<PAGE>

                                     ANNUAL REPORT                 Exhibit 13.1
                                  OF THE TRUSTEES OF
                                     MESABI TRUST

                         For the Year Ended January 31, 1998


ADDRESS

Mesabi Trust
c/o Bankers Trust Company
Corporate Trust and Agency Group
P.O. Box 318
Church Street Station
New York, NY  10015
Telephone - (212) 250-6519

COUNSEL

Oppenheimer Wolff & Donnelly LLP, General Counsel

TRANSFER AGENT

Bankers Trust Company

REGISTRAR

Bankers Trust Company

      Mesabi Trust will provide, upon the written request of any certificate
holder addressed to the Trustees at the above address and without charge to such
certificate holder, a copy of Mesabi Trust's Annual Report on Form 10-K for the
fiscal year ended January 31, 1998 as filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended.


FORWARD-LOOKING INFORMATION

      Certain statements contained in this document are forward-looking,
including specifically those statements estimating 1998 production or shipments.
All such forward-looking statements are based on input from the lessee/operator.
The Trust has no control over the operations and activities of the
lessee/operator except within the framework of current agreements.  Actual
results could differ materially from those indicated in such statements.  For
important factors that could cause actual results to differ materially, see
"Important Factors Affecting Mesabi Trust," below.


                                          1
<PAGE> 
                               SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
 Years ended January 31               1998                1997                 1996                1995                  1994
 ----------------------               ----                -----                -----               ----                  ----
 <S>                               <C>                 <C>                  <C>                 <C>                  <C>
 Royalty and interest income       $    6,860,369      $    6,001,143       $    4,061,228      $    3,485,351       $    3,644,354
 Trust expenses                           362,373             381,534              387,180             426,655              400,041
                                   --------------      --------------       --------------      --------------       --------------
 Net income(a)                     $    6,497,996      $    5,619,609       $    3,674,048      $    3,058,696       $    3,244,313
                                   --------------      --------------       --------------      --------------       --------------
                                   --------------      --------------       --------------      --------------       --------------
 Net income per Unit(b)            $          .50      $          .43       $          .28      $          .23       $          .25
                                   --------------      --------------       --------------      --------------       --------------
                                   --------------      --------------       --------------      --------------       --------------
 Distributions declared
   per unit(b)(c)                  $          .49      $          .42       $         .275      $          .24       $          .27
                                   --------------      --------------       --------------      --------------       --------------
                                   --------------      --------------       --------------      --------------       --------------
 At January 31
 -------------
 Total Assets                      $    4,286,758      $    2,603,167       $    2,286,131      $    1,991,142       $    2,032,398
                                   --------------      --------------       --------------      --------------       --------------
                                   --------------      --------------       --------------      --------------       --------------
</TABLE>
 -----------------

(a)  The Trust, as a grantor trust, is exempt from federal and state income
     taxes.
(b)  Based on 13,120,010 Units of Beneficial Interest outstanding during all
     years.
(c)  During the fiscal year ended January 31, 1998, the Trustees distributed
     $.37 per Unit (including $.145 per Unit declared in fiscal 1997 and
     distributed in February 1997) and declared an additional distribution of
     $.265 per Unit, payable in February 1998.  During the fiscal year ended
     January 31, 1997, the Trustees distributed $.395 per Unit (including $.12
     per Unit declared in fiscal 1996 and distributed in February 1996) and
     declared an additional distribution of $.145 per Unit, payable in February
     1997.  During the fiscal year ended January 31, 1996, the Trustees
     distributed $.255 per Unit (including $.10 per Unit declared in fiscal 1995
     and distributed in February 1995) and declared an additional distribution
     of $.12 per Unit, payable in February 1996.  During the fiscal year ended
     January 31, 1995, the Trustees distributed $.24 per Unit (including $.10
     per Unit declared in fiscal 1994 and distributed in February 1994) and
     declared an additional distribution of $.10 per Unit, payable in February
     1995.  See "Reserves and Distributions" on pages 12 and 13 of this Annual
     Report.

                    TRUSTEES' DISCUSSION AND ANALYSIS OF FINANCIAL
                         CONDITION AND RESULTS OF OPERATIONS

GENERAL

      Mesabi Trust ("Mesabi Trust" or the "Trust"), formed pursuant to an
Agreement of Trust dated July 18, 1961 (the "Agreement of Trust"), is a trust
organized under the laws of the State of New York.  Mesabi Trust holds all of
the interests formerly owned by Mesabi Iron Company, including all right, title
and interest in the Amended Assignment of Peters Lease, the Amended Assignment
of Cloquet Lease, the beneficial interest in the Mesabi Land Trust and all other
assets and property identified in the Agreement of Trust.  The Amended
Assignment of Peters Lease relates to an Indenture made as of April 30, 1915
among East Mesaba [sic] Iron Company, Dunka River Iron Company and Claude W.
Peters (the "Peters Lease") and the Amended Assignment of Cloquet Lease relates
to an Indenture made May 1, 1916 between Cloquet Lumber Company and Claude W.
Peters (the "Cloquet Lease").


      The Trust will terminate twenty-one (21) years after the death of the
survivor of twenty-five (25) persons named in an exhibit to the Agreement of
Trust.  The youngest person on this exhibit is now 37 years old.


                                          2
<PAGE>

      The Agreement of Trust specifically prohibits the Trustees from entering
into or engaging in any business.  This prohibition applies even to business
activities the Trustees deem necessary or proper for the preservation and
protection of the Trust Estate.  Accordingly, the Trustees' activities in
connection with the administration of Trust assets are limited to collecting
income, paying expenses and liabilities, distributing net income and protecting
and conserving the assets held.

      Pursuant to a ruling from the Internal Revenue Service, which ruling was
based on the terms of the Agreement of Trust including the prohibition against
entering into any business, the Trust is not taxable as a corporation for
Federal income tax purposes.  Instead, the holders of the Units of Beneficial
Interest (the "Unitholders") are considered as "owners" of the Trust and the
Trust's income is taxable directly to the Unitholders.

      Leasehold royalty income constitutes the principal source of the Trust's
revenue.  Royalty rates are determined in accordance with the terms of Mesabi
Trust's leases and assignments of leases.  Until August 17, 1989, the overriding
royalty was based on the quantity and iron content of pellets shipped by Reserve
Mining Company ("Reserve") from Mesabi Trust lands, although Mesabi Trust did
not receive any royalty income from May 1986 until July 1990 because Reserve
filed a Chapter 11 bankruptcy petition suspended its operations.

      On August 17, 1989, Cyprus Northshore Mining Corporation ("Cyprus NMC")
purchased substantially all of Reserve's assets, including Reserve's interest in
the Mesabi Trust lands.  In connection with the purchase, Mesabi Trust,
Reserve's Chapter 11 trustee and Cyprus NMC entered into the Amendment of
Assignment, Assumption and Further Assignment of Peters Lease (the "Amended
Assignment of Peters Lease"), the Amendment of Assignment, Assumption and
Further Assignment of Cloquet Lease (the "Amended Assignment of Cloquet Lease")
and the Assumption and Assignment of Mesabi Lease (together with the Amended
Assignment of Peters Lease and the Amended Assignment of Cloquet Lease
Assignment, the "Amended Assignment Agreements").  The Amended Assignment
Agreements modified the method of calculating overriding royalties payable to
Mesabi Trust and transferred Reserve's interest in the Mesabi Trust lands to
Cyprus NMC.

      In 1994, Cyprus NMC was sold by its parent corporation to Cleveland-Cliffs
Inc. ("CCI") and renamed Northshore Mining Corporation ("Northshore").  CCI
operates Northshore as a wholly-owned subsidiary.

      Fee royalties payable to Mesabi Land Trust, a Minnesota land trust of
which Mesabi Trust is the sole beneficiary ("Mesabi Land Trust"), are based on
the amount of crude ore mined.  Crude ore is used to produce iron ore pellets
and other products. Under the Amended Assignment Agreements, overriding
royalties are determined by both the volume and selling price of iron ore
products sold.

      With respect to the volume component of royalty calculation, Northshore is
obligated to pay Mesabi Trust base overriding royalties in varying amounts.  The
volume royalties constitute a percentage of the gross proceeds of iron ore
products produced at Mesabi Trust lands (and to a limited extent other lands)
and shipped from Silver Bay, Minnesota.  The royalty percentage ranges from 2-
1/2% of the gross proceeds (for the first one million tons of iron ore products
so shipped annually) to 6% of the gross proceeds (for all iron ore products in
excess of 4 million tons so shipped annually).

      With respect to the selling price component of royalty calculation,
Northshore is obligated to pay to Mesabi Trust royalty bonuses.  The bonus
royalty is a percentage of the gross proceeds of product shipped from Silver
Bay, and sold at prices above a threshold price.  The threshold price is
adjusted on


                                          3
<PAGE>

an annual basis for inflation and deflation (but not below $30).  The threshold
price was $36.62 for calendar year 1996, was $37.29 for calendar year 1997 and
is $38.21 for calendar year 1998.  The bonus royalty percentage ranges from 1/2
of 1% of the gross proceeds (on all tonnage shipped for sale at prices between
the threshold price and $2.00 above the threshold price) to 3% of the gross
proceeds (on all tonnage shipped for sale at prices $10.00 or more above the
threshold price).  No royalty bonus has been paid under the Amended Assignment
Agreements for several years.

      Generally, Northshore's obligation to pay base overriding royalties and
royalty bonuses with respect to the sale of iron ore products accrues upon the
shipment of those products from Silver Bay.   However, Northshore also is
obligated to pay to Mesabi Trust a minimum advance royalty in equal quarterly
installments.  Royalty advances are credited against certain base overriding
royalties and royalty bonuses.  The amount of advance royalties payable is
subject to adjustment for inflation and deflation (but not below $500,000 per
annum).  Advance royalties payable were $610,335 for calendar year 1996, were
$621,606 for calendar year 1997 and are $636,935 for calendar year 1998.
Northshore is obligated to make quarterly royalty payments in January, April,
July and October of each year.  In the case of base overriding royalties and
royalty bonuses, these quarterly royalty payments are to be made whether or not
the related proceeds of sale have been received by Northshore by the time such
payments become due.

      Under the relevant documents, Northshore may mine and ship iron ore
products from lands other than Mesabi Trust lands.   To encourage the use of
iron ore products from Mesabi Trust lands, Mesabi Trust receives royalties on
stated percentages of iron ore shipped from Silver Bay, whether or not the iron
ore products are from Mesabi Trust lands.  Mesabi Trust receives royalties at
the greater of (i) the aggregate quantity of iron ore products shipped that were
from Mesabi Trust lands, and (ii) a portion of the aggregate quantity of all
iron ore products shipped that were from any lands, such portion being 90% of
the first four million tons shipped during such year, 85% of the next two
million tons shipped during such year, and 25% of all tonnage shipped during
such year in excess of six million tons.

      Northshore has advised the trustees that total calendar year 1998
shipments may  be approximately 4.2 million tons.  However, it is not known what
percentage of these estimated shipments will be from Mesabi Trust lands.  During
calendar years 1997, 1996, 1995 and 1994, the percentage of shipments of iron
ore products from Mesabi Trust lands was approximately 98.3%, 98.4%, 90.6% and
88.3%, respectively, of total shipments.  Northshore has not advised the Trust
what the percentage of iron ore products it anticipates shipping from Mesabi
Trust lands.

      In its recently released annual report, CCI, parent company of Northshore,
the lessee/operator of Mesabi Trust iron ore interests, stated that it is
continuing to evaluate whether to build a facility to produce pig iron in the
United States using a coal-based process.  CCI also stated that if engineering,
marketing and economic evaluations prove positive, the plant will be located at
its Northshore facility in Minnesota presumably using Mesabi Trust ore.  In the
same annual report, it was stated that a decision relative to proceeding with
this project is expected to be made around the middle of this year.  Because of
the preliminary nature of this information, the Trustees are unable to determine
at this time how the addition of a pig iron facility (if the project proceeds)
would impact overall revenues of Mesabi Trust.  As indicated elsewhere in this
report, the Trust's revenues are currently derived almost entirely from iron ore
pellet production and sales.


                                          4

<PAGE>

IMPORTANT FACTORS AFFECTING MESABI TRUST

      The Agreement of Trust specifically prohibits the Trustees from entering
into or engaging in any business.  This prohibition applies even to business
activities the Trustees deem necessary or proper for the preservation and
protection of the Trust Estate.  Accordingly, the Trustees' activities in
connection with the administration of Trust assets are limited to collecting
income, paying expenses and liabilities, distributing net income and protecting
and conserving the assets held.

      Accordingly, the income of the Trust is highly dependent upon the
activities and operations of Northshore, and the terms and conditions of the
Amended Assignment Agreements.  The Trust and the Trustees have no control over
the operations and activities of Northshore, except within the framework of the
Amended Assignment Agreements.

      Due to winter weather, and the increasing royalty percentages based on
tonnage shipped in a calendar year, results for a particular calendar quarter
are typically not indicative of results for future quarters or the year as a
whole.  Factors which can impact the results of the Trust in any quarter or year
include:

1.   SHIPPING CONDITIONS IN THE GREAT LAKES.  Shipping activity by Northshore is
     dependent upon when the Great Lakes shipping lanes freeze for the winter
     months (typically in January) and when they re-open in the spring
     (typically late-March or April).  Base overriding royalties to Mesabi Trust
     are based on shipments made in a calendar quarter.  Because there typically
     is little or no shipping activity in the first calendar quarter, the Trust
     typically receives only the minimum royalty for that period.

2.   OPERATIONS OF NORTHSHORE.  Because the primary portion of the Trust's
     revenues derive from iron ore product shipped by Northshore from Silver
     Bay, Northshore's processing and shipping activities directly impact the
     Trust's revenues in each quarter and for each year.  In turn, a myriad of
     factors affect Northshore shipment volume.  These factors include economic
     conditions in the iron ore industry, pricing by competitors, long-term
     customer contracts or arrangements by Northshore or its competitors,
     availability of ore boats, production at Northshore's mining operations,
     and production at the pelletizing/processing facility.  If any pelletizing
     line becomes idle for any reason, production and shipments (and,
     consequently, Trust income) could be adversely impacted.

3.   INCREASING ROYALTIES.  As described elsewhere in this Report, the royalty
     percentage paid to the Trust increases as the aggregate tonnage of iron ore
     products shipped, attributable to the Trust, in any calendar year
     increases.  Assuming a consistent sales price per ton throughout a calendar
     year, shipments of iron ore product attributable to the Trust later in the
     year generate a higher royalty to the Trust.

4.   PERCENTAGE OF MESABI TRUST ORE.  As described elsewhere in this Report,
     Northshore has the ability to process and ship iron ore product from lands
     other than Mesabi Trust lands. In certain circumstances, the Trust may be
     entitled to royalties on those other shipments, but not in all cases.  In
     general, the Trust will receive higher royalties (assuming all other
     factors are equal) if a higher percentage of shipments are from Mesabi
     Trust lands.  The percentages of shipments that came from Mesabi Trust
     lands were 98.3%, 98.4%, 90.6% and 88.3% in calendar years 1997, 1996, 1995
     and 1994, respectively.


                                          5
<PAGE>

COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1998 AND JANUARY 31, 1997

      Mesabi Trust's gross income for the fiscal year ended January 31, 1998 was
$6,860,369, an increase of $859,226 (or approximately 14.3%) from the gross
income of $6,001,143 for the fiscal year ended January 31, 1997.  The increase
in gross income primarily was due to increased pellet shipments plus a higher
average sales price per ton.  Mesabi Trust's expenses of $362,373 for the fiscal
year ended January 31, 1998 decreased $19,161 (or approximately 5.0%) from
expenses of $381,534 for the fiscal year ended January 31, 1997.  Total
expenses, by category, for each of the last three fiscal years is set forth
under "Income and Expense" on pages 11 and 12 of this report.  Increased income
and decreased expenses resulted in net income of $6,497,996 for the fiscal year
ended January 31, 1998, an increase of $878,387 from the net income of
$5,619,609 for the fiscal year ended January 31, 1997.

      Mesabi Trust's Unallocated Reserve aggregated $719,799 at January 31,
1998, as compared with an Unallocated Reserve of $650,608 at January 31, 1997.
During the fiscal year ended January 31, 1998, the Trustees distributed $.37 per
Unit of Beneficial Interest.  These distributions to Unitholders totaled
$4,854,404.

COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1997 AND JANUARY 31, 1996

      Mesabi Trust's gross income for the fiscal year ended January 31, 1997 was
$6,001,143, an increase of $1,939,915 (or approximately 47.8%) from the gross
income of $4,061,228 for the fiscal year ended January 31, 1996.  The increase
in gross income primarily was due to increased pellet shipments and at a higher
average price, a higher percentage of shipments from Mesabi Trust lands,
increased crude ore production (increasing the amount of royalty income) and a
decrease in the deferred income amount as compared to the comparable period.
Mesabi Trust's expenses of $381,534 for the fiscal year ended January 31, 1997
decreased $5,646 (or approximately 1.5%) from expenses of $387,180 for the
fiscal year ended January 31, 1996.  Total expenses, by category, for each of
the last three fiscal years is set forth under "Income and Expense" on pages 11
and 12 of this report.  Increased income and decreased expenses resulted in net
income of $5,619,609 for the fiscal year ended January 31, 1997, an increase of
$1,945,561 from the net income of $3,674,048 for the fiscal year ended January
31, 1996.

      Mesabi Trust's Unallocated Reserve aggregated $650,608 at January 31,
1997, as compared with an Unallocated Reserve of $541,403 at January 31, 1996.
During the fiscal year ended January 31, 1997, the Trustees distributed $.395
per Unit of Beneficial Interest.  These distributions to Unitholders totaled
$5,182,404.


                                          6
<PAGE>

                                  TO THE HOLDERS OF
                        CERTIFICATES OF BENEFICIAL INTEREST IN
                                     MESABI TRUST

MESABI TRUST

      Mesabi Trust was created in 1961 upon the liquidation of Mesabi Iron
Company.  The sole purpose of the Trust, as set forth in the Agreement of Trust
dated as of July 18, 1961 (the "Agreement of Trust"), is to conserve and protect
the Trust Estate and to collect and distribute the income and proceeds therefrom
to the Trust's Certificate Holders after the payment of, or provision for,
expenses and liabilities.  The Agreement of Trust prohibits the Trust from
engaging in any business.

THE TRUST ESTATE

      The principal assets of Mesabi Trust consist of two different interests in
certain properties in the Mesabi Iron Range: (i) Mesabi Trust's interest as
assignor in the Amended Assignment of Peters and the Amended Assignment of
Cloquet Lease, which together cover properties aggregating approximately 9,750
contiguous acres in St. Louis County, Minnesota (the "Peters Lease Lands" and
the "Cloquet Lease Lands," respectively, and collectively, the "Peters and
Cloquet Lease Lands"), and (ii) Mesabi Trust's ownership of the entire
beneficial interest in Mesabi Land Trust, which has a 20% interest as fee owner
in the Peters Lease Lands and a 100% fee ownership in certain non-mineral-
bearing lands adjacent to the Peters and Cloquet Lease Lands (the "Mesabi Lease
Lands").

      The Peters and Cloquet Lease Lands are located at the eastern end of the
Mesabi Iron Range and contain low-grade iron ore known as taconite,
approximately three tons of which must be beneficiated to produce one ton of
high-grade pellets.  The Trustees have not had any surveys or test drillings
performed to ascertain the iron ore reserves on the Peters and Cloquet Lease
Lands.  However, initial surveys and test drillings made by Mesabi Iron Company
many years ago indicated that these lands contained accessible taconite reserves
capable of yielding approximately 500 million tons of high grade iron ore
pellets.  In its recently released annual report, CCI estimated that there
currently remains enough ore reserve in the Peters and Cloquet Lease Lands to
produce concentrated product for 83 years of mining at current extraction rates.
The Mesabi Lease Lands provide an area for location of service roads, supporting
plants and equipment and dump sites for overburden.

      Under the Amended Assignment Agreements, Northshore produces iron ore from
the Peters and Cloquet Lease Lands for the manufacture of pellets to be sold to
various users, and Mesabi Trust receives royalties on the crude ore extracted
from such Lands and the pellets produced from such crude ore.

LEASEHOLD ROYALTIES

      Northshore is obligated to pay to Mesabi Trust base overriding royalties
and royalty bonuses on all pellets (and other iron ore products) produced from
the Peters and Cloquet Lease Lands ("Mesabi Ore") and shipped from Silver Bay,
Minnesota in each calendar year.  The royalties are based on prices per unit of
product, volumes of product shipped and where on the escalating scale of
royalties -- 2% on the first million tons to 6% on shipments above four million
tons per year -- each shipment falls.


                                          7
<PAGE>

      Base overriding royalties are calculated on the basis of an escalating
scale of percentages of gross sales proceeds of iron ore shipped.  The
applicable percentage is determined by reference to the tonnage of pellets
previously shipped in the then current calendar year, as follows:

<TABLE>
<CAPTION>
                                                                            Applicable royalty
          Tons of iron ore products                                     (expressed as a percentage
             shipped in calendar                                         of gross sales proceeds
                    year                                                   within each tranche)
                ------------                                            --------------------------
       <S>                                                              <C>
       one million or less                                                        2-1/2%
       more than one but not more than two million                                3-1/2%
       more than two but not more than three million                              5%
       more than three but not more than four million                             5-1/2%
       more than four million                                                     6%
</TABLE>
 
      For example, assume that no shipments of iron ore products were made
during the first calendar quarter of 1998 and further assume that pellets were
shipped from Silver Bay, Minnesota in the second and third calendar quarters of
1998 in the following tonnage quantities and rendering the following gross
proceeds:

<TABLE>
<CAPTION>
                             Tonnage              Gross Proceeds
                            ---------             --------------
     <S>                    <C>                   <C>
     2nd Quarter:             500,000             $14,000,000
     3rd Quarter:             500,000             $14,000,000
                            1,000,000             $27,000,000
                            1,000,000             $26,000,000
                            1,000,000             $25,000,000
                            1,500,000             $37,500,000
</TABLE>

In this example, the base overriding royalties payable in respect of the second
and third calendar quarters of 1998 would be as follows:

<TABLE>
     <S>                                          <C>
     2nd Quarter:   $14,000,000 x 2-1/2%          ($  350,000)
     3rd Quarter:   $14,000,000 x 2-1/2%          ($  350,000)
                    $27,000,000 x 3-1/2%          ($  945,000)
                    $26,000,000 x 5%              ($1,300,000)
                    $25,000,000 x 5-1/2%          ($1,375,000)
                    $37,500,000 x 6%              ($2,250,000)
</TABLE>

Based on the same example, the percentage applicable for all iron ore products
shipped in the fourth calendar quarter of 1998 would be 6%, because more than
four million tons were shipped during the first three quarters.

The above figures are provided only to illustrate the method for calculating
base overriding royalties and do NOT indicate the amount of base overriding
royalties the Trustees expect Mesabi Trust to earn calendar 1998 or any other
calendar or fiscal year.  Accordingly, the foregoing example illustrating the
calculation


                                          8
<PAGE>

of base overriding royalties should not be considered a prediction of the amount
of base overriding royalties Mesabi Trust will receive.

      Royalty bonuses are payable on all iron ore products sold at prices above
a threshold price (the "Adjusted Threshold Price").  The Adjusted Threshold
Price was $36.62 per ton for calendar year 1996, was $37.29 per ton for calendar
year 1997 and will be $38.21 per ton for calendar year 1998.  The Adjusted
Threshold Price is subject to adjustment (but not below $30 per ton) for
inflation and deflation and is determined each year on the basis of the change
in a broad based index of inflation and deflation published quarterly by the
U.S. Department of Commerce.

      The amount of royalty bonuses payable for any period is calculated on the
basis of an escalating scale of percentages of the gross sales proceeds to
Northshore of pellets sold at prices above the Adjusted Threshold Price.  The
applicable percentage is determined by reference to the amount by which the
sales prices for a particular quantity of pellets exceeds the Adjusted Threshold
Price, as follows:

<TABLE>
<CAPTION>

       Amount by which
     sales price per ton
       exceeds Adjusted                           Applicable
       Threshold Price                            Percentage
      ----------------                            ----------
     <S>                                          <C>
     $2 or less                                   1/2 of 1%
     more than $2 but not more than $4            1%
     more than $4 but not more than $6            1-1/2%
     more than $6 but not more than $8            2%
     more than $8 but not more than $10           2-1/2%
     more than $10                                3%
</TABLE>

      For example, assume an Adjusted Threshold Price of $38.21 is assumed for
calendar year 1998 and that two million tons of iron ore products were shipped
in the second calendar quarter of 1998 at the following prices:

<TABLE>
               <S>              <C>
               1,000,000 tons @ $29.00/ton
                 300,000 tons @ $31.00/ton
                 300,000 tons @ $34.00/ton
                 100,000 tons @ $36.00/ton
                 100,000 tons @ $38.00/ton
                 100,000 tons @ $40.00/ton
                  50,000 tons @ $42.00/ton
                  50,000 tons @ $46.00/ton
</TABLE>


                                          9
<PAGE>

In this example, the following royalty bonuses would be payable on shipments of
iron ore products on the second calendar quarter of 1998 as follows:

<TABLE>
               <S>                           <C>
               1,000,000 tons @ $29.00/ton   No bonus
                 300,000 tons @ $31.00/ton   No bonus
                 300,000 tons @ $34.00/ton   No bonus
                 100,000 tons @ $36.00/ton   No bonus
                 100,000 tons @ $38.00/ton   No bonus
                 100,000 tons @ $40.00/ton   1/2%
                  50,000 tons @ $42.00/ton   1%
                  50,000 tons @ $46.00/ton   2%
</TABLE>

      The above figures are provided only to illustrate the method for
calculating royalty bonuses and do NOT indicate the amount of royalty bonuses,
if any, the Trustees expect Mesabi Trust to earn in calendar 1998 or any other
calendar or fiscal year.  Accordingly, the foregoing example illustrating the
calculation of royalty bonuses should not be considered a prediction of the
amount, if any, of royalty bonuses Mesabi Trust will receive.  In fact, no
royalty bonus has been paid to the Trust for several years.

      Northshore also must pay base overriding royalties and royalty bonuses on
pellets produced from lands other than Mesabi Lease Lands ("Other Ore") to the
extent necessary to assure payment of base overriding royalties and royalty
bonuses on at least 90% of the first four million tons of pellets shipped from
Silver Bay in each calendar year, at least 85% of the next two million tons of
pellets shipped therefrom in each calendar year, and at least 25% of all tonnage
of pellets shipped therefrom in each calendar year in excess of six million
tons.  Base overriding royalties and royalty bonuses payable on Other Ore can be
recouped by Northshore out of base overriding royalties and royalty bonuses paid
on Mesabi Ore.  The amount of Other Ore royalties and Other Ore royalty bonuses
which can be recouped on any payment date cannot, however, exceed 20% of the
amount of Mesabi Ore royalties and royalty bonuses which are otherwise payable
on that payment date.

      Northshore is obligated to pay to Mesabi Trust advance royalties in equal
quarterly installments.  The advance royalty was $610,335 per annum for the
calendar year ended December 31, 1996, $621,606 for calendar year 1997 and is
$636,935 for the calendar year 1998.  The amount of advance royalties payable is
subject to adjustment (but not below $500,000 per annum) for inflation and
deflation and is determined each year in the same manner as the Adjusted
Threshold Price.  All payments of advance royalties are credited against
payments of base overriding royalties and royalty bonuses payable on Mesabi Ore
until fully recouped.  The amount of advance royalties payable in respect of
each calendar quarter constitutes the minimum overriding royalty amount payable
by Northshore in respect of that calendar quarter.

      Base overriding royalties and royalty bonuses are payable quarterly and
accrue upon shipment, whether or not the actual sales proceeds for any shipment
are received by Northshore.  The amount of base overriding royalties and royalty
bonuses payable with respect to the first three quarters in any calendar year
are determined on the basis of tonnage shipped during each such calendar quarter
and the actual sales proceeds of such shipments, with an adjustment made to the
royalties payable with respect to the last quarter in any calendar year to
account for errors, adjustments and returns.

      In addition, in the event that Northshore commences mining and production
of quarry stone for shipment, Northshore must pay base overriding royalties on
all quarry stone so shipped on the basis of


                                          10
<PAGE>

the same scale of percentages used in calculating base overriding royalties
payable on pellets and other iron ore product.  Northshore has not informed
Mesabi Trust of any present intention to commence mining and production of
quarry stone.

LAND TRUST AND FEE ROYALTIES

      Mesabi Land Trust holds a 20% interest as fee owner in the Peters Lease
Lands and a 100% interest as fee owner in the Mesabi Lease Lands as lessor of
the Mesabi Lease.  Mesabi Trust holds the entire beneficial interest in Mesabi
Land Trust and is entitled to receive the net income of Mesabi Land Trust after
payment of expenses.  Northshore is not obligated to pay royalties or rental to
Mesabi Land Trust as fee owner of the non-mineral bearing Mesabi Lease Lands, a
consideration having been paid in that respect at the inception of the Mesabi
Lease.

      Northshore is required to pay a base royalty to the fee owners in an
amount which, at its option, is either (a) 11-2/3 CENTS per gross ton of crude
ore it mines from the Peters Lease Lands or (b) $.0056 for each 1% of metallic
iron ore natural contained in each gross ton of pellets it produces from the
Peters Lease Lands and ships.  The base fee royalty rate is adjusted up or down
each quarter (but not below the base royalty specified above) by addition or
subtraction of an amount to be determined by reference to changes in Lower Lake
Mesabi Range pellet prices and the All Commodities Producer Price Index.  The
adjustment factor is computed by multiplying the base fee royalty rate specified
above by a percentage that is the sum of (a) one-half of the percentage change,
if any, by which the then prevailing price per iron unit of Mesabi Range
taconite pellets delivered by rail or vessel at Lower Lake Erie ports exceeds
80.5 CENTS (the price per iron unit in effect in January 1982) plus (b) one-half
of the percentage change, if any, by which the All Commodities Producer Price
Index exceeds 295.8 (the level of the Index for December 1981).

      Fee royalties aggregating $326,378 with respect to crude ore mined by
Northshore were earned by Mesabi Land Trust during the fiscal year ended
January 31, 1998.

INCOME AND EXPENSE

      Total income for Mesabi Trust for the fiscal year ended January 31, 1998
was $6,860,369, consisting of $42,416 in interest earned on the investment of
the Unallocated Reserve, $326,378 in fee income, $621,606 in minimum advance
royalty income, and $5,869,969 in overriding royalty income compared with
$6,001,143 in total income for the previous fiscal year.  Total expenses for the
fiscal year were $362,373, compared with $381,534 in total expenses for the
previous fiscal year.  There were distributions paid per Unit of Beneficial
Interest totaling 37 CENTS for the fiscal year ended January 31, 1998, compared
with distributions paid for the fiscal year ended January 31, 1997 of 39.5 CENTS
per Unit.


                                          11
<PAGE>


Total expenses by categories were as follows:

<TABLE>
<CAPTION>
                                                 Fiscal Years ended
                                                     January 31,
                                     ------------------------------------------
                                           1998          1997          1996
                                           ----          ----          ----
<S>                                   <C>             <C>           <C>
Compensation of Trustees              $  129,438      $129,742      $ 131,906
Fees and Disbursements
  Administrative                          62,500        62,500         62,500
  Accounting                              35,734        32,815         29,326
  Inspection trips, travel and
    other expenses of Trustees            31,995        35,164         36,352
  Legal                                   25,802        24,091         17,630
  Mining consultant and field
    representatives                       15,695        16,808         12,558
  Printing of annual and quarterly
    reports, and letters to
    certificate holders                   26,726        33,227         46,676
  Securities and Exchange Commission         ---           250            250
  Transfer Agent and Registrar            24,848        34,017         33,178
  Transfer Agent miscellaneous
    disbursements                          9,628        12,789         13,500
  Other miscellaneous expenses                 7           131          3,304
                                       ----------    ----------     ---------
                                      $  362,373     $ 381,534      $ 387,180
                                       ----------    ----------     ---------
                                       ----------    ----------     ---------
</TABLE>

      Pursuant to an Amendment to the Agreement of Trust (the "Amendment") dated
October 25, 1982, each Individual Trustee receives annual compensation for
services as Trustee of $20,000, adjusted up or down (but not below $20,000) in
accordance with changes from the November 1981 level of 295.5 (the "1981
Escalation Level") in the All Commodities Producer Price Index (with 1967 = 100
as a base), which is published by the U.S. Department of Labor.  The adjustment
is made at the end of each fiscal year and is calculated on the basis of the
proportion between (a) the level of such index for the November preceding the
end of such fiscal year and (b) the 1981 Escalation Level.


RESERVES AND DISTRIBUTIONS

      Mesabi Trust's Unallocated Reserve aggregated $719,799 at January 31,
1998, compared with an Unallocated Reserve of $650,608 at January 31, 1997.  The
Trustees have determined that the Unallocated Reserve should be maintained at a
prudent level.  Accordingly, although the actual amount of the Unallocated
Reserve will fluctuate from time to time, and may increase or decrease from its
current level, it is currently intended that future distributions will be highly
dependent upon royalty income as it is received and the level of Trust expenses.
The amount of future royalty income available for distribution will be subject
to the volume of iron ore product shipments and the dollar level of sales by
Northshore.  Shipping activity is greatly reduced during the winter months and
economic conditions, particularly those affecting the steel industry, may
adversely affect the amount and timing of such future shipments and sales.

      The Trustees will continue to monitor the economic circumstances of the
Trust to strike a responsible balance between distributions to Unitholders and
the need to maintain adequate reserves at a


                                          12
<PAGE>

prudent level, given the unpredictable nature of the iron ore industry, the
Trust's dependence on the actions of the lessee/operator, and the fact the Trust
essentially has no other liquid assets.

      Payments to Unitholders during the fiscal year ended January 31, 1997
totaled $5,182,404 and payments to Unitholders during the fiscal year ended
January 31, 1998 totaled $4,854,404.

CERTIFICATES OF BENEFICIAL INTEREST

      The Certificates of Beneficial Interest are traded on the New York Stock
Exchange.  During the past two fiscal years, the market ranges of the
certificates for each quarterly period and the distributions declared for such
quarterly periods were as follows:

<TABLE>
<CAPTION>

Fiscal Quarter Ended             High              Low        Amount Declared     Per Unit
--------------------             ----              ---        ---------------     --------
<S>                             <C>               <C>         <C>                <C>
April 30, 1996                  4                 3 7/8        $      ---        $    ---
July 31, 1996                   4 1/4             4              1,115,201           0.085
October 31, 1996                4 3/8             4 1/4          2,492,802           0.190
January 31, 1997                4 5/8             4 1/2          1,902,401           0.145
                                                               -----------       ---------
                                                                $5,510,404       $   0.420
                                                               -----------       ---------
                                                               -----------       ---------
</TABLE>

<TABLE>
<CAPTION>

Fiscal Quarter Ended             High              Low        Amount Declared     Per Unit
--------------------             ----              ---        ----------------    --------
<S>                              <C>              <C>         <C>                <C>
April 30, 1997                  4 3/4             4 1/4        $        --       $      --
July 31, 1997                   4 5/8             3 7/8            852,801           0.065
October 31, 1997                4 1/16            3 11/16        2,099,201           0.160
January 31, 1998                4 1/4             3 5/8          3,476,803           0.265
                                                               -----------       ---------

                                                               $ 6,428,805       $   0.490
                                                               -----------       ---------
                                                               -----------       ---------
</TABLE>
 
      As of the close of business on April 20, 1998, the beneficial interest in
Mesabi Trust was represented by 13,120,010 Units registered in the names of
approximately 2,591 individuals holding of record approximately 1,653,664 Units,
and in the names of approximately 526 brokers, nominees, or fiduciaries holding
of record approximately 11,466,346 Units.


                                          13
<PAGE>
 
THE TRUSTEES


The name and address of each Trustee and the principal occupation of each
individual Trustee are as follows:

<TABLE>
<CAPTION>
              Name and Address
                 of Trustee                         Principal Occupation
              -----------------                    -----------------------
<S>                                             <C>
Bankers Trust Company
Corporate Trustee
Four Albany Street
New York, New York 10015

David J. Hoffman                                Mining geologist
Individual Trustee
P.O. Box 10444
Sedona, Arizona 86339

Richard G. Lareau                               Partner in the law firm of
Individual Trustee                              Oppenheimer Wolff & Donnelly LLP
Oppenheimer Wolff & Donnelly LLP
3400 Plaza VII
45 South Seventh Street
Minneapolis, Minnesota 55402

Ira A. Marshall, Jr.                            Private investor; Self-employed
Individual Trustee                              petroleum engineer
12 Fincher Way
Rancho Mirage, California

Norman F. Sprague III                           Private investor; Orthopedic surgeon
Individual Trustee
11600 Wilshire Boulevard
Los Angeles, California 90025


                                           Respectfully submitted,

                                           BANKERS TRUST COMPANY
                                           DAVID J. HOFFMAN
                                           RICHARD G. LAREAU
New York, New York                         IRA A. MARSHALL, JR.
April 23, 1998                             NORMAN F. SPRAGUE III
</TABLE>
 

                                          14
<PAGE>

                             INDEPENDENT AUDITOR'S REPORT

To the Trustees
Mesabi Trust
New York, New York

      We have audited the accompanying balance sheets of Mesabi Trust as of
January 31, 1998 and 1997, and the related statements of income, unallocated
reserve and trust corpus and cash flows for each of the three years in the
period ended January 31, 1998.  These financial statements are the
responsibility of the Trust's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.   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 referred to above present fairly,
in all material respects, the financial position of Mesabi Trust as of
January 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1998, in conformity
with generally accepted accounting principles.

                                             McGLADREY & PULLEN, LLP


                                            /s/ McGladrey & Pullen, LLP

New York, New York
March 24, 1998


                                         F-1

<PAGE>

                                     MESABI TRUST

                                    BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          January 31,
                                                                    ------------------------
                                                                    1998                1997
                                                                    ----                ----

                                     ASSETS
<S>                                                            <C>                  <C>
Cash                                                           $ 3,607,221          $       918
U.S. Government securities,
  at amortized cost (which approximates market)                    499,073            2,484,984
Accrued income                                                     176,641              113,617
Prepaid insurance                                                    3,820                3,645
                                                               -----------          -----------
                                                               $ 4,286,755          $ 2,603,164
                                                               -----------          -----------

Fixed property, including
  intangibles, at nominal values:
     Assignments of leased property:
       Amended Assignment of
          Peters Lease                                         $         1          $         1
       Assignment of Cloquet Lease                                       1                    1

     Certificate of beneficial
     interest for 13,120,010 units
     of Land Trust                                                       1                    1
                                                               -----------          -----------
                                                               $         3          $         3
                                                               -----------          -----------
                                                               $ 4,286,758          $ 2,603,167
                                                               -----------          -----------
                                                               -----------          -----------

                LIABILITIES, UNALLOCATED RESERVE AND TRUST CORPUS

Liabilities:
  Distribution payable                                         $ 3,476,803          $ 1,902,401
  Accrued expenses                                                  90,153               50,155
                                                               -----------          -----------
                                                               $ 3,566,956          $ 1,952,556

Unallocated reserve                                                719,799              650,608

Trust Corpus                                                             3                    3
                                                               -----------          -----------
                                                               $ 4,286,758          $ 2,603,167
                                                               -----------          -----------
                                                               -----------          -----------
</TABLE>



See Notes to Financial Statements.
 

                                         F-2

<PAGE>

                                     MESABI TRUST

                                 STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                      Years ended January 31,
                                          ------------------------------------------------
                                          1998                1997                1996
                                          ----                ----                ----
<S>                                   <C>                 <C>                  <C>
REVENUE

Royalties under amended
  lease agreements                    $ 6,491,575         $ 5,631,330          $ 3,742,921
Royalties under Peters
  Lease fee                               326,378             328,783              276,908
Interest                                   42,416              41,030               41,399
                                      -----------         -----------          -----------

              Total revenue           $ 6,860,369         $ 6,001,143          $ 4,061,228
                                      -----------         -----------          -----------


EXPENSES

Compensation of Trustees              $   129,438         $   129,742          $   131,906
Corporate Trustee's
  administrative fees                      62,500              62,500               62,500
Professional fees and expenses:
  Legal and accounting                     61,536              56,906               46,956
  Mining consultant and
     field representatives                 15,695              16,808               12,558
Transfer agent's and
  registrar's fees                         24,848              34,017               33,178
Other Trust expenses                       68,356              81,561              100,082
                                      -----------         -----------          -----------

              Total expenses          $   362,373         $   381,534          $   387,180
                                      -----------         -----------          -----------

Net income                            $ 6,497,996         $ 5,619,609          $ 3,674,048
                                      -----------         -----------          -----------
                                      -----------         -----------          -----------

Weighted average number
  of units outstanding                 13,120,010          13,120,010           13,120,010
                                      -----------         -----------          -----------
                                      -----------         -----------          -----------

Net income per unit                          $.50                $.43                 $.28
                                             ----                ----                 ----
                                             ----                ----                 ----
</TABLE>
 


See Notes to Financial Statements.


                                         F-3

<PAGE>

                                     MESABI TRUST

                  STATEMENTS OF UNALLOCATED RESERVE AND TRUST CORPUS
                     YEARS ENDED JANUARY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                         Unallocated Reserve
                                                                         -------------------
                                                            Number of                           Trust
                                                              Units            Amount           Corpus
                                                              -----            ------           ------

<S>                                                        <C>              <C>              <C>
Balance, February 1, 1995                                  13,120,010       $   475,358      $         3

     Net income                                                  ---          3,674,048             ---
     Distribution paid August 18, 1995,
     $.065 per unit                                              ---           (852,801)            ---
     Distribution paid November 20, 1995,
     $.09 per unit                                               ---         (1,180,801)            ---
     Distribution declared January 17, 1996,
     paid February 20, 1996,
     $.12 per unit                                               ---         (1,574,401)            ---
                                                          -----------       -----------      -----------


Balance, January 31, 1996                                  13,120,010       $   541,403      $         3

     Net income                                                  ---          5,619,609              --
     Distribution paid August 20, 1996,
     $.085 per unit                                              ---         (1,115,201)            ---
     Distribution paid November 20, 1996,
     $.19 per unit                                               ---         (2,492,802)            ---
     Distribution declared January 17, 1997,
     paid February 20, 1997,
     $.145 per unit                                              ---         (1,902,401)            ---
                                                          -----------       -----------      -----------

Balance, January 31, 1997                                  13,120,010         $ 650,608      $         3

     Net income                                                  ---          6,497,996             ---
     Distribution paid August 20, 1997,
     $.065 per unit                                              ---           (852,801)            ---
     Distribution paid November 20, 1997,
     $.16 per unit                                               ---         (2,099,201)            ---
     Distribution declared January 16, 1997,
     paid February 20, 1998,
     $.265 per unit                                              ---         (3,476,803)            ---
                                                          -----------       -----------      -----------

Balance, January 31, 1998                                  13,120,010        $  719,799      $         3
                                                          -----------       -----------      -----------
                                                          -----------       -----------      -----------
</TABLE>
 


See Notes to Financial Statements.


                                         F-4

<PAGE>

                                     MESABI TRUST

                               STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                Years ended January 31,
                                               --------------------------------------------------------
                                                   1998                 1997                1996
                                                   ----                 ----                ----
<S>                                              <C>                <C>                <C>
Cash flows from operating
  activities:
     Royalties received                          $ 6,769,021        $  5,855,966       $  4,036,713
     Interest received                                42,745              44,634             27,151
     Expenses paid                                  (336,971)           (387,065)          (372,767)
                                                 -----------        ------------       ------------
       Net cash provided
         by operating activities                 $ 6,474,795        $  5,513,535       $  3,691,097
                                                 -----------        ------------       ------------
Cash flows from investing
  activities:
     Maturities of U.S. Government
     securities                                  $ 6,439,490        $  6,833,132       $  4,883,677
  Purchases of U.S.
     Government securities                        (4,453,578)         (7,172,528)        (6,662,615)
                                                 -----------        ------------       ------------
     Net cash (used in) provided by
       investing activities                      $ 1,985,912        $   (339,396)      $ (1,778,938)
                                                 -----------        ------------       ------------
Cash flows from financing
  activities:
     Net cash (used in) financing
     activities, distributions
     to unitholders                              $(4,854,404)       $ (5,182,404)      $ (3,345,603)
                                                 -----------        ------------       ------------

Net increase (decrease) in cash                  $ 3,606,303        $     (8,265)      $ (1,433,444)
Cash, beginning of year                                  918               9,183          1,442,627
                                                 -----------        ------------       ------------

Cash, end of year                                $ 3,607,221        $        918       $      9,183
                                                 -----------        ------------       ------------
                                                 -----------        ------------       ------------

Reconciliation of net income
  to net cash provided by
  operating activities:
  Net income                                     $ 6,497,996        $  5,619,609       $  3,674,048

  Decrease (increase) in
     accrued income                                  (63,024)             13,802             50,505
  Decrease (increase) in prepaid
     insurance                                          (175)                293                ---
  (Decrease) increase in
     accrued expenses                                 39,998              (5,824)            14,413
  (Decrease) increase in deferred
     income                                              ---            (114,345)           (47,869)
                                                 -----------        ------------       ------------
     Net cash provided by
       operating activities                      $ 6,474,795        $  5,513,535       $  3,691,097
                                                 -----------        ------------       ------------
                                                 -----------        ------------       ------------
</TABLE>



See Notes to Financial Statements.


                                         F-5

<PAGE>

Note 1.  Nature of Business, Organization and Significant Accounting Policies

               Nature of business:

                    Mesabi Trust was created in 1961 upon the liquidation of
                    Mesabi Iron Company.  The sole purpose of the Trust, as set
                    forth in the Agreement of Trust dated as of July 18, 1961,
                    is to conserve and protect the Trust Estate and to collect
                    and distribute the income and proceeds therefrom to the
                    Trust's certificate holders after the payment of, or
                    provision for, expenses and liabilities.  The Agreement of
                    Trust prohibits the Trust from engaging in any business.

                    The lessee/operator of Mesabi Trust's mineral interests is
                    Northshore Mining Corporation (NMC), a subsidiary of
                    Cleveland-Cliffs Inc. (CCI).  CCI is among the world's
                    largest producers of iron ore products.  Prior to September
                    30, 1994, the lessee/operator had been a subsidiary of
                    Cyprus Amax Minerals Company and was named Cyprus Northshore
                    Mining Corporation (Cyprus NMC).

               Organization:

                    The beneficial interest in Mesabi Trust is represented by
                    13,120,010 transferable units distributed on July 27, 1961
                    to shareholders of Mesabi Iron Company.

                    The Trust's status as a grantor trust was confirmed by
                    letter ruling addressed to Mesabi Iron Company from the
                    Internal Revenue Service in 1961.  As a grantor trust,
                    Mesabi is exempt from Federal income taxes and its income is
                    taxable directly to the Unitholders.

          A summary of Mesabi Trust's significant accounting policies follows:

               Investments:

                    The Trust invests solely in U.S. Government securities.
                    Management determines the appropriate classifications of the
                    securities at the time they are acquired and evaluates the
                    appropriateness of such classifications as of each balance
                    sheet date.

                    The U.S. government securities are classified as
                    held-to-maturity securities as the Trust has the positive
                    intent and ability to hold to maturity and are stated at
                    amortized cost.


                                         F-6

<PAGE>

                                     MESABI TRUST

                            NOTES TO FINANCIAL STATEMENTS



Note 1.   Nature of Business, Organization and Significant Accounting Policies
          (continued)

          Revenue recognition:

               Royalty income under the amended lease agreements with NMC
               (Cyprus NMC through September 30, 1994) is recognized as it is
               earned.  Under such agreements, royalties are earned upon
               shipment, regardless of whether the actual sales proceeds for any
               shipment are received by NMC.

               Royalty income under the Peters Lease fee agreement also is
               recognized as it is earned.  Under such agreement, however,
               royalties are earned (at the option of NMC (Cyprus NMC through
               September 30, 1994)) either upon mining of crude ore from Peters
               Lease lands or upon shipment of iron ore product produced from
               Peters Lease lands.

          Fixed property, including intangibles:

               The Trust's fixed property, including intangibles, is recorded at
               nominal values and includes the following:

                    (1)  The entire beneficial interest as assignor in the
                         Amended Peters Lease Assignment and the Amended Cloquet
                         Lease Assignment covering taconite properties in
                         Minnesota which are leased to NMC (Cyprus NMC through
                         September 30, 1994).


                    (2)  The entire beneficial interest in Mesabi Land Trust
                         which owns a 20% fee interest in the lands subject to
                         the Peters Lease and the entire fee interest in other
                         properties in Minnesota.

          Accounting estimates:

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

          Fair value of financial instruments:

               The carrying amounts of financial instruments including cash,
               U.S. government securities, distributions payable and accrued
               expenses approximated fair value as of January 31, 1998 and 1997
               because of the relative short maturity of these instruments.


                                         F-7


<PAGE>


                                     MESABI TRUST

                      NOTES TO FINANCIAL STATEMENTS (Continued)


Note 2.   U.S. Government Securities

          The amortized cost approximates market value as of January 31, 1998
          and 1997.  The securities are classified as held-to-maturity and
          mature as follows:

<TABLE>
<CAPTION>
                                                 January 31, 1998    January 31, 1997
                                                 ----------------    ----------------
          <S>                                    <C>                 <C>
          Due within one year                       $  198,502          $ 2,274,407
          Due after one year through
            four years                                 300,571              210,577
                                                    ----------          -----------
                                                    $  499,073          $ 2,484,984
                                                    ----------          -----------
                                                    ----------          -----------
</TABLE>
 
Note 3.   Unallocated Reserve

          Leasehold royalty income constitutes the principal source of revenue
          to Mesabi Trust.  Prior to August 17, 1989, royalties were based on
          the quantity and iron content of pellets shipped by the then lessee,
          Reserve Mining Company ("Reserve"), from Mesabi Trust properties.
          From May 1986 until July 1990, however, Mesabi Trust did not have any
          royalty income, due principally to the filing of a Chapter 11
          bankruptcy petition by Reserve and the suspension of Reserve's
          operations in 1986.

          On August 17, 1989, Cyprus NMC purchased substantially all of
          Reserve's assets, including Reserve's interest in the Mesabi Trust
          lands, and Mesabi Trust entered into agreements with Reserve's Chapter
          11 Trustee and Cyprus NMC, which modified the method of calculating
          royalties payable to Mesabi Trust and transferred the interest of
          Reserve in the Mesabi Trust lands to Cyprus NMC.  Royalties are now
          determined by both the volume and selling price of iron ore pellets
          and other products sold.


          On September 30, 1994, Cyprus Amax Minerals Company sold its iron ore
          operations, including Cyprus NMC, to Cleveland-Cliffs Inc. (CCI).
          CCI renamed the operation Northshore Mining Corporation (NMC).  CCI is
          among the world's largest producers of iron ore products.

          Pursuant to the amended assignment agreements, NMC (Cyprus NMC through
          September 30, 1994) is obligated to pay Mesabi Trust base overriding
          royalties, in varying amounts constituting a percentage of the gross
          proceeds of shipments, from Silver Bay, Minnesota, of iron ore product
          produced from Mesabi Trust lands or, to a limited extent, other lands.
          NMC (Cyprus NMC through September 30, 1994) is obligated to make
          payments of overriding royalties on product shipments within 30 days
          following the calendar quarter in which such shipments occur.  NMC
          (Cyprus NMC through September 30, 1994) resumed mining operations and
          shipping product from Silver Bay in the second calendar quarter of
          1990, and the first payment of overriding royalties was made in July
          1990.


                                         F-8

<PAGE>

                                     MESABI TRUST

                      NOTES TO FINANCIAL STATEMENTS (Continued)


Note 3.   Unallocated Reserve
          (continued)

          NMC (Cyprus NMC through September 30, 1994) also is obligated to pay
          to Mesabi Trust a minimum advance royalty of $500,000 per annum,
          subject to adjustment for inflation and deflation (but not below
          $500,000), which is credited against base overriding royalties and
          royalty bonuses.  NMC (Cyprus NMC through September 30, 1994) is
          obligated to make quarterly payments of the minimum advance royalty in
          January, April, July and October of each year.  For the calendar year
          ending December 31, 1998, the minimum advance royalty is $636,935.
          The minimum annual advance royalty was $621,606; $610,335; and
          $596,246 for the calendar years ended December 31, 1997; 1996; and
          1995, respectively.

          The unallocated reserve aggregated $719,799 at January 31, 1998, as
          compared with an unallocated reserve of $650,608 and $541,403 at
          January 31, 1997 and 1996, respectively.  During the fiscal years
          ended January 31, 1998, 1997 and 1996, the Trustees distributed cash
          payments totaling $4,854,404 (of $.37 per Unit), $5,182,404 (or $.395
          per Unit) and $3,345,603 (or $.255 per Unit), respectively, of
          beneficial interest in Mesabi Trust.  In addition, in January 1998 the
          Trustees declared a distribution of $.265 per unit of beneficial
          interest which was paid in February 1998.

Note 4.   Summary of Quarterly Earnings (Unaudited)

The quarterly results of operations for the two years ended January 31, 1998 
are presented below:

<TABLE>
<CAPTION>
                                                  Year ended January 31, 1998
                                  --------------------------------------------------------
                                     First           Second        Third           Fourth
                                    Quarter         Quarter       Quarter         Quarter
                                  ----------      ----------    ----------      ----------
          <S>                     <C>             <C>           <C>             <C>
          Revenue                 $  249,745      $1,259,552    $2,331,438      $3,019,634
          Expenses                    65,698          80,811        70,289         145,575
                                  ----------      ----------    ----------      ----------
          Net income              $  184,047      $1,178,741    $2,261,149      $2,874,059
                                  ----------      ----------    ----------      ----------
                                  ----------      ----------    ----------      ----------

          Net income per unit     $ 0.014028      $ 0.089843    $ 0.172344      $ 0.219059
                                  ----------      ----------    ----------      ----------
                                  ----------      ----------    ----------      ----------

<CAPTION>
                                                  Year ended January 31, 1997
                                  --------------------------------------------------------

                                     First           Second        Third           Fourth
                                    Quarter         Quarter       Quarter         Quarter
                                  ----------      ----------    ----------      ----------
          <S>                     <C>             <C>           <C>             <C>
          Revenue                 $  384,542      $1,600,470    $2,694,742      $1,321,389
          Expenses                    74,032          98,606        72,123         136,773
                                  ----------      ----------    ----------      ----------
          Net income              $  310,510      $1,501,864    $2,622,619      $1,184,616
                                  ----------      ----------    ----------      ----------
                                  ----------      ----------    ----------      ----------

          Net income per unit     $ 0.023667      $ 0.114471    $ 0.199895      $ 0.090291
                                  ----------      ----------    ----------      ----------
                                  ----------      ----------    ----------      ----------
</TABLE>
 

                                         F-9