LEXINGTON NATURAL RESOURCES TRUST, 497, 1999-05-06

LEXINGTON NATURAL RESOURCES TRUST
497, 1999-05-06

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PROSPECTUS
May 3, 1999

Lexington NATURAL RESOURCES Trust
P.O. Box 1515 / Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
201-845-7300

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

Individual variable annuity contract holders and variable
life insurance policy holders are not "shareholders" of the
Fund. The Participating Insurance Companies and their separate
accounts are the shareholders or investors, although such
companies may pass through voting rights to their variable
annuity contract or variable life insurance policyholders.
SHARES OF THE FUND ARE NOT OFFERED DIRECTLY TO THE GENERAL
PUBLIC.

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

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED NOR DISAPPROVED THE
SHARES OF LEXINGTON NATURAL RESOURCES TRUST. THE SECURITIES AND EXCHANGE
COMMISSION ALSO HAS NOT DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
COMPLETE. ANY PERSON WHO TELLS YOU THAT THE SECURITIES AND EXCHANGE COMMISSION
HAS MADE SUCH AN APPROVAL OR DETERMINATION IS COMMITTING A CRIME.

- --------------------------------------------------------------------------------
<PAGE>

RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The Lexington Natural Resources Trust's investment objective is to seek
long-term growth of capital through investment primarily in common stocks of
companies that own or develop natural resources and other basic commodities, or
supply goods and services to such companies. Current income will not be a
factor. Total return will consist primarily of capital appreciation.

The investment objective may not be changed without shareholder approval.

INVESTMENT STRATEGIES

The Lexington Natural Resources Trust (the "Fund") normally invests at
least 65% of its total assets in companies with substantial natural resource
assets. Natural resource assets are materials derived from natural resources
which have economic value. The Fund seeks to identify securities of companies
that it believes to be undervalued relative to the value of the natural resource
assets they hold. This identification process will take into account current and
anticipated economic and financial conditions.

The remaining 35% of the Fund's total assets may be invested in common
stock of companies that are not natural resource companies and in debt
securities of natural resource companies as well as other companies.

The Fund may invest up to 25% of its total assets in securities principally
traded in markets outside the United States.

PRINCIPAL RISKS

Through stock investments, the Fund may expose you to common stock risks
which may cause you to lose money if there is a sharp or sudden decline in the
share price of one of the companies in the Fund's portfolio. Due to the inherent
effects of the stock market, the value of the Fund will fluctuate with the
movement of the market as well as in response to the activities of individual
companies in the Fund's portfolio.

In addition, the Fund's investments in foreign securities may involve risks
greater than those attendant to investments in securities of U.S. issuers. Some
foreign stock markets tend to be more volatile than U.S. markets due to economic
and political instability and regulatory conditions in those countries. In
addition, many foreign securities are denominated in foreign currencies, whose
values may decline against the U.S. dollar. See "Risk of Investing in Foreign
Securities" on page 4.

Because the Fund will invest a substantial portion of its portfolio in the
securities of companies with natural resource assets, it should be considered as
a vehicle for diversification and not as a balanced investment program.

2
<PAGE>

BAR CHART AND PERFORMANCE TABLE

The bar chart and performance table below show the risks of investing in
the Fund. The chart shows changes in the performance since inception* (08/01/89)
through 12/31/98. The table shows how the average annual return compares with
the most commonly used index for its market segment for 1, 5 and 10 years (or
since inception). You should remember that past performance is not an indication
of future performance.

*Prior to October 14, 1991, the Fund operated under a different name and
investment objective. Fund performance figures in this bar chart do not reflect
separate account fees charged by the insurance company, otherwise performance
figures would be lower.

PAST FUND PERFORMANCE The chart at the left below shows the risk of investing
in the Fund and how the Fund's total return has varied from year-to-year. The
chart at the right compares the Fund's performance with the most commonly used
index for its market segment. Of course, past performance is no guarantee of
future results.

<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
SINCE
INCEPTION
1 YEAR 5 YEAR (08/01/89)
------- ------ ------
<S> <C> <C> <C>
Natural Resources
Trust -19.62% 3.86% 2.77%
S&P 500 28.72% 24.09% 17.49%
</TABLE>

During the eight year period shown in the above bar graph chart, the fund's
highest quarterly return was 19.27% for the third quarter in 1997 and the
fund's lowest quarterly return was -15.11% for the third quarter in 1998.
[LINE GRAPH]

MORE ABOUT OUR INVESTMENT STRATEGIES AND RELATED RISKS

ADDITIONAL INVESTMENT STRATEGIES

At any time management deems it advisable for temporary defensive or
liquidity purposes, the Fund may hold all its assets in cash or cash equivalents
and invest in, or hold unlimited amounts of, debt obligations of the United
States Government or its political subdivisions, and money market instruments
including repurchase agreements with maturities of seven days or less and
Certificates of Deposit.

RELATED RISKS

RISKS OF INVESTING

The following risks are generally common to all managed mutual funds and,
therefore, apply to the Fund:

- MARKET RISK. The market value of a security may go up or down, sometimes
rapidly and unpredictably. A decline in market value may cause a security
to be worth less than it was at the time of purchase. Market risk applies
to individual securities, a particular sector or the entire economy.

- MANAGER RISK. Fund management affects Fund performance. A Fund may lose
money if the Fund manager's investment strategy does not achieve the
Fund's objective or the manager does not implement the strategy properly.

- YEAR 2000 RISK. The Fund or its service providers could be disrupted by
problems in their computer systems related to the Year 2000.

3
<PAGE>

RISK OF INVESTING IN FOREIGN SECURITIES

The following risks apply to all mutual funds that invest in foreign
securities including the Fund:

- LEGAL SYSTEM AND REGULATION RISK. Foreign countries have different legal
systems and different regulations concerning financial disclosure,
accounting and auditing standards. Corporate financial information that
would be disclosed under U.S. law may not be available. Foreign
accounting and auditing standards may render a foreign corporate balance
sheet more difficult to understand and interpret than one subject to U.S.
law and standards. Additionally, government oversight of foreign stock
exchanges and brokerage industries may be less stringent than in the U.S.

- CURRENCY RISK. Most foreign stocks are denominated in the currency of
the stock exchange where they are traded. The Fund's net asset value is
denominated in U.S. dollars. The exchange rate between the U.S. dollar
and most foreign currencies fluctuates; therefore, the net asset value of
the Fund will be affected by a change in the exchange rate between the
U.S. dollar and the currencies in which the Fund's stocks are
denominated. The Fund may also incur transaction costs associated with
exchanging foreign currencies into U.S. dollars.

- STOCK EXCHANGE AND MARKET RISK. Foreign stock exchanges generally have
less volume than U.S. stock exchanges. Therefore, it may be more
difficult to buy or sell shares of foreign securities, which increases
the volatility of share prices on such markets. Additionally, trading on
foreign stock markets may involve longer settlement periods and higher
transaction costs.

- EXPROPRIATION RISK. Foreign governments may expropriate the Fund's
investments either directly by restricting the Fund's ability to sell a
security or by imposing exchange controls that restrict the sale of a
currency or by taxing the Fund's investments at such high levels as to
constitute confiscation of the security. There may be limitations on the
ability of the Fund to pursue and collect a legal judgment against a
foreign government.

The Fund may trade in certain foreign securities markets which are less
developed than comparable U.S. markets. The risks associated with trading in
such markets include:

- limited product lines of companies that own or develop natural resources
or other basic commodities;

- limited markets or financial or managerial resources;

- their securities may be more susceptible to losses and risks of
bankruptcy;

- their securities may trade less frequently and with lower volume, leading
to greater price fluctuations; and,

- their securities are subject to increased volatility and reduced
liquidity due to limited market making and arbitrage activities.

NON-DIVERSIFIED PORTFOLIO

The Fund is a non-diversified investment company. Non-diversified
investment companies may invest an unlimited proportion of their total assets in
a single company, which increases risk. The Fund intends to comply with
diversification requirements of the federal tax law to qualify as a regulated
investment company. For more detailed information on the federal tax law
diversification requirement, see the tax section of the Statement of Additional
Information.

PORTFOLIO TURNOVER

The Fund intends to buy and hold securities for long term growth of
capital, however, annual portfolio turnover could exceed 100%. A 100% turnover
rate occurs if all of the Fund's investments were sold and either repurchased or
replaced in a year. A higher portfolio turnover rate results in higher
transaction costs which are borne by the Fund.

4
<PAGE>

TEMPORARY DEFENSIVE POSITION

When the Fund anticipates unusual market or other conditions, it may
temporarily depart from its goal and invest substantially in high-quality
short-term investments. This could help the Fund avoid losses but may mean lost
opportunities.

INTERESTS OF THE HOLDERS OF VARIABLE INSURANCE CONTRACTS AND POLICIES

The Fund is intended to be the funding vehicle for variable annuity
contracts and variable life insurance policies to be offered by the separate
accounts of certain life insurance companies ("Participating Insurance
Companies"). The Fund currently does not foresee any disadvantages to the
holders of variable annuity contracts and variable life insurance policies
arising from the fact that the interests of the holders of such contracts and
policies may differ. Nevertheless, the Fund's Trustees intend to monitor events
in order to identify any material irreconcilable conflicts which may possibly
arise and to determine what action, if any, should be taken in response thereto.
If a conflict were to occur, an insurance company separate account might be
required to withdraw its investments in the Fund and the Fund might be forced to
sell securities at disadvantageous prices. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the Participating Insurance Companies. The Fund assumes no
responsibility for such prospectuses.

MANAGEMENT OF THE FUND

The business affairs of the Fund are managed under the direction of its
Board of Trustees. There are currently eleven Trustees (of whom seven are
non-affiliated persons) who meet five times each year. The Statement of
Additional Information contains additional information regarding the Trustees
and officers of the Fund.

INVESTMENT ADVISER

Lexington Management Corporation ("LMC"), a wholly-owned subsidiary of
Lexington Global Asset Managers, Inc. ("LGAM"), is the investment adviser to the
Fund. LMC and its predecessor companies, registered investment advisers under
the Investment Advisers Act of 1940, as amended, were established in 1938. LMC
is located at P.O. Box 1515, Park 80 West Plaza Two, Saddle Brook, New Jersey
07663. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities have a controlling interest in Lexington Global Asset Managers,
Inc., a Delaware corporation. LMC advises private clients as well as the Fund.
LMC supervises and assists in the overall management of the Funds, subject to
the oversight by the Board of Trustees. Lexington Funds Distributor, Inc. is a
registered broker-dealer and is the distributor of shares of the Fund.

The Investment Adviser has entered into a sub-advisory management contract
with Market Systems Research Advisors, Inc., 80 Maiden Lane, New York, New York
10038, a registered investment adviser, under which the Sub-Adviser will provide
the Fund with certain investment management and administrative services. The
Sub-Adviser serves as investment adviser to private and institutional accounts.

The Investment Adviser is paid an investment advisory fee at the annual
rate of 1.00% of the average daily net assets of the Fund, which is higher than
that paid by most other investment companies. This fee is computed on the basis
of the Fund's average daily net assets and is payable on the last business day
of each month.

PORTFOLIO MANAGER

The Fund is managed by an investment management team. Frank A. Peluso and
Robert M. DeMichele are the lead managers.

FRANK A. PELUSO has 36 years investment experience. Mr. Peluso is President
and Chief Executive Officer of Market Systems Research Advisors, Inc. ("MSR"),
the sub-adviser to the Fund. Mr. Peluso utilizes a proprietary analytical system
to identify securities with performance potential which he believes to be
exceptional. In addition, Mr. Peluso's proprietary data is used by professional
money managers, insurance companies, brokerage firms, banks, mutual fund
companies and pension funds. In 1976, he established Marketiming, Inc.
(currently named Market Systems Research, Inc., a fully-owned subsidiary of
MSR.) He was with MSR since its inception in 1986.

5
<PAGE>

Mr. Peluso graduated from Princeton University and completed a year of
post-graduate study at Columbia University, and two years of post-graduate study
at Princeton University with a Fellowship in Mathematics.

ROBERT M. DEMICHELE is Chairman and Chief Executive Officer of Lexington
Management Corporation. He is also the Chairman of the Investment Strategy
Group. In addition, he is President of Lexington Global Asset Managers, Inc.,
LMC's parent company. He holds similar offices in other companies owned by
Lexington Global Asset Managers, Inc., as well as, the Lexington Funds.

Prior to joining LMC in 1981, Mr. DeMichele was a Vice President at A.G.
Becker, Inc. the securities division of Warburg, Paribus, Becker, an
international investment banking firm. From 1973 to 1981, Mr. DeMichele held
several positions, the most recent managing A.G. Becker's Funds Evaluation and
Consulting Group for both the East and West coasts.

Mr. DeMichele is a graduate of Union College with a B.A. Degree in
Economics and an M.B.A. in Finance from Cornell University.

HOW TO PURCHASE AND REDEEM SHARES

With the exception of shares held in connection with initial capital of the
Fund, shares of the Fund are currently available for purchase solely by
participating insurance companies for the purpose of funding variable annuity
contracts and variable life insurance policies. Shares of the Fund are purchased
and redeemed at net asset value next calculated after a purchase or redemption
order is received by the Fund in good order. There are no minimum investment
requirements. Payment for shares redeemed will be made as soon as possible, but
in any event within three business days after the order for redemption is
received by the Fund. However, payment may be postponed under unusual
circumstances, such as when normal trading is not taking place on the New York
Stock Exchange.

SHAREHOLDER SERVICING AGREEMENTS

The Fund may enter into Shareholder Servicing Agreements with insurance
companies or other financial institutions ("Shareholder Servicing Agents") that
provide administrative services for the Fund or that provide to contract holders
and policyholders other services relating to the Fund. These services may
include: sub-accounting services, answering inquiries of contract holders and
policyholders regarding the Fund, transmitting, on behalf of the Fund, proxy
statements, annual reports, updated prospectuses and other communications to
contract holders and policyholders regarding the Fund, and such other related
services as the Fund or a contractholder or policyholder may request. The fees
paid by the Fund for these services to Shareholder Servicing Agents will not
exceed 0.25% of the average daily net assets of the Fund represented by shares
owned during the period for which payment is made. LMC, at no additional cost to
the Fund, may pay to Shareholder Servicing Agents additional amounts from its
past profits. A Shareholder Servicing Agent may, from time to time, choose not
to receive all of the fees payable to it.

DETERMINATION OF NET ASSET VALUE

How and when we calculate the Fund's price or net asset value (NAV)
determines the price at which insurance companies buy or sell shares. The net
asset value of the Fund is determined once daily as of 4:00 p.m., New York time,
on each day that the NYSE is open for trading. Per share net asset value is
calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.

As more fully described in the Statement of Additional Information,
portfolio securities are valued using current market valuations: either the last
reported sales price or, in the case of securities for which there is no
reported last sale and fixed-income securities, the mean between the closing bid
and asked price. Securities for which market quotations are not readily
available or which are illiquid are valued at their fair values as determined in
good faith under the supervision of the Fund's officers, and by the Investment
Adviser and the Board of Trustees, in accordance with methods that are
specifically authorized by the Board of Trustees. Short-term obligations with
maturities of 60 days or less are valued at amortized cost as reflecting fair
value.

Foreign Funds. The Fund may invest in securities denominated in foreign
currencies and traded on foreign exchanges. To determine their value, we convert
their foreign-currency price into U.S. dollars by using the exchange
6
<PAGE>

rate last quoted by a major bank. Exchange rates fluctuate frequently and may
affect the U.S. dollar value of foreign-denominated securities, even if their
market prices do not change. In addition, some foreign exchanges are open for
trading when the U.S. market is closed. As a result, the Fund's foreign
securities -- and their prices -- may fluctuate during periods when Fund shares
cannot be bought, sold or exchanged.

The value of securities denominated in foreign currencies and traded on
foreign exchanges or in foreign markets will be translated into U.S. dollars at
the last price of their respective currency denomination against U.S. dollars
quoted by a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good faith by the
Board of Trustees. Because the value of securities denominated in foreign
currencies must be translated into U.S. dollars, fluctuations in the value of
such currencies in relation to the U.S. dollar may affect the net asset value of
Fund shares even without any change in the foreign-currency denominated values
of such securities.

Because foreign securities markets may close before the Fund determines its
net asset value, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Fund calculates its net
asset value may not be reflected unless the Manager, under supervision of the
Board of Trustees, determines that a particular event would materially affect
the Fund's net asset value.

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

The Fund distributes substantially all its net investment income and net
capital gains to shareholders each year.

- Distributions are not guaranteed.

- The Board of Trustees has discretion in determining the amount and
frequency of the distributions.

- All dividends and other distributions will be reinvested automatically in
additional shares and credited to the shareholders' account.

TAX MATTERS

The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), so that it will not be subject to federal income tax on its earnings
and capital gains that are distributed to its shareholders. In addition, the
Fund intends to comply with the diversification requirements of the Code and
Treasury Regulations in order to maintain the tax-deferred status of the
separate accounts of the Participating Insurance Companies.

Shares of the Fund must be purchased through variable life insurance
policies (the "Policies") or variable annuity contracts (the "Contracts"). As a
result, it is anticipated that any dividend or capital gains distribution from
the Fund and any proceeds from the redemption of the shares of the Fund will be
exempt from current taxation if left to accumulate within a Policy or Contract.
Withdrawals from Policies or Contracts may be subject to ordinary income tax
plus a 10% penalty tax if made before age 59 1/2.

The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus, and is subject to
change by legislative, administrative or judicial action. As the foregoing
discussion is for general information only, a prospective investor also should
review the more detailed discussion of federal income tax considerations that is
contained in the Statement of Additional Information. In addition, each
prospective investor should consult with his own tax adviser as to the tax
consequences of investments in the Fund, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.

THE TAX STATUS OF YOUR INVESTMENT IN THE FUND DEPENDS UPON THE FEATURES OF
YOUR POLICY OR CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE POLICY OR
CONTRACT PROSPECTUS.

7
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION. The Statement of Additional Information
provides a more complete discussion about the Fund and is incorporated by
reference into this prospectus, which means that it is considered a part of this
prospectus.

A Statement of Additional Information dated May 3, 1999, which provides a
further discussion of certain matters in this Prospectus and other matters that
may be of interest to some investors, has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated herein by reference.

ANNUAL AND SEMI-ANNUAL REPORTS. The annual and semi-annual reports to
shareholders contain additional information about the Fund's investments,
including a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.

TO REVIEW OR OBTAIN THIS INFORMATION: The Statement of Additional Information
and annual and semi-annual reports are available without charge upon your
request by calling Lexington Natural Resources Trust at (800) 526-0056 Attn:
Shareholder Services. This information may be reviewed at the Public Reference
Room of the Securities and Exchange Commission or by visiting the SEC's World
Wide Web site at www.sec.gov. In addition, this information may be obtained for
a fee by writing or calling the Public Reference Room of the Securities and
Exchange Commission, Washington, D.C. 20549-6009, telephone (800) SEC-0330.

FINANCIAL HIGHLIGHTS

The following financial highlights table is intended to help you understand
the Fund's financial performance for the past 5 years. Certain information
reflects financial highlights for a single share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, whose report, along with the Fund's
financial statements, are included in the annual report, which is available upon
request.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $14.91 $14.29 $11.30 $ 9.71 $10.30
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income.................. 0.08 0.06 0.05 0.06 0.04
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions........................ (2.98) 1.00 2.99 1.58 (0.59)
------ ------ ------ ------ ------
Total income (loss) from
investment operations........ (2.90) 1.06 3.04 1.64 (0.55)
------ ------ ------ ------ ------
Less distributions:
Distributions from net investment
income.............................. (0.08) -- (0.05) (0.05) (0.04)
Distributions from net realized
gains............................... (0.90) (0.44) -- -- --
------ ------ ------ ------ ------
Total distributions............ (0.98) (0.44) (0.05) (0.05) (0.04)
------ ------ ------ ------ ------
Net asset value, end of period........... $11.03 $14.91 $14.29 $11.30 $ 9.71
====== ====== ====== ====== ======
Total return................... (19.62)% 7.15% 26.89% 16.87% (5.38)%
Net assets, end of period (000's
omitted)............................... $35,418 $65,263 $37,934 $16,955 $13,627
Ratio to average net assets:
Expenses............................... 1.29% 1.25% 1.42% 1.47% 1.55%
Net investment income.................. 0.42% 0.39% 0.40% 0.56% 0.49%
Portfolio turnover rate.................. 74.36% 114.16% 102.76% 149.18% 87.40%
</TABLE>

8
<PAGE>

Investment Adviser
- ------------------------------------------------------

LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663

Sub-Adviser
- ------------------------------------------------------

MARKET SYSTEMS RESEARCH ADVISORS, INC.
80 Maiden Lane
New York, N.Y. 10038

Distributor
- ------------------------------------------------------

LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663

Transfer Agent
- ------------------------------------------------------

STATE STREET BANK AND TRUST COMPANY
c/o National Finance Data Services
1004 Baltimore
Kansas City, Missouri 64105

<TABLE>
<CAPTION>
Table of Contents Page
- -------------------------------------------------
<S> <C>
Investment Objective........................ 2

Investment Strategies....................... 2

Principal Risks............................. 2

Bar Chart and Performance Table............. 3

More About Our Investment Strategies and
Related Risks............................. 3

Management of the Fund...................... 5

Investment Adviser.......................... 5

Portfolio Manager........................... 5

How to Purchase and Redeem Shares........... 6

Shareholder Servicing Agreements............ 6

Determination of Net Asset Value............ 6

Dividends and Capital Gain Distributions.... 7

Tax Matters................................. 7

Financial Highlights........................ 8
</TABLE>

[LEXINGTON GRAPHIC]

LEXINGTON
NATURAL
RESOURCES
TRUST

---------------------------
PROSPECTUS
MAY 3, 1999
------------------
------------------

LEXINGTON
May 3, 1999

LEXINGTON NATURAL RESOURCES TRUST

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a prospectus. You
should read it in conjunction with the current prospectus of Lexington
Natural Resources Trust (the "Fund"), dated May 3, 1999, and any revisions
to the prospectus which might occur from time to time. To obtain a copy of
the Fund's prospectus at no charge, please write to the Fund at P.O. Box
1515/Park 80 West-Plaza Two, Saddle Brook, New Jersey 07663 or call the
following number: 201-845-7300.

Lexington Management Corporation is the Fund's investment adviser.
Lexington Funds Distributor, Inc. is the Fund's distributor.

TABLE OF CONTENTS
Page

General Information and History. . . . . . . . . . . . . . 1

Investment Objectives and Policies . . . . . . . . . . . . 1

Certain Investments Methods. . . . . . . . . . . . . . . . 1

Investment Restrictions. . . . . . . . . . . . . . . . . . 1

Management of the Fund . . . . . . . . . . . . . . . . . . 3

Portfolio Transactions
and Brokerage Commissions. . . . . . . . . . . . . . . . .9

Capital Stock Structure. . . . . . . . . . . . . . . . . . 10

Tax Matters . . . . . . . . . . . . . . . . . . . . . . . .11

Performance Calculation. . . . . . . . . . . . . . . . . . 11

Other Information. . . . . . . . . . . . . . . . . . . . . 12

Transfer Agent . . . . . . . . . . . . . . . . . . . . . . 13

Custodian. . . . . . . . . . . . . . . . . . . . . . . . . 13

Counsel and Independent Auditors . . . . . . . . . . . . . 13

Financial Statements . . . . . . . . . . . . . . . . . . . 14

GENERAL INFORMATION AND HISTORY

The Fund is a non-diversified, open-end management investment company
organized on November 15, 1988 as a business trust under the laws of the
Commonwealth of Massachusetts. The Fund was formerly named "Lexington Gold
Trust". At a meeting held on September 30, 1991, the shareholders of the
Fund approved a change in the Fund's fundamental investment objective and
policies. In connection with the change of investment objective and
policies, the Fund also changed its name to "Lexington Natural Resources
Trust".

INVESTMENT OBJECTIVES AND POLICIES

The Fund's investment objective is to seek long-term growth of
capital through investment primarily in common stocks of companies which
own, or develop natural resources and other basic commodities, or supply
goods and services to such companies. Current income will not be a factor.
Total return will consist primarily of capital appreciation.

CERTAIN INVESTMENT METHODS
Generally, a company has substantial natural resource assets when at
least 50% of the non-current assets, capitalization, gross revenues or
operating profits of the company in the most recent or current fiscal year
are involved in or result from, directly or indirectly through
subsidiaries, exploring, mining, refining, processing, fabricating, dealing
in or owning natural resource assets. Examples of natural resource assets
include: companies that specialize in energy sources (e.g., coal,
geothermal power, natural gas and oil), environmental technology (e.g.,
pollution control and waste recycling), forest products, agricultural
products, chemical products, ferrous and non-ferrous metals (e.g., iron,
aluminum and copper), strategic metals (e.g., uranium and titanium),
precious metals (e.g., gold, silver and platinum), and other basic
commodities.

Management attempts to achieve the investment objective of the Fund
by seeking to identify securities of companies that, in its opinion, are
undervalued relative to the value of natural resource holdings of such
companies in light of current and anticipated economic or financial
conditions. Natural resource assets are materials derived from natural
sources which have economic value. The Fund will consider a company to
have substantial natural resource assets when, in management's opinion, the
company's holdings of the assets are of such magnitude, when compared to
the capitalization, revenues or operating profits of the company, that
changes in the economic value of the assets will affect the market price
of the equity securities of such company. The Fund presently does not
intend to invest directly in natural resource assets or related contracts.
The Fund may invest up to 25% of its total assets in securities principally
traded in markets outside the United States.

Management of the Fund believes that, based upon past performance,
the securities of specific companies that hold different types of
substantial natural resource assets may move relatively independently of
one another during different stages of inflationary cycles due to different
degrees of demand for, or market values of, their respective natural
resource holdings during particular portions of such inflationary cycles.
The Fund's fully managed investment approach enables it to switch its
emphasis among various industry groups depending upon management's outlook
with respect to prevailing trends and developments. The investment
objective and policies of the Fund described in the first two paragraphs
of this section are fundamental policies of the Fund and may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as
amended.

INVESTMENT RESTRICTIONS

The Fund's investment objective and the following investment
restrictions are matters of fundamental policy which may not be changed
without the affirmative vote of the lesser of (a) 67% or more of the shares
of the Fund present at a shareholder's meeting at which more than 50% of
the outstanding shares are present or represented by proxy or (b) more than
50% of the outstanding shares. The Fund is a non-diversified management
investment company and

1. with respect to 50% of its assets, the Fund will not at the
time of purchase invest more than 5% of its total assets, at
market value, in the securities of one issuer (except the
securities of the United States Government);

2. with respect to the other 50% of its assets, the Fund will not
invest at the time of purchase more than 25% of the market
value of its total assets in any single issuer.

These two restrictions, hypothetically, could give rise to a
portfolio with as few as fourteen issues.

In addition, the Fund will not:

1. Purchase more than 10% of the voting securities or more than
10% of any class of securities of any issuer. (For this
purpose all outstanding debt securities of an issuer are
considered as one class, and all preferred stocks of an issuer
are considered as one class.)

2. Purchase any security restricted as to disposition under
Federal Securities laws or securities that are not readily
marketable or purchase any securities if such a purchase would
cause the Fund to own at the time of such purchase, illiquid
securities, including repurchase agreements with an agreed upon
repurchase date in excess of seven days from the date of
acquisition by the Fund, having aggregate market value in
excess of 10% of the value of the Fund's total assets.

3. Make short sales of securities or purchase any securities on
margin, except for such short term credits as are necessary for
the clearance of transactions.

4. Write, purchase or sell puts, calls or combinations thereof.
However, the Fund may invest up to 15% of the value of its
assets in warrants. The holder of a warrant has the right to
purchase a given number of shares of a particular company at
a specified price until expiration. Such investments generally
can provide a greater potential for profit- or loss - than
investment of an equivalent amount in the underlying common
stock. The prices of warrants do not necessarily move parallel
to the prices of the underlying securities. If the holder does
not sell the warrant, he risks the loss of his entire
investment if the market price of the underlying stock does
not, before the expiration date, exceed the exercise price of
the warrant plus the cost thereof. It should be understood
that investment in warrants is a speculative activity.
Warrants pay no dividends and confer no rights (other than the
right to purchase the underlying stock) with respect to the
assets of the corporation issuing them. In addition, the sale
of warrants held more than one year generally results in a long
term capital gain or loss to the holder, and the sale of
warrants held for less than such period generally results in
a short term capital gain or loss. The holding period for
securities acquired upon exercise of warrants, however, begins
on the day after the date of exercise, regardless of how long
the warrant was held. This restriction on the purchase of
warrants does not apply to warrants attached to, or otherwise
included in, a unit with other securities.

5. Invest in any commodities or commodities futures contracts,
including futures contracts relating to gold.

6. Invest in real estate.

7. Invest more than 5% of the value of its total assets in
securities of issuers which, with their predecessors, have a
record of less than three years continuous operation.

8. Purchase or retain the securities of any issuer if the officers
or Trustees of the Fund, or its Investment Adviser, or
Sub-Adviser who own individually more than 1/2 of 1% of the
securities of such issuer together own more than 5% of the
securities of such issuer.

9. Lend money or securities, provided that the making of time or
demand deposits with domestic banks and the purchase of debt
securities such as bonds, debentures, commercial paper,
repurchase agreements and short term obligations in accordance
with the Fund's objective and policies, are not prohibited.

10. Borrow money, except for temporary emergency purposes, and in
no event more than 5% of its net assets at value or cost,
whichever is less; or pledge its gold or portfolio securities
or receivables or transfer or assign or otherwise encumber them
in an amount exceeding 10% of the value of its total assets.

11. Underwrite securities issued by others.

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

13. Invest for the purpose of exercising control or management of
another company.

14. Participate on a joint or a joint and several basis in any
trading account in securities.

The percentage restrictions referred to above are to be adhered to
at the time of investment, and are not applicable to a later increase or
decrease in percentage beyond the specified limit resulting from a change
in values or net assets.

MANAGEMENT OF THE FUND

Investment Adviser, Sub-Adviser, Distributor and Administrator

Lexington Management Corporation ("LMC"), P.O. Box 1515, Saddle
Brook, New Jersey 07663 is the investment adviser to the Fund pursuant to
an Investment Advisory Agreement dated August 21, 1991, (the "Advisory
Agreement"). Lexington Funds Distributor, Inc. ("LFD") is the distributor
of Fund shares pursuant to a Distribution Agreement dated September 21,
1991 (the "Distribution Agreement"). Both of these agreements were approved
by the Fund's Board of Directors (including a majority of the Directors who
were not parties to either the Advisory Agreement or the Distribution
Agreement or "interested persons" of any such party) on November 30, 1998
and were last approved by the Board of Directors who are not interested
directors on November 30, 1998. LMC makes recommendations to the Fund with
respect to its investments and investment policies.

LMC also acts as administrator to the Fund and performs certain
administrative and accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semi-annual and annual reports, preparing
registration statements, calculating net asset values, shareholder
communications and supervision of the custodian, transfer agent and
provides facilities for such services. The Fund reimburses LMC for its
actual cost in providing such services, facilities and expenses.

For its investment management services to the Fund, under its
Advisory Agreement, LMC will receive a monthly fee at the annual rate of
0.85% of the Fund's average daily net assets. Advisory fees paid to LMC
and expense reimbursements paid to the Fund are as follows:

ADVISORY SUB-ADVISORY EXPENSE
PERIOD FEE FEE REIMBURSEMENT
- ------ ------------ --------------- --------------
1/1/96 to 12/31/96 $ 260,014 $ 130,009 $ 0
1/1/97 to 12/31/97 635,819 317,919 0
1/1/98 to 12/31/98 480,891 240,442 0

LMC has agreed to reduce its management fee if necessary to keep
total operating expenses at or below 2.50% of the Fund's average daily net
assets. LMC may terminate this voluntary reduction at any time. Brokerage
fees and commissions, taxes, interest and extraordinary expenses are not
deemed to be expenses of the Fund for such reimbursement. LFD pays the
advertising and sales expenses of the continuous offering of Fund shares,
including the cost of printing prospectuses, proxies and shareholder
reports for persons other than existing shareholders. The Fund furnishes
LFD, at printer's overrun cost paid by LFD, such copies of its prospectus
and annual, semi-annual and other reports and shareholder communications
as may reasonably be required for sales purposes.

Under the terms of the investment management agreement, LMC also pays
the Fund's expenses for office rent, utilities, telephone, furniture and
supplies utilized for the Fund's principal office and the salaries and
payroll expense of officers and Trustees of the Fund who are employees of
LMC or its affiliates in carrying out its duties under the investment
management agreement. The Fund pays all its other expenses, including
custodian and transfer agent fees, legal and registration fees, audit fees,
printing of prospectuses, shareholder reports and communications required
for regulatory purposes or for distribution to existing shareholders,
computation of net asset value, mailing of shareholder reports and
communications, portfolio brokerage, taxes and independent Trustees' fees.

LMC has agreed to reduce its management fee if necessary to keep
total operating expenses at or below 2.50% of the Fund's average daily net
assets. Total annual operating expenses may also be subject to state blue
sky regulations. LMC may terminate this voluntarily reduction at any time.

LMC has entered into a sub-advisory management contract with Market
Systems Research Advisors, Inc. ("MSR"), 80 Maiden Lane, New York, New
York 10038, a registered investment advisor, under which the MSR will
provide the Fund with certain investment management and administrative
services. MSR serves as investment adviser to private and institutional
accounts.

The Advisory Agreement, the Sub-Advisory Agreement and the
Distribution Agreement are subject to annual approval by affirmative vote
of the Fund's Board of Directors cast in person at a meeting called for
such purpose, and a majority of the Directors who are not parties either
to the Advisory Agreement, the Sub-Advisory Agreement or the Distribution
Agreement, as the case may be, or "interested persons" of any such party.
Either the Fund or LMC may terminate the Advisory Agreement on 60 days
written notice without penalty. Also, either the Fund or MSR may
terminate the Sub-Advisory Agreement and the Fund or LFD may terminate the
Distribution Agreement on 60 days' written notice without penalty. In
addition, both the Advisory Agreement and the Sub-Advisory Agreement may
be terminated by vote of a majority of the outstanding voting securities
of the Fund on not more than 60 days notice. All of the agreements
mentioned above will terminate automatically in the event of assignment,
as defined in the Investment Company Act of 1940.

LMC is not liable to the Fund or its shareholders for any act or
omission by LMC, its officers, directors or employees or any loss sustained
by the Fund or its shareholders except in the case of willful misfeasance,
bad faith, gross negligence or reckless disregard of duty.

LMC and LFD are wholly owned subsidiaries of Lexington Global Asset
Managers, Inc., a publicly traded corporation. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
majority voting control of outstanding shares of Lexington Global Asset
Managers, Inc. Of the directors, officers or employees ("affiliated
persons") of the Fund, Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor
and Lavery and Mmes. Carnicelli, Carr-Waldron, Curcio, DiFalco, Gilfillan,
Lederer and Mosca (see "Management of the Fund"), may also be deemed
affiliates of LMC and LFD by virtue of being officers, directors or
employees thereof.

Trustees and Officers of the Fund

The Fund's Trustees and executive officers, their ages as of the
Fund's most recent fiscal year-end, their principal occupations and former
affiliations are set forth below:

+ S.M.S. CHADHA (61), TRUSTEE. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of
India; Director, Special Unit for Technical Cooperation among Developing
Countries, United Nations Development Program, New York.

*+ ROBERT M. DEMICHELE (54), PRESIDENT AND CHAIRMAN. P.O. Box 1515, Saddle
Brook, N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; President and Director, Lexington Global Asset Managers, Inc.;
Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.;
Chairman of the Board, Market Systems Research, Inc. and Market Systems
Research Advisors, Inc.; Director, Chartwell Re Corporation, Claredon
National Insurance Company, The Navigator's Group, Inc., Unione Italiana
Reinsurance, Vanguard Cellular Systems, Inc. and Weeden &Co.; Vice Chairman
of the Board of Trustees, Union College and Trustee, Smith Richardson
Foundation.

*+ BEVERLEY C. DUER, P.E. (69), TRUSTEE. 340 East 72nd Street, New York, N.Y.
10021. Private Investor. Formerly Manager, Operations Research Department,
CPC International Inc.

*+ BARBARA R. EVANS (38), TRUSTEE. 5 Fernwood Road, Summit, N.J. 07901. Private
Investor, formerly, Assistant Vice President and Securities Analyst,
Lexington Management Corporation.

*+ RICHARD M. HISEY (40), TRUSTEE and VICE PRESIDENT. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Chief Financial Officer and
Director, Lexington Management Corporation; Chief Financial Officer, Vice
President and Director, Lexington Funds Distributor, Inc; Chief Financial
Officer, Market Systems Research Advisers, Inc.; Executive Vice President,
Chief Financial Officer and General Manager - Mutual Funds, Lexington Global
Asset Managers, Inc.

*+ LAWRENCE KANTOR (51), VICE PRESIDENT AND TRUSTEE. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Executive Vice President and Director,
Lexington Management Corporation; Executive Vice President and Director,
Lexington Funds Distributor, Inc.; Executive Vice President, Lexington
Global Asset Managers, Inc.,

+ JERARD F. MAHER (53), TRUSTEE. 300 Raritan Center Parkway, Edison, N.J.
08818. General Counsel, Federal Business Center; Counsel, Ribis, Graham
&Curtin.

+ ANDREW M. MCCOSH (58), TRUSTEE. 12 Wyvern Park, Edinburgh EH92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland..

*+ DONALD B. MILLER (72), TRUSTEE. 10725 Quail Covey Drive, Boynton Beach,
Florida 33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds;
Director, Maguire Group of Connecticut; prior to January 1989, President,
Director and C.E.O., Media General Broadcast Services.

*+ JOHN G. PRESTON (66), TRUSTEE. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston, Massachusetts.

*+ ALLEN H. STOWE (61), TRUSTEE. 3674 Fifth and Ocean Avenues, Normandy Beach,
New Jersey 08739. President, Dartmouth Co-operative Society Co., Inc.

*+ LISA CURCIO (39), VICE PRESIDENT AND SECRETARY. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor, Inc.;
Secretary, Lexington Global Asset Managers, Inc.

*+ RICHARD J. LAVERY, CLU, CHFC (45), VICE PRESIDENT. P. O. Box 1515, Saddle
Brook, N.J. 07663. Senior Vice President, Lexington Management Corporation;
Vice President, Lexington Funds Distributor, Inc.

*+ JANICE A. CARNICELLI (39), VICE PRESIDENT. P. O. Box 1515, Saddle Brook, N.J.
07663.

*+ CHRISTIE CARR-WALDRON (31), ASSISTANT TREASURER, P.O. Box 1515, Saddle Brook,
N.J. 07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.

*+ CATHERINE DIFALCO (29), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, New
Jersey 07663. Prior to October 1997, Manager, Fund Accounting.

*+ SIOBHAN GILFILLAN (35), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook,
N.J. 07663.

*+ JOAN K. LEDERER (32), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to April 1997, Director of Investment Accounting, Diversified
Investment Advisors, Inc. Prior to April 1996, Assistant Vice President,
PIMCO.

*+ SHERI MOSCA (35), ASSISTANT TREASURER. P. O. Box 1515, Saddle Brook, N.J.
07663.

*+ PETER CORNIOTES (36), ASSISTANT SECRETARY. P. O. Box 1515, Saddle Brook, N.J.
07663. Vice President and Assistant Secretary, Lexington Management
Corporation. Assistant Secretary, Lexington Funds Distributor, Inc.

*+ ENRIQUE FAUST (38), ASSISTANT SECRETARY, P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Vice President, Lexington Management Corporation. Prior to
March 1994, Blue Sky Compliance Coordinator, Lexington Group of Investment
Companies.

* "Interested person" and/or "affiliated person" as defined in the
Investment Company Act of 1940, as amended.

+ Messrs. Chada, Corniotes, DeMichele, Duer, Faust, Hisey, Kantor,
Lavery, Maher, McCosh, Miller, Preston and Stowe, and Mmes.
Carnicelli, Carr-Waldron, Curcio, DiFalco, Evans, Gilfillan, Lederer
and Mosca hold similar offices with some or all of the other
registered investment companies advised and/or distributed by
Lexington Management Corporation or Lexington Funds Distributor, Inc.
or Market Systems Research Advisors, Inc. The Board of Trustees met
5 times during the twelve months ended December 31, 1998, and each
of the Trustees attended at least 75% of those meetings.

Remuneration of Directors and Certain Executive Officers:

Each Trustee is reimbursed for expenses incurred in attending each
meeting of the Board of Trustee or any committee thereof up to a maximum
of $9,000 per year for Trustees living outside the U.S. and $6,000 per
year for Trustee living within the U.S. Each Trustee who is not an
affiliate of the advisor is compensated for his or her services
according to a fee schedule which recognizes the fact that each Trustee
also serves as a Trustee of other investment companies advised by LMC.
Each Trustee receives a fee, allocated among all investment companies
for which the Trustee serves.

Set forth below is information regarding compensation paid or
accrued during the period January 1, 1998 to December 31, 1998 for each
Trustee:

-------------------------------------------------------------------------------
AGGREGATE TOTAL COMPENSATION NUMBER OF
NAME OF TRUSTEE COMPENSATION FROM FROM FUND AND DIRECTORSHIPS IN
FUND FUND COMPLEX FUND COMPLEX
- --------------------------------------------------------------------------------
S.M.S. Chadha $1,712 $27,068 15
- --------------------------------------------------------------------------------
Robert M. DeMichele 0 0 16
- --------------------------------------------------------------------------------
Beverley C. Duer $2,045 $35,518 16
- --------------------------------------------------------------------------------
Barbara R. Evans 0 0 15
- --------------------------------------------------------------------------------
Richard M. Hisey 0 0 7
- --------------------------------------------------------------------------------
Lawrence Kantor 0 0 15
- --------------------------------------------------------------------------------
Jerard F. Maher $1,712 $30,518 16
- --------------------------------------------------------------------------------
Andrew M. McCosh $1,712 $27,818 15
- --------------------------------------------------------------------------------
Donald B. Miller $1,712 $27,818 15
- --------------------------------------------------------------------------------
John G. Preston $1,712 $27,818 15
- --------------------------------------------------------------------------------
Margaret W. Russell* $1,936 $23,228 N/A
- --------------------------------------------------------------------------------
Philip C. Smith* $1,220 $19,200 N/A
- --------------------------------------------------------------------------------
Allen H. Stowe $1,712 $12,340 8
- --------------------------------------------------------------------------------
*Retired

Retirement Plan for Eligible Directors/Trustees

Effective September 12, 1995, the Trustees instituted a Retirement
Plan for Eligible Directors/Trustees (the "Plan") pursuant to which each
Director/Trustee (who is not an employee of any of the Funds, the Advisor,
Administrator or Distributor or any of their affiliates) may be entitled
to certain benefits upon retirement from the Board. Pursuant to the Plan,
the normal retirement date is the date on which the eligible
Director/Trustee has attained age 65 and has completed at least ten years
of continuous and non-forfeited service with one or more of the investment
companies advised by LMC (or its affiliates) (collectively, the "Covered
Funds"). Each eligible Director/Trustee is entitled to receive from the
Covered Fund an annual benefit commencing on the first day of the calendar
quarter coincident with or next following his date of retirement equal to
5% of his compensation multiplied by the number of such Director/Trustee's
years of service (not in excess of 15 years) completed with respect to any
of the Covered Portfolios. Such benefit is payable to each eligible
Trustee in quarterly installments for ten years following the date of
retirement or the life of the Director/Trustee. The Plan establishes age
72 as a mandatory retirement age for Directors/Trustees; however,
Director/Trustees serving the Funds as of September 12, 1995 are not
subject to such mandatory retirement. Directors/Trustees serving the Funds
as of September 12, 1995 who elect retirement under the Plan prior to
September 12, 1996 will receive an annual retirement benefit at any
increased compensation level if compensation is increased prior to
September 12, 1997 and receive spousal benefits (i.e., in the event the
Director/Trustee dies prior to receiving full benefits under the Plan, the
Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)

Retiring will be eligible to serve as Honorary Trustees for one year
after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.

Set forth in the table below are the estimated annual benefits
payable to an eligible Trustee upon retirement assuming various
compensation and years of service classifications. As of December 31,
1998, the estimated credited years of service for Trustees Chadha, Duer,
Maher, McCosh, Miller, Preston and Stowe are 3, 20, 3, 3, 24, 20 and 2,
respectively.

HIGHEST ANNUAL COMPENSATION PAID BY ALL FUNDS
---------------------------------------------

$20,000 $25,000 $30,000 $35,000

YEARS OF
SERVICE ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
------ ----------------------------------------
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500

PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS

As a general matter, purchases and sales of portfolio securities by
the Fund are placed by LMC or MSR with brokers and dealers who in their
opinion will provide the Fund with the best combination of price (inclusive
of brokerage commissions) and execution for its orders. However, pursuant
to the Fund's investment management agreement, management consideration may
be given in the selection of broker-dealers to research provided and
payment may be made at a fee higher than that charged by another
broker-dealer which does not furnish research services or which furnishes
research services deemed to be of lesser value, so long as the criteria of
Section 28(e) of the Securities Exchange Act of 1934, as amended are met.
Section 28(e) was adopted in 1975 and specifies that a person with
investment discretion shall not be "deemed to have acted unlawfully or to
have breached a fiduciary duty" solely because such person has caused the
account to pay a higher commission than the lowest available under certain
circumstances, provided that the person so exercising investment discretion
makes a good faith determination that the commissions paid are "reasonable
in relation to the value of the brokerage and research services provided
. . . viewed in terms of either that particular transaction or his overall
responsibilities with respect to the accounts as to which he exercises
investment discretion."

Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for research services ("soft
dollars") might exceed commissions that would be payable for execution
services alone. Nor generally can the value of research services to the
Fund be measured. Research services furnished might be useful and of value
to LMC or MSR and its affiliates, in serving other clients as well as the
Fund. On the other hand, any research services obtained by LMC or MSR or
its affiliates from the placement of portfolio brokerage of other clients
might be useful and of value to LMC or MSR in carrying out its obligations
to the Fund.

As a general matter, it is the Fund's policy to execute in the U.S.
all transactions with respect to securities traded in the U.S. except when
better price and execution can, in the judgment of management of the Fund,
be obtained elsewhere. Over-the-counter purchases and sales are normally
made with principal market makers, except where, in the opinion of
management, the best executions are available elsewhere.

In addition, the Fund may from time to time allocate brokerage
commissions to firms which furnish research and statistical information to
LMC or MSR or which render to the Fund services which LMC or MSR is not
required to provide. The supplementary research supplied by such firms is
useful in varying degrees and is of indeterminable value. No formula has
been established for the allocation of business to such brokers. For the
fiscal year ended December 31, 1996, the portfolio turnover rate for the
Fund was 102.76% and the Fund paid $118,713 in brokerage commissions and
of that amount, $40,567 was paid for with soft dollars. For the fiscal
year ended December 31, 1997, the portfolio turnover rate for the Fund was
114.16% and the Fund paid $258,001 in brokerage commissions and of that
amount, $106,488 was paid for with soft dollars. For the fiscal year ended
December 31, 1998, the portfolio turnover rate for the Fund was 74.36% and
the Fund paid $136,812 in brokerage commission and of that amount, $43,141
was paid for with soft dollars.

CAPITAL STOCK STRUCTURE

Individual variable annuity contract holders and variable life
insurance policy holders are not "shareholders" of the Fund. The
Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their variable annuity contract or variable life insurance
policy. Shares of the Fund are not offered directly to the general public.

Dividends, Distributions, Voting, Preemptive and Redemption Rights

Shareholders of the Fund are given voting rights. Each share of the
fund will be given one vote, unless a different allocation of voting rights
is required under applicable law for a mutual fund that is an investment
medium for variable life insurance or annuity contracts. Participating
insurance companies provide variable annuity Contract Holders and
Participants the right to direct the voting of Fund shares at shareholder
meetings to the extent required by law. See the Separate Account
prospectus for the Variable Contract for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the fund to hold
annual shareholder meetings, although special meetings may be cancelled for
the Fund, for purposes such as electing or removing Trustees, changing
fundamental policies or approving an investment management contract. A
shareholders' meeting will be held after the Fund begins operations for the
purpose of electing the initial Board of Trustees to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the
Trustees have been elected by the shareholders of the fund. In addition,
the holders of not less than two-thirds of the outstanding shares or other
voting interests of the Fund may remove a person serving as Trustee either
by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as trustee, if requested in writing to do so
by the holders of a person serving as trustee, if requested in writing to
do so by the holders of not less than 10% of the outstanding shares of
other voting interests of the Fund. The Fund is required to assist in
shareholders' communications. In accordance with current laws, an
insurance company issuing a variable life insurance or annuity contract
that participates in the Fund will request voting instructions from
Contract Holders and will vote shares or other voting interest in the
Separate Account in proportion to the voting instructions received.

TAX MATTERS

The following is only a summary of certain additional federal income
tax considerations that are not described in the Prospectus and generally
affect the Fund and its shareholders. 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.

The Fund intends to qualify as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended (the "Code"). If so
qualified, the Fund will not be subject to federal income tax on its
investment company taxable income and net capital gains to the extent that
such investment company taxable income and net capital gains are
distributed in each taxable year to the segregated asset accounts
("Accounts") of certain life insurance companies ("Participating
Companies") that hold its shares. In addition, if the Fund distributes
annually to the Accounts its ordinary income and capital gain net income,
in the manner prescribed in the Code, it also will not be subject to the
4% federal excise tax otherwise applicable to a RIC on any of its
undistributed income or gains. Distributions of net investment income and
net short-term capital gains will be treated as ordinary income and
distributions of net long-term capital gains will be treated as long-term
capital gain in the hands of the insurance companies. Under current tax
law, capital gains or dividends from the Fund are not currently taxable to
a holder of a variable annuity contract (a "Contract") or variable life
insurance policy (a "Policy") when left to accumulate within such Contract
or Policy.

Section 817(h) of the Code requires that investments of an Account
of an insurance company be "adequately diversified," in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of
the Contracts or Policies based on such account to receive the tax-deferred
or tax-free treatment generally afforded holders of annuities or life
insurance policies under the Code. The Department of the Treasury has
issued Regulations under section 817(h) which, among other things, provide
the manner in which an Account will treat investments in a RIC for purposes
of the applicable diversification requirements. Under the Regulations, if
a RIC satisfies certain conditions, the RIC will not be treated as a single
investment of the Account for these purposes, but rather the Account will
be treated as owning its proportionate share of each of the assets of the
RIC. The Fund plans to satisfy these conditions at all times so that each
Account of a Participating Company investing in the Fund will be treated
as adequately diversified under the Code and Regulations.

For information concerning the federal income tax consequences to the
holders of a Contract or Policy, such holders should consult the
prospectuses for their particular Contract or Policy.

PERFORMANCE CALCULATION
For purposes of quoting and comparing the performance of the Fund to
that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, rules promulgated by the
Securities and Exchange Commission ("SEC"), a fund's advertising
performance must include total return quotations calculated according to
the following formula:

P(1 + T)n= ERV
Where: P = a hypothetical initial payment of $1,000,
T = average annual total return,
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of the 1, 5 or 10
year period, at the end of such period (or
fractional portion thereof).

Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for publication,
and will cover 1,5 and 10 year periods of the Fund's existence or such
shorter period dating from the effectiveness of the Fund's Registration
Statement. In calculating the ending redeemable value, the maximum sales
load is deducted from the initial $1,000 payment and all dividends and
distributions by the Fund are assumed to have been reinvested at net asset
value as described in the Prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is computed by finding
the average annual compounded rates of return over the 1, 5 and 10 year
periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value. Any recurring account
charges that might in the future be imposed by the Fund would be included
at that time.

The Fund may also from time to time include in such advertising a
total return figure that is not calculated according to the formula set
forth above in order to compare more accurately the performance of the Fund
with other measures of investment return. For example, in comparing the
Fund's total return, the Fund calculates its aggregate total return for the
specified periods of time by assuming the investment of $10,000 in Fund
shares and assuming the reinvestment of each dividend or other distribution
at net asset value on the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment
from the ending value and by dividing the remainder by the beginning value.
Such alternative total return information will be given no greater
prominence in advertising than the information prescribed under Item 21 of
Form N-1A.

The Fund's performance may be compared in advertising to the
performance of other mutual funds in general, or of particular types of
mutual funds, especially those with similar objectives. Such performance
data may be prepared by Lipper Analytical Services, Inc. and other
independent services which monitor the performance of mutual funds. The
Fund may also advertise mutual fund performance rankings which have been
assigned to it by such monitoring services.

Pursuant to the SEC calculation, the Fund's average total rate of
return for the one and five year and since commencement (8/1/89) period
ended December 31, 1998 was -19.62%, 3.86% and 2.77%.

OTHER INFORMATION

As of February 19, 1999, Lexington Management Corporation, Park 80
West Plaza Two, Saddle Brook, N.J. 07663 owned beneficially 10,319 shares
of the Fund (0.40% of the Fund's outstanding shares). The balance of the
outstanding shares of the Fund (99.6%) are owned by Aetna Life Insurance
and Annuity Company, Kemper Investors Life Insurance Company and Safeco
Life and Annuity Company and are allocated to separate accounts which are
used for funding variable annuity contracts and variable life insurance
policies.

TRANSFER AGENT

State Street Bank and Trust Company, c\o National Financial Data
Services (the "Transfer Agent") acts as the transfer agent and dividend
disbursing agent for the Fund. The Transfer Agent may be reached by
sending any correspondence to 1004 Baltimore, Kansas City, Missouri 64105.

CUSTODIAN

Chase Manhattan Bank, N.A. 1211 Avenue of the Americas, New York, New
York 10036 has been retained to act as custodian for the Fund's portfolio
securities including those to he held by foreign banks and foreign
securities depositories that qualify as eligible foreign custodians under
the rules adopted by the Securities and Exchange Commission and for the
Fund's domestic securities and other assets.

COUNSEL AND INDEPENDENT AUDITORS

Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New
York 10022 will pass upon legal matters for the Fund in connection with the
offering of its shares. KPMG LLP, 345 Park Avenue, New York, New York
10154, has been selected as independent auditors for the Fund for the
fiscal year ending December 31, 1999.

<PAGE>

LEXINGTON NATURAL RESOURCES TRUST
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998

NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------
COMMON STOCKS: 99.7%
BASIC MATERIALS: 8.1%
46,000 Martin Marietta Materials, Inc. ........ $ 2,860,625
-----------
ENERGY SOURCES: 71.3%
17,000 AES Corporation ........................ 805,375
32,000 Anadarko Petrol Corporation ............ 988,000
30,000 Aquarion Company ....................... 1,230,000
53,000 Avatar Holdings, Inc.1 ................. 834,750
20,000 Burlington Resources, Inc. ............. 716,250
12,500 Chevron Corporation .................... 1,036,719
22,000 Coastal Corporation .................... 768,625
20,000 Coflexip S.A. (ADR) .................... 650,000
23,000 Columbia Energy Group .................. 1,328,250
30,000 Diamond Offshore Drilling, Inc. ........ 710,625
18,200 Elf Aquitaine S.A. (ADR) ............... 1,030,575
14,600 Enbridge, Inc. ......................... 666,125
18,500 Enron Corporation ...................... 1,055,656
20,100 Exxon Corporation ...................... 1,469,812
40,000 Halliburton Company .................... 1,185,000
45,000 Nabors Industries, Inc. ................ 610,312
41,500 Noble Affiliates, Inc.1 ................ 1,021,937
25,000 PennzEnergy Company .................... 407,812
25,000 Pennzoil-Quaker State .................. 370,313
27,500 Piedmont Natural Gas Company, Inc....... 993,438
27,500 Schlumberger, Ltd. ..................... 1,268,438
56,500 Stolt Comex Seaway, S.A. (ADR).......... 377,844
20,000 Texaco, Inc. ........................... 1,057,500
64,000 The Williams Companies, Inc. ........... 1,996,000
20,000 Total S.A. (ADR) ....................... 995,000
30,000 USX-Marathon Group ..................... 903,750
28,000 YPF Sociedad Anonima (ADR) ............. 782,250
-----------
25,260,356
-----------
ENVIRONMENTAL TECHNOLOGY: 5.3%
47,000 Pall Corporation ....................... 1,189,688
15,000 Waste Management, Inc. ................. 699,375
-----------
1,889,063
-----------
PAPER AND FOREST PRODUCTS: 10.1%
50,000 Fort James Corporation ................. $ 2,000,000
35,000 International Paper Company ............ 1,568,438
-----------
3,568,438
-----------
PRECIOUS METALS: 4.9%
50,000 Placer Dome, Inc. ...................... 575,000
28,000 Stillwater Mining Company .............. 1,148,000
-----------
1,723,000
-----------
TOTAL INVESTMENTS: 99.7%
(cost $36,867,810+) (Note 1)............ 35,301,482
Other assets in excess of
liabilities: 0.3% ...................... 116,492
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $11.03 per
share on 3,211,597 shares
outstanding) ........................... $35,417,974
===========

- -------------------------
1 Non-income producing security.
ADR--American Depository Receipt.
+ Aggregate cost for Federal income tax is identical.

The Notes to Financial Statements are an integral part of this statement.

<PAGE>

LEXINGTON NATURAL RESOURCES TRUST
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998

ASSETS
Investments, at value (cost $36,867,810) (Note 1) .............. $35,301,482
Cash ........................................................... 233,624
Receivable for shares sold ..................................... 5,466
Dividends and interest receivable .............................. 19,513
-----------
Total Assets .............................................. 35,560,085
-----------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ............... 29,241
Payable for shares redeemed .................................... 76,880
Accrued expenses ............................................... 35,990
-----------
Total Liabilities ......................................... 142,111
-----------
NET ASSETS (equivalent to $11.03 per share on
3,211,597 shares outstanding) (Note 3) ........................ $35,417,974
===========
NET ASSETS consist of:
Paid-in capital-unlimited shares of beneficial
interest at no par value (Note 1) ............................ $39,213,580
Undistributed net investment income (Note 1) ................... 201,165
Accumulated net realized loss on investments (Notes 1 and 6) ... (2,430,443)
Unrealized depreciation of investments ......................... (1,566,328)
-----------
TOTAL NET ASSETS .......................................... $35,417,974
===========

The Notes to Financial Statements are an integral part of this statement.

<PAGE>

LEXINGTON NATURAL RESOURCES TRUST
STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>

<S> <C> <C>
INVESTMENT INCOME
Dividends ....................................................... $ 780,422
Interest ........................................................ 62,665
------------
843,087
Less: foreign tax expense ....................................... 19,887
------------
Total investment income .................................... $ 823,200

EXPENSES

Investment advisory fee (Note 2) ............................. 480,891
Accounting expenses (Note 2) ................................. 46,348
Professional fees ............................................ 26,287
Printing and mailing expenses ................................ 24,721
Directors' fees and expenses ................................. 14,077
Computer processing fees ..................................... 13,508
Custodian expenses ........................................... 7,792
Registration fees ............................................ 1,061
Other expenses ............................................... 6,782
------------
Total expenses ............................................. 621,467
------------
Net investment income ...................................... 201,733
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 4)
Net realized loss on investments ............................. (2,286,879)
Net change in unrealized depreciation of investments ......... (8,067,438)
------------
Net realized and unrealized loss ........................... (10,354,317)
------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................ $(10,152,584)
============
</TABLE>

The Notes to Financial Statements are an integral part of this statement.

<PAGE>

LEXINGTON NATURAL RESOURCES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1998 and 1997

1998 1997
------------- -------------
<S> <C> <C>
Net investment income ................................................... $ 201,733 $ 245,932
Net realized gain (loss) from investment transactions ................... (2,286,879) 2,699,440
Net change in unrealized appreciation (depreciation) of investments ..... (8,067,438) 768,667
----------- -----------
Increase (decrease) in net assets resulting from operations .......... (10,152,584) 3,714,039
Distributions to shareholders from net investment income ................ (246,500) --
Distributions to shareholders from net realized gains from security
transactions ......................................................... (2,842,852) (1,902,822)
Increase (decrease) from capital share transactions (Note 3) ............ (16,602,952) 25,517,709
----------- -----------
Net increase (decrease) in net assets ................................ (29,844,888) 27,328,926
NET ASSETS:
Beginning of period ................................................... 65,262,862 37,933,936
----------- -----------
End of period (including undistributed net investment income of
$201,165 and $245,932 in 1998 and 1997, respectively) ............... $35,417,974 $65,262,862
=========== ===========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

<PAGE>

LEXINGTON NATURAL RESOURCES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Lexington Natural Resources Trust (the "Trust") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Trust's investment objective is to seek long-term growth
of capital through investment primarily in common stock of companies which own,
or develop natural resources and other basic commodities, or supply goods and
services to such companies. With the exception of shares held in connection with
initial capital of the Trust, shares of the Trust are currently being offered
only to participating insurance companies for allocation to certain of their
separate accounts established for the purpose of funding variable annuity
contracts and variable life insurance policies issued by the participating
insurance companies. The following is a summary of significant accounting
policies followed by the Trust in the preparation of its financial statements:

INVESTMENTS Securities transactions are accounted for on a trade date
basis. Realized gains and losses from investment transactions are reported on
the identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked prices is used. Securities traded on the over-the-counter market are
valued at the mean between the last current bid and asked prices. Short-term
securities having a maturity of 60 days or less are stated at amortized cost,
which approximates market value. Securities for which market quotations are not
readily available and other assets are valued by management in good faith under
the direction of the Trust's Board of Trustees. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income, adjusted for amortization of premiums and accretion of discounts, is
accrued as earned.

FEDERAL INCOME TAXES It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes is required.

DISTRIBUTIONS Dividends from net investment income and net realized capital
gains are normally declared and paid annually, but the Trust may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. At December 31, 1998,
reclassifications were made to the Trust's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.

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

2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE

The Trust pays an investment advisory fee to Lexington Management
Corporation ("LMC") at an annual rate of 1.00% of the Trust's average daily net
assets. LMC has entered into a sub-advisory management contract with Market
Systems Research Advisors, Inc. ("MSR"), a registered investment advisor, under
which MSR will provide the Trust with certain investment management and
administrative services. Pursuant to the terms of the sub-advisory contract
between LMC and MSR, LMC pays MSR a monthly sub-advisory fee of 0.50% of the
Trust's average daily net assets. For 1998, the investment advisor has
voluntarily agreed to reimburse the Trust if total annual expenses (including
management fees, but excluding interest, taxes, brokerage commission and
extraordinary expenses) exceed 2.50% of the Trust's average net assets. No
reimbursement was required for the year ended December 31, 1998.

The Trust also reimburses LMC for certain expenses, including accounting
costs of $46,348, which are incurred by the Trust, but paid by LMC.

<PAGE>

LEXINGTON NATURAL RESOURCES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (continued)

3. CAPITAL STOCK

Transactions in capital stock were as follows:

Year ended
December 31, 1998 December 31, 1997
------------------------------- ----------------------------
Shares Amount Shares Amount
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ....................... 588,215 $ 8,218,783 3,601,366 $ 53,536,615
Shares issued on
reinvestment of dividends ....... 274,122 3,089,351 116,969 1,902,821
----------- ------------ ---------- ------------
862,337 11,308,134 3,718,335 55,439,436
Shares redeemed ................... (2,026,593) (27,911,086) (1,996,391) (29,921,727)
----------- ------------ ---------- ------------
Net increase (decrease) ........... (1,164,256) $(16,602,952) 1,721,944 $ 25,517,709
=========== ============ ========== ============
</TABLE>

4. PURCHASES AND SALES OF INVESTMENT SECURITIES

The cost of purchases and proceeds from sales of investments for the year
ended December 31, 1998, excluding short-term securities, were $34,664,638 and
$51,209,864, respectively.

At December 31, 1998, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$2,879,567 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $4,445,895.

5. INVESTMENT AND CONCENTRATION RISKS

The Trust makes significant investments in foreign securities and has a
policy of investing in the securities of companies that own or develop natural
resources and other basic commodities, or supply goods and services to such
companies. There are certain risks involved in investing in foreign securities
or concentrating in specific industries such as natural resources that are in
addition to the usual risks inherent in domestic investments. These risks
include those resulting from future adverse political and economic developments,
as well as the possible imposition of foreign exchange or other foreign
governmental restrictions or laws, all of which could affect the market and/or
credit risk of the investments.

6. FEDERAL INCOME TAXES-CAPITAL LOSS CARRYFORWARDS

Capital loss carryforwards available for Federal income tax purposes as of
December 31, 1998 are $2,430,444 expiring in 2006.

To the extent any future capital gains are offset by these losses, such
gains would not be distributed to contractholders.

7. TAX INFORMATION (UNAUDITED)

The Trust designates $2,809,529, whether take in shares or in cash, as 20%
long-term capital gain distributions.

<PAGE>

LEXINGTON NATURAL RESOURCES TRUST
FINANCIAL HIGHLIGHTS

Selected per share data for a share outstanding throughout the period:

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $ 14.91 $ 14.29 $ 11.30 $ 9.71 $ 10.30
-------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income .................... 0.08 0.06 0.05 0.06 0.04
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions .................. (2.98) 1.00 2.99 1.58 (0.59)
-------- ------- ------- ------- -------
Total income (loss) from investment
operations ............................... (2.90) 1.06 3.04 1.64 (0.55)
-------- ------- ------- ------- -------
Less distributions:
Distributions from net investment
income ................................... (0.08) -- (0.05) (0.05) (0.04)
Distributions from net realized gains ..... (0.90) (0.44) -- -- --
-------- ------- -------- -------- -------
Total distributions ....................... (0.98) (0.44) (0.05) (0.05) (0.04)
-------- ------- -------- -------- -------
Net asset value, end of period ............ $ 11.03 $ 14.91 $ 14.29 $ 11.30 $ 9.71
======== ======= ======== ======== =======
Total return .............................. (19.62)% 7.15% 26.89% 16.87% (5.38)%
Ratio to average net assets:
Expenses ................................. 1.29% 1.25% 1.42% 1.47% 1.55%
Net investment income .................... 0.42% 0.39% 0.40% 0.56% 0.49%
Portfolio turnover rate ................... 74.36% 114.16% 102.76% 149.18% 87.40%
Net assets, end of period (000's
omitted) ................................. $ 35,418 $ 65,263 $ 37,934 $ 16,955 $13,627
</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Trustees and Shareholders
Lexington Natural Resources Trust:

We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Natural
Resources Trust as of December 31, 1998, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Natural Resources Trust as of December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.

KPMG LLP

New York, New York
February 8, 1999