Publishing -- 0.4%
43,000 Times Publishing................................. 119,739
----------
Energy Equipment & Services -- 0.3%
95,000 Chuan Hup Holdings............................... 85,357
----------
Food & Household Products -- 0.6%
80,000 Goodman Fielder Asia Holdings.................... 142,661
15,000 Prima............................................ 52,469
----------
Total......................................... 195,130
----------
Multi-Industry -- 1.7%
43,000 Parkway Holdings................................. 105,583
45,000 Straits Steamship Land........................... 154,321
312,000 UTD Industrial CP................................ 293,169
----------
Total......................................... 553,073
----------
Real Estate -- 1.0%
53,000 Singapore Land................................... 310,802
----------
Transportation--Airlines-- 0.8%
28,000 Singapore Airlines............................... 257,339
----------
Total Singapore............................... 1,833,140
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Spain -- 2.6%
Telecommunications -- 0.6%
16,200 Telefonica de Espana SA............................ $ 191,276
----------
Utilities--Electrical & Gas -- 2.0%
18,100 Fuerzas Electric Catal............................. 93,730
16,600 Iberdrola SA....................................... 102,348
49,000 Sevillana de Electricidad.......................... 231,420
49,900 Union Electric Fenosa.............................. 207,632
----------
Total........................................... 635,130
----------
Total Spain..................................... 826,406
----------
Sweden -- 2.7%
Banking -- 0.5%
14,150 Skand Enskilda Banking............................. 80,898
3,750 Svenska Handelsbk, Series A........................ 49,437
2,300 Svenska Handelsbk, Series B........................ 29,084
----------
Total........................................... 159,419
----------
Forest Products & Paper-- 1.8%
2,550 Mo Och Domsjo AB................................... 118,689
1,700 Stora Kopparbergs, Series A........................ 102,681
1,400 Stora Kopparbergs, Series B........................ 84,373
16,350 Svenska Cellulosa AB-SCA........................... 256,235
----------
Total........................................... 561,978
----------
Utilities - Electric & Gas-- 0.4%
5,350 Sydkraft AB, Series A.............................. 69,091
5,500 Sydkraft AB, Series C.............................. 64,369
----------
Total........................................... 133,460
----------
Total Sweden.................................... 854,857
----------
Switzerland -- 3.3%
Banking -- 0.5%
260 Schweizerische Bankverein.......................... 71,902
110 Schweizerische Bankgesellsch....................... 91,261
----------
Total........................................... 163,163
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Switzerland -- continued
Insurance -- 2.5%
95 Baloise Holdings.................................... $ 172,727
200 Winterhur........................................... 103,896
180 Zurich Versicherun REG.............................. 171,887
350 Zurich Versicherun BR............................... 332,888
----------
Total............................................ 781,398
----------
Machinery & Engineering-- 0.3%
75 Rieter Holdings AG.................................. 103,132
----------
Total Switzerland................................ 1,047,693
----------
Total Common Stocks (identified cost,
$30,526,311)................................... 29,408,711
----------
PREFERRED STOCKS -- 3.6%
Australia -- 0.6%
Broadcasting & Publishing -- 0.6%
13,750 News Corporation Limited............................ 47,436
44,900 Publishing & Broadcasting........................... 132,274
----------
Total Australia.................................. 179,710
----------
Austria -- 0.8%
Banking -- 0.8%
4,150 Creditanstalt Bank.................................. 241,219
----------
Industrial Components -- 0.0%
200 MBIA AG............................................. 9,351
----------
Total Austria.................................... 250,570
----------
Belgium -- 0.5%
Metals--Steel -- 0.5%
27,246 Cockerill Sambre.................................... 167,879
----------
Total Belgium.................................... 167,879
----------
Germany -- 1.6%
Automobile -- 1.1%
1,550 Volkswagen AG....................................... 340,610
----------
</TABLE>

continued
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS -- CONTINUED
Germany -- continued
Machinery & Engineering-- 0.5%
550 GEA AG..................................... $ 174,637
-----------
Total Germany........................... 515,247
-----------
Italy -- 0.1%
Transportation--Airlines-- 0.1%
92,856 Alitalia Linee Aeree Italy................. 36,678
-----------
Total Italy............................. 36,678
-----------
Total Preferred Stocks (identified cost,
$1,122,913).......................... 1,150,084
-----------
MUTUAL FUND SHARES -- 2.1%
5,000 Argentina Fund, Inc.......................... 60,625
2,100 Brazil Fund, Inc............................. 69,300
1,600 Chile Fund, Inc.............................. 73,800
2,700 First Philippine Fund, Inc................... 52,312
3,000 India Growth Fund, Inc....................... 57,750
5,500 Indonesia Fund, Inc.......................... 67,375
2,200 Mexico Fund, Inc............................. 50,050
3,800 Portugal Fund, Inc........................... 52,250
6,000 R.O.C. Tawain Fund, Inc...................... 71,250
3,000 Thai Capital Fund, Inc....................... 49,875
10,800 Turkish Investment Fund, Inc................. 60,750
-----------
Total Mutual Fund Shares (at net asset
value)............................... 665,337
-----------
*REPURCHASE AGREEMENT -- 4.1%
$1,305,000 State Street Bank & Trust Co., 5.15%, dated
12/30/94 due 1/3/95 (at amortized cost).... 1,305,000
-----------
Total Investments (identified cost,
$33,619,561)......................... $32,529,132+
-----------
</TABLE>

* THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

+ THE COST OF INVESTMENTS FOR FEDERAL TAX PURPOSES AMOUNTS TO $33,633,967. THE
NET UNREALIZED DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO
$1,104,835, WHICH IS COMPRISED OF $479,704 APPRECIATION AND $1,584,539 DEPRE-
CIATION AT DECEMBER 31, 1994.

NOTE: THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($32,139,527) AT DECEMBER 31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost
$33,619,561; tax cost $33,633,967)............................ $32,529,132
Foreign currency (identified and tax cost, $513,178)........... 513,899
Receivable for foreign currency sold........................... 1,018,452
Receivable for Fund shares sold................................ 341,710
Dividend and interest receivable............................... 93,906
-----------
TOTAL ASSETS.............................................. 34,497,099
Liabilities:
Payable for investments purchased.............................. $ 1,278,665
Payable for foreign currency purchased......................... 1,020,756
Payable for Fund shares redeemed............................... 5,653
Accrued expenses............................................... 52,498
-----------
TOTAL LIABILITIES......................................... 2,357,572
Net Assets:
for 3,384,413 shares of beneficial interest outstanding........ $32,139,527
Net Assets Consist of:
Paid-in capital................................................ $33,215,142
Net unrealized appreciation (depreciation) of investments
and foreign currency transactions............................. (1,094,129)
Accumulated net realized gain (loss) on investments and
foreign currency transactions................................. (32,131)
Undistributed net investment income............................ 50,645
-----------
TOTAL NET ASSETS.......................................... $32,139,527
Net Asset Value:
Class A Investment Shares ($2,544,906/267,930 shares
of beneficial interest outstanding)........................... $9.50
Class B Investment Shares ($5,602,374/589,954 shares
of beneficial interest outstanding)........................... $9.50
Class C Investment Shares ($162,663/17,132 shares
of beneficial interest outstanding)........................... $9.49
Y Shares ($23,829,584/2,509,397 shares of beneficial
interest outstanding)......................................... $9.50
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $9.50)*................ $9.97
Class B Investment Shares...................................... $9.50
Class C Investment Shares...................................... $9.49
Y Shares....................................................... $9.50
Redemption Proceeds Per Share:
Class A Investment Shares...................................... $9.50
Class B Investment Shares (95/100 of $9.50)**.................. $9.03
Class C Investment Shares (99/100 of $9.49)**.................. $9.40
Y Shares....................................................... $9.50
</TABLE>

*SEE "WHAT SHARES COST" IN THE PROSPECTUS.

**SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Period Ended December 31, 1994*
<TABLE>
<S> <C> <C> <C>
Investment Income:
Dividend income (net of foreign taxes withheld of $16,637)...... $ 133,535
Interest income................................................. 22,775
-----------
Total income................................................ 156,310
Expenses:
Investment advisory fee................................ $60,885
Administrative personnel and services fees............. 16,438
Custodian and portfolio accounting fees................ 41,050
Transfer and dividend disbursing agent fees
and expenses.......................................... 861
Distribution services fee--
Class A Investment Shares............................. 1,270
Distribution services fee--
Class B Investment Shares............................. 8,718
Distribution services fee--
Class C Investment Shares............................. 281
Shareholder services fee--
Class B Investment Shares............................. 2,906
Shareholder services fee--
Class C Investment Shares............................. 93
Legal fees............................................. 611
Printing and postage................................... 408
Miscellaneous.......................................... 19,196
-------
Total expenses...................................... 152,717
Deduct--Waiver of investment
advisory fee.............................. $44,928
--Waiver of administrative personnel and
services fees............................. 16,438 61,366
------- -------
Net expenses................................................ 91,351
-----------
Net investment income..................................... 64,959
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments and foreign currency
transactions (identified cost basis)........................... (27,654)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency............................... (1,094,129)
-----------
Net realized and unrealized gain (loss) on investments
and foreign currency....................................... (1,121,783)
-----------
Change in net assets resulting from operations.............. ($1,056,824)
</TABLE>

*FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Period Ended December 31, 1994*
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets: 1994*
-----------
Operations
Net investment income........................................... $ 64,959
Net realized gain (loss) on investments and foreign currency
($4,592 net gain as computed for federal tax purposes)......... (27,654)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency............................... (1,094,129)
-----------
Change in net assets resulting from operations.................. (1,056,824)
-----------
Distributions to shareholders
Dividends to shareholders from net investment income:
Class A Investment Shares....................................... (259)
Y Shares........................................................ (14,055)
Distributions to shareholders from net realized gain on
investment transactions:
Class A Investment Shares....................................... (363)
Class B Investment Shares....................................... (811)
Class C Investment Shares....................................... (24)
Y Shares........................................................ (3,279)
-----------
Change in net assets from distributions to shareholders......... (18,791)
-----------
Fund Share (Principal) Transactions
Proceeds from sale of shares.................................... 33,532,764
Net asset value of shares issued to shareholders in payment of
dividends declared............................................. 8,355
Cost of shares redeemed......................................... (325,977)
-----------
Change in net assets from Fund share transactions............... 33,215,142
-----------
Change in net assets.............................................. 32,139,527
-----------
Net Assets:
Beginning of period............................................. --
End of period (including undistributed net investment income of
$50,645)........................................................ $32,139,527
-----------
</TABLE>

*FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
[LOGO] FINANCIAL HIGHLIGHTS
Period Ended December 31, 1994
- --------------------------------------------------------------------------------
(For a share outstanding
throughout the period)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
INVESTMENT INVESTMENT INVESTMENT
SHARES SHARES SHARES Y SHARES
------------ ------------ ------------ ------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994* 1994* 1994* 1994*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $10.00 $10.00 $10.00 $10.00
Income from investment
operations
Net investment
income............... 0.02 0.00 0.03 0.02
Net realized and
unrealized gain
(loss) on
investments.......... (0.52) (0.50) (0.54) (0.51)
------ ------ ------ ------
Total from investment
operations........... (0.50) (0.50) (0.51) (0.49)
------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income.... (0.00) (0.00) (0.00) (0.01)
------ ------ ------ ------
Net Asset Value, End of
Period.................. $ 9.50 $ 9.50 $ 9.49 $ 9.50
------ ------ ------ ------
Total return+........ (5.08%) (5.19%) (5.19%) (5.02%)
------ ------ ------ ------
Ratios to Average Net
Assets
Expenses............. 1.26%(b) 2.02%(b) 2.01%(b) 1.06%(b)
Net investment
income............... 0.91%(b) 0.10%(b) 0.85%(b) 1.03%(b)
Expense
waiver/reimbursement
(a).................. 0.83%(b) 0.83%(b) 0.83%(b) 0.83%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $2,545 $5,602 $163 $23,830
Portfolio turnover
rate................. 1% 1% 1% 1%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 2, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTIN-
GENT DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION EMERGING MARKETS GROWTH FUND
- --------------------------------------------------------------------------------
[LOGO] Emerging Markets look to gain momentum
- --------------------------------------------------------------------------------
A REPORT FROM YOUR
PORTFOLIO MANAGER
by William Hackney

The First Union Emerging Markets Growth Portfolio (the "Fund") began operation
on September 1, 1994. Marvin and Palmer Associates, a nationally recognized
global equity manager located in Wil- mington, Delaware, serves as sub-adviser
to the Fund.

The investment strategy for the Fund is focused on two key areas of the
world--the Far East and Latin America. Exposure to the emerging markets in Eu-
rope, the Mideast, and Africa are currently minimal because we do not see fa-
vorable economic dynamics in these areas.

At the end of 1994, 57% of the portfolio was invested in Far East countries,
22% in Latin America, 20% in cash reserves and 1% in Israel. Malaysia was the
largest single country represented in the portfolio with a 13% investment.
About half of the portfolio is composed of service and financial companies, two
sectors where we see substantial growth opportunities.

From inception to the end of 1994, the Fund experienced a total return of neg-
ative 18.3%* on Y Shares and Class A Investment Shares, and a total return of
negative 18.4% on Class B and Class C Investment Shares. This decline largely
reflected the effects of the Mexican financial crisis on key Latin American
stock markets and the sell-off in many Pacific Rim markets due to higher U.S.
interest rates. In addition, it reflected concerns about the U.S./China trade
dispute.

THE IMPORTANCE OF A LONG-TERM OUTLOOK

The Fund's disappointing short-term performance has not altered our favorable
view of many Latin American and Far East emerging market economies. Nor have we
altered our basic investment strategy, because the Fund should be viewed as a
long-term investment.

The developing world (also called emerging

TOP HOLDINGS BY MARKET VALUE**
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
First Pacific Co. 3.7%
- --------------------------------------------------------------------------------
Public Bank, Berhad 3.1%
- --------------------------------------------------------------------------------
San Miguel Corp. 2.8%
- --------------------------------------------------------------------------------
Taiwan Fund, Inc. 2.7%
- --------------------------------------------------------------------------------
Korea Fund, Inc. 2.2%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS
**$8,423,453
- --------------------------------------------------------------------------------
</TABLE>

**As of December 31, 1994

markets) currently accounts for over two-thirds of the world's population. Yet,
those countries account for only about one-third of the world's output of goods
and services--or gross domestic product--and less than 6% of the world's stock
market capitalization.

There is a growing understanding among both developed and developing nations
that capital drives economic growth. Countries must create an attractive in-
vestment environment relative to other nations if they are to mobilize domestic
and foreign investment. We believe as the world's emerging economies become
more liberal, their share of global output and market capitalization may surge
as well.

To be sure, the Mexican devaluation in December

continued

* Performance quoted represents past performance. Investment return and princi-
pal value will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.

FIRST UNION EMERGING MARKETS GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A REPORT FROM YOUR PORTFOLIO MANAGER
continued

1994, shocked the financial markets and caused many international investors to
take a more cautious approach. But our experience with other international in-
vestment shocks--such as the 1992 devaluations in the United Kingdom, Sweden
and Finland, as well as the 1989 Tiananmen
Square Massacre which shook the Hong Kong market--suggest that panic declines
like we saw recently in Mexico actually represent above-average long-term buy-
ing opportunities.

We are particularly encouraged by recent "weaker" economic signals from the
U.S. and the downtrend
in long-term U.S. interest rates. As the U.S. economy slows in 1995, we expect
the Federal Reserve Board to shift to a more accommodative monetary policy.
This may result in a more positive environment for emerging markets as more li-
quidity comes back into the world's economic system.

FIRST UNION EMERGING MARKETS GROWTH FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS A SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION EMERGING MARKETS GROWTH FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Emerging Markets Growth Fund--Class A Shares (the "Fund") from September
6, 1994 (start of performance) to December 31, 1994, compared to the Morgan
Stanley, Emerging Markets Index (the "MSEM Index").

"Graphic representation 'N' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obliga- tions of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class A Shares
after deducting the maximum sales charge of 4.75% ($10,000 investment minus
$475 sales charge = $9,525). The Fund's performance assumes the reinvestment
of all dividends and distributions. The MSEM Index has been adjusted to
reflect reinvestment of dividends on securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The MSEM Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

FIRST UNION EMERGING MARKETS GROWTH FUND
- --------------------------------------------------------------------------------
[LOGO] How a $10,000 Investment in the Fund has performed
- --------------------------------------------------------------------------------
RESULTS TO DATE
CLASS B SHARES

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION EMERGING MARKETS GROWTH FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Emerging Markets Growth Fund--Class B Shares (the "Fund") from September
6, 1994 (start of performance) to December 31, 1994, compared to the Morgan
Stanley, Emerging Markets Index (the "MSEM Index").

"Graphic representation 'NN' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obliga- tions of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class B Shares.
The ending value of the Fund reflects a 5.00% contingent deferred sales
charge on any redemption less than 1 year from the purchase date. The Fund's
perfor- mance assumes the reinvestment of all dividends and distributions.
The MSEM In- dex has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The MSEM Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION EMERGING MARKETS GROWTH FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Emerging Markets Growth Fund--Class C Shares (the "Fund") from September
6, 1994 (start of performance) to December 31, 1994, compared to the Morgan
Stanley, Emerging Markets Index (the "MSEM Index").

"Graphic representation 'NNN' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obligations of, or guaranteed by, any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund's Class C Shares.
The ending value of the Fund reflects a 1.00% contingent deferred sales
charge on any redemption less than 1 year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions.
The MSEM Index has been adjusted to reflect reinvestment of dividends on
securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The MSEM Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

PERFORMANCE OF $10,000 INVESTED IN FIRST UNION EMERGING MARKETS GROWTH FUND
The graph below illustrates the hypothetical investment of $10,000 in the First
Union Emerging Markets Growth Fund--Y Shares (the "Fund") from September 6,
1994 (start of performance) to December 31, 1994, compared to the Morgan Stan-
ley, Emerging Markets Index (the "MSEM Index").

"Graphic representation 'NNNN' omitted. See Appendix."

Past performance is not predictive of future performance. Your investment re-
turn and principal value will fluctuate, so when shares are redeemed, they
may be worth more or less than their original cost. Mutual funds are not
obligations of, or guaranteed by, any bank and are not federally insured.

* The Fund's performance assumes the reinvestment of all dividends and distri-
butions. The MSEM Index has been adjusted to reflect reinvestment of
dividends on securities in the index.

** Total return quoted reflects all applicable sales charges and contingent de-
ferred sales charges.

The MSEM Index is not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.

FIRST UNION EMERGING MARKETS GROWTH FUND
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
PORTFOLIO OF
INVESTMENTS

December 31, 1994

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 76.9%
Argentina -- 6.1%
Banking -- 2.2%
6,000 Banco Frances, ADR............................... $ 128,250
3,450 Banco DaGalicia, ADR............................. 59,512
----------
Total......................................... 187,762
----------
Building Materials -- 1.6%
20,000 Cementera Argentina.............................. 131,987
----------
Construction & Housing-- 0.8%
25,000 Comercial del la Plata........................... 63,744
----------
Telecommunications -- 1.5%
2,500 Argentina Telecom, ADR........................... 129,375
----------
Total Argentina............................... 512,868
----------
Brazil -- 2.1%
Forest Products & Paper-- 0.6%
3,700 Aracruz Celulose, ADR............................ 47,175
----------
Metals -- 0.6%
1,800 Companhia Siderurgica de Tubarso, ADR............ 48,369
----------
Telecommunications -- 0.9%
1,800 Telecom Brazilia, ADR............................ 80,545
----------
Total Brazil.................................. 176,089
----------
Chile -- 2.7%
Banking -- 0.3%
1,700 Banco O'Higgins, ADR............................. 29,113
----------
Building Materials -- 1.2%
4,000 Maderas Y Sinteticos S.A., ADR................... 102,000
----------
Chemicals -- 0.9%
2,600 Sociedad Quimica Y Minera de Chile, ADR.......... 75,725
----------
Utilities -- 0.3%
1,000 Chilgener, ADR................................... 24,625
----------
Total Chile................................... 231,463
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
China -- 0.4%
Utilities -- 0.4%
2,500 Huaneng Power International, Inc., ADR........... $ 36,875
----------
Colombia -- 0.7%
Building Materials -- 0.7%
3,000 **Cemetos Paz De Rio, ADR........................ 58,500
----------
Hong Kong -- 8.3%
Broadcasting & Publishing -- 1.9%
40,000 Television Broadcasts............................ 159,731
----------
Electronics -- 0.5%
18,000 Johnson Electric Holdings........................ 41,290
----------
Financial Services -- 0.4%
160,000 Guangzhou Investments Co......................... 32,463
----------
Multi-Industry -- 1.4%
30,000 Hutchison Whampoa................................ 121,349
----------
Telecommunications -- 4.1%
420,000 First Pacific Co................................. 306,668
22,000 Hong Kong Telecom................................ 41,936
----------
Total......................................... 348,604
----------
Total Hong Kong............................... 703,437
----------
Indonesia -- 3.8%
Banking -- 0.5%
14,000 Bank International, Indonesia.................... 44,586
----------
Chemicals -- 1.2%
4,000 PT Tri Polyta Indonesia, ADR..................... 97,000
----------
Telecommunications -- 2.1%
5,000 Perusahaan Per Per Indosat, ADR.................. 178,750
----------
Total Indonesia............................... 320,336
----------
India -- 5.1%
Beverages & Tobacco -- 1.4%
11,600 **ITC, Inc., GDR................................. 116,000
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
India -- continued
Chemicals -- 1.5%
4,800 **Indian Rayon & Ind, Inc., GDR.................. $ 82,800
2,300 **Reliance Industries Ltd., GDR.................. 45,425
----------
Total......................................... 128,225
----------
Healthcare & Cosmetics-- 1.1%
4,200 **Ranbaxy Laboratories, Ltd., GDR................ 91,350
----------
Leisure & Tourism -- 0.7%
4,000 East India Hotels, Ltd., GDR..................... 59,000
----------
Metals -- 0.4%
3,500 **Indian Aluminum Co., Ltd., GDR................. 35,704
----------
Total India................................... 430,279
----------
Israel -- 0.9%
Telecommunications -- 0.9%
5,500 ECI Telecom, Ltd................................. 74,937
----------
Korea -- 4.2%
Electronics -- 1.0%
1,800 **Samsung Electronics, Ltd., GDR................. 81,000
----------
Metals -- 1.0%
3,000 Pohang Iron & Steel.............................. 87,750
----------
Multi-Industry -- 2.2%
8,000 Korea Fund, Inc.................................. 182,000
----------
Total Korea................................... 350,750
----------
Malaysia -- 12.7%
Banking -- 5.7%
14,000 Arab-Malaysian Merchant Bank, Berhad............. 132,681
15,000 Malayan Bank, Berhad............................. 90,464
125,000 Public Bank, Berhad.............................. 258,916
----------
Total......................................... 482,061
----------
Broadcasting & Publishing -- 1.0%
25,000 New Straits Times Press.......................... 80,282
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Malaysia -- continued
Forest Products & Paper-- 1.1%
15,000 Aokam Perdana, Berhad............................ $ 92,814
----------
Leisure & Tourism -- 2.1%
30,000 Resorts World, Berhad............................ 176,229
----------
Telecommunications -- 2.8%
6,000 Telekom Malaysia, Berhad......................... 40,650
38,000 Technology Resources Industries, Berhad.......... 121,285
40,000 Uniphone Telecommunications...................... 77,384
----------
Total......................................... 239,319
----------
Total Malaysia................................ 1,070,705
----------
Mexico -- 8.8%
Building Materials -- 1.0%
4,000 Cemex, S.A. de C.V............................... 19,680
8,000 Tolmex, S.A. de C.V.............................. 66,400
----------
Total......................................... 86,080
----------
Constructions & Housing-- 0.6%
3,500 Empresas ICA Sociedad, ADR....................... 54,250
----------
Financial Services -- 0.5%
14,000 Grupo Financiero Banamex Accivel................. 40,320
----------
Leisure & Tourism -- 1.3%
60,000 Grupo Posadas S.A................................ 46,560
30,419 Grupo Situr, S.A. de C.V......................... 61,446
----------
Total......................................... 108,006
----------
Machines & Engineering-- 1.5%
4,300 Grupo Bufete Industrial, S.A..................... 126,850
----------
Multi-Industry -- 1.8%
6,000 **Grupo Carso, S.A. de C.V., ADR................. 81,000
8,000 Grupo Sidek, S.A. de C.V., ADR................... 70,000
----------
Total......................................... 151,000
----------
</TABLE>

continued

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Mexico -- continued
Retail -- 1.1%
30,000 Cifro S.A. de C.V., ADR......................... $ 62,700
1,200 Grupo Casa Autry, ADR........................... 27,000
----------
Total........................................ 89,700
----------
Telecommunication -- 1.0%
1,500 Grupo Iusacell, S.A. de C.V., ADR............... 27,937
1,700 Grupo Televisa, S.A. de C.V., ADR............... 53,975
----------
Total........................................ 81,912
----------
Total Mexico................................. 738,118
----------
Peru -- 0.6%
Banking -- 0.6%
3,000 Banco Wiese Ltd., ADR........................... 56,250
----------
Philippines -- 2.8%
Beverages & Tobacco -- 2.8%
45,000 San Miguel Corp................................. 236,066
----------
Singapore -- 7.5%
Banking -- 1.3%
10,000 United Overseas Bank, Ltd....................... 105,624
----------
Broadcasting & Publishing -- 1.3%
6,000 Singapore Press Holdings........................ 109,054
----------
Food & Household Products -- 1.7%
25,000 Cerebos Pacific, Ltd............................ 137,174
----------
Real Estate -- 3.2%
46,000 DBS Land........................................ 136,927
39,000 Straits Steamship Land.......................... 133,745
----------
Total........................................ 270,672
----------
Total Singapore.............................. 622,524
----------
Taiwan -- 3.6%
Appliances & Household Durables -- 0.9%
3,500 **Hocheng Corp., GDR............................ 77,000
----------
</TABLE>

continued
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- CONTINUED
Taiwan -- continued
Multi-Industry -- 2.7%
7,800 Taiwan Fund, Inc............................... $ 225,225
----------
Total Taiwan................................ 302,225
----------
Thailand -- 6.6%
Banking -- 1.5%
12,000 Bangkok Bank................................... 128,102
----------
Real Estate -- 1.2%
6,000 Land & House Company........................... 96,076
----------
Telecommunications -- 3.9%
12,000 Advanced Info Services......................... 166,341
17,000 Telecomasia.................................... 50,120
8,800 United Communications Industries, Ltd.......... 112,870
----------
Total....................................... 329,331
----------
Total Thailand.............................. 553,509
----------
Total Common Stocks (identified cost,
$7,943,308)............................... 6,474,931
----------
*REPURCHASE AGREEMENT -- 22.3%
$1,881,000 State Street Bank and Trust Co., 5.15%,
dated 12/30/94, due 1/3/95................... 1,881,000
----------
Total Investments (identified cost,
$9,824,308)............................... $8,355,931+
----------
</TABLE>

* THE REPURCHASE AGREEMENT IS FULLY COLLATERALIZED BY U.S. GOVERNMENT AND/OR
AGENCY OBLIGATIONS BASED ON MARKET PRICES AT THE DATE OF THE PORTFOLIO.

** RESTRICTIVE SECURITY, WHICH REPRESENTS AN INVESTMENT IN SECURITIES NOT REG-
ISTERED UNDER THE SECURITIES ACT OF 1933. AT THE END OF THE PERIOD THESE
SECU- RITIES AMOUNTED TO 7.9% OF NET ASSETS.

+ THE COST FOR FEDERAL TAX PURPOSES AMOUNTS TO $9,852,663. THE NET UNREALIZED
DEPRECIATION OF INVESTMENTS ON A FEDERAL TAX BASIS AMOUNTS TO $1,496,732,
WHICH IS COMPRISED OF $1,531,403 DEPRECIATION AND $34,671 APPRECIATION AT DE-
CEMBER 31, 1994.

NOTE: THE CATEGORIES OF INVESTMENTS ARE SHOWN AS A PERCENTAGE OF NET ASSETS
($8,423,453) AT DECEMBER 31, 1994.

THE FOLLOWING ABBREVIATIONS ARE USED IN THE PORTFOLIO:

ADR--AMERICAN DEPOSITARY RECEIPT
GDR--GERMAN DEMOCRATIC REPUBLIC (EAST GERMANY)

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

December 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in repurchase agreement ............................. $1,881,000
Investments in securities........................................ 6,474,931
----------
Total investments, at amortized cost and value
(identified cost $9,824,308; tax cost $9,852,663)............... 8,355,931
Cash............................................................. 919
Receivable for Fund shares sold.................................. 110,581
Dividend and interest receivable................................. 8,274
----------
TOTAL ASSETS................................................ 8,475,705
Liabilities:
Payable for Fund shares redeemed................................. $ 21,240
Tax withholding liability........................................ 424
Accrued expenses................................................. 30,588
----------
TOTAL LIABILITIES........................................... 52,252
Net Assets:
for 1,031,670 shares of beneficial interest outstanding.......... $8,423,453
Net Assets Consist of:
Paid-in capital.................................................. $9,991,162
Net unrealized appreciation (depreciation) of investments and
foreign currency transactions................................... (1,468,364)
Accumulated net realized gain (loss) on investments and foreign
currency transactions........................................... (103,062)
Undistributed net investment income.............................. 3,717
----------
TOTAL NET ASSETS............................................ $8,423,453
Net Asset Value:
Class A Investment Shares ($867,049 / 106,190 shares
of beneficial interest outstanding)............................. $8.17
Class B Investment Shares ($1,589,047 / 194,720 shares
of beneficial interest outstanding)............................. $8.16
Class C Investment Shares ($89,236 / 10,933 shares
of beneficial interest outstanding)............................. $8.16
Y Shares ($5,878,121 / 719,827 shares of beneficial
interest outstanding)........................................... $8.17
Offering Price Per Share:
Class A Investment Shares (100/95.25 of $8.17)**................. $8.58
Class B Investment Shares........................................ $8.16
Class C Investment Shares........................................ $8.16
Y Shares......................................................... $8.17
Redemption Proceeds Per Share:
Class A Investment Shares........................................ $8.17
Class B Investment Shares (95/100 of $8.16)***................... $7.75
Class C Investment Shares (99/100 of $8.16)***................... $8.08
Y Shares......................................................... $8.17
</TABLE>

**SEE "WHAT SHARES COST" IN THE PROSPECTUS.

***SEE "REDEEMING SHARES" IN THE PROSPECTUS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Period Ended December 31, 1994*
<TABLE>
<S> <C> <C> <C>
Investment Income:
Dividend income (net of foreign taxes withheld of
$1,015)............................................... $ 20,058
Interest Income....................................... 23,839
-----------
Total income...................................... 43,897
Expenses:
Investment advisory fee...................... $35,047
Administrative personnel and services fees... 15,890
Custodian and portfolio accounting fees...... 30,192
Transfer and dividend disbursing agent
fees and expenses........................... 2,570
Distribution services fee--
Class A Investment Shares................... 505
Distribution services fee--
Class B Investment Shares................... 2,924
Distribution services fee--
Class C Investment Shares................... 163
Shareholder services fee--
Class B Investment Shares................... 975
Shareholder services fee--
Class C Investment Shares................... 54
Legal fees................................... 454
Printing and postage......................... 908
Miscellaneous................................ 1,435
-------
Total expenses............................ 91,117
Deduct--
Waiver of investment advisory fee.... $35,047
Waiver of administrative personnel
and services fee.................... 15,890 50,937
------- -------
Net expenses......................................... 40,180
-----------
Net investment income............................. 3,717
Realized and Unrealized Gain (Loss) on Investments and Foreign
Currency:
Net realized gain (loss) on investment and foreign
currency transactions (identified cost basis)........ ($ 103,062)
Net change in unrealized appreciation (depreciation)
on investments and foreign currency.................. (1,468,364)
-----------
Net realized and unrealized gain (loss) on
investments and
foreign currency................................. (1,571,426)
-----------
Change in net assets resulting from operations.... ($1,567,709)
</TABLE>

*FOR THE PERIOD FROM SEPTEMBER 6, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Period Ended December 31, 1994*
<TABLE>
<S> <C>
1994*
----------
Increase (Decrease) in Net Assets:
Operations
Net investment income............................................ $ 3,717
Net realized gain (loss) on investment and foreign currency
($69,824 net loss as computed for federal tax purposes)......... (103,062)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency................................ (1,468,364)
----------
Change in net assets resulting from operations................... (1,567,709)
----------
Fund Share (Principal) Transactions
Proceeds from sales of shares.................................... 10,115,458
Cost of shares redeemed.......................................... (124,296)
----------
Change in net assets from Fund share transactions................ 9,991,162
----------
Change in net assets............................................... 8,423,453
----------
Net Assets:
Beginning of period.............................................. --
----------
End of period (including undistributed net investment
income of $3,717)............................................... 8,423,453
----------
</TABLE>

*FOR THE PERIOD FROM SEPTEMBER 6, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

FIRST UNION EMERGING MARKETS GROWTH FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Period Ended December 31, 1994
[LOGO]
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
INVESTMENT INVESTMENT INVESTMENT
SHARES SHARES SHARES Y SHARES
------------ ------------ ------------ ------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994* 1994* 1994* 1994*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $10.00 $10.00 $10.00 $10.00
Income from investment
operations
Net investment
income............... (0.00) (0.02) (0.02) 0.01
Net realized and
unrealized gain
(loss) on
investments and
translation of
assets and
liabilities in
foreign currency.... (1.83) (1.82) (1.82) (1.84)
------ ------ ------ ------
Total from investment
operations........... (1.83) (1.84) (1.84) (1.83)
------ ------ ------ ------
Less distributions
Dividends to
shareholders from net
investment income.... (0.00) (0.00) (0.00) (0.00)
------ ------ ------ ------
Net Asset Value, End of
Period.................. $ 8.17 $ 8.16 $ 8.16 $ 8.17
------ ------ ------ ------
Total return+........ (18.30%) (18.40%) (18.40%) (18.30%)
------ ------ ------ ------
Ratios to Average Net
Assets
Expenses............. 1.78%(b) 2.53%(b) 2.53%(b) 1.53%(b)
Net investment
income............... (0.12%)(b) (0.84%)(b) (0.82%)(b) 0.43%(b)
Expense
waiver/reimbursement
(a).................. 2.18%(b) 2.18%(b) 2.18%(b) 2.18%(b)
Supplemental Data
Net assets, end of
period (000 omitted). $867 $1,589 $89 $5,878
Portfolio turnover
rate................. 17% 17% 17% 17%
</TABLE>

* REFLECTS OPERATIONS FOR THE PERIOD FROM SEPTEMBER 6, 1994 (COMMENCEMENT
OF OPERATIONS) TO DECEMBER 31, 1994.

+ BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES
LOAD OR CONTINGENT
DEFERRED SALES CHARGE, IF APPLICABLE.

(A) THIS VOLUNTARY EXPENSE DECREASE IS REFLECTED IN BOTH THE EXPENSE AND NET
INVESTMENT INCOME RATIOS SHOWN ABOVE.

(B) COMPUTED ON AN ANNUALIZED BASIS.

(SEE NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS)

Period Ended December 31, 1994

(1) ORGANIZATION

First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of seventeen portfolios (individually referred to as the
"Fund," or collectively as the "Funds"). The Board of Trustees (the "Trustees")
has established four classes of shares. Effective March 1, 1995, the classes
established by the Trust will be redesignated as follows: Class A Investment
Shares (formerly Class B Investment Shares), Class B Investment Shares (for-
merly Class C Investment Shares), Class C Investment Shares (formerly Class D
Investment Shares), and Y Shares (formerly Trust Shares), for: First Union Bal-
anced Portfolio, First Union Emerging Markets Growth Portfolio, First Union
Fixed Income Portfolio, First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union International Equity Portfolio, First Union Managed Bond Port-
folio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, First
Union Tax Free Money Market Portfolio, First Union Treasury Money Market Port-
folio, First Union U.S. Government Portfolio, First Union Utility Portfolio,
First Union Value Portfolio, and First Union Virginia Municipal Bond Portfolio.
(All references herein and in the financial statements are to the new class
designations.) As of December 31, 1994, each of the Funds was offering the
Class A Investment Shares, Class B Investment Shares, Class C Investment Shares
and Y Shares, except for: First Union Managed Bond Portfolio, which was only
offering Y Shares; First Union Tax Free Money Market Portfolio and First Union
Treasury Money Market Portfolio, which were only offering Class A Investment
Shares and Y Shares; and First Union Florida Municipal Bond Portfolio, First
Union Georgia Municipal Bond Portfolio, First Union High Grade Tax Free Portfo-
lio, First Union Money Market Portfolio, First Union North Carolina Municipal
Bond Portfolio, First Union South Carolina Municipal Bond Portfolio, and First
Union Virginia Municipal Bond Portfolio, which were only offering Class A In-
vestment Shares, Class B Investment Shares and Y Shares.

The assets of each Fund are segregated and a shareholder's interest is limited
to the Fund in which shares are held. The financial statements included herein
are only those of First Union Emerging Markets Growth Portfolio ("Emerging Mar-
kets Growth") and First Union International Equity Portfolio ("International
Equity"). The financial statements of the other Funds are presented separately.

(2) SIGNIFICANT ACCOUNTING POLICIES

A. Investment Valuations--Listed equity securities are valued at the last
sale price reported on national securities exchanges. Unlisted securities
and short-term obligations (and private placement securities) are
generally valued at the prices provided by an independent pricing
service. Short-term securities with remaining maturities of sixty days or
less may be stated at amortized cost, which approximates value.
Investments in other regulated investment companies are valued at net
asset value.

continued

The Funds invest in equity and fixed income securities of non-U.S.
issuers. Although the Funds maintain a diversified investment portfolio,
the political or economic developments within a particular country or
region may have an adverse effect on the ability of foreign domiciled
issuers to meet their obligations. Additionally, political or economic
developments may impact the liquidity and volatility of portfolio
securities and currency holdings.

At December 31, 1994, Emerging Markets Growth was diversified across the
following industries:

Appliance & Household
Durables 0.9%
Banking 12.3
Beverage & Tobacco 4.2
Broadcasting & Publishing 4.1
Building Materials
4.5
Chemicals 3.6

Construction &
Housing 1.4

Forest Products & Paper 1.7%
Healthcare & Cosmetics 1.1
Leisure & Tourism 4.1
Machines & Engineering 1.5
Metals 2.0
Multi-Industry 8.1
Real Estate 4.4
Retail 1.1
Telecommunications 17.4
Utilities 0.7

At December 31, 1994, International Equity was diversified across the
following industries:

Electronics 1.5
Financial Services 0.9
Aerospace & Military
Technology 1.0%
Food & Household
Products 1.6
Appliance &
Household Durables 1.7
Automobiles 6.2
Banking 16.9
Beverages & Tobacco 1.0
Broadcasting & Publishing 1.8
Building Materials 1.4
Business & Public Services 1.2
Chemicals 2.2
Construction &
Housing 2.7
Data Processing &
Reproduction 1.1
Electrical &
Electronics 1.0
Electronic Components 0.2
Energy Equipment &
Services 0.3
Energy Sources 4.8
Financial Services 1.9
Forest Products & Paper 4.5
Food & Household Products 1.7
Gold Mines 0.2
Health & Personal
Care 0.4
Industrial Components 0.7
Insurance 3.9
Japanese City Banks 0.8

Japanese Regional Banks 0.6%
Japanese Trust Banks 0.4
Leisure & Tourism 2.2
Machinery & Engineering 2.4
Merchandising 0.2
Metals--Non-Ferrous 0.5
Metals--Steel 2.6
Miscellaneous Materials 0.9
Multi-Industry 8.7
Real Estate 5.8
Recreation & Other Consumer Goods 1.1
Telecommunications 1.4
Textiles & Apparel 1.1
Transportation--Airlines 1.9
Transportation--Road & Rail 0.3
Transportation--Shipping 0.3
Utilities 1.2
Utilities--Electrical & Gas 4.6
Wholesale & International Trade 1.3

continued

B. Repurchase Agreements--It is the policy of the Funds to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Funds to monitor, on a daily basis, the market value of
each repurchase agreement's underlying collateral to ensure that the value
of collateral at least equals the principal amount of the repurchase
agreement, including accrued interest.

The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Trust's adviser or sub-adviser, to be creditworthy pursuant to
guidelines established by the Trustees. Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Funds could receive less than the repurchase price on the
sale of collateral securities.

D. Federal Taxes--It is the policy of the Funds to comply with the
provisions of the Code applicable to regulated investment companies and to
distribute to shareholders each year substantially all of their taxable
income. Accordingly, no provisions for federal tax are necessary. However,
federal taxes may be imposed on the Funds upon the disposition of certain
investments in Passive Foreign Investment Companies. Withholding taxes on
foreign dividends have been provided for in accordance with the Funds'
understanding of the applicable countries' tax rules and rates.

At December 31, 1994, Emerging Markets Growth, for Federal tax purposes,
had a capital loss carryforward of $69,824, which will reduce the Fund's
taxable income arising from future net realized gain on investments, if
any, to the extent permitted by the Code, and thus will reduce the amount
of distributions to shareholders which would otherwise be necessary to
relieve the Fund of any liability for federal tax. Pursuant to the Code,
such capital loss carryforward will expire in 2002.

E. When-Issued and Delayed Delivery Transactions--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.

F. Deferred Expenses--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from each Fund's commencement date.

continued

G. Forward Commitments--The Funds may enter into forward commitments for
forward foreign currency exchange contracts which are based upon financial
indices at an exchange rate at a future date. Risks may arise upon entering
these contracts from the potential inability of counterparties to meet the
terms of their contracts and from unanticipated movements in foreign
exchange rates. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any
gains or losses are recorded for financial statement purposes as unrealized
until the contract settlement date. These Funds had no forward foreign
currency exchange contracts outstanding at December 31, 1994.

H. Foreign Currency Translation--The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies ("FC") are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian
bank. The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.

Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of FCs, and currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest,
and foreign withholding taxes recorded on the Funds' books, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets
and liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.

I. Restricted Securities--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Board of Trustees. The Funds will not
incur any registration costs upon such resales. The Funds' restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by each Fund's pricing committee. Additional information on each
restricted security held in Emerging Markets Growth at December 31, 1994 is
as follows:

continued
<TABLE>
<CAPTION>
ACQUISITION
SECURITY DATE(S) ACQUISITION COST
-------- ----------- ----------------
<S> <C> <C>
Cementos Paz Del Rio SA (800
shares
@ $23.75, 1,000 shares @
$25.831, 300 shares @
$25.3125, 900 shares @
$23.25).................... 9/23/94-11/4/94 $ 73,350
ITC, Inc., GDR (5,800 shares
@ $28.75).................. 9/6/94 166,750
Indian Rayon & Ind, Inc
(4,800 shares
@ $20.75).................. 11/3/94 99,600
Reliance Industries, Ltd,
GDR (2,300 shares
@ $30.75).................. 9/6/94 169,125
Ranbaxy Laboratories, Ltd,
GDR (3,200 shares @ $21.00,
1,000 shares @ $21.75)..... 10/12/94-11/15/94 88,950
Indian Aluminum Co., Ltd,
GDR (2,000 shares @ $10.50,
1,500 shares @ $11.75)..... 11/9/94-11/15/94 38,625
Samsung Electronics, Ltd,
GDR (1,800 shares
@ $87.00).................. 9/6/94 200,100
Grupo Carso, S.A. de C.V.,
ADR (4,500 shares @ $22.00,
1,500 shares @ $22.75)..... 9/6/94-9/7/94 133,125
Hocheng Corp., GDR (3,500
shares @ $29.75)........... 11/3/94 104,125
</TABLE>

J. Other--Investment transactions are accounted for on the trade date.

(3) SHARES OF BENEFICIAL INTEREST

<TABLE>
<CAPTION>
EMERGING MARKETS GROWTH INTERNATIONAL EQUITY
Period Ended Period Ended
December 31, 1994(a) December 31, 1994(b)
------------------------- ---------------------
Shares Dollars Shares Dollars
----------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Class A Investment Shares:
Shares sold.................. 107,331 $1,026,176 271,932 $2,657,505
Shares issued to shareholders
in payment of dividends
declared.................... -- -- 65 614
Shares redeemed.............. (1,141) (10,403) (4,068) (38,325)
---------- ------------- -------- -----------
Net change resulting from
Class A Investment Share
transactions................ 106,190 $ 1,015,773 267,929 $2,619,794
---------- ------------- -------- -----------
</TABLE>

(a) For the period from September 6, 1994 (commencement of operations) to Decem-
ber 31, 1994.

(b) For the period from September 2, 1994 (commencement of operations) to Decem-
ber 31, 1994.

continued
<TABLE>
<CAPTION>
EMERGING MARKETS GROWTH INTERNATIONAL EQUITY
Period Ended Period Ended
December 31, 1994(a) December 31, 1994(b)
------------------------- ----------------------
Shares Dollars Shares Dollars
----------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Class B Investment Shares:
Shares sold................. 202,997 $1,942,811 601,778 $5,886,527
Shares issued to
shareholders in
payment of dividends
declared................... -- -- 86 802
Shares redeemed............. (8,277) (71,499) (11,910) (113,721)
----------- ------------ --------- -----------
Net change resulting from
Class B Investment Share
transactions............... 194,720 $ 1,871,312 589,954 $5,773,608
----------- ------------ --------- -----------
<CAPTION>
EMERGING MARKETS GROWTH INTERNATIONAL EQUITY
Period Ended Period Ended
December 31, 1994(a) December 31, 1994(b)
------------------------- ----------------------
Shares Dollars Shares Dollars
----------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Class C Investment Shares:
Shares sold................. 10,933 $105,500 17,281 $168,242
Shares issued to
shareholders in
payment of dividends
declared................... -- -- 3 24
Shares redeemed............. -- -- (151) (1,419)
----------- ------------ --------- -----------
Net change resulting from
Class C Investment Share
transactions............... 10,933 $105,500 17,133 $166,847
----------- ------------ --------- -----------
<CAPTION>
EMERGING MARKETS GROWTH INTERNATIONAL EQUITY
Period Ended Period Ended
December 31, 1994(a) December 31, 1994(b)
------------------------- ----------------------
Shares Dollars Shares Dollars
----------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Y Shares:
Shares sold................. 724,945 $7,040,972 2,526,593 $24,820,491
Shares issued to
shareholders in
payment of dividends
declared................... -- -- 739 6,914
Shares redeemed............. (5,118) (42,395) (17,935) (172,512)
----------- ------------ --------- -----------
Net change resulting from Y
Share transactions......... 719,827 6,998,577 2,509,397 24,654,893
----------- ------------ --------- -----------
Net change resulting from
Fund Share transactions.... 1,031,670 $9,991,162 3,384,413 $33,215,142
----------- ------------ --------- -----------
</TABLE>

(a) For the period from September 6, 1994 (commencement of operations) to Decem-
ber 31, 1994.
(b) For the period from September 2, 1994 (commencement of operations) to Decem-
ber 31, 1994.

continued

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

Investment Advisory Fee--First Union National Bank of North Carolina, the
Trust's investment adviser (the "Adviser"), receives for its services an annual
investment advisory fee based on the percentage of each Fund's average daily
net assets (see below). The Adviser may voluntarily choose to waive a portion
of its fee and reimburse certain operating expenses of the Funds. The Adviser
can modify or terminate this voluntary waiver and reimbursement at any time at
its sole discretion.

EMERGING MARKETS GROWTH

<TABLE>
<CAPTION>
ADVISORY AVERAGE AGGREGATE
FEE DAILY NET ASSETS
-------- -----------------------------------
<S> <C>
1.50% on the first $100 million
1.45% on the next $100 million
1.40% on the next $100 million
1.35% on assets in excess of $300 million
</TABLE>

INTERNATIONAL EQUITY

<TABLE>
<CAPTION>
ADVISORY AVERAGE AGGREGATE
FEE DAILY NET ASSETS
-------- -----------------------------------
<S> <C>
0.82% on the first $20 million
0.79% on the next $30 million
0.76% on the next $50 million
0.73% on assets in excess of $100 million
</TABLE>

Under the terms of a sub-advisory agreement between the Adviser and Marvin &
Palmer Associates, Inc., Marvin & Palmer Associates, Inc. receives an annual
fee from the Adviser of Emerging Markets Growth Fund's average daily net assets
(see below).

<TABLE>
<CAPTION>
AVERAGE AGGREGATE
SUB-ADVISORY FEE DAILY NET ASSETS
---------------- -----------------------------------
<S> <C>
1.00% on the first $100 million
0.95% on the next $100 million
0.90% on the next $100 million
0.85% on assets in excess of $300 million
</TABLE>

Under the terms of a sub-advisory agreement between the Adviser and Boston In-
ternational Advisors, Inc., Boston International Advisors, Inc. receives an an-
nual fee from the Adviser of International Equity Fund's average daily net as-
sets (see below).

<TABLE>
<CAPTION>
AVERAGE AGGREGATE
SUB-ADVISORY FEE DAILY NET ASSETS
---------------- -----------------------------------
<S> <C>
0.32% on the first $20 million
0.29% on the next $30 million
0.26% on the next $50 million
0.23% on assets in excess of $100 million
</TABLE>

In addition, Marvin & Palmer Associates, Inc. and Boston International Advi-
sors, Inc. may voluntarily choose to reduce their compensation.

continued

Under the terms of a Shareholder Services Agreement with First Union Brokerage
Services ("FUBS"), the Funds will pay FUBS up to 0.25 of 1% of average net as-
sets of the Funds' Class B and Class C Investment Shares for the period. This
fee is to obtain certain services for shareholders and to maintain the share-
holder accounts.

Organizational Expenses--Organizational expenses incurred by Emerging Markets
Growth and International Equity were borne initially by FAS and are estimated
at $66,635 and $50,000, respectively. The Funds have agreed to reimburse FAS
for the organizational expenses during the five year period following August
24, 1994, the date the Funds first became effective. For the year ended Decem-
ber 31, 1994, Emerging Markets Growth and International Equity paid $1,481 and
$1,111, respectively, pursuant to this agreement.

Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of FAS, FSC, and FServ.

(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
Purchases Sales
----------- ----------
<S> <C> <C>
Emerging Markets Growth................................. $ 9,145,926 $1,104,438
International Equity.................................... $32,610,255 $ 300,558
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT

Year Ended December 31, 1994

The Trustees and Shareholders of
FIRST UNION FUNDS:

First Union International Equity Portfolio--statements of operations and
changes in net assets and the financial highlights for the period from
September 2, 1994 (commencement of operations) to December 31, 1994.

First Union Emerging Markets Growth Portfolio--statements of operations
and changes in net assets and the financial highlights for the period from
September 6, 1994 (commencement of operations) to December 31, 1994.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Union International Equity Portfolio and First Union Emerging Markets Growth
Portfolio as of December 31, 1994, and the results of their operations, changes
in their net assets, and the financial highlights for each of the periods
listed above, in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Pittsburgh, Pennsylvania
February 13, 1995

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS

TRUSTEES:
Edward C. Gonzales
James S. Howell, Chairman
Gerald M. McDonnell
Thomas L. McVerry
William Walt Pettit
Russell A. Salton, III, M.D.
Michael S. Scofield

OFFICERS:
Edward C. Gonzales, President and Treasurer
Joseph S. Machi, Vice President and Assistant Treasurer
Peter J. Germain, Secretary
Mark A. Sheehan, Assistant Secretary

<PAGE>

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

[THIS PAGE INTENTIONALLY LEFT BLANK]
INVESTMENTS IN THE FIRST UNION FUNDS ARE NOT ENDORSED OR GUARANTEED BY FIRST
UNION, ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF FIRST UNION, ARE NOT INSURED OR
OTHERWISE PROTECTED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERN-
MENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.

[LOGO]

Federated Securities Corp., Distributor
535681 (10/PKG.)
G00851-05 (2/95)

Appendix
A
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Fixed Income Fund, Class A
Shares, (the "Fund") adjusted to reflect a sales load of 4.75%
("Fund/4.75%") is represented by a solid line. The Fund adjusted to
reflect a sales load of 4.00% ("Fund/4.00%") is represented by a broken
line, and the Lehman Brothers Intermediate Government/Corporate Bond
Index ("LBIG/CBI") is represented by a dotted line. The line graph is a
visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund/4.75%, the Fund/4.00% and the
LBIG/CBI. The "y" axis reflects the cost of the investment. The "X"
axis reflects computation periods from the Fund's start of performance,
1/31/89, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund/4.75% and the
Fund/4.00%, as compared to the LBIG/CBI; the ending values are $14,511,
$14,625 and $15,966, respectively.

AA
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Fixed Income Fund, Class B
Shares, (the "Fund") adjusted to reflect a contingent deferred sales
charge of 4.00% ("Fund/4.00%") is represented by a solid line. The Fund
adjusted to reflect a contingent deferred sales charge of 3.00%
("Fund/3.00%") is represented by a broken line, and the Lehman Brothers
Intermediate Government/Corporate Bond Index ("LBIG/CBI") is represented
by a dotted line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund/4.00%, the Fund/3.00% and the LBIG/CBI. The "y" axis reflects the
cost of the investment. The "X" axis reflects computation periods from
the Fund's start of performance, 1/25/93, through 12/31/94. The right
margin of the chart reflects the ending value of the hypothetical
investment in the Fund/4.00% and the Fund/3.00%, as compared to the
LBIG/CBI; the ending values are $9,846, $9,943 and $10,466,
respectively.

AAA
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Fixed Income Fund, Class C
Shares, (the "Fund") adjusted to reflect a contingent deferred sales
charge of 1.00% ("Fund/1.00%") is represented by a solid line. The
Lehman Brothers Intermediate Government/Corporate Bond Index
("LBIG/CBI") is represented by a broken line. The line graph is a
visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund/1.00% and the LBIG/CBI. The
"y" axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 9/2/94,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund/1.00% as compared to
the LBIG/CBI; the ending values are $9,770, and $9,897, respectively.

AAAA
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Fixed Income Fund, Y Shares, (the
"Fund") is represented by a solid line. The Lehman Brothers
Intermediate Government/Corporate Bond Index ("LBIG/CBI") is represented
by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund and the LBIG/CBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 13/31/90, through 12/31/94. The right margin of
the chart reflects the ending value of the hypothetical investment in
the Fund as compared to the LBIG/CBI; the ending values are $12,853, and
$13,106, respectively.

B
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Managed Bond Fund, Y Shares, (the
"Fund") is represented by a solid line. The Lehman Brothers
Intermediate Government/Corporate Bond Index ("LBIG/CBI") is represented
by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund and the LBIG/CBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 4/1/91, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund as compared to the LBIG/CBI; the ending values are $12,467, and
$13,038, respectively.

C
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union U.S. Government Bond Fund, Class
A Shares, (the "Fund") adjusted to reflect a sales load of 4.00%
("Fund/4.00%") is represented by a solid line. The Fund adjusted to
reflect a sales load of 4.75% ("Fund/4.75%") is represented by a broken
line, and the Lehman Brothers Intermediate Government Bond Index
("LBIGBI") is represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund/4.00%, the Fund/4.75% and the LBIGBI. The
"y" axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 1/12/93,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund/4.00% and the
Fund/4.75%, as compared to the LBIGBI; the ending values are $9,985,
$9,907, and $10,628, respectively.

CC
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union U.S. Government Bond Fund, Class
B Shares, (the "Fund") adjusted to reflect a contingent deferred sales
charge of 4.00% ("Fund/4.00%") is represented by a solid line. The Fund
adjusted to reflect a contingent deferred sales charge of 3.00%
("Fund/3.00%") is represented by a dotted line, and the Lehman Brothers
Intermediate Government Bond Index ("LBIGBI") is represented by a broken
line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund/4.00%,
the Fund/3.00% and the LBIGBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 1/12/93, through 12/31/94. The right margin of
the chart reflects the ending value of the hypothetical investment in
the Fund/4.00% and the Fund/3.00%, as compared to the LBIGBI; the ending
values are $9,844, $9,986 and $10,628, respectively.

CCC
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union U.S. Government Bond Fund, Class
C Shares, (the "Fund") adjusted to reflect a contingent deferred sales
charge of 1.00% ("Fund/1.00%") is represented by a solid line. The
Lehman Brothers Intermediate Government Bond Index ("LBIGBI") is
represented by a broken line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund/1.00% and the LBIGBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 9/2/94, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund/1.00% as compared to the LBIGBI; the ending values are $9,772, and
$9,907, respectively.

CCCC
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union U.S. Government Fund, Y Shares,
(the "Fund") is represented by a solid line. The Lehman Brothers
Intermediate Government Bond Index ("LBIGBI") is represented by a broken
line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund and the
LBIGBI. The "y" axis reflects the cost of the investment. The "X" axis
reflects computation periods from the Fund's start of performance,
8/25/93, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund as compared to
the LBIGBI; the ending values are $9,754, and $9,880, respectively.

D
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Utility Fund, Class A Shares,
(the "Fund") adjusted to reflect a sales load of 4.75% ("Fund/4.75%") is
represented by a solid line. The Fund adjusted to reflect a sales load
of 4.00% ("Fund/4.00%") is represented by a broken line, and the S&P
Utility Index ("SPUI") is represented by a dotted line. The line graph
is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund/4.75%, the Fund/4.00% and the
SPUI. The "y" axis reflects the cost of the investment. The "X" axis
reflects computation periods from the Fund's start of performance,
1/4/94, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund/4.75% and the
Fund/4.00%, as compared to the SPUI; the ending values are $8,992,
$9,062 and $9,196, respectively.

DD
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Utility Fund (the "Fund"), Class
B Shares, adjusted to reflect a contingent deferred sales charge of
5.00% (the "Fund/5.00%") is represented by a solid line. The Fund
adjusted for a 4.00% contingent deferred sales charge is reflected by a
dashed line. The S&P Utility Index ("SPUI") is represented by a dotted
line The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund/5.00%,
the Fund/4.00%, and the SPUI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 1/4/94, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund/5.00%, the Fund/4.00%, and the SPUI; the ending values are $8,907,
$9,001, and $9,196, respectively.

DDD
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Utility Fund, Class C Shares,
(the "Fund") adjusted to reflect a contingent deferred sales charge of
1.00% ("Fund/1.00%") is represented by a solid line. The S&P Utility
Index ("SPUI") is represented by a broken line. The line graph is a
visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund/1.00% and the SPUI. The "y"
axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 9/2/94,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund/1.00% as compared to
the SPUI; the ending values are $9,680, and $9,738, respectively.

DDDD
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Utility Fund, Y Shares, (the
"Fund") is represented by a solid line. The S&P Utility Index ("SPUI")
is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and the SPUI. The "y" axis reflects the
cost of the investment. The "X" axis reflects computation periods from
the Fund's start of performance, 2/28/94, through 12/31/94. The right
margin of the chart reflects the ending value of the hypothetical
investment in the Fund as compared to the SPUI; the ending values are
$9,845, and $9,679, respectively.

E
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Balanced Fund (the "Fund"), Class
A Shares, adjusted to reflect a contingent deferred sales charge of
4.75% (the "Fund/4.75%") is represented by a solid line. The Fund
adjusted for a 4.00% contingent deferred sales charge( the "Fund/4.00%")
is reflected by a dashed line. The S&P 500 Index is represented by
hyphens. The Lehman Brother Government/Corporate Bond Index ("LBG/CBI")
is represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund/4.75%, the Fund/4.00%, the S&P 500, and the
LB/CBI. The "y" axis reflects the cost of the investment. The "X" axis
reflects computation periods from the Fund's start of performance,
6/6/91, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund/4.75%, the
Fund/4.00%, the S&P 500, and the and the LBG/CBI; the ending values are
$12,411 and $12,476, $13,073, and $12,829, respectively.

EE
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Balanced Fund (the "Fund"), Class
B Shares, adjusted to reflect a contingent deferred sales charge of
3.00% (the "Fund/3.00%") is represented by a solid line. The Fund
adjusted for a 4.00% contingent deferred sales charge is reflected by a
dashed line. The S&P 500 Index is represented by hyphens. The Lehman
Brother Governtment/Corporate Bond Index ("LBG/CBI") is represented by a
dotted line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund/4.00%,
the Fund/3.00%, the S&P 500, and the and the LBG/CBI. The "y" axis
reflects the cost of the investment. The "X" axis reflects computation
periods from the Fund's start of performance, 1/25/93, through 12/31/94.
The right margin of the chart reflects the ending value of the
hypothetical investment in the Fund/4.00%, the Fund/3.00%, the S&P 500,
and the and the LBG/CBI; the ending values are $10,123 and $10,227,
$11,046, and $10,487, respectively.

EEE
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Balanced Fund (the "Fund"), Class
C Shares, adjusted to reflect a contingent deferred sales charge of
1.00% (the "Fund/1.00%") is represented by a solid line. The S&P 500
Index is represented by hyphens. The Lehman Brother
Governtment/Corporate Bond Index ("LBG/CBI") is represented by a dotted
line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund/1.00%,
the S&P 500, and the LBG/CBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 9/2/94, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund/1.00%, the S&P 500, and the and the LBG/CBI; the ending values are
$9,547 and $9,754, and $9,885, respectively.

EEEE
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Balanced Fund, Y Shares, (the
"Fund") is represented by a solid line. The S&P 500 Index is
represented by hyphens. The Lehman Brother Governtment/Corporate Bond
Index ("LBG/CBI") is represented by a dotted line. The line graph is a
visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund, the S&P 500, and the LBG/CBI.
The "y" axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 4/1/91,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund, the S&P 500, and the
and the LBG/CBI; the ending values are $13,480 and 13,655, and $13,038,
respectively.

F
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Value Fund, Class A Shares,
adjusted to reflect a sales load of 4.75% (the "Fund/4.75%") is
represented by a dashed line. First Union Value Fund, Class A Shares,
adjusted to reflect a sales load of 4.00% (the "Fund/4.00%") is
represented by a solid line. The S&P 500 Index is represented by a
dotted line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund/4.75%,
the Fund/4.00%, and the S&P 500 Index. The "y" axis reflects the cost
of the investment. The "X" axis reflects computation periods from the
Fund's start of performance, 4/12/85, through 12/31/94. The right
margin of the chart reflects the ending value of the hypothetical
investment in the Fund/4.75%, the Fund/4.00%, and the S&P 500 Index; the
ending values are $27,713, $27,928, and $34,995, respectively.

FF
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Value Fund, Class B Shares,
adjusted to reflect a contingent deferred sales charge of 4.00% (the
"Fund/4.00%") is represented by a dashed line. First Union Value Fund,
Class B Shares, adjusted to reflect a contingent deferred sales charge
of 3.00% (the "Fund/3.00%") is represented by a solid line. The S&P 500
Index is represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund/4.00%, the Fund/3.00%, and the S&P 500
Index. The "y" axis reflects the cost of the investment. The "X" axis
reflects computation periods from the Fund's start of performance,
1/25/93 through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund/4.00%, the
Fund/3.00%, and the S&P 500 Index; the ending values are $10,616,
$10,723, and $11,046, respectively.

FFF
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Value Fund, Class C Shares,
adjusted to reflect a contingent deferred sales charge of 1.00% (the
"Fund") is represented by a solid line. The S&P 500 Index is
represented by a dashed line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and the S&P 500 Index. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 9/2/94, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund and the S&P 500 Index; the ending values are $9,560, and $9,754,
respectively.

FFFF
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Value Fund, Y Shares, (the
"Fund") is represented by a solid line. The S&P 500 Index is
represented by a broken line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and the S&P 500 Index. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 12/31/90, through 12/31/94. The right margin of
the chart reflects the ending value of the hypothetical investment in
the Fund as compared to the S&P 500 Index ; the ending values are
$15,210 and $15,648 respectively.

G
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Florida Municipal Bond Fund,
Class A Shares, (the "Fund") adjusted to reflect a sales load of 4.00%
("Fund/4.00%") is represented by a solid line. The Fund adjusted to
reflect a sales load of 4.75% ("Fund/4.75%") is represented by a broken
line, and the Lehman Brothers Florida Municipal Bond Index ("LBFMBI") is
represented by a dotted line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund/4.00%, the Fund/4.75% and the LBFMBI. The "y" axis reflects
the cost of the investment. The "X" axis reflects computation periods
from the Fund's start of performance, 7/5/93, through 12/31/94. The
right margin of the chart reflects the ending value of the hypothetical
investment in the Fund/4.00% and the Fund/4.75%, as compared to the
LBFMBI; the ending values are $9,213, $9,142, and $9,927, respectively.

GG
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Florida Municipal Bond Fund,
Class B Shares, (the "Fund") adjusted to reflect a contingent deferred
sales charge of 4.00% ("Fund/4.00%") is represented by a solid line.
The Fund adjusted to reflect a contingent deferred sales charge of 3.00%
("Fund/3.00%") is represented by a broken line, and the Lehman Brothers
Florida Municipal Bond Index ("LBFMBI") is represented by a dotted line.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 purchase in the Fund/4.00%, the
Fund/3.00% and the LBFMBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 7/1/93, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund/4.00% and the Fund/3.00%, as compared to the LBFMBI; the ending
values are $9,139, $9,235 and $9,927, respectively.

GGG
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Florida Municipal Bond Fund, Y
Shares, (the "Fund") is represented by a solid line. The Lehman
Brothers Florida Municipal Bond Index ("LBFMBI") is represented by a
broken line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
the LBFMBI. The "y" axis reflects the cost of the investment. The "X"
axis reflects computation periods from the Fund's start of performance,
2/28/94, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund as compared to
the LBFMBI; the ending values are $9,346, and $9,631, respectively.

H
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Georgia Municipal Bond Fund,
Class A Shares, (the "Fund") adjusted to reflect a sales load of 4.00%
("Fund/4.00%") is represented by a solid line. The Fund adjusted to
reflect a sales load of 4.75% ("Fund/4.75%") is represented by a broken
line, and the Lehman Brothers Georgia Municipal Bond Index ("LBGMBI") is
represented by a dotted line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund/4.00%, the Fund/4.75% and the LBGMBI. The "y" axis reflects
the cost of the investment. The "X" axis reflects computation periods
from the Fund's start of performance, 7/1/93, through 12/31/94. The
right margin of the chart reflects the ending value of the hypothetical
investment in the Fund/4.00% and the Fund/4.75%, as compared to the
LBGMBI; the ending values are $9,018, $8,947 and $9,852, respectively.

HH
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Georgia Municipal Bond Fund,
Class B Shares, (the "Fund") adjusted to reflect a contingent deferred
sales charge of 4.00% ("Fund/4.00%") is represented by a solid line.
The Fund adjusted to reflect a contingent deferred sales charge of 3.00%
("Fund/3.00%") is represented by a broken line, and the Lehman Brothers
Georgia Municipal Bond Index ("LBGMBI") is represented by a dotted line.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 purchase in the Fund/4.00%, the
Fund/3.00% and the LBGMBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 7/1/93, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund/4.00% and the Fund/3.00%, as compared to the LBGMBI; the ending
values are $8,949, $9,045 and $9,852, respectively.

HHH
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Georgia Municipal Bond Fund, Y
Shares, (the "Fund") is represented by a solid line. The Lehman
Brothers Georgia Municipal Bond Index ("LBGMBI") is represented by a
broken line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
the LBGMBI. The "y" axis reflects the cost of the investment. The "X"
axis reflects computation periods from the Fund's start of performance,
2/28/94, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund as compared to
the LBGMBI; the ending values are $9,313, and $9,588, respectively.

I
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union High Grade Tax Free Fund, Class A
Shares, (the "Fund") adjusted to reflect a sales load of 4.00%
("Fund/4.00%") is represented by a solid line. The Fund adjusted to
reflect a sales load of 4.75% ("Fund/4.75%") is represented by a broken
line, and the Lehman Brothers Insured Bond Index ("LBIBI") is
represented by a dotted line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund/4.00%, the Fund/4.75% and the LBIBI. The "y" axis reflects the
cost of the investment. The "X" axis reflects computation periods from
the Fund's start of performance, 2/25/92, through 12/31/94. The right
margin of the chart reflects the ending value of the hypothetical
investment in the Fund/4.00% and the Fund/4.75%, as compared to the
LBIBI; the ending values are $10,974, $10,887, and $11,587,
respectively.

II
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union High Grade Tax Free Fund, Class B
Shares, (the "Fund") adjusted to reflect a contingent deferred sales
charge of 4.00% ("Fund/4.00%") is represented by a solid line. The Fund
adjusted to reflect a contingent deferred sales charge of 3.00%
("Fund/3.00%") is represented by a dotted line, and the Lehman Brothers
Insured Bond Index ("LBIBI") is represented by a broken line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund/4.00%, the Fund/3.00% and the
LBIBI. The "y" axis reflects the cost of the investment. The "X" axis
reflects computation periods from the Fund's start of performance,
1/12/93, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund/4.00% and the
Fund/3.00%, as compared to the LBIBI; the ending values are $10,011,
$9,906 and $10,627, respectively.

III
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union High Grade Tax Free Fund, Y
Shares, (the "Fund") is represented by a solid line. The Lehman
Brothers Insured Bond Index ("LBIBI") is represented by a broken line.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 purchase in the Fund and the LBIBI. The
"y" axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 2/28/94,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund as compared to the
LBIBI; the ending values are $9,369, and $9,563, respectively.

J
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union North Carolina Municipal Bond
Fund, Class A Shares, (the "Fund") adjusted to reflect a sales load of
4.00% ("Fund/4.00%") is represented by a solid line. The Fund adjusted
to reflect a sales load of 4.75% ("Fund/4.75%") is represented by a
broken line, and the Lehman Brothers State General Obligations Bond
Index ("LBSGOBI") is represented by a dotted line. The line graph is a
visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund/4.00%, the Fund/4.75% and the
LBSGOBI. The "y" axis reflects the cost of the investment. The "X"
axis reflects computation periods from the Fund's start of performance,
1/12/93, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund/4.00% and the
Fund/4.75%, as compared to the LBSGOBI; the ending values are $9,709,
$9,633, and $10,642, respectively.

JJ
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union North Carolina Municipal Bond
Fund, Class B Shares, (the "Fund") adjusted to reflect a contingent
deferred sales charge of 4.00% ("Fund/4.00%") is represented by a solid
line. The Fund adjusted to reflect a contingent deferred sales charge
of 3.00% ("Fund/3.00%") is represented by a dotted line, and the Lehman
Brothers State General Obligations Bond Index ("LBSGOBI") is represented
by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund/4.00%, the Fund/3.00% and the LBSGOBI. The "y" axis reflects the
cost of the investment. The "X" axis reflects computation periods from
the Fund's start of performance, 1/12/93, through 12/31/94. The right
margin of the chart reflects the ending value of the hypothetical
investment in the Fund/4.00% and the Fund/3.00%, as compared to the
LBSGOBI; the ending values are $9,608, $9,717 and $10,642, respectively.

JJJ
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union North Carolina Municipal Bond
Fund, Y Shares, (the "Fund") is represented by a solid line. The Lehman
Brothers State General Obligations Bond Index ("LBSGOBI") is represented
by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund and the LBSGOBI. The "y" axis reflects the cost of the investment.
The "X" axis reflects computation periods from the Fund's start of
performance, 1/12/93, through 12/31/94. The right margin of the chart
reflects the ending value of the hypothetical investment in the Fund as
compared to the LBSGOBI; the ending values are $9,297, and $9,689,
respectively.

K
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union South Carolina Municipal Bond
Fund, Class A Shares, (the "Fund") adjusted to reflect a sales load of
4.00% ("Fund/4.00%") is represented by a solid line. The Fund adjusted
to reflect a sales load of 4.75% ("Fund/4.75%") is represented by a
broken line, and the Lehman Brothers South Carolina Municipal Bond Index
("LBSCMBI") is represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund/4.00%, the Fund/4.75% and the LBSCMBI. The
"y" axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 1/3/94,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund/4.00% and the
Fund/4.75%, as compared to the LBSCMBI; the ending values are $8,636,
$8,705, and $9,350, respectively.

KK
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union South Carolina Municipal Bond
Fund, Class B Shares, (the "Fund") adjusted to reflect a contingent
deferred sales charge of 5.00% ("Fund/5.00%") is represented by a solid
line. The Fund adjusted to reflect a contingent deferred sales charge
of 4.00% ("Fund/4.00%") is represented by a dotted line, and the Lehman
Brothers South Carolina Municipal Bond Index ("LBSCMBI") is represented
by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund/5.00%, the Fund/4.00% and the LBSCMBI. The "y" axis reflects the
cost of the investment. The "X" axis reflects computation periods from
the Fund's start of performance, 1/3/94, through 12/31/94. The right
margin of the chart reflects the ending value of the hypothetical
investment in the Fund/5.00% and the Fund/4.00%, as compared to the
LBSCMBI; the ending values are $8,569, $8,663 and $9,350, respectively.

KKK
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union South Carolina Municipal Bond
Fund, Y Shares, (the "Fund") is represented by a solid line. The Lehman
Brothers South Carolina Municipal Bond Index ("LBSCMBI") is represented
by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund and the LBSCMBI. The "y" axis reflects the cost of the investment.
The "X" axis reflects computation periods from the Fund's start of
performance, 2/28/94, through 12/31/94. The right margin of the chart
reflects the ending value of the hypothetical investment in the Fund as
compared to the LBSCMBI; the ending values are $9,286, and $9,546,
respectively.

L
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Virginia Municipal Bond Fund,
Class A Shares, (the "Fund") adjusted to reflect a sales load of 4.00%
("Fund/4.00%") is represented by a solid line. The Fund adjusted to
reflect a sales load of 4.75% ("Fund/4.75%") is represented by a broken
line, and the Lehman Brothers Virginia Municipal Bond Index ("LBVMBI")
is represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund/4.00%, the Fund/4.75% and the LBVMBI. The
"y" axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 7/7/93,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund/4.00% and the
Fund/4.75%, as compared to the LBVMBI; the ending values are $9,115,
$9,045 and $9,979, respectively.

LL
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Virginia Municipal Bond Fund,
Class B Shares, (the "Fund") adjusted to reflect a contingent deferred
sales charge of 4.00% ("Fund/4.00%") is represented by a solid line.
The Fund adjusted to reflect a contingent deferred sales charge of 3.00%
("Fund/3.00%") is represented by a dotted line, and the Lehman Brothers
Virginia Municipal Bond Index ("LBVMBI") is represented by a broken
line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund/4.00%,
the Fund/3.00% and the LBVMBI. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 7/1/93, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund/4.00% and the Fund/3.00%, as compared to the LBVMBI; the ending
values are $9,049, $9,134 and $9,979, respectively.

LLL
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Virginia Municipal Bond Fund, Y
Shares, (the "Fund") is represented by a solid line. The Lehman
Brothers Virginia Municipal Bond Index ("LBVMBI") is represented by a
broken line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
the LBSCMBI. The "y" axis reflects the cost of the investment. The "X"
axis reflects computation periods from the Fund's start of performance,
2/28/94, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund as compared to
the LBVMBI; the ending values are $9,418, and $9,698, respectively.

M
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union International Equity Fund, Class
A Shares, adjusted to reflect a sales load of 4.75% (the "Fund") is
represented by a solid line, and the Morgan Stanley, Europe, Australia,
and Far East Index ("EAFE Index") is represented by a broken line. The
line graph is a visual representation of a comparison of change in value
of a hypothetical $10,000 purchase in the Fund and the EAFE Index. The
"y" axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 9/2/94,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund as compared to the EAFE
Index; the ending values are $9,041 and $9,586, respectively.

MM
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union International Equity Fund, Class
B Shares, adjusted to reflect a contingent deferred sales charge of
5.00% (the "Fund") is represented by a solid line, and the Morgan
Stanley, Europe, Australia, and Far East Index ("EAFE Index") is
represented by a broken line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and the EAFE Index. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 9/2/94, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund as compared to the EAFE Index; the ending values are $9,011 and
$9,586, respectively.

MMM
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union International Equity Fund, Class
C Shares, adjusted to reflect a contingent deferred sales charge of
1.00% (the "Fund") is represented by a solid line, and the Morgan
Stanley, Europe, Australia, and Far East Index ("EAFE Index") is
represented by a broken line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and the EAFE Index. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 9/2/94, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund as compared to the EAFE Index; the ending values are $9,391 and
$9,586, respectively.

MMMM
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union International Equity Fund, Y
Shares, (the "Fund") is represented by a solid line, and the Morgan
Stanley, Europe, Australia, and Far East Index ("EAFE Index") is
represented by a broken line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and the EAFE Index. The "y" axis reflects the cost of the
investment. The "X" axis reflects computation periods from the Fund's
start of performance, 9/2/94, through 12/31/94. The right margin of the
chart reflects the ending value of the hypothetical investment in the
Fund as compared to the EAFE Index; the ending values are $9,498 and
$9,586, respectively.

N
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Emerging Markets Growth Fund,
Class A Shares, adjusted to reflect a sales load of 4.75% (the "Fund")
is represented by a solid line, and the Morgan Stanley, Emerging Markets
Index ("MSEM Index") is represented by a broken line. The line graph is
a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and the MSEM Index. The "y"
axis reflects the cost of the investment. The "X" axis reflects
computation periods from the Fund's start of performance, 9/6/94,
through 12/31/94. The right margin of the chart reflects the ending
value of the hypothetical investment in the Fund as compared to the MSEM
Index; the ending values are $7,782 and $9,054, respectively.

NN
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Emerging Markets Growth Fund,
Class B Shares, adjusted to reflect a contingent deferred sales charge
of 5.00% (the "Fund") is represented by a solid line, and the Morgan
Stanley, Emerging Markets Index ("MSEM Index") is represented by a
broken line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
the MSEM Index. The "y" axis reflects the cost of the investment. The
"X" axis reflects computation periods from the Fund's start of
performance, 9/6/94, through 12/31/94. The right margin of the chart
reflects the ending value of the hypothetical investment in the Fund as
compared to the MSEM Index; the ending values are $7,750 and $9,054,
respectively.

NNN
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Emerging Markets Growth Fund,
Class C Shares, adjusted to reflect a contingent deferred sales charge
of 1.00% (the "Fund") is represented by a solid line, and the Morgan
Stanley, Emerging Markets Index ("MSEMIndex") is represented by a broken
line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund and the
MSEM Index. The "y" axis reflects the cost of the investment. The "X"
axis reflects computation periods from the Fund's start of performance,
9/6/94, through 12/31/94. The right margin of the chart reflects the
ending value of the hypothetical investment in the Fund as compared to
the MSEM Index; the ending values are $8,080 and $9,054, respectively.

NNN
The graphic presentation here displayed consists of a legend in the
upper left quadrant of the chart indicating the components of the
corresponding line graph. First Union Emerging Markets Growth Fund, Y
Shares, (the "Fund") is represented by a solid line, and the Morgan
Stanley, Emerging Markets Index ("MSEM Index") is represented by a
broken line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
the MSEM Index. The "y" axis reflects the cost of the investment. The
"X" axis reflects computation periods from the Fund's start of
performance, 9/6/94, through 12/31/94. The right margin of the chart
reflects the ending value of the hypothetical investment in the Fund as
compared to the MSEM Index; the ending values are $8,170 and $9,054,
respectively.