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<SEC-DOCUMENT>0000922423-96-000330.txt : 19960718
<SEC-HEADER>0000922423-96-000330.hdr.sgml : 19960718
ACCESSION NUMBER:		0000922423-96-000330
CONFORMED SUBMISSION TYPE:	497
PUBLIC DOCUMENT COUNT:		1
FILED AS OF DATE:		19960717
SROS:			NONE

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			CALIFORNIA MUNI FUND
		CENTRAL INDEX KEY:			0000715756
		STANDARD INDUSTRIAL CLASSIFICATION:	 []
		IRS NUMBER:				136828244
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		497
		SEC ACT:		1933 Act
		SEC FILE NUMBER:	002-82143
		FILM NUMBER:		96595834

	BUSINESS ADDRESS:	
		STREET 1:		90 WASHINGTON ST - 19TH FL
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10006
		BUSINESS PHONE:		2126353005
</SEC-HEADER>
<DOCUMENT>
<TYPE>497
<SEQUENCE>1
<DESCRIPTION>STATEMENT OF ADDITIONAL INFORMATION
<TEXT>

                                                                     Rule 497(c)
                                                       Registration No.: 2-82143
                       STATEMENT OF ADDITIONAL INFORMATION




                            THE CALIFORNIA MUNI FUND



                                  P.O. Box 1013
                              Bowling Green Station
                          New York, New York 10274-1013
                                 (800) 322-6864







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







     THIS STATEMENT IS DATED APRIL 25, 1996 AS SUPPLEMENTED ON JULY 17, 1996
           AND SUPPLEMENTS THE FUND'S PROSPECTUS DATED APRIL 25, 1996.










<PAGE>




                                TABLE OF CONTENTS

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

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

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

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

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

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

DISTRIBUTION PLAN...........................................................  14

CALCULATION OF YIELD........................................................  16


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


TAXES.......................................................................  20

PORTFOLIO TRANSACTIONS......................................................  27

ADDITIONAL INFORMATION ABOUT THE ORGANIZATION
  OF THE FUND...............................................................  28

INFORMATION WITH RESPECT TO CALIFORNIA STATE
  AND MUNICIPAL FINANCES....................................................  29


OTHER INFORMATION...........................................................  45

FINANCIAL STATEMENTS........................................................ 45


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



                                       -2-



<PAGE>



                                  INTRODUCTION

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


                        INVESTMENT OBJECTIVE AND POLICIES


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


                                       -3-



<PAGE>



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

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

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


                             INVESTMENT RESTRICTIONS


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

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

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

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


                                       -4-



<PAGE>




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

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

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

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

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

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

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

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

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

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

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


                                       -5-



<PAGE>



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

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


            ADDITIONAL INFORMATION RELATING TO MUNICIPAL OBLIGATIONS


MUNICIPAL BONDS

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

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


                                       -6-



<PAGE>



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


MUNICIPAL NOTES

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


VARIABLE RATE INSTRUMENTS

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


                                       -7-



<PAGE>



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


                       ADDITIONAL INFORMATION RELATING TO
                             LOWER RATED SECURITIES


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


                                       -8-



<PAGE>



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

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


                                       -9-



<PAGE>



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

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

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

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


                             MANAGEMENT OF THE FUND


TRUSTEES AND OFFICERS

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



                                      -10-



<PAGE>



                  James C.  Armstrong:  Trustee of the Fund. Mr.  Armstrong is a
partner  in  Armstrong/Seltzer  Communications  Inc.,  a  New  York  management,
consulting and public relations firm. He was formerly Executive Director, Global
Public  Affairs  Institute  at  New  York  University  and  Professor,  Bell  of
Pennsylvania Chair in Telecommunications, Temple University, and is a management
consultant.  He was with American  Telephone and Telegraph Company for 15 years.
His last  position  with  AT&T was  Director,  Corporate  Policy  Analysis.  Mr.
Armstrong  previously held positions at the Institute for Defense Analysis,  the
Office of the  Postmaster  General,  and on the  faculty  of the  University  of
Maryland.  He  has  been a  consultant  to  government,  academic  and  business
organizations,  and has served on various  government-industry  task  forces and
committees.  Mr.  Armstrong was an Officer in the United States Navy and holds a
Ph.D. in nuclear  physics.  Mr.  Armstrong's  address is 51 Mt.  Pleasant  Road,
Morristown, New Jersey 07960.

                  James  A.  Bowers:  Trustee  of  the  Fund.  Mr.  Bowers  is a
consultant for Prototypes  (formerly,  Director of Finance and  Administration),
The American Telephone and Telegraph Company, The RAND Corporation and CogniTech
Services Corporation.  He was employed at AT&T for 23 years. His latest position
with AT&T was in the  Treasury  Department  as District  Manager-Securities  and
Exchange Commission  Reporting.  Mr. Bowers holds Bachelor of Science and Master
of Arts  degrees in Economics  from Florida  Atlantic  University.  Mr.  Bowers'
address is 60 East Eighth Street, New York, N.Y. 10003.



                  Clark L. Bullock: Trustee of the Fund. Mr. Bullock is Chairman
of the Board of Shelter Rock Investors  Services  Corp., a  privately-held,  New
York-based  investment company. Mr. Bullock received a Masters of Science degree
in Mathematical  Economics from Purdue University in 1972 and a Bachelor of Arts
degree in International  Relations from the University of Arizona. Mr. Bullock's
address is c/o Shelter Rock Investors,  150 Hopper Avenue,  Waldwick, New Jersey
07463.

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

                  *Vincent J. Malanga:  Chairman of the Board,  Chief  Executive
Officer, President and Treasurer of the Fund, New York


                                      -11-



<PAGE>




Muni Fund,  Inc., and  Fundamental  Fixed Income Fund. Mr. Malanga is President,
Treasurer and a Director of Fundamental Portfolio Advisors, Inc., Executive Vice
President,  Secretary and a Director of  Fundamental  Service  Corporation,  and
President,  LaSalle Economics Inc., an economic  consulting firm. Mr. Malanga is
Vice President, Secretary and a 50% shareholder of LaSalle Portfolio Management,
Inc.,  the  general  partner  of both  LPM  Financial  Futures  Fund I,  Limited
Partnership and LPM Equities Fund Limited  Parntership.  Prior thereto, he was a
Vice  President  and Senior  Economist at A. Gary  Shilling & Company,  Inc., an
economic  consulting and brokerage firm. He previously served as an Economist at
White, Weld & Co. (an investment  banking and brokerage firm) and so served from
1976 to 1978.  Prior thereto,  Mr. Malanga,  who holds a Ph.D. in Economics from
Fordham  University,  was an Economist at the Federal  Reserve Bank of New York.
Mr. Malanga's  address is 90 Washington  Street,  19th Floor, New York, New York
10006.

                  David P.  Wieder:  Vice  President  of the Fund,  Secretary of
Fundamental   Portfolio  Advisors,   Inc.,  and  President  and  a  Director  of
Fundamental  Shareholder  Services,  Inc. Mr. Wieder holds a Bachelor of Science
degree  in  Economics  from  Cornell  University.  Mr.  Wieder's  address  is 90
Washington Street, 19th Floor, New York, New York 10006.



                  Carole  M.  Laible:  Secretary  of  the  Fund.  Treasurer  and
Secretary of Fundamental  Shareholders Services, Inc. She was formerly a General
Service  Manager  for  McGladrey  & Pullen.  Ms.  Laible  received a Bachelor of
Science degree from St. John's  University in 1986. Ms.  Laible's  address is 90
Washington Street, 19th Floor, New York, New York 10006.

                  All  of the  Trustees  of  the  Fund  are  also  Directors  of
Fundamental  Funds, Inc. and Trustees of Fundamental  Fixed-Income  Fund. All of
the officers of the Fund hold similar offices with Fundamental  Funds,  Inc. and
Fundamental Fixed-Income Fund.

                  For services and  attendance at board meetings and meetings of
committees  which  are  common to the Fund,  Fundamental  Fixed-Income  Fund and
Fundamental  Funds,  Inc.  (other  affiliated  mutual funds for which the Fund's
investment manager acts as the investment adviser), each Trustee of the Fund who
is not affiliated with the Fund's investment  manager is compensated at the rate
of $6,500 per quarter  prorated among the three funds based on their  respective
average net assets.  Each such Trustee is also reimbursed by the three funds, on
the same basis, for actual out-of-pocket  expenses relating to his attendance at
meetings.  For the fiscal year ended December 31, 1995, Trustees' fees totalling
$5,504 were paid by the Fund to the Trustees as a group.  As of the date of this
Statement of Additional Information, Trustees and



                                      -12-



<PAGE>



officers  of the Fund as a group owned  beneficially  less than 1% of the Fund's
outstanding shares.



                                      -13-



<PAGE>



                               COMPENSATION TABLE

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

                        AGGREGATE COMPENSATION FROM FUND



                                                                 AGGREGATE
                                                                 COMPENSATION
                                                                 PAID BY ALL
                                        HIGH-           U.S.     FUNDS MANAGED
                                        YIELD  TAX-     GOV'T    BY
                               CALI-    MUNI-  FREE     STRA-    FUNDAMENTAL
                               FORNIA   CIPAL  MONEY    TEGIC    PORTFOLIO
NAME                 NY MUNI   MUNI     BOND   MARKET   INCOME   ADVISORS, INC.
- ----                 -------   ----     ----   ------   ------   --------------


James C. Armstrong   $18,333   $1,376   $117   $4,518   $1,656   $26,000

James A. Bowers       18,333    1,376    117    4,518    1,656    26,000

Clark L. Bullock      18,333    1,376    117    4,518    1,656    26,000

L. Greg Ferrone       18,333    1,376    117    4,518    1,656    26,000









INVESTMENT MANAGEMENT

                  Pursuant to a proposal to externalize the portfolio management
of the Fund,  the Fund's  Board of  Trustees  on October 1, 1986,  approved  the
appointment of Fundamental Portfolio Advisors, Inc. as investment manager of the
Fund.  At a meeting  of  shareholders  of the Fund  held on  January  26,  1987,
shareholders  approved a Management  Agreement (the "Original  Agreement")  with
Fundamental  Portfolio  Advisors,   Inc.  (the  "Manager").   A  new  Management
Agreement,  which is substantially  identical to the Original  Agreement and was
adopted  by the  Board of  Trustees  on  November  10,  1988,  was  approved  by
shareholders  on April 27th,  1989.  The Board of  Trustees  last  approved  the
Management  Agreement on October 19, 1994.  Vincent J. Malanga,  Chairman of the
Board,  Chief  Executive  Officer,  President and Treasurer of the Fund, and Dr.
Lance M. Brofman, Chief Portfolio Strategist of the Fund, each own approximately
48.5% of the outstanding shares of the voting capital stock of the Manager.

                  The Manager has agreed that it will notify the Fund's Board of
Trustees before engaging any new clients of material


                                      -14-



<PAGE>



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

TRANSFER AGENT


                  Fundamental Shareholder Services, Inc., P.O. Box 1013, Bowling
Green  Station,  New York,  New York  10274-1013,  an affiliate  of  Fundamental
Portfolio  Advisors,  Inc. and  Fundamental  Service  Corporation,  performs all
services in  connection  with the  transfer  of shares of the Fund,  acts as its
dividend  disbursing  agent,  and  as  administrator  of  the  exchange,   check
redemption, telephone redemption and expedited redemption privileges of the Fund
pursuant  to a Transfer  Agency and  Service  Agreement  dated as of February 1,
1990.  During the fiscal year ended December 31, 1995, fees paid to the Transfer
Agent by the Fund amounted to $27,231.



                                DISTRIBUTION PLAN


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

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


                                      -15-



<PAGE>



establish  accounts or sub-accounts  on behalf of their customers  ("Shareholder
Service Agents").

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

                  On  April  16,  1987,  the  Board  of  Trustees  of the  Fund,
including  a  majority  of the  "disinterested"  Trustees  who have no direct or
indirect  financial  interest  in the  operation  of the Plan or any  agreements
relating  thereto,   authorized  the  Fund  to  enter  into  an  agreement  with
Fundamental Service  Corporation,  a Delaware  corporation,  under the Plan. The
agreement  provides  that the  Fund may pay the  usual  and  customary  agency's
commission to  Fundamental  Service  Corporation  for producing and placing Fund
advertising  in  newspapers,  magazines  or  other  periodicals,  or on radio or
television.  In addition to the foregoing,  the Fund may pay Fundamental Service
Corporation  for  marketing  research  and  promotional  services   specifically
relating to the distribution of Fund shares,  including  employment  expenses of
personnel  primarily  responsible  for responding to inquiries from  prospective
investors.  The  following  persons own of record 5% or more of the  outstanding
shares of voting  stock of  Fundamental  Service  Corporation:  Mr.  Vincent  J.
Malanga (43.71%);  Mr. Thomas W. Buckingham  (43.71%);  and Dr. Lance M. Brofman
(9.90%).


                  The Plan has been renewed to continue in effect until December
31,  1996.  The Plan will  continue in effect from year to year if  specifically
approved at least annually by the Board of Trustees and the affirmative  vote of
a  majority  of the  Trustees  who are not  parties to any  Shareholder  Service
Agreement or "interested persons" of any such party by votes cast in person at a
meeting called for such purpose. In approving the Plan, the Trustees determined,
in the  exercise  of their  business  judgment  and in light of their  fiduciary
duties as Trustees of the Fund, that there was a reasonable  likelihood that the
Plan would benefit the Fund and its  shareholders.  The Plan may only be renewed
if the Trustees make a similar  determination for each subsequent year. The Plan
may not be amended to increase the maximum amount of payments by



                                      -16-



<PAGE>



the Fund to its Shareholder Service Agents without shareholder approval, and all
material  amendments to the provisions of the Plan must be approved by a vote of
the  Board of  Trustees  and of the  Trustees  who have no  direct  or  indirect
interest in the Plan, cast in person at a meeting called for the purpose of such
vote.

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


                  During the year ended December 31, 1995,  amounts  incurred by
the Fund under the Plan aggregated $51,029,  including expenses for: advertising
- --  $8,675;   printing  and  mailing  of  Prospectuses  to  other  than  current
shareholders -- $5,613 and sales and shareholder  servicing  support services --
$36,741.  Of the amount paid on behalf of the Fund during last year, $29,220 was
paid to  Fundamental  Service  Corporation  for  expenses  incurred and services
rendered by it pursuant to the Plan.



                              CALCULATION OF YIELD


                  The Fund's yield  quotations  and average  annual total return
quotations  as they  appear in the  Prospectus,  this  Statement  of  Additional
Information or in  advertising  and sales  material,  are calculated by standard
methods prescribed by the Securities and Exchange Commission.

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

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

                  Where:   a =     dividends and interest earned during the
                                   period

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



                                      -17-



<PAGE>



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

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

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

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

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

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

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

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

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


                                      -18-



<PAGE>




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

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


                  The Fund's yield for the one-month  period ended  December 31,
1995 determined in accordance with the above formula was 4.23%.


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

                           P(1+T)n = ERV

Where:            P    =   a hypothetical initial payment of $1000

                  T    =   average annual total return

                  n    =   number of years

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

For  purposes of the above  computation,  it is assumed that all  dividends  and
distributions made by the Fund are reinvested at net


                                      -19-



<PAGE>




asset value during the designated period. The average annual return quotation is
determined to the nearest  1/100 of 1%. The average  annual total return for the
year ended December 31, 1995 was 32.02%. For the five-year period ended December
31, 1995,  the average  annual total return was 7.57%.  The average annual total
return was 7.07% for the ten-year period ended December 31, 1995.


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


                  The Fund may also  from  time to time  advertise  its  taxable
equivalent yield. The Fund's taxable  equivalent yield is determined by dividing
that  portion  of the Fund's  yield  (calculated  as  described  above)  that is
tax-exempt by one minus the stated  marginal  Federal income tax rate and adding
the  product  to that  portion,  if any,  of the  yield of the Fund  that is not
tax-exempt.  The taxable  equivalent  yield of the Fund for the one-month period
ended December 31, 1995 was 7.87% for a taxpayer whose income was subject to the
then highest combined Federal and California State income tax rate of 46.24%.


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


                 CUSTODIAN AGREEMENT AND INDEPENDENT ACCOUNTANTS



                  The Chase  Manhattan  Bank,  N.A. (the "Bank"),  114 West 47th
Street, New York, New York, acts as Custodian of the Fund's cash and securities.
The Bank also acts as  bookkeeping  agent  for the Fund,  and in that  capacity,
monitors the Fund's accounting records and calculates its net asset value.



                                      -20-



<PAGE>




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

                                      TAXES


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


Qualification as a Regulated Investment Company

                  The Fund has  elected  to be taxed as a  regulated  investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated  investment company,  the Fund is not subject to federal
income tax on the portion of its net investment income (i.e.,  taxable interest,
dividends and other taxable ordinary  income,  net of expenses) and capital gain
net income  (i.e.,  the excess of capital  gains over  capital  losses)  that it
distributes  to  shareholders,  provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) and at least 90% of
its tax-exempt income (net of expenses  allocable  thereto) for the taxable year
(the  "Distribution  Requirement"),  and satisfies certain other requirements of
the Code that are  described  below.  Distributions  by the Fund made during the
taxable year or, under specified  circumstances,  within twelve months after the
close of the taxable year, will be considered  distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.

                  In addition to  satisfying  the  Distribution  Requirement,  a
regulated  investment  company must: (1) derive at least 90% of its gross income
from dividends,  interest,  certain  payments with respect to securities  loans,
gains  from the sale or other  disposition  of stock or  securities  or  foreign
currencies  (to the  extent  such  currency  gains are  directly  related to the
regulated  investment  company's  principal  business of  investing  in stock or
securities)  and other income  (including but not limited to gains from options,
futures or forward  contracts) derived with respect to its business of investing
in such stock,  securities or  currencies  (the "Income  Requirement");  and (2)
derive  less  than  30% of its  gross  income  (exclusive  of  certain  gains on
designated hedging transactions that are offset by realized or unrealized losses
on


                                      -21-



<PAGE>



offsetting positions) from the sale or other disposition of stock, securities or
foreign  currencies (or options,  futures or forward contracts thereon) held for
less than three  months (the  "ShortShort  Gain  Test").  For  purposes of these
calculations, gross income includes tax-exempt income. However, foreign currency
gains, including those derived from options,  futures and forwards,  will not in
any event be  characterized  as Short-Short Gain if they are directly related to
the  regulated  investment  company's  investments  in stock or  securities  (or
options or futures thereon).  Because of the Short-Short Gain Test, the Fund may
have to limit the sale of appreciated  securities that it has held for less than
three months.  However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss,  since the  recognition of a loss before the
expiration of the  three-month  holding period is disregarded  for this purpose.
Interest (including original issue discount) received by the Fund at maturity or
upon the  disposition  of a security held for less than three months will not be
treated  as gross  income  derived  from the sale or other  disposition  of such
security within the meaning of the Short-Short Gain Test.  However,  income that
is attributable to realized market  appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.

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

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

                  In addition to satisfying the  requirements  described  above,
the Fund must  satisfy  an asset  diversification  test in order to qualify as a
regulated  investment company.  Under this test, at the close of each quarter of
the Fund's  taxable  year,  at least 50% of the value of the Fund's  assets must
consist of cash and cash items, U.S. Government securities,  securities of other
regulated investment companies, and securities of other issuers (as to which the
Fund has not  invested  more than 5% of the value of the Fund's  total assets in
securities of such issuer and as to which the Fund


                                      -22-



<PAGE>



does not  hold  more  than  10% of the  outstanding  voting  securities  of such
issuer),  and no more than 25% of the value of its total  assets may be invested
in the securities of any one issuer (other than U.S.  Government  securities and
securities of other regulated investment  companies),  or in two or more issuers
which the Fund  controls and which are engaged in the same or similar  trades or
businesses.

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


Excise Tax on Regulated Investment Companies

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

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

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


                                      -23-



<PAGE>



portfolio  investments  to make  sufficient  distributions  to avoid  excise tax
liability.


Fund Distributions

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

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

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

                  AMT is  imposed  in  addition  to,  but only to the  extent it
exceeds,  the regular tax and is computed -- at a maximum  marginal  rate of 28%
for noncorporate  taxpayers and 20% for corporate  taxpayers -- on the excess of
the taxpayer's  alternative  minimum  taxable income  ("AMTI") over an exemption
amount. In addition,  under the Superfund  Amendments and Reauthorization Act of
1986, a tax is imposed for taxable years beginning after 1986 and before 1996 at
the rate of 0.12% on the  excess  of a  corporate  taxpayer's  AMTI  (determined
without  regard to the  deduction  for this tax and the AMT net  operating  loss
deduction) over $2 million. Exempt-


                                      -24-



<PAGE>



interest dividends derived from certain "private activity" municipal obligations
issued after August 7, 1986 will generally  constitute an item of tax preference
includable in AMTI for both corporate and noncorporate  taxpayers.  In addition,
exempt-interest dividends derived from all municipal obligations,  regardless of
the date of issue, must be included in adjusted current earnings, which are used
in computing an additional corporate preference item (i.e., 75% of the excess of
a corporate  taxpayer's  adjusted  current  earnings  over its AMTI  (determined
without  regard  to  this  item  and  the AMT  net  operating  loss  deduction))
includable in AMTI.

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

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

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

                  Ordinarily, shareholders are required to take distributions by
the Fund into account in the year in which they


                                      -25-



<PAGE>



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

                  The Fund will be  required in certain  cases to  withhold  and
remit to the U.S.  Treasury 31% of ordinary  income and capital gain  dividends,
and the proceeds of redemption of shares,  paid to any  shareholder  who (1) has
provided either an incorrect tax identification  number or no number at all, (2)
is subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income  properly,  or (3) has failed to certify to the Fund
that it is not  subject to backup  withholding  or that it is a  corporation  or
other "exempt recipient."


Sale or Redemption of Shares

                  A  shareholder  will  recognize  gain or  loss on the  sale or
redemption  of shares of the Fund in an amount equal to the  difference  between
the proceeds of the sale or redemption and the shareholder's  adjusted tax basis
in the shares.  All or a portion of any loss so recognized  may be disallowed if
the  shareholder  purchases  other  shares of the Fund  within 30 days before or
after the sale or  redemption.  In general,  any gain or loss  arising  from (or
treated as arising  from) the sale or  redemption  of shares of the Fund will be
considered  capital gain or loss and will be  long-term  capital gain or loss if
the shares were held for longer than one year. However, any capital loss arising
from the sale or  redemption  of  shares  held for six  months  or less  will be
disallowed to the extent of the amount of exempt-interest  dividends received on
such  shares and (to the extent not  disallowed)  will be treated as a long-term
capital loss to the extent of the amount of capital gain  dividends  received on
such shares. For this purpose,  the special holding period rules of Code Section
246(c)(3)  and (4) generally  will apply in  determining  the holding  period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary  income.
Capital  losses in any year are  deductible  only to the extent of capital gains
plus, in the case of noncorporate taxpayers, $3,000 of ordinary income.


Foreign Shareholders

                  Taxation of a shareholder  who, as to the United States,  is a
nonresident alien individual, foreign trust or estate,


                                      -26-



<PAGE>



foreign corporation, or foreign partnership ("foreign shareholder"),  depends on
whether the income from the Fund is "effectively connected" with a U.S. trade or
business carried on by such shareholder.

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

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

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

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


Effect of Future Legislation; Local Tax Considerations

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

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


                                      -27-



<PAGE>




                             PORTFOLIO TRANSACTIONS



                  The Fund's management provides the Fund with investment advice
and  recommendations  for the purchase and sale of portfolio  securities.  Newly
issued  securities are usually  purchased from the issuer or an underwriter,  at
prices including underwriting fees; other purchases and sales are usually placed
with those dealers from whom it appears that the best price or execution will be
obtained.  All orders for the  purchase  and sale of  portfolio  securities  are
placed by the Fund's  management,  subject to the general  control of the Fund's
Trustees.  The Fund's  management may sell portfolio  securities  prior to their
maturity if market conditions and other considerations  indicate, in the opinion
of the Fund's management,  that such sale would be advisable.  In addition,  the
Fund's  management  may engage in  short-term  trading  when it  believes  it is
consistent with the Fund's  investment  objective.  Also, a security may be sold
and  another of  comparable  quality  may be  simultaneously  purchased  to take
advantage of what the Fund's management  believes to be a temporary disparity in
the normal yield  relationship  of two  securities.  The  frequency of portfolio
transactions  -- the  Fund's  turnover  rates  -- will  vary  from  year to year
depending  upon market  conditions.  For the years ended  December  31, 1995 and
1994,  the Fund's annual rate of portfolio  turnover was  approximately  53% and
16%, respectively.  Because a high turnover rate increases transaction costs and
the possibility of taxable  short-term  gains (see "Dividends and Tax Status" in
the  Fund's  Prospectus),  the  Fund's  management  weighs  the  added  costs of
short-term  investment  against  anticipated  gains.  The Fund's  management  is
generally   responsible   for  the   implementation,   or   supervision  of  the
implementation,  of investment decisions,  including the allocation of principal
business and portfolio brokerage, and the negotiation of commissions.


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

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


                                      -28-



<PAGE>



research brokerage and research services provided by the broker-dealer.

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

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

     From January 1, 1990 to January 31, 1996,  the Manager  directed  syndicate
designations in the aggregate dollar amount of $858,094 to Capital Institutional
Services,  Inc. ("CIS") in connection with the Fundamental Funds' bond purchases
through  underwriting  syndicates.  The  Manager  has  represented  that CIS,  a
third-party research provider, at the Manager's direction, paid portions of such
syndicate  designations  to  approximately  30  different  firms  that  provided
research  services  used by the  Manager  in  managing  the  Fundamental  Funds,
including Capital Market Services,  Inc. ("CMS").  Further, that CMS was paid by
CIS $115,000 for research provided to the Manager and used by it in managing the
Fund and the other funds in the Fundamental  complex. The $115,000 dollar amount
paid by CIS to CMS for the  three  most  recent  fiscal  years of the Fund  was:
$35,000 in 1995;  $55,000 in 1994;  and  $25,000 in 1993.  The  Manager has also
represented that it was recently learned that at all times during the three most
recent  fiscal years of the Fund,  CMS was 100% owned by Mr.  Donald E. Newell's
wife.  Mr.  Vincent J.  Malanga  and Mr.  Donald E.  Newell  are each  executive
officers and 50% shareholders of LaSalle Portfolio  Management,  Inc. On May 23,
1996, in order to remove any  appearance of  impropriety  concerning  all of the
payments  made by CIS to CMS in return for  research the Manager  obtained  from
CMS, the Fund's independent Trustees asked the Manager to obtain $115,000 "to or
for the  benefit  of the  [Fundamental]  Funds,  either  from  CMS or one of its
affiliates  directly,  or out of [the Manager's] own resources." That request is
currently under consideration by the Manager.


            ADDITIONAL INFORMATION ABOUT THE ORGANIZATION OF THE FUND


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

                  The Fund's  Declaration of Trust permits the Trustees to issue
an  unlimited  number of full and  fractional  shares  of a single  class and to
divide or combine the shares into a greater or lesser  number of shares  without
thereby changing the proportionate  beneficial interests in the Fund. Each share
represents an interest in the Fund proportionately equal to the interest of each
other  share.  Certificates  representing  the  shares  of the Fund  will not be
issued.  Upon  liquidation of the Fund, all shareholders of the Fund would share
pro  rata  in  the  net  assets  of  the  Fund  available  for  distribution  to
shareholders.   If  they  deem  it  advisable   and  in  the  best  interest  of
shareholders, the Board of Trustees of the Fund may create additional classes of
shares which


                                      -29-



<PAGE>



may be different  from each other only as to dividends or each of which may have
separate  assets and  liabilities  (in which  case any such  class  would have a
designation  including the word "Series").  If additional  classes designated as
Series were created, shares of each Series would be entitled to vote as a Series
only to the  extent  required  by the 1940 Act or as  permitted  by the Board of
Trustees. Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions  of the  1940  Act or  applicable  state  law,  or  otherwise,  to be
submitted to the holders of the outstanding  voting  securities of an investment
company  such as the Fund,  shall not be deemed to have been  effectively  acted
upon unless approved by the holders of a majority of the  outstanding  shares of
each Series affected by such matter.  Rule 18f-2 further  provides that a Series
shall be deemed to be affected by a matter unless it is clear that the interests
of each Series in the matter are substantially identical or that the matter does
not  significantly  affect any interest of such  Series.  An example of a matter
that would be voted on by each  Series is  approval  of an  investment  advisory
agreement.  However,  the Rule  exempts  the  selection  of  independent  public
accountants,  the  approval of contracts  with  principal  underwriters  and the
election of Trustees from the separate voting  requirements of the Rule. Income,
direct  liabilities and expenses of the Fund would be allocated among the Series
in  proportion  to the  relative  net  assets  of each  Series  by the  Board of
Trustees.  Allocations  would be made as often as  necessary to comply with Rule
2a-4 under the 1940 Act.


                  INFORMATION WITH RESPECT TO CALIFORNIA STATE
                             AND MUNICIPAL FINANCES


                  Certain  California (the "State")  constitutional  amendments,
legislative measures,  executive orders, civil actions and voter initiatives, as
well as the general financial condition of the State, could adversely affect the
ability of issuers of  California  Municipal  Obligations  to pay  interest  and
principal on such  obligations.  The following  information  constitutes  only a
brief summary,  does not purport to be a complete  description,  and is based on
information drawn from official statements  relating to securities  offerings of
the State of California and various local agencies,  available as of the date of
this Statement of Additional  Information.  While the Fund has not independently
verified such information,  it has no reason to believe that such information is
not correct in all material respects.


                               RECENT DEVELOPMENTS


                  From  mid-1990  to late 1993,  the State  suffered a recession
with  the  worst  economic,  fiscal  and  budget  conditions  since  the  1930s.
Construction,   manufacturing  (especially  aerospace),  exports  and  financial
services, among others, were



                                      -30-



<PAGE>




all severely affected. Job losses have been the worst of any post-war recession.
Unemployment  reached 10.1% in January 1994, but fell sharply to 7.7% in October
and November 1994. According to the State's Department of Finance, recovery from
the recession in California began in 1994.

                  The recession  seriously  affected  State tax revenues,  which
basically mirror economic conditions.  It also has caused increased expenditures
for health and welfare  programs.  The State also has been  facing a  structural
imbalance in its budget with the largest programs  supported by the General Fund
(K-12  schools and  community  colleges,  health and welfare,  and  corrections)
growing at rates higher than the growth rates for the principal  revenue sources
of the  General  Fund.  As a result,  the  State  experienced  recurring  budget
deficits in the late 1980s and early 1990s. The State  Controller  reported that
expenditures  exceeded  revenues  for four of the five fiscal  years ending with
1991-92.  The State had an operating  surplus of  approximately  $109 million in
1992-93 and $836 million in 1993- 94.  However,  at June 30, 1994,  according to
the Department of Finance,  the State's Special Fund for Economic  Uncertainties
("SFEU") still had a deficit, on a budget basis, of approximately $1.8 billion.

                  The  accumulated  budget deficits over the past several years,
together with  expenditures  for school funding which have not been reflected in
the budget, and reduction of available internal  borrowable funds, have combined
to significantly deplete the State's cash resources to pay its ongoing expenses.
In order to meet its cash needs,  the State has had to rely for several years on
a series of external borrowings , including  borrowings past the end of a fiscal
year.  Such  borrowings are expected to continue in future fiscal years. To meet
its cash flow needs in the  1994-95  fiscal year the State  issued,  in July and
August 1994, $4.0 billion of revenue anticipation warrants which mature on April
25, 1996, and $3.0 billion of revenue  anticipation  notes which matured on June
28, 1995.


                  As a result of the  deterioration  in the  State's  budget and
cash situation,  the rating agencies reduced the State's credit ratings. Between
October 1991 and July 1994, the rating on the State's general  obligation  bonds
was reduced by S&P from "AAA" to "A," by Moody's from "Aaa" to "A1" and by Fitch
from "AAA" to "A."


                  The 1994-95  Fiscal Year Budget (as updated in the January 10,
1995  Governor's  Budget)  projected  $42.4 billion of General Fund revenues and
transfers and $41.7 billion of budgeted  expenditures.  In addition, the 1994-95
Budget  Act  anticipated  deferring  retirement  of  about  $1  billion  of  the
accumulated



                                      -31-



<PAGE>




budget  deficit  to the  1995-96  fiscal  year when it is  intended  to be fully
retired by June 30, 1996.

                           The Governor's Budget for 1995-96 proposed General
Fund revenues and transfers of $42.5 billion and  expenditures of $41.7 billion,
which would leave a balance of approximately  $92 million in the budget reserve,
the SFEU, at June 30, 1996 after repayment of the accumulated  budget  deficits.
The Budget proposal was based on a number of assumptions,  including  receipt of
$830 million from the Federal  government  to offset costs of  undocumented  and
refugee immigrants.

                           On December 6, 1994, Orange County, California
(the "County"),  together with its pooled  investment funds (the "County Funds")
filed for  protection  under  Chapter 9 of the Federal  Bankruptcy  Code,  after
reports that the County Funds had suffered  significant  market  losses in their
investments,  causing a  liquidity  crisis for the County  Funds and the County.
More than 180 other public entities,  most of which, but not all, are located in
the County,  were also depositors in the County Funds.  As of mid-January  1995,
following a restructuring  of most of the County Funds' assets to increase their
liquidity  and reduce  their  exposure to interest  rate  increases,  the County
estimated the County Funds' loss at about $1.69  billion,  or about 23% of their
initial  deposits of  approximately  $7.5  billion.  Many of the entities  which
deposited monies in the County Funds, including the County, are facing cash flow
difficulties  because of the  bankruptcy  filing and may be  required  to reduce
programs or capital  projects.  This also may affect their ability to meet their
outstanding obligations.

                  The State  has no  existing  obligation  with  respect  to any
outstanding  obligations  or  securities  of the  County  or  any  of the  other
participating  entities.  However, in the event the County is unable to maintain
county administered State programs because of insufficient  resources, it may be
necessary for the State to  intervene,  but the State cannot  presently  predict
what, if any, action may occur.


                  On January 17,  1994,  an  earthquake  of the  magnitude of an
estimated 6.8 on the Richter Scale struck Los Angeles causing significant damage
to public and private  structures and facilities.  Although some individuals and
businesses  suffered  losses  totaling in the  billions of dollars,  the overall
effect of the earthquake on the regional and State economy is not expected to be
serious.

                                 STATE FINANCES

                  State  moneys  are  segregated   into  the  General  Fund  and
approximately 600 Special Funds. The General Fund consists


                                      -32-



<PAGE>



of the  revenues  received  into the State  Treasury  and  earnings  from  State
investments, which are not required by law to be credited to any other fund. The
General Fund is the principal  operating  fund for the majority of  governmental
activities and is the depository of most major State revenue sources.


                  The  SFEU  is  funded  with  General  Fund  revenues  and  was
established  to protect  the State from  unforeseen  reduced  levels of revenues
and/or  unanticipated  expenditure  increases.   Amounts  in  the  SFEU  may  be
transferred  by the  Controller  as  necessary to meet cash needs of the General
Fund. The Controller is required to return moneys so transferred without payment
of interest as soon as there are  sufficient  moneys in the  General  Fund.  For
budgeting  and  accounting  purposes,  any  appropriation  made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting  purposes,
the  Controller is required to add the balance in the General Fund so as to show
the total monies then available for General Fund purposes.

                  Inter-fund  borrowing  has been  used  for many  years to meet
temporary  imbalances of receipts and  disbursements  in the General Fund. As of
June 30, 1994, the General Fund had outstanding loans in the aggregate principal
amount of $43 million to the General Fund from the SFEU and outstanding loans in
the aggregate principal amount of $5.2 billion,  which consisted of $4.0 billion
of internal  loans to the General Fund from the SFEU and other Special Funds and
$1.2 billion of external  loans  represented  by the 1994  revenue  anticipation
warrants.

                  Articles XIIIA and XIIIB to the State  Constitution  and Other
Revenue Law Changes. Prior to 1977, revenues of the State government experienced
significant  growth primarily as a result of inflation and continuous  expansion
of the tax base of the State. In 1978, State voters approved an amendment to the
State  Constitution  known as  Proposition  13, which added Article XIIIA to the
State  Constitution,  reducing ad valorem local property taxes by more than 50%.
In addition,  Article  XIIIA  provides  that  additional  taxes may be levied by
cities,  counties and special  districts  only upon  approval of not less than a
two-thirds vote of the "qualified  electors" of such district,  and requires not
less than a two-thirds  vote of each of the two houses of the State  Legislature
to enact any  changes in State  taxes for the  purpose of  increasing  revenues,
whether by increased rate or changes in methods of computation.


                  Primarily as a result of the  reductions in local property tax
revenues received by local governments  following the passage of Proposition 13,
the  Legislature   undertook  to  provide  assistance  to  such  governments  by
substantially  increasing  expenditures  from the General  Fund for that purpose
beginning in


                                      -33-



<PAGE>




the  1978-79  fiscal  year.  In recent  years,  in  addition  to such  increased
expenditures,  the  indexing of personal  income tax rates (to adjust such rates
for the effects of inflation),  the elimination of certain  inheritance and gift
taxes and the  increase of exemption  levels for certain  other such taxes had a
moderating  impact on the growth in State revenues.  In addition,  the State has
increased expenditures by providing a variety of tax credits, including renters'
and senior citizens' credits and energy credits.


                  The  State is  subject  to an  annual  "appropriations  limit"
imposed  by Article  XIIIB of the State  Constitution  adopted in 1979.  Article
XIIIB prohibits the State from spending  "appropriations  subject to limitation"
in  excess of the  appropriations  limit  imposed.  "Appropriations  subject  to
limitations" are  authorizations  to spend "proceeds of taxes," which consist of
tax  revenues,  and certain  other funds,  including  proceeds  from  regulatory
licenses,  user  charges or other fees to the extent that such  proceeds  exceed
"the cost reasonably  borne by such entity in providing the regulation,  product
or service." One of the  exclusions  from these  limitations  is "debt  service"
(defined as "appropriations  required to pay the cost of interest and redemption
charges,  including  the  funding of any  reserve or sinking  fund  required  in
connection  therewith,  on  indebtedness  existing or legally  authorized  as of
January 1, 1979 or on bonded indebtedness  thereafter  approved" by the voters).
In addition,  appropriations  required to comply with  mandates of courts or the
Federal  government  and,  pursuant  to  Proposition  111  enacted in June 1990,
appropriations  for qualified  capital  outlay  projects and  appropriations  of
revenues  derived from any increase in gasoline  taxes and motor vehicle  weight
fees above January 1, 1990 levels are not included as appropriations  subject to
limitation.  In addition,  a number of recent  initiatives  were  structured  or
proposed to create new tax revenues  dedicated to certain  specific  uses,  with
such new taxes expressly exempted from the Article XIIIB limits (e.g., increased
cigarette  and  tobacco  taxes  enacted  by   Proposition   99  in  1988).   The
appropriations limit also may be exceeded in cases of emergency. However, unless
the emergency arises from civil  disturbance or natural disaster declared by the
Governor,  and the appropriations are approved by two-thirds of the Legislature,
the appropriations  limit for the next three years must be reduced by the amount
of the excess.

                  The State's  appropriations limit in each year is based on the
limit for the prior year, adjusted annually for changes in California per capita
personal income and changes in population,  and adjusted,  when applicable,  for
any  transfer  of  financial  responsibility  of  providing  services to or from
another unit of government. The measurement of change in population is a blended
average of statewide overall population growth, and


                                      -34-



<PAGE>



change in attendance at local school and community  college ("K- 14") districts.
As  amended  by  Proposition  111,  the  appropriations  limit  is  tested  over
consecutive  two-year periods.  Any excess of the aggregate  "proceeds of taxes"
received over such two-year periods above the combined appropriations limits for
those two years is divided  equally  between  transfers  to K-14  districts  and
refunds to taxpayers.


                  As  originally  enacted in 1979,  the  State's  appropriations
limit was based on its 1978-79 fiscal year  authorizations to expend proceeds of
taxes and was  adjusted  annually  to  reflect  changes  in cost of  living  and
population  (using  different  definitions,  which were modified by  Proposition
111). Commencing with the 1991-92 fiscal year, the State's  appropriations limit
is adjusted  annually based on the actual  1986-87 limit,  and as if Proposition
111 had been in  effect.  The  State  Legislature  has  enacted  legislation  to
implement  Article XIIIB which  defines  certain terms used in Article XIIIB and
sets  forth the  methods  for  determining  the  State's  appropriations  limit.
Government Code Section 7912 requires an estimate of the State's  appropriations
limit to be included in the Governor's  Budget,  and thereafter to be subject to
the budget process and established in the Budget Act.

                  For the 1990-91  fiscal year, the State  appropriations  limit
was $32.7 billion,  and appropriations  subject to limitation were $7.51 billion
under the limit.  The limit for the 1991-92 fiscal year was $34.2  billion,  and
appropriations  subject to  limitations  were $3.8 billion under the limit.  The
limit for the 1992-93  fiscal year was $35.01  billion,  and the  appropriations
subject to  limitation  were $7.53  billion  under the limit.  The limit for the
1993-94  fiscal  year was $36.060  billion,  and the  appropriations  subject to
limitation  were $6.55  billion  under the limit.  The  estimated  limit for the
1994-95  fiscal  year was  $37.55  billion,  and the  appropriations  subject to
limitations were estimated to be $6.05 billion under the limit.

                  In November 1988, State voters approved  Proposition 98, which
changed State funding of public  education  below the  university  level and the
operation of the State's  appropriations  limit,  primarily by guaranteeing K-14
schools a minimum  share of General  Fund  revenues.  Under  Proposition  98 (as
modified by Proposition  111, which was enacted in June 1990), K- 14 schools are
guaranteed the greater of (a) 40.3% of General Fund revenues ("Test 1"), (b) the
amount  appropriated to K-14 schools in the prior year,  adjusted for changes in
the cost of living  (measured as in Article XIIIB by reference to California per
capita personal  income) and enrollment  ("Test 2"), or (c) a third test,  which
would  replace  the second  test in any year when the  percentage  growth in per
capita General Fund revenues from



                                      -35-



<PAGE>




the prior year plus .5% is less than the  percentage  growth in  California  per
capita  personal  income  ("Test 3").  Under "Test 3," schools would receive the
amount appropriated in the prior year adjusted for changes in enrollment and per
capita General Fund revenues,  plus an additional  small adjustment  factor.  If
"Test 3" is used in any  year,  the  difference  between  "Test 311 and "Test 2"
would  become a "credit"  to schools  which  would be the basis of  payments  in
future  years when per capita  General Fund  revenue  growth  exceeds per capita
personal income growth.

                  Proposition 98 permits the  Legislature by two- thirds vote of
both  houses,  with the  Governor's  concurrence,  to suspend the K-14  schools'
minimum  funding  formula  for a  one-year  period.  In the  fall of  1989,  the
Legislature  and the Governor  utilized this  provision to avoid having 40.3% of
revenues  generated by a special  supplemental  sales tax enacted for earthquake
relief go to K-14 schools.  Proposition 98 also contains provisions transferring
certain State tax revenues in excess of the Article XIIIB limit to K-14 schools.

                  The 1991-92 Budget Act,  applying "Test 211 of Proposition 98,
appropriated   approximately  $18.5  billion  for  K-  14  schools  pursuant  to
Proposition  98.  During the course of the fiscal  year,  revenues  proved to be
substantially  below  expectations.  By  the  time  the  Governor's  Budget  was
introduced  in January  1992,  it became clear that per capita growth in General
Fund revenues for 1991-92 would be far smaller than the growth in California per
capita personal income and the Governor's Budget therefore reflected a reduction
in Proposition 98 funding in 1991-92 by applying "Test 3" rather than "Test 2."

                  In response to the  changing  revenue  situation  and to fully
fund the  Proposition  98 guarantee in both the 1991-92 and 1992-93 fiscal years
without  exceeding  it, the  Legislature  enacted  several  bills as part of the
1992-93  budget  package  which  responded  to the  fiscal  crisis in  education
funding. Fiscal year 1991-92 Proposition 98 appropriations for K-14 schools were
reduced by $1.083  billion.  In order to not  adversely  impact cash received by
school  districts,   however,  a  short-term  loan  was  appropriated  from  the
non-Proposition  98 State General Fund. The Legislature then appropriated  $16.6
billion to K-14 schools for 1992-93 (the minimum  guaranteed by Proposition 98),
but  designated  $1.083  billion of this  amount to "repay" the prior year loan,
thereby reducing cash outlays in 1992-93 by that amount. In addition to reducing
the 1991-92  fiscal year  appropriations  for K-14 schools by $1.083 billion and
converting  the amount to a loan (the  "inter-year  adjustment"),  Chapter  703,
Statutes of 1992 also made an  adjustment  to "Test 1," based on the  additional
$1.2 billion of local  property taxes that were shifted to schools and community
colleges. The "Test 1" percentage changed from 40% to 37%. Additionally, Chapter
703



                                      -36-



<PAGE>



contained a provision that if an appellate court should determine that the "Test
1" recalculation or the inter-year adjustment is unconstitutional, unenforceable
or invalid,  Proposition 98 would be suspended for the 1992-93 fiscal year, with
the result that K- 14 schools would  receive the amount  intended by the 1992-93
Budget Act compromise.


                  The State Controller stated in October 1992 that, because of a
drafting  error in  Chapter  703,  he could not  implement  the  $1.083  billion
reduction of the 1991-92  school  funding  appropriation,  which was part of the
inter-year  adjustment.  The Legislature untimely enacted corrective legislation
as part of the 1993-94 Budget package to implement the $1.083 billion inter-year
adjustment as originally intended.

                  In the 1992-93 Budget Act, a new loan of $732 million was made
to K-12  schools  in order to  maintain  per-average  daily  attendance  ("ADA")
funding at the same level as  1991-92,  at $4,187.  An  additional  loan of $241
million was made to community  college  districts.  These loans are to be repaid
from future  Proposition 98 entitlements.  (The teachers'  organization  lawsuit
discussed  above also seeks to declare  invalid  the  provision  making the $732
million a loan  "repayable" from future years'  Proposition 98 funds.  Including
both State and local funds,  and  adjusting for the loans and  repayments,  on a
cash basis,  total  Proposition  98 K-12  funding in 1992-93  increased to $21.5
billion, 2.4% more than the amount in 1992-93 ($21.0 billion).

                  Based on revised  State tax revenues and  estimated  decreased
reported  pupil  enrollment,  the 1993-94  Budget Act projected that the 1992-93
Proposition  98 Budget Act  appropriations  of $16.6 billion  exceeded a revised
minimum guarantee by $313 million.  As a result, the 1993-94 Budget Act reverted
$25  million  in  1992-93  appropriations  to the  General  Fund.  Limiting  the
reversion to this amount ensures that per ADA funding for general  purposes will
remain at the prior  year  level of $4,217 per  pupil.  The  1993-94  Governor's
Budget  subsequently  proposed  deficiency  funding of $121  million  for school
apportionments and special education, increasing funding per pupil in 1992-93 to
$4,244.   The  1993-94  Budget  Act  also  designated  $98  million  in  1992-93
appropriations  toward  satisfying prior years' guarantee  levels, an obligation
that  resulted  primarily  from  updating  State tax revenues  for 1991-92,  and
designates $190 million as a loan repayable from 1993-94 funding.

                  The 1993-94  Budget Act projected the  Proposition  98 minimum
funding  level at $13.5  billion  based on the  "Test 3"  calculation  where the
guarantee  is  determined  by the  change in per capita  growth in General  Fund
revenues, which are projected to decrease on a year-over-year basis. This amount
also takes



                                      -37-



<PAGE>



into account increased property taxes transferred to school districts from other
local governments.


                  Legislation accompanying the 1993-94 Budget Act (Chapter 66/93
) Provided a new loan of $609  million to K-12  schools in order to maintain per
ADA funding at $4,217 and a loan of $178  million to community  colleges.  These
loans have been  combined  with the K-14 1992-93  loans into one loan  totalling
$1.760 billion.  Repayment of this loan would be from future years'  Proposition
98 entitlements,  and would be conditioned on maintaining current funding levels
per pupil for K-12  schools.  Chapter 66 also reduced the "Test 1" percentage to
35% to reflect the property tax shift among local government agencies.

                  The  1994-95   Budget  Act   appropriated   $14.4  billion  of
Proposition 98 funds for K-14 schools based on Test 2. This exceeded the minimum
Proposition  98  guarantee  by $8 million to maintain  K-12 funding per pupil at
$4,217.  Based upon updated State revenues,  growth rates and inflation factors,
the  1994-95  Budget  Act   appropriated   an  additional  $286  million  within
Proposition 98 for the 1993-94 fiscal year, to reflect a need in  appropriations
for school districts and county offices of education,  as well as an anticipated
deficiency in special education  fundings.  These and other minor  appropriation
adjustments  increased the 1993-94  Proposition  98 guarantee to $13.8  billion,
which  exceeded the minimum  guarantee in that year by $272 million and provided
per pupil funding of $4,225.

                  The 1995-96  Governor's  Budget  adjusted the 1993-94  minimum
guarantee  to  reflect   changes  in  enrollment  and  inflation,   and  1993-94
Proposition 98  appropriations  were  increased to $14.1  billion,  primarily to
reflect changes in the statutory  continuous  appropriation for  apportionments.
The revised  appropriations  exceeded the minimum guarantee by $32 million. This
appropriation level still provided per-pupil funding of $4,225.

                  The 1994-95  Proposition  98 minimum  guarantee  also has been
adjusted for changes in factors  described above, and was calculated to be $14.9
billion. Within the minimum guarantee,  the dollars per pupil were maintained at
the prior year's level;  consequently,  the 1994-95 minimum guarantee included a
loan repayment of $135 million, and the per pupil funding increased to $4,231.

                  The 1995-96  Governor's  Budget proposes to appropriate  $15.9
billion of  Proposition 98 funds to K-14 to meet the guarantee  level.  Included
within the  guarantee  is a loan  repayment  of $379  million  for the  combined
outstanding  loans of $1.76 billion.  Funding per pupil is estimated to increase
by $61 over 1994-95 to $4,292.




                                      -38-



<PAGE>



                             SOURCES OF TAX REVENUE


                  The   California   personal   income  tax,  which  in  1992-93
contributed  about 44% of General Fund  revenues,  is closely  modeled after the
Federal  income tax law. It is imposed on net taxable  income (gross income less
exclusions and deductions). The tax is progressive with rates ranging from 1% to
11%.  Personal,  dependent,  and other credits are allowed against the gross tax
liability.  In addition,  taxpayers may be subject to an alternative minimum tax
("AMT")  which is much like the  Federal  AMT.  This is  designed to ensure that
excessive use of tax preferences does not reduce  taxpayers'  liabilities  below
some minimum level.  Legislation enacted in July 1991 added two new marginal tax
rates,  at 10% and 11%,  effective for tax years 1991 through 1995.  After 1995,
the maximum personal income tax rate is scheduled to return to 9.3%, and the AMT
rate is scheduled to drop from 8.5% to 7%.


                  The personal income tax is adjusted  annually by the change in
the consumer price index to prevent  taxpayers from being pushed into higher tax
brackets without a real increase in income.


                  The sales tax is imposed upon  retailers  for the privilege of
selling tangible personal  property in California.  Most retail sales and leases
are  subject to the tax.  However,  exemptions  have been  provided  for certain
essentials  such  as  food  for  home  consumption,   prescription  drugs,  gas,
electricity and water. Sales tax accounted for about 38% of General Fund revenue
in 1992-93.  Bank and  corporation  tax revenues  comprised about 11% of General
Fund  revenue  in  1992-93.  In 1989,  Proposition  99 added a 25 cents per pack
excise tax on  cigarettes,  and a new  equivalent  excise  tax on other  tobacco
products.  Legislation  enacted in 1993 added an additional 2 cents per pack for
the purpose of funding breast cancer research.


                    GENERAL FINANCIAL CONDITION OF THE STATE


                  In the years following enactment of the Federal Tax Reform Act
of 1986,  and  conforming  changes to the  State's tax laws,  taxpayer  behavior
became more difficult to predict,  and the State  experienced a series of fiscal
years in which  revenue  came in  significantly  higher or lower  than  original
estimates.  The 1989-90 fiscal year ended with revenues below  estimates and the
SFEU was fully depleted by June 30, 1990. This date  essentially  coincided with
the date of the most recent recession,  and the State subsequently accumulated a
budget  deficit in the SFEU  approaching  $2.8 billion at its peak.  The State's
budget problems in recent years also have been caused by a structural  imbalance
which has been  identified  by the current  and  previous  Administrations.  The
largest General Fund programs -- K-14



                                      -39-



<PAGE>




education,  health,  welfare and corrections -- were increasing  faster than the
revenue base, driven by the State's rapid population increases.

                  Starting  in the 1990-91  fiscal  year,  each budget  required
multibillion  dollar actions to bring projected  revenues and expenditures  into
balance and to close large "budget gaps" which were identified.  The Legislature
and Governor eventually agreed on significant cuts in program expenditures, some
transfers  of  program  responsibilities  and  funding  from the  State to local
governments, revenue increases (particularly in the 1991-92 fiscal year budget),
and  various  one-time  adjustments  and  accounting  changes.  However,  as the
recession  took hold and  deepened  after the summer of 1990,  revenues  dropped
sharply and expenditures for health and welfare programs increased as job losses
mounted,  so that the State ended each of the 1990-91 and 1991-92  fiscal  years
with an  unanticipated  deficit in the budget reserve,  the SFEU, as compared to
projected positive balances.

                  As a result of the  revenue  shortfalls  accumulating  for the
previous two fiscal  years,  the  Controller in April 1992  indicated  that cash
resources  (including  borrowing  from Special Funds) would not be sufficient to
meet all General Fund  obligations  due on June 30 and July 1, 1992. On June 25,
1992, the Controller issued $475 million of 1992 Revenue  Anticipation  Warrants
(the "1992 Warrants") in order to provide funds to cover all necessary  payments
from the General Fund at the end of the 1991-92 fiscal year and on July 1, 1992.
The 1992 Warrants were paid on July 24, 1992. In addition to the 1992  Warrants,
the Controller  reported that as of June 30, 1992, the General Fund had borrowed
$1.336 billion from the SFEU and $4.699 billion from other Special Funds,  using
all but about $183 million of borrowable cash resources.

                  To balance the 1992-93 Governor's  Budget,  program reductions
totalling  $4.365  billion and a revenue and  transfer  increase of $872 million
were proposed for the 1991-92 and 1992- 93 fiscal years. Economic performance in
the State  continued  to be  sluggish  after the 1992-93  Governor's  Budget was
prepared.  By the  time of the  "May  Revision,"  issued  on May 20,  1992,  the
Administration  estimated  that the  1992-93  Budget  needed to address a gap of
about $7.9  billion,  much of which was needed to repay the  accumulated  budget
deficits of the previous two years.

                  The severity of the budget  actions needed led to a long delay
in adopting the budget.  With the failure to enact a budget by July 1, 1992, the
State had no legal  authority  to pay many of its  vendors  until the budget was
passed.  Starting  on July  1,  1992,  the  Controller  was  required  to  issue
"registered  warrants"  in lieu of  normal  warrants  backed by cash to pay many
State obligations. Available cash was used to pay



                                      -40-



<PAGE>



constitutionally  mandated  and  priority  obligations,  such as debt service on
bonds and revenue anticipation  warrants.  Between July 1 and September 4, 1992,
the Controller  issued an aggregate of approximately  $3.8 billion of registered
warrants  payable from the General Fund, all of which were called for redemption
by September 4, 1992 following  enactment of the 1992-93 Budget Act and issuance
by the State of $3.3 billion of interim notes.


                  The Legislature  enacted the 1992-93 Budget Bill on August 29,
1992, and it was signed by the Governor on September 2, 1992. The 1992-93 Budget
Act provided for  expenditures  of $57.4  billion and  consisted of General Fund
expenditures  of $40.8  billion and Special Fund and Bond Fund  expenditures  of
$16.6 billion.  The Department of Finance estimated a balance in the SFEU of $28
million on June 30, 1993.

                  The $7.9 billion budget gap was closed primarily  through cuts
in the program expenditures (principally for health and welfare programs, aid to
schools and support  for higher  education),  together  with some  increases  in
revenues  from  accelerated  collections  and  changes in tax laws to confirm to
Federal  law  changes,  and  a  variety  of  on-time  inter-fund  transfers  and
deferrals.  The  other  major  component  of  the  budget  compromise  was a law
requiring  local  governments to transfer a total of $1.3 billion to K-12 school
and community  college  districts,  thereby reducing by that amount General Fund
support for those districts under Proposition 98.


                  In May 1993,  the  Department  of Finance  projected  that the
General  Fund would end the  fiscal  year on June 30,  1993 with an  accumulated
budget deficit of about $2.8 billion,  and a negative fund balance of about $2.2
billion (the  difference  being  certain  reserves for  encumbrances  and school
funding costs). As a result, the State issued $5 billion of revenue anticipation
notes and warrants.


                  The Governor's 1993-94 Budget,  introduced on January 8, 1993,
proposed General Fund expenditures of $37.3 billion,  with projected revenues of
$39.9 billion.  It also proposed Special Fund  expenditures of $12.4 billion and
Special Fund revenues of $12.1 billion.  The 1993-94 fiscal year represented the
third  consecutive  year the Governor and the Legislature were faced with a very
difficult  budget  environment,  requiring  revenue actions and expenditure cuts
totaling billions of dollars to produce a balanced budget. To balance the budget
in the face of declining  revenues,  the  Governor  proposed a series of revenue
shifts from local  government,  reliance on increased Federal aid and reductions
in state spending.

                  The "May Revision" of the Governor's  Budget,  released on May
20, 1993, indicated that the revenue projections



                                      -41-



<PAGE>




of the January Budget  Proposal were tracking  well,  with the full year 1992-93
about $80  million  higher  than the  January  projection.  Personal  income tax
revenue was higher than projected,  sales tax was close to target,  and bank and
corporation taxes were lagging behind  projections.  The May Revision  projected
the State would have an  accumulated  deficit of about $2.75 billion by June 30,
1993. The Governor  proposed to eliminate this deficit over an 18-month  period.
He also  agreed to retain the 0.5% sales tax  scheduled  to expire June 30 for a
six-month  period,  dedicated to local public safety  purposes,  with a November
election  to  determine  a  permanent  extension.  Unlike  previous  years,  the
Governor's  Budget and May Revision did not calculate a "gap" to be closed,  but
rather set forth revenue and  expenditure  forecasts  and proposals  designed to
produce a balanced budget.


                  The 1993-94  Budget Act was signed by the Governor on June 30,
1993, along with implementing legislation. The Governor vetoed about $71 million
in spending. With enactment of the Budget Act, the State carried out its regular
cash flow borrowing  program for the fiscal year, which included the issuance of
approximately $2 billion of revenue  anticipation notes that matured on June 28,
1994.


                  The 1993-94 Budget Act was predicated on General Fund revenues
and transfers  estimated at $40.6  billion,  about $700 million  higher than the
January  Governor's  Budget, but still about $400 million below 1992-93 (and the
second consecutive year of actual decline).  The principal reasons for declining
revenues were the continued weak economy and the expiration (or repeal) of three
fiscal  steps  taken in 1991--a  half cent  temporary  sales tax, a deferral  of
operating loss carry forwards,  and repeal by initiative of a sales tax on candy
and snack foods.


                  The 1993-94  Budget Act also assumed  Special Fund revenues of
$11.9 billion, an increase of 2.9% over 1992-93.

                  The 1993-94 Budget Act included  General Fund  expenditures of
$38.5 billion (a 6.3%  reduction from projected  1992-93  expenditures  of $41.1
billion), in order to keep a balanced budget within the available revenues.  The
Budget  also  included  Special  Fund  expenditures  of  $12.1  billion,  a 4.2%
increase.

                  The 1993-94  Budget Act contained no General Fund  tax/revenue
increases other than a two year suspension of the renters' tax credit.

                  Administration reports during the course of the 1993-94 fiscal
year  indicated  that while  economic  recovery  appeared to have started in the
second half of the fiscal year,


                                      -42-



<PAGE>




recessionary  conditions  continued  longer than had been  anticipated  when the
1993-94  Budget Act was adopted.  Overall,  revenues for the 1993-94 fiscal year
were about $800 million lower than original  projections,  and expenditures were
about  $780  million  higher,  primarily  because of higher  health and  welfare
caseloads,  lower  property  taxes which require  greater State support for K-14
education to make up to shortfall, and lower than anticipated Federal government
payments  for  immigrationrelated  costs.  The  reports  in May and  June  1994,
indicated  that revenues in the second half of the 1993-94 fiscal year were very
close to the  projections  made in the  Governor'S  Budget of January 10,  1994,
which was consistent with a slow turn around in the economy.

                  The Department of Finance's July 1994 Bulletin, which included
final June receipts,  reported that June revenues were $114 million (2.5%) above
projection,  with final end-ofyear  results at $377 million (about 1%) above the
May  Revision  projections.  Part of  this  result  was  due to the  end-of-year
adjustments and reconciliations.  Personal income tax and sales tax continued to
track  projections.  The largest factor in the higher than anticipated  revenues
was from bank and  corporation  taxes,  which were $140  million  (18.4%)  above
projection in June.

                  During the 1993-94  fiscal  year,  the State  implemented  the
Deficit  Retirement  Plan,  which was part of the 1993-94 Budget Act, by issuing
$1.2  billion of revenue  anticipation  warrants in February  1994 that  matured
December 21,  1994.  This  borrowing  reduced the cash deficit at the end of the
1993-94 fiscal year. Nevertheless, because of the $1.5 billion variance from the
original 1993-94 Budget Act assumptions,  the General Fund ended the fiscal year
at June 30, 1994 carrying forward an accumulated  deficit of approximately  $1.8
billion.


                  Because  of the  revenue  shortfall  and the  State's  reduced
internal  borrowable cash resources,  in addition to the $1.2 billion of revenue
anticipation  warrants issued as part of the Deficit  Retirement Plan, the State
issued an additional $2.0 billion of revenue anticipation  warrants that matured
July 26, 1994,  which were needed to fund the State's  obligations  and expenses
through the end of the 1993-94 fiscal year.


                  The 1994-95  fiscal year  represented  the fourth  consecutive
year the  Governor  and  Legislature  were  faced with a very  difficult  budget
environment  to produce A  balanced  budget.  Many  program  cost and  budgetary
adjustments had already been made in the last three years. The Governor's Budget
Proposal,  as updated in May and June 1994 proposed a two-year  solution to pass
the accumulated  deficit.  The budget proposal set forth revenue and expenditure
forecasts  and revenue  and  expenditure  proposals  which  estimated  operating
surpluses for the budget for



                                      -43-



<PAGE>




both 1994-95 and 1995-96,  and lead to the elimination of the accumulated budget
deficit, estimated at about $1.8 billion at June 30, 1994, by June 30, 1996.

                  The  1994-95  Budget  Act,  signed by the  Governor on July 8,
1994,  projected  revenues and transfers of $41.9  billion,  $2.1 billion higher
than revenues in 1993-94.  This  reflected the  Administration's  forecast of an
improving  economy.  Also included in this figure was the  projected  receipt of
about $360 million from the Federal  Government to reimburse the State's cost of
incarcerating  undocumented  immigrants,   most  of  which  eventually  was  not
received.

                  The 1994-95  Budget Act  projected  Special  Fund  revenues of
$12.1 billion, a decrease of 2.4% from 1993-94 estimated revenues.

                  The 1994-95 Budget Act projected  General Fund expenditures of
$40.9  billion,  an increase of $1.6 billion over the 1993-94  fiscal year.  The
1994-95 Budget Act also projected Special Fund expenditures of $13.7 billion,  a
5.4% increase over 1993-94 fiscal year estimated expenditures.

                  The  1994-95  Budget Act  contained  no tax  increases.  Under
legislation  enacted for the 1993-94  Budget Act,  the  renters'  tax credit was
suspended for two years (1993 and 1994).  A ballot  proposition  to  permanently
restore the renters' tax credit after 1995 failed at the June 1994 election. The
Legislature  enacted a further  one-year  suspension of the renters' tax credit,
for 1995, saving about $390 million in the 1995-96 fiscal year.

                  The 1994-95 Budget Act assumed that the State would use a cash
flow  borrowing  program in 1994-95 which  combines  one-year notes and two-year
warrants,  which were issued. Issuance of the warrants allows the State to defer
repayment of approximately  $1.0 billion of its accumulated  budget deficit into
the 1995-96  fiscal  year.  The Budget  Adjustment  Law  enacted  along with the
1994-95 Budget Act is designed to ensure that the warrants will be repaid in the
1995-96 fiscal year.

                  The  Department  of Finance  Bulletin for April 1995  reported
that General  Fund  revenues  for March 1995 were $28  million,  or 1.1%,  below
forecast,  and that  year-to-date  General Fund revenues  were $110 million,  or
0.4%, below forecast.

                  Initial analysis of the Federal fiscal year 1995 budget by the
Department  of Finance  indicates  that about $98 million was  appropriated  for
California  to  offset  costs  of  incarceration  of  undocumented  and  refugee
immigrants, less than



                                      -44-



<PAGE>




the $356 million which was assumed in the State's 1954-95 Budget Act.

                  For the  first  time in  four  years,  the  State  enters  the
upcoming 1995-96 fiscal year with  strengthening  revenues based on an improving
economy.  On January 10, 1995,  the Governor  presented his 1995-96  Fiscal Year
Budget Proposal (the "Proposed  Budget").  The Proposed Budget estimates General
Fund  revenues and  transfers  of $42.5  billion (an increase of 0.2% over 1994-
95).  This nominal  increase from 1994-95  fiscal year  reflects the  Governor's
realignment  proposal and the first year of his tax cut proposal.  Without these
two proposals,  General Fund revenues would be projected at approximately  $43.8
billion,  or an increase of 3.3% over  1994-95.  Expenditures  are  estimated at
$41.7 billion  (essentially  unchanged from 1994-95).  Special Fund revenues are
estimated  at $13.5  billion  (10.7%  higher  than  1994- 95) and  Special  Fund
expenditures  are estimated at $13.8 billion  (12.2% higher than  1994-95).  The
Proposed  Budget projects that the General Fund will end the fiscal year at June
30, 1996 with a budget surplus in SFEU of about $92 million,  or less than 1% of
General Fund  expenditures,  and will have repaid all of the accumulated  budget
deficits.


                             RECENT ECONOMIC TRENDS


                  Revised  employment data indicate that California's  recession
ended in 1993,  and  following a period of  stability,  a solid  recovery is now
underway.  The State's  unemployment  rate fell sharply last year, from 10.1% in
January to 7.7% in October and November  1994.  The gap between the national and
California jobless rates narrowed from 3.4 percentage points at the beginning of
1994 to an average of 2 percentage points in October and November. The number of
unemployed  Californians  fell by nearly 400,000 during the year, while civilian
employment increased more than 300,000 in 1994.

                  Other   indicators,   including  retail  sales,   homebuilding
activity,  existing  home sales and bank lending  volume all confirm the State's
recovery .

                  Personal  income  was  severely  affected  by  the  Northridge
Earthquake,  which  reduced the first  quarter  1994 figure by $22 billion at an
annual rate,  reflecting the uninsured  damage to residences and  unincorporated
businesses.  As a result, personal income growth for all of 1994 was about 4.2%.
However,  excluding the Northridge effects,  growth would have been in excess of
5%. Personal income is expected to grow 6.6% for 1995.





                                      -45-



<PAGE>




                                OTHER INFORMATION

                  As of April 22, 1996,  the following  person was known by Fund
Management to have owned beneficially, directly or indirectly, 5% or more of the
outstanding  shares of the Fund: Esther Miller,  Agent for Emunah Trust (6.70%),
13-47 Zito Court, Fairlawn, New Jersey 07410.



                              FINANCIAL STATEMENTS


                  Audited  financial  statements  of the Fund for the year ended
December 31, 1995 are attached hereto.




                                      -46-



<PAGE>



                 INFORMATION WITH RESPECT TO SECURITIES RATINGS*


Standard & Poor's Corporation.

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

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

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

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

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

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

                  (2)  Nature and provisions of the obligation.

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

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

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

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


                                       A-1



<PAGE>



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

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

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

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

MOODY'S INVESTORS SERVICE, INC.

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

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

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

                                       A-2



<PAGE>



other elements  present which make the long-term  risks appear  somewhat  larger
than in Aaa securities.  Their market value is virtually immune to all but money
market influences, with the occasional exception of oversupply in a few specific
instances.

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

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

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

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


                                       A-3



<PAGE>



FITCH

Ratings

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

                                       AAA

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

                                       AA

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

                                        A

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

                                       BBB

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

                                       BB

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

                                       A-4



<PAGE>




                                        B

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

                                       CCC

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

                                       CC

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

                                        C

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

                                  DDD, DD AND D

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

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



                                       A-5



<PAGE>



DUFF & PHELPS, INC.


RATING
SCALE             DEFINITION

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

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

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

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

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

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

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

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

DP                Preferred stock with dividend arrearages.


                                       A-6



<PAGE>



RATING
SCALE        DEFINITION

             HIGH GRADE

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

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

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

             GOOD GRADE

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

             SATISFACTORY GRADE

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

             NON-INVESTMENT GRADE

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

             DEFAULT

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


                             MUNICIPAL NOTE RATINGS

                  The ratings of Moody's for tax-exempt  notes are MIG 1, MIG 2,
MIG 3 and MIG 4. Notes bearing the designation MIG 1 are

                                       A-7



<PAGE>



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

                               SHORT-TERM RATINGS

FITCH

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

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

                                      F-1+

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

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

                                       F-1

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

                                       F-2

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



                                       A-8



<PAGE>



MUNICIPAL COMMERCIAL PAPER RATINGS

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

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

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



                                       A-9




<PAGE>
(Left column)

THE CALIFORNIA MUNI FUND

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------

ASSETS
  Cash..........................................................    $    88,714
  Investment in securities at value (cost $17,427,017)..........     18,194,659
  Interest receivable...........................................        258,709
                                                                    -----------
        Total assets............................................     18,542,082
                                                                    -----------
LIABILITIES
  Payables
    Dividends...................................................         14,473
    Capital Shares Redeemed.....................................      5,812,594
  Accrued expenses..............................................         92,683
                                                                    -----------
        Total liabilities.......................................      5,919,750
                                                                    -----------
NET ASSETS consisting of:
  Accumulated net realized loss....................  $ (373,252)   
  Unrealized appreciation of securities............      767,642
  Paid-in-capital applicable to 1,416,845 shares 
    of beneficial interest (Note 4)................   12,227,942
                                                     -----------    -----------
                                                                    $12,622,332
                                                                    ===========
NET ASSET VALUE PER SHARE.......................................          $8.91
                                                                          =====

(Right column)

STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------

INVESTMENT INCOME
  Interest income...............................................     $1,111,595
EXPENSES (Notes 2 and 3)
  Management fee.......................................  $67,639
  Custodian and accounting fees........................   61,158
  Transfer agent fees..................................   27,231
  Professional fees....................................  142,856
  Printing and postage.................................    9,607
  Interest.............................................   53,171
  Distribution expenses................................   51,029
  Shareholder communication............................   12,000
  Trustees' fees.......................................    7,532
  Miscellaneous........................................      730
                                                         -------
        Total expenses..........................................        432,953
                                                                     ----------
        Net investment income...................................        678,642
                                                                     ----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
  Net realized gain on investments..............................        152,418
  Unrealized appreciation of investments for the year...........      3,192,187
                                                                     ----------
        Net gain on investments.................................      3,344,605
                                                                     ----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................     $4,023,247
                                                                     ==========

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                       Year Ended       Year Ended
                                                                      December 31,     December 31,
                                                                          1995             1994
                                                                      ------------     ------------
<S>                                                                   <C>              <C>    
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
  Net investment income.............................................  $    678,642     $    947,323
  Net realized gain (loss) on investments...........................       152,418         (525,670)   
  Unrealized appreciation (depreciation) of investments for the year     3,192,187       (3,571,076)   
                                                                      ------------     ------------
        Net increase (decrease) in net assets from operations.......     4,023,247       (3,149,423)   

DIVIDENDS PAID TO SHAREHOLDERS FROM
  Investment income.................................................      (678,642)        (947,323)
CAPITAL SHARE TRANSACTIONS (Note 4).................................    (1,279,945)      (1,625,159)   
                                                                      ------------     ------------
        Total increase (decrease)...................................     2,064,660       (5,721,905) 
  
NET ASSETS:
  Beginning of year.................................................    10,557,672       16,279,577
                                                                      ------------     ------------
  End of year.......................................................   $12,622,332      $10,557,672
                                                                      ============     ============
</TABLE>
                       See Notes to Financial Statements.


                                       5
<PAGE>

THE CALIFORNIA MUNI FUND

STATEMENT OF INVESTMENTS
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 Principal
  Amount                              Issue000                                                    Type0     Rating00       Value
  ------                              --------                                                    -----     --------       -----
<S>             <C>                                                                                <C>        <C>      <C>         
$  100,000      Arvin Development Corporation, COP, RB, 8.750%, 9/01/18........................    FCLT       NR       $     24,015
 9,395,000      Bakersfield, COP, ETM, CAB, 4/15/21............................................    FCLT       AAA         2,335,127
   200,000      Beverly Hills, PFA, RB, IFRN*, MBIA Insured, 6/01/15...........................    LRIB       AAA           192,344
   250,000      Big Independent Cities, Pooled Insurance Program, RB, Series A, 
                  8.250%, 3/01/09..............................................................    FCLT       NR            258,205
   100,000      CSAC Finance Corp, COP, Sutter County Health Facilities Project, 
                  7.800%, 1/01/21..............................................................    FCLT       BAA1          101,873
    40,000      California Health Facilities Authority, Pomona Valley Community Hospital 
                  Project, Series A, 7.000%, 1/01/17...........................................    FCLT       A-             40,527
 1,050,000      California Health Facilities Authority, Valley Presbyterian Hospital Project, 
                  RB, Series A, 9.000%, 5/01/12................................................    FCLT       BB          1,051,333
   300,000      California Statewide Communities Development Authority, Cedars Sinai Medical 
                  Project, COP, RB, IFRN*, 11/01/15............................................    LRIB       A1            248,232
    15,000      Corona City, CRA, SFRM, RB, 9.000%, 11/15/12...................................    FCLT       A              15,395
   300,000      East Bay, Wastewater System Project, RB, Refunding, AMBAC Insured, 
                  IFRN*, 6/01/20...............................................................    LRIB       AAA           297,774
   500,000      Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, 
                  CAB, 1/01/26.................................................................    FCLT       BBB-           74,410
   250,000      Hawthorne, CRA, TAR, 6.750%, 9/01/24...........................................    FCLT       BAA           264,592
 1,800,000      Irvine Ranch Water District, Consolidated Improvement Districts, 
                  LOC Industrialized Bank of Japan, VRDN, 6/01/15..............................    VRDN       VMIG1       1,800,000
   200,000      Lake Elsinore, USD, Refunding, COP, 6.900%, 2/01/20............................    FCLT       BBB           215,066
 1,700,000      Los Angeles Regional Airports Improvement Corp, LOC Societe Generale, 
                  VRDN, 12/01/25...............................................................    VRDN       A1+         1,700,000
 1,192,923      Los Angeles, HFA, MFH Project C, CAB, RB, 12/01/2..............................    FCLT       NR          1,192,923
    15,000      Los Angeles, Home Mortgage, RB, 9.000%, 6/15/18................................    FCLT       A              15,620
   300,000      Los Angeles, Multiple Capital Facilities Project III, COP, IFRN*, 11/01/11.....    INLT       A1            300,438
   575,000      Madera, USD, COP, Educational Facilities Project, 5.750%, 9/01/13..............    FCLT       BAA1          560,027
    35,000      Modesto, Valley Oak Project, RB, 10.60%, 5/01/09...............................    FCSI       NR             36,450
   350,000      New Haven, USD, AMBAC Insured, CAB, 8/01/16....................................    FCLT       AAA           107,636
   250,000      Northern California Power Agency, Multiple Capital Facilities, RB,
                  MBIA Insured, IFRN*, 8/01/25.................................................    LRIB       AAA           292,083
   250,000      Northern California Transmission Agency, CA-ORE Transmission Project, RB,
                  MBIA insured, IFRN*, 4/29/24.................................................    LRIB       AAA           245,325
   250,000      Orange County, LTA, RB, IFRN*, 2/14/11.........................................    LRIB       AA            272,963
   250,000      Orange County, LTA, RB, IFRN*, 2/14/11.........................................    LRIB       AAA           271,358
   250,000      Palmdale, SFRM, Series A, CAB, 3/01/17.........................................    FCLT       AAA            75,903
   200,000      Panoche, Water District, COP, 7.500%, 12/01/08.................................    FCSI       BBB           219,374
   250,000      Rancho, Water District Financing Authority, RB, Prerefunded @104,
                  AMBAC Insured, IFRN*, 8/17/21................................................    LRIB       AAA           318,075
   250,000      Redding, Electric System, COP, Series A, FGIC Insured, IFRN*, 6/01/19..........    LRIB       AAA           254,368
   500,000      Rio, USD, COP, FSA Insured, Convertible, CAB, 9/01/28..........................    FCLT       AAA           332,780
</TABLE>

                                       6
<PAGE>

THE CALIFORNIA MUNI FUND

STATEMENT OF INVESTMENTS (continued)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 Principal
  Amount                              Issue000                                                    Type0     Rating00       Value
  ------                              --------                                                    -----     --------       -----
<S>             <C>                                                                                <C>        <C>      <C>         
$  175,000      Riverside, HFA, Riverside Apartment Project, RB, 7.875%, 11/01/19..............    FCSI       BB-      $    185,133
 2,000,000      Salinas Redevelopment Agency, TAB, CGIC Insured, Central City Project, 
                  CAB, 11/01/22................................................................    FCLT       AAA           453,040
   500,000      San Bernardino, COP, Series B, MBIA Insured, IFRN*, 7/01/16....................    INLT       AAA           515,550
   900,000      San Bernardino, COP, Series PA-38, MBIA Insured, IFRN*, 7/01/16................    LRIB       AAA           937,512
   200,000      San Diego Water Authority, COP, FGIC Insured, IFRN*, 4/22/09...................    LRIB       AAA           220,992
 1,440,000      San Jose, CRA, TAB, MBIA Insured, IFRN*, 8/01/16...............................    LRIB       AAA         1,325,174
   250,000      Solana County, IHFA, Northbay Hospital, COP, 7.750%, 11/01/19..................    FCLT       BBB-          261,855
   500,000      Southern California Public Power Authority, AMBAC Insured, IFRN*, 7/01/15......    LRIB       AAA           461,015
   250,000      Southern California Public Power Authority, FGIC Insured, IFRN*, 7/01/17.......    LRIB       AAA           244,297
   105,000      Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series A, 6.450%, 12/01/28.......    FCLT       AAA           110,029
   250,000      Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series B, 6.300%, 12/01/28.......    FCLT       AAA           258,482
   100,000      Upland, HFA, RB, 7.850%, 7/01/20...............................................    FCLT       BBB           107,364
                                                                                                                        -----------
                        Total Investments (Cost $17,427,017**).................................                         $18,194,659
                                                                                                                        ===========
</TABLE>

 * Inverse Floating Rate Notes (IFRN) are instruments  whose interest rates bear
   an inverse relationship to the interest rate on another security or the value
   of an index. (see Note 5). Rates shown are at year end.

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



                                       7
<PAGE>

THE CALIFORNIA MUNI FUND

STATEMENT OF INVESTMENTS (continued)
December 31, 1995
- --------------------------------------------------------------------------------

Legend

0Type      FCLT   -Fixed Coupon Long Term
           FCSI   -Fixed Coupon Short or Intermediate Term
           LRIB   -Residual Interest Bond Long Term
           SRIB   -Residual Interest Bond Short or Intermediate Term
           INLT   -Indexed Inverse Floating Rate Bond Long Term
           INSI   -Indexed Inverse Floating Rate Bond Short or Intermediate Term
           VRDN   -Variable Rate Demand Note

00Ratings  If a security  has a split  rating the highest  applicable  rating is
           used, including published ratings on identical credits for individual
           securities not individually rated. Ratings are unaudited.

           NR-Not Rated

000Issue   AMBAC  American Municipal Bond Assurance Corporation
           AMT    Alternative Minimum Tax
           CAB    Capital Appreciation Bond
           CGIC   Capital Guaranty Insurance Company
           COP    Certificate of Participation
           CRA    California Redevelopment Agency
           ETM    Escrowed to Maturity
           FGIC   Financial Guaranty Insurance Corporation
           FNMA   Federal National Mortgage Association
           FSA    Financial Security Association
           GNMA   Government National Mortgage Association
           HFA    Housing Finance Authority
           IHFA   Intercommunity Hospital Financing Authority
           LTA    Local Transportation Authority
           MBIA   Municipal Bond Insurance Assurance Corporation
           MFH    Multi Family Housing
           PFA    Public Financing Authority
           RB     Revenue Bond
           SFRM   Single Family Residential Mortgage
           TAB    Tax Allocation Bond
           TAR    Tax Allocation Refunding
           USD    Unified School District

                       See Notes to Financial Statements.



                                       8
<PAGE>

THE CALIFORNIA MUNI FUND

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

(Left Column)

1. Significant Accounting Policies

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

    Valuation  of  Securities-Investments  are  stated at value  based on prices
provided by a pricing  service when such prices are believed to reflect the fair
market value of such securities. Securities not priced in this manner are at the
mean of the last  reported  bid and asked prices  provided by  principal  market
makers and recognized  dealers in such  securities.  Other assets and securities
for which no  quotations  are readily  available  are valued in good faith under
methods approved by the Board of Trustees.

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

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

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

    Accounting  Estimates-The  preparation of financial statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial  statements and the reported amounts of increases and decreases in
net assets from  operations  during the reporting  period.  Actual results could
differ from those estimates.

2. Investment Advisory Fees and Other Transactions With Affiliates

    Under a Management Agreement,  the Fund pays an investment management fee to
Fundamental  Portfolio Advisors,  Inc. (the Man-

(Right column)

ager)  equal to 0.5% of the  Fund's  average  daily net  asset  value up to $100
million and decreasing by .02% of each $100 million  increase in net assets down
to 0.4% of net assets in excess of $500 million.

    Under the  Agreement,  the Manager is required to  reimburse  to the Fund an
amount  not  exceeding  the  amount of fees  payable  to the  Manager  under the
Agreement  for any  fiscal  year,  if,  and to the  extent  that  the  aggregate
operating  expenses of the Fund for any fiscal year  (including the fees payable
to the Manager,  but  excluding  interest  expense,  taxes,  brokerage  fees and
commissions,  extraordinary expenses beyond the control of the Manager and other
fees and expenses  properly  excludable from the definition of "aggregate annual
expenses"  under  California  law) exceed any expense  limitation  imposed under
California  law.  No such  reimbursements  was  required  during  the year ended
December 31, 1995.

    Pursuant to a  Distribution  Plan (the Plan) adopted  pursuant to Rule12b-1,
promulgated  under the Investment  Company Act of 1940, the Fund may pay certain
promotional  and  advertising  expenses and may  compensate  certain  registered
securities   dealers  and  financial   institutions  for  services  provided  in
connection  with the  processing  of orders for  purchase or  redemption  of the
Fund's shares and furnishing other  shareholder  services.  Payments by the Fund
shall not in the aggregate, in any fiscal year, exceed 0.5% of the average daily
net assets of the Fund.

    Under a Distribution  Agreement with Fundamental  Service Corporation (FSC),
an affiliate of the Manager,  amounts are paid under the Plan to compensate  FSC
for the  services it provides  and the  expenses  it bears in  distributing  the
Fund's shares to investors.  Fees for those services  aggregated  $9,600 for the
year ended December 31, 1995.

    The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of
the  Manager,  for the services it provides  under a Transfer  Agent and Service
Agreement.  Transfer  agent fees for the year ended  December  31,  1995 are set
forth in the statement of operations.

3. Trustees' Fees

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

4. Shares of Beneficial Interest

    As of  December  31,  1995  there  were an  unlimited  number  of  shares of
beneficial  interest  (no par  value)  authorized.  



                                       9
<PAGE>

THE CALIFORNIA MUNI FUND

NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------

(left column)

Transactions in shares of beneficial interest were as follows:

                                 Year Ended                 Year Ended
                             December 31, 1995           December 31, 1994
                          ------------------------     ------------------------
                            Shares        Amount        Shares        Amount
                          ---------     ----------     ---------    -----------
Shares sold.............  7,881,857    $66,180,540     1,971,607    $15,716,250
Shares issued on
  reinvestment of
  dividends.............     60,506        494,825        69,822        570,507
Shares redeemed......... (8,012,453)   (67,955,310)   (2,270,355)   (17,911,916)
                          ---------     ----------     ---------    -----------
Net increase (decrease).    (70,090)   ($1,279,945)     (228,926)   ($1,625,159)
                          =========     ==========     =========    ===========


5. Complex Securities and Investment Transactions
   Inverse Floating Rate Notes:

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

Investment Transactions:

    During the year ended  December 31, 1995, the cost of purchases and proceeds
from sales of investment  securities,  other than short-term  obligations,  were
$7,389,258 and $7,877,645 respectively.

    As of  December  31,  1995  the net  unrealized  appreciation  of  portfolio
securities   amounted  to  $767,642  composed  of  unrealized   appreciation  of
$1,033,537 and unrealized depreciation of $265,895.

(Right column)

6. Line of Credit

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

7. Contingencies

    The Fund has been named as a defendant  in a class action  lawsuit  alleging
that the Fund invested in certain  derivative  financial  instruments  that were
inconsistent with the Fund's stated investment objectives.  The suit claims that
the defendants,  which include the Fund's investment adviser,  distributor,  and
certain control  persons,  are liable for damages because there existed material
misstatements or omissions in the prospectuses that rendered them misleading.

    Management  has  entered  into  negotiations  with the  plaintiffs  who have
consented to a series of  adjournments of all operative dates in the litigation.
These  negotiations  have  resulted  in  a  settlement  in  principle  with  the
plaintiffs  that,  if  consummated,  would  require a payment  of  approximately
$500,000 or more under certain  future  circumstances  by the Fund's  investment
adviser  and  no  liability  or  cost  to the  Fund  or  its  shareholders.  The
contemplated stipulation of settlement expressly states that the settlement does
not  constitute  an  admission  of  wrongdoing  by the Fund or any of the  other
defendants.  The settlement remains subject to final documentation and agreement
by the parties and approval by the Court. If the settlement is not  successfully
concluded,  the Fund  intends  to contest  the  litigation  vigorously.  If this
litigation ever goes forward,  it would involve  significant  complexities  that
preclude a present determination of whether any liability to the Fund ultimately
would  result and, if so,  whether any such  liability  would be material to the
financial  position  of the Fund.  Accordingly,  and  because  the  contemplated
settlement  does not require any payment by the Fund, no amount has been accrued
in the financial  statements with respect to this matter. 8. Selected  Financial
Information

                                       10
<PAGE>

THE CALIFORNIA MUNI FUND

NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                               ------------------------------------------------------
                                                               1995        1994        1993        1992        1991
                                                               ----        ----        ----        ----        ----
<S>                                                            <C>         <C>         <C>         <C>         <C>
PER SHARE OPERATING PERFORMANCE
  (for a share outstanding throughout the year)
Net Asset Value, Beginning of Year.........................    $ 7.10      $ 9.49      $ 8.81      $ 8.80      $ 8.64
Income from investment operations:
Net investment income......................................       .419        .553        .563        .604        .571
Net realized and unrealized gains (losses) on investments..      1.810      (2.390)       .876        .010        .160
        Total from investment operations...................      2.229      (1.837)      1.439        .614        .731
Less Distributions:
Dividends from net investment income.......................      (.419)      (.553)      (.563)      (.604)      (.571)   
Dividends from net realized gains..........................        -           -         (.196)        -           -
        Total distributions................................      (.419)      (.553)      (.759)      (.604)      (.571)   
Net Asset Value, End of Year...............................    $ 8.91      $ 7.10      $ 9.49       $ 8.81     $ 8.80
Total Return ..............................................     32.02%     (19.89%)     16.80%        7.23%      8.75%

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000)..............................     12,622      10,558      16,280       11,549      9,669
Ratios to Average Net Assets:
  Interest expense.........................................       .39%        .98%        .39%         .16%       .14%
  Operating expenses.......................................      2.81%       2.50%       1.77%*       1.47%*     2.24%
        Total expenses.....................................      3.20%       3.48%       2.16%*       1.63%*     2.38%
        Net investment income..............................      5.02%       6.80%       6.04%*       6.87%*     6.58%*   
Portfolio turnover rate....................................     53.27%      15.88%      51.26%       18.91%     47.34%

BANK LOANS
Amount outstanding at end of year (000 omitted)............     $    0      $1,292      $3,714            0        645
Average amount of bank loans outstanding during the year
  (000 omitted)............................................     $  642      $1,690      $  958          274        155+   
Average number of shares outstanding during the year
  (000 omitted)............................................      1,635       1,711       1,517        1,214      1,115+   
Average amount of debt per share during the year...........     $  .39      $  .95      $  .63       $  .23     $  .14

<FN>
 +Monthly average.
**These ratios are after expense reimbursement of .50% for each of the years ended December 31, 1993, and 1992.
</FN>
</TABLE>


                                       11

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

The Board of Trustees and Shareholders
The California Muni Fund

    We have  audited  the  accompanying  statement  of  assets  and  liabilities
including  the  statement  of  investments  of The  California  Muni  Fund as of
Decernber  31, 1995 and the related  statement of  operations  for the year then
ended,  statements  of  changes  in net  assets for each of the two years in the
period then ended, and the selected  financial  information for each of the five
years  in the  period  then  ended.  These  financial  statements  and  selected
financial  information  are the  responsibility  of the Fund's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
selected financial information based on our audits.

    We conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance  about  whether  the  financial  statements  and  selected
financial  information  are free of  material  misstatement.  An audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the financial  statements.  Our procedures  included  confirmation of securities
owned as of December 31, 1995 by  correspondence  with the  custodian.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

    In our opinion, the financial statements and selected financial  information
referred to above  present  fairly,  in all  material  respects,  the  financial
position of The California Muni Fund as of December 31, 1995, the results of its
operations,  changes in its net assets, and selected  financial  information for
the  periods  indicated,   in  conformity  with  generally  accepted  accounting
principles.

                                                            S I G N A T U R E

New York, New York
February 13, 1996

                                       12





<PAGE>

(Left column)

                            THE CALIFORNIA MUNI FUND
                              90 Washington Street
                               New York, NY 10006
                                 1-800-322-6864

                              Independent Auditors
                            McGladrey & Pullen, LLP
                               New York, NY 10017

                                    Attorney
                            Kramer, Levin, Naftalis,
                            Nessen, Kamin & Frankel
                                919 Third Avenue
                               New York, NY 10022

This report and the financial statements contained
herein are submitted for the general information of
the shareholders of theFund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.


(Right Column)

                            THE CALIFORNIA MUNI FUND

                                 Annual Report
                               December 31, 1995

                            THE CALIFORNIA MUNI FUND

                                     Double
                               Tax-Free Investing

                                  FUNDAMENTAL
                          Fundamental Family of Funds
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----