PROSPECTUS
                                                                     May 1, 1997
Lexington TAX FREE MONEY Fund, Inc.
    

P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
           Toll Free: Service--1-800-526-0056
24 Hour Account Information--1-800-526-0052

A NO-LOAD MONEY MARKET MUTUAL FUND WITH THE  PRINCIPAL  INVESTMENT  OBJECTIVE OF
CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAXES.

================================================================================

       Lexington  Tax Free Money Fund,  Inc.  (the "Fund") is a diversified
   open-end management  investment company,  known as a money market mutual
   fund.
       Shareholders  may  invest,  reinvest  or  redeem  shares at any time
   without charge or penalty.
       The Fund's  investment  objective is to seek current  income  exempt
   from Federal income taxes while also maintaining stability of principal,
   liquidity and  preservation  of capital.  The Fund invests in short-term
   municipal securities which are described more fully on page 3.
       Shares  of the  Fund  are not  insured  or  guaranteed  by the  U.S.
   Government  and there can be no assurance  that the Fund will be able to
   maintain a stable net asset value of $1.00 per share.
       Shareholders may use free redemption checks provided by the Fund for
   amounts of $100.00 or more.
       Lexington  Management  Corporation ("LMC") is the Investment Adviser
   of  the  Fund.   Lexington  Funds  Distributor,   Inc.  ("LFD")  is  the
   Distributor of Shares of the Fund.
       This Prospectus concisely sets forth information about the Fund that
   you should know before  investing.  It should be read and  retained  for
   future reference.

   
       A STATEMENT  OF  ADDITIONAL  INFORMATION  DATED  MAY 1, 1997,  WHICH
   PROVIDES A FURTHER  DISCUSSION OF CERTAIN AREAS IN THIS  PROSPECTUS  AND
   OTHER MATTERS THAT MAY BE OF INTEREST TO SOME INVESTORS,  HAS BEEN FILED
   WITH THE SECURITIES AND EXCHANGE  COMMISSION AND IS INCORPORATED  HEREIN
   BY REFERENCE.  FOR A FREE COPY,  CALL THE APPROPRIATE  TELEPHONE  NUMBER
   ABOVE OR WRITE TO THE ADDRESS LISTED ABOVE.
    

       Mutual fund shares are not deposits or  obligations  of (or endorsed
   or guaranteed by) any bank, nor are they federally  insured or otherwise
   protected by the Federal Deposit  Insurance  Corporation  ("FDIC"),  the
   Federal  Reserve  Board or any other  agency.  Investing in mutual funds
   involves investment risks, including the possible loss of principal, and
   their value and return will fluctuate.


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


      INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE

<PAGE>


                                    FEE TABLE

ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets) (net of reimbursement):
    Management fees ....................................................   0.50%
    Other fees .........................................................   0.50%
                                                                           ----
    Total Fund Operating Expenses ......................................   1.00%
                                                                           ====

<TABLE>
<CAPTION>

Example:                                                                     1 year   3 years  5 years   10 years
                                                                              -----    ------   ------    -------
<S>                                                                          <C>       <C>      <C>       <C>    
You would pay the following expenses on a $1,000 investment, assuming
  (1) 5% annual return and (2) redemption at the end of each period          $10.20    $31.84   $55.25    $122.46
</TABLE>

   
    The purpose of the foregoing table is to assist an investor in understanding
the  various  costs  and  expenses  that  an  investor  in the  Fund  will  bear
indirectly.  (For more complete  descriptions of the various costs and expenses,
see  "How  to  Purchase  Shares"  and  "Investment   Adviser,   Distributor  and
Administrator" below.) The Expenses and Example appearing in the table above are
based on the Fund's expenses for the period from January 1, 1996 to December 31,
1996. Absent expense  reimbursements,  total fund operating  expenses would have
been 1.09% of the Fund's  average  net assets.  The  Example  shown in the table
above should not be considered a  representation  of past or future expenses and
actual expenses may be greater or less than those shown.

                              FINANCIAL HIGHLIGHTS
    The following Financial Highlights  information for each of the years in the
five year period  ended  December 31, 1996 has been audited by KPMG Peat Marwick
LLP,  Independent  Auditors,  whose report  thereon  appears in the Statement of
Additional Information.  This information should be read in conjunction with the
financial  statements  and related  notes  thereto  included in the Statement of
Additional  Information.  The Fund's annual report,  which  contains  additional
performance information, is available upon request and without charge.
    

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

   

      Selected Per Share Data for a share outstanding throughout the period

<TABLE>
<CAPTION>

                                                                     YEAR ENDED DECEMBER 31,
                                         ---------------------------------------------------------------------------------
                                              1996          1995          1994          1993          1992          1991 
                                         -----------   -----------   -----------   -----------   -----------   -----------
<S>                                            <C>           <C>           <C>           <C>           <C>           <C>  
Net asset value, beginning of period ...       $1.00         $1.00         $1.00         $1.00         $1.00         $1.00
                                         -----------   -----------   -----------   -----------   -----------   -----------
Income from investment operations:
  Net investment income ................       0.026         0.029         0.020         0.018         0.024         0.041
Less distributions:
  Dividends from
    net investment income ..............      (0.026)       (0.029)       (0.020)       (0.018)       (0.024)       (0.041)
                                         -----------   -----------   -----------   -----------   -----------   -----------
Net asset value, end of period .........       $1.00         $1.00         $1.00         $1.00         $1.00         $1.00
                                         ===========   ===========   ===========   ===========   ===========   ===========
Total return ...........................        2.61%         2.92%         2.00%         1.78%         2.47%         4.22%
Ratio to average net assets:
  Expenses, before reimbursement .......        1.09%         1.12%         1.09%         0.92%         0.99%         0.96%
  Expenses, net of reimbursement .......        1.00%         1.00%         1.00%         0.92%         0.99%         0.96%
  Net investment income,
    before reimbursement ...............        2.50%         2.76%         1.88%         1.77%         2.46%         4.06%
  Net investment income ................        2.59%         2.88%         1.97%         1.77%         2.46%         4.06%
Net assets, end of period
  (000's omitted) ......................     $26.516       $28,231       $37,654       $41,096       $45,844       $53,722

</TABLE>

<TABLE>
<CAPTION>

                                                            YEAR ENDED DECEMBER 31,
                                         -----------------------------------------------------
                                             1990          1989          1988          1987
                                         -----------   -----------   -----------   -----------
<S>                                            <C>           <C>           <C>           <C>  
Net asset value, beginning of period ...       $1.00         $1.00         $1.00         $1.00
                                         -----------   -----------   -----------   -----------
Income from investment operations:
  Net investment income ................       0.053         0.056         0.047         0.041
Less distributions:
  Dividends from
    net investment income ..............      (0.053)       (0.056)       (0.047)       (0.041)
                                         -----------   -----------   -----------   -----------
Net asset value, end of period .........       $1.00         $1.00         $1.00         $1.00
                                         ===========   ===========   ===========   ===========
Total return ...........................        5.39%         5.73%         4.79%         4.21%
Ratio to average net assets:
  Expenses, before reimbursement .......        0.93%         0.88%         0.91%         0.74%
  Expenses, net of reimbursement .......        0.93%         0.88%         0.91%         0.74%
  Net investment income,
    before reimbursement ...............        5.26%         5.57%         4.67%         4.09%
  Net investment income ................        5.26%         5.57%         4.67%         4.09%
Net assets, end of period
  (000's omitted) ......................     $57,881       $61,385       $82,755       $84,954

</TABLE>
--------------------------------------------------------------------------------
    

                                        2

<PAGE>


   
                               YIELD INFORMATION
    For the  seven-day  period ended  December 31, 1996,  the Fund's  annualized
current yield was 2.79% and the compounded effective yield was 2.83%. This yield
is  subject  to market  conditions  and will  fluctuate  daily as income  earned
fluctuates.  The above yield quotations are not an indication or  representation
by the Fund of future yields or rates of return.  This  Prospectus may be in use
for a full  year  and it  can be  expected  that  these  yields  will  fluctuate
substantially  over that time. To obtain a current yield quotation for the Fund,
call the  appropriate  toll free  telephone  number  listed on the cover of this
Prospectus.
    

    The weighted average portfolio maturity on December 31, 1996 was 42 days.

                       COMPARATIVE PERFORMANCE INFORMATION
    Advertisements  and  communications  may compare the Fund's performance with
that of other mutual funds, as reported by Lipper Analytical  Services,  Inc. or
similar independent services or financial publications.  Such performance may be
categorized  according to the Fund's asset size as determined by the independent
service.  From time to time,  the  performance  of the Fund may be  compared  to
various  investment  indicies,  including the Dow Jones  Industrial  Average and
Standard & Poor's 500 Composite Stock Index. Quotations of historical yields are
not indicative of future dividend income, but are an indication of the return to
shareholders only for the limited  historical period used. The Fund's yield will
depend on the  particular  investments  in its  portfolio,  its total  operating
expenses and other conditions. For further information,  including an example of
the yield calculation, see the Statement of Additional Information.

                             DESCRIPTION OF THE FUND
    The Fund is a diversified open-end management  investment company known as a
money  market  mutual  fund.  It is called a no-load fund because its shares are
sold without a sales charge.

                              INVESTMENT OBJECTIVE
    The Fund's  investment  objective  is to seek  current  income  exempt  from
federal income taxes while also  maintaining  stability of principal,  liquidity
and preservation of capital.

                               INVESTMENT POLICIES
    The Fund will seek to  achieve  its goal  through  investment  in high grade
short term municipal obligations issued by states, territories,  and possessions
of the United  States  and by the  District  of  Columbia,  and their  political
subdivisions,  and duly constituted authorities and corporations.  It will limit
its  portfolio  purchases,  as well as the  underlying  securities of repurchase
agreements  entered  into by it,  to  those  United  States  dollar  denominated
instruments which its Board of Directors determines present minimal credit risks
and which are of "high  quality" as determined by any major rating service (such
as Standard & Poor's Corporation or Moody's Investors Service,  Inc.) or, in the
case of any instruments that are not rated, are of a quality  comparable to such
rated  instruments as determined by its Board of Directors.  The Fund will enter
into repurchase  agreements  only with  commercial  banks and primary dealers in
U.S. government securities. Repurchase agreements when entered into with primary
dealers,  will be fully  collateralized  including the interest  earned  thereon
during the entire  term of the  agreement.  If the  institution  defaults on the
repurchase  agreement,  the  Fund  will  retain  possession  of  the  underlying
securities. In addition, if bankruptcy proceedings are commenced with respect to
the seller, realization on the collateral may be delayed or limited and the Fund
may incur  additional  costs.  In such case the Fund  will be  subject  to risks
associated  with changes in the market value of the collateral  securities.  The
Fund intends to limit  repurchase  agreements  to  institutions  believed by its
adviser to present minimal credit risk. The Fund will maintain a dollar weighted
average  portfolio  maturity  of not more than 90 days and will not  acquire any
portfolio  security with a remaining  maturity of more than thirteen months (397
days).
    The Fund may also hold cash and invest in  obligations,  the  interest  from
which may be  subject  to  federal  income  tax,  so long as at least 80% of the
Fund's net income is derived  from  securities,  the income from  which,  in the
opinion of Counsel for the issuers  thereof,  is exempt from federal income tax;
provided,  however,  the Fund may invest in instruments  yielding taxable income
such as short term money market  instruments  equal to or  exceeding  20% of the
Fund's net income in extraordinary  circumstances when adverse market conditions
dictate a defensive  position.  Any net income  earned from taxable  instruments
will be taxable to shareholders of the Fund as ordinary  income.  The investment
policies set forth in the preceding  paragraph are fundamental  policies and may
not be changed without approval of the shareholders.


                                       3
<PAGE>


    The Fund restricts its purchases of municipal  securities to those rated not
lower than AA or Aa or MIG-2 (see  "Appendix"  in the  Statement  of  Additional
Information), or municipal securities which have been issued by an issuer having
outstanding  debt  securities  rated  not  lower  than AA or Aa or  MIG-2 or are
specifically  determined  by the Fund's Board of Directors to be of high quality
and represent minimal credit risks. Any municipal  security which depends on the
credit of the Federal  government  will be regarded as having a rating of AAA or
Aaa.  Purchases of tax exempt  instruments  such as municipal  commercial  paper
(which  are also known as short term  discount  notes)  will be limited to those
obligations  rated A-1 or Prime-1 (see "Appendix" in the Statement of Additional
Information) or unrated  obligations of equivalent quality, as determined by the
Board of Directors.  Municipal commercial paper or short term discount notes are
short term  obligations  of  municipalities  which are likely to be used to meet
seasonal  working  capital  needs  of  municipalities  or  interim  construction
financing  and  to be  paid  from  general  revenues  of the  municipalities  or
refinanced  with long term debt. In most cases,  such  obligations are backed by
letters of credit, not repurchase agreements or other credit facility agreements
offered by banks or other institutions.

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

                                PORTFOLIO MANAGER
    Denis P. Jamison,  C.F.A.  Senior Vice  President,  Director of Fixed Income
Strategy is responsible for  fixed-income  portfolio  management at LMC. He is a
member of the New York Society of Security  Analysts.  Mr.  Jamison has 25 years
investment experience.
    

    Prior to joining  LMC in 1981,  Mr.  Jamison  had spent nine years at Arnold
Bernhard  &  Company,   an  investment   counseling   and   financial   services
organization.  At Bernhard,  he was a Vice  President  supervising  the security
analyst  staff  and  managing  investment  portfolios.  He  is a  specialist  in
government, corporate and municipal bonds. Mr. Jamison is a graduate of the City
College of New York with a B.A. in Economics. Mr. Jamison has been the portfolio
manager of the Fund since July of 1981.

                INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR
   
    Lexington Management  Corporation,  ("LMC") P.O. Box 1515/Park 80 West Plaza
Two,  Saddle Brook,  New Jersey 07663,  is the  investment  adviser of the Fund.
Lexington  Funds  Distributor  Inc.  ("LFD") is the distributor of shares of the
Fund. LMC, established in 1938, currently manages over $3.3 billion in assets.
    

    LMC serves as investment  adviser to other investment  companies and private
and institutional investment accounts.  Included among these clients are persons
and  organizations  which own  significant  amounts  of  capital  stock of LMC's
parent. The clients pay fees which LMC considers  comparable to the fees paid by
similarly served clients.

    LMC  also  acts  as   administrator   to  the  Fund  and  performs   certain
administrative and internal accounting  services,  including but not limited to,
maintaining  general  ledger  accounts,  regulatory  compliance,  preparation of
financial information for semiannual 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 shall  reimburse  LMC for its actual cost in providing  such
services, facilities and expenses.

    LMC  and  LFD  are  wholly-owned  subsidiaries  of  Lexington  Global  Asset
Managers,  Inc., a Delaware  corporation with offices at Park 80 West Plaza Two,
Saddle  Brook,  N.J.  07663.  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.

   
    For the fiscal year ended  December  31,  1996,  the Fund paid LMC a monthly
management  fee at the annual rate of 1/2 of 1% of the average daily net assets.
For the year ending  December 31, 1996,  LMC earned  $113,774 in net  management
fees from the Fund. See "Investment  Adviser,  Distributor and Administrator" in
the Statement of Additional Information.
    

                             HOW TO PURCHASE SHARES

    INITIAL  INVESTMENTS:  MINIMUM $1,000.  BY WIRE: (1) Telephone the Fund toll
free at 1-800-526-0056 and provide the account registration, address, and social
security or tax  identification  number, the amount being wired, the name of the
wiring bank, and the name and telephone  number of the person to be contacted in


                                       4
<PAGE>

connection with the order. You will then be provided with an account number. (2)
Instruct your bank to wire the specified  amount,  along with the account number
and  registration  to: State Street Bank and Trust Company,  Attn:  Mutual Funds
Dept., re: Lexington Tax Free Money Fund, Account No. 99043713.  (3) A completed
New Account Application must then be forwarded to the Fund at the address on the
Application.

    BY MAIL: Send a check payable to Lexington Tax Free Money Fund, along with a
completed  New Account  Application,  to State Street Bank & Trust  Company (the
"Agent") at the address on the Application.

    SUBSEQUENT  INVESTMENTS--BY  WIRE:  Instruct your bank to wire the specified
amount and  appropriate  information to the Agent (see "Initial  Investments--By
Wire"--(2), above).

    BY MAIL--MINIMUM  $50: Send a check payable to Lexington Tax Free Money Fund
to the Agent,  (see back cover of this  prospectus  for address)  accompanied by
either the detachable form which accompanies the Agent's confirmation of a prior
transaction,  or a  letter  indicating  the  dollar  value of the  shares  to be
purchased and identifying the Fund, the account number, and registration.

    BROKER-DEALERS:  You may invest in shares of the Fund through broker-dealers
who are members of the National  Association  of Securities  Dealers,  Inc., and
other financial institutions and who have selling agreements with LFD. Banks and
other financial  institutions may be required to register as dealers pursuant to
state law.  Broker-dealers and financial  institutions who process such purchase
and sale transactions for their customers may charge a transaction fee for these
services. The fee may be avoided by purchasing shares directly from the Fund.

    PURCHASE  PRICE  AND  EFFECTIVE  DATE:   Shares  of  the  Fund  are  offered
continuously  at net asset  value  which will  normally be constant at $1.00 per
share.  Net asset  value is  determined  as of the  close of the New York  Stock
Exchange  (currently 4:00 p.m. New York time) and on such other times or days as
there is a sufficient degree of trading in the portfolio  securities of the Fund
to  materially  affect its net asset  value.  The price at which a  purchase  is
effected is based on the next calculation of net asset value per share after the
order is  placed.  Investments  for  which  market  quotations  are not  readily
available shall be valued by management in good faith under the direction of the
Fund's Board of Directors.  Fund assets are valued based upon the amortized cost
method. No sales charge is imposed on purchases of shares. There is no assurance
that the Fund will  maintain a net asset  value per share of $1.00.  Orders will
become  effective  when an  investor's  wire  order or check is  converted  into
federal funds (monies  credited to a bank's account with its registered  Federal
Reserve  Bank).  If payment is transmitted by federal funds wire, the order will
become effective upon receipt. Payments transmitted by bank wire may take longer
to be converted into federal funds.  Money transmitted by check will normally be
considered to have been  converted  into federal funds on the first business day
following receipt by the Agent.

    AN OPEN ACCOUNT: By investing in the Fund, a shareholder appoints the Agent,
as his agent, to establish an Open Account to which all shares purchased will be
credited,  together with any dividends and capital gain distributions  which are
paid  in  additional  shares.  (See  "Dividend,  Distribution  and  Reinvestment
Policy"). Share certificates will be issued, for full shares only when requested
in writing. Unless payment for shares is made by certified or cashier's check or
federal  funds wire,  certificates  will not be issued for 30 days.  In order to
facilitate  redemptions and transfers,  most  shareholders  elect not to receive
certificates.

    After an Open  Account  is  established,  payments  can be  provided  for by
"Lex-O-Matic" or other authorized  automatic bank check program accounts (checks
drawn on the investor's bank periodically for investment in the Fund).

    AUTOMATIC  INVESTING PLAN WITH  "LEX-O-MATIC".  A shareholder may arrange to
make  additional  purchases  of shares  automatically  on a monthly or quarterly
basis. The investments of $50 or more are automatically deducted from a checking
account  on or about  the 15th day of each  month.  The  institution  must be an
Automated  Clearing House (ACH) member.  Should an order to purchase shares of a
fund be cancelled  because your automated  transfer does not clear,  you will be
responsible  for any  resulting  loss  incurred  by that fund.  The  shareholder
reserves the right to  discontinue  the  Lex-O-Matic  program  provided  written
notice  is  given  ten days  prior to the  scheduled  investment  date.  Further
information  regarding  this service can be obtained  from  Lexington by calling
1-800-526-0056. On payroll deduction accounts administered by an employer and on
payments into  qualified  pension or profit  sharing plans and other  continuing
purchases programs, there are no minimum purchase requirements.

    TERMS OF OFFERING:  If an order to purchase shares is cancelled  because the
investor's  check does not clear, the purchaser will be responsible for any loss
incurred by the Fund.  To recover any such loss,  the Fund reserves the right to
redeem  shares owned by the  purchaser,  seek  reimbursement  directly  from the


                                       5
<PAGE>

purchaser and may prohibit or restrict the purchaser in placing future orders in
any of the Lexington Funds.

    The Fund  reserves the right to reject any order,  and to waive or lower the
investment  minimums  with respect to any person or class of persons,  including
shareholders  of the Fund's special  investment  programs.  An order to purchase
shares is not binding on the Fund until it has been confirmed by the Agent.

    ACCOUNT STATEMENTS:  The Agent will send shareholders a confirmation of each
transaction  indicating  the  date of the  transaction,  the  number  of  shares
purchased or redeemed,  the price per share and the total amount of the purchase
or redemption  proceeds.  A statement is also sent to shareholders  quarterly or
when  a  change  in  the  registration,  address,  or  dividend  option  occurs.
SHAREHOLDERS ARE URGED TO RETAIN THEIR ACCOUNT STATEMENTS FOR TAX PURPOSES.

                              HOW TO REDEEM SHARES
    BY TELEPHONE:  Shares may be redeemed by telephone.  Call the Fund toll free
1-800-526-0056. A REDEMPTION AUTHORIZATION WHICH IS CONTAINED IN THE NEW ACCOUNT
APPLICATION,  OR A SEPARATE AUTHORIZATION FORM MUST BE ON FILE WITH LFD BEFORE A
SHAREHOLDER MAY REDEEM IN THIS MANNER.  Shareholders may elect on the redemption
authorization form to have checks for redemption  proceeds in any amount of $200
or more mailed  either to the  registered  address,  to the  shareholder's  bank
account,  or to any other  designated  person,  and a new form must be completed
whenever these instructions are revised.

    Shareholders may request that redemption proceeds of $1,000 or more be wired
directly to a COMMERCIAL BANK ACCOUNT.  The signatures on such a request must be
guaranteed,  unless an  authorization  for redemption by telephone form has been
previously filed with LFD. The Agent presently imposes a $5.00 wire charge.

    BY CHECK: Shareholders may effect redemptions by writing checks drawn on the
Fund,  payable  to the order of any  person in any  amount of $100 or more up to
$500,000 at no charge.  Checks in amounts over $500,000 will not be honored. The
special  forms and  instructions  may be  obtained  from the Fund or the  agent.
Redemption  checks should not be used to close your account.  Redemption  checks
are free,  but the Agent  will  impose a fee  (currently  $15.00)  for  stopping
payment of a redemption check upon your request or if the Agent cannot honor the
redemption  check due to insufficient  funds,  uncollected  funds or other valid
reason.

    PROCEDURES FOR REDEMPTIONS BY TELEPHONE OR CHECK MAY ONLY BE USED FOR SHARES
FOR WHICH SHARE CERTIFICATES HAVE NOT BEEN ISSUED, AND MAY NOT BE USED TO REDEEM
SHARES PURCHASED BY CHECK WHICH HAVE BEEN ON THE BOOKS OF THE FUND FOR LESS THAN
15 DAYS.

    BY MAIL:  Send to the Agent (see back cover of this prospectus for address):
(1) a written request for redemption, signed by each registered owner exactly as
the shares are  registered  including the name of the Fund,  account  number and
exact  registration;  (2) share certificates for any shares to be redeemed which
are held by the shareholder;  (3) signature guarantees,  when required;  and (4)
the additional  documents  required for redemptions by corporations,  executors,
administrators,  trustees  and  guardians.  REDEMPTIONS  BY MAIL WILL NOT BECOME
EFFECTIVE UNTIL ALL DOCUMENTS IN PROPER FORM HAVE BEEN RECEIVED BY THE AGENT. IF
A SHAREHOLDER HAS ANY QUESTIONS REGARDING THE REQUIREMENTS FOR REDEEMING SHARES,
HE SHOULD  CALL THE FUND AT THE TOLL  FREE  NUMBER  ON THE BACK  COVER  PRIOR TO
SUBMITTING A REDEMPTION REQUEST.

    Checks for  redemption  proceeds will be mailed within three  business days,
but will not be mailed until all checks in payment for the shares to be redeemed
have been  cleared.  Shares  redeemed  will earn  dividends  through the date of
redemption.  Shareholders  who redeem all of their  shares will  receive a check
representing the value of the shares redeemed plus the accrued dividends through
the date of  redemption.  Where  shareholders  redeem  only a  portion  of their
shares,  all  dividends  declared  but unpaid  will be  distributed  on the next
dividend payment date.

    SIGNATURE  GUARANTEE:  Signature  guarantees are required in connection with
(a) redemptions by mail involving  $25,000 or more; (b) all redemptions by mail,
regardless of the amount  involved,  when the proceeds are to be paid to someone
other than the registered  owners;  (c)  authorizations to effect redemptions by
telephone,  telegram,  or check;  (d)  changes in  instructions  as to where the
proceeds of redemptions are to be sent; and (e) share transfer requests.

    The Agent requires that the guarantor be either a commercial bank which is a
member of the Federal Deposit Insurance Corporation,  a trust company, a savings
and loan  association,  a  savings  bank,  a credit  union,  a member  firm of a
domestic stock exchange,  or a foreign branch of any of the foregoing.  A NOTARY
PUBLIC IS NOT AN ACCEPTABLE GUARANTOR.

                                       6
<PAGE>

    With  respect  to  redemption  requests  submitted  by mail,  the  signature
guarantees must appear either: (a) on the written request for redemption, (b) on
a separate  instrument of assignment  ("stock  power") which should  specify the
total number of shares to be redeemed or (c) on all share certificates  tendered
for redemption and, if shares held by the Agent are also being redeemed,  on the
letter or stock power.  Signature  guarantees in connection with  redemptions by
telephone, telegram, or check must appear on the appropriate authorization form.

    REDEMPTION PRICE: The redemption price will be the net asset value per share
of the Fund next determined  after receipt by the Agent of a redemption  request
in proper  form (see  "Determination  of Net Asset  Value" in the  Statement  of
Additional  Information).  The right of redemption  may be suspended (a) for any
period during which the New York Stock  Exchange is closed or the Securities and
Exchange   Commission  ("SEC")  determines  that  trading  on  the  Exchange  is
restricted,  (b) when there is an emergency as determined by the SEC as a result
of which it is not reasonably  practicable for the Fund to dispose of securities
owned by it or to determine fairly the value of its net assets,  or (c) for such
other periods as the SEC may by order permit for the protection of  shareholders
of the  Fund.  Due to the  proportionately  high  cost  of  maintaining  smaller
accounts,  the Fund reserves the right to redeem all shares in an account with a
value of less than $500 (except  retirement plan accounts) and mail the proceeds
to the shareholder.  Shareholders  will be notified before these redemptions are
to be made and will have 30 days to make an additional investment to bring their
accounts up to the required minimum.

                              SHAREHOLDER SERVICES
    TRANSFER:  Shares  of the  Fund  may be  transferred  to  another  owner.  A
signature  guarantee  of the  registered  owner is  required  on the  letter  of
instruction or accompanying stock power.

    SYSTEMATIC WITHDRAWAL PLAN: Shareholders may elect to withdraw cash in fixed
amounts from their  accounts at regular  intervals.  The minimum  investment  to
establish a  Systematic  Withdrawal  Plan is $10,000.  If the proceeds are to be
mailed to someone  other than the  registered  owner,  a signature  guarantee is
required.

    GROUP   SUB-ACCOUNTING:    To   minimize   recordkeeping   by   fiduciaries,
corporations, and certain other investors, the minimum initial investment may be
waived.

                               EXCHANGE PRIVILEGE
    Shares of the Fund may be exchanged  for shares of the  following  Lexington
Funds on the basis of relative net asset value per share, next determined at the
time of the  exchange.  In the event  shares of one or more of these Funds being
exchanged by a single investor have a value in excess of $500,000, the shares of
the Fund will not be  purchased  until  the third  business  day  following  the
redemption of the shares being  exchanged in order to enable the redeeming  fund
to utilize normal securities  settlement procedures in transferring the proceeds
of the  redemption  to the Fund.  EXCHANGES  MAY NOT BE MADE UNTIL ALL CHECKS IN
PAYMENT FOR THE SHARES TO BE EXCHANGED HAVE BEEN CLEARED.

    Lexington Funds currently available for exchange are:

LEXINGTON WORLDWIDE  EMERGING  MARKETS FUND, INC.  (NASDAQ SYMBOL:  LEXGX)/Seeks
          long-term  growth of capital  primarily  through  investment in equity
          securities of companies  domiciled in, or doing business in,  emerging
          countries and emerging markets.

       

   
LEXINGTON INTERNATIONAL FUND, INC. (NASDAQ SYMBOL: LEXIX)/Seeks long term growth
          of capital through investment in common stocks of companies  domiciled
          in foreign countries.

LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.  (NASDAQ SYMBOL:  LXCAX)/Seeks
          long-term  capital   appreciation   through  investment  in  companies
          domiciled in the Asia Region with a market capitalization of less than
          $1 billion.

LEXINGTON TROIKA DIALOG RUSSIA FUND, INC. (NASDAQ SYMBOL: LETRX)/Seeks long-term
          capital  appreciation  through  investment  primarily  in  the  equity
          securities  of  Russian  companies.  The  Fund  has a  $5,000  MINIMUM
          INVESTMENT.
    


                                       7
<PAGE>

LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ SYMBOL:  LEBDX)/Seeks  high current
          income  by  investing  in  a  combination   of  foreign  and  domestic
          high-yield,  lower rated debt  securities.  Capital  appreciation is a
          secondary objective.

   
LEXINGTON SMALLCAP  VALUE FUND,  INC.  (NASDAQ  SYMBOL:  LESVX)/Seeks  long-term
          capital  appreciation through investment in common stocks of companies
          domiciled in the United  States with a market  capitalization  of less
          than $1 billion.
    

LEXINGTON GOLDFUND,  INC. (NASDAQ SYMBOL:  LEXMX)/Seeks capital appreciation and
          such hedge  against  loss of buying  power as may be obtained  through
          investment in gold bullion and equity  securities of companies engaged
          in mining or processing gold throughout the world.

LEXINGTON CORPORATE  LEADERS TRUST FUND (NASDAQ SYMBOL:  LEXCX)/Seeks  long-term
          capital  growth and income  through  investment  in an equal number of
          shares of the  common  stocks of a fixed  list of  American  blue chip
          corporations.

LEXINGTON GROWTH AND INCOME FUND, INC.  (NASDAQ SYMBOL:  LEXRX)/Seeks  long-term
          capital  appreciation  through  investments  in stocks of large,  ably
          managed and well financed companies. Income is a secondary objective.

   
LEXINGTON CONVERTIBLE SECURITIES FUND (NASDAQ SYMBOL:  CNCVX)/Seeks total return
          by providing capital appreciation,  current income and conservation of
          capital through  investments in a diversified  portfolio of securities
          convertible into shares of common stock.
    

LEXINGTON GNMA INCOME FUND, INC.  (NASDAQ  SYMBOL:  LEXNX)/Seeks a high level of
          current  income,  consistent  with  liquidity and safety of principal,
          through investment primarily in mortgage-backed GNMA Certificates.

LEXINGTON MONEY  MARKET  TRUST  (NASDAQ  SYMBOL:  LMMXX)/Seeks  a high  level of
          current income  consistent with  preservation of capital and liquidity
          through  investments  in  interest  bearing  short term  money  market
          instruments.
LEXINGTON TAX FREE MONEY FUND, INC. (NASDAQ SYMBOL:  LTFXX)/Seeks current income
          exempt from  Federal  income  taxes while  maintaining  liquidity  and
          stability  of principal  through  investment  in short term  municipal
          securities.

    Shareholders  in any of these funds may exchange all or part of their shares
for  shares  of one or  more  of the  other  funds,  subject  to the  conditions
described herein.  The Exchange  Privilege enables a shareholder in any of these
funds to acquire shares in a fund with a different investment objective when the
shareholder  believes that a shift between  funds is an  appropriate  investment
decision.  Shareholders  contemplating  an exchange should obtain and review the
prospectus of the fund to be acquired.

    If an exchange involves  investing in a Lexington Fund not already owned and
a new account has to be established,  the dollar amount  exchanged must meet the
initial investment of the Fund being purchased.  IF, HOWEVER, AN ACCOUNT ALREADY
EXISTS IN THE FUND BEING  BOUGHT,  THERE IS A $500  MINIMUM  EXCHANGE  REQUIRED.
SHAREHOLDERS MUST PROVIDE THE ACCOUNT NUMBER OF THE EXISTING ACCOUNT.

    Any exchange  between mutual funds is, in effect,  a redemption of shares in
one Fund and a purchase  in the other Fund.  Shareholders  should  consider  the
possible tax effects of an exchange.

    TELEPHONE EXCHANGE PROVISIONS--Exchange instructions may be given in writing
or  by  telephone.   TELEPHONE  EXCHANGES  MAY  ONLY  BE  MADE  IF  A  TELEPHONE
AUTHORIZATION  FORM HAS BEEN PREVIOUSLY  EXECUTED AND FILED WITH LFD.  TELEPHONE
EXCHANGES  ARE  PERMITTED  ONLY AFTER A MINIMUM OF 7 DAYS HAVE  ELAPSED FROM THE
DATE OF A  PREVIOUS  EXCHANGE.  EXCHANGES  MAY NOT BE MADE  UNTIL ALL  CHECKS IN
PAYMENT FOR THE SHARES TO BE EXCHANGED HAVE BEEN CLEARED.  Telephonic  exchanges
can only involve shares held on deposit at the Agent; shares held in certificate
form by the shareholder cannot be included.  However,  outstanding  certificates
can be returned to the Agent and  qualify  for these  services.  Any new account
established with the same  registration will also have the privilege of exchange
by  telephone in the  Lexington  Funds.  All  accounts  involved in a telephonic
exchange MUST have the same registration and dividend option as the account from
which the shares were  transferred  and will also have the privilege of exchange
by telephone in the Lexington Funds in which these services are available.

    By checking  the box on the New Account  Application  authorizing  telephone
exchange services, a shareholder constitutes and appoints LFD distributor of the
Lexington Group of Mutual Funds as the true and lawful attorney to surrender for
redemption or exchange any and all non-certificated  shares held by the Agent in
account(s) designated, or in any other account with the Lexington Funds, present
or future, which has the identical  registration with full power or substitution
in the premises, authorizes and directs LFD to act upon any instruction from any
person by  telephone  for exchange of shares held in any of these  accounts,  to
purchase  shares of any other  Lexington  Fund that is  available,  provided the
registration  and mailing address of the shares to be purchased are identical to


                                       8
<PAGE>

the registration of the shares being redeemed,  and agrees that neither LFD, the
Agent, nor the Fund(s) will be liable for any loss,  expense or cost arising out
of any  requests  effected in  accordance  with this  authorization  which would
include requests effected by imposters or persons otherwise  unauthorized to act
on behalf of the account.  LFD, the Agent and the Fund,  will employ  reasonable
procedures to confirm that  instructions  communicated  by telephone are genuine
and if they do not  employ  reasonable  procedures  they may be  liable  for any
losses  due  to   unauthorized   or  fraudulent   instructions.   The  following
identification  procedures  may include,  but are not limited to, the following:
account number,  registration and address,  taxpayer  identification  number and
other  information   particular  to  the  account.  In  addition,  all  exchange
transactions  will take place on recorded  telephone lines and each  transaction
will be confirmed in writing by the Fund. LFD reserves the right to cease to act
as agent subject to the above  appointment upon thirty (30) days' written notice
to the address of record.  If other than an  individual,  it is  certified  that
certain  persons have been duly  elected and are now legally  holding the titles
given and that the said corporation,  trust, unincorporated association, etc. is
duly  organized  and  existing  and has power to take action  called for by this
continuing Authorization.

    Exchange authorization forms, Telephone authorization forms and prospectuses
of the other funds may be obtained from LFD.

    LFD has made  arrangements  with certain  dealers to accept  instructions by
telephone  to  exchange  shares  of the  Fund  for  shares  of one of the  other
Lexington investment companies at net asset value as described above. Under this
procedure, the dealer must agree to indemnify the Distributor and the funds from
any loss or liability that any of them might incur as a result of the acceptance
of such telephone  exchange orders. A properly signed exchange  application must
be received by the Distributor within five days of the exchange request. In each
such exchange, the registration of the shares of the fund being acquired must be
identical to the  registration  of the shares of the fund  exchanged.  Shares in
certificate  form are not eligible  for this type of exchange.  LFD reserves the
right to reject any telephone exchange request. Any telephone exchange orders so
rejected may be processed by mail.

    A capital  gain or loss for federal tax  purposes  may be realized  upon the
exchange,  depending upon the cost or other basis of the shares  redeemed.  This
exchange  offer is  available  only in states  where  shares  of the fund  being
acquired  may legally be sold and may be modified or  terminated  at any time by
the  Fund.  Broker-dealers  who  process  exchange  orders  on  behalf  of their
customers may charge a fee for their services. Such fee may be avoided by making
requests for exchange directly to the Fund or Agent.

                 DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
    The Fund declares and reinvests  daily,  dividends  from its net  investment
income and distributes  such dividends on the last day of each month.  Dividends
or  distribution  payments  will be  reinvested at net asset value in additional
full and fractional shares of the Fund unless and until the shareholder notifies
the Agent in writing that he wants to receive his payments in cash. This request
must be received by the Agent at least seven days before the payment date.  Upon
receipt by the Agent of such written notice,  all further  payments will be made
in cash until  written  notice to the contrary is  received.  An account of such
shares owned by each shareholder  will be maintained by the Agent.  Shareholders
whose  accounts are  maintained  by the Agent will have the same rights as other
shareholders  with  respect  to  shares  so  registered  (see  "How to  Purchase
Shares--An Open Account").

    Since  substantially  all of the net income  will be  declared as a dividend
each time the net asset value of the Fund is determined, the net asset value per
share  will  normally  remain at one  dollar  per share  immediately  after such
dividend declaration and determination.

                                   TAX MATTERS
    The Fund intends to qualify as a regulated  investment company by satisfying
the  requirements  under  Subchapter M of the Internal  Revenue Code of 1986, as
amended (the "Code"),  including requirements with respect to diversification of
assets, distribution of income and sources of income. It is the Fund's policy to
distribute to  shareholders  all of its investment  income (net of expenses) and
any capital gains (net of capital losses) so that, in addition to satisfying the
distribution  requirement  of  Subchapter  M, the Fund  will not be  subject  to
federal income tax or the 4% excise tax.

    The Fund intends to invest principally in tax-exempt  municipal  obligations
so that  distributions by the Fund of its net tax-exempt  interest income can be
designated as exempt-interest  dividends, which are excludable from gross income
for federal income tax purposes.  However,  shareholders  are required to report
the  receipt  of  exempt-interest  dividends,  together  with  other  tax-exempt


                                       9
<PAGE>

interest,   on  their   federal   income  tax  returns.   In   addition,   these
exempt-interest  dividends may be subject to the federal alternative minimum tax
and to state and local income tax, and will be taken into account in determining
the portion, if any, of Social Security benefits received which must be included
in  gross  income  for  federal  income  tax  purposes.   Finally,  interest  or
indebtedness  incurred or  continued  to  purchase  or carry  shares of the Fund
(which  indebtedness  likely need not be directly  traceable  to the purchase or
carrying of such shares) will not be deductible for federal income tax purposes.

    Distributions  by the Fund of any taxable net investment  income and any net
short-term  capital gain are taxable to shareholders as ordinary  income.  These
distributions  are treated as dividends  for federal  income tax purposes but do
not qualify for the 70% dividends-received deduction for corporate shareholders.
The Fund is  managed  so that it will not have any  long-term  capital  gains or
losses.  The  percentage  of the  Fund's  net  investment  income  (taxable  and
tax-exempt) which constitutes  tax-exempt  interest will be determined  annually
and will be applied  uniformly to all  distributions  of such income made during
the  year for  purposes  of  designating  a  portion  of such  distributions  as
exempt-interest dividends. This percentage may differ from the actual tax-exempt
percentage for any particular day or period during the year.

    Distributions to shareholders will be treated in the same manner for federal
income tax purposes whether received in cash or reinvested in additional  shares
of the Fund. In general, distributions by the Fund are taken into account by the
shareholders in the year in which they are made. However,  certain distributions
made during January will be treated as having been paid by the Fund and received
by the  shareholders on December 31 of the preceding  year. A statement  setting
forth the  federal  income tax status of all  distributions  made or deemed made
during  the year  will be sent to  shareholders  promptly  after the end of each
year.  Shareholders  purchasing shares of the Fund just prior to the ex-dividend
date will be taxed on the entire  amount of the dividend  received,  even though
the net asset value per share on the date of such purchase  reflected the amount
of such dividend.

    All or a portion of any loss realized upon a taxable  disposition  of shares
of the Fund may be disallowed  if other shares of the Fund are purchased  within
30 days before or after such disposition.

    Under the back-up withholding rules of the Code, certain shareholders may be
subject to 31%  withholding of federal income tax on ordinary  income  dividends
paid by the Fund. In order to avoid this back-up withholding, a shareholder must
provide the Fund with a correct taxpayer  identification  number (which for most
individuals is their Social Security number) or certify that it is a corporation
or otherwise exempt from or not subject to back-up withholding.  The new account
application  included with this Prospectus  provides for shareholder  compliance
with these certification requirements.

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

            CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
    Chase  Manhattan  Bank,  N.A. 1211 Avenue of the Americas New York, New York
10022, has been retained to act as the Custodian for the Fund's  investments and
assets.  State  Street Bank and Trust  Company,  225  Franklin  Street,  Boston,
Massachusetts  02110 is the transfer agent and dividend disbursing agent for the
Fund. Neither Chase Manhattan Bank, N.A. nor State Street Bank and Trust Company
have  any  part  in  determining  the  investment  policies  of the  Fund  or in
determining  which portfolio  securities are to be purchased or sold by the Fund
or in the declaration of dividends and distributions.

   
                        COUNSEL AND INDEPENDENT AUDITORS
    Kramer,  Levin,  Naftalis,  & Frankel,  919 Third Avenue, New York, New York
10022 will pass upon legal  matters for the Fund in  connection  with the shares
offered by this Prospectus.

    KPMG Peat Marwick 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, 1997.
    


                                       10
<PAGE>

                                OTHER INFORMATION
    The Fund was organized as a Maryland corporation on November 18, 1976. Prior
to April 29, 1980, its corporate name was "Lexington Tax Free Daily Income Fund,
Inc." On April 26, 1983,  the name of the Fund was changed from  "Lexington  Tax
Free Daily Income Fund,  Inc." to Lexington  Tax Free Money Fund,  Inc. The Fund
has  authorized  1,000,000,000  shares of capital  stock,  $0.01 par value.  All
shares are of the same  class,  with like rights and  privileges.  Each share is
entitled to one vote and to participate equally in distributions declared by the
Fund and in its net assets on liquidation. The shares have non-cumulative voting
rights,  which means that the holders of more than 50% of the shares  voting for
the election of directors  can elect 100% of the  Directors if they choose to do
so, and, in such event, the holders of the remaining less than 50% of the shares
voting for the  election  of  directors  will not be able to elect any person or
persons to the Board of Directors.  The shares are fully paid and non-assessable
when issued and have no preference,  preemptive, or conversion rights. There are
no options or other special rights outstanding relating to any Fund shares.

    The Fund  will not  normally  hold  annual  shareholder  meetings  except as
required by Maryland  General  Corporation Law or the Investment  Company Act of
1940.  However,  meetings  of  shareholders  may be  called  at any  time by the
Secretary upon the written request of shareholders  holding in the aggregate not
less than 25% of the outstanding  shares,  such request  specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of  shareholders  for the purpose of voting upon the  question of
removal of any Director when requested to do so in writing by the  recordholders
of not less than 10% of the  Fund's  outstanding  shares.  The Fund will  assist
shareholders in any such communication between shareholders and Directors.

    The Code of Ethics adopted by each of the Adviser and the Fund prohibits all
affiliated  personnel  from  engaging in personal  investment  activities  which
compete  with or  attempt to take  advantage  of the  Fund's  planned  portfolio
transactions. The objective of each Code of Ethics is that the operations of the
Adviser  and  Fund be  carried  out  for the  exclusive  benefit  of the  Fund's
shareholders.  All organizations  maintain careful monitoring of compliance with
the Code of Ethics.

    A Registration  Statement (herein called the "Registration  Statement"),  of
which this Prospectus is a part, has been filed with the SEC,  Washington,  D.C.
under the Securities Act of 1933, as amended.

    No  person  has  been  authorized  to give  any  information  or to make any
representations  other than those contained in this Prospectus and in the Fund's
official  sales  literature in connection  with the offer of the Fund's  shares,
and, if given or made,  such other  information or  representations  must not be
relied upon as having been  authorized  by the Fund.  This  Prospectus  does not
constitute  an offer in any  State in  which,  or to any  person  to whom,  such
offering may not lawfully be made. A "Statement of Additional  Information",  to
which  reference is made in this  Prospectus,  provides a further  discussion of
certain  areas in the  Prospectus  and other matters which may be of interest to
some investors and is available by request without cost as indicated herein. The
Prospectus and the Statement of Additional  Information omit certain information
contained in the Registration  Statement, to which reference is made, filed with
the  Commission.  Items which are thus  omitted,  including  contracts and other
documents referred to or summarized herein and therein, may be obtained from the
Commission upon payment of the prescribed fees.


                                       11

<PAGE>

INVESTMENT ADVISER
--------------------------------------------------------------------------------

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

DISTRIBUTOR
--------------------------------------------------------------------------------

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

ALL SHAREHOLDER REQUESTS FOR SERVICES OF ANY KIND SHOULD BE
SENT TO:

TRANSFER AGENT
--------------------------------------------------------------------------------

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

OR CALL TOLL FREE:
SERVICE: 1-800-526-0056
24 HOUR ACCOUNT INFORMATION: 1-800-526-0052







TABLE OF CONTENTS                                                        PAGE
-----------------------------------------------------------------------------


Fee Table .............................................................    2

Financial Highlights ..................................................    2

Yield Information .....................................................    3

Comparative Performance Information ...................................    3

Description of the Fund ...............................................    3

Investment Objective ..................................................    3

Investment Policies ...................................................    3

Management of the Fund ................................................    4

Portfolio Manager .....................................................    4

Investment Adviser, Distributor and Administrator .....................    4

How to Purchase Shares ................................................    4

How to Redeem Shares ..................................................    6

Shareholder Services ..................................................    7

Exchange Privilege ....................................................    7

Dividend, Distribution and Reinvestment Policy ........................    9

Tax Matters ...........................................................    9

Custodian, Transfer Agent and
  Dividend Disbursing Agent ...........................................   10

Counsel and Independent Auditors ......................................   10

Other Information .....................................................   11


                                    LEXINGTON

                                    LEXINGTON
                                       TAX
                                      FREE
                                      MONEY
                                   FUND, INC.

      ----------------------------------o---------------------------------

  o No sales charge
  o No redemption fee
  o Free check writing service
  o Free telephone exchange privilege

      ----------------------------------o---------------------------------

                               The Lexington Group
                                       of
                                     NO LOAD
                              Investment Companies


   
                                   PROSPECTUS
                                   MAY 1, 1997
                                  ============
    

<PAGE>

                       LEXINGTON TAX FREE MONEY FUND, INC.

                       STATEMENT OF ADDITIONAL INFORMATION

   
                                   MAY 1, 1997

    This statement of additional  information which is not a prospectus,  should
be read in conjunction  with the current  prospectus of Lexington Tax Free Money
Fund,  Inc.(the  "Fund"),  dated May 1, 1997,  as it may be revised 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 toll-free numbers:
    

               Shareholder Services Information:-- 1-800-526-0056
                  24 Hour Account Information:-- 1-800-526-0052

Lexington  Management  Corporation  ("LMC")  serves  as  the  Fund's  investment
adviser. Lexington Funds Distributor, Inc. ("LFD") is the Fund's distributor.

                                TABLE OF CONTENTS

                                                                           Page

Investment Policy .....................................................       2
Yield Calculation .....................................................       2
Investment Restrictions ...............................................       3
Investment Adviser, Distributor and Administrator .....................       4
Portfolio Transactions ................................................       6
Determination of Net Asset Value ......................................       6
Dividend, Distribution and Reinvestment Policy ........................       6
Tax Matters ...........................................................       7
Custodian, Transfer Agent and Dividend Disbursing Agent ...............      10
Management of the Fund ................................................      10
Appendix ..............................................................      13
Financial Statements ..................................................      15


                                       1
<PAGE>

                                INVESTMENT POLICY

    The fundamental  investment  objective of the Fund is to seek current income
exempt from Federal income taxes while also maintaining  stability of principal,
liquidity and preservation of capital.

    The Fund will seek to  achieve  its goal  through  investment  in short term
municipal  securities  issued by states,  territories,  and  possessions  of the
United States and by The District of Columbia, and their political subdivisions,
and duly constituted  authorities and corporations.  It will limit its portfolio
purchases, as well as the underlying securities of repurchase agreements entered
into by it, to those United  States  dollar  denominated  instruments  which its
Board of  Directors  determines  present  minimal  credit risks and which are of
"high  quality" as  determined  by any major rating  service (such as Standard &
Poor's  Corporation or Moody's Investors  Service,  Inc.) or, in the case of any
instruments  that are not  rated,  are of a  quality  comparable  to such  rated
instruments  as determined  by its Board of Directors.  The Fund will enter into
repurchase  agreements only with commercial banks and dealers in U.S. Government
securities.  Repurchase agreements when entered into with dealers, will be fully
collateralized  including the interest  earned thereon during the entire term of
the agreement. If the institution defaults on the repurchase agreement, the Fund
will retain possession of the underlying securities.  In addition, if bankruptcy
proceedings  are  commenced  with  respect  to the  seller,  realization  on the
collateral may be delayed or limited and the Fund may incur additional costs. In
such case the Fund will be  subject  to risks  associated  with  changes  in the
market value of the collateral securities.  The Fund intends to limit repurchase
agreements to institutions  believed by LMC to present minimal credit risks. The
Fund will maintain a dollar weighted average portfolio maturity of not more than
90 days and will not acquire any portfolio security with a remaining maturity of
more than thirteen months (397 days).

    The Fund may also hold cash and invest in  obligations,  the  interest  from
which may be  subject  to  Federal  income  tax,  so long as at least 80% of the
Fund's net income is derived  from  securities,  the income from  which,  in the
opinion of Counsel for the issuers  thereof,  is exempt from Federal income tax;
provided,  however,  the Fund may invest in instruments  yielding taxable income
equal  to  or  exceeding   20%  of  the  Fund's  net  income  in   extraordinary
circumstances when adverse market conditions dictate a defensive  position.  Any
net income earned from taxable  instruments  will be taxable to  shareholders of
the Fund as ordinary income,  except to the extent that individual taxpayers may
exclude  such income  pursuant to the combined  dividend  and interest  received
exclusion (see "Federal Income Taxation").  The investment policies set forth in
the three preceding  paragraphs are fundamental  policies and may not be changed
without approval of the shareholders.

    The Fund restricts its purchases of municipal  securities to those rated not
lower than AA or Aa or MIG-2 (see  "Appendix"),  or municipal  securities  which
either have been issued by an issuer having  outstanding  debt securities  rated
not lower than AA or Aa or MIG-2 or are  specifically  determined  by the Fund's
Board of Directors to be of high quality and represent minimal credit risks. Any
municipal security which depends on the credit of the Federal government will be
regarded as having a rating of AAA or Aaa.  Purchases of tax exempt  instruments
such as municipal  commercial paper (which are also known as short term discount
notes)  will  be  limited  to  those  obligations  rated  A-l  or  Prime-l  (see
"Appendix") or unrated  obligations of equivalent  quality, as determined by the
Board of Directors.  Municipal commercial paper or short term discount notes are
short term  obligations  of  municipalities  which are likely to be used to meet
seasonal  working  capital  needs  of  municipalities  or  interim  construction
financing  and  to be  paid  from  general  revenues  of the  municipalities  or
refinanced  with long term debt. In most cases,  such  obligations are backed by
letters of credit, not repurchase agreements or other credit facility agreements
offered by banks or other institutions.

                                YIELD CALCULATION

    The Fund provides  current yield and effective yield  quotations,  which are
calculated in accordance  with the  regulations  of the  Securities and Exchange
Commission,  based upon changes in account value during a recent  seven-day base
period.

   
    Current yield  quotations are computed by  annualizing  (on a 365-day basis)
the "base period  return".  The "base period  return" is computed by determining
the net change exclusive of capital changes in the value of the account, divided
by the value of the account at the beginning of the base period. Effective yield
is  computed by  compounding  the "base  period  return".  Based upon  dividends
actually credited to the shareholders' accounts (I.E.: based upon net investment
income),  the  current  yield to an  investor  in the Fund during the last seven
calendar  days of its fiscal year ended  December 31, 1996 was at an annual rate
of 2.79% and the  effective  yield was at an annual  rate of 2.83%.  The average
weighted  maturity of investments  was 42 days. The current and effective  yield
are affected by market conditions,  portfolio quality,  portfolio maturity, type
of instruments  held and operating  expenses.  The Fund attempts to keep its net
asset  value  per  share at  $1.00,  but  attainment  of this  objective  is not
guaranteed.  This Statement of Additional  Information  may be in use for a full
year and it can be expected that these yields will fluctuate  substantially from
the example shown above.
    


                                       2
<PAGE>

    The current and effective yield figures are not a  representation  of future
yield as the Fund's net income  and  expenses  will vary based on many  factors,
including  changes in short term money market yields  generally and the types of
instruments in the Fund's portfolio.  The stated yield of the Fund may be useful
in reviewing the Fund's performance and in providing a basis for comparison with
other  investment   alternatives.   However,  unlike  bank  deposits  and  other
investments  which pay fixed yields for stated periods of time, the yield of the
Fund fluctuates.  In addition, other investment companies may calculate yield on
a different basis and may purchase  securities for their  portfolios  which have
different   qualities  and  maturities  than  those  of  the  Fund's   portfolio
securities.

   
             EQUIVALENT YIELDS: TAX EXEMPT VERSUS TAXABLE SECURITIES
    

    The following  table shows the effect of the tax status of municipal  bonds,
notes and  commercial  paper on the  effective  yield  received by their holders
under the  Federal  income tax laws.  It gives the  approximate  yield a taxable
security  must earn at  various  income  brackets  to  produce  after tax yields
equivalent to those of tax exempt municipal bonds, notes and commercial paper.

    The  table,  which  is  based on tax  rates  in  effect  on the date of this
Prospectus,  provides  separate  computations  for  taxpayers  who file joint or
individual  returns.  Of course,  no  assurance  can be given that the Fund will
achieve any specific tax exempt  yield.  While it is expected that the Fund will
invest principally in obligations the interest from which is exempt from Federal
income tax, other income received by the Fund may be taxable. The table does not
take into account state or local taxes, if any, payable on Fund distributions.

<TABLE>
<CAPTION>

   
                    COMPARISON OF TAXABLE AND TAX-FREE YIELDS

                                        MARGINAL
          TAXABLE INCOME                 FEDERAL               TAX-EXEMPT YIELD
JOINT RETURNS       SINGLE RETURNS      TAX RATE   1.5%   2%    3%    4%    5%    6%    7%
-------------------------------------------------------------------------------------------
<C>                 <C>                   <C>       <C>   <C>   <C>   <C>   <C>   <C>   <C>
1997

$0 - $41,199        $0 - $24,649          15%       1.8   2.4   3.5   4.7   5.9   7.1   8.2
$41,200-$99,599     $24,650-$59,749       28%       2.1   2.8   4.2   5.6   6.9   8.3   9.7
$99,600-$151,749    $59,750-$124,649      31%       2.2   2.9   4.3   5.8   7.2   8.7  10.1
$151,750-$271,049   $124,650-$271,049     36%       2.3   3.1   4.7   6.3   7.8   9.4  10.9
$271,050+           $271,050+             39.6%     2.5   3.3   5.0   6.6   8.3   9.9  11.6

</TABLE>
    

                             INVESTMENT RESTRICTIONS

    The  Fund's  investment  program  is  subject  to  a  number  of  investment
restrictions which reflect  self-imposed  standards as well as Federal and state
regulatory  limitations.  The investment restrictions are matters of fundamental
policy and may not be changed without the affirmative  vote of the lesser of (a)
50% of the  outstanding  shares  of the  Fund or (b)  67% or more of the  shares
present at a meeting if more than 50% of the outstanding  shares of the Fund are
represented at the meeting in person or by proxy.

    The Fund shall not: (l) issue senior  securities;  (2) borrow money,  except
from banks as a temporary  measure for  extraordinary or emergency  purposes and
not for  investment  purposes or through  "reverse  repurchase  agreements";  no
borrowing  shall be made if such borrowing,  combined with any then  outstanding
borrowings,  shall  exceed  5%  of  the  Fund's  total  assets;  (3)  underwrite
securities  of other  issuers;  (4)  concentrate  its  investments  to an extent
greater  than 25% of the value of its total assets in either (a)  securities  of
issuers located in a single state or (b) revenue bonds which derive revenue from
projects of a similar type or class of facilities;  these  limitations not being
applicable to securities  issued or guaranteed by the U.S.  Government or any of
its agencies or  instrumentalities,  or to  certificates  of deposit or banker's
acceptances;   (5)  purchase  or  sell  real  estate,   commodity  contracts  or
commodities  or invest in interests in oil, gas or other mineral  exploration or
development programs (however,  the Fund may purchase municipal bonds secured by
real estate or interests  herein);  (6) make loans to other  persons  except (a)
through the purchase of a portion or portions of an issue or issues of municipal
bonds or notes  or other  publicly  distributed  bonds,  notes,  debentures  and
evidences of indebtedness  authorized by its investment  policy,  or (b) through
investments in "repurchase  agreements"  (which are arrangements under which the
Fund  acquires  a debt  security  subject  to an  obligation  of the  seller  to
repurchase  it at a fixed price within a short fixed  period),  provided that no
more than 10% of the Fund's  assets may be  invested  in  repurchase  agreements
which mature in more than seven days; or (c) through loans of securities held in
the Fund's  portfolio to  responsible  borrowers and subject to 100%  collateral
requirements in accordance with guidelines  established by the Fund's  directors
and  applicable  federal  regulations;  (7) purchase the  securities  of another
investment company or investment trust,  except in the open market and then only
if no profit, other than the customary broker's commission, results to a sponsor
or dealer,  or by merger or other  reorganization;  (8) purchase any security on
margin or effect a short sale of a  security;  (9) buy  securities  from or sell
securities  (other than  securities  issued by the Fund) to any of its officers,
directors or its  investment  adviser,  as principal;  (10) contract to sell any
security or evidence  of  interest  therein,  except to the extent that the same


                                       3
<PAGE>


shall be owned by the Fund; (11) purchase or retain securities of an issuer when
one or more of the  officers  and  directors  of the  Fund or of the  investment
adviser,  or a  person  owning  more  than  10%  of the  stock  of  either,  own
beneficially  more  than 1/2 of 1% of the  securities  of such  issuer  and such
persons owning more than 1/2 of 1% of such securities  together own beneficially
more than 5% of the  securities of such issuer;  (12) invest more than 5% of its
total assets in the  securities of any one issuer (except  securities  issued or
guaranteed  by  the  United  States   Government  or  any  of  its  agencies  or
instrumentalities),  except that such restriction  shall not apply to 25% of the
Fund's  portfolio;  (13) purchase an  industrial  revenue bond if as a result of
such  purchase more than 5% of total Fund assets would be invested in industrial
revenue bonds where the payment of principal and interest are the responsibility
of a company with less than three years'  operating  history;  (14) purchase any
security restricted as to disposition under Federal securities laws; or (15) buy
or sell puts, calls or other options.

    For the purposes of these limitations, each government subdivision, (county,
city) and any subdivision,  agency or instrumentality  thereof (school district,
authority) shall be considered as a separate issuer. If a security is guaranteed
as to principal and interest the  guarantor may be considered as the issuer.  If
the security is backed only by the assets or revenues of a specific entity, that
entity shall be deemed the issuer.

    With  regard  to  restriction  (6) (b)  above,  the  Fund  will  enter  into
repurchase  agreements  only with  commercial  banks and primary dealers in U.S.
government securities.

    The Fund's investment portfolio may include repurchase  agreements ("repos")
with banks and dealers in U.S.  Government  securities.  A repurchase  agreement
involves the  purchase by the Fund of an  investment  contract  from a bank or a
dealer  in  U.S.  Government  securities  which  contract  is  secured  by  debt
securities  whose value is equal to or greater than the value of the  repurchase
agreement  including the agreed upon interest.  The agreement  provides that the
institution will repurchase the underlying securities at an agreed upon time and
price.  The total amount  received on repurchase  would exceed the price paid by
the Fund,  reflecting  an agreed upon rate of  interest  for the period from the
date of the  repurchase  agreement  to the  settlement  date,  and  would not be
related  to the  interest  rate on the  underlying  securities.  The  difference
between the total amount to be received upon the  repurchase  of the  securities
and the price  paid by the Fund  upon  their  acquisition  is  accrued  daily as
interest. If the institution defaults on the repurchase agreement, the Fund will
retain  possession  of the  underlying  securities.  In addition,  if bankruptcy
proceedings  are  commenced  with  respect  to the  seller,  realization  on the
collateral  by the Fund  may be  delayed  or  limited  and the  Fund  may  incur
additional costs. In such case the Fund will be subject to risks associated with
changes in the market value of the  collateral  securities.  The Fund intends to
limit repurchase agreements to transactions with institutions believed by LMC to
present minimal credit risk.

    Payment  of  interest  expense  by the  Fund in  connection  with  borrowing
permitted  under its investment  restrictions  would have the effect of reducing
the Fund's yield to its shareholders. Although the Fund has the right to pledge,
mortgage or hypothecate its assets,  in order to comply with a state statute the
Fund will not, as a matter of  operating  policy while  offering  shares in such
state,  pledge,  mortgage or hypothecate its portfolio  securities to the extent
that at any time the  percentage  of pledged  securities  will exceed 10% of the
total net assets of the Fund.

    Lending of portfolio  securities:  As stated in number (6) above, subject to
guidelines  established  by the  directors  and by the  Securities  and Exchange
Commission,  the Fund  from  time-to-time,  may  lend  portfolio  securities  to
brokers, dealers,  corporations or financial institutions and receive collateral
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned  securities.  Such  collateral will be either
cash or  fully  negotiable  U.S.  Treasury  or  agency  issues.  If  cash,  such
collateral will be invested in short term securities, the income from which will
increase the return to the Fund.  However,  a portion of such incremental return
may be shared with the borrower. If securities,  the usual procedure will be for
the  borrower  to pay a fixed  fee to the  Fund  for  such  time as the  loan is
outstanding.  The Fund  will  retain  substantially  all  rights  of  beneficial
ownership as to the loaned portfolio  securities including rights to interest or
other distributions and will have the right to regain record ownership of loaned
securities  in order to  exercise  such  beneficial  rights.  Such loans will be
terminable at any time. The Fund may pay reasonable fees to persons unaffiliated
with it in  connection  with the  arranging  of such loans.  Also,  the Fund has
undertaken not to invest in real estate limited partnership interests,  oil, gas
or mineral leases, as well as exploration or development programs. The Fund will
not purchase warrants except in units with other securities in original issuance
thereof or attached to other securities,  if at the time of purchase, the Fund's
investment in warrants,  valued at the lower of cost or market,  would exceed 5%
of the Fund's  total  assets.  Warrants  which are not listed on the New York or
American Stock Exchanges shall not exceed 2% of the Fund's net assets. Shares of
the Fund will not be issued for consideration other than cash.

                INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR

    LMC, P.O. Box 1515/Park 80 West Plaza Two,  Saddle Brook,  New Jersey 07663,
is the  investment  adviser  to  the  Fund  and,  as  such,  advises  and  makes
recommendations  to the Fund with  respect  to its  investments  and  investment
policies.

                                       4
<PAGE>

    Pursuant to an investment advisory agreement the Fund will pay LMC an annual
investment advisory fee equal to 0.5% of its average daily net assets up to $150
million, 0.4% of such value in excess of $150 million up to $400 million;  0.35%
of such  value in excess of $400  million up to $800  million;  and 0.3% of such
value in excess of $800 million,  after  deduction of Fund expenses,  if any, in
excess of the expense  limitations  set forth below.  The fee is computed on the
basis of current  net assets at the end of each  business  day and is payable at
the end of each month. The investment  advisory agreement provides that LMC must
also pay the Fund monthly the amount by which all of the Fund's  other  expenses
(including the  investment  advisory fee) exclusive of interest and taxes exceed
1% of the Fund's net assets during any fiscal year, calculated by averaging such
net assets daily.

    Under the terms of the advisory  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
directors  of the  Fund  who are  also  employees  of LMC or its  affiliates  in
carrying out its duties under the investment advisory  agreement.  The Fund pays
all its  other  expenses,  including  custodian  and  transfer  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 directors' fees, and
furnishes the  Distributor,  at printer's  overrun cost paid by the Distributor,
such  copies  of its  prospectus,  annual,  semiannual  and  other  reports  and
shareholder  communications as may reasonably be required for sales purposes. In
addition,  the Fund will  bear any costs  associated  with the  securities  loan
program (any such loans will increase the return to shareholders).

    LMC's services are provided and its investment advisory fee is paid pursuant
to an agreement which will automatically  terminate if assigned and which may be
terminated by either party upon 60 days' notice.  The terms of the agreement and
any renewal  thereof  must be  approved  at least  annually by a majority of the
Fund's Board of Directors, including a majority of directors who are not parties
to the  agreement  or  "interested  persons"  of such  parties,  as such term is
defined under the Investment Company Act of 1940, as amended.

    LMC  serves as  investment  adviser  to other  investment  companies  and to
private and institutional investment accounts.  Included among these clients are
persons and  organizations  which own  significant  amounts of capital  stock of
LMC's parent (see below).  These clients pay fees which LMC considers comparable
to the fee levels for similarly served clients.

   
    LMC's  accounts are managed  independently  with reference to the applicable
investment  objectives and current security holdings,  but on occasion more than
one investment  company or counsel account may seek to engage in transactions in
the same security at the same time. To the extent practicable, such transactions
will be made on a pro rata  basis in  proportion  to the  respective  amounts of
securities  to be  bought  and  sold  for  each  portfolio,  and  the  allocated
transactions  will be averaged as to price.  While this  procedure may adversely
affect the price or volume of a given Fund  transaction,  LMC believes  that the
ability  of the Fund to  participate  in  combined  transactions  may  generally
produce better executions overall. LMC received from the Fund under the advisory
agreement the following net fees as of the fiscal year ended  December 31, 1994,
$199,643; December 31, 1995, $168,718 and December 31, 1996, $113,774.
    

    LMC  also  acts  as   administrator   to  the  Fund  and  performs   certain
administrative and internal accounting  services,  including but not limited to,
maintaining  general  ledger  accounts,  regulatory  compliance,  preparation of
financial information for semiannual and annual reports,  preparing registration
statements,   calculating  net  asset  values,  shareholder  communications  and
supervision of the custodian of, transfer agent and provides facilities for such
services.  The  Fund  pays LMC a fee,  payable  monthly,  equal to the  pro-rata
portion of LMC\AIs actual cost in providing such services and facilities.

   
    LFD  also  serves  as  Distributor  for  Fund  shares  under a  Distribution
Agreement  which is subject to annual approval by a majority of the Fund's Board
of  Directors,  including a majority who are not  "interested  persons".  Of the
Directors, executive officers, and employees ("affiliated persons") of the Fund,
Messrs. Corniotes,  DeMichele, Faust, Hisey, Jamison, Kantor, Lavery, and Luehs,
and Mmes. Carnicelli,  Carr, Curcio, Gilfillan and Mosca (see "Management of the
Fund")  may also be  deemed  affiliates  of LMC by  virtue  of  being  officers,
directors or employees thereof.  As of March 1, 1997, all officers and Directors
of the Fund as a group owned less than 1% of record capital shares of the Fund.
    

    LMC  and  LFD  are  wholly-owned  subsidiaries  of  Lexington  Global  Asset
Managers,  Inc., a Delaware  corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663.  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.

                                       5
<PAGE>

                             PORTFOLIO TRANSACTIONS

   
    Portfolio  securities are normally purchased directly from an underwriter or
dealer in municipal securities.  Therefore, usually no brokerage commissions are
paid by the Fund.  Transactions are allocated to various dealers by the Fund and
LMC in their best  judgment.  Dealers  are  selected  primarily  on the basis of
prompt  execution  of  orders  at the  most  favorable  prices.  The Fund has no
obligation to deal with any dealer or group of dealers.  Particular  dealers may
be selected  for  research or  statistical  and other  services to enable LMC to
supplement its own research and analysis with that of such firms. Information so
received  will be in addition to an not in lieu of the  services  required to be
performed by LMC under the investment advisory agreement and the expenses of LMC
will not necessarily be reduced as a result of the receipt of such  supplemental
information.  For the fiscal years ended  December  31, 1994,  1995 and 1996 all
portfolio  transactions  were effected on a net basis through  dealers acting as
principal and, accordingly, no brokerage commissions were payable.
    

                        DETERMINATION OF NET ASSET VALUE

    The net asset value of the Fund is  determined as of the close of trading on
the New York Stock  Exchange  each day the  Exchange is open for business and at
such other times and/or such other days as there is sufficient  trading in short
term  municipal  securities to affect  materially the Fund's net asset value per
share.   Substantially  all  of  the  Fund's  net  income  calculated  from  the
immediately  preceding  determination  of  net  income,  is  declared  daily  as
dividends (see "Dividend, Distribution and Reinvestment Policy").

    For the  purpose  of  determining  the price at which  shares are issued and
redeemed,  the net asset  value per share is  calculated  immediately  after the
daily dividend declaration by: (a) valuing all securities and instruments as set
forth  below;  (b)  deducting  the  Fund's  liabilities;  and (c)  dividing  the
resulting amount by the number of shares outstanding.  As discussed below, it is
the intention of the Fund to maintain a net asset value per share of $1.00.  The
Fund's  portfolio  instruments  are valued on the basis of amortized  cost. This
involves  valuing an instrument at its cost and  thereafter  assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating  interest  rates on the  market  value of the  security.  While this
method  provides  certainty in valuation,  it may result in periods during which
the value,  as determined  by amortized  cost, is higher or lower than the price
the Fund would  receive if it sold its  portfolio.  During  periods of declining
interest  rates,  the daily yield on shares of the Fund  computed  as  described
above  may be  higher  than a like  computation  made by a fund  with  identical
investments  utilizing  a method of  valuation  based  upon  market  prices  and
estimates of market  prices for all of its portfolio  instruments.  Thus, if the
use of amortized cost by the Fund results in a lower  aggregate  portfolio value
on a particular day, a prospective  investor in the Fund would be able to obtain
a somewhat higher yield than would result from an investment in a fund utilizing
solely  market  values,  and existing  investors in the Fund would  receive less
investment  income.  The  converse  would  apply in a period of rising  interest
rates.

    The Fund's use of amortized cost and the maintenance of the Fund's per share
net value at $1.00 is based on its election to operate  under the  provisions of
Rule 2a-7 under the Investment  Company Act of 1940. As a condition of operating
under that rule,  the Fund must  maintain a  dollar-weighted  average  portfolio
maturity  of 90  days  or  less,  purchase  only  instruments  having  remaining
maturities of 13 months (397 days) or less, and invest only in securities  which
are  determined  by the Board of Directors to present  minimal  credit risks and
which are of high quality as determined by any major rating  service,  or in the
case of any instrument not so rated,  considered by the Board of Directors to be
of comparable quality.

    The Board of  Directors  has also  agreed,  as a  particular  responsibility
within  the  overall  duty  of  care  owed  to its  shareholders,  to  establish
procedures  reasonably  designed,  taking into account current market conditions
and the Fund's investment objective,  to stabilize the net asset value per share
as computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Board deems appropriate and at such intervals as
are  reasonable  in light of  current  market  conditions,  of the  relationship
between the amortized cost value per share and a net asset value per share based
upon available  indications  of market value.  In such review,  investments  for
which market  quotations are readily available are valued at the most recent bid
price or quoted  yield  equivalent  for such  securities  or for  securities  of
comparable maturity,  quality and type as obtained from one or more of the major
market makers for the securities to be valued.  Other investments and assets are
valued at fair value, as determined in good faith by the Board of Directors.

                 DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY

    The Fund declares and reinvests  daily,  dividends  from its net  investment
income and distributes  such dividends on the last day of each month.  Dividends
or  distribution  payments  will be  reinvested at net asset value in additional
full and fractional shares of the Fund unless and until the shareholder notifies
State  Street Bank and Trust  Company,  N.A.,  (the  "Agent") in writing that he
wants to receive his  payments  in cash.  This  request  must be received by the
Agent at least seven days before the payment date.  Upon receipt by the Agent of

                                       6
<PAGE>

such written  notice,  all further  payments  will be made in cash until written
notice to the  contrary is  received.  An account of such  shares  owned by each
shareholder  will be maintained by the Agent.  Shareholders  whose  accounts are
maintained  by the Agent will have the same  rights as other  shareholders  with
respect to shares so registered  (see "How to Purchase Shares - An Open Account"
in the Prospectus).

    Since substantially all of the net income will be declared as dividends each
time the net asset  value of the Fund is  determined,  the net  asset  value per
share  will  normally  remain at one  dollar  per share  immediately  after such
dividend declaration and determination (see "Investment Policy").

                                   TAX MATTERS

    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  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 "Short-Short 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

                                       7
<PAGE>

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  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
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 they will not qualify for the 70% dividends-received deduction
for corporate shareholders.

    The Fund does not expect to realize any long-term capital gains or losses.

    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 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  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  as discussed  below.  Distributions  by the Fund of any investment
company taxable income 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-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.

                                       8
<PAGE>

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

    Distributions by the Fund that do not constitute  ordinary income dividends,
exempt-interest  dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares;  any excess will be treated as gain from the sale of his 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 net
investment  income  or  recognized   capital  gain  net  income,  or  unrealized
appreciation  in the  value of the  assets of the  Fund,  distributions  of such
amounts  will be  taxable to the  shareholder  in the  manner  described  above,
although such distributions  economically  constitute a return of capital to the
shareholder.

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

    The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income  dividends and capital gain  dividends,  and the
proceeds of redemption of shares,  paid to any  shareholder (1) who has provided
either an incorrect  tax  identification  number or no number at all, (2) who is
subject to backup  withholding  by the IRS for  failure to report the receipt of
interest or dividend  income  properly,  or (3) who 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

    The Fund  seeks to  maintain  a stable  net asset  value of $1.00 per share;
however, there can be no assurance that the Fund will do this. In such a case, 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.   

FOREIGN SHAREHOLDERS

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

    If the income from the Fund is not  effectively  connected with a U.S. trade
or business carried on by a foreign shareholder,  ordinary income dividends paid
to a foreign shareholder will be subject to U.S.  withholding tax at the rate of
30% (or lower treaty rate) upon 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 and exempt-interest dividends.

    If the income from the Fund is  effectively  connected  with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends and
any gains  realized  upon 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 foreign noncorporate  shareholders,  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  tax (or taxable at a reduced  treaty  rate)
unless  such  shareholders  furnish  the Fund with  proper  notification  of its
foreign status.

                                       9
<PAGE>

    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 the Treasury Regulations issued thereunder as in effect on
the date of this  Statement of Additional  Information.  Future  legislative  or
administrative   changes  or  court  decisions  may  significantly   change  the
conclusions  expressed  herein,  and any such  changes or  decisions  may have a
retroactive effect with respect to the transactions contemplated herein.

    Rules of state and local  taxation  of ordinary  income and  exempt-interest
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 of these and other state and local tax
rules affecting investment in the Fund.

            CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT

    Chase Manhattan Bank, N.A., 1211 Avenue of the Americas,  New York, New York
10036 has been retained to act as the custodian for the Fund's  investments  and
assets.  State  Street Bank and Trust  company,  225  Franklin  Street,  Boston,
Massachusetts  02110 is the transfer agent and dividend disbursing agent for the
Fund. Neither Chase Manhattan Bank, N.A. nor State Street Bank and Trust Company
have  any  part  in  determining  the  investment  policies  of the  Fund  or in
determining  which portfolio  securities are to be purchased or sold by the Fund
or in the declaration of dividends and distributions.

                             MANAGEMENT OF THE FUND

    The  Directors  and  executive  officers  of the  Fund and  their  principal
occupations are set forth below:

   
+S.M.S.  CHADHA(59),  Director.  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(52),  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 (67),  Director.  340 East 72nd Street,  New York, N.Y. 10021.
    Private Investor;  formerly Manager of Operations Research  Department,  CPC
    International, Inc.

*+BARBARA R. EVANS (36),  Director. 5 Fernwood Road, Summit, N.J. 07901. Private
    Investor.  Prior  to May  1989,  Assistant  Vice  President  and  Securities
    Analyst,  Lexington  Management  Corporation.  Prior  to  March  1987,  V.P.
    Institutional Equity Sales - L.F. Rothschild, Unterberg, Towbin.

*+LAWRENCE  KANTOR (49),  Vice  President and  Director.  P.O. Box 1515,  Saddle
    Brook, N.J. 07663. Executive Vice President, Managing Director and Director,
    Lexington  Management  Corporation;  Executive  Vice President and Director,
    Lexington  Funds  Distributor,  Inc.;  Executive  Vice President and General
    Manager -- Mutual Funds, Lexington Global Asset Managers, Inc.

+JERARD F. MAHER (50), Director. 300 Raritan Center Parkway, Edison, N.J. 08818.
    General Counsel, Federal Business Center; Counsel, Ribis, Graham &Curtin.

+ANDREW M. McCOSH (56),  Director.  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 (70), Director. 10725 Quail Covey Road, Boynton Beach, Florida
    33436.  Chairman,  Horizon Media,  Inc.;  Trustee,  Galaxy Funds;  Director,
    Maguire Group of Connecticut;  prior to January 1989, President,  C.E.O. and
    Director, Media General Broadcast Services (advertising firm).

+JOHN G. PRESTON (64),  Director.  3 Woodfield  Road,  Wellesley,  Massachusetts
    02181.   Associate   Professor   of   Finance,   Boston   College,   Boston,
    Massachusetts.

+MARGARET W. RUSSELL (76), Director. 55 North Mountain Avenue,  Montclair,  N.J.
    07042.  Private Investor,  formerly  Community Affairs Director,  Union Camp
    Corporation.

*+DENIS P. JAMISON (49),  Vice President and Portfolio  Manager.  P.O. Box 1515,
    Saddle Brook,  N.J. 07663.  Senior Vice President,  Director of Fixed Income
    Investment  Strategy,  Lexington  Management  Corporation.  Mr. Jamison is a
    Chartered Financial Analyst and a member of the New York Society of Security
    Analysts.
    

                                       10
<PAGE>
   

*+LISA A. CURCIO (37),  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.

*+RICHARD M. HISEY (38),  Vice  President and Treasurer.  P.O. Box 1515,  Saddle
    Brook, N.J. 07663. Chief Financial Officer,  Managing Director and Director,
    Lexington Management  Corporation;  Chief Financial Officer,  Vice President
    and Director,  Lexington Funds  Distributor,  Inc; Chief Financial  Officer,
    Market Systems Research Advisors, Inc..

*+RICHARD J. LAVERY, CLU ChFC (42), 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 (37), Vice President.  P.O. Box 1515,  Saddle Brook, N.J.
    07663.

*+CHRISTIE CARR (29),  Assistant  Treasurer.  P.O. Box 1515,  Saddle Brook, N.J.
    07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick.

*+SIOBHAN GILFILLAN (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
    07663.

*+THOMAS LUEHS (35),  Assistant  Treasurer.  P.O. Box 1515,  Saddle Brook,  N.J.
    07663. Prior to November,  1993, Supervisor Investment Accounting,  Alliance
    Capital Management, Inc.

*+SHERI MOSCA (33),  Assistant  Treasurer.  P.O. Box 1515,  Saddle  Brook,  N.J.
    07663.

*+PETER CORNIOTES (34), Assistant  Secretary.  P.O. Box 1515, Saddle Brook, N.J.
    07663.   Assistant  Vice  President  and  Assistant   Secretary,   Lexington
    Management  Corporation.  Assistant Secretary,  Lexington Funds Distributor,
    Inc.

*+ENRIQUE J. FAUST (36), Assistant Secretary.  P.O. Box 1515, Saddle Brook, N.J.
    07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington Group
    of Investment Companies.


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

+Messrs. Chadha Corniotes,  DeMichele,  Duer,  Faust,  Hisey,  Jamison,  Kantor,
    Lavery, Luehs, Maher, McCosh, Miller,  Preston, and Mmes. Carnicelli,  Carr,
    Curcio, Evans,  Gilfillan,  Mosca and Russell hold similar offices with some
    or  all  of  the  other  registered   investment  companies  advised  and/or
    distributed  by  Lexington   Management   Corporation  and  Lexington  Funds
    Distributor, Inc.

    The Board of Directors met 5 times during the twelve  months ended  December
31, 1996, and each of the Directors attended at least 75% of those meetings.

    

            REMUNERATION OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS:

    Each Director is reimbursed for expenses  incurred in attending each meeting
of the Board of Directors or any committee thereof.  Each Director 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  Director  also serves as a
Director of other investment  companies advised by LMC. Each Director receives a
fee,  allocated  among all investment  companies for which the Director  serves.
Effective  September  12, 1995 each Director  receives  annual  compensation  of
$24,000. Prior to September 12, 1995, the Directors who were not employed by the
Fund or its affiliates received annual compensation of $16,000.

<PAGE>

   
    Set forth below is information regarding compensation paid or accrued during
the period January 1, 1996 to December 31, 1996 for each Director:

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------
                               AGGREGATE       TOTAL COMPENSATION FROM           NUMBER OF
    NAME OF DIRECTOR    COMPENSATION FROM FUND  FUND AND FUND COMPLEX  DIRECTORSHIPS IN FUND COMPLEX
----------------------------------------------------------------------------------------------------
<S>                              <C>                    <C>                          <C>
   S.M.S. Chadha                 $856                   $13,696                      16
----------------------------------------------------------------------------------------------------
   Robert M. DeMichele             0                       0                         17
----------------------------------------------------------------------------------------------------
   Beverley C. Duer             $1,712                  $29,110                      17
----------------------------------------------------------------------------------------------------
   Barbara R. Evans                0                       0                         16
----------------------------------------------------------------------------------------------------
   Lawrence Kantor                 0                       0                         16
----------------------------------------------------------------------------------------------------
   Jerard F. Maher               $856                   $16,046                      17
----------------------------------------------------------------------------------------------------
   Andrew M. McCosh              $856                   $13,696                      16
----------------------------------------------------------------------------------------------------
   Donald B. Miller             $1,712                  $26,760                      16
----------------------------------------------------------------------------------------------------
   Francis Olmsted*             $1,068                  $16,800                      N/A
----------------------------------------------------------------------------------------------------
   John G. Preston              $1,712                  $26,760                      16
----------------------------------------------------------------------------------------------------
   Margaret Russell             $1,712                  $25,048                      16
----------------------------------------------------------------------------------------------------
   Philip C. Smith              $1,600                  $25,080                      16
----------------------------------------------------------------------------------------------------
   Francis A. Sunderland*        $744                   $10,528                      N/A
----------------------------------------------------------------------------------------------------

</TABLE>

*Retired                                           
    

                                       11
<PAGE>

RETIREMENT PLAN FOR ELIGIBLE DIRECTORS/TRUSTEES

    Effective September 12, 1995, the Directors 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 Director 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  Directors will be eligible to serve as Honorary  Directors 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  Director upon retirement  assuming  various  compensation and years of
service  classifications.  As of December 31, 1996, the estimated credited years
of service for Director  Chadha,  Duer,  Maher,  McCosh,  Miller,  Preston,  and
Russell are 1, 18, 1, 1, 22, 18, and 15, respectively.
    

<TABLE>
<CAPTION>

                                HIGHEST ANNUAL COMPENSATION PAID BY ALL FUNDS

                       -------------------------------------------------------------
<S>     <C>             <C>               <C>               <C>               <C>   
                       $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

</TABLE>

                                       12
<PAGE>


                                    APPENDIX

MUNICIPAL  SECURITIES  AND  OTHER  INVESTMENTS:  Municipal  bonds  include  debt
obligations  issued to obtain funds for various public  purposes,  including the
construction  of a wide range of public  facilities  such as airports,  bridges,
highways, housing,  hospitals, mass transportation,  schools, streets, water and
sewer works, and gas and electric utilities.  Municipal bonds may also be issued
in connection with the refunding of outstanding obligations, and obtaining funds
to lend to other public  institutions  and  facilities or for general  operating
expenses. In addition,  certain types of industrial development bonds are issued
by or on  behalf of  public  authorities  to  obtain  funds to  provide  various
privately operated facilities for business and manufacturing,  housing,  sports,
conventions or trade shows,  pollution control, and airport,  mass transit, port
and parking facilities.  Such obligations are included within the term municipal
securities if the interest paid thereon is exempt from federal income tax .

    The  two  principal   classifications   of  municipal   bonds  are  "general
obligation" and "revenue"  bonds.  General  obligation  bonds are secured by the
issuer's  pledge of its full faith,  credit and taxing  power for the payment of
principal and interest. In some instances,  the taxes that can be levied for the
payment  of  debt  service  may  be  limited  as  to  rate,  amount  or  special
assessments.  Revenue  bonds are payable  only from the revenue  derived  from a
particular facility or class of facilities, or, in some cases, from the proceeds
of a special excise tax or other specific  revenue source.  Although  industrial
development  bonds are issued by municipal  authorities,  they are generally not
secured by the taxing power of the  municipality but are secured by the revenues
derived from payments from specific projects by the industrial user.

    There are, in addition to the two principal classifications described above,
a variety  of hybrid  and  special  types of  municipal  obligations  as well as
numerous differences in the security of municipal bonds.

    Municipal notes include tax,  revenue and bond  anticipation  notes of short
maturity,  generally less than three years, which are issued to obtain funds for
various public purposes.

    Project notes are issued by local public agencies  created under the laws of
a state,  territory or U. S.  possession and have  maturities of up to one year.
They generally  relate to financing of housing,  redevelopment  or urban renewal
programs and are backed by agreements between the issuing agencies and the U. S.
Department  of Housing  and Urban  Development  . Thus,  while the local  agency
issuing project notes is the primary obligor, such notes are secured by the full
faith and credit of the U. S.  Government.  Ratings of Municipal Bonds: The four
highest ratings of Moody's for municipal bonds are Aaa, Aa, A and Baa. Municipal
bonds  rated Aaa are  judged to be of the "best  quality".  The  rating of Aa is
assigned  to  municipal  bonds  which are 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 Aaa bonds because margins of protection
may not be as large or  fluctuation  of  protective  elements  may be of greater
amplitude or there may be other elements  present which make the long-term risks
appear somewhat larger than Aaa securities. Municipal bonds rated A possess many
favorable   investment   attributes  and  are  considered  "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.  Municipal  bonds rated Baa are  considered
"medium  grade"  obligations.  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.

    The four highest  ratings of Standard & Poor's for  municipal  bonds are AAA
(Prime), AA (High Grade), A (Good Grade) and BBB (Medium Grade). Municipal bonds
rated AAA are "obligations of the highest quality". The rating of AA is accorded
issues with investment  characteristics "only slightly less marked than those of
the prime  quality  issues".  The category of A describes  "the third  strongest
capacity for payment of debt service".  Principal and interest payments on bonds
in this  category are regarded as safe.  It differs from the two higher  ratings
because,  with  respect to general  obligation  bonds,  there is some  weakness,
either in the local  economic  base,  in debt  burden,  in the  balance  between
revenues and  expenditures,  or in quality of management.  Under certain adverse
circumstances,  any one such weakness  might impair the ability of the issuer to
meet debt  obligations at some future date. With respect to revenue bonds,  debt
service coverage is good, but not exceptional. Stability of the pledged revenues
could  show  some  variations  because  of  increased  competition  or  economic
influences on revenues. Basic security provisions, while satisfactory,  are less
stringent. Management performance appears adequate. The BBB rating is the lowest
"investment  grade" security rating. The difference between A and BBB ratings is
that  the  latter  shows  more  than  one  fundamental  weakness,  or  one  very
substantial  fundamental weakness,  whereas the former shows only one deficiency
among the factors  considered.  With respect to revenue bonds,  debt coverage is
only fair. Stability of the pledged revenues could show substantial  variations,
with the  revenue  flow  possibly  being  subject  to erosion  over time.  Basic
security  provisions are no more than adequate and management  performance could
be stronger.

MOODY'S RATING OF MUNICIPAL NOTES:

    MIG 1: the best quality,  enjoying strong  protection from  established cash
flows of funds for their servicing or from established and broad-based access to
the market for refinancing, or both.

                                       13
<PAGE>

    MIG 2: high quality,  with margins of protection ample although not so large
as in the preceding group.

    MIG 3:  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.  

MUNICIPAL  COMMERCIAL  PAPER RATINGS:  Commercial  paper rated A-l by Standard &
Poor's has the following characteristics:  Liquidity ratios are adequate to meet
cash  requirements.  Long term senior  debt is rated "A" or better,  although in
some cases "BBB"  credits may be allowed.  The issuer has access to at least two
channels of borrowing. Basic earnings and cash flow have an upward trend with an
allowance made for unusual  circumstances.  Typically,  the issuer's industry is
well  established and the issuer has a strong position within the industry.  The
reliability  and quality of  management  are  questioned.  Relative  strength or
weakness of the above factors determines  whether the issuer's  commercial paper
is rated A-l, A-2 or A-3.

    The rating  Prime-l is the  highest  commercial  paper  rating  assigned  by
Moody's.  Among the factors  considered by Moody's in assigning  ratings are the
following:  (l)  evaluation  of the  management  of  the  issuer;  (2)  economic
evaluation  of  the  issuer's   industry  or  industries  and  an  appraisal  of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's  products in relation to the competition  and customer  acceptance;
(4)  liquidity;  (5) amount and quality of long term debt; (6) trend of earnings
over a period of ten years;  (7) financial  strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of  obligations  which may be  present  or which may arise as a result of public
interest questions and preparations to meet such obligations.

                                       14
<PAGE>


LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)

December 31, 1996

<TABLE>
<CAPTION>

 Principal                                                          Maturity  Coupon   Yield to    Value
   Amount                Security                         Rating     Date      Rate    Maturity  (Note 1)
----------------------------------------------------------------------------------------------------------
<S>           <C>                                      <C>          <C>         <C>      <C>     <C>
              ALABAMA: 5.4%
 $  640,000   Alaska Industrial Development & Export
               Authority (Lot 11)* ...................      A-1      7/1/07     4.20%    4.20%   $ 640,000
    800,000   Columbia IndustrialDevelopment Board
               (Alabama Power)* ......................  VMig 1/A-1  10/1/22     4.65     4.65      800,000
                                                                                                 ---------
                                                                                                 1,440,000
                                                                                                 ---------

              CALIFORNIA: 13.6%
  1,200,000   California Pollution ControlFinance Authority
               (Southdown Project)* ..................     A-1+     2/15/98     3.50     3.50    1,200,000
    900,000   California Pollution Control Finance Authority
               (Southern California Project)* Mig ....    1/A-1+    2/28/08     4.70     4.70      900,000
    500,000   SouthCoast Local Education Agencies
               Series 1996 A .........................     SP-1+    6/30/97     4.75     4.07      501,609
  1,000,000   State Of California Revenue Anticipation 
                Notes Mig ............................    1/SP1+    6/30/97     4.50     3.97    1,002,513
                                                                                                 ---------
                                                                                                 3,604,122
                                                                                                 ---------

              FLORIDA: 5.3%
  1,400,000   Indian River County Hospital District*..  VMig1/A-1   10/1/15     4.15     4.15    1,400,000
                                                                                                 ---------

              GEORGIA: 9.7%
  1,000,000   Fulton County I.D.A. (ADP Project)* ....    P-1/Aa2    9/1/12     3.70     3.70    1,000,000
    800,000   Georgia Technical Foundation Facilities Inc.*  A-1+    2/1/12     3.55     3.55      800,000
    780,000   Municipal Electric Authority Of Georgia
               Series B** ............................  VMig 1/A-1+  4/1/97     3.55     3.55      780,000
                                                                                                 ---------
                                                                                                 2,580,000
                                                                                                 ---------

              HAWAII: 8.1%
  1,250,000   City &County Of Honolulu** .............   A-1+/P-1    2/7/97     3.55     3.55    1,250,000
    900,000   Hawaii State Department Budget & Finance
              (Kuakini Medical Center)* ..............    Vmig 1     7/1/05     4.10     4.10      900,000
                                                                                                 ---------
                                                                                                 2,150,000
                                                                                                 ---------
              ILLINOIS: 0.6%
    100,000   City Of Chicago Pre-Refunded G.O. Bonds      AAA/Aaa   1/1/11     8.00     3.83      102,010
     50,000   State Of Illinois Pre-Refunded
               Revenue Bonds .........................       AAA     6/1/03     7.50     3.95       51,684
                                                                                                 ---------
                                                                                                   153,694
                                                                                                 ---------
              INDIANA: 1.5%
    400,000   Gary Industrial Environmental Improvement
               Authority (U.S. Steel)* ...............   P-1/A-1+   7/15/02     3.70     3.70      400,000
                                                                                                 ---------
              KANSAS: 3.0%
    800,000   Burlington Pollution Control (Kansas City
               Power and Light) Series B** ...........      P-1      3/3/97     3.50     3.50      800,000
                                                                                                 ---------

              KENTUCKY: 3.8%
  1,000,000   PendletonCounty Leasing Program** .......     A-1+      1/2/97     3.55     3.55    1,000,000
                                                                                                 ---------

              LOUISIANA: 5.5%
    700,000   Caddo ParishI.D.B. (Pennzoil Project)* .      A1      12/1/12     4.40     4.40      700,000
    500,000   New Orleans G.O.Bonds ..................    AAA/Aaa   12/1/97     5.63     3.73      507,820
    105,000   State Of Louisiana Series A G.O.Bonds ..    AAA/Aaa    8/1/97     4.50     3.98      105,294
    150,000   State Of Louisiana Pre-Refunded Revenue
               Bonds .................................    AAA/Aaa    8/1/02     7.00     3.95      155,446
                                                                                                 ---------
                                                                                                 1,468,560
                                                                                                 ---------

</TABLE>


                                       15
<PAGE>

LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)

December 31, 1996 (continued)

<TABLE>
<CAPTION>

 Principal                                                          Maturity  Coupon   Yield to    Value
   Amount                Security                         Rating     Date      Rate    Maturity  (Note 1)
----------------------------------------------------------------------------------------------------------
<S>           <C>                                      <C>          <C>         <C>      <C>     <C>

              MAINE: 0.8%
  $ 200,000   Maine Health &Higher Education Facilities
               Revenue Bonds .........................    AAA/Aaa    7/1/97     5.60%    3.97%$    201,537
                                                                                                 ---------

              NEW JERSEY: 1.7%
    300,000   Fort Lee G.O. Bonds ....................      Aa       2/1/97     4.85     3.63      300,297
    145,000   Stafford Township G.O.Bonds ............      AAA      9/1/97     5.50     4.01      146,372
                                                                                                 ---------
                                                                                                   446,669
                                                                                                 ---------

              NEW YORK: 14.1%
    555,000   Cattaraugus County G.O.Bonds ...........      AAA      6/1/97     5.20     3.99      557,665
    600,000   City Of New York Series B* .............  VMig1/A-1+  8/15/18     4.50     4.50      600,000
    200,000   City Of New York Subseries B-2* ........  VMig1/A-1+  8/15/19     4.75     4.75      200,000
    400,000   City Of New York Subseries B-2* ........  VMig1/A-1+  10/1/20     4.50     4.50      400,000
    400,000   New YorkCity Municipal Water Authority
               Series A* .............................  VMig1/A-1+  6/15/25     4.70     4.70      400,000
  1,200,000   State Of New York (G.O. Bond Anticipation
               Notes) Series S** .....................    A-1/P-1    2/3/97     3.45     3.45    1,200,000
    250,000   Suffolk County New York G.O. Bonds .....    AAA/Aaa   7/15/97     3.70     3.69      250,000
    125,000   Triborough Bridge &Tunnel Authority Series
               A Revenue Bonds .......................    AAA/Aaa    1/1/97     5.80     3.96      125,000
                                                                                                 ---------
                                                                                                 3,732,665
                                                                                                 ---------

              OKLAHOMA: 1.0%
    150,000   Grand River DamAuthority Pre-Refunded
               Revenue Bonds .........................    AAA/Aaa    6/1/98     6.45     4.06      154,360
    105,000   Grand River Dam Authority Pre-Refunded
               Revenue Bonds .........................    AAA/Aaa    6/1/06     7.00     4.06      108,276
                                                                                                 ---------
                                                                                                   262,636
                                                                                                 ---------

              OHIO: 5.7%
  1,000,000   Ohio State Air Quality Development
               Authority** ...........................  VMig1/A-1+   2/6/97     3.55     3.55    1,000,000
    500,000   Ohio State Air Quality Development
               Authority** ...........................  VMig1/A-1+   2/7/97     3.50     3.50      500,000
                                                                                                 ---------
                                                                                                 1,500,000
                                                                                                 ---------

              PENNSYLVANIA: 2.3%
   500,000    VENANGO I.D.A. (PENNZOIL PROJECT)
               SERIES 1982A* .........................        A-1   12/1/12     4.40     4.40      500,000
    100,000   Bethel ParkSchool District Pre-Refunded
               Revenue Bonds .........................    AAA/Aaa    2/1/01     6.85     3.99      100,231
                                                                                                 ---------
                                                                                                   600,231
                                                                                                 ---------

              SOUTH CAROLINA: 2.6%
    400,000   York County Pollution Control Authority
               (Project NRU 84 N-1)* .................   Mig1/A-1+  9/15/14     4.15     4.15      400,000
    300,000   York County PollutionControlAuthority
               (Project NRU 84 N-2)* .................   Mig1/A-1+  9/15/14     4.15     4.15      300,000
                                                                                                 ---------
                                                                                                   700,000
                                                                                                 ---------
</TABLE>
                                       16

<PAGE>


LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)

December 31, 1996 (continued)

<TABLE>
<CAPTION>

 Principal                                                          Maturity  Coupon   Yield to    Value
   Amount                Security                         Rating     Date      Rate    Maturity  (Note 1)
----------------------------------------------------------------------------------------------------------
<S>           <C>                                      <C>          <C>         <C>      <C>     <C>

              TEXAS: 11.2%
  $ 330,000   Coppell I.D.C. Series 1984 
               (Minyard Properties)* .................      A-1    12/1/01      3.70%    3.70% $   330,000
    800,000   Garland I.D.A.* ........................      A-1     12/1/05     4.35     4.35      800,000
  1,000,000   Harris County HealthFacilities Development
               Corporation (Texas MedicalCenter)* ....VMig1/A-1+     2/5/22     4.70     4.70    1,000,000
    100,000   North Harris & Montgomery Community
               College District Series B G.O. Bonds ..   AAA/Aaa    8/15/97     4.25     3.57      100,390
    745,000   Texas Higher Education Authority Inc.
               Series B* .............................    VMig1     12/1/25     4.10     4.10      745,000
                                                                                                ----------
                                                                                                 2,975,390
                                                                                                ----------

              VERMONT: 1.5%
    400,000   Vermont Student Assistance Corporation*      VMig1     1/1/04     3.65     3.65      400,000
                                                                                                ----------

              WYOMING 3.7%
  1,000,000   Gillette County (Pacificorp)** .........   A-1+/P-1    1/3/97     3.45     3.45    1,000,000
                                                                                                ----------

              TOTAL INVESTMENTS: 101.1%
               (cost $26,815,504 ) (Note 1) ......................                              26,815,504

              Liabilities in excess of other assets: (1.1%) ......                                (299,964)
                                                                                                ----------

              TOTAL NET ASSETS: 100.0%
               (equivalent to $1.00 per share on
               26,515,540 shares outstanding) ....................                             $26,515,540
                                                                                               ===========

</TABLE>

<TABLE>
<CAPTION>
<S>                                                             <C>

* Seven-day Floating Rate Note backed by Letter of Credit.
**Municipal Commercial Paper.                                    I.D.A.-- Industrial Development Authority
  Aggregate cost for Federal income tax purposes is identical.   I.D.B.--Industrial Development Bonds
                                                                 I.D.C.-- Industrial Development Corporation
                                                                   G.O.-- General Obligation
</TABLE>

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


LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996

ASSETS

Investments, at value (cost $26,815,504) (Note 1) .........          $26,815,504
Cash (Note 4) .............................................              123,465
Receivable for shares sold ................................                6,560
Dividends and interest receivable .........................              158,284
                                                                     -----------
            Total Assets ..................................           27,103,813
                                                                     -----------

LIABILITIES

Due to Lexington Management Corporation (Note 2) ..........               11,493
Payable for investment securities purchased ...............              509,461
Payable for shares redeemed ...............................               21,530
Accrued expenses ..........................................               45,789
                                                                     -----------
            Total Liabilities .............................              588,273
                                                                     -----------

NET ASSETS (equivalent to $1.00 per share on
  26,515,540 shares outstanding) (Note 3) .................          $26,515,540
                                                                     ===========

NET ASSETS consist of:
Capital stock--authorized 1,000,000,000 shares,
   $.01 par value per share ...............................             $265,155
Additional paid-in capital ................................           26,250,385
                                                                     -----------
                                                                     $26,515,540
                                                                     ===========
  The Notes to Financial Statements are an integral part of these statements.

                                       17
<PAGE>

LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1996

<TABLE>
<CAPTION>

INVESTMENT INCOME
<S>                                                                      <C>           <C>      
Interest income .....................................................                   $979,752

EXPENSES

    Investment advisory fee (Note 2) ................................     $136,524
    Transfer agent and shareholder servicing expense (Note 2) .......       31,599
    Printing and mailing expenses ...................................       31,022
    Professional fees ...............................................       22,823
    Accounting expenses (Note 2) ....................................       19,848
    Registration fees ...............................................       17,654
    Directors' fees and expenses ....................................       15,577
    Custodian expense ...............................................        4,826
    Computer processing fees ........................................        4,080
    Other expenses ..................................................       12,575
                                                                           -------
           Total expenses ...........................................      296,528
           Less: expenses recovered under contract with the
             investment adviser (Note 2) ............................       22,750       273,778
                                                                           -------    ----------
           Net investment income ....................................                    705,974

                                                                                      ----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ....................                  $ 705,974
                                                                                      ==========





LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENTS OF CHANGES INNET ASSETS
Years ended December 31, 1996 and 1995

                                                                          1996           1995
                                                                        ----------    ----------
Net investment income ...............................................    $ 705,974     $ 970,838
Distributions to shareholders from net investment income ............     (705,974)     (970,838)
Decrease in net assets from capital share transactions

  (Note 3) ..........................................................   (1,715,724)   (9,422,578)
                                                                        ----------    ----------
Net decrease in net assets ..........................................   (1,715,724)   (9,422,578)

NET ASSETS

    Beginning of period .............................................   28,231,264    37,653,842
                                                                        ----------    ----------
    End of period ...................................................  $26,515,540   $28,231,264
                                                                        ==========    ==========

</TABLE>


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


                                       18
<PAGE>


LEXINGTON TAX FREE MONEY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 1996 and 1995

1.  SIGNIFICANT ACCOUNTING POLICIES

Lexington  Tax Free Money Fund,  Inc.  (the  "Fund") is an open end  diversified
management  investment  company  registered under the Investment  Company Act of
1940,  as amended.  The Fund's  investment  objective is to seek current  income
exempt from Federal income taxes while also maintaining  stability of principal,
liquidity and preservation of capital. The following is a summary of significant
accounting  policies  followed by the Fund in the  preparation  of its financial
statements:

     INVESTMENTS Security  transactions are accounted for on a trade date basis.
Investments  are carried at amortized  cost,  which  approximates  market value.
Under this valuation  method, a portfolio  instrument is carried at cost and any
discount  or premium is  amortized  on a constant  basis to the  maturity of the
instrument. Interest income is accrued as earned.

     FEDERAL  INCOME  TAXES  It is the  Fund's  intention  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 taxes has been made.

     DIVIDENDS  Dividends  are declared  daily from the total of net  investment
income and net realized gain (loss) on investments.

     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 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 may differ from those estimates.

2.  INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE

The Fund pays an  investment  advisory fee to Lexington  Management  Corporation
("LMC") at an annual rate of 0.5% of the Fund's  average  daily net assets up to
$150  million and in  decreasing  stages to 0.3% of average  daily net assets in
excess of $800 million.  LMC is required to reimburse the Fund for any expenses,
including the  investment  adviser's fee but  excluding  interest and taxes,  in
excess of 1% of the Fund's average daily net assets.  Reimbursement for the year
ended December 31, 1996 amounted to $22,750 and is set forth in the statement of
operations.

The Fund also  reimbursed  LMC for certain  expenses,  including  accounting and
shareholder  servicing  costs,  of $35,754 which were incurred by the Fund,  but
paid by LMC.

3.  CAPITAL STOCK

Transactions (at $1.00 per share) in capital stock were as follows:

                                                    Year ended      Year ended
                                                   December 31,    December 31,
                                                       1996            1995
                                                    -----------    ------------
    Shares sold                                     19,634,926      17,149,761
    Shares issued on reinvestment of dividends         634,447         850,185
                                                    ----------      ----------
                                                    20,269,373      17,999,946

    Shares redeemed                                (21,985,087)    (27,422,524)
                                                    ----------      ----------
      Net decrease                                  (1,715,724)     (9,422,578)
                                                    ==========      ==========

4.  CASH

In order to facilitate the clearing  process for redemptions by check,  the Fund
maintains a compensating  balance with its transfer agent. At December 31, 1996,
this  compensating  balance  amounted  to $48,600 and is included in cash in the
statement of assets and liabilities.

5.  TAX DISTRIBUTION INFORMATION (unaudited)

99.46% of the  dividends  paid by the Fund for the year ended  December 31, 1996
are tax-exempt for regular Federal income tax purposes.

                                       19
<PAGE>

LEXINGTON TAX FREE MONEY FUND, INC.
FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>

                                                             Year Ended December 31,
                                                  -----------------------------------------------
                                                   1996      1995       1994      1993     1992
                                                  -------   -------    -------   -------  -------
<S>                                               <C>        <C>        <C>      <C>       <C>  
Net asset value, beginning of period              $1.00      $1.00      $1.00    $1.00     $1.00
Income from investment operations:
     Net investment income                        0.026      0.029      0.020    0.018     0.024
Less distributions:
     Distributions from net investment income    (0.026)    (0.029)    (0.020)  (0.018)   (0.024
     )
                                                  -----      -----      -----    -----     -----
Net asset value, end of period                    $1.00      $1.00      $1.00    $1.00     $1.00
                                                  =====      =====      =====    =====     =====
Total Return                                      2.61%      2.92%      2.00%    1.78%     2.47%
Ratio to average net assets:
     Expenses, before reimbursement               1.09%      1.12%      1.09%    0.92%     0.99%
     Expenses, net of reimbursement               1.00%      1.00%      1.00%    0.92%     0.99%
     Net investment income, before
      reimbursement                               2.50%      2.76%      1.88%    1.77%     2.46%
     Net investment income                        2.59%      2.88%      1.97%    1.77%     2.46%
Net assets, end of period (000's omitted)       $26,516    $28,231    $37,654  $41,096   $45,844

</TABLE>

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

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Lexington Tax Free Money Fund, Inc.:

     We have audited the  accompanying  statements of net assets  (including the
portfolio of investments) and assets and liabilities of Lexington Tax Free Money
Fund, Inc. as of December 31, 1996, 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.  Our  procedures  included  confirmation  of securities  owned as of
December  31,  1996 by  correspondence  with  the  custodian.  As to  securities
purchased but not received,  we performed other appropriate auditing procedures.
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 Tax Free Money Fund,  Inc. as of December 31, 1996, 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 Peat Marwick LLP

New York, New York
February 14, 1997


                                       20