<PAGE>    1
                                       
                                                                            
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-KSB

                                   (Mark One)
 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
                                  ACT OF 1934

                     For the fiscal year ended MAY 31, 1998

                                       OR

 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
                              EXCHANGE ACT OF 1934

                         Commission file number 1-12867

                       TERRA NATURAL RESOURCES CORPORATION
                 (formerly NEVADA MANHATTAN MINING INCORPORATED)
             (Exact name of registrant as specified in its charter)

                   Nevada                              88-0219765
     (State or other jurisdiction of     (I.R.S. Employer Identification Number)
      incorporation or organization)


      5038 North Parkway Calabasas, Suite 100, Calabasas, California 91302
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (818) 591-4400

                    Securities registered pursuant to Section
                               12(b) of the Act:


          Title of each class Name of each exchange on which registered
                 Common Stock, $.01 Par Value OTC Bulletin Board

                        Preferred Stock, $1.00 Par Value

        Securities registered pursuant to Section 12(g) of the Act: None



<PAGE>    2


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months,  and (2) has been subject to such filing  requirements
for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Issuer's revenues for its most recent fiscal year.               $557,691

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
registrant,  based on the average of the high and low prices of the Common Stock
on the OTC Bulletin Board on August 14, 1998, was  $10,276,676.  For purposes of
this  computation,  all officers,  directors,  and 5%  beneficial  owners of the
registrant  (as  indicated  in  Item  12)  are  deemed  to be  affiliates.  Such
determination  should not be deemed an admission that such directors,  officers,
or 5% beneficial owners are, in fact, affiliates of the registrant.

Number of shares of Common  Stock,  $.01 Par  Value,  outstanding  at August 14,
1998, was 33,385,149.

                     Documents incorporated by reference:     None




<PAGE>    3



                   TABLE OF CONTENTS - 1998 FORM 10-KSB REPORT

                                                                       Page
                                                                      Numbers
                                                                    -----------
                                     PART I

Item   1.      Business                                                    3

Item   2.      Properties                                                  6

               Risk Factors                                                27

Item   3.      Legal Proceedings                                           38

Item   4.      Submission of Matters to a Vote of Security Holders         41

                                     PART II

Item   5.      Market for Registrant's Common Equity and Related
               Stockholder Matters                                         42

Item   6       Management's Discussion and Analysis of Financial
               Condition and Results of Operations                         44

Item   7.      Financial Statements                                        47
                                                                       F1-F33

Item   8.      Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure                         48

                                    PART III

Item  9.       Directors, Executive Officers, Promoters and Control 
               Persons; Compliance with Section 16(a) of the Exchange Act  49

Item  10.      Executive Compensation                                      54

Item  11.      Security Ownership of Certain Beneficial Owners
               and Management                                              56

Item  12.      Certain Relationships and Related Transactions              58

Item  13.      Exhibits and Reports on Form 8-K                            59

Signatures                                                                 62

<PAGE>    4
                                     PART I
                                   
                                  1. BUSINESS

Business Development
--------------------

    Terra  Natural  Resources  Corporation  (the  "Company"),   formerly  Nevada
Manhattan  Mining  Incorporated,  was formed on June 10,  1985,  in the state of
Nevada  under the name of Epic  Enterprises,  Ltd. On September  11,  1987,  the
Company  amended  its  Articles  of  Incorporation  changing  its name to Nevada
Manhattan Mining Incorporated.  On May 12, 1998, the Company further amended its
Articles  of  Incorporation   changing  its  name  to  Terra  Natural  Resources
Corporation.

    The Company was originally  formed  primarily to develop a property  located
near the town of Tonopah,  Nevada (the  "Nevada  Property"),  other gold mineral
properties which it had previously  owned,  and certain gold mineral  properties
which it acquired in January and  February,  1997.  Pursuant to prior  action of
both  the  Company's  directors  and  its  shareholders,  certain  gold  mineral
properties  have been abandoned as uneconomic.  The Company in the last eighteen
months has acquired the rights to harvest  various species of hardwoods in up to
774,000 hectares (approximately 1,935,000 acres) of timber properties located on
various tracts of land in the state of Para,  Brazil and  approximately  184,000
hectares  (approximately  460,000  acres) of timber located on tracts of land in
the state of Amazonas,  Brazil (the "Brazilian Timber Properties").  The Company
has also recently  entered into a lease  agreement and is currently  operating a
sawmill facility located near the city of Belem,  Para,  Brazil. The Company has
also acquired the rights to seven (7) gold mining  concessions and four (4) coal
mining concessions in Indonesia.

    A  description  of  the  Company's  timber  business  is  presented  in  the
"Properties" section of this Annual Report.

    The  Company  has its  principal  executive  offices at 5038  North  Parkway
Calabasas, Suite 100, Calabasas, California 91302. Its telephone number is (818)
591-4400 and its facsimile number is 818 591-4411.

    Management  of the  Company  presently  consists of a  five-member  board of
directors  (two of which are neither  executive  officers  nor  employees).  The
Company  employs  two (2)  full-time  executive  officers  as well as seven  (7)
full-time employees at its principal offices.  The Company's  subsidiary,  Terra
Resources  Brazil,  Ltda.,  employs  approximately  90 persons in Brazil who are
employed in various  capacities  relating to its sawmill operations located near
the port city of Belem, Brazil.


<PAGE>    5


The Company's Subsidiaries
--------------------------

    Equatorial Resources,  Ltd.  (hereinafter  "Equatorial") was incorporated in
the British Virgin Islands as an international  business company on December 13,
1996.  Equatorial  currently  maintains offices in Road Town,  Tortola,  British
Virgin  Islands  with  its  primary   business   office  located  in  Calabasas,
California.  Equatorial's  board of directors consists of three (3) members with
such number being able to increase to seven.  Its authorized  capitalization  is
25,000  shares of common  stock and 25,000  shares of  preferred  stock with its
largest single shareholder being Terra Natural Resources  Corporation which owns
99% of Equatorial's outstanding common shares.

    Equatorial's  primary business purpose is the acquisition and development of
timber  producing  property in the Amazon  Basin of Brazil.  Since  Equatorial's
inception,  it has acquired  various  rights to develop  and/or  harvest  timber
properties on up to approximately 950,000 hectares located in the states of Para
and Amazonas, Brazil.

     Terra  Resources  Brazil Ltda.  (hereinafter  "Terra") was  incorporated in
Brazil in May 1998, to replace Equatorial as the operating entity of the Company
in  Brazil.  Terra is owned  99.5% by the  Company  and .5% by  Terra's  sawmill
manager  in  nominee  name  of the  company.  Terra's  address  is  Rod.  Arthur
Bernardes, Km. 9 S/N, Tapana, Belem, Para, Brasil.

    The main purpose of this  subsidiary to the Company is to own,  lease and/or
operate the assets  currently  being  utilized in Brazil to conduct its sawmill,
harvesting and sales operations.  When it commences this line of business, Terra
will also serve to conduct the business of buying and selling  rough sawn timber
produced by other operators (i.e.,  sawmills) and, in some cases,  improving the
timber before resale.  In addition,  as described  elsewhere  herein,  Terra has
entered into a contract with Equatorial.  (also owned by the Company) to acquire
certain equipment and office furniture  previously utilized by Equatorial in its
sawmill operations in Sao Miguel do Guama, Para, Brazil.

    Kalimantan  Resources,   Ltd.  Kalimantan  Resources,   Ltd.,   (hereinafter
"Kalimantan") was incorporated in the British Virgin Islands as an international
business company on September 16, 1996.  Kalimantan  currently maintains offices
in Road Town,  Tortola,  British Virgin Islands with its primary business office
located in Calabasas, California.  Kalimantan's board of directors consists of 3
members  with such  number  being  able to  increase  to seven.  Its  authorized
capitalization  is 1,000 shares of common stock with its sole shareholder  being
Terra Natural Resources Corporation.

    Kalimantan's  primary  business  purpose is to enter into  contracts for the
exploration and if warranted the development and extraction of coal and gold ore
in Indonesia.  Since Kalimantan's inception it has: entered into an agreement to
acquire a  fifty-one  percent  (51%)  interest  in a gold  exploration  property
comprising  10,000 hectares (25,000 acres) located in East  Kalimantan;  entered
into two (2) additional  agreements to acquire an additional six (6) gold mining
concessions  aggregating over 23,400 hectares (58,500 acres) and ) four (4) coal
properties  located  in  Kalimantan,   Indonesia,  comprising  325,800  hectares
(814,500  acres);  and entered into an agreement with Maxwells Energy and Metals
Technology Ltd. to substitute the acquired  original 10,000 hectare property for
a 16,000  hectare  (40,000  acre)  tract  located  elsewhere  on the  island  of
Kalimantan.

<PAGE>    6

                                  2. PROPERTIES

The Company's Business
----------------------

    The Company's  business is the  harvesting  of timber and the  production of
rough sawn lumber and other  finished wood products in Brazil,  the  exploration
and mining of precious metals in Nevada,  and the exploration of precious metals
and coal in Indonesia.  To this end, the Company has acquired  various rights to
develop and/or harvest timber properties on up to approximately 950,000 hectares
located in the states of Para and Amazonas, Brazil; the right to conduct sawmill
operations  at a 3.6  hectare  sawmill  facility  located  near the port city of
Belem, Para, Brazil;  and the right to conduct  exploration  activities on seven
(7) gold properties and four (4) coal properties in Indonesia.

    The Company holds various  rights in and to the  following  properties:  (i)
various timber properties  aggregating up to approximately  774,000 hectares and
sawmill  facilities  located  in the  state of Para,  Brazil  and  approximately
184,000 hectares located in the state of Amazonas, Brazil (the "Brazilian Timber
Properties");  (ii)  twenty-eight (28) patented and one  hundred-eighteen  (118)
unpatented claims aggregating  approximately 1,800 acres (the "Nevada Property")
which are located near the town of  Manhattan,  Nevada  (approximately  45 miles
northeast  of Tonopah,  Nevada);  (iii) seven (7) gold  concessions  aggregating
39,400  hectares  (98,500 acres) which are located in both the gold belt area of
Kalimantan,  Indonesia,  and on the  island of  Sumatra  (see  "Indonesian  Gold
Concessions");  and  (iv)  four  (4)  coal  properties  located  in  Kalimantan,
Indonesia,  comprising  325,800  hectares  (814,500 acres) (the "Indonesian Coal
Concessions"). A more thorough description of the properties is contained within
portions  of  this  section  of  this  Report  entitled  "The  Brazilian  Timber
Properties," "The Nevada Property," and "The Indonesian Concessions."

    Management of the Company  generally  reviews all proposed  natural resource
projects  submitted  by third  parties.  The Company  initially  will be heavily
dependent upon the operations presently being conducted in Brazil.

    The Company has budgeted the sum of One Hundred Thousand Dollars  ($100,000)
from sums  anticipated to be spent for compliance with applicable  environmental
laws. However,  the Company can provide no assurance that the amount so budgeted
for environmental  compliance will be consistent with the amounts actually spent
for  compliance  or  that  the  actual  amount  of  such  compliance  may not be
substantially  greater  than that  which has been  projected  to be spent by the
Company pursuant to the budget.


<PAGE>    7


THE BRAZILIAN TIMBER PROPERTIES

    The Company has acquired  sundry rights in up to 774,000  hectares of timber
properties  located on various  tracts of land in the state of Para,  Brazil and
approximately 184,000 hectares of timber located on a tract of land in the state
of Amazonas, Brazil. In addition, the Company has entered into a lease agreement
and is currently  operating a sawmill  facility  located near the city of Belem,
Para, Brazil.

    The  Company  believes  that its  primary  strengths  are its  strategically
located timberlands,  and its expanding sawmill operations. The Brazilian Timber
Properties contain a variety of timber species of which initially only seventeen
(17) of the most  commercial  of the one  hundred  twenty-five  (125)  available
species have been selected and factored into the Company's  economic  forecasts.
The other  species will be harvested at the  appropriate  time.  The Company has
taken the initial steps in developing a government- managed forestry plan issued
from  an  agency  of  the  Brazilian  federal  government,  which  includes  the
development  of  multi-year  harvesting  schedules.  The Company  has  generated
initial  revenue  from  these   operations  of   approximately   $803,000  since
commencement.

    To date,  approximately  $2.3  million has been  provided by the Company for
initial start-up of its operations in Brazil.

    In  February  1998,  a  dispute  arose  between  the  Company's  subsidiary,
Equatorial,  and Jonasa (see "Jonasa Concessions" in this section). In addition,
the Company  had been  considering  transferring  its  operations  closer to the
principal port in the area, Belem, to sell more of its products for export,  and
consolidating   its  operations  with  the   administration   of  its  Brazilian
operations.  As a result,  Equatorial  and Jonasa  entered into a compromise and
settlement  agreement  which  resulted  in the  removal  of  about  $230,000  in
equipment  from the Sao  Miguel  sawmill  facility  and the  abandonment  of its
operations in Sao Miguel.

    In May 1998, the Company formed a new  subsidiary,  Terra  Resources  Brazil
Ltda.  ("Terra").  Terra and  Equatorial  thereafter  entered  into an agreement
whereby  Equatorial  agreed to deliver its equipment to a sawmill facility owned
by  Tropical  Woods and  located in a suburb of Belem.  On May 15,  1998,  Terra
entered into a lease agreement with Tropical Woods (the "Tropical Woods Lease"),
leased the sawmill  for a minimum of two years and,  on June 8, 1998,  commenced
the processing of Brazilian hardwoods and the production of rough sawn timber.

         The Tropical Woods Lease  requires  Terra (as the entity  designated by
the Company) to pay to the lessor the sum of  approximately  $12,750  (R$15,000)
per month to lease about 3.6 hectares of property and related sawmill  equipment
(the "Facility"),  including a port for the delivery and storage of logs, 2 band
saws, a loader,  forklift,  finishing  and/or  specialty saws, 2 hangars for the
housing of the saws and storage of rough sawn timber,  various ancillary sawmill
equipment and an office  building.  In addition,  Tropical  Woods is required to
deliver a minimum of 2,300 cubic meters (m3) logs of Brazilian  hardwoods,  from
Tropical  Woods'  property   consisting  of  162,982   hectares  of  timberland,
specifically  designated by Terra in order to meet actual or anticipated demand,
which the Company could expand either through  additional  volumes from Tropical
Woods or other sources.

<PAGE>    8

    The Facility presently consists of the port, the office building, one 150 cm
(diameter) band saw to cut log blocks,  one 90 cm band saw to cut the log blocks
into wood planks,  one  multilamina  (brought from Sao Miguel),  one  multiplaca
(brought from Sao Miguel),  one table saw, four destopedeiras (two of which were
brought from Sao Miguel),  one planer,  one portable saw (indespam)  leased from
another  entity,  a loader to  transport  logs from the port to the saws located
within the Facility,  a forklift to transport sawn timber and equipment,  a 1994
Mercedes truck  (previously owned by the Company),  various ancillary  equipment
(carts, rollers, etc.) and the remaining equipment from Sao Miguel not presently
being utilized  (including  carts,  band saws and related  equipment)  which the
Company plans to use in its expansion.

    It is estimated  that the Facility has a current daily  cutting  capacity of
about 50 m3 per day.  During the first month of operation  (from June 8, 1998 to
July 7, 1998),  production  was limited to about 10 m3 per day due in large part
to  resolving  various  operational  bottlenecks  and  improving  the layout and
quality of the facility. During the second month of operation,  daily production
increased  to about 25 m3 per day.  The  Company  projects  that  average  daily
production  will  increase  to at least 40 m3 per day  during  September,  1998.
Further increases are anticipated.

    All of this  revenue has been  reinvested  in  improvements  to the mill and
infrastructure  on the property.  The  Company's  subsidiary,  Terra,  currently
employs  approximately 90 persons to operate the mill and conduct the activities
contemplated  under the agreements  pertaining to these  concessions.  Potential
markets  for the  lumber  include  the Far East,  Brazil,  Europe and the United
States.

    The  description  of  the  Company's  proposed  activities  relating  to the
Brazilian Timber Properties which follows  summarizes and updates the activities
more particularly  described in the 1997 Business Plan which was appended to the
Company's Registration Statement on Form 10.

    Terranorte   Concessions.   On  May  30,  1997,  the  Company's  subsidiary,
Equatorial,  entered  into an  Agreement  to Harvest  Timber and Develop  Timber
Properties with Terranorte S.A. (the "Terranorte Agreement"). Under the terms of
the original agreement,  Terranorte granted to Equatorial the exclusive right to
either  harvest the timber or to purchase  certain  species of logs extracted by
Terranorte which are located on approximately 20,000 hectares of timber property
located near the town of Moju, Para, Brazil. In May 1997,  Equatorial  Resources
began  harvesting  operations  employing its own crews and purchasing  harvested
logs from Terranorte.

    Terranorte and Equatorial have subsequently amended the Terranorte Agreement
to include the rights to harvest up to an additional  390,000 hectares of timber
properties located in the vicinity of the Terranorte property.

<PAGE>    9

    Timberlands.  On April 22, 1998, the Company  entered into an agreement with
Roy  Skluth/Ralph  Financial  ("Skluth")  to acquire  title to land,  containing
approximately  292,598 hectares,  which consists of one large tract in the state
of  Amazonas  and  several  smaller  tracts  in the state of Para.  The  Company
acquired  title to the  property  for the  issuance of  5,000,000  shares of the
Company's  common stock.  The shares were valued at $3,984,375  which represents
the fair market value of the stock at date of  issuance.  The shares were issued
as escrow  shares  contingent  upon  Skluth's  completion  of certain  financial
obligations to the Company and the Company's  completion of its due diligence as
to the proper conveyance of the deeds for the property. Skluth has until October
7, 1998 to complete his financial  obligation to the Company and the Company has
until October 22, 1998 to complete its due diligence.  Also, the Company has the
right to cancel the shares and  rescind  the  acquisition  any time prior to the
completion of its due diligence.  Also, if the stockholder does not complete his
financial obligation to the Company,  then the Company can cancel the shares and
the property remains with the Company.

    The Jonasa Concessions.  On May 30, 1997, Jonasa Navigation, S.A. ("Jonasa")
and Equatorial  Resources  entered with an agreement to jointly  develop various
tracts of timber  properties  comprising up to 276,000  hectares  located in the
state of Para,  Brazil.  Under this  agreement,  Jonasa  granted  to  Equatorial
Resources the  exclusive  right to harvest all of the timber which Jonasa now or
hereafter  has the right to extract from the  properties  comprising  the Jonasa
Concessions.  In consideration of this grant, Equatorial Resources agreed to pay
to Jonasa fifty  percent  (50%) of the net proceeds  received on the sale of all
timber and related  products  produced and sold pursuant to the  agreement.  The
term "net  proceeds" is defined to be the gross sales price  received for lumber
sold,  less the costs of harvesting,  reclamation,  transportation  to the mill,
milling expenses,  physicalization duties, transportation f.o.b. to the ports of
Belem and Breves,  and certain operating  expenses  associated with Equatorial's
operations in Brazil.  The parties also  designated  Equatorial as its exclusive
export agent for all products produced and sold under the joint venture.

    The United  Nations  Food and  Agricultural  Organization  (F.A.O.),  Simons
Corporation  (Canada) and Reid,  Collins &  Associates,  Ltd.  (Canada),  highly
respected  forestry  experts,  have  evaluated  24,000  hectares  of the  Jonasa
Concessions  and have posited that each  hectare  will yield  approximately  200
cubic meters of raw timber.  If these  evaluations  are accurate with respect to
all of the Jonasa  Concessions,  the total  potential asset value of all 276,000
hectares  would be  approximately  55.2  million  cubic  meters of raw  hardwood
timber.  Management projects that a lesser amount of cubic meters of timber will
be extracted per hectare in order to comply with environmental  guidelines being
established by the Company.

    In February 1998, a dispute arose between  Jonasa and Equatorial  concerning
the use and operation of the mill which  Equatorial  was operating in Sao Miguel
do Guama,  Para,  Brazil.  As a result,  a lawsuit was  instituted by Equatorial
concerning the respective  rights of the parties to certain equipment located at
the mill facility under a separate agreement to operate that facility.  In March
1998, the parties  reached a settlement  relating only to the disposition of the
equipment at the sawmill and without  prejudice  to the  parties'  claims to the
balance of the disputes relating to the sawmill.

<PAGE>    10
     
    It is  anticipated  that  Jonasa  will  dispute  Equatorial's  claims to the
cutting  rights on the Jonasa  Concessions  under the  agreement  because of the
disputes  which arose with  respect to the sawmill  operations  in Sao Miguel do
Guama and the agreement relating to that facility. To date, the parties have not
conferred in an attempt to reach a mutually agreeable resolution of all disputes
which  remain,  including  the  continuation  of  cutting  rights to the  Jonasa
Concessions.

    Production at Tapana Sawmill. On June 8, 1998, Terra commenced operations at
the sawmill  previously known as "Tropical Woods." As of July 25, 1998, the mill
had  processed  approximately  1,800 cubic meters of logs which  resulted in the
production   of  463  cubic  meters  of  rough  sawn  timber  with  a  value  of
approximately USD $200,000. As of the latter date,  approximately USD $90,000 in
sales have been made and the  majority  of the balance of the timber so produced
has been pre-sold and is awaiting shipment to Spain in mid-August. Production at
the mill has  steadily  increased  from  about 10 cubic  meters a day during the
first few weeks of  operation  to a  present  production  rate of about 25 cubic
meters per day, absent problems. Additional increases are planned both short and
long term.

    The Tropical Woods Agreement also includes the minimal  monthly  delivery of
at least 2,300 m3 of raw materials for  processing.  Tropical Woods owns 162,982
hectares of  timberland  from which the Company is currently  receiving  its raw
inventory.

    The  Brazilian  Timber  Properties  are  accessible  primarily  by navigable
waterways and raw materials are delivered to the current  sawmill  operations by
discharging  the raw materials from the barges carrying these materials from the
cutting sites directly to the mill which contains its own port.

Government Regulations in Brazil

    Both the federal  government of Brazil and the state governments of Para and
Amazonas  have  adopted  laws  and  standards  relating  to the  harvesting  and
reclamation of forests. The Company and its subsidiaries,  Equatorial and Terra,
have  familiarized  themselves with all of these laws and standards.  These laws
are extensive and have not all been fully  adjudicated  by the courts in Brazil.
At present,  several  agencies have  interpreted many of these laws in different
manners.

    The Company has entered into an  agreement  with  Eco-Rating  International,
Incorporated  ("Eco-Rating"),  Zurich, Switzerland, to better assist the Company
and  its  subsidiaries  in  understanding  and  complying  with  such  laws  and
standards.  Under the terms of its agreement  with the Company,  Eco-Rating  has
agreed to establish an "eco-efficiency  model" designed to enable the Company to
establish  environmental  management guidelines for the conduct of activities on
its Brazilian  Timber  Properties  consistent with all applicable  environmental
laws and standards.


<PAGE>    11


Metsa Cooperation Agreement

    On March 3, 1998,  the Company  entered into a  cooperation  agreement  with
Metsa  Timber   (Helsinki,   Finland)   covering   distribution  and  management
assistance.  Metsa has extensive  experience in the Northern European white wood
business and is part of the Metsaliito  Group..  Metsa has commenced an analysis
of the  ability  of the  Company's  subsidiary,  Terra,  to sell sawn  timber to
markets in western Europe and Japan.  The agreement also provides for management
assistance.


THE NEVADA PROPERTY

    Current  Ownership  Interest.  The Nevada Property  consists of twenty-eight
(28)  patented and one  hundred-eighteen  (118)  unpatented  claims  aggregating
approximately  1,800 acres. The Company believes it has an undivided one hundred
percent  100%)  interest  in the Note and Deed of Trust  underlying  the  Nevada
Property  based  upon the  agreements  described  below in greater  detail.  The
primary areas of current  development are the Litigation Hill Area and the White
Caps Mine Area.  Both areas will be  discussed  in  greater  detail  below.  The
Company  has  identified  1,500  tons to be mined by open pit  methods  at 0.206
ounces per ton of gold of proven and probable  reserves in the  Litigation  Hill
area.  The  Company has sold  approximately  $40,000 of gold  produced  from the
Nevada Property. The Company has not identified any other reserves at the Nevada
properties defined as proven and probable,  but believes  mineralization  exists
due to assays,  extensive  historical  gold  production  and  volumes of assays,
geological, geophysical and geochemical analyses.

    The Company  originally  acquired its rights to the Nevada Property pursuant
to a mining agreement dated April 4, 1987 (the "Nevada Property Agreement") with
Anthony C. Selig and related  entities  (the "Selig  Entities").  On December 9,
1987, the Selig Entities and the Company entered into an amendment to the Nevada
Property  Agreement reducing both the area of interest and the purchase price of
the Nevada Property from Two Million One Hundred Thousand  Dollars  ($2,100,000)
to Six Hundred Thousand Dollars ($600,000) and modifying,  amongst other things,
the schedule of semiannual  payments due from the Company to the Selig  Entities
in consideration of the purchase of the Nevada Property.

    On March 2, 1989, the Company entered into an agreement entitled  "Manhattan
Mining Property Agreement" with Argus Resources, Inc., a Nevada corporation, and
Argus Mines, Inc., a Nevada corporation (the "Argus  Companies");  and the Selig
Entities (the "Nevada Mining Agreement").  This agreement was entered into after
a dispute had arisen between Argus Resources, Inc., and the Selig Entities under
the lease/purchase agreement which had been previously entered into between such
parties and which originally formed the basis upon which the Company derived its
rights  to  the  Property.  This  agreement  also  modified  certain  terms  and
conditions contained within the Nevada Property Agreement.

<PAGE>    12

    Under the terms of the Nevada Property  Agreement,  as amended,  the Company
was  required to pay, and did pay, to the other  parties the sum of  Twenty-Five
Thousand  Dollars  ($25,000) upon  execution of the agreement.  The Company also
agreed to pay the Argus  Companies the additional sum of One Hundred  Sixty-Five
Thousand  Dollars  ($165,000)  in monthly  installments  of Seven  Thousand Five
Hundred Dollars ($7,500) commencing on April 15, 1989, and continuing thereafter
until  the  entire  sum was paid in full.  The  Nevada  Property  Agreement,  as
amended, further required the Company to issue 100,000 shares of Common Stock as
additional consideration to Argus Resources,  Inc. In fact, the Company paid the
Argus  Companies,  Inc., and the Selig Entities all amounts due under the Nevada
Property  Agreement,  as amended,  and issued  100,000 shares of Common Stock to
Argus Resources, Inc.

    Pursuant to the terms and conditions of the Nevada  Property  Agreement,  as
amended,  the Argus Companies executed a Corporation  Quitclaim Deed conveying a
forty percent (40%) undivided  interest in the Nevada Property to the Company on
March 9, 1989. Concurrently therewith, the Company delivered a Deed of Trust and
Assignment  of Rents  (the "Deed of  Trust")  to the Selig  Entities  to further
secure the obligations under the Nevada Property  Agreement.  This Note and Deed
of Trust has been paid in full by the  Company  in March and June,  1997 and was
delivered to the Company.  Both the  Corporation  Quitclaim Deed and the Deed of
Trust were duly  recorded  in the  office of the  county  records by and for Nye
County, Nevada.

    The Company had  previously  entered  into a Joint  Venture  Agreement  with
Marlowe Harvey/Maran Holdings, Inc. ("Marlowe Harvey");  Argus Resources,  Inc.;
and the Selig Entities  respecting the Nevada  Property.  Under the terms of the
Joint  Venture  Agreement,  Marlowe  Harvey was entitled to a fifty-one  percent
(51%)  interest  in the Nevada  Property  in  consideration  of  Marlowe  Harvey
assuming certain  obligations,  including the purchase of the Deed of Trust from
the Selig  Entities.  The remaining  forty-nine  percent  (49%)  interest in the
Nevada Property was to be held equally by Argus Resources, Inc., and the Company
in  consideration  of their  payment of their pro rata share of all  amounts due
under the  promissory  note (the  "Nevada  Note")  secured  by the Deed of Trust
created by the Nevada  Property  Agreement,  as  amended.  The failure of either
Argus  Resources,  Inc.,  or the  Company to pay any  amounts due under the note
during the first year of the joint venture was to be deemed a default  requiring
the  defaulting  party to quitclaim  its interest in the Nevada  Property to the
remaining parties. The Argus Companies, Marlowe Harvey and the Company were also
responsible for their pro rata share of all property development expenses.

    On October 20, 1995,  the Company and Mr. Harvey "as an  individual  and for
Maran  Holdings and Argus  Resources"  executed an agreement (the "Amended Joint
Venture  Agreement")  which  purports  to amend  the  June  1993  Joint  Venture
Agreement.  The Amended  Joint Venture  Agreement  obligates  Marlowe  Harvey to
convey to the  Company  within  ten (10) days of the date of  execution  of such
Agreement  fifty-two  percent (52%) of the outstanding and issued stock in Argus
Resources, Inc.("Argus"), in exchange for the payment of One Hundred Forty-Seven
Thousand Dollars ($147,000) to be paid in the future from a percentage of Argus'
share of the net  proceeds  realized  from the  sale of gold  production  on the
Nevada Property. In addition, Marlowe Harvey agreed to convey a one percent (1%)
interest in the Nevada  Property  to the  "management"  of the Company  (Messrs.
Michaels  and  Kramer) in exchange  for a  "production  payment" of  Forty-Seven
Thousand  Dollars   ($47,000)   likewise  to  be  paid  from  future  production
attributable  to Argus  Resources,  Inc. It was,  and is, the  intention  of the
Company's  officers  to convey  their  rights  under the Amended  Joint  Venture
Agreement  to the  Company in  exchange  for the  Company's  assumption  of such
officers' obligations under such Agreement.

<PAGE>    13

    Both the obligations of the Company and its officers under the Amended Joint
Venture  Agreement were to be secured by the pledge of Common Stock (in the case
of the Company,  1,235,429  shares) with "piggyback"  registration  rights to be
granted to  Marlowe  Harvey in two (2) years in the event  $147,000  is not paid
from  production  by that time. If only a portion of the  production  payment is
made by October 20, 1997, the obligation to seek  registration was to be ratably
reduced.  The  Company was further  required  to issue  1,186,981  shares of its
Common Stock to Maran  Holdings,  Inc.,  an  affiliate of Argus,  at the time at
which it was  obligated  to issue to Argus the shares to be used as security for
the production payment.

    The Amended Joint Venture  Agreement  also required both the Company and its
joint  venture  partners to each make  one-half of the  property tax and BLM fee
payments and the payments due to the Selig  Entities  under the Nevada  Property
Agreement.

    In January  1996,  the  Company  notified  Marlowe  Harvey  that it had been
"ready,  willing,  and able" to convey the Common Stock pursuant to the terms of
the Amended Joint Venture  Agreement.  In addition,  the Company made all of the
required  property tax payments relating to the Nevada Property and the payments
due to the  Selig  Entities  in  reliance  upon the terms of the  Amended  Joint
Venture  Agreement.  Marlowe  Harvey has failed to reimburse the Company for its
one-half  share of the property tax and BLM fee payments and the payments due to
the Selig  Entities  which were  advanced  on its behalf by the  Company and has
failed to make the  conveyances  required  by the terms  and  conditions  of the
Amended Joint Venture  Agreement.  As a result, the Company instituted an action
in Nye  County,  Nevada,  on  November  4,  1996,  originally  seeking  specific
performance  and damages against  Marlowe  Harvey,  Maran Holdings Inc.,  Calais
Resources Inc., and Argus  Resources,  Inc. The Company has recently amended the
complaint  to seek a  judicial  determination  that  the  Harvey  Entities  have
forfeited  all  rights  in and to the Joint  Venture  Agreement  and the  Nevada
Property.  This action is described in further  detail under the Section of this
Report entitled "LEGAL PROCEEDINGS." Depending on the outcome of the action, the
Company will either own 100% of the Nevada  Property if  successful or 50% if it
does not prevail. Regardless of the outcome the Company will continue to operate
its portion of the Nevada Property.

    In March 1997, the Company  entered into a Sale and Purchase  Agreement with
the Selig Entities.  The Selig Entities were the original owners of the patented
and unpatented  mining claims  comprising the Nevada Property,  having perfected
their rights to ownership  pursuant to Federal and local law. Under the terms of
this  agreement,  the Selig  Entities  agreed to sell to the Company one hundred
percent (100%) of their interests in the Nevada Note, the Deed of Trust, and the
Nevada  Property  for the sum of Three  Hundred  Seventy Five  Thousand  Dollars
($375,000) payable as follows:  One Hundred Thousand Dollars ($100,000) in March
1997 and the balance  plus all accrued and unpaid  interest  (calculated  at the
rate of 5.25%) on or before February 6, 1999. The Company in fact paid the first
installment of One Hundred Thousand Dollars ($100,000) in March 1997 and prepaid
the remaining  balance in June 1997. As a result,  all  obligations to the Selig
Entities  have been  fulfilled by the Company and the original  note and deed of
trust have been  delivered by the Selig  Entities to the Company.  The agreement
also acknowledges that the Company is the only person or entity legally entitled
to conduct  mineral  operations  on the  Nevada  Property.  The  Company is also
required  to pay all U.S.  Bureau of Land  Management  annual  maintenance  fees
associated with the claims  comprising the Nevada Property.  Such fees have been
paid by the Company through August 1999.

<PAGE>    14

    The Company  entered into a Subscription  Agreement with Silenus  Limited on
April 14,  1997  (the  "Subscription  Agreement").  The  Subscription  Agreement
required  the  Company to grant to Silenus  Limited a  $2,000,000  deed of trust
encompassing  the Nevada  Property  until the  Debentures  issued to Silenus are
converted,  redeemed or paid in full.  The Company  has  neither  delivered  nor
recorded this deed.

    The Company entered into an agreement with Royal Gold,  Inc.  ("Royal Gold")
on  December  17, 1997  whereby  Royal Gold  agreed to  undertake  a  three-year
exploration program at the Company's Nevada Property.  Royal Gold is required to
pay all underlying  property  maintenance  fees and expend $100,000  annually in
exploration  during the term of the  agreement.  At its  option,  Royal Gold can
extend the agreement  year-to-year after the initial period and can purchase the
Company's interest in the Nevada properties for a cash price of $5,000,000.  The
Company  retains a 4% net  smelter  return  royalty  and its  right to  continue
development of the underground  areas.  Royal Gold elected not to pay the August
1998 required  maintenance fees and,  therefore,  the status of the agreement is
uncertain.

    Property  Description.  The Nevada Property is located in an historic mining
district which has experienced  mining  operations from 1866 to the present with
the major  activity in the late 1860s,  between 1906 and 1921,  and from 1960 to
the present. Placer and lode mining took place principally in the Reliance Mine,
the White Caps Mine,  the Union  Amalgamated  Mine,  the Manhattan  Consolidated
Mine, the Earle Mine, the Big Four Mine, and the April Fool Mine.

    The Nevada  Property lies in several shallow gullies in a general area which
is located  between  7,500 to 7,800  feet in  elevation.  Mineralization  of the
Nevada Property  appears to be  structurally  controlled by a series of parallel
east-northeast  trending faults dipping from 50 to 75 degrees southwest and with
some cross or perpendicular faults. The Nevada Property consists of two distinct
areas  which  require   different   mining  and  production   techniques.   Gold
mineralization in the vicinity of "Litigation Hill" is near the surface and much
less expensive to mine. The lower grade  mineralization  can be "leached"  while
higher grades must be milled. Gold mineralization located in the White Caps Mine
has revealed two  delineated  mineralized  areas below the 600-foot  level and a
deeper exploration target requiring substantially higher costs for extraction as
compared to "Litigation  Hill."  "Dewatering"  the mine and driving a decline to
the 800-foot  level could become quite  costly.  Additionally,  any ore obtained
from the  White  Caps  Mine may be  required  to be  processed  using  autoclave
technology  or  other  proven  methods  in order to  comply  with  environmental
regulations  due to the  mineralization's  high  content of  antimony,  mercury,
arsenic,  and  sulphur;   nevertheless,  the  Company  believes  that  the  deep
mineralized  area  located  within  the  White  Caps  Mine may  have  sufficient
potential to justify the large development  program.  Both the "Litigation Hill"
and White Caps Mine areas of the Property will be discussed below.

<PAGE>    15

    The White Caps Mine is located in the Manhattan Mining District.  Production
of gold began in 1911 and  remained in  production  until 1935 when the vein was
lost and the lower  levels of the mine  encountered  water.  A total of  120,000
ounces of gold were produced during that period.  The mine was closed in 1942 by
government order relating to all "mining  activities  nonessential to the [World
War II] effort."

    The mine was found to be flooded  from its deepest  point at the  1,300-foot
level to the 450-foot  level.  Beginning in 1957, a $400,000  program was put in
place to "dewater,"  renovate,  and reactivate the mine.  Pumping of water began
that year and by 1958, the water level was down to the 800-foot  level.  At that
time some  exploration  resumed at the upper levels of the mine. At the 300-foot
level,  antimony-mercury  mineralization  grading  60  percent  and  8  percent,
respectively, was discovered.

    An extensive  antimony deposit (also containing gold and mercury values) was
located near the 500-foot  level and plans were made to begin mining  activities
after the renovation of the mine was completed.  While continuing to explore for
gold  mineralization  on the lower levels of the mine, the owners leased out the
right to mine antimony-gold-mercury  mineralization above the 600-foot levels in
1962 and production thereafter began.

    A diamond drilling program in 1962 relocated the gold-bearing vein which had
been lost in 1935 when it faulted  out at the  600-foot  level.  Drilling of the
formation began at the head of the winze (i.e. incline shaft) and continued down
to the 1,200-foot level. Eight  regularly-spaced holes of approximately 100 feet
in length were drilled.  These holes  revealed a gold  mineralized  area 65 feet
wide with  values  ranging as high as 7.7 ounces  per ton and  averages  over .8
ounces per ton. This mineralization is found in the foot wall of the old winze.

    The next phase of the 1962 drilling program  consisted of diamond drilling a
"hole" starting at the 1,200-foot  level. Six holes of approximately 100 feet in
length each were drilled and revealed  gold values  averaging  over 3 ounces per
ton with a high of 6 ounces per ton.  This  drilling  program  blocked  out gold
mineralization  of  over  14,000  ounces  of  gold  according  to a 1964  report
published by the California  Mining  Journal.  The program also indicated that a
mineralized  area containing  several hundred thousand ounces of gold is present
in the  relocated  vein which runs from the 600-foot  level down to the 800-foot
level and from the 1,200-foot level down to at least the 1,300-foot level.

    Before production could begin, a fire was accidentally  started by a pumping
subcontractor  at the 300-foot  level.  The ore bins,  shaft and head frame were
destroyed  and the mine was closed in 1964.  The low price of gold (then $35 per
ounce), high costs to rebuild the damaged mine, and the lack of funds caused the
White Caps Mine to close in 1964,  and it has  remained  closed since that time.
The Company's plans include  reentering this mine and resuming gold  exploration
and production.

<PAGE>    16

    By contrast,  "Litigation  Hill" was the site of both Earle and Consolidated
Mines,  all early producers of high-grade  areas until the veins ran out. Recent
geomagnetic   activity  and  a  drilling  program  have  located  several  small
commercial-sized  deposits  of  medium-grade  gold  mineralization  which can be
either milled or heap leached.

    The Company has conducted a geophysics and geochemical survey of "Litigation
Hill." A Schlumberger resistivity survey indicated gold mineralization down to a
depth of 1,000 feet (the limit of the instrument's  sensitivity).  Bulk sampling
conducted  by Nevada  Gold  Fields and the Placer  Management  Group of the mine
dumps remaining at these mines indicated an overall average grade of .206 ounces
of gold per ton.

    The 1987  exploration  of underground  workings on "Litigation  Hill" showed
that the Earle Mine had  experienced  massive  cave-ins.  Two samples were taken
from channel cuts. These samples, which were performed by Nevada Gold Fields and
the Placer  Management  Group,  indicated values of .120 ounces of gold per ton.
The Bath Mine was  accessible  through a stope which leads  directly to the main
haulage   decline.   Channel  cut  samples   were  taken  on  pillars   left  in
previously-worked  stopes.  Values  varied from .64 to 1.288  ounces of gold per
ton.

    The  Company  initiated a rotary  drilling  program in 1988.  Holes  drilled
pursuant to the program  varied in depth from 200 feet to 525 feet.  Gold values
located in the carbonates at a depth of 70 feet indicate that open pit mining is
suitable for the lower grade present.

    The Company commenced an exploration program during the years 1989 and 1990.
This  program  consisted  of two  parts:  conducting  a  magnetic  survey of the
property and drilling 25 reverse circulation  drill-angle holes varying in depth
from 50 to 150 feet. The magnetic survey identified the areas around "Litigation
Hill" and the White Caps Mine as strong  targets  for further  exploration.  The
drilling program located several areas of gold mineralization.

    In September  1993,  the then joint venture  partners  began a decline (i.e.
tunnel) in order to  intercept  a drill hole which had been  drilled by Freeport
Mining  Company in 1983.  The drill hole revealed that from 465 feet to 505 feet
below the surface,  an average gold grade of .886 ounces of gold per ton over 40
feet  existed.  The  decline was  completed  during the Spring of 1994 and drill
stations were prepared.  Exploration and drilling activities  commenced and were
ongoing until October, 1997. The decline is approximately nine feet by nine feet
and  runs at an  approximate  twelve-degree  grade.  At the  500-foot  level,  a
turnaround or transfer bay has been added to enable the operators of the mine to
successfully remove ore in a cost-effective method.

    The 1993 drilling  program also included the mapping and sampling of the old
workings  of the  Consolidated  Mine  (which  was closed in 1939) as well as the
drilling and sampling of the decline itself in the immediate potential ore zones
contained within the decline.

<PAGE>    17

    The Nevada  Business Plan. In July 1995, the Company engaged the services of
William R. Wilson, a minerals industry consultant,  to prepare a plan to develop
the Nevada  Property  (the  "Nevada  Business  Plan").  According  to the Nevada
Business Plan, two  alternative  plans for  exploration  and  development of the
Property  exist.  The first plan would extend the existing  decline in the White
Caps Mine to the  565-foot  level,  rehabilitate  and mine old  workings  in the
Consolidated Manhattan Mine, drift and mine a new area near the drill hole which
was intercepted by the decline formed during the 1993 program,  rehabilitate the
White Caps Shaft, and mine the 565-foot level,  670-foot level,  800-foot level,
910-foot level,  1,120-foot level, 1,200-foot level, and 1,300-foot level of the
White Caps Mine.

    According  to  the  Nevada  Business  Plan,  the  major  advantage  to  this
alternative  would be that  access  to the lower  levels of the White  Caps Mine
would be  considerably  improved.  It is  anticipated  that the lower levels may
yield higher grades as compared to the yields  anticipated  at current levels of
the mine.

    The second  alternative  identified in the Nevada Business Plan would extend
the decline in the White Caps Mine to the 565-foot level,  rehabilitate and mine
old workings in the Consolidated  Manhattan Mine, drift and mine a new area near
the drill hole  which was  intercepted  by the  decline  formed  during the 1993
program,  mine the  565-foot  level  only in the White Caps  Mine,  and  conduct
underground  sampling in the White Caps Mine in the 670-foot through  1,300-foot
levels.

    The Nevada Business Plan identifies the major advantage to this  alternative
to be  significantly  reduced  capital costs  combined with the  opportunity  to
sample  underground  the White Caps Mine without  rehabilitating  the White Caps
shaft. The disadvantages of this alternative are that mining access to the lower
portions of the White Caps Mine may not be completed,  and it is still not known
whether access can be obtained to each of the levels below the 560-foot level.

    Cash flow analyses  pertaining to both alternatives  project a positive cash
flow for the initial development. Management utilized these analyses in reaching
a decision to proceed with the second alternative.

    The cash flow  calculations  are on a "cash basis," an industry  standard in
comparing mining operations.  The cash basis includes exploration,  development,
equipment,  mining, hauling, processing, and refining costs. Some overhead costs
were not  included  in the cash flow  analysis as of the time the  analysis  was
prepared  because the Company had not  determined  what its actual  mine-related
overhead costs would be. A ten percent allowance for general and  administrative
expenses  was  included.  Since the Company used a mining  contractor,  Harrison
Western  Construction  Company,  the  majority of the mine  related  overhead is
included in the contractor's  cost. The costs of the Company's on-site geologist
and project manager are included as the 10% general and administrative  costs in
the cash flow analysis.  The following major  assumptions  were used in the Cash
Flow projections:

<PAGE>18

    o    Gold price of $390.

    o    Mining costs of $43 per ton.

    o    Processing and environmental costs of $15 per ton.

    o    Mining General and Administrative costs of $6 per ton.

    o    Refining charges of $2 per ounce.

    The Nevada Business Plan concludes by recommending the second alternative as
the preferable  alternative for the Company to follow. In June 1996, the Company
initiated the second alternative by contracting with Harrison Western Mining and
Construction Company, Lakeland, Colorado, to execute this plan.

    In July 1995, the Company  notified  Marlowe  Harvey and related  companies,
then the  operator  of the  Nevada  Property,  that  Marlowe  Harvey  was not in
compliance with contractual  operations  under the Nevada Property  Agreement as
well as several applicable mining laws and regulations. At that time the Company
assumed the position of operator and continues to act in this capacity.

    All  permits  for this  operation  have been  issued,  and the Company is in
compliance with all state, federal, and environmental regulations to the best of
its knowledge and belief.

    Initially, the Company's operations in Nevada will be heavily dependent upon
the mill  constructed  approximately  one mile from the Nevada Property which is
currently owned and operated by New Concept Mining,  Inc. ("New  Concept").  The
Company  presently  intends  to use the New  Concept  mill for  milling  the ore
produced  from the  Nevada  Property  and  selling  gold  bullion  dore  bars or
concentrate  for sale to  third-party  buyers.  Under the terms of an  agreement
entered  into with the  Company,  New  Concept has agreed to provide the Company
with the  capacity to  initially  process  between  1,000-1,200  tons of ore per
month.  New Concept has also agreed to  increase  processing  capacity  once the
Company's  development  program  expands.  The Company also has had  preliminary
discussions  with New  Concept  to  purchase  up to one half of the mill.  These
discussions have not resulted in a binding agreement between the Company and New
Concept.

    The  Company  has also  budgeted  the sum of One  Hundred  Thousand  Dollars
($100,000) to be spent in the foreseeable  future for compliance with applicable
environmental  laws.  However,  the Company can  provide no  assurance  that the
amount so budgeted for  environmental  compliance  will be  consistent  with the
amounts  actually  spent  for  compliance  or that  the  actual  amount  of such
compliance may not be  substantially  greater than that which has been projected
to be spent by the Company pursuant to the budget.

    Over the past four (4) years,  the Company has expended  approximately  $1.8
million dollars on development  expenses on or relating to the Nevada  Property.
These expenses relate  primarily to developing the most effective means by which
to establish commercial ore bodies and production.

<PAGE>    19

    Currently,  there are no ongoing  development  operations at this  property.
Management  cites a  depressed  world gold  price and  better  use of  available
capital, most notably its Brazilian Timber Operations.  Future plans include the
conclusion  of the decline  accessing  the White Caps Mine and  subsequent  gold
production, assuming commercial gold grades and operations can be established.

    In  accordance  with  SEC  Industry  Guide  7  and  Statement  of  Financial
Accounting Standards No. 121, the Company has provided an impairment against the
Nevada properties of $2,894,000. The balance of the capitalized capital costs of
the Nevada Property of $2,936,000 represents acquisition costs of $2,525,000 and
capital  development costs of $411,000.  The capitalized  development  costs, in
turn,  are  limited  to the  proven/probable  reserves  contained  in the Nevada
Property. The proven/probable reserves are based on a revised report prepared by
Mr.  Wilson in January  1998 (see page 11, this  Section).  This report used the
same  information  contained in the Nevada Business Plan with  adjustments for a
$300 gold price and additional  drilling on the Nevada Property since the Nevada
Business Plan was written in 1995.


THE INDONESIAN CONCESSIONS

    General.  In August 1996, the Company entered into an agreement to acquire a
fifty-one  percent  (51%)  interest in a gold  exploration  property  comprising
10,000  hectares  (25,000  acres)  located in East  Kalimantan,  Indonesia  (the
"Kalimantan Property").  In January and February, 1997, the Company entered into
two (2)  additional  agreements  to acquire an  additional  six (6) gold  mining
concessions  aggregating over 23,400 hectares (58,500 acres) and ) four (4) coal
properties  located  in  Kalimantan,   Indonesia,  comprising  325,800  hectares
(814,500  acres).  In January 1997,  the Company and Maxwells  Energy and Metals
Technology  Ltd., a Bahamian  Company  ("Maxwells"),  agreed to  substitute  the
original  10,000 hectare  property  (i.e. the Kalimantan  Property) for a 16,000
hectare  (40,000 acre) tract (the "Sopang  Property")  located  elsewhere on the
island of Kalimantan.  In May 1998, for no additional  consideration,  Singkamas
assigned its interests in one  additional  coal  property to the Agreement  with
Nevada/Kalimantan (see Mecfa Property).  Ownership of the Indonesian Concessions
will be acquired through the Company's wholly-owned  subsidiary formed under the
laws  of  the  British  Virgin  Islands  known  as  Kalimantan  Resources,  Ltd.
("Kalimantan  Resources").  NONE OF THE  PROPERTIES  IDENTIFIED  ABOVE  HAVE ANY
PROVEN  AND  RECOVERABLE  RESERVES  BASED ON  GUIDELINES  ESTABLISHED  UNDER SEC
INDUSTRY GUIDE 7.

    Mineralization of the Indonesian islands known as Kalimantan (the Indonesian
section of Borneo)  and  Sumatra  occurred as a result of rifting of the earth's
crust at the ocean floor.  There are  approximately  fifteen  known  mineralized
"arcs"  comprising all of Indonesia.  Six (6) of these arcs contain the majority
of the gold and copper deposits currently  discovered in Indonesia.  The Central
Kalimantan Arc is the area which has evidenced the majority of recent  attention
of  mineral  exploration  efforts  although   significant  work  is  also  being
undertaken  in other areas.  Located  within the Central  Kalimantan  Arc is the
Kelian  Mine  which has been  operating  since 1992 and  produces  approximately
450,000  ounces of gold per annum from ore grading  approximately  1.8 grams per
tonne of gold. Over seventy (70) tonnes of gold has been produced to date. Based
upon current  estimated  reserves,  the mine is scheduled to operate until 2003.
Further south is the Mt. Muro Mine. Production for 1996 at this mine was 187,000
ounces of gold. At present,  it is impossible to predict  whether the Indonesian
Concessions  possess any recoverable  reserves of gold ore or whether the yields
noted in the  above-described  mines  will be  indicative  of the  yields  to be
established on the Indonesian Concessions.

<PAGE>    20

    Three (3)  agreements  cover the various  concessions  which the Company and
Kalimantan  Resources  have  acquired:  (i) the  Principles  of Agreement by and
between the Company and Maxwells,  as amended;  (ii) the  Acquisition  Agreement
dated January  26,1997 by and between  Kalimantan  Resources and Singkamas Agung
Ltd.;  and (iii) the  Acquisition  Agreement  dated  February 18,  1997,  by and
between Kalimantan Resources and Kalimas Jaya Ltd.

    Current  political and economic  conditions in Indonesia  have curtailed the
Company's  activities in the region over the past year.  This may have an impact
on the viability of the Company's  projects in the region.  The Company recently
commenced  additional  activities  related  to one of its coal  properties  (see
"Mecfa Property" more particularly  described hereafter) by organizing available
data and making  that data  available  to one or more  potential  joint  venture
partners in a series of discussions and meetings in both the Company's corporate
offices in California and Singapore,  as well as follow-up  meetings in Jakarta,
Indonesia for the purpose of reviewing  available  geological,  permit and title
data. These current  activities are for the purpose of establishing  exploration
programs and,  subsequently,  the potential for commercial  viability  through a
joint venture with a partner/operator.

    In  accordance  with  SEC  Industry  Guide  7  and  Statement  of  Financial
Accounting Standards No. 121, the Company has provided an impairment against the
Indonesian  properties  of  $227,000 as of May 31,  1997.  This  represents  the
exploration  expenditures  as of  December  31,  1996 as the  properties  do not
contain any proven or probable reserves. In addition, for the year ended May 31,
1998,  the  Company  has  taken a  write-down  for the  Sopang  Gold  Concession
acquisition cost of $1,200,000.

    The  Sopang  Property.  The  Company  acquired  its  interest  in the Sopang
Property pursuant to a document entitled  "Principles of Agreement" dated August
19, 1996  ("POA").  The parties to the POA are  Maxwells  and the  Company.  The
Company and Maxwells  originally agreed to conduct  exploration  activities on a
10,000 hectare tract,  but pursuant to an addendum to the POA,  substituted  the
16,000 hectare Sopang Property.

    In  exchange  for a  fifty-one  percent  (51%)  interest  in the  concession
relating to the Sopang  Property,  the Company agreed to convey to Maxwells Four
Hundred Thousand (400,000) shares of its Common Stock. In addition,  the Company
must issue an additional Four Million  (4,000,000) shares of its Common Stock to
Maxwells should an investment  banker confirm by independent  appraisal that the
Sopang  Property is valued to be at least Twelve  Million  Dollars  ($12,000,000
U.S.) and/or such investment banker provides financing to the Company based upon
an evaluation of at least Twelve Million Dollars  ($12,000,000 U.S.) or upon the
appreciation of the Common Stock in an aggregate amount exceeding Twelve Million
Dollars  ($12,000,000) within ninety (90) days of an announcement by the Company
of its  acquisition  of the Indonesian  Property.  A provision of the POA allows
Maxwells to obtain a "nondilutive"  percentage  ownership in the Common Stock to
be issued under the POA should the Sopang  Property  produce at least  2,000,000
ounces of gold.

<PAGE>    21

    While the Company was entitled to defer  exploration  activities for six (6)
months,  exploration  activities  commenced but are currently not ongoing on the
Sopang Property.

    Under the POA, the Company is responsible  for one hundred percent (100%) of
all exploration and operating expenses relating to the Sopang Property.

    Maxwells  has  agreed  to  provide  a voting  trust  in  favor  of  existing
management.  Maxwells is not, however, required to vote its shares with existing
management in connection  with the  registration of Common Stock issued or to be
issued to Maxwells.

    The  Company has  undertaken  efforts to confirm the chain of title which it
believes to exist with respect to the Sopang Property.

    West   Kalimantan   Gold  Project.   On  January  26,  1997,  the  Company's
wholly-owned  subsidiary,  Kalimantan  Resources,  entered  into an  Acquisition
Agreement  with  Singkamas  Agung Ltd.,  a Bahamian  corporation  ("Singkamas"),
relating to one (1) gold mining concession and three (3) coal mining concessions
located in Kalimantan, Indonesia (the "Acquisition Agreement").  Singkamas is an
affiliate  of Maxwells and is owned and  controlled  by the same persons who own
and control Maxwells.

    The gold mining concession subject to the Acquisition Agreement relates to a
62-hectare  (155-acre)  tract  located  in West  Kalimantan  and is known as the
"Silobat  Property" (which has been expanded to 2,000 hectares).  Currently,  PT
Kajiwahida  Mandiri,  an Indonesian limited liability company ("PT Kajiwahida"),
holds a Kuasa Pertambangan  Eksploitasi license ("KPE") and a Kuasa Pertambangan
Pengangkutan and Penjualan license ("KPPE") issued by the Indonesian Directorate
General of General  Mining  and the  Ministry  of Mines and Energy on October 7,
1996. On December 21, 1996, PT  Kajiwahida  entered into a Mining  Authorization
Transfer  Agreement with PT Duta Sena Rahayu,  an Indonesian  limited  liability
company ("PT Duta"),  whereby PT Kajiwahida  agreed to transfer its KPE and KPPE
licenses to PT Duta in exchange for $5,000,000  payable as follows:  $100,000 at
the time of execution of the Acquisition Agreement; four consecutive installment
payments of $100,000 each on the fourth days of February,  March,  April and May
1997;  and a final  payment of  $4,500,000 at such time as official test results
from  exploration  activities  demonstrate  the existence of at least  2,000,000
ounces of gold reserves.  Should exploration  activities reveal gold reserves of
less than 2,000,000  ounces,  the final payment is to be adjusted in relation to
the amount of gold  reserves so  established.  In addition,  PT  Kajiwahida  was
obligated to seek the appropriate  governmental authority to expand its licenses
to include a 2,000-hectare  tract  contiguous to the 62-hectare  tract currently
comprising the Silobat Property.

<PAGE>    22

    On December 21, 1996, the  shareholders of PT Duta and Kalimantan  Resources
entered  into a  Cooperation  Agreement  whereby in exchange  for  assuming  the
financial  responsibilities under the Transfer Agreement, the shareholders of PT
Duta agreed to hold the shares of such limited liability company for the benefit
of Kalimantan  Resources.  On the same date, Kalimantan Resources entered into a
Participation  Agreement with Singkamas whereby  Kalimantan  Resources agreed to
grant to Singkamas a net profits  interest  derived from the exploitation of the
Silobat Property.

    The Acquisition  Agreement with Singkamas requires  Kalimantan to secure the
issuance by the Company of Four  Million  (4,000,000)  shares of Common Stock as
follows:  Two Hundred  Thousand  (200,000)  upon  execution  of the  Acquisition
Agreement  and the  balance to be issued  upon  verification  by an  independent
evaluation  that the value of the Silobat  Property and the three (3) Indonesian
Coal  Concessions  equal or exceed Forty Million Dollars  ($40,000,000).  In the
case of the initial  issuance  of shares and  twenty-five  percent  (25%) of the
balance of the shares of Common  Stock to be issued,  Singkamas  is  entitled to
"piggyback"  registration  rights.  The Company has issued Two Hundred  Thousand
(200,000)  shares of its Common Stock to Singkamas as of the date of this Annual
Report.

    To date,  no funds have been  transferred  by Kalimantan to PT Kajiwahida or
any other  party.  However,  Kalimantan  Resources  has been given  authority to
conduct trenching and pitting and has conducted  preliminary  mapping,  sampling
and trench hole pitting  under the  supervision  of Behre  Dolbear & Co. for the
purpose of  evaluating  the Silobat  Property.  Under the  supervision  of Behre
Dolbear,  three  separate  sampling  programs  were  conducted  at  the  Silobat
Property.  Based on that work which  indicates  the presence of  anomalous  gold
values in four sampling  pits,  the Company  intends to initiate a core drilling
program at the Silobat  Property,  but as of May 31,  1998,  the Company has not
initiated the drilling or development activities.  Recent political and economic
conditions  in the region have impacted the  Company's  plans to commence  these
activities.

    The Company  (through  its  association  with  Singkamas)  is  currently  in
negotiations with PT Kajiwahida to amend the terms of the Acquisition  Agreement
to reflect  the accord  reached by the parties to enable  Kalimantan  to conduct
further  exploration  activities  on the  Silobat  Property  and to  forego  any
payments  due under the  Acquisition  Agreement  until  such time as  conditions
improve.

    The Silobat Property forms part of what was known as the Chinese District of
Western  Borneo and has been the  location of  substantial  exploitation  by the
Chinese since the 1880s.  In the 1960s, a Dutch company was granted a concession
to conduct  mining  operations  on the Silobat  Property,  but such property was
abandoned shortly thereafter  because of political unrest,  sabotage and lack of
funding.

    The property is located 1 degree 1 minute north longitude and 109 degrees 12
minutes  east  latitude in the  subdistrict  of Sambas,  Kalimantan  Barat.  The
topography  of the property is  characterized  by swampy  lowlands with isolated
hilly outcrops covered mainly with  revegetation  and local rubber  plantations.
The  geology  is  characterized  by  green-black  mudstone,   fine  silt  stone,
quartz-feldspar porphyry and quartz diorite rock types.

    In 1977,  21 rock chip and 7 stream  sediment  samples  were  submitted  for
analysis to the  Superintendent  Laboratories  in Jakarta.  Only small traces of
gold were detected in all rock samples  submitted while stream sediment  samples
yielded values of .5 to 1.05 ppm in four of the seven samples.

<PAGE>    23

    Recent  political  and economic  conditions  in the region have impacted the
Company's plans with respect to some of these activities.

    Munung (Monroe) Property. The Company's wholly-owned subsidiary,  Kalimantan
Resources,  entered into an Acquisition  Agreement for Gold and Coal Concessions
February 18, 1997, with Kalimas Jaya Ltd., a Bahamian  corporation  ("Kalimas"),
relating to five (5) gold mining  concessions and one (1) coal mining concession
(the "Kalimas Acquisition Agreement").  Kalimas is also an affiliate of Maxwells
and is owned and  controlled  by the same persons who own and control  Maxwells.
Kalimas  acquired its rights to the concession  relating to the Monroe  Property
pursuant to a Development  Agreement  dated February 14, 1997, by and between PT
Muara  Mayang  Coal  Utama  ("PT  Muara")  and  Kalimas.  Under the  Development
Agreement,  Kalimas  obtained  the right to acquire an 80%  interest  in a Kuasa
Pertambangan  Penyelidikan  ("KP")  issued to PT Muara for the sum of $1,000,000
payable as follows:  $150,000 upon  execution of the  Development  Agreement and
verification  by  Kalimas  that  PT  Muara  possesses  marketable  title  to the
concession without encumbrances and $850,000 upon commencement of production and
generation of net profits.

    The  Monroe  Property  comprises  6,096  hectares  and is located in Central
Kalimantan, Indonesia. It is located in the same general area of the Kelian gold
mining concession which has produced over 450,000 per annum ounces of gold since
1992.

    The existing KP issued on the Monroe  Property  allows PT Muara to conduct a
general  survey and perform  exploration  activities for gold and other precious
metals. The Development Agreement requires PT Muara to use its "expert abilities
and efforts" to obtain additional licenses for the exploitation,  production and
refining,  and  transportation and sale of all minerals obtained from the Monroe
Property.

    The Kalimas Acquisition  Agreement requires Kalimas to convey a 51% interest
in all current and future  licenses which it acquires with respect to the Monroe
Property.

    To date,  no sums have been paid by Kalimas or  Kalimantan  Resources  to PT
Muara  nor has any  exploration  work been  performed  on the  Monroe  Property.
Kalimantan  Resources currently intends to complete title work prior to engaging
in any exploration activities.

    Recent  political  and economic  conditions  in the region have impacted the
Company's plans to commence these activities.

    Telen  (Tomak)  Property.  The second gold  concession  in which  Kalimantan
Resources  received rights under the Kalimas  Acquisition  Agreement is known as
the Telen or Tomak Property. This property comprises 687 hectares and is located
in East  Kalimantan,  Indonesia.  Kalimas  acquired  its rights to the  property
pursuant to a Development  Agreement  dated February 14, 1997,  which it entered
into with PT Walea Bahimas,  an Indonesian limited liability  company.  PT Walea
Bahimas currently holds a KP for general survey and exploration on the property.
Kalimas is  required  to pay a purchase  price of  $1,000,000  to acquire an 80%
interest  in the  current  KP. The  Development  Agreement  contains  provisions
similar to those  contained  within the  Development  Agreement  relating to the
Monroe Property with respect to payment terms.  Moreover,  PT Walea Bahimas will
only be entitled to receive the final  $850,000  payment  upon  commencement  of
commercial  production and obtaining  licenses for exploration and exploitation,
production and refining, and transportation and sale.

<PAGE>    24
     
    Kalimas was obligated to commence  exploration in or before April 1997 or at
such other time as agreed upon by the parties.  In addition to being required to
dig test pits as part of the exploration program, Kalimas has agreed to: conduct
shallow  drilling to a depth of  approximately 60 meters during the first 90-day
period,  conduct  deep  drilling  to a depth of at least 200  meters  during the
second 90-day period,  and securing a commitment of at least $300,000 during the
first three (3) years of exploration activities.

    The Kalimas Acquisition  Agreement requires Kalimas to convey a 51% interest
in all current and future  licenses  which it acquires with respect to the Tomak
Property. In addition,  Kalimas and the Company have agreed that Kalimas will be
entitled  to receive a number of shares of Common  Stock the amount of which was
to be  determined  no later than July 1997.  The Kalimas  Acquisition  Agreement
further  provides  that the value of the Common Stock is to be determined at $10
per share, which was the approximate value as of January 26, 1997.

    To date,  no sums have been paid by Kalimas or  Kalimantan  Resources  to PT
Walea Balimas nor has any exploration work been performed on the Tomak Property.
Kalimantan  Resources currently intends to complete title work prior to engaging
in any exploration activities.

    Recent  political  and economic  conditions  in the region have impacted the
Company's plans to commence these activities.

    Long Beleh (La Bella) Property.  The La Bella Property  represents the third
gold concession in which  Kalimantan  Resources  acquired rights pursuant to the
Kalimas Acquisition Agreement.  This property currently comprises 4,637 hectares
and is located in East Kalimantan, Indonesia. Kalimas acquired its rights in and
to a KP for general survey and exploration  pursuant to a Development  Agreement
dated February 14, 1997,  with PT Muara Koman Mas ("PT Muara Koman").  The terms
and  conditions  for the  acquisition of an eighty percent (80%) interest in the
current license and all future licenses held or to be held by PT Muara Koman are
identical to the terms and conditions  described above and relating to the Tomak
Property. The obligations of Kalimas under the Kalimas Acquisition Agreement are
identical  to the  obligations  which it  possesses  with  respect  to the Tomak
Property.

    To date, no sums have been paid by either Kalimas or Kalimantan Resources to
PT Muara Koman nor has any exploration  been performed on the La Bella Property.
Kalimantan  Resources currently intends to complete title work prior to engaging
in any exploration activities.

    Recent  political  and economic  conditions  in the region have impacted the
Company's plans to commence these activities.

<PAGE>    25

    Sengingi  Property.  The Sengingi  Property is the fourth gold concession in
which Kalimantan  Resources acquired rights pursuant to the Kalimas  Acquisition
Agreement. Unlike the previous gold concessions mentioned in this Section of the
Annual Report,  the Sengingi  Property is a  4,000-hectare  (10,000-acre)  tract
which is located on the island of Sumatra in the  province  of Riau,  Indonesia.
Kalimas  acquired the right to obtain an eighty  percent (80%)  interest in a KP
for  exploration  and a KPE for  exploitation  with respect to 3,000 hectares of
this property from PT Aksara Mina Artha ("PT Aksara")  pursuant to a Development
Agreement  dated  February 14, 1997.  Under the terms of its  agreement  with PT
Aksara,  Kalimas  is  obligated  to pay PT  Aksara  $1,000,000  to be paid  from
production derived from the property. In all other material respects,  the terms
and conditions of the  Development  Agreement  between Kalimas and PT Aksara and
the terms and conditions of the Kalimas  Acquisition  Agreement  between Kalimas
and  Kalimantan  Resources are identical to the terms and  conditions  described
above  with  respect  to the  other  gold  concessions  subject  to the  Kalimas
Acquisition Agreement.

    Recent  political  and economic  conditions  in the region have impacted the
Company's plans to commence these activities.

    Kuantan  Property.   The  last  gold  concession   subject  to  the  Kalimas
Acquisition Agreement is known as the Kuantan Property.  The Kuantan Property is
also located in Riau Province, Sumatra, Indonesia, and comprises 8,000 hectares.
Kalimas  derives its rights  pursuant to a Development  Agreement dated February
14, 1997,  between it and PT Aksara Tama Pramita ("PT Aksara  Tama").  PT Aksara
Tama currently holds a KP for general survey and exploration.  The general terms
and conditions upon which Kalimas is to acquire an eighty percent (80%) interest
in all current and future  licenses on the Kuantan  Property  are similar to the
terms and  conditions  upon  which all other  licenses  subject  to the  Kalimas
Acquisition Agreement have been acquired.  The purchase price which Kalimas will
be required to pay for the Kuantan  Property is  $1,000,000  payable as follows:
$250,000 upon execution of the Development Agreement and verification by Kalimas
that PT  Aksara  Tama  possesses  marketable  title  to the  concession  without
encumbrances,  and  $750,000  to be paid upon  commencement  of  production  and
generation of net profits.

    Recent  political  and economic  conditions  in the region have impacted the
Company's plans to commence these activities.

    Indonesian Coal Concessions.  As previously mentioned,  Kalimantan Resources
and  Singkamas  entered into an  Acquisition  Agreement on January 26, 1997.  In
addition to  acquiring  rights to the  Silobat  Property,  Kalimantan  Resources
obtained  rights to three  coal  mining  concessions  aggregating  over  286,000
hectares.  Singkamas  acquired its rights to these three coal mining concessions
pursuant to  Development  agreements  entered into with the PT Andhika  Group of
Companies,   three  Indonesian   limited  liability   brother-sister   companies
(collectively referred to as "PT Andhika"). Under the terms of these Development
Agreements,  Singkamas received the right to acquire  seventy-seven and one-half
percent (77.5%) interest in the three contracts of work ("COWs")  currently held
by PT Andhika.

<PAGE>    26

    Under  the  terms  of  the  Acquisition   Agreement  between  Singkamas  and
Kalimantan  Resources,  Singkamas has agreed to assign a fifty-one percent (51%)
in and to the COWs (as well as a fifty-one  percent 51%  interest in the Silobat
Property) in  consideration  of the issuance of shares of the  Company's  Common
Stock described elsewhere in this Annual Report in greater detail.

    In March 1997, Kalimantan Resources,  engaged an Indonesian exploration crew
to travel to the properties and to perform  preliminary  evaluations of possible
coal  reserves in place on the three (3) coal  concessions  located in Indonesia
where the Company and  Kalimantan  Resources  have  entered  into  contracts  to
acquire certain exploration and exploitation rights.

    Mecfa  Property.  During the  Company's  past fiscal year and  confirmed  as
recently as May 1998, for no additional  consideration,  Singkamas  assigned its
interests   in   one   additional   coal   property   to  the   Agreement   with
Nevada/Kalimantan.  The Mecfa coal property is comprised of three blocks of land
totaling  39,770  hectares,  not included in the Company's other coal properties
noted above.  Contracts  of Work  ("COW") have been issued for these  properties
supporting  the  potential  for  commercial  viability  and allowing for further
exploration  and  development  to  take  place.  Although  the  property  has an
indication of a potential commercial coal resource, guidelines established under
SEC Industry Guide 7, do not support the inference of proven/probable  reserves.
This project is the primary focus of the Company's coal  activities in Indonesia
and  is  currently  being  reviewed  by  potential  joint  venture/operators  as
mentioned above.


Behre Dolbear Agreement

    The Company  entered into an agreement  with Behre  Dolbear & Company,  Inc.
("Behre Dolbear"),  an  internationally  recognized mining consulting firm which
was  established  in  1911.  Behre  Dolbear  may be  responsible  for  providing
independent technical advisory third-party validation services to the Company as
more  particularly  outlined in the  agreement.  Under the  supervision of Behre
Dolbear,  three  separate  sampling  programs  were  conducted  at  the  Silobat
Property.  Based on that work which  indicates  the presence of  anomalous  gold
values in four sampling  pits,  the Company  intends to initiate a core drilling
program at the Silobat Gold Property in the future.


<PAGE>    27



                                  RISK FACTORS
                                  ------------

    THE PURCHASE OF SHARES OF COMMON STOCK OF THE COMPANY INVOLVES A SUBSTANTIAL
DEGREE OF RISK AND IS SUITABLE ONLY FOR PERSONS OF SUBSTANTIAL MEANS WHO HAVE NO
NEED FOR LIQUIDITY IN THEIR  INVESTMENT.  THIS SECTION OF THE ANNUAL REPORT SETS
FORTH THE RISKS AND SPECIAL  CONSIDERATIONS WHICH THE COMPANY BELIEVES MAY EXIST
CONCERNING  AN  INVESTMENT IN THE COMMON  STOCK.  PROSPECTIVE  INVESTORS  SHOULD
RECOGNIZE THAT FACTORS OTHER THAN THOSE SET FORTH BELOW MAY ULTIMATELY AFFECT AN
INVESTMENT  IN A MANNER AND TO A DEGREE  WHICH  CANNOT BE FORESEEN AT THIS TIME.
ALL  PROSPECTIVE  INVESTORS  ARE URGED TO CONSULT WITH THEIR  ADVISORS  PRIOR TO
MAKING AN INVESTMENT IN COMMON STOCK SO THAT THEY UNDERSTAND FULLY THE NATURE OF
THE  UNDERTAKING  AND THE  RISKS  WHICH  MAY BE  INVOLVED  PRIOR  TO  INVESTING.
FURTHERMORE,  ALL PROSPECTIVE  INVESTORS ARE URGED TO REVIEW WITH THEIR COUNSEL,
ACCOUNTANTS,  AND PROFESSIONAL ADVISORS THE FINANCIAL STATEMENTS ATTACHED TO THE
ANNUAL REPORT. ANY DOCUMENTS DESCRIBED IN THIS ANNUAL REPORT WHICH HAVE NOT BEEN
ATTACHED AS  EXHIBITS  MAY BE OBTAINED BY  PROSPECTIVE  INVESTORS  AND/OR  THEIR
ADVISORS UPON REQUEST FROM THE COMPANY.

    THIS ANNUAL  REPORT ALSO CONTAINS  CERTAIN  FORWARD-LOOKING  STATEMENTS  AND
INFORMATION THAT ARE BASED UPON  MANAGEMENT'S  BELIEFS AS WELL AS ON ASSUMPTIONS
MADE BY AND UPON  INFORMATION  CURRENTLY  AVAILABLE TO MANAGEMENT.  WHEN USED IN
THIS  ANNUAL  REPORT,  THE  WORDS  "EXPECT,"   "ANTICIPATE,"  "INTEND,"  "PLAN,"
"BELIEVE," "SEEK" AND "ESTIMATE" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
SUCH FORWARD-LOOKING STATEMENTS. HOWEVER, THIS ANNUAL REPORT ALSO CONTAINS OTHER
FORWARD-LOOKING  STATEMENTS.  FORWARD-LOOKING  STATEMENTS  ARE NOT GUARANTEES OF
FUTURE  PERFORMANCE  AND  ARE  SUBJECT  TO  CERTAIN  RISKS,   UNCERTAINTIES  AND
ASSUMPTIONS,  INCLUDING,  BUT NOT LIMITED TO, THE FOLLOWING RISK FACTORS,  WHICH
COULD CAUSE THE COMPANY'S  FUTURE RESULTS AND STOCK VALUES TO DIFFER  MATERIALLY
FROM THOSE EXPRESSED IN ANY  FORWARD-LOOKING  STATEMENTS MADE BY OR ON BEHALF OF
THE COMPANY. MANY OF SUCH FACTORS ARE BEYOND THE COMPANY'S ABILITY TO CONTROL OR
PREDICT.  READERS ARE  CAUTIONED  NOT TO PUT UNDUE  RELIANCE ON  FORWARD-LOOKING
STATEMENTS.  THE COMPANY  DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE  PUBLICLY
ANY AND ALL FORWARD-LOOKING STATEMENTS,  WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.

<PAGE>    28

NO COMMERCIALLY VIABLE ORE DEPOSITS

    Even  though the  Company  has  reviewed  reports and records of its mineral
properties and believes them to have potential, there is no assurance that there
are commercially viable ore deposits.

HISTORY OF LOSSES

    Although  the Company was formed in 1985 to engage in precious  metal mining
activities, its net worth is limited. The Company has a stockholders' deficiency
of $56,285.  As of May 31, 1998,  the Company has realized an aggregate net loss
(since inception) of $29,238,115.  Until the fiscal year ended May 31, 1997, the
Company had failed to post revenues from operations. Total revenues for 1997 and
1998 were  $287,178 and $557,691  respectively,  and  additional  increases  are
anticipated. However, prospective Investors should be aware that the Company was
a development-stage  company that only recently  (1997/1998) has begun to report
sales. There is no guaranty that the Company's  operations will be successful or
realize a profit in the future.  Moreover, the Company's net worth and the value
of its Common Stock will  ultimately  be dependent  upon the overall  success of
timber operations currently being conducted and to be conducted on the Brazilian
Timber Properties,  mining operations conducted on the Nevada Property,  and the
Indonesian Concessions.

    The  financial  information  accompanying  this Annual  Report  reflects the
current financial  condition of the Company. It should be noted that the Company
has not yet  reported  a profit  from  operations  since  its  inception  to the
present. Management projects that the further exploration and development of its
properties will result in profitable operations although, for the reasons stated
elsewhere in this Annual Report, no guaranty to that effect can be made.

HISTORY OF UNSUCCESSFUL OPERATIONS

    Timber,  mining and natural  resource  operations  are  speculative by their
nature.  Management  of the Company  has in the past  selected  certain  mineral
properties  which have proven to be  uneconomic.  There is no assurance that the
present  gold,  coal,  and  timber  properties  will  prove  to be  economic  or
profitable to the Company.  Although revenues have commenced and are increasing,
if all or most of the  properties  prove to be  uneconomic,  the  Company may be
unable to realize a profit from its operations  which may have a profound impact
upon the value of the Company and the liquidity of the Common Stock.

PROFITABILITY OF BRAZILIAN TIMBER OPERATIONS

     The Company has expended  considerable  sums to improve the Tropical  Woods
sawmill facility located in Belem, Para Brazil. Although revenues have commenced
and are  increasing,  no assurances  can be given that the  Company's  Brazilian
timber operations will be profitable.


<PAGE>    29


TITLE PROBLEMS TO BRAZILIAN TIMBER PROPERTIES

     The Company has  acquired  its rights to the  Brazilian  Timber  Properties
pursuant to agreements  entered into by and between the Company's  subsidiaries,
Equatorial  Resources,  Ltd. ("Equatorial  Resources"),  Terra Resources Brazil,
Ltda.  ("Terra")  and third  parties.  The Company  also  acquired its rights to
operate the "Tropical Woods" sawmill facility.

    The Company has performed preliminary title work on the tracts of properties
on which current harvesting  operations are being conducted.  These examinations
have been  conducted by legal  counsel in Belem,  Brazil,  who are  competent to
examine title.  While Equatorial  Resources has commenced timber production from
these properties, there can be no assurance that title problems and other claims
hostile to the chain of title on which the  Company has relied will not arise in
the future.

    Before any sums are  expended  by the  Company on timber  operations  on the
other tracts of  properties  on which it has  acquired  harvesting  rights,  the
Company  intends to employ legal  counsel to advise it of the status of title to
these concessions.

    In  addition  to the title  problems  and  environmental  problems  commonly
associated  with the  development  of timber  properties  in the United  States,
foreign  ownership of timber rights in foreign  countries  subjects a U.S.-based
company to the additional risk of political instability.


RISKS OF FORFEITURE TO BRAZILIAN TIMBER PROPERTIES

    A recent federal law in Brazil grants  certain rights to indigenous  peoples
who invade  individually-owned  property in various  regions of the country.  In
cases where such invasion has occurred, the federal government has condemned the
properties and paid "just compensation" to the owners. Some of the properties in
which the Company has acquired  rights are subject to this  legislation.  In the
case  of  its  agreement  relating  to  the  Jonasa   Concessions,   any  tracts
appropriated by the federal  government,  under this legislation are required to
be  replaced  by  Jonasa.  In the case of the tracts  subject to the  Terranorte
Agreement,  a physical inspection of the tract was made prior to commencement of
harvesting  operations.  The Company and its subsidiaries,  Equatorial Resources
and Terra,  will be subject to the risk of forfeiture  of its rights  subject to
such conditions.

    It should be noted that the Company and  certain of its key  personnel  have
limited  operating   experience  in  Brazil  and  in  timber  operations.   Such
inexperience could result in unsuccessful  operations or unfavorable  returns to
the Company.

<PAGE>    30

NEVADA PROPERTY

    The Company has acquired its rights to the Nevada Property through a variety
of agreements  with  predecessors-in-interest.  The precise nature and amount of
interest  owned by the  Company is now the  subject of a lawsuit  pending in Nye
County and more  particularly  described  in the section of this  Annual  Report
entitled "LEGAL PROCEEDINGS." The Company is seeking to obtain an order from the
court  declaring that the Company is the owner of the undivided 100% interest in
a substantial number of the mining claims comprising the Nevada Property. If the
Company is unsuccessful in its request for declaratory  relief,  title to 50% of
the  interests  in the Nevada  Property  may be  retained by persons or entities
other than the Company.

    The Company has executed an agreement encumbering the Nevada Property in the
principal amount of Two Million Dollars ($2,000,000) to Silenus Limited pursuant
to a privately-negotiated  placement of 8% Senior Secured Convertible Debentures
described  elsewhere in this Annual Report.  Until such time as all  obligations
due under the  Debentures  issued to  Silenus  Limited  are paid,  converted  or
redeemed,  and the  encumbrances  on the Nevada  Property are  reconveyed to the
Company,  one of the primary assets of the Company,  namely the Nevada Property,
may be subject to the terms and  conditions  of such  instruments.  Any  default
under such  agreement  which  remains  uncured  would subject the Company to the
possible loss of the Nevada Property.

TITLE PROBLEMS ASSOCIATED WITH THE INDONESIAN CONCESSIONS

    Mineral  interests in Indonesia are  controlled  exclusively  by the federal
government through the Ministry of Mines and Energy. Title to a mineral property
in  Indonesia  is  subject  to  obtaining  various  forms  of  licenses  for the
extraction of commercial  quantities of minerals after obtaining property rights
from the fee owner.  Title is confirmed  by the  issuance of a  government  seal
affixed to specific property location maps.

    Because direct foreign ownership of mining concessions is difficult,  if not
prohibited  by  Indonesian  law,  the  Company  and its  subsidiary,  Kalimantan
Resources,  must rely upon its contractual  rights under the various  agreements
into which they and/or their  predecessors  have  entered.  These  contracts are
described in greater detail  elsewhere in this Annual  Report.  Should a dispute
arise as to the interpretation or enforcement of such agreements,  resort to the
Indonesian  judicial  system  will likely be  required.  It should be noted that
since members of the judicial branch are employed by the executive branch of the
government,  a fair opportunity to assert a foreign  company's rights under such
agreement may be limited.

    Even  if  the  contractual  rights  of  Kalimantan   Resources  are  clearly
delineated  in  its  agreements,  the  Company's  interests  in  the  Indonesian
concessions are subject to title failures associated with the entities with whom
Kalimantan Resources has contracted. The Company has not currently completed its
title investigations with respect to the Indonesian Concessions.  However, prior
to the time at which any  payments  will be made to the  current  holders of the
licenses,  the Company  will have  satisfied  itself that either it,  Kalimantan
Resources, or the parties with whom it has contracted (and/or their predecessors
in interest) will have good and  merchantable  title to the particular  licenses
purported to be owned by such third parties.

<PAGE>    31

    Ownership  of licenses to explore for and/or  exploit  natural  resources in
foreign  countries  is also subject to political  risks.  The United  States has
important  economic,  commercial and security  interests in Indonesia because of
its growing  economy and markets and its  strategic  location in relation to key
international  straits.  The U.S. and Indonesia maintain cordial and cooperative
relations, although the two countries are not bound by formal security treaties.

    Indonesia is a republic  based upon its 1945  constitution  providing  for a
limited separation of executive,  legislative and judicial power. The president,
elected to a five-year  term,  is the  overwhelmingly  dominant  government  and
political figure. The president appoints the cabinet, currently composed of four
coordinating  ministers  (in the  fields  of  political  and  security  affairs,
economic  and  financial  affairs,  people's  welfare and  industrial  and trade
affairs),  thirteen  state  ministers,  twenty-four  ministers  and  three  high
officials with the status of state ministers.  Moreover, judges are employees of
the executive branch.

    Unlike Western  democratic  systems,  the legislative branch meets only once
during its five-year  term, to formulate the overall  principles and aims of the
government and to elect the president and vice president.  Representative bodies
at all levels in  Indonesia  eschew  voting,  preferring  to arrive at decisions
through "consultation and consensus."

    Because of the presence of a strong executive branch, some foreign companies
have been forced to accede to government  demands to revise  licenses to include
the participation of Indonesian-owned  companies,  larger foreign companies and,
in some instances, the Indonesian government. The inability of a foreign company
to  effectively  enforce  its  rights  in  licenses  issued  by  the  Indonesian
government through the judicial branch of government  represents a risk of doing
business in a developing country as compared to the United States.

    Recent  political and economic  conditions in the region have restricted the
commencement of exploration and development activities in some of the Indonesian
projects.

GOVERNMENTAL REGULATION

    Mining  operations  on the  Nevada  Property  are  and  will be  subject  to
substantial  federal,  state and local  regulation  concerning  mine  safety and
environmental protection. Some of the laws and regulations which will pertain to
mining operations include  maintenance of air and water quality  standards;  the
protection  of  threatened,   endangered  and  other  species  of  wildlife  and
vegetation;  the preservation of certain cultural  resources and the reclamation
of exploration, mining and processing sites. These laws are continually changing
and, as a general  matter,  are becoming more  restrictive.  The location of the
Nevada Property is found in an area which strongly  encourages mining operation.
However,  the Company's  inability to comply with such  federal,  state or local
ordinances and regulations on an ongoing basis may cause  significant  delays in
the permitting  process or in the operations  anticipated to be conducted on the
Nevada  Property.  In  addition,  delays  in such  compliance  could  result  in
unexpected and substantial  capital  expenditures.  Although no such problems or
delays are anticipated, no assurances can be given that the Company will be able
to comply with all  applicable  law and  regulations  and maintain all necessary
permits,  licenses and approvals or, in the alternative,  that compliance and/or
permitting will be obtained without substantial delays and/or expenses.

<PAGE>    32

    With regard to the Nevada Department of Conservation and Natural  Resources,
Division  of  Environmental   Protection  ("NDEP"),  the  Company  has  received
authorization  to proceed with its currently  planned  mining  operations on the
Nevada Property pursuant to the applicable statutes and regulations  relating to
a small mining operation. In the event, however, the Company's operations exceed
the designated  limits for a limited mining  operation,  a full reclamation plan
will need to be  prepared,  submitted  and  approved  by NDEP.  The  Company  is
currently  preparing such a reclamation plan. While the Company believes that it
will be able to obtain such  approval,  there is no guarantee  that the required
approval will in fact be obtained by the Company.

    A change in the nature or magnitude of the Company's  presently  anticipated
operations on the Nevada Property may trigger the need to obtain additional NDEP
and other federal, state or local governmental  approvals,  licenses or permits.
For example,  water processing  discharge needs may trigger the requirement that
the Company obtain a water pollution  control  permit.  The Company is currently
preparing for submission of an application for a water pollution control permit.
Other  significant  permits,  required by a change in  operations  on the Nevada
Property,  might include an NDEP permit,  air quality permit,  waste  management
permit,  archeological  clearance and wildlife permit. There is no guaranty that
the Company will be able to obtain any or all of the required federal,  state or
local  permits  that might be  required to expand its  operations  on the Nevada
Property.

    Even if the Company does not change its currently planned  operations on the
Nevada Property, the Company is nevertheless  vulnerable to the various federal,
state and local laws and regulations governing regulations and protection of the
environment,  occupational health, labor standards and other matters. The reason
for this is that these laws are continually  changing,  and as a general matter,
are becoming more restrictive.

    To comply with these  federal,  state and local laws, the Company may in the
future be required to make capital and operating  expenditures on  environmental
projects both with respect to maintaining  currently planned  operations and the
initiation of new operations.  Such projects may include,  for example,  air and
water pollution control equipment;  treatment,  storage and disposal  facilities
for solid and hazardous waste;  remedial actions required for the containment of
tailings pond seepage; continuous testing programs; data collection and analysis
land reclamation  (specifically  including existing mine and processing waste on
the  Nevada  Property);  landscaping  and  construction  projects.  There  is no
guaranty that the Company will technically or financially be able to comply with
any or all of these potential requirements.

ENVIRONMENTAL REGULATION AND LIABILITY

    United  States:  The  Company's  proposed  mineral  operations on the Nevada
Property are and will be subject to environmental  regulation by federal,  state
and local  authorities.  Under applicable federal and state law, the Company may
become  jointly  and  severally  liable with all prior  property  owners for the
treatment,  cleanup,  remediation and/or removal of substances discovered at the
Property  which are deemed by federal  and/or state law to be toxic or hazardous
("Hazardous  Substances").  Liability  may be imposed among other things for the
improper  release,  discharge,  storage,  use,  disposal  or  transportation  of
Hazardous Substances only in the areas which the Company disturbs.

<PAGE>    33

    Applicable law imposes strict joint and several  liability on, among others,
"owners" and "operators" of properties  contaminated with Hazardous  Substances.
Such   liability   may  result  in  any  and  all  "owners",   "operators"   and
"transporters"  of contaminated  property being required to bear the entire cost
of  remediation.  The Company may utilize  substances  which have been deemed by
applicable  law to be  Hazardous  Substances.  The  potential  liability  of the
Company  under such laws will be derived from the  Company's  classification  as
both an "owner" and  "operator" of a  contaminated  property.  While the Company
intends to employ all reasonably practicable safeguards to prevent any liability
under applicable laws relating to Hazardous  Substances,  mineral exploration by
its very nature will subject the Company to  substantial  risk that  remediation
may be  required.  If the cleanup or  remediation  of  hazardous  substances  is
required  on  the  Nevada  Property,  substantial  delays  could  occur  in  the
permitting  process and/or in the further  extraction of gold and other precious
minerals on the Nevada Property.

    Brazil:  Both the federal  government of Brazil and the state governments of
Para and Amazonas have adopted laws and standards relating to the harvesting and
reclamation of forest.  These laws have not been completely  adjudicated through
the  courts  in  Brazil.  As  a  consequence,   many  government  agencies  have
interpreted  these  laws  and  regulations  in  inconsistent  manners,   thereby
contributing to uncertainty as to the Company's compliance with these standards.
Failure to comply with these  standards  results in varying levels of sanctions,
including  the  cessation of further  activities.  As discussed  elsewhere,  the
Company  intends to conduct its  operations  to meet or exceed these  standards.
Consequently, costs of operations will be higher.

    Indonesia:  The  Indonesian  Concessions  may also be subject to federal and
provincial   environmental   laws  in  place  or  being  contemplated  by  those
governmental  entities.   Mining  in  certain  locations  in  Indonesia  may  be
restricted  because of  difficulties  associated  with mine  reclamation,  water
quality, air quality, endangered species or local cultural conditions similar to
those restrictions of other international mining operations in Indonesia.

LIQUIDITY OF COMMON STOCK; CAPITALIZATION

    The  Company's  Common  Stock is currently  traded on the NASDAQ  Electronic
Bulletin Board. Over the past six (6) months ending August 31, 1998, the average
monthly trading volume has been approximately  5,500,000 shares (see "Market for
Common Equity"). In addition,  the number of outstanding shares of the Company's
common  stock  has  increased  from  12,215,415  shares  as of May  31,  1997 to
26,492,543  shares  as  of  May  31,  1998.  The  result  of  this  increase  in
capitalization  results in greater difficulty for shareholders in the Company to
realize a return of their investment based upon  price-earning  ratios.  Trading
volumes  on the  Electronic  Bulletin  Board have been  limited  and there is no
assurance  that the Electronic  Bulletin Board will provide an effective  market
for a prospective investor to sell his or her shares of Common Stock.

<PAGE>    34

CLASSIFICATION OF SECURITIES

    Currently, the Company's stock is considered to be "penny stock" pursuant to
Section 3(a)(51)(A) of the Securities Exchange Act of 1934. This designation has
resulted from various factors including a lack of performance by the Company and
increased  capitalization.  In the event the price of the Company's Common Stock
remains  below $5.00 per share,  the Company will  continue to be subject to the
increased disclosure  requirements associated with the issuers of "penny stock".
In addition to increased disclosure requirements, such situation may also result
in either a decrease in the liquidity of the stock or a total disappearance of a
market for the Common Stock. In either  instance the difficulty  associated with
disposition of the shares may increase.

DEPENDENCE UPON MANAGEMENT

    The business of the Company is and will be greatly dependent upon the active
participation of Christopher D. Michaels and Jeffery S. Kramer. The Company also
anticipates that it will be dependent upon the active participation of other key
personnel and/or consultants in the future. The Company presently has employment
agreements with both Mr. Michaels and Mr. Kramer and has entered into agreements
with key  consultants;  nevertheless,  the loss of the services of Mr. Michaels,
Mr. Kramer and/or other key personnel (including such consultants) regardless of
reason  could  adversely  affect the Company  and the  Company's  business.  The
Company  does not maintain any life  insurance  policies  enabling it to receive
benefits in the case of either Mr. Michaels' or Mr. Kramer's death. In addition,
Messrs.  Michaels  and  Kramer are  parties  and  subject to a consent  judgment
wherein they are restrained  from selling  securities in interstate  commerce in
violation  of the  provisions  of section 5 of the  Securities  Act of 1933,  as
amended (the "Act"), or from engaging in any transaction, practice, or course of
conduct  resulting  in a violation  of the  antifraud  provisions  of the Act. A
violation of these provisions could result in the resignation of these officers.
To the  extent  that  the  services  of Mr.  Michaels  or Mr.  Kramer  would  be
unavailable  to the  Company for any  reason,  the Company  might be required to
employ other executive personnel to manage and operate the Company.  There is no
assurance  that the  Company  under such  circumstances  would be able to employ
qualified  persons on terms suitable to the Company to assure the fulfillment of
the objectives stated in this Annual Report.

LACK OF DIVERSIFICATION

    The Company  has,  in the past,  maintained  other  mineral  properties  for
exploration and  development.  These  properties were located in Bolivia,  South
America and  Vancouver,  British  Columbia.  Through its board of directors  and
shareholders,  the Company elected to abandon such other  properties as a result
of uneconomic  results.  The Company's  primary assets presently  consist of the
Brazilian  Timber   Properties,   the  Nevada   Property,   and  the  Indonesian
Concessions.  No  assurance  can be given  that once the  Company  increases  or
continues its timber operations in Brazil and completes its present  exploration
and development of the Company's properties in Nevada and Indonesia as described

<PAGE>    35

in  further  detail in this  Annual  Report,  it will be able to  establish  and
produce profitable revenues from such operations.  In addition,  there can be no
assurance that continued  development  activities on the Nevada  Property and/or
exploration  activities currently being conducted on the Indonesian  Concessions
will result in the establishment of commercial quantities of mineralization.  As
a result,  persons reading this Annual Report should be aware that investment in
the Common Stock represents an additional risk because the Company's  activities
are  presently  confined to the conduct of timber  operations  on the  Brazilian
Timber  Properties,  the  exploration,  development  and gold  production on the
Nevada  Property,  and  preliminary  exploration  activities  on  certain of the
Indonesian Concessions.

STOCK ISSUANCES UNDER MINING CONTRACTS

    The Company has entered into various  contracts  with third parties to issue
Common  Stock in  consideration  of  services  rendered  in  relation to various
mineral  properties.  Common  Stock has been  issued to the  following  parties:
Harrison Western Construction Company (100,000 shares); Maxwells Energy & Metals
Technology Ltd.  (400,000  shares);  and Singkamas Agung Ltd.  (200,000 shares).
Maxwells  Energy & Metals  Technology  Ltd. is entitled to receive an additional
4,000,000 shares of Common Stock if an investment banker confirms by independent
appraisal  that  the  value  of the  properties  subject  to the  Principles  of
Agreement dated August 19, 1996 equals or exceeds  $12,000,000.  Singkamas Agung
Ltd. is entitled to receive an additional 3,800,000 shares of Common Stock if an
independent  evaluation confirms that the value of the properties subject to the
Acquisition  Agreement dated January 26, 1997 equals or exceeds $40,000,000.  Of
the  additional  shares  which may be issued to  Singkamas  Agung Ltd.,  950,000
shares are entitled to "piggy-back"  registration  rights. Once these shares are
issued to the various parties and such shares become unrestricted,  the sales of
such securities could adversely affect the price of Common Stock.

REGULATORY PROCEEDINGS

    In May 1989,  the Company  received  notice that the Securities and Exchange
Commission (the  "Commission") had commenced an informal  investigation into the
Company's  compliance with the registration  and disclosure  requirements of the
Securities Act of 1933 (the " '33 Act") and the Securities  Exchange Act of 1934
(the " '34 Act"). Thereafter the Commission commenced an extensive review of the
Company's  books and  records  relating  to the  Company's  business  and mining
operations,  its capital  raising  activities,  and its financial  condition and
history.  Through  all  stages of the  investigation,  the  Company  voluntarily
cooperated with the Commission.

    On August 3, 1993,  the  Commission  and the Company agreed to terminate the
Commission's  investigation  by the  entry of a  consent  judgment  against  the
Company and certain of the Company's past and present key  employees.  These key
employees include Christopher D. Michaels,  Jeffrey Kramer and Stanley Mohr. The
terms and conditions of the consent judgment can be summarized as follows:

        1. The Company and its officers, agents, servants,  employees and others
    receiving  actual notice of the consent judgment neither admitted nor denied
    any of the allegations alleged by the Commission;

<PAGE>    36

        2. The Company and its officers, agents, servants, employees, and others
    receiving actual notice of the consent  judgment are permanently  restrained
    and  enjoined  from  violating  section  5 of the '33  Act or  from  selling
    securities in interstate commerce unless and until a registration  statement
    is in effect or the security or transaction is exempt from the  registration
    provisions of the '33 Act and/or the '34 Act;

        3. The Company and its officers, agents, servants, employees, and others
    receiving actual notice of the consent  judgment are permanently  restrained
    from engaging in any transaction,  practice, or course of conduct, employing
    any course of  conduct,  or  obtaining  any money or property by means of an
    untrue  statement  of a material  fact,  or any omission to state a material
    fact,  necessary to make the statements  made in light of the  circumstances
    under which they were made not  misleading  in  violation  of the  antifraud
    provisions of the '33 Act and '34 Act.

    As part of the  consent  judgment,  the  Company  was  required to engage an
independent  certified public accountant to conduct a full and complete analysis
of the  disposition  of all funds received by the Company from investors and, to
the extent so discovered, to disgorge all ill-gotten gains.

    On April 7, 1994,  in  response  to the audits  completed  by the  certified
public  accountant,  the Company and the  Commission  entered into a stipulation
regarding the  resolution of all  outstanding  issues which then existed,  which
stipulation  was entered as an order by the United States District Court for the
Central District of California.  Such stipulation  contained an  acknowledgement
that the Company and its executive  officers had received no ill-gotten gains as
a result  of prior  activities  by the  Company  in  offering  and  selling  its
securities,  and that the consent judgment resolved once and for all, all issues
raised by the  Commission as a result of the  Company's  prior  activities.  The
Company  and the persons  named in the formal  order of  investigation  were not
required to pay any fines or required to disgorge any monies previously received
by it in connection with its securities.

<PAGE>    37

    On February 27, 1989, the Pennsylvania  Securities Commission issued a cease
and desist order against the Company and  Christopher  D.  Michaels,  Jeffrey S.
Kramer,  Stanley J. Mohr, and William  Michaels  prohibiting them from violating
Section 201 of the  Pennsylvania  Securities Act of 1972 relating to the sale of
unregistered "penny stocks."

    As a result of the foregoing  regulatory and judicial  actions,  the Company
may not be able to utilize the  exemptions  from  registration  available  under
Regulation A and Rule 701  promulgated  under the '33 Act and may not be able to
rely upon certain private placement exemptions afforded by applicable state blue
sky laws in  connection  with the offer and sale of  securities in a transaction
which qualifies as exempt from  qualification  under the '33 Act. In such cases,
the Company would be required to  register/qualify  the  transaction  under said
blue sky laws,  which would likely increase the cost of, and extend the time for
completing, any private placement of securities.



<PAGE>    37


FLUCTUATION OF COMMODITY PRICES

    Since its  deregulation  in August 1971,  the market price for gold has been
highly speculative and volatile.  Since 1980, gold has fluctuated from a high of
approximately  $850 per ounce in January 1980 to a low of approximately $285 per
ounce in 1985 and 1998.  Currently  gold is  trading at  approximately  $285 per
ounce.  In 1996,  gold averaged over $380 per ounce.  Instability in gold prices
may affect the profitability of the Company's future operations.

    Similarly,  coal  and  timber  prices  fluctuate.   Natural  resources  have
traditionally  evidenced  volatile swings in pricing,  thereby affecting overall
the relative  profitability of engaging in these lines of business. For example,
timber prices increased  fifty-two  percent (52%) in 1996 while coal prices have
remained  relatively  stable for the past  several  years.  Coal  prices,  which
historically  have been heavily  dependent upon mining  conditions,  location of
deposits,  and freight variations,  have remained relatively stable for the past
several years.

USE OF FORWARD-LOOKING STATEMENTS

    This Annual Report  contains  "forward-looking  statements"  as that term is
defined in the Private Securities Litigation Reform Act of 1995. Such statements
are  found  in  the  Sections  of  this  Annual  Report   entitled   "BUSINESS,"
"PROPERTIES," and "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION"
and elsewhere.  Prospective  Investors are cautioned that the  assumptions  upon
which such  statements are based cannot be guarantied by the Company to occur in
the  future or that the  overall  success  of the  Company  might be  materially
adversely affected should such bases (or some of them) not occur.




<PAGE>    38


                              3. LEGAL PROCEEDINGS


o On November 4, 1996,  the Company  filed a  complaint  (the  "Action")  in Nye
County,  Nevada against Marlowe Harvey,  Maran Holdings Inc.,  Calais  Resources
Inc., and Argus Resources,  Inc. (the "Harvey  Entities").  The complaint in the
Action alleges,  amongst other things,  that the Harvey Entities  breached their
obligations under various  agreements  (including the October 20, 1995 amendment
to the Joint  Venture  Agreement  discussed in further  detail in the Section of
this Annual Report entitled  "Properties" -- The Nevada Property").  The Action,
as amended,  seeks a judicial  declaration  that the Harvey Entities do not have
any joint venture or real property interest in the mining claims included within
the Nevada  Property.  The  Action  also seeks  compensatory  damages  and other
financial  relief  based on the Harvey  Entities'  breach of contract  and other
causes of action.

    During April 1997 the Company through its counsel filed a first amendment to
its complaint in the action. Counsel for the Harvey Entities filed answers and a
counterclaim  in the  Action  during  July  1997.  In their  answer,  the Harvey
Entities have generally  denied the  allegations of the first amended  complaint
and have raised various affirmative defenses. In their counterclaims, the Harvey
entities  were seeking an  injunction  preventing  the Company  from  conducting
activities  related to the Nevada Property  pending  resolution of the issues in
the Action and  compensation  and punitive  damages and other  financial  relief
based on breach of contract and other causes of action.

    In July 1997, the Harvey Entities moved for a preliminary injunction against
the Company  preventing it from conducting  further  activities at the Manhattan
Project without their consent,  from issuing press releases  describing  certain
real  property as being wholly owned by the Company,  and from using the same as
security for loans.  After a two-hour  hearing on  September 4, 1997,  the court
refused to issue an injunction against the Company. Pursuant to stipulation, the
parties have agreed not to interfere with one another's operations on the Nevada
Property.  Additionally,  the  Company  has agreed not to further  encumber  the
Nevada  Property  pending  trial.  A trial  date  was set for  September,  1998.
Settlement discussions have been instituted by the parties without resolve as of
the date of this filing.  On August 28, 1998, on motion  brought by the Company,
the court granted a continuance  and ordered  Marlowe  Harvey to engage in "good
faith" settlement negotiations.

    If the  Company is  successful  in  obtaining  specific  performance  of the
agreement alleged in the Action, it will effectively  continue to own or control
an undivided  100%  interest in the Nevada  property.  Regardless of whether the
Company is  successful  in the Action,  it will continue to own at least a fifty
percent  (50%)  undivided  interest  in the  Nevada  Property  by  virtue of its
contractual rights.

<PAGE>    39

o On June 12, 1996, the Company entered into an agreement with Harrison  Western
Construction  Corporation to perform contract mine  development  services on the
Company's  Nevada Gold  Property.  On or about October 23, 1997,  these services
ceased and a dispute arose between the parties.  The scope of work  estimated at
the time of  commencement  was  approximately  $600,000 as projected by Harrison
Western. Subsequently, the projected completion costs were extended to a cost of
approximately  $800,000 by Harrison  Western.  At  termination of the agreement,
Harrison Western  reportedly  furnished a total amount of services and materials
totaling approximately $1,684,000 without completion of the objectives for which
the Company  entered  into the  agreement.  The Company  provided  approximately
$1,155,000 in cash to Harrison  Western and as well provided  stock for services
as a credit  against  the  remaining  balance.  Additional  stock was  issued to
Harrison  Western as collateral for any unpaid and owing amounts.  Subsequent to
the  termination  of the  agreement,  Harrison  Western  filed a mechanic's  and
materialman's  lien in the  amount of  $482,749  on the  Company's  Nevada  Gold
Property on January 20, 1998. This filing was, in the opinion of the Company and
its counsel,  in direct violation of specific clauses contained in the agreement
between the parties.

    In support of its lien,  Harrison Western filed a lawsuit on July 1, 1998 in
Federal District Court in Nevada (case no.  CV-S-98-00968-PMP  (RJJ)). On August
27,  1998,  the Company was granted a motion to stay the  proceedings  and enter
arbitration.  The parties have been ordered to report to the District  Court the
status of the  arbitration  proceedings  on or before  November  30,  1998.  The
Company  believes  that any  arbitration  agreement or damages  would not have a
material impact on the Company.

o On July 14, 1998,  the following  entitled  lawsuit was filed in United States
District Court for the Central District of California (Case No. 98-5624 JSL CTx)
(the "Securities  Action") on behalf of the Company and Francis Parkes,  Dr. Joe
C. Rude,  Christopher D.  Michaels,  who are  individual  Company  shareholders:
Francis  Parkes,  Dr.  Joe C. Rude  III,  Christopher  D.  Michaels  and  Nevada
Manhattan Mining, Inc. v. Sheldon Salcman, Arie Rabinowitz,  Mayer Rooz, Thomson
Kernaghan & Co. Limited,  Soreq,  Inc.,  Silenus Limited,  Mary Park Properties,
L.H. Financial Services, Austost Anstalt Schaan, Tusk Investments,  Inc., Mendel
Group,  Inc.,  Top Holding  International,  Ltd.,  Praha  Investments  S.A., UFH
Endowment,  Ltd., Atead Consulting S.A., and Ausinvest  Anstalt Balzers,  In the
Securities Action, plaintiffs contend that defendants violated Section 10(b) and
13(g)  of  the  Securities  Exchange  Act,  Section  1962(b)  of  the  Racketeer
Influenced and Corrupt  Organizations  Act, and committed fraud by engaging in a
fraudulent  scheme to manipulate and artificially  depress the market in and for
the  Company's  common stock by use of massive short sales.  Plaintiffs  seek an
unspecified   amount  of  damages,   including   punitive  damages,  a  judicial
declaration that the terms,  conditions and covenants of certain  debentures and
subscription agreements were violated and certain injunctive relief.

<PAGE>    40

    UFH Endowment,  Ltd and Austost Anstalt Schaan v. Nevada  Manhattan  Mining,
Inc., Jeffrey Kramer and Christopher Michaels, (Case No. 98 Civ. 5032) (the "UFH
Action") was filed in United States District Court for the Southern  District of
New York on or about July 15, 1998,  by the  Securities  Action  defendants  UFH
Endowment,  Ltd. and Austost  Anstalt  Schaan  against the  Company,  Jeffrey S.
Kramer,  Senior  Vice-President  and Chief Operating  Officer of the Company and
Christopher Michaels, President of the Company. The plaintiffs in the UFH Action
claim that the Company breached certain debentures and subscription  agreements,
and that the other  defendants  induced such breach and thus seek an  injunction
directing the Company to file a  registration  statement with the Securities and
Exchange  Commission  ("SEC") and to issue common stock, as well as damages from
the Company and defendants  Kramer and Michaels.  Approximately  one month after
first filing their complaint,  the plaintiffs amended their complaint to include
a claim purporting to allege violations by the Company and Jeffrey S. Kramer and
Christopher  D.  Michaels of Section  10(b) of the  Exchange  Act and Rule 10b-5
promulgated  thereunder and a claim  purporting to allege  violations of Section
20(a) of the Exchange Act by Jeffrey S. Kramer and Christopher  Michaels.  On or
about July 30, 1998 plaintiffs sought a preliminary  injunction  requesting that
the Company be compelled to file a registration statement with the SEC and issue
stock to the plaintiffs.  This motion was denied.  On july 27,1998,  the Company
filed a motion to stay,  dismiss  or  transfer  the UFH  Action  to the  Central
District of California. This motion has not been fully briefed.

    Mendel Group,  Inc. v. Nevada  Manhattan  Mining,  Inc.,  Jeffrey Kramer and
Christopher D. Michaels, (Case No. 98 Civ. 5504) (the "Mendel Action") was filed
in United  States  District  Court for the  Southern  District of New York on or
about August 6, 1998, by the  Securities  Action  defendant  Mendel Group,  Inc.
against  the  Company,  Jeffrey  S.  Kramer,  Senior  Vice-President  and  Chief
Operating  Officer of the Company,  and Christopher  Michaels,  President of the
Company.  The plaintiff  claims  violations  of Sections  10(b) and 20(a) of the
Securities  Exchange Act, the Uniform  Commercial  Code,  and breach of contract
based on allegations  that the Company  wrongfully  failed to honor the terms of
certain  convertible  debentures and failed to file a registration with the SEC.
The complaint requests that the court issue an injunction  directing the Company
to file a  registration  statement with the SEC, issue common stock to them, and
requests  damages  against  the  Company,  Jeffrey  S.  Kramer  and  Christopher
Michaels.

    The Company  intends to vigorously  prosecute  the  Securities  Action.  The
Company  denies any  wrongdoing  and intends to  vigorously  defend both the UFH
Action and Mendel Action.

o A prior regulatory  proceeding  against the Company and certain key employees,
which resulted in the entry of a consent judgment, but subsequently was followed
by a  stipulation  which  contained an  acknowledgment  that the Company and its
executive  officers  had  received  no  ill-gotten  gains as a  result  of prior
activities by the Company in offering and selling its  securities,  is described
elsewhere in this Annual Report (see "Risk Factors - Regulatory Proceedings" and
"Management - Regulatory Proceedings").


<PAGE>    41


             4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual  Meeting of  Shareholders  was held on April 17, 1998 in Los Angeles,
California.

Total  shares of common  stock  eligible  to vote at the meeting in person or by
proxy were 16,993,815  shares.  Present at the meeting were 9,687,615 shares, or
57% of eligible votes.

All  directors  nominated  by  the  Board  were  elected  by  the  shareholders.
Tabulation  of the voting for directors  and the other  proposals  presented for
shareholder approval is presented in the table below.
<TABLE>
<CAPTION>
<S>                            <C>          <C>         <C>       <C>         <C>           <C>        <C>

                                               %                     %                         %          
                                            Eligible              Eligible                  Eligible     Broker 
NOMINEE                           Yes         Votes       No        Votes     Abstentions     Votes    Non-Votes
-------                           ---         -----       --        -----     -----------     -----
Christopher D. Michaels        9,614,174      56.57        0          0          73,451        .43         0
Jeffrey S. Kramer              9,615,960      56.58        0          0          71,665        .42         0
Stanley J. Mohr                9,619,909      56.61        0          0          67,716        .39         0
Joe C. Rude III                9,622,809      56.62        0          0          64,816        .38         0
William E. Wilson              9,613,238      56.57        0          0          74,387        .43         0

PROPOSAL to amend Articles     9,284,270      54.63     85,237       .50        318,098       1.87         0
of Incoporation to change
company name

PROPOSAL to ratify             9,569,257      56.31     28,217       .16         90,151        .53         0
appointment of independent
accountants
</TABLE>

<PAGE>    42

                                     PART II

                           5. MARKET FOR COMMON EQUITY
                         AND RELATED STOCKHOLDER MATTERS

Public Market
-------------

    The  Company  received  approval  for  trading  of its  Common  Stock on the
Electronic  Bulletin Board (NASDAQ) in March 1996. From the period from December
1995 until March 1996, the Company published "bid" and "ask" prices on the "pink
sheets".

    The low  and  high  prices  for  the  Common  Stock  since  commencement  of
quotations are as follows:

            High          Date                 Low           Date
         --------     -------------          ------      -------------
         $  14.50     March 3, 1997          $0.125      June 30, 1998

    Over the six-month period ending August, 1998, the average monthly volume of
trading of the Company's Common Stock has been  approximately  5,500,000 shares.
Over the last three months, however, the stock has been subject to extraordinary
trading volume of 5,900,000 shares in June, 1998, 14,500,00 shares in July, 1998
and 4,900,000 shares in August.  This above-average  trading volume, the Company
believes,  was  part of a  fraudulent  scheme  to  manipulate  the  price of the
Company's  Common  Stock,  as  discussed  elsewhere  in this  Report (see "Legal
Proceedings").

    Prospective  Investors  should be aware  that the  volume of  trading on the
Electronic  Bulletin  Board  traditionally  has been limited and there can be no
assurance  that the Electronic  Bulletin Board will provide an effective  market
for a shareholder to sell his or her Common Stock of the Company.

    The  Company's  Registration  Statement  on Form 10  pursuant to the section
12(b)  of the  Securities  Exchange  Act of 1934  (the  "Exchange  Act")  became
effective on June 2, 1997. The Company is now a "fully-reporting company" within
the meaning of the Exchange  Act. For the period ended May 31, 1998,  there were
834  stockholders  of record plus  approximately  1900  stockholders  in "Street
Name."

    The  Company  has  applied for  listing  with the  American  Stock  Exchange
("AMEX") by requesting a preliminary listing eligibility opinion.



<PAGE>    43


    The high and low interdealer  prices for the calendar quarters since trading
began on the  Electronic  Bulletin Board  (without  retail  markup,  markdown or
commission) are as follows:

   Quarter Ended                                         High           Low
   -------------                                     ---------       --------
December 31, 1995...............................     $    1.25       $  1.25
March 31, 1996..................................     $    2.44       $  1.35
June 30, 1996...................................     $    3.75       $  1.812
September 30, 1996..............................     $    4.25       $  2.125
December 31, 1996...............................     $   10.375      $  2.875
March 31, 1997..................................     $   14.50       $  6.00
June 30, 1997...................................     $    9.75       $  3.0625
September 30, 1997..............................     $    7.50       $  3.75
December 31, 1997...............................     $    4.5625     $  0.6875
March 31, 1998..................................     $    2.125      $  0.9375
June 30, 1998...................................     $    1.80       $  0.125


DIVIDENDS

    The Company has not paid cash  dividends on any of its Common Stock and does
not  anticipate  paying any cash  dividends  on any of its Common  Stock for the
foreseeable future.

    The Board of Directors  declared a dividend to all shareholders of record as
of December  31,  1997  consisting  of one share of a new series of  Convertible
Preferred Stock (the "1998  Preferred  Stock"),  $1.00 par value,  for every 100
shares of Common Stock owned. As authorized in the Company's Amended Certificate
of  Determination  of  Preferences  of Series A  Preferred  Stock filed with the
Nevada  Secretary of State on January 14, 1998, the 1998 Preferred Stock will be
convertible  to one share of  Common  Stock for a period of one year and carry a
dividend  equal to eight percent (8%) of par value,  payable in cash or stock at
the Company's election.  Such dividends are cumulative so that if full dividends
in respect of any  previous  dividend  period are not paid,  holders of the 1998
Preferred  Stock are entitled to receive any  deficiency  before any dividend or
other  distribution  may be made or declared by the Company  with respect to any
other class of stock  including  other  series of  preferred  shares  should the
Company  elect to issue such  additional  series.  Each share of 1998  Preferred
Stock will have attached a warrant (the  "Warrant")  to purchase two  additional
shares of  Common  Stock at $3.00  per  share  for a period  of two  years.  The
Warrants are callable by the Company at $3.50 per share.



<PAGE>    44




                   6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction
------------

     The  Company is a timber  and mining  company,  with  corporate  offices in
Calabasas,   California,   owning  interest(s)  in  certain  timber  or  mineral
properties  located  in the  (1)  states  of  Para  and  Amazonas,  Brazil  (the
"Brazilian  Timber  Properties");  (2) Manhattan  Mining  District,  Nye County,
Nevada, (the "Nevada Property"); (3) Indonesian Gold Belt, Kalimantan, Indonesia
(the  "Indonesian  Gold  Concessions");  (4) Kutai District of East  Kalimantan,
Indonesia (the "Indonesian Coal Concessions"); and (5) on the island of Sumatra,
Indonesia.  The terms and  conditions  of these  acquisitions  and the risks and
contingencies  associated  with such ownership  interests are more  particularly
described in the Section of the Annual Report entitled  "PROPERTIES"  AND "RISKS
FACTORS."


Comparison of Results of Operations -- Year Ended May 31, 1998
Compared to Year Ended May 31, 1997
---------------------------------------------------------------

    Net loss for the year  ended May 31,  1998 was  $9,282,695  as  compared  to
$6,535,952  for the year ended May 31, 1997.  The Company  experienced  sales of
Brazilian  timber  during the year ended May 31, 1998,  resulting in revenues of
$515,691  with a gross profit of $120,983,  compared to timber sales of $287,178
with a gross  profit of $26,089  for the same period  last year.  The  principal
expenses  during the year ended May 31,  1998,  were  attributed  to expenses in
Brazil (approximately  $2,005,000),  office salaries (approximately $592,000 and
officers' salaries of approximately $274,000),  travel (approximately $355,000),
stock and warrants for consulting  fees and other services  ($1,721,000),  legal
fees  ($265,000),  and financing  expense of $1,692,000.  During the fiscal year
ended May 31,  1998,  the Company took a  $1,200,000  write-down  on its mineral
properties.

    As of July 1, 1997,  Brazil is no longer  considered  a highly  inflationary
economy  under  SFAS 52.  Therefore,  translation  adjustments  will begin to be
accumulated in a separate  component of equity.  Translation  adjustments during
the year ended May 31,  1997 were taken to income and were not  material  to the
Company's results of operations.

<PAGE>    45

Year Ended May 31, 1997 Compared to Year Ended May 31, 1996
-----------------------------------------------------------

    Net loss for the year  ended May 31,  1997 was  $4,213,009  as  compared  to
$1,325,094  for the year ended May 31, 1996. The Company  experienced  its first
sales of  Brazilian  timber  during the year ended May 31,  1997,  resulting  in
revenues of $287,178 with a gross profit of $26,089.  The principal increases in
expenses  during the year ended May 31,  1997,  were  attributed  to expenses in
Brazil  (approximately  $145,000),  office  salaries  (approximately  $145,000),
travel  (approximately  $215,000),  stock for services to employees  ($240,000),
consulting  fees  ($115,000),   legal  fees  ($175,000),   discount  on  options
($150,000), warrant expenses ($1,200,000), financing expense of $677,000 related
to conversion of debt to common stock and a general  increase in other  expenses
attributable  to the  Company's  increased  activities  from the previous  year.
During the year ended May 31, 1997,  the Company  invested  $2,600,000 in Common
Stock  toward the purchase of certain  contractual  rights to the seven (7) gold
mining concessions  comprising the Indonesian Gold Concessions,  $227,000 toward
certain  exploration  activities  relating to the Silobat  Property  (one of the
Indonesian Gold Concessions),  $1,670,000  ($700,000 in Common Stock) toward the
acquisition of and improvements to the infrastructure  relating to the Brazilian
Timber  Properties,  and  $2,350,000  ($250,000 in Common Stock) in  development
activities on the Nevada Property.

    As of July 1, 1997,  Brazil is no longer  considered  a highly  inflationary
economy  under  SFAS 52.  Therefore,  translation  adjustments  will begin to be
accumulated in a separate  component of equity.  Translation  adjustments during
the year ended May 31,  1997 were taken to income and were not  material  to the
Company's results of operations.


Liquidity and Capital Resources
-------------------------------

    The Company's  working capital  position as of May 31, 1998 was a deficit of
approximately  $3,356,000.  Almost since inception,  the Company has experienced
pressure on its working capital position due to operating losses and the need to
continually  invest in exploration  activities on the Nevada  Property and, more
recently,  the Brazilian  Properties,  the Silobat Property and the remainder of
the Indonesian Concessions.

    To raise funds in the past,  the Company has relied upon private  placements
of its  equity  securities.  Over the past two  years,  the  Company  has raised
approximately  $5,538,000  pursuant to such private placements and notes payable
to stockholders. In addition, the Company in 1997 concluded privately-negotiated
placements  of  approximately   Three  Million  Five  Hundred  Thousand  Dollars
($3,500,000) of 8% Senior  Convertible  Debentures with certain  investors.  The
Company has initiated  litigation relating to its Convertible  Debenture holders
(see "LEGAL PROCEEDINGS").

    On March 27, 1998, the Company executed an agreement securing $14 million in
equity financing,  primarily to fund its timber operations in South America. The
financing,  through  Bristol  Asset  Management  Company  II  LLC,  requires  an
effective  registration  statement  and  enables  the  Company to draw up to $14
million over a three-year  period.  As of the filing date of this Annual Report,
the Company has not effected a registration  statement covering the common stock
to be issued pursuant to the $14 million equity financing agreement.

<PAGE>    46

    On September 2, 1998, TiNV1,  Inc.,  ("TiNV1"),  entered into a Subscription
Agreement  and a letter  agreement  with the  Company  pursuant  to which  TiNV1
purchased  5,500,000  shares of the Company's  common stock for  $500,000.  This
transaction,  which provided a significant capital infusion into the Company, is
described in more detail in Note 12 to the  Financial  Statements -  "Subsequent
Events."

    The  Brazilian  operations  represent  an  opportunity  for the  Company  to
generate  significant  cash flows for the first time. The Company  believes that
with the anticipated increase in daily production at its Brazilian operations to
125 cubic meters per day, much of its continued operations in Brazil, Indonesia,
the Nevada  Property,  and its operating  expenses and overhead at its corporate
offices will be funded by the cash flow generated from its operations in Brazil.

    The Company  anticipates that it will require additional capital and intends
to secure it through its agreement  with Bristol  Assets  Management  Company II
LLC, by utilizing a publicly registered offering of its securities,  the capital
provided by the TiNV1 transaction,  "Private  Placements" and/or funds generated
from its Brazilian operations.


<PAGE>    47



                             7. FINANCIAL STATEMENTS



              TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
                (FORMERLY NEVADA MANHATTAN MINING INCORPORATED)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                       


Independent Auditors' Reports                                         F-2 - 3


Consolidated Balance Sheet                                                F-4


Consolidated Statements of Operations                                     F-5


Consolidated Statements of Changes in Stockholders' 
Equity (Deficiency)                                                   F-6 - 7


Consolidated Statements of Cash Flows                                 F-8 - 9

Notes to Consolidated Financial Statements                          F-10 - 33



<PAGE>    F-1








                          INDEPENDENT AUDITORS' REPORT



TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
TERRA NATURAL RESOURCES CORPORATION

We have audited the  accompanying  consolidated  balance  sheet of Terra Natural
Resources  Corporation  (formerly  Nevada  Manhattan  Mining  Incorporated)  and
Subsidiaries  as of May 31, 1998,  and the related  consolidated  statements  of
operations,  changes in stockholders' equity (deficiency) and cash flows for the
year then  ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Terra
Natural  Resources  Corporation and Subsidiaries as of May 31, 1998, and results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in the  financial
statements,  the Company  has  incurred  net losses and its current  liabilities
exceed its current assets.  These matters,  among others, as discussed in Note 1
to the financial statements, raise substantial doubt about the Company's ability
to continue as a going  concern.  Management's  plans in regard to these matters
are also  described  in Note 1. The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.



                                       MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
                                          Certified Public Accountants

New York, New York
September 3, 1998


<PAGE>    F-3









                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders
Terra Natural Resources Corporation


We have audited the  accompanying  consolidated  balance  sheet of Terra Natural
Resources  Corporation  (formerly  Nevada  Manhattan  Mining  Incorporated)  and
subsidiaries  as of May 31,  1997 (not  separately  presented  herein),  and the
related consolidated  statements of operations,  changes in stockholders' equity
and cash  flows for the year then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Terra
Natural  Resources  Corporation  and  subsidiaries  as of May 31, 1997,  and the
results  of its  operations  and its cash  flows  for the year  then  ended,  in
conformity with generally accepted accounting principles.

As discussed in Note 11, the Company has restated its financial  statements  for
the year ended May 31, 1997 to account for the rescission,  in December 1997, of
the  $3,000,000  note  agreement  with an  officer  of the  Company's  Brazilian
subsidiary.  The effect of the  restatement  was to decrease  long-term debt and
Brazilian timber concessions by $2,596,729. As explained in Note 11, the Company
has restated its financial  statements as of May 31, 1996 and for the year ended
May 31, 1997 to provide for  impairment  of its mining  properties in accordance
with SEC guidelines.  The effect of the restatement was to increase  accumulated
deficit and decrease  property by $947,429 as of May 31, 1996 and  $3,120,873 as
of May 31,  1997,  and  increase  net loss for the year  ended  May 31,  1997 by
$2,173,444.  Accordingly,  the  accompanying  financial  statements for the year
ended May 31, 1997 have been restated to correct the error and the rescission.

                                             Jackson & Rhodes P.C.

July 28, 1997 (except as to Notes 2 and 11, 
     which are as of February 13, 1998)
Dallas, Texas



<PAGE>    F-4


              TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  MAY 31, 1998
           ASSETS
CURRENT ASSETS
    Cash and Cash Equivalents                                       $    81,529
    Accounts Receivable, net of allowance for
     doubtful accounts of $150,000                                      255,027
    Inventories                                                         108,844
    Prepaid Expenses                                                    283,354
                                                                    -----------
       Total Current Assets                                             728,754

PROPERTIES AND EQUIPMENT
    Mineral Properties:
       Domestic   2,936,000
       Indonesia  1,400,000
    Timber Concessions                                                  700,000
    Machinery and Equipment, net                                        355,392

OTHER ASSETS                                                            265,700
                                                                    -----------
       TOTAL ASSETS                                                 $ 6,385,846
                                                                    ===========

           LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
    Accounts Payable and Accrued Expenses                           $ 1,445,106
    Convertible Notes Payable to Stockholders - 
      Secured by Common Stock                                         1,366,075
    Notes Payable to Stockholders                                       522,950
    Note Payable to Officer                                             718,000
    Current Portion of Long-Term Debt                                    32,214
                                                                   ------------
       Total Current Liabilities                                      4,084,345

    Long-Term Debt                                                       44,327
    Convertible Debentures                                            2,313,459
                                                                    -----------
       TOTAL LIABILITIES                                              6,442,131
                                                                    -----------
COMMITMENTS AND CONTINGENCIES (Note 7)                                        -

MINORITY INTEREST                                                             -

STOCKHOLDERS' DEFICIENCY
    Preferred Stock, $1 par value, 250,000 shares
     authorized, 176,414 shares issued and
     outstanding                                                        176,414
    Common Stock, $0.01 par value, 50,000,000 shares
     authorized and 26,492,543 shares issued and
     outstanding                                                        264,926
    Additional Paid-in Capital                                       28,715,550
    Accumulated Foreign Currency Translation                             24,940
    Accumulated Deficit                                             (29,238,115)
                                                                   ------------
       TOTAL STOCKHOLDERS' DEFICIENCY                               (    56,285)
                                                                   ------------

       TOTAL LIABILITIES STOCKHOLDERS' DEFICIENCY                  $  6,385,846
                                                                   ============

See Accompanying Notes to Consolidated Financial Statements.


<PAGE>    F-5


              TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                           FOR THE YEARS ENDED MAY 31,




                                                      1997              1998
                                                   ------------      ---------

REVENUES                                          $    287,178    $    557,691

COST OF SALES                                          261,089         394,708
                                                  ------------    ------------

GROSS PROFIT                                            26,089         162,983

EXPLORATION COSTS                                   (2,119,042)              -

   
GENERAL AND ADMINISTRATIVE EXPENSES                 (4,270,020)     (7,541,328)
                                                  ------------    ------------

NET LOSS FROM OPERATIONS                            (6,362,973)    (7,378,355)
                                                  ------------    ------------
    

OTHER EXPENSES
    Interest Expense                                    23,479         624,034
    Write-Off of Mineral Properties                          -       1,200,000
                                                  ------------    ------------
       Total Other Expenses                             23,479       1,824,034
                                                  ------------    ------------

NET LOSS                                            (6,386,452)     (9,202,392)

CUMULATED PREFERRED DIVIDENDS                          149,500          80,316
                                                  ------------    ------------

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS       $(6,535,952)    $(9,282,695)
                                                   ===========     ===========

BASIC LOSS PER SHARE                               $(     0.61)    $(     0.62)
                                                   ===========     ===========

DILUTED LOSS PER SHARE                             $(     0.61)    $(     0.62)
                                                   ===========     ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING          10,684,176      14,969,621
                                                   ===========     ===========



See Accompanying Notes to Consolidated Financial Statements.





<PAGE>    F-6



              TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
                    FOR THE YEARS ENDED MAY 31, 1997 AND 1998

<TABLE>
<CAPTION>
                                                                                                                   
                                          Stock               Preferred Stock            Common Stock              
                                      to be Issued         Shares        Amount       Shares       Amount          
                                     --------------        --------    ----------  ----------     ----------       
    <S>                               <C>                  <C>         <C>          <C>            <C>             

    Balance, May 31, 1996             $     -              132,510     $132,510      8,353,881     $ 83,539        

    Shares Issued for Property            108                    -            -        689,200        6,892        

    Shares Issued for Accounts
     Payable                                -                    -            -        100,000        1,000        

    Shares Issued for Cash                  -               96,409       96,409      1,917,351       19,174        

    Shares Issued for Services              -                    -            -         120,000       1,200        

    Shares Issued for Conversion 
      of Debt                               -                    -            -       1,087,133      10,871        

    Conversion of Preferred Stock           -             (    600)      (  600)          6,000          60        

    Warrants Issued with Debentures         -                    -            -               -           -        

    Other Warrants Issued                   -                    -            -               -           -        

    Preferred Dividend                      -                    -            -               -           -        

    Net Loss                                -                    -                           -            -        
                                      -------              -------    ---------     ----------     --------        

    Balance, May 31, 1997             $   108              228,319     $228,319     12,273,565     $122,736        
                                      =======              =======     ========     ==========     ========        
</TABLE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' 
EQUITY (DEFICIENCY) - continued
<TABLE>
<CAPTION>
                                           Additional          Accumulated
                                             Paid-in        Foreign Currency      Accumulated
                                            Capital           Translation            Deficit          Total
                                           -----------      -----------------     ------------      ---------
    <S>                                    <C>              <C>                   <C>               <C>

    Balance, May 31, 1996                  $15,079,460      $      -              $(13,098,003)     $ 2,197,506

    Shares Issued for Property               3,293,000             -                         -        3,300,000

    Shares Issued for Accounts
     Payable                                   249,000             -                         -          250,000

    Shares Issued for Cash                   1,888,477             -                         -        2,004,060

    Shares Issued for Services                 238,800             -                         -          240,000

    Shares Issued for Conversion 
      of Debt                                1,076,755             -                         -        1,087,626

    Conversion of Preferred Stock                  540             -                         -                -

    Warrants Issued with Debentures            666,668             -                         -          666,668

    Other Warrants Issued                    1,206,875             -                         -        1,206,875

    Preferred Dividend                               -             -                (  149,500)       ( 149,500)

    Net Loss                                         -             -                (6,386,452)      (6,386,452)
                                           -----------       -----------          ------------      ----------- 

    Balance, May 31, 1997                  $23,699,575         $        -         $(19,633,955)     $ 4,416,783
                                           ===========        ==========          ============      ===========
</TABLE>

     
R                               
   See Accompanying Notes to Consolidated Financial Statements.
                                
                                                                
                                       


<PAGE>    F-7



              TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
                    FOR THE YEARS ENDED MAY 31, 1997 AND 1998

<TABLE>
<CAPTION>
                                         Stock                Preferred Stock            Common Stock               
                                      to be Issued           Shares       Amount      Shares        Amount          
                                      ------------          ----------  ---------    ----------   ----------        
    <S>                               <C>                   <C>         <C>          <C>            <C>             

    Balance, May 31, 1997             $     108              228,319    $ 228,319    12,273,565     $122,736        

    Common Stock Issued For:
      Cash                             (    108)                   -            -      2,165,400      21,654        
      Property                                -                    -            -      5,005,000      50,050        
      Conversion of Debt and Interest         -                    -            -        582,575       5,826        
      Conversion of Debentures                -                    -            -        338,302       3,383        
      Collateral for Stockholders Notes       -                    -            -      2,743,698      27,437        
      Conversion of Preferred Stock           -             (207,444)    (207,444)     2,280,199      22,802        
      Liquidated Damages                      -                    -            -        289,426       2,894        
      Services Rendered                       -                    -            -        814,378       8,144        

    Discount for Conversion of Debentures     -                    -            -              -           -        

    Warrants Issued For:
      Services Rendered                       -                    -            -              -           -        

    Common Stock Dividend
      Issuance of Preferred Stock             -              167,789      167,789              -           -        
      Issuance of Common Stock Warrants       -                    -            -              -           -        
      Dividends to be Paid                    -             ( 12,250)    ( 12,250)             -           -        

    Common Stock in Escrow                    -                    -            -              -           -        

    Foreign Currency Translation Adjustment   -                    -            -              -           -        

    Preferred Dividend                        -                    -            -              -           -        

    Net Loss                                  -                    -            -              -           -        
                                      ---------             --------    ---------    -----------    --------    ----

    Balance, May 31, 1998             $       -              176,414    $ 176,414    26,492,543     $264,926       $
                                      =========             ========    =========    ==========     ========       =
</TABLE>


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' 
EQUITY (DEFICIENCY) - continued

<TABLE>
<CAPTION>
                                           Additional          Accumulated
                                             Paid-in        Foreign Currency      Accumulated
                                            Capital           Translation            Deficit         Total
                                           -----------      -----------------     ------------     ---------
    <S>                                    <C>              <C>                   <C>              <C>

    Balance, May 31, 1997                  $23,699,575      $        -            $(19,633,955)    $ 4,416,783

    Common Stock Issued For:
      Cash                                     547,672               -                       -          569,218
      Property                               3,946,123               -                       -        3,996,173
      Conversion of Debt and Interest          766,463               -                       -          772,289
      Conversion of Debentures                 331,089               -                       -          334,472
      Collateral for Stockholders Notes     (   27,437)              -                       -                -
      Conversion of Preferred Stock            389,886               -                       -          205,244
      Liquidated Damages                       406,606               -                       -          409,500
      Services Rendered                      1,545,026               -                       -        1,553,170

    Discountfor Conversion of Debentures       500,000               -                       -          500,000

    Warrants Issued For:
      Services Rendered                        428,996               -                       -          428,996

    Common Stock Dividend
      Issuance of Preferred Stock                    -               -         (       167,789)               -
      Issuance of Common Stock Warrant         165,926               -         (       165,926)               -
      Dividends to be Paid                           -               -                  12,250                -

    Common Stock in Escrow                  (3,984,375)              -                       -       (3,984,375)

    Foreign Currency Translation 
     Adjustment   -                                  -            24,940                     -           24,940

    Preferred Dividend                               -               -             (    80,316)      (   80,316)

    Net Loss                                         -               -             ( 9,202,379)      (9,202,379)
                                          ------------      ------------            -------------     ----------- 

    Balance, May 31, 1998                 $ 28,715,550      $     24,940          $(29,238,115)     $(   56,285)
                                          ============      ============          ============      =========== 
</TABLE>


                                       



<PAGE>    F-8



              TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           FOR THE YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
                                                            1997            1998
                                                        ------------     -----------
<S>                                                     <C>              <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net Loss                                            $(6,535,952)     $(9,282,695)
    Adjustments to Reconcile Net Loss to Net
       Cash Used in Operating Activities:
              Provision for Doubtful Accounts                    -           150,000
              Write-Off of Mineral Properties                    -         1,200,000
              Common Stock Issued for Services              240,000        1,442,447
              Warrants Issued for Services                1,206,875          278,996
              Write-Off of Officer Advances                      -            52,013
              Common Stock Issued for Financing 
               Expense                                      677,000                -
              Amortization of Debenture Discount                  -          314,598
              Depreciation                                   23,931           35,645
              Write-Off of Mill Acquisition Cost                  -          291,246
           (Increase) Decrease
              Accounts Receivable                        (   58,161)      (   46,866)
              Inventories                                         -       (  108,844)
              Prepaid Expenses                           (  622,710)          61,878
              Other Assets                                        -       (   40,701)
           Increase (Decrease)
              Accounts Payable and Accrued Expenses         772,572        1,122,390
                                                        ------------      -----------
       Net Cash Used in Operating Activities             (4,296,445)      (4,529,893)
                                                        -----------      -----------


CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of Property and Equipment                   (  253,998)     (   333,441)
                                                        ------------     ------------


CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from Issuance of Convertible Debentures      2,000,000        1,500,000
    Payments on Long-Term Debt                          (   114,284)      (   29,881)
    Advances from Officer                                        -           718,000
    Proceeds from Issuances of Notes to Stockholders        986,196        1,978,075
    Payments for Notes to Stockholders                           -        (  375,000)
    Proceeds from Issuance of Common Stock                2,004,060          569,218
                                                        -----------      ------------
       Net Cash Provided by Financing Activities          4,875,972        4,360,412
                                                        -----------      -----------

Foreign Currency Translation Adjustment                           -           24,940
                                                        -----------       ----------

Net Increase (Decrease) in Cash and Cash 
  Equivalents                                               325,529       (  477,982)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR              233,982          559,511
                                                        -----------      -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                $    559,511     $    81,529
                                                        ============     ===========
</TABLE>



See Accompanying Notes to Consolidated Financial Statements.

                                       



<PAGE>    F-9


              TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED MAY 31, 1998





SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    During the years  ended May 31, 1997 and 1998,  the  Company  paid no income
taxes and no interest.



SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING

    During 1997, the Company issued 589,200 shares of common stock in connection
    with  the  Indonesian  mining  property  acquisitions,  100,000  shares  for
    domestic  mining  services  and  100,000  shares  for  a  Brazilian   timber
    concession  (Note 2). In  addition,  the Company  issued  120,000  shares to
    employees  for services and 1,087,133  shares for  conversion of $410,626 in
    debt.  The Company also issued  warrants in connection  with a debenture and
    issued other  warrants  (see Note 4). The Company  also assumed  $375,000 in
    debt in connection  with acquiring an additional  interest in the mine (Note
    2). The Company also accrued $149,500 in preferred dividends during 1997.

    During  1998,  the Company  issued  814,378  shares of its common  stock for
    services  rendered by employees  and third parties for  $1,553,170,  338,302
    shares of its  common  stock  for  conversion  of  $334,472  of  convertible
    debentures,  2,280,199  shares of its  common  stock for the  conversion  of
    $207,444 of preferred stock and payment of cumulative dividends of $205,244,
    582,575  shares  of its  common  stock for the  conversion  of  $772,289  of
    stockholder's notes and interest, 289,426 shares of its common stock for the
    payment of  liquidating  damages of  $409,500  and  5,000,000  shares of its
    common stock for the purchase of timberlands in Brazil for  $3,996,173.  See
    Note 8 - Stockholders' Equity for further details of these transactions.














See Accompanying Notes to Consolidated Financial Statements.

                                       


<PAGE>    F-10



                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 1 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Organization
                  Terra Natural Resources  Corporation and Subsidiaries  (Nevada
                  Manhattan Mining  Incorporated)  (the "Company") was organized
                  to  acquire,  explore,  develop,  finance  and sell mining and
                  timber rights and properties. For the year ended May 31, 1998,
                  the  Company  changed its name from  Nevada  Manhattan  Mining
                  Incorporated to Terra Natural Resources Corporation.

                  For the year ended May 31, 1997, the Company's  majority-owned
                  subsidiary   Equatorial   Resources,    Ltd.   ("Equatorial"),
                  conducted the Company's  Brazilian timber operations.  For the
                  year ended May 31, 1998, the Company has ceased to operate its
                  Brazilian  timber  operations  under Equatorial and all of its
                  timber  concessions  are being assigned to the Company's newly
                  formed majority-owned  subsidiary Terra Resources Brazil, Ltd.
                  This decision is not considered to be a discontinued operation
                  because the Company is still operating the timber concessions.

                  Basis of Presentation
                  The accompanying  consolidated  financial statements have been
                  prepared in  accordance  with  generally  accepted  accounting
                  principles which contemplate  continuation of the Company as a
                  going  concern.   As  shown  in  the  consolidated   financial
                  statements,  the Company has incurred operating losses and has
                  had  negative  cash  flows  from  operations  for the last two
                  years.   These  matters  raise  substantial  doubt  about  the
                  Company's ability to continue as a going concern.

                  In view of the matters  described in the preceding  paragraph,
                  recoverability  of a  major  portion  of  the  recorded  asset
                  amounts shown in the accompanying  consolidated  balance sheet
                  is dependent upon continued  operations of the Company,  which
                  in turn is dependent upon the Company's ability to continue to
                  raise   capital  and   generate   positive   cash  flows  from
                  operations.  The  consolidated  financial  statements  do  not
                  include   any   adjustments,   if   any,   relating   to   the
                  recoverability and classification of recorded asset amounts or
                  amounts  and  classifications  of  liabilities  that  might be
                  necessary  should  the  Company  be  unable  to  continue  its
                  existence.  Management  plans to take the following steps that
                  it believes will be sufficient to provide the Company with the
                  ability to continue in existence:






<PAGE>    F-11


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 1 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

                  Management's  Financial  Plan to provide  sufficient  funds to
                  continue the Company's  operations,  development and expansion
                  consists  primarily  of (a)  the  $14  million  Bristol  Asset
                  Management  Investment  Agreement  (see  Note 7 -  "Investment
                  Agreement"); (b) the September 2, 1998 $500,000 Stock Purchase
                  Agreement  (see  Note  12  -  "Subsequent  Events");  and  (c)
                  increasing   revenue   from   Brazilian   Timber   Operations.
                  Management   believes  that  the   increasing   revenues  from
                  Brazilian  operations  and  available  capital  from  the  two
                  above-mentioned  investment agreements will provide sufficient
                  capital to continue the Company's operations,  development and
                  expansion activities.

                  Principles of Consolidation
                  The consolidated  financial statements include the accounts of
                  the  Company   and  its   majority-owned   subsidiaries.   All
                  significant   intercompany   accounts  and   transactions  are
                  eliminated in consolidation.

                  Cash and Cash Equivalents
                  For  statement of cash flow  purposes,  the Company  considers
                  short-term  investments  with  original  maturities  of  three
                  months or less to be cash equivalents.

                  Mineral Properties
                  Acquisition  costs relating to mineral  properties with proven
                  and probable  reserves are deferred  until the  properties are
                  put into commercial production, sold or abandoned. Exploration
                  costs,  including  an  allocation  of  employee  salaries  and
                  related costs,  are charged to operations when incurred.  Mine
                  development  costs  incurred  to develop  new ore  bodies,  to
                  expand or rehabilitate  the capacity of operating mines, or to
                  develop  areas  substantially  in  advance of  production  are
                  charged to operations until management has established  proven
                  and probable reserves for the property.  For properties placed
                  in production,  the related  deferred costs are depleted using
                  the units-of-production  method over the life of the reserves.
                  Deferred costs applicable to sold or abandoned  properties are
                  charged against  operations at the time of sale or abandonment
                  of the property.

                  Management's estimates of gold prices,  recoverable proven and
                  probable  reserves,  operating,  capital and reclamation costs
                  are  subject  to  certain  risks and  uncertainties  which may
                  affect  the  recoverability  of the  Company's  investment  in
                  mineral  properties.  Although  management  has  made its best
                  estimate of these factors based on current  conditions,  it is
                  possible that changes could occur in the near term which could
                  adversely affect  management's  estimate of the net cash flows
                  expected to be generated from propeties in operation.



                                                         
<PAGE>    F-12


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 1 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

                  Timber Concessions
                  Timber  concessions  costs  relate to the fees paid to acquire
                  the  rights  to  harvest  timber.  The  acquisition  costs are
                  amortized  over  the  term  or  useful  life  of  the  related
                  concession.  The harvesting and reclamation  costs are charged
                  to expense as incurred.

                  Machinery and Equipment
                  Machinery and equipment is stated as its historical  cost less
                  accumulated   depreciation.   Depreciation  of  machinery  and
                  equipment is primarily  determined by using the  straight-line
                  method  over the  estimated  useful  life of seven  years  for
                  furniture and fixtures and ten years for mill equipment.

                  Impairment of Long-Lived Assets
                  In  accordance  with  Financial   Accounting  Standards  Board
                  ("FASB")  Statement of Financial  Accounting  Standards (SFAS)
                  No. 121,  "Accounting for the Impairment of Long-Lived  Assets
                  and for  Long-Lived  Assets  to be  Disposed  of",  long-lived
                  assets are reviewed for impairment  whenever events or changes
                  in  circumstances  indicate that the carrying  amounts of such
                  assets  may not be  recoverable.  Impairment  losses  would be
                  recognized  if the carrying  amounts of the assets  exceed the
                  fair value of the assets.

                  Foreign Currency Translation
                  For  foreign  subsidiaries  whose  functional  currency is the
                  local  foreign  currency,   the  balance  sheet  accounts  are
                  translated at exchange  rates in effect at the end of the year
                  and income and  expense  accounts  are  translated  at average
                  exchange rates for the year.  Translation gains and losses are
                  included as a separate component of stockholders' equity.

                  Revenue Recognition 
                  Substantially  all  revenues   are  recognized  when  finished
                  products   are  shipped   with   appropriate   provision   for
                  uncollectible accounts.

                  Income Taxes
                  The Company  accounts for income taxes in accordance with SFAS
                  No. 109,  "Accounting  for Income  Taxes'.  Deferred taxes are
                  provided on a liability method whereby deferred tax assets are
                  recognized for deductible temporary differences,  and deferred
                  tax   liabilities   are  recognized   for  taxable   temporary
                  differences. Temporary differences are the differences between
                  the reported  amounts of assets and  liabilities and their tax
                  bases.   Deferred  tax  assets  are  reduced  by  a  valuation
                  allowance  when,  in the  opinion  of  management,  it is more
                  likely than not that some  portion or all of the  deferred tax
                  assets  will  not  be   realized.   Deferred  tax  assets  and
                  liabilities  are  adjusted  for the  effects of changes in tax
                  laws and rates on the date of enactment.



                                      


<PAGE>    F-13


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 1 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

                  Net Loss Per Share
                  For the year ended May 31, 1998, the Company  adopted SFAS No.
                  128, "Earnings Per Share". Basic loss per share is computed by
                  dividing net loss  attributable to common  stockholders by the
                  weighted average number of common shares outstanding.  Diluted
                  loss per share is  computed  similar  to basic  loss per share
                  except that the denominator is increased to include the number
                  of additional  common shares that would have been  outstanding
                  if the  potential  common  shares  had been  issued and if the
                  additional  common  shares were  dilutive.  Loss per share for
                  1997 has been  restated  using the  methodologies  of SFAS No.
                  128.

                  Concentration of Credit Risk
                  The Company sells  products  (primarily in Brazil) and extends
                  credit  based on an  evaluation  of the  customer's  financial
                  condition, generally without requiring collateral. Exposure to
                  losses  on  receivables  is  principally   dependent  on  each
                  customer's  financial  condition.  The  Company  monitors  its
                  exposure  for  credit  losses  and  maintains  allowances  for
                  anticipated losses.

                  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,  as well as the  reported  amounts of revenues and
                  expenses  during the reported  periods.  Actual  results could
                  differ from those estimates.

                  Fair Value of Financial Instruments
                  The Company  measures its financial  assets and liabilities in
                  accordance with generally accepted accounting principles.  For
                  certain of the Company's financial instruments including cash,
                  accounts   receivable,   and  accounts   payable  and  accrued
                  expenses,  the carrying amounts  approximate fair value due to
                  their short maturities. The amounts owed for notes payable and
                  convertible  debentures  also  approximate  fair value because
                  current  interest  rates and terms  offered to the Company for
                  similar notes are substantially the same.



                                     

<PAGE>    F-14



                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 1 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

                  Recently Issued Accounting Pronouncements
                  In  June  1997,   FASB  issued   SFAS  No.   130,   "Reporting
                  Comprehensive   Income",   which  establishes   standards  for
                  reporting  and   displaying   comprehensive   income  and  its
                  components  in  financial   statements.   This   statement  is
                  effective for fiscal years  beginning after December 15, 1997.
                  The  adoption  of  this  standard  is not  expected  to have a
                  material impact on the presentation of the Company's financial
                  statements.

                  In June 1997,  FASB issued SFAS No.  131,  "Disclosures  about
                  Segments  of an  Enterprise  and Related  Information",  which
                  requires a company  to report  certain  information  about its
                  operating  segments  including  factors  used to identify  the
                  reportable  segments and types of products  and services  from
                  which each  reportable  segment  derives  its  revenues.  This
                  statement  is  effective  for  fiscal  years  beginning  after
                  December  15,  1997.  The  adoption  of this  standard  is not
                  expected to have a material impact on the  presentation of the
                  Company's financial statements.


NOTE 2 -      PROPERTIES AND EQUIPMENT

                  Brazil

                  The Company has acquired  various rights (Jonosa  Concessions,
                  Terranorte   Concessions   and   Timberlands),    to   up   to
                  approximately  958,000  hectares  (2,395,000  acres) of timber
                  properties  located  in  Brazil.  In  addition,   the  Company
                  acquired  a  sawmill  facility  located  near  the town of Sao
                  Miguel do Guama,  which is no longer  operated by the Company.
                  The Company began harvesting trees in April 1997 and commenced
                  sales during the year ended May 31, 1997.


                  The Jonasa Concessions
                  The  Company,  through  Equatorial,   entered  into  a  letter
                  agreement with Madeira Intex, S.A, ("Madeira") whereby Madeira
                  agreed  to  assign  its  rights  in  and  to a  Joint  Venture
                  Agreement   which  Madeira  had  entered  into  in  1984  with
                  Companhia  Agropecuaria  do Rio Jabuti  ("Jonasa").  The Joint
                  Venture  Agreement  required  Jonasa to assign to Madeira  the
                  exclusive  rights to extract and market all lumber licensed by
                  the  appropriate  Brazilian  authorities  for export.  All the
                  various  agreements  were  integrated  into  an  Agreement  to
                  Jointly  Develop  Timber  Properties.  Under  this  agreement,
                  Jonasa has granted to Equatorial the properties comprising the
                  Jonasa Concessions. In consideration of this grant, Equatorial
                  has agreed to pay to Jonasa 50% of the net  proceeds  received
                  on the sale of all timber and related  products  produced  and
                  sold pursuant to the agreement.  During the year ended May 31,
                  1998, the Company temporarily  suspended  harvesting of timber
                  under this agreement.  The Company has decided to harvest from
                  the Terranorte Concessions and Tropical Woods Concessions. See
                  Jonasa Concessions in Note 7 - Commitments and Contingencies.


                                      
<PAGE>    F-15


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 2 -      PROPERTIES AND EQUIPMENT (continued)

                  Terranorte Concessions
                  On May 30,  1997,  Equatorial  entered  into an  Agreement  to
                  Harvest Timber and Develop Timber  Properties  with Terranorte
                  S.A.  ("Terranorte").  Terranorte  granted to  Equatorial  the
                  exclusive  right to either  harvest  the timber or to purchase
                  certain  species of logs  extracted by  Terranorte  located on
                  approximately 490,000 hectares of timber property located near
                  the town of Moju, Para, Brazil. In June 1997, Equatorial began
                  harvesting  operations  employing its own crews and purchasing
                  harvested logs from Terranorte.

                  Sao Miguel Sawmill
                  On May 30,  1997,  Equatorial  and  Jonasa  Madeiras  Limitada
                  ("Jonasa  Madeiras")  entered  into an  Agreement  to  Acquire
                  Sawmill.  Under the terms of the  agreement,  Jonasa  Madeiras
                  agreed to convey all right,  title, and interest in and to the
                  sawmill  facility,  all  equipment  relating  to  the  sawmill
                  facility,  and 246 hectares of adjacent real property,  all of
                  which is located  near the town of Sao Miguel do Guama,  Para,
                  Brazil.  During  the year  ended  May 31,  1998,  the  Company
                  abandoned  the use of the sawmill and  extracted a majority of
                  the  assets   purchased  during  the  year.  The  Company  has
                  terminated  the  agreement  for  the use of the  sawmill,  and
                  charged the acquisition cost to expense for the year ended May
                  31, 1998.

                  Timberlands
                  In April  1998,  the  Company  entered  into an  agreement  to
                  acquire  title  to  land,  containing   approximately  292,598
                  hectares,  which  consists  of one large tract in the state of
                  Amazonas and several  smaller tracts in the state of Para. The
                  Company  acquired  title to the  property  for the issuance of
                  5,000,000  shares of the Company's  common  stock.  The shares
                  were valued at  $3,984,375  which  represents  the fair market
                  value of the stock at date of issuance. The shares were issued
                  as escrow shares contingent upon the stockholder's  completion
                  of  certain  financial  obligations  to the  Company  and  the
                  Company's  completion  of its due  diligence  as to the proper
                  conveyance of the deeds for the property.  The stockholder has
                  until October 7, 1998 to complete his financial  obligation to
                  the  Company  and the  Company  has until  October 22, 1998 to
                  complete its due diligence. Also, the Company has the right to
                  cancel the shares and rescind the  acquisition  any time prior
                  to  the  completion  of  its  due  diligence.   Also,  if  the
                  stockholder does not complete his financial  obligation to the
                  Company,  then the  Company  can  cancel  the  shares  and the
                  property remains with the Company.


                                      

<PAGE>    F-16


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 2 -      PROPERTIES AND EQUIPMENT (continued)

                  Tapana (Tropical Woods) Sawmill
                  In May 1998, the Company  entered into a lease agreement for a
                  sawmill,  located in Belem, Brazil which includes 3.6 hectares
                  of  property,  an  office  building,  a sawmill  with  related
                  equipment and a port for  unloading  and storage of logs.  The
                  lease is for a  minimum  of two  years.  Also,  the  agreement
                  provides  for  Tropical  Woods to  deliver a minimum  of 2,300
                  cubic meters of logs per month from their property, consisting
                  of 162,982  hectares.  The Company began operating the sawmill
                  in June 1998.

                  Domestic Mineral Properties
                  The Company owns a 100% interest in mineral properties located
                  in the  Manhattan  Mining  District,  Nye County  Nevada  (the
                  Nevada  Properties).  The  Nevada  Properties  consist  of  28
                  patented (fee  ownership) and 65 unpatented  (deed  ownership)
                  mining  claims that include the  Whitecaps  Mine,  Union Mine,
                  Consolidated   Mine,   Earl   Mine,   Bath   Mine  and   other
                  miscellaneous mines and claims which cover approximately 1,800
                  acres.

                  In March 1997,  the Company  entered  into a Sale and Purchase
                  Agreement  with the former  owners of the  Nevada  Properties.
                  Under the terms of this latest  agreement,  the former  owners
                  agreed to sell to the Company  100% of their  interests in the
                  Nevada Properties for $375,000,  payable as follows:  $100,000
                  in March  1997 and the  balance  plus all  accrued  and unpaid
                  interest  (calculated  at the  rate  of  5.25%)  on or  before
                  February 6, 1999.  The Company paid the first  installment  of
                  $100,000 in March 1997 and paid the balance in June 1997.  See
                  Note 7 for discussion of a contingency regarding the ownership
                  of the property.  The  agreement  also  acknowledges  that the
                  Company is the only entity legally entitled to conduct mineral
                  operations  on  the  Nevada  Property.  The  Company  is  also
                  required  to pay all U.S.  Bureau of Land  Management  ("BLM")
                  annual  maintenance fees associated with the claims comprising
                  the Nevada  Property.  The Company is current with the fees to
                  the BLM.

                  Management of the Company is active in the supervision of work
                  taking  place,   plus  future   planning  of  all  aspects  of
                  operations.  The operating permits for the Manhattan Gold Mine
                  were issued to the Company by the State of Nevada during April
                  1996.  The  Company  negotiated  an  agreement  with  Harrison
                  Western Mining and Construction  Company  ("Harrison") for the
                  beginning of  production  in July 1996.  The work was begun in
                  July 1996 and  included  placement  of mine shops and  support
                  facilities;  mining in the  existing  workings of the mine and
                  extension  of the  existing  decline  from its end location of
                  1,200  linear  feet from the  surface to the White Caps Level.
                  Underground  flooding  and  caving  of  the  existing  decline
                  required an alternate  access way and a new decline was driven
                  from  approximately  800  feet on the  existing  decline.  The
                  development  activities  with  Harrison have been ceased as of
                  May 31, 1998 because of depressed  gold prices and the Company
                  lacks the  capital  requirements  and they are in  arbitration
                  (see Note 7) relating to a dispute with Harrison.

                                      

<PAGE>    F-17


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 2 -      PROPERTIES AND EQUIPMENT (continued)

                  On November 25, 1997,  the Company  entered into a non-binding
                  letter of intent with Royal Gold relating to  exploration  and
                  development efforts on its Nevada Property. Under terms of the
                  letter of intent,  Royal Gold was granted an exclusive  option
                  to explore,  develop and purchase all of the  interests  which
                  are  or may  be  controlled  by  the  Company  on  the  Nevada
                  Property. The renewable three year agreement provides that the
                  Company will retain a 4% net smelter  returns royalty and also
                  will reserve the right to continue with the development of its
                  under ground mining  opportunity  at the White Caps  location.
                  Royal  Gold has the  option to  acquire  all of the  Company's
                  interests in the property for $5,000,000.  The agreement would
                  continue  indefinitely  to  the  extent  that  Royal  Gold  is
                  achieving production in commercial quantities or is engaged in
                  reclamation.

                  For the year ended May 31, 1997,  the Company has performed an
                  assessment of the  recoverability of the carrying value of its
                  domestic  mineral  properties  and has provided an  impairment
                  write-down against this property as explained in Note 11.

                  Indonesia Mineral Properties
                  The Company has made certain  acquisitions in Indonesia during
                  the year ended May 31, 1997:

                  On August 19, 1996,  the Company  entered into an agreement to
                  acquire a 51% interest in a metals/minerals mining property in
                  Kalimantan, Indonesia (Sopang Gold Concession).  Consideration
                  for the purchase  consisted of 400,000 shares of the Company's
                  common  stock due upon the  signing  of the  agreement  and an
                  additional   4,000,000  shares  to  be  released  only  if  an
                  independent valuation of the property exceeds $12,000,000. The
                  Company  issued  shares and has valued the  400,000  shares at
                  $1,200,000  based  upon the $3 market  price of the  Company's
                  common shares at the time.

                  The Sopang  Gold  Concessions  ("Sopang")  consists  of 16,480
                  hectares and is held under Indonesian title as a KP, a form of
                  Indonesian  citizen ownership with a joint venture  agreement.
                  The concession is located in southeast Kalimantan.  Because of
                  the lack of major  infrastructure  in the area,  initial  work
                  will be limited to surface trenching and geochemical sampling.
                  The Company has not  initiated  any  material  exploration  or
                  development activities as of May 31, 1998.


                                     

<PAGE>    F-18


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 2 -      PROPERTIES AND EQUIPMENT (continued)

                  The West  Kalimantan  Gold Project ("West  Kalimantan")  is 75
                  kilometers  south  of  the  Sarawak  region  of  Malaysia  and
                  contains  62  hectares  with the  intent to expand to at least
                  2,000  hectares.  The Project is held under a KP title, a form
                  of  Indonesian  citizen  ownership  in joint  venture with the
                  Company. Access to the property is by road and motorized canoe
                  for initial  field work and  helicopter  support for  advanced
                  exploration  activities.  Infrastructure  is  limited  but the
                  proximity  to the west  coast  of  Kalimantan  and low  relief
                  terrain  indicates  no unusual  development  problems  will be
                  encountered.   Following  a  survey  and   additional   ground
                  sampling,  supervised by Behre,  Dolbear & Company,  Inc., key
                  core  drill  targets  were  identified  from  pitting  showing
                  anomalous gold values, but as of May 31, 1998, the Company has
                  not initiated the drilling or development activities.

                  The Cepa Coal Project  ("Cepa") in East  Kalimantan  covers an
                  area of  approximately  286,000  hectares and is held in three
                  concessions  as Contracts of Work  ("COW's").  Initial work on
                  the property will include reasonable expansion of ownership to
                  include promising additional property containing similar coal.

                  During  the year  ended May 31,  1998,  the  concessions  were
                  expanded  to include the Mecfa Coal  Property.  The Mecfa Coal
                  Property is comprised of three blocks of land totaling  39,770
                  hectares  which have a COW. The  property is  currently  being
                  reviewed by potential joint venture partners.

                  The West  Kalimantan  and Cepa  projects,  collectively,  were
                  acquired in January 1997 for 200,000 common shares issued upon
                  signing of the agreement and an additional 3,800,000 shares to
                  be released only if an  independent  valuation of the property
                  exceeds $40,000,000. The Company has valued the 200,000 shares
                  at $1,400,000 based upon the $10 market price of the Company's
                  common shares at the time,  discounted  30% for the restricted
                  nature of and the thin market for the shares.

                  The Company owns the  interests  it acquired  with the 600,000
                  shares   issued  as   explained   above.   The   Company   has
                  contractually   acquired  the  rights  to  obtain  controlling
                  interests in five  additional  gold  concessions in Indonesia.
                  The  Company  is  currently   reviewing  these  properties  to
                  determine an applicable acquisition structure.

                  For the year ended May 31, 1997,  the Company has performed an
                  assessment of the  recoverability of the carrying value of its
                  Indonesia  mineral  properties  and has provided an impairment
                  write-down  against this property as explained in Note 11. For
                  the  year  ended  May 31,  1998,  the  Company  has  taken  an
                  impairment   write-down   for  the  Sopang   Gold   Concession
                  acquisition cost of $1,200,000.  Based on the current analysis
                  of the property and its underlying minerals, the Company could
                  not  substantiate  that future  operations  would provide cash
                  flows to  recover  the  acquisition  cost.  The  Company  will
                  expense, as incurred,  future development and exploration cost
                  until the  Company can  determine  the  property's  proven and
                  probable mineral reserves.

                                                         

<PAGE>    F-19


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 3 -      CONVERTIBLE NOTES PAYABLE STOCKHOLDERS - SECURED BY COMMON STOCK

                  As of May 31, 1998 the Company has  $1,366,075  due to various
                  stockholders.  The principal and accrued interest,  at 10% per
                  annum,  are due within a one year period from date of advance.
                  Each  note is  secured  by a  certain  number of shares of the
                  Company's  common  stock.  The  number of  shares,  which were
                  issued on the date of the advance,  is  determined by dividing
                  the principal  amount by the fair market value of the stock on
                  the date of advance. If the Company does not repay the note on
                  the due date, the principal and unpaid  interest are converted
                  to common stock. For the year ended May 31, 1997 and 1998, the
                  Company issued 0 and 2,741,698  shares,  respectively,  of the
                  Company's common stock to secure the loans, and 0 and 355,000,
                  respectively,  of the  shares  have been  converted  to equity
                  leaving  2,386,698  shares  outstanding  as collateral for the
                  debt at May 31, 1998.

NOTE 4 -      NOTE PAYABLE TO OFFICER

                  During the Year  ended May 31,  1998,  the COO of the  Company
                  advanced   $718,000  to  the   Company  for  working   capital
                  requirements.  The note bears interest at 8% per annum and all
                  principal and accrued interest is due September 1998.

NOTE 5 -      LONG-TERM DEBT AND NOTES PAYABLE

                  Notes payable to  stockholders  of $522,950 accrue interest at
                  the  rate  of  9%,  are  due  on  demand and are guaranteed by
                  certain Company officers.

                  As of May 31, 1998, long-term debt consisted of:

                   Note payable to stockholder, interest imputed      
                   at 9%, payable $1,000 per month until April 2001  $    40,646

                   Note payable to stockholder at $2,000 per
                   month, including interest at 9%                        35,895
                                                                     -----------
                                                                          76,541
                  Current portion                                         32,214
                                                                     -----------
                  Long-term debt                                     $    44,327
                                                                     ===========

                  Maturities of long-term  debt principal are as follows for the
                  years ending May 31:

                  1999                                               $    32,214
                  2000                                                    23,992
                  2001                                                    15,533
                  2002                                                     4,802
                                                                    ------------
                                                                     $    76,541
                                      

<PAGE>    F-20


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 6 -      CONVERTIBLE DEBENTURES

                  In April and July 1997, the Company entered into  Subscription
                  Agreements  related to two negotiated  private placements (the
                  "Debentures").  These  transactions were made in reliance upon
                  the exemption  from  registration  afforded by Section 4(2) of
                  the Securities Act of 1933. As a result, the Company issued an
                  aggregate  of  $3,500,000  of 8%  Senior  Secured  Convertible
                  Debentures  due March 31,  2000 and July 1, 2000 for the April
                  ($2,000,000) and July ($1,500,000) offerings, respectively.

                  The  Debentures  may be converted into shares of the Company's
                  Common  Stock at any time  commencing  June 2, 1997 at a price
                  equal  to the  lesser  of  seventy-five  percent  (75%) of the
                  closing  bid price of the Common  Stock on the  closing  date;
                  seventy-five  percent  (75%) of the  closing  bid price of the
                  Common Stock on the day prior to the funding of any subsequent
                  funding; or seventy-five  percent (75%) of the average closing
                  bid price for the five trading days immediately  preceding the
                  actual date of conversion of the  Debentures.  With respect to
                  the April 1997 funding, if conversion is made after August 16,
                  1997,  the conversion  price will be seventy-two  and one-half
                  percent (72.5%) of the  above-referenced  valuation standards.
                  The Company has  recorded  $666,666 and $500,000 for the years
                  ended May 31, 1997 and 1998, respectively,  deferred financing
                  charges for the differences  between the conversion  price and
                  the  fair  market  value  of the  stock  at the  date  of each
                  funding.  The discount is being amortized over the life of the
                  debentures.

                  The Company was required to use its "best  efforts" to cause a
                  Registration   Statement  with  the  Securities  and  Exchange
                  Commission to become effective.  If the Registration Statement
                  did not become  effective  within 120 days of each  respective
                  funding,  the Company is required  to pay  liquidated  damages
                  equal to two  percent  (2%) of the  Debentures  for the  first
                  thirty days and three percent (3%) per month  thereafter until
                  the Registration  Statement  becomes  effective.  For the year
                  ended May 31,  1998,  the  Company  has  incurred  $717,636 of
                  liquidating  damages of which  $409,500 has been  converted to
                  289,426 shares of the Company's common stock.

                  With  regard  to  the  April  1997  funding,  until  at  least
                  seventy-five percent (75%) of the Debentures are converted,  a
                  deed of trust on the Nevada Property and a pledge of 1,000,000
                  shares of Common  Stock will  secure the  Debentures.  No such
                  security is given on the Debentures issued in July 1997.

                  The Company  has issued  warrants  to the  Subscribers  of the
                  April and July  offerings.  Regarding the  Subscribers  of the
                  April  offering,  the Company has granted 62,500 warrants with
                  an exercise  price of $8 per share and an  expiration  date of
                  April  16,  2002.  Regarding  Subscribers  of  the  July  1997
                  offering,  the  Company has granted  75,250  warrants  with an
                  exercise  price of $6.75 per share and an  expiration  date of
                  July 16, 2002.  The exercise price is subject to adjustment to
                  account for payments of dividends, stock splits, reverse stock
                  splits, and similar events. See Note 7 - "Legal Proceedings."

                                      

<PAGE>    F-21


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 7 -      COMMITMENT AND CONTINGENCIES

                  Leases
                  The Company's  Brazilian  operation leases  approximately  3.6
                  hectares of property and a related  sawmill through May, 2000.
                  The future  minimum lease  payments are $180,000 for each year
                  ending May 31, 1999 and 2000. Rent expense amounted to $27,181
                  and  $20,726  for the  years  ended  May 31,  1997  and  1998,
                  respectively.


                  Securities and Exchange Commission
                  In fiscal 1994,  the Company  entered into a consent  judgment
                  with the  Securities  and  Exchange  Commission  following  an
                  investigation into the Company's business activities.

                  In  connection  with the  judgment,  the Company  received the
                  following  "Stipulation  Regarding  Resolution of  Outstanding
                  Issues" from the Commission  closing out the investigation and
                  all related issues:

                     "Whereas  the  disposition  of  funds  analysis   conducted
                     pursuant to the Judgment of Permanent  Injunction and Other
                     Relief   against    Defendant   Terra   Natural   Resources
                     Corporation  entered  on  August 3,  1993 has  revealed  no
                     ill-gotten gains received by any defendant, the undersigned
                     parties  hereby  stipulate that all  outstanding  issues in
                     this action have been resolved, including disgorgement, and
                     that  the  judgment  entered  against  the  defendants  are
                     final."

                  The entry of the  judgment may impose  certain  burdens on the
                  Company  with  respect  to its  future  activities.  The  more
                  significant of such burdens are as follows:

                  (i) The Company may not be able to utilize the exemptions from
                      registration  available  under  Regulation A and  Rule 701
                      under the 1933 Act.

                  (ii)The  Company  may  not be  able  to  rely  on the  private
                      placement  exemptions provided in various state securities
                      laws in  connection  with the offer and sale of securities
                      in a  transaction  which  qualifies  as an exempt  sale of
                      securities under the 1933 Securities Act.

                  In such case,  the  Company  would be  required to qualify the
                  transaction  under the state securities laws, which may not be
                  available.  This qualification would increase the cost of, and
                  extend the time for  completing,  such  private  placement  of
                  securities.

                  Commissions
                  During May 1997, the Company agreed to pay two shareholders an
                  aggregate  of  3%  of  the  "net  profits"  of  the  Company's
                  Brazilian operations. For the year ended May 31, 1997 and 1998
                  no commissions were paid.


                                                         

<PAGE>    F-22


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998

NOTE 7 -      COMMITMENT AND CONTINGENCIES (continued)

                  Legal Proceedings
                  During  November  1996,  the Company filed a lawsuit in Nevada
                  against  its  former  joint  venturer  partners  in the Nevada
                  Properties ("the Harvey Entities").  The complaint  originally
                  alleged, among other things, that the Harvey Entities breached
                  their  obligations  under  various  agreements.  The action as
                  amended seeks damages of  approximately  $4,000,000  resulting
                  from  the  actions  and  inactions  of  the  defendants.  In a
                  counterclaim,   the   defendants  are  seeking  an  injunction
                  preventing the Company from conducting  activities  related to
                  the mine and punitive damages and other financial relief based
                  on breach of contract and other causes of action.

                  The  Company  subsequently  amended its  complaint,  seeking a
                  judicial  determination  that the Joint Venture  Agreement was
                  null and void and a  determination  that the  Harvey  Entities
                  have forfeited all interest in the Nevada properties.  After a
                  hearing  in  September  1997,  the court  refused  to issue an
                  injunction against the Company.  Pursuant to stipulation,  the
                  parties  have  agreed  not to  interfere  with  one  another's
                  operations on the Nevada Properties. Additionally, the Company
                  has agreed not to further encumber the Nevada property pending
                  trial.

                  If the Company is successful in obtaining specific performance
                  of the agreement  alleged in the Action,  it will  effectively
                  continue to own or control an undivided  100%  interest in the
                  Nevada   property.   Regardless  of  whether  the  Company  is
                  successful  in the Action,  it will continue to own at least a
                  50% undivided  interest in the Nevada  Properties by virtue of
                  its contractual rights.

                  In June 1996,  the  Company  entered  into an  agreement  with
                  Harrison  Western  Construction  Corporation  ("Harrison")  to
                  perform  contract mine  development  services on the Company's
                  Nevada Properties.  In October 1997, these services ceased and
                  a  dispute  arose  between  the  parties.  The  scope  of work
                  estimated  at  the  time  of  commencement  was  approximately
                  $600,000 as  projected  by  Harrison.  At  termination  of the
                  agreement,  Harrison  reportedly  furnished a total  amount of
                  services  and  materials  totaling  approximately   $1,684,000
                  without  completion  of the  objectives  for which the parties
                  entered into the  agreement.  The Company  paid  approximately
                  $1,155,000,  in 1997, in cash to Harrison and in November 1996
                  issued  100,000  shares of the  Company's  stock in payment of
                  $250,000  of  services.  In July 1997,  an  additional  65,000
                  shares were issued to  Harrison as  collateral  for any unpaid
                  and  owing  amounts.  Subsequent  to  the  termination  of the
                  agreement,  Harrison filed a mechanic's and materialman's lien
                  in the amount of $482,749 on the Company's  Nevada property in
                  January 1998.  This filing was, in the opinion of the Company,
                  in direct  violation  of  specific  clauses  contained  in the
                  agreement between the parties.

                                     

<PAGE>    F23


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 7 -      COMMITMENT AND CONTINGENCIES (continued)

                  In support of its lien,  Harrison filed a lawsuit in July 1998
                  in Federal  District  Court in  Nevada.  In August  1998,  the
                  Company was granted a motion to stay the proceedings and enter
                  arbitration.  The parties  have been  ordered to report to the
                  Federal   District   Court  the  status  of  the   arbitration
                  proceedings  on or  before  November  30,  1998.  The  Company
                  believes that any  arbitration  agreement or damages would not
                  have a material impact on the Company's financial statements.

                  In July 1998,  the Company and  several  stockholders  filed a
                  lawsuit,  in United  States  District  Court  for the  Central
                  District of  California  against its  Debenture  holders.  The
                  lawsuit  contends that the defendants  violated  Section 10(b)
                  and 13(g) of the Securities  Exchange Act,  Section 1962(b) of
                  the Racketeer  Influenced and Corrupt  Organizations  Act, and
                  committed  fraud  by  engaging  in  a  fraudulent   scheme  to
                  manipulate and artificially  depress the market in and for the
                  Company's  common  stock by use of massive  short  sales.  The
                  Plaintiffs  seek an unspecified  amount of damages,  including
                  punitive  damages,  a  judicial  declaration  that the  terms,
                  conditions   and   covenants   of   certain   debentures   and
                  subscription  agreements were violated and certain  injunctive
                  relief.

                  In July 1998,  the  Company  and  certain  board  members  and
                  officers of the Company were named as  defendants  in lawsuits
                  filed by certain debenture holders.  Each suit claims that the
                  defendants   breached  certain   debentures  and  subscription
                  agreements  and failed to file a  registration  statement with
                  the Securities and Exchange Commission.  Also, the suits claim
                  that the  defendants  were in violation  of Section  10(b) and
                  20(a) of the  Securities  and  Exchange  Act.  The Company and
                  other   defendants   deny  any  wrong  doings  and  intend  to
                  vigorously  defend  both these  lawsuits.  The impact of these
                  lawsuits on the  Company's  financial  position or  operations
                  cannot be determined presently.

                  Jonasa Agreement
                  In  February  1998,  a dispute  arose  between  the  Company's
                  subsidiary,  Equatorial and Jonasa.  In addition,  the Company
                  had been considering transferring its operations closer to the
                  principal  port  in the  area,  Belem,  to  sell  more  of its
                  products for export, and consolidating its operations with the
                  administration  of  its  Brazilian  operations.  As a  result,
                  Equatorial and Jonasa entered into a compromise and settlement
                  agreement which resulted in the removal of  substantially  all
                  equipment  from  the  Sao  Miguel  sawmill  facility  and  the
                  abandonment  of its  operations  in Sao  Miguel.  Given  these
                  events,  the legality of the Jonasa Timber Concession could be
                  contested by Jonasa.  However,  the Company  believes any such
                  actions by Jonasa would be  defendable by the Company and that
                  the Concession is still valid.


                                                         
<PAGE>    F-24


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 7 -      COMMITMENT AND CONTINGENCIES (continued)

                  Regulations
                  The  Company's  mining  operations,   exploration  and  timber
                  activities are subject to various foreign,  federal, state and
                  local  laws  and  regulations   governing  protection  of  the
                  environment.  These laws are  continually  changing  and, as a
                  general  matter,  are becoming  more  restrictive.  Management
                  believes that the Company is in material  compliance  with all
                  applicable laws and regulations.

                  Investment Agreement
                  During the year ended May 31, 1998,  the Company  entered into
                  an agreement for an investor to purchase up to  $14,000,000 of
                  the  Company's  common stock over a period of three years from
                  March 28, 1998.  The  principal  terms of the agreement are as
                  follows:

                  -  The sale of the Company's common stock to the investor will
                     be in the form of a Put  Notice in which the  Company  will
                     designate  the dollar  amount of shares to be  purchased by
                     the investor. Each Put Notice must be in an amount not less
                     than $50,000.  The number of shares to be issued under each
                     Put  Notice  shall be an  amount  equal  to the Put  amount
                     divided by 78% of the lowest sale price of the common stock
                     as listed on the principal  exchange during the ten trading
                     days prior to the Put Notice.

                  -  The Company may not issue a Put Notice if  a)trading of the
                     Company's  common stock is  suspended  or  delisted,  b)the
                     closing  price of the  Company's  common stock is less than
                     $.25 per share,  c)a registration  statement,  covering the
                     shares,  is not  effective or is subject to a stop order or
                     is otherwise suspended,  d)the Dow Jones Industrial Average
                     has dropped more than 3% within the preceding five business
                     days,  or e)the common stock is not then  registered  under
                     the Exchange Act.

                  -  Also,  with the  issuance of the shares the  investor is to
                     receive common stock purchase  warrants to purchase  shares
                     of the Company's  common  stock.  Each warrant shall be for
                     the  purchase  of shares  in an amount  equal to 12% of the
                     number  of shares of  common  stock  purchased  and with an
                     exercise  price of equal to 94% of the average  closing bid
                     price for the  Company's  common  stock on the exchange for
                     ten trading days prior to the Put Notice. The warrant shall
                     be exercisable for a five-year period.

                  -   To the  extent  that the  Company  has not  delivered  Put
                      Notices  to the  investor  on or before  one year from the
                      date of the agreement in an aggregate  dollar amount equal
                      to the  lessor of  a)$4,666,667  or b)the  maximum  dollar
                      amount with  respect to which Put Notices  could have been
                      delivered  prior to such date, then any warrants that have
                      not been issued had such Put Notices been delivered  shall
                      be issued.  The exercise  price of the  warrants  shall be
                      equal to 94% of the  average  closing  bid  price  for the
                      Company's  common  stock on the  exchange  during  the ten
                      trading days prior to the one year anniversary.

                                      
<PAGE>    F-25


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 7 -      COMMITMENT AND CONTINGENCIES (continued)

                  -  To the  extent  that  the  Company  has not  delivered  Put
                     Notices  to the  investor  on or before  two years from the
                     date of the agreements in an aggregate  dollar amount equal
                     to the  lessor  of  a)$9,333,332  or b)the  maximum  dollar
                     amount with  respect to which Put  Notices  could have been
                     delivered  prior to such date,  then any warrants that have
                     not been issued had such Put Notices been  delivered  shall
                     be issued.  The  exercise  price of the  warrants  shall be
                     equal  to 94% of the  average  closing  bid  price  for the
                     Company's  common  stock  on the  exchange  during  the ten
                     trading days prior to the two year anniversary.

                  -  To the  extent  that  the  Company  has not  delivered  Put
                     Notices to the investor on or before the termination of the
                     agreement   in  an   aggregate   dollar   amount  equal  to
                     $14,000,000  or b)the maximum dollar amount with respect to
                     which Put Notices could have been  delivered  prior to such
                     date,  then any warrants  which have not been  delivered to
                     the  investor  which  would  have been  issued had such Put
                     Notices been delivered shall be issued.  The exercise price
                     of the  warrants  shall  be  equal  to  94% of the  average
                     closing  bid price for the  Company's  common  stock on the
                     exchange   during  the  ten  trading   days  prior  to  the
                     termination date.

NOTE 8 -      STOCKHOLDERS' EQUITY

                  Preferred Stock
                  The Company is  authorized  to issue  up to 250,000  shares of
                  Preferred  Stock  with  a  par  value  of $1.00 per share. The
                  Preferred Stock may be issued from time to time in one or more
                  series.

                  In October 1995,  the Board of Directors  authorized  Series A
                  Preferred Stock ("Old Series A") for up to 250,000 shares. The
                  Old Series A holders  are  entitled to receive an 8% per annum
                  cumulative  dividend and a  liquidating  preference of $10 per
                  share. The holders of the Old Series A shall have the right to
                  convert each share of Series A into 10 shares of the Company's
                  common stock, for the period of issuance to December 31, 1997.
                  The Old Series A shares automatically  convert to 10 shares of
                  the  Company's  common  stock upon the earlier of December 31,
                  1997 or the Company  successful  completion of an IPO for more
                  than $5,000,000.

                  In January 1998, the Board of Directors  authorized a Series A
                  Preferred Stock ("New Series A") for up to 250,00 shares.  The
                  New Series A holders  are  entitled to receive an 8% per annum
                  cumulative   dividend   payable   December   31,  1998  and  a
                  liquidating  preference  of $3.50 per share.  The New Series A
                  shares  automatically  convert into one share of the Company's
                  common  stock on December 31,  1998.  Also,  each New Series A
                  share has a common stock purchase warrant entitled to purchase
                  two shares of the Company's common stock at $3.00 per share on
                  or before December 31, 1999.

                                      
<PAGE>    F-26


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 8 -      STOCKHOLDERS' EQUITY (continued)

                  For the years ended May 31, 1996 and 1997,  the Company issued
                  132,510  and  95,809,  respectively,   of  Old  Series  A  for
                  aggregate  proceeds of $1,791,425.  As of May 31, 1998, 20,875
                  Old  Series  A  shares  have not  been  converted  which  have
                  cumulative  dividends  of  $35,172.  These  shares  are  being
                  converted as the holders present them for conversion.

                  In  December  1997,  the  Company   declared  a  dividend  for
                  shareholders  of record as of December 31, 1997.  The dividend
                  is to be paid in one New  Series A for each 100  shares of the
                  Company's  common stock.  As of May 31, 1998,  the Company has
                  issued approximately  155,539 New Series A shares of the total
                  to be issued of 167,789.

                  Common Stock
                  For the year ended May 31, 1997, the Company had the following
                  significant  common  stock  transactions   (see  Note  12  for
                  Subsequent Events):

                        -   Issued  120,000  common  shares to certain employees
                            for  services  rendered.  The Company has valued the
                            shares at $240,000 based upon the $2 market price of
                            the Company's common shares at the time.

                         -  Issued   100,000   common   shares  to  its   mining
                            contractor  in Nevada  to  settle a mining  contract
                            payable of  $250,000.  The shares were valued at the
                            amount of the payable settled. The fair value of the
                            shares  at the  time  was  approximately  $2.50  per
                            share.

                         -  Issued    1,087,133   common   shares   to   certain
                            shareholder creditors for the conversion of $410,626
                            in debt. The Company recorded a financing expense of
                            $677,000  (included  in general  and  administrative
                            expenses) for the excess of the fair market value of
                            the  shares  over the  amount of the debt.  The fair
                            market  value  was  determined  as the $1 per  share
                            price at which the Company was issuing its shares in
                            a private placement at the time.

                  For the year ended May 31, 1998, the Company had the following
                  significant common stock transactions:

                         -  Issued   814,378  shares  for  payment  of  services
                            rendered by employees  and  unrelated  parties.  The
                            shares  have  been  valued at  $1,553,170,  the fair
                            market value at the date of issuance.

                         -  Issued   338,302   shares   for   the conversion  of
                            convertible  debentures  for  $334,472 of discounted
                            principal.

                         -  Issued  2,280,199  shares for  the conversion of Old
                            Series A  Preferred  Stock for $207,444 of par value
                            and  $205,244 of  cumulative dividends.
                            
                         -  Issued  289,426 shares for the payment of liquidated
                            damages of $409,500  associated with the convertible
                            debentures.

                                                         
<PAGE>    F-27




                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998


NOTE 8 -      STOCKHOLDERS' EQUITY (continued)

                         -  Issued  5,000,000  shares  for  the  acquisition  of
                            timberlands  in  Brazil  for  $3,984,375,  the  fair
                            market  value of the stock at the date of  issuance.
                            The shares have been issued as escrow shares per the
                            Company's  purchase  contract.  The  shareholder  is
                            required to perform  certain  financial  obligations
                            prior to the  release  of the  shares  from  escrow.
                            Also,  the Company has to complete its due diligence
                            as to the  proper  conveyance  of the  deeds for the
                            land.  The Company has not  recorded the purchase as
                            an asset until the Stockholder's obligations and the
                            Company's due diligence  have been  completed.  (See
                            Note 2 - "Timberlands").

                         - Issued 2,743,698 shares as collateral for shareholder
                           notes of which $436,088 of principal and interest and
                           355,000 shares have converted to common stock for the
                           year ended May 31, 1998.

                         -  Issued   582,575   shares  for  the   conversion  of
                            shareholder notes and accrued interest for $772,289,
                            of which $436,088 represents  principal and interest
                            for shareholder  notes secured by common stock,  the
                            fair  market  value of the shares at the date of the
                            issuance of the notes.

                  Warrants
                  During the year ended May 31,  1997,  warrants  were issued to
                  third  parties  for  an  aggregate  of  412,500   shares.   In
                  accordance with SFAS 123, the Company  expensed  $1,206,875 in
                  connection with these warrants.

                  During  the year  ended  May 31,  1998,  the  Company  had the
                  following significant issuances of warrants:

                     -   Issued to a shareholder for services  200,000  warrants
                         to purchase  the  Company's  common  stock at $2.50 per
                         share for a period from date of grant to May 2000.  The
                         Company  recognized  compensation  expense of $268,996,
                         the fair market value of the warrants at date of grant.

                     -   Issued for  services  350,000  warrants to purchase the
                         Company's  common stock at $4.06 per share for a period
                         from date of grant to June 2002. The Company recognized
                         compensation  expense of $10,000, the fair market value
                         of the services rendered.

                     -   Issued  167,789 warrants to purchase  two shares of the
                         Company's common  stock at $3.00 per share on or before
                         December  31, 1999 in association with the New Series A
                         shares.


                                                        
<PAGE>    F-28


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 8 -      STOCKHOLDERS' EQUITY (continued)


                  Stock Options
                  The Company has adopted only the disclosure provisions of SFAS
                  No. 123. It applies  Accounting  Principles  Bulletin  ("APB")
                  Opinion No. 25,  "Accounting  for Stock Issued to  Employess",
                  and related  interpretations  in  accounting  for its plan and
                  does not recognize  compensation  expense for its  stock-based
                  compensation   plan  other  than  for  restricted   stock  and
                  options/warrants  issued  to  outside  third  parties.  If the
                  Company had elected to recognize  compensation  expense  based
                  upon the fair  value at the grant  date for  awards  under its
                  plan consistent  with the  methodology  prescribed by SFAS No.
                  123, the  Company's net income and earnings per share would be
                  reduced to the proforma amounts indicated below:

                                             For The Years Ended,
                                             --------------------
                                                   May 31,
                                            1997                1998
                                          -------              ------
                  Net Loss
                     As Reported         $(6,535,952)         $(9,282,695)
                                         ============         ===========
                     Proforma            $(6,584,802)         $(9,315,016)
                                         ============         ===========

                  Basic Loss Per Share
                     As Reported         $(      .61)         $(     0.62)
                                         ============         ============
                     Proforma            $(      .62)         $(     0.62)
                                         ============         ============



                  These  proforma  amounts may not be  representative  of future
                  disclosures  because  they do not take  into  effect  proforma
                  compensation  expense  related to grants made before 1995. The
                  fair value of these options was estimated at the date of grant
                  using  the   Black-Scholes   option-pricing   model  with  the
                  following weighted-average assumptions for the years ended May
                  31, 1997 and 1998: dividend yields of 0% and 0%, respectively;
                  expected volatility of 44% and 129%,  respectively;  risk-free
                  interest rates of 6.63% and 5.74%, respectively;  and expected
                  life of 1.0 and 3.0 years, respectively.

                  The Black-Scholes option valuation model was developed for use
                  in estimating  the fair value of traded  options which have no
                  vesting restrictions and are fully transferable.  In addition,
                  option valuation models require the input of highly subjective
                  assumptions  including  the expected  stock price  volatility.
                  Because   the   Company's    employee   stock   options   have
                  characteristics  significantly  different from those of traded
                  options,   and  because   changes  in  the  subjective   input
                  assumptions can materially affect the fair value estimate,  in
                  management's  opinion,  the existing models do not necessarily
                  provide a  reliable  single  measure  of the fair value of its
                  employee stock options.

                                                           
<PAGE>    F-29


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 8 -      STOCKHOLDERS' EQUITY (continued)


The following  summarizes the stock option and warrant transactions (see Note 12
for Subsequent Events):
<TABLE>
<CAPTION>
                                                   Weighted                         Weighted
                                                   Average                          Average
                                Stock Options      Exercise           Other         Exercise
                                 Outstanding        Price           Warrants         Price
                                 -----------        -----           --------         -----
<S>                             <C>                <C>            <C>               <C>    

Balance, May 31, 1996                230,000       $   1.00          125,000         $  2.50
  Granted                            150,000       $   1.70          387,500         $  3.81
  Exercised                               -                               -
  Canceled                                -                               -
                                    --------                        -------

Balance, May 31, 1997                380,000       $   1.70          512,500         $  3.49
  Granted                             50,000       $   1.00          793,039         $  3.80
  Exercised                               -                       (  100,000)        $  1.00
  Canceled                                -                               -
                                     -------                      ----------

Outstanding, May 31, 1998            430,000       $   1.70        1,205,539         $  3.90
                                     =======                       =========

Exercisable, May 31, 1997            380,000       $   1.70          512,500         $  3.49
                                     =======                       =========

Exercisable, May 31, 1998            430,000       $   1.70        1,205,539         $  3.90
                                    ========                       =========
</TABLE>

The weighted average remaining contractual lives of the options and warrants are
8.0 and 3.1 years, respectively, at May 31, 1998.










                                      

<PAGE>    F-30


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 9 -      INCOME TAXES


                  The  Company  has  recorded  no income  tax  benefit,  nor has
                  deferred  taxes  in  any  year  due  to a net  operating  loss
                  carryforward amounting to approximately $25,000,000 at May 31,
                  1998, which will expire, if not utilized, starting 2002.

                  There are no  significant  temporary  differences  between the
                  Company's tax and financial bases.

                  Following  is  a reconciliation  between  income tax provision
                  (credit) and  the  amount that would  result from applying the
                  U. S. statutory rate to pretax income (loss):

                                                            May 31,
                                                 1997                   1998
                                                 ----                   ----
                  Income Tax Credit at 
                    Statutory Rate            $(1,430,000)          $(3,634,624)
                  Lack of Taxable Income 
                    in Carryback Period         1,430,000             3,634,624
                                              -----------           -----------
                  Income Tax Provision        $         -           $         -
                                              ===========           ===========

                  Following are the  components  of the  Company's  deferred tax
                  asset   resulting   from  the   Company's  net operating  loss
                  carryforward  at each period:

                                                         May 31,
                                                 1997                   1998
                                                 ----                   ----
               
                  Deferred Tax Asset          $5,300,000             $9,900,000
                  Valuation Allowance         (5,300,000)            (9,900,000)
                                              -----------           -----------
                  Net Deferred Tax Asset      $        -             $        -
                                              ===========            ==========




                                      

<PAGE>    F-31


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 10 -  GEOGRAPHIC AND SEGMENT INFORMATION

             Geographic Information
             Financial  data by  geographic  area  as of and for the  years
             ended May 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>

                                                            Operating            Identifiable
                1997                   Sales                   Loss                 Assets
             ----------            -------------           -------------           ----------
             <S>                    <C>                    <C>                   <C>
             United States                    -            $(5,823,572)          $ 3,661,472
             Indonesia -             (   318,165)            2,600,000
             Brazil                      287,148           (   221,236)            2,323,751
                                    -------------           -----------           -----------
                Total               $    287,148           $(6,362,973)          $ 8,585,223
                                    ============           ===========           ===========


                1998
             ----------
             United States         $      41,740           $(6,740,233)          $ 3,407,899
             Indonesia -             (    13,110)            1,400,000
             Brazil                      515,951            (2,449,036)            1,577,947
                                    ------------            ----------           -----------
                Total               $    557,691           $(9,202,379)          $ 6,385,846
                                    ============           ===========           ===========
</TABLE>


             Financial  data by segment as of and for the years  ending May
             31, 1997 and 1998 were as follows:

<TABLE>
<CAPTION>

                1997                     Timber                Mining              Total
             ----------             -------------          ------------        ------------
             <S>                    <C>                    <C>                 <C>
             Sales                  $    287,178           $         -         $   287,178
                                    ============           ============        ===========

             Operating Loss         $(   221,238)          $(2,379,049)          $(5,597,286)
             General Corporate 
               Expenses                        -                     -            (3,789,165)
                                    ------------         --------------          -----------
             Net Loss               $(   221,238)          $(2,379,049)          $(6,386,452)
                                    ============           ============          ===========

             Identifiable Assets    $ 2,323,751            $ 5,829,783           $ 8,153,534
             Corporate Assets                                   -                     -                431,689
                                    -----------            -----------           -----------
             Total Assets           $ 2,323,751            $ 5,829,783           $ 8,585,223
                                    ===========            ===========           ===========

             Capital Expenditures   $    253,998           $         -           $    253,998
                                    ============           ===========           ============

             Depreciation           $      5,500           $    18,431           $     23,931
                                    ============           ===========           ============
</TABLE>



                                                    

<PAGE     F-32


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 10 - GEOGRAPHIC AND SEGMENT INFORMATION (continued)

<TABLE>
<CAPTION>
 
                1998                     Timber                Mining              Total
             ----------             -------------          ------------        -----------
             <S>                    <C>                    <C>                 <C>
             Sales                  $    515,951           $     41,740        $   557,691
                                    ============           ============        ============

             Operating Loss         $(2,449,036)           $(1,768,388)        $(4,217,424)
             General Corporate 
               Expenses                       -                      -          (4,984,955)
                                    -----------            -----------         -----------
             Net Loss               $(2,449,036)           $(1,766,388)        $(9,202,379)
                                    ===========            ===========         ===========

             Identifiable Assets    $ 1,577,947           $ 4,336,000          $ 5,913,947
             Corporate Assets                 -                     -              471,899
                                    -----------           -----------          -----------
             Total Assets           $ 1,577,947           $ 4,336,000          $ 6,385,846
                                    ===========           ===========          ===========

             Capital Expenditures   $    320,702          $        -           $    320,702
             Corporate Expenditures            -                   -                 12,739
                                    ------------          ----------           ------------
             Total Expenditures     $    320,702          $        -           $    333,441

             Depreciation           $     16,857          $        -           $     16,857
             Corporate Depreciation            -                   -                 18,788
                                    ------------          ----------           ------------
                Total Depreciation  $     16,857          $        -           $     35,645
                                    ============          ==========           ============
</TABLE>

             One customer accounted for approximately 20% of the Company's sales
             for the year ended May 31, 1997.

NOTE 11 -  RESTATEMENTS

                  The Company has restated its financial statements for the year
                  ended May 31, 1997 to account for the rescission,  in December
                  1997, of a $3,000,000  note  agreement  with an officer of the
                  Company's Brazilian subsidiary.  The effect of the restatement
                  was to decrease long-term debt and Brazilian timber concession
                  by $2,596,729.

                  As explained in Note 2, the Company has restated its financial
                  statements  as of May 31,  1996 and for the year ended May 31,
                  1997 to provide for  impairment  of its mining  properties  in
                  accordance with SEC guidelines.  The effect of the restatement
                  was as follows:

                                                  Increase (Decrease)
                                              -------------------------------
                                                                  Accumulated
           Period            Net Loss          Property             Deficit
         -------------      ----------        -----------          ----------
          May 31, 1997      $2,173,444        $(3,120,873)         $3,120,873
          May 31, 1996      $        -        $         -          $  947,429


                                      

<PAGE>    F-33


                       TERRA NATURAL RESOURCES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 1997 AND 1998



NOTE 11 -     RESTATEMENTS (continued)

                  The  amounts as of May 31,  1996  relate  solely to the Nevada
                  property.  The 1997 amounts are as a result of the  impairment
                  of Nevada and Indonesia  (increase in net loss and decrease in
                  property):

                                             Nevada               Indonesia
                                             ------               ---------
                  May 31, 1997             $1,946,662              $226,782


NOTE 12 -     SUBSEQUENT EVENTS

                  Tropical Woods Concessions
                  In August 1998,  the Company  entered  into an agreement  with
                  Tropical Woods to harvest timber from 1,380 hectares, in Para,
                  Brazil, for a period of thirty years.

                  Stock Purchase Agreement
                  In September  1998, the Company  entered into a stock purchase
                  agreement  to  sell 5,500,000 shares  of  its common stock for
                  $500,000.

                  Simultaneously with the stock purchase agreement,  the Company
                  issued a stock  option for the  purchase  of up to  70,000,000
                  shares of the Company's  common stock at a price of $0.335 per
                  share and expiring in September 2005. However, at present, the
                  Company's Articles of Incorporation authorizes the issuance of
                  up to 50,000,000  shares of the Company's common stock. If the
                  Company does not gain  stockholders'  approval for an increase
                  in the number of authorized  shares, to allow for the exercise
                  of the  option,  then the  option  will be  cancelled.  If the
                  option is  cancelled,  the  purchaser may elect to rescind the
                  purchase agreement and receive a refund of the purchase price,
                  or  obtain  from  the  CEO  and COO  their  securities  of the
                  Company,  owned by them.  The option  holders  have planned to
                  transfer a portion of the  options  to the  Company's  CEO and
                  COO. While the number of options that may be  transferred  has
                  not  been  specified,  it  is  anticipated  that  it  will  be
                  material.

                  Also, the Company has agreed to use its best efforts to create
                  a class of  preferred  stock which  converts to the  Company's
                  common  stock,  on a  public  sale,  with  attributes  no less
                  favorable  than those  comprising  the shares of common  stock
                  purchased,  as stated  above.  The  preferred  stock will have
                  voting  rights to elect three  Directors,  and the Company has
                  the right to exchange the preferred stock for the common stock
                  acquired, as stated above.




                                      


<PAGE     48


               8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                       ACCOUNTING AND FINANCIAL DISCLOSURE


Changes in Certifying Accountants
---------------------------------

    On July 7, 1998, the Company  dismissed Jackson & Rhodes P.C., the Company's
independent auditors.

    In connection with its audits of the Company's financial  statements for the
Company's most recent fiscal years,  there were no disagreements  with Jackson &
Rhodes P.C. on any matters of  accounting  principles  or  practices,  financial
statement disclosure,  or auditing scope or procedures which, if not resolved to
the  satisfaction  of Jackson & Rhodes P.C.,  would have caused Jackson & Rhodes
P.C. to make  reference to the matter in their report.  Jackson & Rhodes' report
on the Company's financial statements for each period for which Jackson & Rhodes
performed an audit of the Company's financial statements contained no adverse or
disclaimer of opinion and was not modified or qualified as to uncertainty, audit
scope, or accounting principles. The decision to change accountants was approved
by the board of directors of the Company.

    On July 7, 1998, the board of directors appointed Merdinger, Fruchter, Rosen
& Corso, P.C. to serve as the Company's independent auditors for the fiscal year
ended May 31, 1998.

<PAGE>    49

                                    PART III

        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

    The  Company's  Bylaws  authorize  the creation of the offices of President,
Treasurer (Chief Financial Officer), one or more Vice Presidents, Secretary, and
one or more  Assistant  Secretaries  and  Assistant  Treasurers  as the Board of
Directors  deems  proper.  The  Bylaws  also  provide  for not less  than  three
directors  and not more than seven  directors  who shall hold  office  until the
following  annual meeting of the  shareholders.  The Bylaws further provide that
the number of directors may be increased by the affirmative vote of the Board of
Directors or a majority in interest of the  shareholders at an annual or special
meeting.

    The executive officers and directors of the Company are as follows:

         Name                    Age                   Position
         ----                    ---                   --------
  Christopher D. Michaels         55     President and Chairman of the Board

  Jeffrey S. Kramer               44     Senior Vice President, Chief Financial
                                         Officer,
                                         Chief Operating Officer,
                                         Secretary-Treasurer, and Director

  Stanley J. Mohr                 62     Vice President of Shareholder Relations
                                         and Director

  Joe C. Rude III, M.D.           53     Director

  William E. Wilson               82     Director

  Lloyd S. Pantell                46     President of Terra Resources Brazil,
                                         Ltda.


     Christopher D. Michaels, Age 55, cofounded the Company in June 1986. He has
served as  President,  Chief  Executive  Officer and Chairman of the Board since
1986.  Mr.  Michaels is also a director,  President and Chairman of the Board of
Equatorial  Resources,  Ltd.  and the  Chairman  and a  director  of  Kalimantan
Resources,  Ltd.,  subsidiaries of the Company. Mr. Michaels received a bachelor
of arts degree from Alfred University  located in New York and after graduation,
took a post with the United States government overseas. Since 1980, Mr. Michaels
has acted in a sales and management  capacity in corporations  primarily engaged
in  mining  and  minerals  and  other   resources.   Mr.  Michaels  has  both  a
comprehensive background and experience in international relations and has spent
extensive  time,  both  nationally and  internationally,  at the various company
timber and mining locations.

<PAGE     50

     Jeffrey S. Kramer, Age 44, Senior Vice President,  Chief Financial Officer,
Secretary-Treasurer,  and Director,  has held these  positions  since 1989.  Mr.
Kramer  is  also a  director,  vice  president  and the  secretary-treasurer  of
Equatorial  Resources,  Ltd.  and a  director  and  the  secretary-treasurer  of
Kalimantan Resources,  Ltd. Mr. Kramer attended the City College of New York. He
has held  management  positions  with  Continental  Cafes.  As  Chief  Financial
Officer,  Mr.  Kramer's  responsibilities  include  business  affairs,  contract
administration,  public relations,  and broker and shareholder relations. He has
traveled both nationally and internationally on behalf of the company to conduct
contract negotiations and assist in the supervision of the Company's projects.

     Stanley J. Mohr, Age 62, Vice President of Shareholder Relations,  has been
with Nevada  Manhattan  Mining  since 1986 and a director  of the company  since
1992.  He is also a director of  Kalimantan  Resources,  Ltd.  Mr. Mohr has been
employed as a marketing executive with several mining and exploration  companies
and has gained  extensive  experience in many phases of operations in the mining
industry.

     Joe C. Rude III, Age 53, has been a Director  since April,  1995.  Dr. Rude
has been a shareholder of record since 1989 and has been an active member of the
Shareholders' Advisory Committee for several years representing  shareholders at
Directors meetings.  Dr. Rude is a graduate of the University of Texas at Austin
(pre-med.) and later from Southwestern  Medical School in Dallas, Texas in 1970.
From 1977 to 1995, he was associated  with Cobb Radiology  Associates,  Austell,
Georgia,  which merged with Quantum  Radiology in 1995. Since 1995, Dr. Rude has
been a diagnostic radiologist at Quantum Radiology.  Dr. Rude also is a co-owner
of the Ambulatory Care Center.

     William E. Wilson,  Age 82, was elected a director in April,  1998.  He has
been a  shareholder  of  record  since  1987  and  has  recently  served  on the
Shareholders' Advisory Committee representing shareholders at Board of directors
meetings.  Mr.  Wilson began his career in the insurance  industry in 1934.  Mr.
Wilson  joined  the  Army  Air  Corps in 1941,  serving  as a pilot  and  flying
instructor.  In 1945, he rejoined the Insurance agency as a partner. In 1952, he
was  recalled to active  duty and served  during the Korean  conflict  until his
release in 1954.  Mr. Wilson  retired from active reserve as a Lt. Col. In 1964.
He  purchased  his  own  insurance  agency  in  1954.  The  agency  was  sold to
Underwood-Anderson  &  Associates  in 1985;  however,  Mr.  Wilson  remained  an
associate agent until his retirement in 1996.  During his insurance  career,  he
was an active participant in civic affairs.  He has held insurance licenses plus
Real Estate Broker and Securities licenses (Florida).

     Lloyd  S.  Pantell,  Age  46,  has  been  the  President  of the  Company's
subsidiary,  Terra Resources Brazil, Ltda. ("Terra"),  since February, 1998. Mr.
Pantell is a graduate of the University of California at Los Angeles (B.A., 1973
Psychology) and later from Pepperdine  University School of Law (J.D., 1977) and
the  Georgetown  University  Law Center  (LL.M.,  1978).  From 1978 to 1980, Mr.
Pantell  served as staff  counsel to  McCulloch  Oil  Corporation,  Los Angeles,
California.  After that time,  Mr. Pantell was a private law  practitioner  with
emphasis in business law,  natural resource law, and securities until serving in
his present capacity with Terra.

<PAGE>    51

Regulatory Proceedings

    In May 1989,  the Company  received  notice that the Securities and Exchange
Commission (the  "Commission") had commenced an informal  investigation into the
Company's  compliance with the registration  and disclosure  requirements of the
Securities Act of 1933 (the " '33 Act") and the Securities  Exchange Act of 1934
(the " '34 Act"). Thereafter the Commission commenced an extensive review of the
Company's  books and  records  relating  to the  Company's  business  and mining
operations,  its capital  raising  activities,  and its financial  condition and
history.  Through  all  stages of the  investigation,  the  Company  voluntarily
cooperated with the Commission.

    On August 3, 1993,  the  Commission  and the Company agreed to terminate the
Commission's  investigation  by the  entry of a  consent  judgment  against  the
Company and certain of the Company's past and present key  employees.  These key
employees include Christopher D. Michaels,  Jeffrey Kramer and Stanley Mohr. The
terms and conditions of the consent judgment can be summarized as follows:

        1. The Company  neither  admitted  nor  denied  any  of  the allegations
    alleged by the Commission;

        2. The Company and its officers, agents, servants, employees, and others
    receiving actual notice of the consent  judgment are permanently  restrained
    and  enjoined  from  violating  section  5 of the '33  Act or  from  selling
    securities in interstate commerce unless and until a registration  statement
    is in effect or the security or transaction is exempt from the  registration
    provisions of the '33 Act and/or the '34 Act;

        3. The Company and its officers, agents, servants, employees, and others
    receiving actual notice of the consent  judgment are permanently  restrained
    from engaging in any transaction,  practice, or course of conduct, employing
    any course of  conduct,  or  obtaining  any money or property by means of an
    untrue  statement  of a material  fact,  or any omission to state a material
    fact,  necessary to make the statements  made in light of the  circumstances
    under which they were made not  misleading  in  violation  of the  antifraud
    provisions of the '33 Act and the '34 Act.

    As part of the  consent  judgment,  the  Company  was  required to engage an
independent  certified public accountant to conduct a full and complete analysis
of the  disposition  of all funds received by the Company from investors and, to
the extent so discovered, to disgorge all ill-gotten gains.

<PAGE>    52

    On April 7, 1994,  in  response  to the audits  completed  by the  certified
public  accountant,  the Company and the  Commission  entered into a stipulation
regarding the  resolution of all  outstanding  issues which then existed,  which
stipulation  was entered as an order by the United States District Court for the
Central District of California.  Such stipulation  contained an  acknowledgement
that the Company and its executive  officers had received no ill-gotten gains as
a result  of prior  activities  by the  Company  in  offering  and  selling  its
securities,  and that the consent judgment resolved once and for all, all issues
raised by the  Commission as a result of the  Company's  prior  activities.  The
Company  and the persons  named in the formal  order of  investigation  were not
required to pay any fines or required to disgorge any monies previously received
by it in connection with its securities.

    On February 27, 1989, the Pennsylvania  Securities Commission issued a cease
and desist order against the Company and  Christopher  D.  Michaels,  Jeffrey S.
Kramer,  Stanley J. Mohr, and William  Michaels  prohibiting them from violating
Section 201 of the  Pennsylvania  Securities Act of 1972 relating to the sale of
unregistered "penny stocks."

SIGNIFICANT EMPLOYEES AND CONSULTANTS

Agreement with Gold King Mines Corporation
------------------------------------------

    On April 1, 1995, the Company entered into an Agreement with Gold King Mines
Corporation ("Gold King"), Denver,  Colorado. Under the terms of this Agreement,
Gold  King has  agreed  to  provide  the  services  of  William  R.  Wilson on a
consulting basis at the rate of $500 per day. The initial term of the consulting
agreement was through  December 31, 1995, and extended for one-year periods upon
mutual  agreement  between Gold King and the Company.  Gold King and the Company
have extended this consulting agreement for three years.

    Mr.  Wilson has  provided  various  services  to the Company  including  the
preparation of the Business Plan. Mr. Wilson possesses a professional  degree in
metallurgical  engineering from the Colorado School of Mines, Golden,  Colorado,
and has been awarded a Master's in Business  Administration  from the University
of Southern California,  Los Angeles,  California. In his more than thirty years
of  experience,  Mr.  Wilson has, for the past  fifteen  years served in various
seniority executive  capacities with engineering,  construction,  and consulting
firms,  many of such capacities as president or the chief  executive  officer of
mining companies operating in the United States and internationally.  Mr. Wilson
is the past chairman of the Colorado Mining Association and serves on the boards
of two publicly traded international resource companies.

    Mr. Wilson's primary  responsibility  to the Company has been and will be to
act as project  manager for the Nevada  Property  and to provide  technical  and
managerial consulting to the Company on the Indonesian Concessions.

<PAGE     53

Agreement with British Far East Holdings Ltd.
---------------------------------------------

    On April 30,  1997,  the Company  entered  into a financial  and  management
services  agreement  with British Far East  Holdings  Ltd.  ("BFE").  Under this
agreement,  BFE has agreed to provide the personal services of Arthur Lipper III
to the Company  for a period of  thirty-six  months to assist the  Company  with
respect to  financial  and business  matters.  The Company has agreed to pay BFE
$5,000 per month for the first  three  days of  service  and $1,000 per diem for
each  additional day of service  rendered by Mr. Lipper under the contract.  The
agreement  also grants to BFE  warrants to purchase up to 100,000  shares of the
Company's  Common Stock at one hundred  twenty  percent  (120%) of the April 30,
1997 market price of $5.75 per share (subject to adjustment for certain  events)
vesting at the rate of  thirty-three  and  one-third  percent (33 1/3%) per year
after the first twelve months of service.

Agreement with Eco-Rating International
---------------------------------------

    In order to better assure compliance with applicable Brazilian environmental
laws and regulations,  the Company has entered into an agreement with Eco-Rating
International,  Zurich,  Switzerland  ("Eco-Rating").  Under  the  terms  of the
agreement,   Eco-Rating   has  agreed  to  assist  in  the   development  of  an
"eco-efficiency model" designed to establish environmental management guidelines
for the Company's  operations  in Brazil.  It is the objective of the Company to
establish a  reputation  as a leader in the timber  industry in  environmentally
related  issues and to develop  its  properties  in a manner  best  designed  to
properly reclaim any areas harvested pursuant to its concessions.


      COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities  Exchange Act of 1934, as amended,  requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's  Common Stock to file with the Securities and Exchange  Commission
reports of ownership and of changes in beneficial  ownership of Common Stock and
other equity securities of the Company.  For the fiscal year ended May 31, 1998,
all reports were timely filed except three late filings of Form 4 by Joe C. Rude
III, a director of the Company.




<PAGE>    54



                           10. EXECUTIVE COMPENSATION

Executive Compensation
----------------------

    The table set forth below identifies the compensation  paid to the Company's
executive  officers for the last three completed fiscal years (i.e. fiscal years
ending May 31, 1996; May 31, 1997; and May 31, 1998):
<TABLE>
<CAPTION>

                                                      SUMMARY COMPENSATION TABLE

                                                                                       Long Term Compensation
                                                                        ---------------------------------------------------
                                                                                Awards                      Payouts
                                 Annual Compensation                    ------------------------    ------------------------
                  ---------------------------------------------------   Restricted   Securities                     All
Name and                                              Other                Stock     Underlying       LTIP         Other
Principal                                             Annual              Award(s)     Optional/    Payouts     Compensation
Position          Year       Salary($)   Bonus($)  Compensation($)(1)       ($)        SARs(#)         ($)            ($)
----------       ------    -----------  ---------- -----------------    ----------- ------------  ------------   -----------
<S>              <C>       <C>          <C>        <C>                 <C>           <C>            <C>         <C>

Christopher
Michaels,        1998      $ 156,000       --            $5,408               --       10,000(2)       --             --
President        1997      $ 251,299       --            $6,264               --       10,000          --             --
and Chairman     1996      $ 100,449       --            $6,316        $ 225,000(3)    10,000          --             --
of the Board     
                                                        
Jeffrey          1998      $ 156,000       --            $6,056               --       10,000(2)       --             --
Kramer,          1997      $ 224,397       --            $8,080               --       10,000          --             --
Senior Vice      1996      $ 117,791       --            $7,658        $ 225,000(3)    10,000          --             --
President and             
Director
             


Stanley Mohr,    1998      $91,000    $61,250(4)         $6,840               --       10,000(2)       --             --
Vice President   1997      $79,500         --            $5,875               --       10,000          --             --
And Director     1996      $78,214         --            $5,400               --       10,000          --             --
</TABLE>
------------
(1) The Company incurs the annual cost of health insurance for Messrs. Michaels,
    Kramer and Mohr and their respective dependents.

(2) The  Company  has  granted  stock  options  to all  members  of its board of
    directors  in the  amount of 10,000  shares  per full year of  service as an
    active  member of the board.  These  options may be  exercised  at $1.00 per
    share of Common Stock.  Options may not be exercised after the expiration of
    10 years  from the date of the grant and are  nontransferable  other than by
    inheritance.  As of the date of this Annual Report,  the Company has granted
    options aggregating 120,000 shares to Mr. Michaels, 90,000 shares to Mr.
    Kramer and 60,000 shares to Mr. Mohr.

(3)  The  Company  granted  Messrs.  Michaels  and Kramer the option to purchase
     900,000 shares of Common Stock each at an average price of $1.50 per share.
     These options were  exercised  during the year ended May 31, 1996, at which
     time the  Company's  board of  directors  agreed to issue these  shares for
     services rendered. The Company has valued these restricted securities to be
     worth twenty-five cents ($.25) per share.

(4)  The Company paid a bonus of 100,000 shares to Mr. Mohr for services  during
     1998. The Company has valued these  restricted  securities at 70% of market
     on May 31, 1998, or $.6125 per share.

<PAGE>    55

OPTIONS AND STOCK APPRECIATION RIGHTS

    The table set forth below provides certain information concerning individual
grants of stock  options  and stock  appreciation  rights  (whether  granted  in
connection with stock options or as  "freestanding"  rights made during the last
fiscal year of the Company  ending May 31, 1998) to each of the named  executive
officers, directors, and/or others noted below:

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
                               (Individual Grants)
<TABLE>
<CAPTION>                                                   
                                                           % of Total
                                  Number of Securities    Options/SARs
                                  Underlying Options/      Granted to          Exercise
                                        SARS                Employees            or Base     Expiration
          Name                       Granted(4)           in Fiscal Year       Price($/Sh)      Date
          ----                       ----------           --------------       -----------      ----
<S>                               <C>                     <C>                  <C>           <C>    
                                                          
Christopher D. Michaels(1)...          10,000                   20%              $ 1.00      May 31, '06
Jeffrey S. Kramer(1).........          10,000                   20%              $ 1.00      May 31, '06
Stanley Mohr(1)..............          10,000                   20%              $ 1.00      May 31, '06
Joe Rude III(1)..............          10,000                   20%              $ 1.00      May 31, '06
Edna Pollack(2)                        10,000                   20%              $ 1.00      May 31, `06
</TABLE>

---------------
(1)  The  Company  has  granted  stock  options  to all  members of its board of
     directors  pursuant to Stock Option  Agreements  executed at various times.
     Under the terms of these agreements, each director has been granted options
     to purchase  10,000  shares of Common  Stock per full year of service.  The
     exercise  price for such  options  is $1.00 per  share.  The years in which
     stock options were initially granted to each respective board member are as
     follows:  Christopher  Michaels,  1986; Jeffrey Kramer, 1989; Stanley Mohr,
     1993, Joe Rude' III, 1996 and Edna Pollack, 1996. In 1996, the Stock Option
     Agreements relating to Messrs.  Michaels,  Kramer and Mohr were extended so
     that they may be exercised  through May 31, 2006.  The remaining may not be
     exercised after the expiration of ten (10) years from the date of grant and
     are nontransferable other than by inheritance.


(2)  The  Company  has  granted  stock  options  to all  members of its board of
     directors  pursuant to Stock Option  Agreements  executed at various times.
     Under the terms of these agreements, each director has been granted options
     to purchase  10,000  shares of Common  Stock per full year of service.  The
     exercise  price for such  options  is $1.00 per  share.  The years in which
     stock options were initially granted to each respective board member are as
     follows:  Christopher  Michaels,  1986; Jeffrey Kramer, 1989; Stanley Mohr,
     1993, Joe Rude' III, 1996 and Edna Pollack, 1996. In 1996, the Stock Option
     Agreements relating to Messrs.  Michaels,  Kramer and Mohr were extended so
     that they may be exercised  through May 31, 2006.  The remaining may not be
     exercised after the expiration of ten (10) years from the date of grant and
     are nontransferable other than by inheritance.

(3) Ms. Pollack's term as director ended on April 17, 1998.



<PAGE>    56



    The following table sets forth, on an aggregated basis,  certain information
with regard to Options and SAR Exercises  during the year ending May 31, 1998 by
each of the named executive officers:

             AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                            FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
                                               Number Of Unexercised    Value Of Unexercised
                                               Securities Underlying        In-The-Money
                                                   Options/SARS              Option/SARs
                    Shares Acquired              at May 31, 1998            At May 31, 1998
                       On Exercise    Value       Exercisable/               Exercisable/
       Name                (#)      Realized      Unexercisable             Unexercisable
       ----                ---      --------      -------------             -------------
<S>                 <C>             <C>        <C>                      <C>    
                                                                           
Christopher D.
  Michaels......            0            0            120,000                    --
Jeffrey S. Kramer           0            0             90,000                    --
Stanley Mohr                0            0             60,000                    --
</TABLE>



DIRECTOR COMPENSATION

Director  compensation  in fiscal year ended May 31, 1998,  consisted  solely of
stock options  granted in the  quantities  and under the terms noted in footnote
(1) to the OPTIONS/SAR GRANTS IN LAST FISCAL YEAR table above.




       11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

    The following  table sets forth certain  information  as of August 14, 1998,
regarding the record and  beneficial  ownership of the Common Stock with respect
to: (i) any individual or group of affiliated  individuals or persons owning, of
record or beneficially,  five percent (5%) or more of the outstanding  shares of
the  Common  Stock;  (ii) the  amount of shares  of Common  Stock  owned by each
executive officer and director of the Company; and (iii) the number of shares of
Common Stock owned, of record or  beneficially,  by the directors of the Company
as a group.  Except  as  otherwise  indicated,  the  Company  believes  that the
beneficial owners listed below, based upon information  provided by such owners,
have sole voting and investment power with respect to such shares.


<PAGE>    57


<TABLE>
<CAPTION>
                                           Amount and 
                                            Nature of 
 Title          Name and Address            Beneficial           Percent of
of Class       of Beneficial Owner             Owner              Class (1)
--------    ------------------------       ------------          ----------
<S>         <C>                           <C>                    <C>    

(i)
Common      Roy Skluth                     5,000,000(2)           14.79%
            116 Avenue I
            Redondo Beach, CA  90277
(ii)
Common      Christopher D. Michaels          729,417(3)            2.16%
            5038 N. Parkway Calabasas
            Calabasas, CA 91320

Common      Jeffrey S. Kramer                770,000 (4)           2.28%
            5038 N. Parkway Calabasas
            Calabasas, CA 91320

Common      Stanley L. Mohr                  212,000 (5)            .63%
            5038 N. Parkway Calabasas
            Calabasas, CA  91320

Common      Joseph C. Rude' III, M.D.      3,256,230 (6)           9.629%
            3065 River N. Pkwy.
            Atlanta, Georgia  30328

Common      William E. Wilson                122,959                .36%
            1819 E. Brainard St.
            Pensacola, FL  32503
(iii)
Common      All Officers and               5,090,606 (7)          15.05%
            Directors as a Group
            (5 persons)
</TABLE>
------------
(1)  In addition to the  33,385,149  shares of Common  Stock  outstanding  as of
     August 14, 1998, the  percentages  noted in this column assume the issuance
     of 430,000 shares of Common Stock pursuant to various options  primarily to
     existing  management which may be issued in whole or in part within 60 days
     of the date of this Annual Report.

(2)  Should  Roy  Skluth  be  unable  to meet his  financial  obligation  to the
     Company,  as described elsewhere in this Annual Report, the Company will be
     able to retain the Timberlands and cancel these shares.  (See "Properties -
     Timberlands" in Part I of this Report.)

<PAGE>    58



(3) Includes  options to purchase up to 120,000 shares of Common Stock which may
    be  exercised  in whole or in part within 60 days of the date of this Annual
    Report.

(4)  Includes  options to purchase up to 90,000 shares of Common Stock which may
     be  exercised in whole or in part within 60 days of the date of this Annual
     Report.

(5)  Includes  105,000 shares held in the name of Lomar Trust as well as options
     to purchase up to 60,000  shares of Common  Stock which may be exercised in
     whole or in part within 60 days of the date of this Annual Report.

(6)  Includes  shares owned by Carolyn Rude and Cobb  Radiology (an affiliate of
     Dr.  Rude) as well as options  to  purchase  up to 30,000  shares of Common
     Stock which may be exercised in whole or in part within 60 days of the date
     of this Annual Report.

(7)  Includes  options to purchase up to 330,000  shares of Common  Stock by all
     Directors  and  Officers as a group which may be  exercised  in whole or in
     part within 60 days of the date of this Annual Report.



               12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    During the last fiscal year the Company  entered into  certain  transactions
with Jeffrey S. Kramer, an officer and Director of the Company. Specifically, as
of August 14, 1998,  Mr.  Kramer has loaned the Company an aggregate of $718,000
which is evidenced by promissory  notes payable in his name (the  "Notes").  The
Notes are: payable in September 1998 and bear interest at the rate of 8.0%.

During the last fiscal year the Company entered into certain  transactions  with
Joe C. Rude, a Director of the Company,  and his wife,  Dr.  Carolyn Rude. As of
August 14, 1998,  Joe  Rude/Carolyn  Rude have loaned a total of $250,000 to the
Company  at  an  annual   interest   rate  of  10%,  some  of  which  loans  are
collateralized by common stock and made an additional  $95,000 investment in the
Company for which they received 1,500,000 shares.

During the last fiscal year, the Company paid  Christopher D. Michaels,  CEO and
Chairman, $45,000 of interest relating to loans in the prior fiscal year.


<PAGE>    59


                      13. EXHIBITS AND REPORTS ON FORM 8-K


EXHIBIT
 NUMBER                DESCRIPTION OF EXHIBIT                
---------            ---------------------------
   
3.(i)     Articles of Incorporation of Epic Enterprises, Ltd., Filed June 10, 
          1985*

3.(ii)    Certificate   of  Amendment  to  Articles  of   Incorporation   of  
          Epic Enterprises, Ltd., Filed September 11, 1987*

3.(iii)   Certificate  of  Amendment  to  Articles  of  Incorporation  of Nevada
          Manhattan Mining Incorporated Filed October 26, 1987*

3.(iv)    Certificate of Amendment of Articles of Incorporation of Nevada 
          Manhattan Mining Incorporated Filed August 31, 1995*

3.(v)     Certificate of  Determination of Preferences of Series A Preferred 
          Stock of Nevada Manhattan Mining Incorporated Filed October 25, 1995*

3.(vi)    Bylaws of Epic Enterprises, Ltd.*
 
3.(vii)   Memorandum and Articles of Association of Equatorial Resources, Ltd. +
 
3.(viii)  Memorandum and Articles of Association of Kalimantan Resources, Ltd. +
 
3.(ix)    Amended Certificate of Determination of Preferences of Series A 
          Preferred Stock of Nevada Manhattan Incorporated Filed January 14, 
          1998 ++

3.(x)     Certificate of Amendment of Articles of Incorporation of Terra Natural
          Resources Corporation Filed May 12, 1998

4.(i)     Pages 1, 3, 4, and 5 of the Bylaws of Epic Enterprises, Ltd.*

4.(ii)    Pages 1 through 9 of  Certificate  of  Determination  of  Preferences
          of Series A Preferred  Stock of Nevada  Manhattan  Mining Incorporated
          Filed October 25, 1995*

4.(iii)   Stock Options Issued to Directors+
 
4.(iv)    Subscription Agreement dated April 14, 1997 with Silenus Limited** 

4.(v)     Warrant to  Purchase  Common  Stock** 
                      
4.(vi)    Deed of Trust in favor of Silenus Limited**
                     
4.(vii)   Form of Debenture**  

4.(viii)  Subscription  Agreement dated July 15, 1997****  
                  
4.(ix)    Warrants to Purchase Common  Stock**** 

4.(x)     Form of Debenture****

<PAGE>    60

EXHIBIT
 NUMBER                DESCRIPTION OF EXHIBIT                
---------            ---------------------------
10.(i)    Mining Agreement Dated April 4, 1987*

10.(ii)   Amendment to Mining Agreement Dated December 9, 1987*

10.(iii)  Manhattan Mining Property Agreement Dated March 2, 1989*

10.(iv)   Corporation Quitclaim Deed Filed March 9, 1989*

10.(v)    Deed of Trust and Assignment of Rents Recorded March 9, 1989*

10.(vi)   Joint Venture Agreement Dated June 1993*

10.(vii)  Letter Agreement Dated August 10, 1995*

10.(viii) Amendment to Joint Venture Agreement Dated October 20, 1995*

10.(ix)   Contract Between Nevada Manhattan Mining, Inc. and Harrison Western
          Construction Corp.*

10.(x)    Principles of Agreement Dated August 19, 1996, as amended***

10.(xi)   Employment Agreement Dated January 1,1995 with Christopher D.Michaels*

10.(xii)  Employment Agreement Dated January 1, 1995 with Jeffrey Kramer*

10.(xiii) Consulting Agreement with Gold King Mines Corporation Dated April 1,
          1995*

10.(xiv)  Consulting Services Agreement Dated October 7, 1996 with Behre 
          Dolbear & Company,  Inc. *

10.(xviii)Letter Agreement dated April 23,1997 with British Far East Holding 
          Ltd.**

10.(xix)  Addendum Agreement to Principles of Agreement+


10.(xx)   Acquisition Agreement by and between Sinkamas Agunbg Ltd. and 
          Kalimantan Resources, Ltd. dated January 26, 1997+

10.(xxi)  Acquisition Agreement for Gold and Coal Concessions by and between 
          Kalimas Jaya Ltd. and Kalimantan Resources, Ltd.+

10.(xxii) November 11, 1996 letter Agreement with Maderia Intex, S.A.
          International Exports+

10.(xxiii)Proposal for Sale and Purchase and Authorization for Exploration of 
          Timber+

10.(xxiv) Eco-Rating Standard Agreement dated December 17, 1996+

10.(xxv)  Sale and Purchase Agreement dated February 6, 1997+

10.(xxvi) Agreement to Jointly Develop Timber Properties dated May 30, 1997****

<PAGE>    61

EXHIBIT
 NUMBER                DESCRIPTION OF EXHIBIT                
---------            ---------------------------

10.(xxvii)Agreement to Acquire Sawmill dated May 30, 1997****

10.(xxviii)Agreement to Harvest Timber and Develop Harvest Properties****

10.(xxix)  Addendum to Contract for Extraction of Timber and Development of 
           Timber Properties****

10.(xxx)   Term Sheet for Royal Gold/Nevada Manhattan Mining Agreement and 
           Option to Purchase dated November 25, 1997
                 
10.(xxxi)  Cooperation Agreement with Metsa Timber dated March 3, 1998

10.(xxxii) Agreement Re Acquisition of Timber Rights dated April 22, 1998

10.(xxxiii)Addendum No. 1 to Agreement Re Acquisition of Timber Rights

1.(xxxiv) Addendum No. 2 to Agreement Re Acquisition of Timber Rights

10.(xxxv) Addendum No. 3 to Agreement Re Acquisition of Timber Rights

10.(xxxvi)Investment Agreement with Bristol Asset Management, LLC. dated March 
          27, 1998

10.(xxxvii)Subscription Agreement with TiNV1, Inc. dated as of August 28, 1998

10.(xxxviii)Agreement with TiNV1, Inc. dated as of August 28, 1998

10.(xxxix) Option Agreement with TiNV1, Inc. dated as of August 28, 1998

10.(xl)   Letter Agreement with TiNV1, Inc. dated as of August 28, 1998

16        Letter on Change in Certifying Accountant +++

21        Subsidiaries of Small Business Issuer

27        Financial Data Schedule

99.(i)    Business Plan Dated July 1995*

99.(ii)   Business Plan Dated January 1997+
---------------- 
+.       Filed with Form 10 Filed April 3, 1997 and as amended

++       Filed with Form 10-QSB for the quarterly period ended February 28, 1998

+++      Filed with 8-K Current Report dated July 7, 1998

*        Filed with Registration Statement on Form SB-2 on December 6, 1996 
         (Registration No. 333-17423).

**       Filed with Registration Statement on Form SB-2 on May 28, 1997 
         (Registration No. 333-27923).

***      Principles  of  Agreement  in  original  form filed  with  Registration
         Statement on Form SB-2 on December 6, 1996.  Amendment to this document
         filed  with  Registration  Statement  on Form  SB-2 on  July  31,  1997
         (Registration No. 333-27923).

****     Filed with Registration Statement on Form SB-2 on July 31, 1997 
         (Registration No. 333-27923).


REPORTS ON FORM 8-K

8-K Report dated March 31, 1998 to report the press release  issued on March 31,
1998 announcing that the Company has secured $14 million in equity  financing to
fund its timber operations in South America.


<PAGE>    62


                                   SIGNATURES


    In accordance  with Section 13 or 15(d) of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                             TERRA NATURAL RESOURCES
                                             CORPORATION

                                             /s/ Jeffrey S. Kramer
Date:    September 11, 1998              By: _______________________________
                                             Chief Financial Officer, Senior VP,
                                             and Director

    In  accordance  with the Exchange  Act, this Report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.


                                 President, Director 
/s/ CHRISTOPHER D. MICHAELS      and Chief Executive          September 11, 1998
------------------------------   Officer
    Christopher D. Michaels 
                 
                                  Senior Vice President
/s/ JEFFREY S. KRAMER             Chief Financial             September 11, 1998
-----------------------------     Officer, Director
    Jeffrey S. Kramer                  


/s/ STANLEY J. MOHR                Director                   September 11, 1998
-----------------------------
    Stanley J. Mohr


/s/ JOE RUDE III, M.D.              Director                  September 11, 1998
-----------------------------
    Joe C. Rude III, M.D.


/s/ WILLIAM E. WILSON                Director                 September 11, 1998
-----------------------------
    William E. Wilson