SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

     OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended 12/31/97                    Commission File No. 0-9416

                     FRANKLIN CONSOLIDATED MINING CO., INC.
                 (name of small business issuer in its charter)

            Delaware                                          13-2878202
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

                   76 Beaver Street, New York, New York 10005
                    (Address of principal executive offices)

Issuers telephone number:                                           212-344-2828
Securities Registered under Section 12(b) of the Exchange Act:      None
Securities Registered under Section 12(g) of the Exchange Act:      Common

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act  during  the past 12 months  (or such  shorter
period that the  registrant  was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes __X__  No _____

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  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-KSB
or any amendment to this Form 10-KSB. [_]

State issuer's revenues for its most recent fiscal year.              $3,888

State the  aggregate  market value of the voting and  non-voting  common  equity
stock held by non-  affiliates  computed by  reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
as of a specified date within the past 60 days
                                                                      $5,669,860

State the  number  of  shares  outstanding  of each of  issuers  class of common
equity, as of the latest practical date.

                         98,879,328 as of March 31, 1998

DOCUMENTS INCORPORATED BY REFERENCE IN PART III - SIX

Transitional Small Business Disclosure Format (check one) Yes_____  No __X__


<PAGE>


PART I                         TABLE OF CONTENTS                          PAGE

Item 1      Description of Business                                         3

Item 2      Properties                                                     14

Item 3      Legal Proceedings                                              23

Item 4      Submission of Matters to a Vote of Security Holders            30

PART II

Item 5      Market for Registrant's Common Equity and Related
            Stockholder Matters                                            30

Item 6      Management's Discussion and Analysis or Plan
            of Operation                                                   34

Item 7      Financial Statements                                          38-F-1

Item 8      Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                         39

PART III

Item 9      Directors, Executive Officers, Promoters and Control
            Person; Compliance with Section 16(a) of the
            Exchange Act                                                   40

Item 10     Executive Compensation                                         41

Item 11     Security Ownership of Certain Beneficial Owners
            and Management                                                 42

Item 12     Certain Relationships and Related Transactions                 42

PART IV

Item 13     Exhibits,  Reports on Form 8-K                                43-49

            Signatures                                                     50


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<PAGE>


                                     PART I

Item 1. Description of Business

General

The Company,  originally  incorporated on December 1, 1976 under the laws of the
State of  Delaware,  is engaged in the  exploration,  development  and mining of
precious and nonferrous metals,  including gold, silver,  lead, copper and zinc.
The Company owns or has an interest in a number of precious and nonferrous metal
properties.  The Company's  principal  mining  properties  are ( i) the Franklin
Mines, located near Idaho Springs in Clear Creek County, Colorado, for which the
Company acquired the exclusive right to explore,  develop,  mine and extract all
minerals  located in approximately 51 [owned and/or patented] mining claims (the
"Franklin  Mines"),  (ii) the Franklin mill, a crushing and flotation mill which
is located on the site of the Franklin Mines (the "Franklin Mill") and (iii) the
Gold Hill Mill, a fully  permitted  modern  facility  located in Boulder County,
Colorado (the "Gold Hill Mill").  While none of its properties were  operational
in fiscal year 1997, the Company  continued its  rehabilitation  of the Franklin
Mines and Franklin Mill in anticipation of the commencement of operations.

History and Development of the Company

The claims which  comprise  the Franklin  Mines are located on a site upon which
placer gold was discovered above the ground at Idaho Springs,  Colorado in 1859.
The  Franklin  Mines vein  system was  discovered  in 1865.  Thereafter,  mining
commenced  on the site in 1865 and  continued on an almost  uninterrupted  basis
through  1915 until the  outbreak  of World War I caused  curtailment  of mining
operations in the area. The principal minerals extracted during this period were
gold,  silver,  lead, copper and zinc. The Franklin Mines have not operated on a
continuous or consistent commercial basis since 1915.

On December  26,  1976,  the Company  acquired  Gold  Developers  and  Producers
Incorporated, a Colorado corporation which, prior to the acquisition,  leased 28
patented  mining claims from Audrey and David Hayden and Dorothy Kennec pursuant
to a mining lease and option to purchase,  dated November 12, 1976  (hereinafter
collectively  referred to as the "Hayden/Kennec  Leases").  In 1981, the Company
commenced a  rehabilitation  program to extend and  rehabilitate  the shafts and
tunnels in place at the Franklin Mines, install the Franklin Mill and search for
and delineate a commercial  ore body.  The Company  completed the Franklin Mill,
which is capable of crushing,  processing and  concentrating  approximately  150
tons of ore per 24 hour period, in 1983.


                                       3
<PAGE>


The Zeus Joint Venture

In February,  1993, the Company  entered into a joint venture  arrangement  with
Island Investment Corp., a Nevada corporation ("Island"),  pursuant to which the
parties  formed  Zeus  No.  1  Investments,  a  California  general  partnership
(hereinafter  referred  to as "Zeus",  the "Joint  Venture"  or the "Zeus  Joint
Venture").  The Zeus Joint Venture was formed to develop the Franklin  Mines and
related assets of the Company. In May, 1993, Island assigned its interest in the
Zeus Joint  Venture to Gems and Minerals  Corp.,  a wholly owned  subsidiary  of
Island  ("Gems").  The  activities  of the Zeus Joint  Venture was overseen by a
management  committee  comprised of three members,  one member appointed by Gems
and two members appointed by Franklin.

The Joint  Venture  was formed to provide  the Company  with the  financial  and
technical support necessary to develop the Franklin Mining properties. While the
Zeus Joint  Venture was granted the exclusive  right to use the Franklin  Mining
properties,  at no time did the Company  transfer  its  leasehold  interests  or
ownership  interest in its mining  permits to the Joint Venture or to Gems.  The
Company  did,  however,  relinquish  its  interest in 82.5% of the profits  from
operations  at the Franklin  Mine and Mill as Gems was to  contribute  necessary
capital and other technical  support to bring the Franklin Mines into operation.
Each of Gems and the  Company  were  free to  pursue  other  business  interests
outside the Joint Venture exclusive of the other.

Since the inception of the Joint Venture, Gems maintained the responsibility for
supplying technology,  engineers and personnel,  as well as additional equipment
and financing to bring the Franklin Mines and Mill into  operation.  The Company
retained  responsibility  for  keeping  its  permits in full  force and  effect.
However, since the Company had limited financial resources,  it was dependent on
Gems for its primary funding.

On June 5, 1996,  the Company  entered into a non-binding  letter of intent (the
"June 5 Letter  of  Intent")  with  Gems to  acquire  certain  assets of Gems in
exchange for 67% of the Company,  which  together with the 18% then held by Gems
would equal  approximately 85% of the Company.  For more information on issuance
of shares to Gems,  See Item Market for  Registrants  Common  Equity and Related
Stockholders Matters,- Sale of Restricted Securities.  However, after conducting
preliminary  due diligence,  it was mutually  determined by Gems and the Company
that it would not be in the best  interest  of  either  parties  to  pursue  the
Transactions set forth in the June 5 Letter of Intent.

On July 15, 1996, Gems transferred 31.5% of its 82.5% interest in the Zeus Joint
Venture to Nuco Ventures,  Inc., a Delaware  company and wholly owned subsidiary
of Gems ("Nuco").

During  1997,  it became  apparent to the Company  that Gems did not possess the
technical  and  financial  resources  required to bring the Franklin  Mines into
operation as contemplated by the Joint Venture.  Additionally,  on September 25,
1997,  the Company  entered into a letter of intent,  (the  "Martucci  Letter of
Intent"), with Mr. William C.


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<PAGE>


Martucci  ("Martucci")  to acquire (the  "Transaction")  all of the  outstanding
shares of POS  Financial  Corp.,  a New Jersey  corporation  ("POS") and certain
other  entities  owned  by  him  including  U.S.  Mining,  Inc.,  a  New  Jersey
corporation  ("USM"), in exchange for newly issued shares of Common Stock of the
Company. It was contemplated,  that Martucci would receive  approximately 85% of
the outstanding shares of the Company, upon the closing of the Transaction.  The
consummation  of the Transaction was predicated upon the completion of customary
due  diligence,  the  execution  of  definitive  agreements  and the approval of
Franklin  stockholders.  Additionally,  Mr.  Martucci  agreed to cover  expenses
incurred  with  respect  the  Transaction  in the form of loans to the  Company.
Management  believed that the financial  support to be supplied by Mr.  Martucci
pursuant to the Letter of Intent would be  sufficient  to fund the Company prior
to the consummation of the Transaction.

On November 25, 1997 in a step  transaction,  USM acquired an aggregate of 82.5%
interest  in the Zeus  Joint  Venture  from  Gems and Nuco in  exchange  for the
assumption  of  approximately   $100,000  in  liabilities  of  Gems  (the  "Gems
Liabilities").  USM thereafter  simultaneously assigned the acquired interest to
the Company in exchange for the  assumption of the Gem's  liabilities.  Upon the
acquisition of the 82.5% interest of the Zeus Joint Venture by the Company,  the
Zeus Joint Venture  relationship  with Gems was terminated and the Joint Venture
was  effectively  dissolved.  The  result of the  termination  of the Zeus Joint
Venture is that the  Company  has  reacquired  the right to 100% of the  profits
generated  from the  Franklin  Mines and Mill once  these  properties  come into
operation which will further enhance the Company's future profitability.

On April 6, 1998,  Martucci  terminated  the Martucci  Letter of Intent.  During
1997, POS and/or affiliates advanced to Franklin approximately $955,756 of funds
including approximately $410,000 advanced to the Company by POS through advances
made to Gems for the  Company  (the "POS  Advances")  and on March 9, 1998,  the
Company  executed  a  Loan  Agreement  and  Promissory  Note  (the  "POS  Note")
evidencing  the terms upon which the Company  would repay the POS  Advances  and
upon which POS would advance  additional  funds to the Company on an "as needed"
basis.  The POS Note; in the principal  amount of $955,756,  bears interest at a
rate of 8% per annum and is due and  payable on May 4, 1998 but can be  extended
on a month to month basis.  The POS Note is secured by a first  priority lien on
substantially all of the assets of the Company.  POS thereafter assigned the POS
Note to USM on March 9th, 1998.

Notwithstanding,  the termination of the Martucci Letter of Intent,  the Company
and Mr. Martucci have agreed to continue  negotiations  for a possible  business
combination between the Company and the Martucci Companies on an informal basis.
However, there can be no assurance that any definitive agreement will be reached
between the parties regarding future acquisitions.  Moreover, since Martucci and
the Martucci Companies have been the primary source of funding to the Company as
of late;  there can be no assurance  that the Company will have  adequate  funds
available to repay the POS Note. In the event that the Company should default on
its  obligations  to repay the POS  advances,  USM may  foreclose  on the assets
securing  the POS Note.  Such  foreclosure  actions by USM would have a material
adverse effect on the future


                                       5
<PAGE>


operations of the Company and on the  Company's  ability to explore the Franklin
Mines.

Operations at the Company's Mining Properties

(1)  Compliance with DMG regulations at the Franklin Mines and Franklin Mill.

On or about  January  9,  1996,  the  Company  received  a  letter  from the DMG
outlining  the  status  of the  Company's  112D  Mining  Permit  (the  "Franklin
Permit").  The DMG identified  several areas in which it believed  violations of
the terms of the Franklin Permit may have existed. The major issues cited by the
DMG in its January correspondence are outlined as follows:

The Franklin  Mill. On September 2, 1993,  the DMG approved,  subject to certain
conditions,  a revision to the Franklin  Permit to change the processing  method
then currently in place at the Franklin Mill to a Carbon In Leach  process.  The
conditions  set forth by the DMG included  submission of quarterly  sampling and
analyses to be performed in connection with the milling process.  These sampling
requirements  were to remain in effect  for the life of the  Franklin  Permit or
until a subsequent  change was agreed to by the DMG. As of January 9, 1996,  the
DMG stated that the Company had failed to submit such  information to the DMG in
accordance with such conditions and, therefore, it believed a possible violation
existed regarding such matter.

Tailings  Disposal Area. As approved on September 26, 1983, the original  mining
plan of the Company called for tailings to be slurried to a Lined Tailings Ponds
located adjacent to the Franklin Mill (the "Lined Tailings Ponds"). The original
mining plan also contemplated a system for draining residual tailings water from
the  tailings  pond  disposal  area  (the  "Disposal   Area")  to  minimize  the
infiltration  of tailings  water into  groundwater  in the area  during  run-off
periods.  According to the DMG, inspections conducted over the prior three years
indicated  that the condition of the Disposal  Area at the Franklin  Mines would
not effectively  minimize  infiltration  of tailings water into  groundwater and
that the system in place for draining  residual tailings water from the Disposal
Area to the  Lined  Tailings  Ponds was no longer  functional.  The DMG  further
claimed that acidic water had been  observed  during  inspections  to be seeping
from the Lined  Tailings  Ponds into nearby  drainage  during the spring run-off
period.  Therefore, the DMG required that action be taken at the site to prevent
any further  leakage into area drainage on or before January 10, 1996 to prevent
a citation for possible permit violations.  Moreover,  the DMG required that the
Company submit a revision to the Franklin Permit to include a plan for long term
correction of this problem on or before March 8, 1996.

Lower  Tailings  Pond.  On or about  August  13,  1988,  the  Company  submitted
Amendment  application  AM-001 to the DMG to amend its  original  mining plan to
conduct  custom  milling and to dewater the tailings on the lower  tailings pond
which is located  below the Lined  Tailings  Ponds near the  Franklin  Mill (the
"Lower  Pond").  The DMG,  on April 4, 1989,  agreed to approve  this  amendment
application  provided  that the Company  comply with  certain  conditions  on or
before  April 11,  1989.  The DMG stated that it had no record of the  Company's
response to such compliance


                                       6
<PAGE>


request  and  demanded  that such  conditions  be agreed to by the Company on or
before January 31, 1996 or the amendment application would be denied.

Additionally,  on August  16,  1990,  the DMG  conducted  an  inspection  of the
Franklin Mines property and reported that the Lower Pond was actively being used
for tailings disposal.  The DMG considered this activity a possible violation of
the  Franklin  Permit based on its review of its files.  The DMG further  stated
that no tailings  disposal  would be allowed in the Lower Pond until the Company
could  demonstrate that an adequate  groundwater  monitoring  program was put in
place and that the  groundwater  quality for existing and  potential  future use
would not be impacted by the use of the Lower Pond by the Company.  Further, the
DMG stated that any raises or  enlargements  of the area would  require  further
revision of the  Franklin  Permit and approval by the DMG before such work could
be commenced.

Groundwater  Monitoring  Plan.  In a technical  revision to the Franklin  Permit
approved  by the DMG on  February  1, 1985,  the  Company  committed  to monitor
upgradient and downgradient  surface and groundwater at the Franklin Mines. Such
approval was given on the condition that analyses of the surface and groundwater
be submitted with each annual report of the Company. The groundwater  monitoring
plan was further revised in technical  revisions to the Franklin Permit approved
by the DMG on each of  September  2,  1993 and  March 14,  1994.  The  technical
revision   approved  on  September  2,  1993  required  the  Company  to  submit
groundwater  analyses to the DMG on a quarterly basis;  however,  the DMG stated
that it had not received the  required  analyses  from that date and the Company
needed to verify whether its surface and  groundwater  monitoring  programs were
active  and  functional  on or before  March 8,  1996.  Until  such time as this
information  was submitted to the DMG, the Company was prohibited from disposing
further tailings on the property.

Reclaimation  Plan. On October 5, 1983, the Company committed to remove all mine
buildings in the event that the Company should  reclaim the property  comprising
the Franklin  Mines and  Franklin  Mill.  On March 14, 1994,  the DMG approved a
technical  revision to the Franklin Permit in which the reclaimation bond of the
Company  was  recalculated.  To help  reduce  reclaimation  costs,  the  Company
committed to filing an amendment  prior to mine  start-up and no later than July
1,  1995  which  included  a plan to leave  the mine and mill  structures  after
reclaimation. The DMG stated that this plan was not submitted and therefore, any
costs  associated  with the demolition and disposal of such structures will need
to be included in the  Company's  reclaimation  bond.  The DMG required that the
Company  submit to it, no later  than March 8,  1996,  specifications  and other
details  regarding the structures to be demolished for purposes of recalculating
the bond.

Although  the  Company  responded  to the  claims of the DMG in a letter,  dated
January  19,  1996,  the DMG cited the Company for  possible  violations  of the
Franklin Permit with respect to the issues relating to, among other things,  the
Disposal Area, the Lower Pond and the groundwater  monitoring  plan. On or about
March 28, 1996 at a hearing before the Mined Land Reclaimation Board, the agency
responsible for overseeing and reviewing permitting issues ("MLRB") and the DMG,
the Company  received a temporary  cease and desist  order  prohibiting  it from
conducting mining


                                       7
<PAGE>

and/or  milling  operations  at the  Franklin  Mines until such time as all past
violations cited by the DMG were satisfied.

During  fiscal year 1996 and 1997,  the  majority of the  remedial  work and the
technical  revisions  to the  Franklin  Permit  consisted  of work  relating  to
correcting  violations  existing with respect to the matters  identified  above.
Specifically, the Company (a) instituted a plan quarterly groundwater monitoring
which included  surface water and groundwater  sampling plans, (b) took steps to
correct the run-off problem associated with the Disposal Area, (c) reclaimed the
Lined Tailings Ponds, (d) commenced  preliminary plans for the installation of a
paste  backfill  system  for  tailings  disposal  in the Lined Pond and (e) made
application to the DMG for expansion of the permitted area at the Franklin Mines
and Franklin Mill to allow for  performance of certain of the  remediation  work
outlined above.  Upon completion of paste backfill work, it is anticipated  that
the Company will possess substantial  tailings disposal capacity consistent with
its production plans. However, should additional disposal areas be required, the
Company may make application to the DMG to reopen the Lined Tailings Ponds which
it has recently  reclaimed.  Since the  reclaimation  work relating to the Lined
Tailings Ponds has been completed,  the Company may also make application to the
DMG to reduce the $252,000 reclaimation bond currently posted with the DMG.

In addition to the work performed in connection with the Franklin  Permits,  the
Company   submitted   to  the  DMG  an   environmental   protection   plan  (the
"Environmental  Protection  Plan") which  complies  with the  provisions  of the
Mineral Rules and  Regulations  of the MLRB of Hard Rock,  Metal and  Designated
Mining  Operations.  The  Environmental  Protection  Plan  includes an emergency
response plan for  designated  chemicals used on site and  appropriate  measures
consistent with the recommendations by the Colorado Division of Wildlife for the
Protection  of  Wildlife  to prevent  damage to area  wildlife  from  designated
chemicals,  toxic  or  acid  forming  materials  and  acid  mine  drainage.  The
Environmental Protection Plan has been accepted by the DMG.

On January 31, 1997, the Company received  approval from the DMG of its March 6,
1996 amendment application to the Franklin Permit. The notification of approval,
received by the Company on February  28,  1997,  increased  the total  permitted
area,  revised the mining plan to include the  processing  of ore from the Mogul
Mines, alters the milling process, propose tailings paste disposal, and modifies
the surface water control  plan.  All of the terms of the amendment  approved by
the DMG were  incorporated  into the  Franklin  Permit and made a part  thereof.
However,  the DMG set forth certain conditions to its approval which required (i
) the submission of a final design for tailings disposal  facilities in the form
of a  technical  revision  to the DMG for  approval  prior to  operation  of the
Franklin  Mill,  (ii) the  installation  of the  components of the Surface Water
Control Plan not later than April 15, 1997 and (iii) the  completion  of closure
plans for the Lined  Tailings  Pond by spring  runoff  and in any event no later
than April 15. Finally,  the schedule for the completion of the closure plan for
Tailings  Pond 5 will be  determined by the DMG during fiscal year 1997 and will
be dependent on the Company's tailings disposal plan which is to be submitted to
the DMG in 1997.


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<PAGE>


In the Spring of 1997,  the region in which the Franklin  mining  properties are
located was subject to severe weather  patterns which caused flood conditions in
the area.  As a result,  the  Company  was  unable to  complete  its work at the
Franklin Mines within the prescribed  time frame.  Given the oral agreement with
the DMG to grant the Company  latitude  with  respect to the  completion  of its
projects,  the Company  failed to make any formal  application to the DMG for an
extension of time to complete the Surface  Water  Control Plan and closure plans
for the tailings ponds. As a result of this  oversight,  the Company  received a
formal  Notice of Violation  and Cease and Desist Order from the DMG for failure
to fully  complete  these  projects as  prescribed by the DMG in its January 31,
1997 approval.

Thereafter,  installation of the Surface Water Control Plan, and the closure and
reclamation  of the tailings  ponds were  completed and the Cease and Desist was
automatically  lifted without  further  action by the Company or  administrative
proceedings by the DMG. As of the date hereof, the Company is in compliance with
all applicable  regulations  and no violations  exist against the Company or its
properties.

(2)  Newmineco and the Mogul Mine.

On September  26, 1996,  the Company  acquired a 20% interest in Newmineco  from
Gems for a purchase price of $600,000 evidenced by an interest only note bearing
interest at 9.5% per annum (the "Newmineco Note").  Payments of interest were to
be made  quarterly,  the first  payment  being due on  December  31,  1996.  The
principal amount of the Newmineco Note was due on June 30, 1997. The Company, at
its option,  could  convert the  principal  and interest  payments due under the
Newmineco Note into the Company's  Common Stock on or after January 1, 1997 at a
conversion  rate of .078 per  share.  The  conversion  shares  had  registration
rights.  Additionally,  the  Company  acquired  the right to  receive  the first
$500,000 of profits distributed by Newmineco, but thereafter,  will receive only
that portion of such profits  which the Company  would be entitled in respect of
the aforesaid 20% ownership  interest.  As of December 31, 1996, the Company had
failed to make its December 31, 1996 interest payment on the Newmineco Note.

The  majority  of the rights to the Mogul Mine were  evidenced  by a Lease dated
March 18, 1996,  entered into between Island, as lessee, and the Ruggs (McCollum
being the  lessor/optionor  as to the  Muscat  Lode claim  only) as lessor  (the
"Rugg/Mogul  Lease"). The Rugg/Mogul Lease was contributed to Newmineco prior to
the acquisition by the Company of 20% of the LLC.

During the early part of 1996 and again in the latter  part of the year,  mining
commenced at the Mogul Mine in accordance  with a  prospecting  permit which had
been secured by Durango Metals,  Inc. a former  owner/operator of the Mogul Mine
(the "Durango Prospecting  Permit).  Approximately 285 tons of ore were mined in
1996,  of which 85 tons were  shipped to a regional  smelter for  processing  in
March,  1996 and  approximately  200 tons were crushed at the Franklin Mill from
October through


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<PAGE>


December.  As a result of such  operations,  the Company has been advised by the
management of Newmineco  that  approximately  $30,000 of revenue was realized by
the LLC,  all of which was  applied  against  expenditures  incurred by the LLC.
Therefore, the Company did not realize any revenues against its right to receive
a $500,000 priority payment from revenues generated from the Mogul Mine.

In the latter part of 1996,  Newmineco  informed the Company  that  disputes had
arisen among various  parties to the  Newmineco  agreements  which  included the
Rugg/Mogul Lease and use of the underlying leasehold rights. On January 1, 1997,
Island,  the former  lessee  under the  Rugg/Mogul  Lease,  received a notice of
intent to terminate  the  Rugg/Mogul  Leases from the Ruggs  unless  Island paid
approximately  $85,000  allegedly due to the Ruggs  pursuant to the terms of the
lease  within 30 days of the date of the  notice.  The  Company  was  advised by
Newmineco and Island that the parties were  negotiating in good faith to resolve
their  differences and that they were hopeful that a resolution would be reached
shortly.

During the later part of 1996, the Company  entered into  discussions  with Gems
regarding the problems with the Mogul Mine which  included  certain title issues
with  respect  to the  rights to mine the Mogul  Mine and  litigation  commenced
against various parties,  including the Company, in connection  therewith.  As a
result of these discussions,  the Company,  Gems, Com, Inc. and Newmineco agreed
that,  effective  December 31, 1996,  the  $600,000  purchase  price paid by the
Company,  for its 20%  interest in Newmineco  would be reduced to $150,000.  The
parties  further  agreed that the $450,000  reduction in the Newmineco Note plus
accrued and unpaid  interest  thereon would be applied  against the  outstanding
balance of the Gold Hill Note (as hereafter  defined),  thereby further reducing
the principal balance of the Gold Hill Note to $586,419. Moreover, Gems and Com,
Inc. agreed to indemnify the Company for any damages incurred as a result of any
lawsuits arising out of the Company's interest in Newmineco and/or the Gold Hill
Mill.  For further  information  regarding the Gold Hill Mill and Gold Hill Note
See Item 1. Description of Business (3) the Gold Hill Mill. For more information
regarding the title issues and litigation  involving the Mogul Mine, see Item 2.
Property-Rugg/Mogul  Lease; Item 3 Litigation-Durango  Litigation. The Gold Hill
Note was further reduced by $150,000 in 1997 as a result of the reduction of the
purchase of the interest in the Newmineco  Note  evidenced by the Newmineco Note
to 0.

On February 7, 1997, Gems notified the Company that it had assigned its interest
in the  Newmineco  Note to  certain  third  parties,  including  John  Miner,  a
consultant  to the Zeus Joint  Venture.  Thereafter,  on February 10, 1997,  the
Company  notified  Mr.  Miner,  as special  agent to the  assignees  that it had
elected to convert the principal due on the Newmineco  Note into Common Stock of
the Company in  accordance  with the terms  therein.  An  aggregate of 7,692,308
shares were issued to the assignees in full satisfaction of the Newmineco Note.

(3)  The Gold Hill Mill

In July,  1996,  the  Company  acquired  the Gold Hill Mill from COM,  Inc.  for
$2,500,000  note (the "Gold Hill  Note")  payable  to COM,  Inc. a wholly  owned
subsidiary of Gems.  The Gold Hill Note bears interest at a rate of 8% per annum
and interest payments are


                                       10
<PAGE>


$50,000 payable  quarterly and is secured by a mortgage on the property in favor
of COM, Inc. The principal amount of the Gold Hill Note is due June 3, 1999. The
first quarterly  interest payment was due on October 3, 1996. In addition to the
Gold Hill Note and mortgage, the Company and COM, Inc. entered into a memorandum
of  understanding  in which the parties  agreed that certain  items needed to be
addressed as post closing  items with respect to the sale of the Gold Hill Mill.
These issues  included,  but were not limited to (i) the  disposition of certain
liens which were  outstanding  on the  property as of July 3, 1996,  including a
judgement  lien in the amount of $6,815.50  and a Deed of Trust in the amount of
$300,000 which  represented a debt owed by Gems, (ii) COM,  Inc.'s  agreement to
defend,  indemnify  and hold the Company  harmless for any current or subsequent
notices of liens  served upon the  Company  relating  to  indebtedness  or other
claims of such parties which  occurred  prior to the sale of the property to the
Company and (iii) the receipt by the Company of title insurance.  As of the date
hereof, none of the items set forth in the memorandum of understanding have been
satisfied.

In July, 1996, the Company  commenced an offering to purchase assets  consisting
of Promissory  Notes and other debt  instruments  from third parties in exchange
for Common Stock of the Company.  Com, Inc.  thereafter  agreed to purchase such
assets from the Company in exchange for a reduction in the  indebtedness  of the
Gold Hill Note.  The Company  further  agreed to use its best  efforts to file a
registration statement with respect to such shares within 45 to 60 days from the
date upon which the offering  terminated.  As a result of the  Transaction,  the
Company was able to reduce the Gold Hill Note by  $1,463,581,  leaving a balance
of $1,036,419.  The Gold Hill Note was further  reduced by a $600,000  credit in
accordance with the agreements reached with respect to the purchase price of the
Company's  Newmineco  interest.  As  of  December  31,  1997,  given  effect  to
adjustments  relating to intercompany loans between Gems and the Company made in
connection with the settlement of affairs  relating to the Zeus Joint Venture as
well as the $600,000 credit afforded to the Company in connection with the Mogul
Mine Note, the balance of the Gold Hill Note has been reduced to $0.

As further  inducement to purchase the Gold Hill Mill,  Gems  represented to the
Company at the time of the purchase of the facility,  that it had  contracted to
acquire the rights to mill mine dump material  located on fourteen mine dumps in
the  immediate  vicinity  of the Gold Hill  Milling  facility  (the  "Gold  Hill
Dumps"). The Company was advised by Gems that the Gold Hill Dumps were estimated
to contain an aggregate of  approximately  590,000 tons of material grading 0.15
to 0.18  ounces  of gold per ton  (opt  gold) of dump  material.  In the  fourth
quarter 1996, Gems advised the Company that due to the failure of the parties to
act, the agreement has been terminated.

The Gold Hill Mill is located  within close  proximity to the Franklin Mines and
Mill as well as the Mogul  Mine and it was  hoped  that the  acquisition  of the
facility would afford the Company the opportunity to expand its geographic reach
into the Gold Hill Mining  region.  It was  contemplated  that the Company would
conduct milling operations at the Gold Hill Mill and Franklin Mill at a combined
initial  rate of 200 tons per day and that such  capacity  would  eventually  be
increased.


                                       11
<PAGE>


However,  the present regulatory climate has made it economically  unfeasible to
bring the Gold Hill Mill into  operations.  Recent changes in the laws governing
milling  and mining in Boulder  County  restrict  the use of milling  facilities
located in Boulder  County to processing  ore recovered  within the county only.
Therefore,  the laws  preclude  the  Company  from  using the Gold Hill Mill for
processing  ore from the Franklin  Mines.  Management  does not believe that any
mines located in Boulder County are operating at this time. Additionally, at the
time  of the  acquisition  of the  Gold  Hill  Mill  by the  Company,  Gems  had
represented to the Company that it had obtained the rights to mill the Gold Hill
Dumps.  Since the agreements  permitting such activities  were  terminated,  the
Company cannot use the Gold Hill Mill for this purpose.  Therefore,  the Company
hopes to sell the real property and remove the milling  equipment for relocation
to the Franklin  Mine.  Approximately  5 acres of property will be available for
sale.

Despite  its  decision  not to  operate  the Gold Hill  Mill,  the  Company  has
continued to take the  necessary  action to preserve  Permit  #94-117 (the "Gold
Hill Permit").  Throughout 1996 and 1997, the Company has continued to work with
the DMG to correct  possible  violations of the Gold Hill Permit,  including the
rehabilitation of the required spring  evaporation  system at the tailings ponds
located  on the Gold  Hill  Mill  property.  As of the date  hereof,  no  formal
violations  are  pending  with  respect  to the Gold Hill  Permits  and the same
remains in full force and effect.

To reclaim the property, the Company will be required to remove all tailings and
ore from the  site,  test the  condition  of water  located  at the Hazel A adit
pursuant  to  Boulder  County  Water  Control  Board  requirements  and fill the
tailings  pond with soil,  contour  and seed the same in  accordance  with state
regulations.  In the event that the water  quality is found to be in  compliance
with  existing  standards,  the adit will be plugged  and  capped.  The  Company
expects  reclaimation costs to be approximately  $15,000 to $20,000 and does not
expect reclaimation efforts in any event to exceed the $33,000 reclaimation bond
posted at the DMG to cover reclaimation costs.

The Company  estimates  that the sale of the real property  comprising  the Gold
Hill Mill will generate approximately $350,000 based upon estimates given to the
Company by local Realtors. Management believes that the equipment has a value of
approximately $925,000 and the water rights are valued at approximately $25,000.
As a result of the  aforementioned  estimated  values,  the value of the  assets
comprising the Gold Hill Mill were written down by $1.2 million.

Other Matters

On or about June 12, 1997,  the Company filed with the  Securities  and Exchange
Commission  (the  "Commission")  a  Registration  Statement  on Form  SB-2  (the
"Registration  Statement") on behalf of certain  shareholders of the Company for
the purpose of  registering an aggregate of 15,951,885  shares.  The Company was
obligated to file the  Registration  Statement  on behalf of these  shareholders
pursuant to certain  contractual  agreements granting such persons demand and/or
piggyback registration rights.


                                       12
<PAGE>


After  receiving  comments from the  Commission  on or about July 18, 1997,  the
Company  received  requests  from the  majority of the Selling  Shareholders  to
withdraw  their shares from the  Registration  Statement  because,  assuming all
other  provisions of Rule 144 are complied with, the shares may be sold pursuant
to Rule 144 because the 1 year holding period has expired. Simultaneously,  with
the filing of this Annual Report,  the Company intends to file an application to
withdraw the  Registration  Statement.  The Company  expects that the Commission
will consent to the  withdrawal  of the  Registration  Statement  based upon its
recent  discussions  with the  Commission,  provided the Company  addresses  the
Commission's comments in conjunction with the filing of this report.

The Company,  through the Joint  Venture or  otherwise,  has not  conducted  any
significant commercial mining operations and, as a result, had not generated any
significant  revenues  through December 31, 1997 from operations at the Franklin
Mine.  Therefore,  the  Company  remains  in the  development  stage.  Based  on
information  developed  through the Analysis  Program and  previously  available
geological data and reports as well as reports and other information supplied to
the Company by Gems, the Company is hopeful that economically  viable commercial
mining operations at the Idaho Springs mining facilities can be conducted in the
future.  Moreover,  the Company  continues to work closely with  Colorado  state
mining  regulatory  agencies  in  preparation  and  anticipation  of full  scale
operations at the Franklin Mines and Franklin Mill.

Water, Utilities and Refining Contracts

The Company has  historically  purchased  power from Public  Service  Company of
Colorado at its published rates.  Moreover,  the Company's  management  believes
that sufficient water for present and future operations may be obtained from the
City of Idaho  Springs  at its  normal  rates or from  other  nearby  sources at
reasonable rates. The Company's management does not anticipate any difficulty in
obtaining  sufficient  water and power sources for its future mining and milling
operations.

In the  past,  the  Company  has  entered  into  refining  agreements  with Zinc
Corporation  of America  and ASARCO  Incorporated  for the sale and  refining of
lead, zinc and copper concentrates  produced from the Franklin Mine in Colorado.
The  Company's  management  expects that at such time as it  recommences  active
mining  and  milling  operations,  the  Company  will not have  difficulties  in
renewing or  renegotiating  contracts with either ASARCO or Zinc  Corporation of
America or entering into new contracts with their competitors.

Employees and Technical Consultants

As of December 31, 1997,  the Company had no full-time  employees.  Three of the
Company's executive officers serve as needed on a part-time basis and one of the
Company's  executive  officers  serves  on  a  full  time  basis,  each  for  no
compensation.  With respect to  operations  at the  Franklin  Mines and Franklin
Mill,  technical  personnel  and other  qualified  consultants  and  experts are
retained on a contract or consulting basis.  Management  anticipates that as the
Company's business develops, additional


                                       13
<PAGE>


technical  administrative staff may be hired as well as qualified geological and
technical consultants on an as needed basis.

Item 2. Properties

Glossary of Terms
-----------------

Assay                           A chemical evaluation of metal content conducted
                                after mining ore.

Backfill                        Mine waste which is disposed of underground in a
                                formerly mined area.

Chacopyrite                     A mineral containing copper, iron and sulphur.

Cyanidation and Pulp Recovery   The  process by which gold is  extracted  in the
                                milling process through the use of cyanide.

Development Stage Company       Companies  engaged  in  the  preparation  of  an
                                established  commercially  mineable  deposit  or
                                reserve  for its  extract  which  are not in the
                                production stage.

Dip                             An angle measured in degrees from the horizon.

Fault                           A   fracture   in  the   earth   through   which
                                mineralizing solutions may rise and form a vein.

Fault System                    A large regional fracture.

Footwall                        That portion of the vein which is located below.

Galena                          A mineral containing both lead and sulphur.

Gravity Concentration           Minerals  concentrated by application of devices
                                employing the force of gravity.

Hanging wall                    That portion of the vein which is overhead.

J.L. Emerson Fault              A large  fracture in the earth' s crust  located
                                in the Franklin Mine area.

Laramide Period                 A period in history dating back approximately 70
                                to 90 million years ago.


                                       14
<PAGE>


Main Trunk                      A highly mineralized portion of the J.L. Emerson
                                fault located on the properties constituting the
                                Franklin Mines.

Massive Sulfides                High quality ore.

Microcline gneiss               A type of rock found at the Franklin Mine.

Mill                            The plant facility where the metals constituting
                                the ore are removed from mined rock.

Mine Workings                   The areas where ore is being mined.

Mineral Concentrate             A mill  product  where the rock  particles  have
                                been removed from the metallic minerals.

Mineralized Rock                Rock which contains the minerals to be mined.


Monzonite                       Intrusive rock types containing large amounts of
                                quartz  and often the  progenitor  of  metallic,
                                mineralizing solutions.

Ore                             A metallic or  non-metallic  mineral that can be
                                mined from the earth and sold at a profit.

Ore Conduit                     An opening through which mineralizing  solutions
                                can rise.

Ore Reserves                    Minerals  located in the ground whose  existence
                                is governed by varying degrees of probability.

Ore Shoot                       A body of ore.

Orogeny                         An event causing a major upheaval or reshapement
                                of  the  earth's   crust,   such  as  volcanism,
                                mountain building or ore formation.

Paste Backfill                  Procedure  in which  backfill  is  treated  with
                                certain   chemicals  to  solidify  the  same  to
                                prevent seepage

Pegatites                       A type of rock found in the Franklin Mine.


                                       15
<PAGE>


Pillars                         Unmined sections of ore in a stope.

Pre-Cambrian age                A   time   period   in   history   dating   back
                                approximately 600 million years ago.

Probable (Indicated) Reserves   Reserves  for which  quantity  and grade  and/or
                                quality are computed from information similar to
                                that used for proven reserves,  but the site for
                                inspection, sampling and measurement are farther
                                apart or are otherwise less  adequately  spaced.
                                The  degree of  assurance,  although  lower than
                                that for  proven  reserves,  is high  enough  to
                                assume continuity between point of observation.

Production Shaft                The device through which ore is hoisted from the
                                mine and the area through  which  materials  are
                                lowered  into the mine and miners enter and exit
                                the mine.

Proven (Measured) Reserves      Reserves for which (a) quantity is computed from
                                dimensions   revealed  in  outcrops,   trenches,
                                workings  or  drill  holes;  grade  quality  are
                                computed  from the results of detailed  sampling
                                and (b) the sites for  inspection,  sampling and
                                measurement   are  spaced  so  closely  and  the
                                geologic character is so well defined that size,
                                shape, depth and mineral content of reserves are
                                well established.

Pyrite                          A mineral containing both zinc and sulphur.

Raise                           A tunnel driven upward from a level.

Refractory                      A  difficulty  in  separating  value  metals  or
                                minerals from the host rock.

Reserves                        That part of a mineral  deposit  which  could be
                                economically  and legally  extracted or produced
                                at the time of the reserve determination.

Schist, granite gneiss          A type of rock found in the Franklin Mine.

Selective Flotation             Minerals  concentrated  in  a  selected  mineral
                                group in the mill.


                                       16
<PAGE>


Shaft                           A  vertical  tube-like  opening  whereby  miners
                                enter the mine.

Slurry                          A mixture of ground rock or minerals in water.

Slimes                          Exceedingly fine particles mixed with water.

Sphalerite                      A mineral containing both zinc and sulphur.

Strike                          In a horizontal direction.

Stope                           The  area  of  the  mine  where  miners  extract
                                mineral deposits from the mine.

Tailings                        Waste which is produced by the Mill.

Tailings Pond                   The location where mill wastes are deposited.

Telluride                       A mineral containing  tellurium often found with
                                quantities of gold and/or silver and sulphur.

Tennentite                      A complex mineral containing copper, antimony or
                                arsenic,   often  containing  large  amounts  of
                                silver.

Tertiary Period                 A   time   period   in   history   dating   back
                                approximately 40 to 70 million years ago.

Vein                            A fracture in the earth's  crust where  minerals
                                have been deposited.

Winze                           A tunnel driven downward from a level.

Colorado Mining Properties

The property which constitutes the Franklin Mines consists of (i) 100% leasehold
interest in the mineral rights to 28 claims  comprising  approximately 322 acres
evidenced by the  Hayden/Kennec  Leases and (ii) an  additional 23 claims leased
and/or  purchased by the Company  covering less than 100% of the mineral  rights
comprising  approximately 20 additional acres, for a total of 51 claims over 340
acres.  Such properties  include all  improvements  made by the Company thereon,
including the


                                       17
<PAGE>


Franklin  Mill capable of  supporting  up to a 150 ton per day  operation in its
present  state.  The Company  does not intend to exploit any claims for which it
holds less than a 100% interest. Management believes that it currently maintains
adequate insurance for all of its mining properties.

Hayden/Kennec Leases

The original Hayden/Kennec Leases provided for payment by the Company of certain
liabilities  relating to the leased  property and a minimum  royalty  payment of
$2,000 per month or 5% of the  Company's  net smelter  royalties  realized  from
production  whichever was greater to Mrs. Hayden and Mrs.  Kennec.  The original
Hayden/Kennec Leases expired in November, 1996 at which time the Company had the
option to purchase the leasehold  rights for a purchase price of $1,250,000 less
any royalties  previously paid as of the expiration date. As of November,  1996,
the Company paid approximately $480,000 in royalties.

On November 19, 1996, the Company entered into an amendment to the Hayden/Kennec
Leases with Dorothy  Kennec (the "Kennec  Amendment").  Pursuant to the terms of
the  Kennec  Amendment,  Kennec  agreed to extend  the term as it relates to her
portion of the leasehold rights through November 12, 1997. In consideration  for
such extension, the Company agreed to increase the royalty payment due to Kennec
under the original  Hayden/Kennec  Leases from $1,000 to $2,000 per month and to
issue to Kennec  104,000  shares of the Common  Stock of the  Company  valued at
$.125 per share,  having an aggregate market value on or about November 19, 1996
of $13,000.  All of the payments made under the Kennec  Amendment plus the value
of the shares issued  thereunder are to be further  applied  against the buy-out
price of the  property  under  the  original  Hayden/Kennec  Leases.  Additional
payments  totaling  approximately  $60,000  was  advanced by or on behalf of the
Company to each of Mrs. Hayden and Mrs. Kennec through December, 1997.

To further  secure the ability of the Company and the Zeus Joint  Venture,  Gems
entered into an agreement  on December  21, 1995 to purchase  Hayden's  interest
thereto (the "Hayden  Interests")  for a purchase  price of $75,000 (as the same
has  been  subsequently  amended  from  time  to  time,   "Hayden-Gems  Purchase
Agreement").  Gems made an initial payment of $5,000 to Hayden and the remainder
of the purchase price was to be paid on or prior to the  expiration  date of the
Hayden/Kennec  Leases.  Gems advised the Company that under  Colorado law, if an
owner of 50% of  mineral  rights  desired  to  exploit  those  rights,  then the
remaining 50% owner could not object to the exploitation of the rights, provided
the non-participating  owner received 50% of the net profits generated from such
exploitation.  Therefore,  Gems  informed the Company that it believed that with
the  acquisition  of the  Hayden  interest,  together  with the  portion  of the
Hayden/Kennec  Leases  owned by Kennec,  the Company and the Zeus Joint  Venture
would have adequate  access to the minerals  during the remainder of the term of
the  Hayden/Kennec  Leases on a continuing basis even if Kennec should elect not
to renew the lease or sell her  interests in the mining rights to the Company as
per the terms of the Hayden/Kennec Leases.


                                       18
<PAGE>


On  November  12,  1997,  Gems  had  failed  to  comply  with  the  terms of the
Hayden/Kennec-Gems Purchase Agreement. On November 13, 1997, Hayden entered into
an agreement to sell the Hayden interests to USM for a purchase price of $75,000
(the "Hayden-USM Purchase Agreement").  The purchase price is evidenced by note,
due  on  February  2,  1998.  Upon  the  execution  of the  Hayden-USM  Purchase
Agreement, USM agreed to extend the Hayden/Kennec Leases upon the same terms and
conditions   currently  in  effect  through  March  13th,  1998  (the  "Extended
Expiration  Date").  As  of  the  date  hereof,  USM  has  not  consummated  the
transaction  contemplated by the Hayden-USM Purchase  Agreement;  however, it is
expected that the transactions will close upon delivery by Hayden of clear title
to the  interests  being  conveyed  to  USM.  Additionally,  the  Company  is in
negotiations  with the parties to further extend the terms of the  Hayden/Kennec
Leases.

Location and Access

The Franklin Mines and Franklin Mill are located in Clear Creek County, Colorado
approximately  2.7 miles north of the town of Idaho  Springs which is accessible
from Interstate 70 approximately 33 miles west of Denver.  From Idaho Springs, a
county  maintained  gravel road  connecting  Idaho  Springs with Central City in
Gilpin County passes  within 1/4 of a mile of the Franklin Mine  facilities  and
offices.  A minor roadway,  also maintained by the County,  allows access to the
Franklin Mine within 1/8 of a mile. The mine location is accessible  year round,
except in the case of a major snow storm in winter months.

Ore Deposition in the Area

Most of the ore  deposition  in the area where the Franklin  Mine is located has
been  credited to the period of the Laramide  Orogeny.  Ore  extracted  from the
region included gold, silver, copper, lead, zinc and uranium. By far the largest
single metal values were in gold,  with silver  being a distant  second.  Though
many of the smaller  veins  located in the area  pinched out at moderate  depth,
some have shown strong mineralization at greater depths.

The  ore   deposits   are  of  four   types:   (I)  pyritic   gold  ores;   (ii)
galena-sphalerite ores; (iii) composite (pyrite-galena-sphalerite) ores and (iv)
telluride  ores.   Pyritic  gold  ores  are  chiefly   associated  with  pyrite,
chacopyrite and tennentite.  The "composite  ores" are believed to be the result
of two or more  periods  of  mineralization,  with  pyritic  minerals  first and
galena-sphalerite  second;  mineral  content  varies  widely  with the  relative
percentage of the  different  types of ore present.  Telluride  ores are present
mostly in the Northeast  corner of the district,  but some  telluride  ores have
been noted elsewhere.


                                       19
<PAGE>


Geology of the Franklin Mines

The rocks most commonly seen in the Franklin Mines are  Pre-Cambrian age granite
and microcline gneiss. Tertiary Period,  monzonite,  the most common of which is
quartz  monzonite,  can be seen on the ninth level and are  reported  from lower
levels in the Gem vein or Gem workings of the Franklin Mines. The general strike
of the system is N75 degrees W with dips varying from 45(degree) to 79(degree).

The structure of the mines is controlled by the J.L.  Emerson Fault system which
runs in a west  north  west  direction  across the whole  property  and  beyond.
Secondary to the J.L. Emerson Fault are a multitude of small fissure veins which
are parasitic to the main break.  Some of these veins contribute to considerable
mineralization  where they  intersect the J.L.  Emerson Fault  structure.  These
mineral bodies are  observable in several  locations in the Franklin 73 mine and
the Gem mine,  one  measuring  22 feet wide and 60 feet in  length.  It has been
reliably  reported  that some of the  large  stopes  mined in the Gems  workings
measured up to 105 feet in width.

Estimated Ore Reserves

The mineral  lodes of the Franklin  Mines consist of these  associated  with the
Gem,  the  Freighter  and  the  Franklin  mines  and  those  minerals  generally
associated  with the "Main  Trunk" of the J.L.  Emerson  Fault.  No reference is
being made regarding the mineral  potential of structures  situated adjacent to,
or off the "Main Trunk".

Sampling by the channel  sample method was  conducted  during the period of 1975
through 1993 with assaying  provided by the Franklin and other  accredited assay
laboratories.  Assays were also  obtained from the old Gem Mining Co. mine assay
map, dated 1921 (the "Gems Assay Map").  The sampling process was carried out at
right  angles to the strike of the veins.  Blocks were  sampled on three or four
sides and at times within by raise or winze. Those blocks which were extensively
mined were  entered  where  possible  through  open stopes with both pillars and
"backfill" being sampled.

The Franklin  mineral  structure  is generally a tabular  structure in shape and
consisting of several  parallel to  sub-parallel  veins,  striking in a westerly
direction and dipping at 45(degree) - 79(degree) north. Its depth is unknown!

The J.L. Emerson Fault is a large regional structure,  striking east to west and
having an irregular  plain that dips to the north at 45 to 79 degrees.  The J.L.
Emerson Fault is associated throughout with a series of parallel to sub-parallel
sigmoidal  shaped  fractures that may focus east or west on the principal  fault
plain.  These  fracture  patterns  are found on nearly all levels and  represent
important centers of mineral  concentration.  The J.L. Emerson Fault consists of
two main parallel to sub-parallel  mineralized  fault  fractures,  the so called
"footwall"  and  "hanging  wall"  veins.   Each  of  the  principal   veins  has
historically contributed to ore production in the Gem vein. A second set of true
fissure veins of a later date and striking northeast and southwest


                                       20
<PAGE>

interdict the J.L.  Emerson  Fault at several  points,  but do not cross.  These
veins are of unknown economic potential.

The  mineral  structures  in the  Franklin  Mines are often  large,  but  poorly
defined. It was suggested that a core drilling program be conducted at promising
locations to determine  potential mineral reserves  therein.  It was believed by
management and Gems, its joint venture  partner,  that much  unexplored  mineral
potential exists in the Franklin Mine.

A geological report prepared by Gifford A. Dieterle in December,  1993 indicated
that proven and probable  reserves since 1987 to be as follows using a margin of
error of plus or minus 15% assuming a metallurgical recovery of 90%.

As filed with  Securities & Exchange  Commission;  Summary of Reserves Report by
Gifford A. Dieterle, Geologist, dated December 7, 1993.

     In place                                             173,486.60 Tons
     Broken ore (in stopes or on surface)                   4,700.00 Tons
     Ore Mined or Milled since 1987                         8,100.00 Tons
                                                          ----------
                                                          186,286.60 Tons

     Average Grade of Gold:                           .315 ounces per ton
     Average Grade of Silver:                        6.740 ounces per ton

As of the date hereof,  the Company has not received any information which would
require modification of the above table.

Operations.

The  successful  conclusion of the paste back fill testing  program will provide
the Company with adequate  tailings disposal and will bring the Company close to
the  commencement  of  operations.  The Company is hopeful that it will commence
rehabilitation  before  the end of the  second  quarter  of  1998  by  initially
bringing to the surface  8000 tons of ore  existing at the 5th level  tunnel via
the Freighters  Friend Shaft. The Company has been approached by and is pursuing
ventures  with two local  mining  operators  to mill ore mined from other mining
properties located in the region at the Franklin Mill.

The Company has retained Walsh Environmental Scientists and Engineers,  Inc., of
Boulder,  Colorado  to oversee  all  environmental,  compliance  and  regulatory
matters  relative to the Franklin  Mines and Franklin Mill and has purchased the
necessary  equipment to conduct  paste back fill testing with regard to tailings
disposal on the property. It is anticipated that such tests will be completed to
the satisfaction of the DMG by the end of the second quarter of 1998.


                                       21
<PAGE>


Since the acquisition of Gem's 82 1/2% of the Joint Venture,  the Company is now
entitled to receive 100% of the profits from mining  operations  and will assume
full responsibility for management of the Franklin Mining Properties. Management
believes that an initial capital  requirement of approximately  $750,000 will be
required to bring the Franklin Mine and Mill into  operation.  In addition,  USM
and its affiliates have verbally pledged to continue to provide financing to the
Company on an as needed basis through  December 31, 1998,  this  financing is in
addition to the POS Advances made in 1997.  Other  alternatives  such as private
placements,  loans or public  offerings may be considered  for future  operating
capital.

Mill/Metallurgy

The  Franklin  Mill,  when  constructed  in 1982,  was  designed  to recover and
concentrate  metallic minerals by two historic methods;  selective flotation and
gravity by table and jig.  Both systems were  operated in a continuous  circuit.
The  Franklin  Mill has a daily  processing  capacity  (operating  for a 24 hour
period)  of  approximately  150 tons of ore.  In the  past,  the  Franklin  Mill
operated on an eight hour  schedule and processed  approximately  30 tons of ore
during that time interval.

The Franklin ore is refractory and therefore difficult to separate. Pyrite (iron
sulfide) constitutes  approximately 23% of the weight of the ore.  Approximately
35% of the gold  content of the ore remains  locked in the pyrite as  refractory
gold and is not  recoverable  by ordinary  means.  In 1993, a new  metallurgical
process was introduced to attempt to extract gold from the pyrite  concentrates.
This  process  attempted  to break down the pyrite  minerals  by  oxidation  and
thereby free the contained  refractory  gold. The procedure  involved the use of
standard banks of flotation cells (48"), pyrite slurry (30%), air and agitation.
At a later  stage  pre-processing  of the  pyrite by further  milling  occurred.
Processed pyrite was subjected to cyanidation and carbon-pulp  recovery of gold.
The process was  initially  reported to be  successful by the then joint venture
operator with recovery of 85% of gold.  However,  later testing  indicated  that
little or no gold could be recovered through this process.

Standard  milling  procedures  are intended  for newly mined ore with  selective
flotation of; a) lead, silver, gold and b) zinc and c) gravity  concentration of
gold bearing pyrite.  Gold bearing pyrite concentrates will be taken off site to
a copper  smelter where gold and silver will be extracted.  Average  recovery of
gold in lead concentrate is estimated at approximately  60%; pyrite  concentrate
35%; slimes 5% (lost).

In the past, the Franklin Mill operated on a limited schedule while  exploration
and development was taking place.  While the Franklin Mill has not operated with
respect to ore milling, limited crushing activities took place in early 1996 for
the  purpose of  crushing  bulk test ore  samples  prior to assay.  Thus,  prior
milling and the crushing recently done at the Franklin Mill can be characterized
as "exploratory" in nature.

Completed  in 1992,  the Gold  Hill  Mill is a fully  permitted  modern  milling
facility  completed in 1992.  With the  exception of test milling  approximately
4,000  tons of ore by the  previous  owner,  the  Gold  Hill  Mill  has not been
operated since its completion in any commercial operations.


                                       22
<PAGE>


Offices of the Company

The Company  maintains its executive  offices,  consisting of approximately  500
square feet, at 76 Beaver Street,  Suite 500, New York,  New York.  During 1997,
the Company  agreed to rent this space for a monthly  rental of $600 pursuant to
an oral agreement with a non-affiliate.  In 1998, the Company  re-negotiated its
oral  agreement  and now pays a monthly  rental of $3,500 for the office  space,
secretarial  and other  services  provided  to the  Company.  The  Company  also
maintains an office on site at the Franklin mine in Idaho Springs.

The Company's management anticipates this space will service the Company's needs
for the  foreseeable  future and that,  in the event such  space  should  become
unavailable  in the  future,  the  Company  will be able to lease these or other
suitable facilities on a reasonable basis.

Item 3. Legal Proceedings

Convertible Debentures

On June 1, 1994, the Company advised the Transfer Agent/Trustee that the Company
was  not  in  compliance  with  certain  of the  terms  of  the  indenture  (the
"Indenture")  relating to the  Company's  12 1/4%  Convertible  Debentures  (the
"Debentures") in that it had not maintained  current filings with the Securities
and  Exchange  Commission  (the  "Commission")  as  required.  Accordingly,  the
Transfer  Agent/Trustee was instructed not to convert any of the Debentures into
Common Stock of the Company until such time as the Company notified the Transfer
Agent. The Company failed to make required sinking fund payments in 1994 and was
unable to pay the principal  balance of the  Debentures due on December 31, 1994
resulting in a default under the terms of the Indenture.

Although  the Company was in  default,  it agreed to continue to make  quarterly
interest  payments to the Debenture  Holders  during fiscal year 1995 until such
time as the  principal  amount of the  Debentures  could be paid in full. It was
anticipated  that the  Company  would  have the  funds  available  to make  such
payments by December 31, 1995.  The Company  made the first  quarterly  interest
payment  due on the  Debentures  in 1995 but has  failed to make any  additional
payments with respect to such interest as of the date hereof.

In December 1995, the Company sent notices to the debenture  holders  requesting
their  consent to extend the  maturity  date of the  Debentures  to December 31,
1996. It was also  contemplated that the conversion rights of such holders would
also be extended at its current rate of $.50 per share.  The Company also agreed
that it would bring current all interest  payments due and owing to such holders
through  December 31, 1995,  prepay  interest which will become due and owing at
the end of the  first  quarter  of  1996  and set up a fund  with  the  Transfer
Agent/Trustee  to secure  the  timely  payment  of the  principal  amount of the
Debentures  on December 31, 1996.  The Company set February 15, 1996 as the date
upon  which all  Debenture  Holders  had to submit  their  consent  forms to the
Company indicating whether they agreed to extend the maturity


                                       23
<PAGE>


date as to their  bonds or reject  such  proposal.  Any holder  which  failed to
return a consent  form  within the  prescribed  time was to be treated as having
consented to the extension.  As of the February 15, 1996, the Company received a
negative response from one holder owning $1,000 principal amount of Debentures.

While the Company  intended to comply with the terms of its agreements  with the
holders of the Debentures,  a series of unforeseen circumstances relating to the
Company's permits and reclaimation bond caused a cash flow shortage. As a result
the Company has been unable to make the payments described above.  Management is
hopeful that the Company's limited cash flow will improve in the near future and
at such time intends to comply with the terms of its December  1995  agreements.
As of December 31, 1997,  the accrued and unpaid  interest on the  Debentures is
approximately $49,000.

On January  17,  1997,  the Company  received a letter from  counsel to James E.
Hopis,  Revocable  Trust,  a holder of  $5000.00  of  Debentures  of the Company
demanding payment of such bond immediately or legal action will be taken against
the Company to collect on such  Debenture.  In September,  1997,  certain of the
Company's 12 1/4% Convertible Debenture holders,  including the Hopis Trust (the
"Plaintiff  Debentureholders")  instituted an action in the Supreme Court of the
State of New York  against  the Company  for  payment on  approximately  $42,500
principal  amount of  Debentures  plus  accrued  and  unpaid  interest  totaling
approximately  $13,000 and other costs and expenses related thereto. The Company
has answered the aforesaid complaint.

Thereafter,  the Plaintiff  Debentureholders  moved for summary judgment against
the Company.  The Company chose not to oppose the motion and a default  judgment
was entered  against the Company in the amount of $42,500 plus  interest,  costs
and disbursements (the "Judgment").  Moreover, the issue of attorney's fees were
severed from the case and all to be set down for an inquest.

In  February,   1998,   USM  entered  into  an  agreement   with  the  Plaintiff
Debentureholders  agreeing to pay the Judgement plus certain additional costs in
the event that the Company  fails to pay the  Judgment and USM  consummates  the
Transaction  with the  Company.  In the event that USM does not  consummate  the
Transaction by July 12, 1998,  USM agreed to pay the Plaintiff  Debentureholders
$5,100 for their  agreement  not to enter the  Judgment  against  the Company or
pursue the  inquest.  Plaintiff  Debentureholders  have  agreed not to enter the
Judgment against the Company until July 12, 1998 or until USM notifies them that
it will not pursue the Transaction.

As of  the  date  hereof,  the  Company  is not  aware  of  any  termination  or
modification  of the  Agreement  and  believes  it is in full force and  effect.
However, there can be no assurance that USM will not terminate this Agreement or
that the Agreement will expire;  the result of which will be the entering of the
Judgement  against  the  Company  and a  possible  inquest  as to the  Company's
liability regarding attorney's fees.


                                       24
<PAGE>


The  continued  default and failure to comply  with the 1994 and  December  1995
agreements may result in Company being subject to additional  legal  proceedings
by the Transfer  Agent/Trustee under the Indenture or from other holders seeking
immediate payment of the $102,500 plus related interest and penalties. While the
Company  hopes to cure the default or, in the  alternative,  reach an acceptable
settlement  arrangement  with the holders,  there can be no  assurance  that the
funds will be available in the future to meet all of the Company's  obligations.
Management remains hopeful that payment or, in the alternative,  commencement of
settlement  negotiations,  will delay the commencement of any legal action until
the Company can make the appropriate arrangements to repay the Debentureholders.

Golder Litigation

On or about February 5, 1996, Bradley, Campbell, Carney & Madsen, P.C., Colorado
counsel  to the  Company,  Gems,  Zeus and  Newmineco  ("BCCM")  entered  into a
contract  with Golder  Associates,  Inc.  ("Golder"),  pursuant to which  Golder
agreed to perform certain services at the Mogul Mine pertaining to environmental
issues,  including,  but not limited to, (a) reviewing  surface and  groundwater
quality and compliance  standards,  (b) reviewing 110  permitting  requirements,
applications and responses,  (c) reviewing certain  environmental plans relating
to the Mogul Mine and (d) assessing water discharge  requirements and dispensing
advice with respect to water discharge and surface spring outflow management and
mitigation of poor drainage quality (the "Mogul Tunnel  Contract").  At the time
of the Mogul Tunnel  Contract,  BCCM allegedly  entered into said contract as an
agent of Durango, the lessee of the Mogul Mine at that time.

On or about February 5, 1996,  BCCM entered into a second  contract with Golder,
pursuant to which  Golder  agreed to perform  certain  services at the  Franklin
Mines and Franklin Mill pertaining to environmental issues,  including,  but not
limited to, (a) phase 1 site assessment,  (b) preliminary  regulatory and permit
review,  (c)  engineering  site  inspections,  (d)  designs  for  surface  water
management  at  the  ore  handling   facility,   (e)  technical   memorandum  on
alternatives   for  the  extension  of  #5  tailings  pond,  (f)  assistance  in
negotiation  with the DMG and (g)  recommendations  for bulk  ore  sampling  and
mineralogical  testing at the Franklin Mines (the "Franklin Mine Contract").  At
the time of the  Franklin  Mines  Contract,  BCCM  allegedly  entered  into said
contract as an agent of the Zeus Joint Venture.

On or about August 23,  1996,  Gems  executed a note to Golder in the  aggregate
principal  amount of $268,683.75  and a note to BCCM in the aggregate  principal
amount of $109,785.35  to secure legal and  engineering  fees  outstanding as of
such date.  Each note was due and  payable on or before  December  23,  1996 and
bears  interest  at a rate of 6% per annum.  In the event that the  payments  of
principal and interest under the notes were not paid when due, all principal and
interest will accrue  additional  interest at a rate of 10% per annum. The notes
were secured by a pledge of  approximately  3,600,000  shares of Common Stock of
the Company owned by Gems,  pursuant to a Security  Agreement,  dated August 23,
1996. Any default under the notes


                                       25
<PAGE>


constituted  an event of default  under the Security  Agreement.  Gems failed to
make the required payments as of December 23, 1996.

On or about January 28, 1997, Golder commenced an action against BCCM, Zeus, the
Company,  Gems,  Island,  and Durango in the United States District Court of the
District  of  Colorado  to recover  sums due and owing from the  Defendants  for
breach of contract,  breach of implied  warranty,  misrepresentation,  negligent
misrepresentation,  default  under the Golder note and quantum merit arising out
of each of the Mogul Tunnel Contract and the Franklin Mine Contract. The Company
is a named  defendant to this  litigation  by virtue of its general  partnership
interest  in Zeus,  it being  joint and  severally  liable with Gems and Nuco as
general partners in the Joint Venture.

The aggregate  amount of the Golder claims are  approximately  $281,670.99  plus
prejudgment and post judgment interest, costs and expenses (including attorney's
fees) and any additional relief granted by the court, $124,159.87,  exclusive of
interest and other costs and  expenses,  of which is  attributable  to the Mogul
Tunnel  Contract  and  $157,511.12,  exclusive  of interest  and other costs and
expenses, of which is attributable to the Franklin Mines Contract.

On or about March 12, 1997, BCCM filed a motion to dismiss counts III, IV, and V
of the  Complaint  relating  to the breach of  warranty,  misrepresentation  and
negligent   misrepresentation  arguing  that  these  claims  were  pled  in  the
alternative  and only become  viable in the event other  defendants  in the case
deny BCCM authority to enter into the subject contracts. Also on March 12, 1996,
Zeus, the Company,  Island and Gems moved to dismiss or stay proceedings pending
arbitration arguing that arbitration clauses in the subject contract require the
captioned  action to be  submitted  to  arbitration.  However,  Durango  filed a
separate  answer to the  Complaint  denying that BCCM had any authority to enter
into any  contract on behalf of Durango and denying  that  Durango  ratified any
exercise of such authority.  Therefore, on or about March 27, 1997, Golder moved
to file an amended  complaint  to clarify its position  that the claims  against
Durango are also asserted against the Franklin  Defendants.  The Company has not
received a copy of such  complaint to date.  Notwithstanding,  the  parties,  on
April 4, 1997,  executed a  stipulation  agreeing to  arbitration  on all issues
concerning the subject  contracts but excluding  issues relating to the note and
security agreement.

The Company is currently engaged in settlement  negotiations with the parties in
hopes of resolving  this  dispute and has an agreement in principal  with all of
the parties. However, there can be no assurance that final settlement agreements
will be  executed  or that the  Company  will be  successful  should this matter
proceed to arbitration.  The Company estimates that its portion of the liability
in this matter is approximately  $35,000 in the event that the settlement should
be consummated.

Environmental Matters:

As of the date hereof,  the Company has no violations against it with respect to
the Franklin Mines and Franklin Mill. While there are no outstanding  violations
against the  Company at this time,  there can be no  assurance  that the Company
will be able to adequately  comply with the  conditions  set forth in its permit
approval or that future


                                       26
<PAGE>


violations   will  not  arise  and  that  such   violations  will  not  lead  to
interruptions  in operations at the Franklin Mines or Franklin Mill. For further
information  regarding  the  Permits,  see Item I,  Business  of the  Company  -
Operations at the Company's Mining Properties.

Durango Litigation

On or about February 1, 1996,  Newmineco,  Island,  Gems and Zeus entered into a
series of Transactions  with Durango,  Thames Hartley,  the president of Durango
("Hartley") and J. Wayne Tatman ("Tatman"),  an agent of Durango and Hartley and
president of  Consolidated  Milling,  Inc.  ("Consolidated  Milling") to develop
certain mining properties,  including the Mogul Mines. For further  information,
see Item 1, Business of the  Company-Newmineco.  On or about March 1996,  Island
acquired the Rugg/Mogul Lease through a Novation Agreement. The Rugg/Mogul Lease
was then  renegotiated  and assigned to Newmineco.  Thereafter,  Island and Gems
notified the Company that Tatman,  Hartley and Durango and certain other parties
to the Newmineco  venture  breached  their  agreements  and as a result,  Island
terminated certain venture agreements involving these persons. Island thereafter
assigned its interest in Newmineco to Gems.  For more  information on the status
of the Rugg/Mogul  Leases,  see Item 2. Properties  Rugg/Mogul  Leases; For more
information on the relationship of the parties, see Item 1.  Business-Operations
at the Company's Mining Properties.

In June,  1996,  Durango  and/or Hartley served a series of Notices of Intent to
Lien  properties  owned or  leased  by each of  Gems,  Island  and the  Company,
including the Gold Hill Mill. Thereafter, on or about October 15, 1996, James A.
Wood and David C.  Sutton,  each the owner of claims  located on the  properties
comprising  the Mogul Mines (the  "Delaware  Claims" and the  "Bonanza  Claims",
respectively) and Durango, as the proported lessee of such claims,  commenced an
action in District Court, Boulder County,  Colorado,  against the Ruggs, Island,
Newmineco,  the Company and any other unknown parties of interest to quiet title
to each of the Delaware  Claim and Bonanza  Claims  (hereinafter  the  "Disputed
Claims").  The complaint  further  alleges that the defendants  have removed ore
mined from the Disputed  Claims and that, as a result of trespass and conversion
of certain equipment of Plaintiff Durango,  plaintiffs have been further damaged
in the amount of  approximately  $800,000.  In addition to the actions for quiet
title  and  for  the  adjudication  of the  ownership  of the  disputed  Claims,
Plaintiffs  requisite damages for conversion of Plaintiff  Durango's  equipment,
seeks a full  accounting  of the ore removed  from the  premises and request all
other  damages,  costs and  expenses,  including  attorney's  fees incurred with
respect to this dispute.

The Company,  as well as its co-defendants,  retained local Colorado counsel and
intend  to  rigorously  defend  this  action  while  there are  motions  pending
regarding the  sufficiency of the  defendant's  pleadings,  no decision has been
made regarding such motions and no trial has yet been scheduled. In addition, on
or about October 30, 1996,  each of Com,  Inc.,  the previous  owner of the Gold
Hill Mill,  Gems,  Island,  the Company,  Hayden and Kennec  commenced an action
against each of Durango,  Hartley,  Consolidated  Milling and Tatman in District
Court, Boulder Country, Colorado relating to the Company's properties in Boulder
County claiming, among other things,


                                       27
<PAGE>


that (i) all liens be removed from the public record, (ii) damages were incurred
for the filing of excessive liens,  together with costs and expenses,  including
reasonable  attorney's  fees incurred in connection  therewith,  (iii) breach of
contract with respect to the Newmineco venture agreement,  (iv) damages incurred
for loss of business opportunities and interference with plaintiff's contractual
relationships and (v) defendants  slandered plaintiffs title to property causing
them  damages.  A similar  complaint  was also filed in Clear Creek  County with
respect to liens filed against the  Company's  properties in Clear Creek County.
No counterclaims  have been asserted against any of the Plaintiffs.  As a result
of recent  motions filed on behalf of the Company in the Boulder  County action,
an order was entered by the Court in 1997,  to discharge all liens filed against
the  Company's  properties.  The  Company  has been  advised  that the  Court is
expected to enter this order shortly and such order will  thereafter be recorded
to remove the subject liens.  The Clear Creek County Court has executed an order
removing the liens against the Company's  Clear Creek County  properties and the
Company has been  advised by local  counsel  that such order is being filed with
the Clear Creek  County to remove the liens from the record.  Issues  concerning
damages  suffered and defendants  liability with respect  thereto in each of the
actions are to litigated. No trial dates have been set at this time.

NASDAQ Delisting

In 1996, the Commission  approved  certain  amendments to the  requirements  for
continued  listing on the NASDAQ  Small-Cap  Market.  On February 27, 1998,  the
Company  received a notification  letter from NASDAQ  informing the Company that
the Company's  Common Stock was not in compliance with the new minimum bid price
requirement of $1.00 which became  effective on February 23, 1998. The review of
the  Company's  Common  Stock price was based upon the price data  covering  the
previous 30 consecutive trade dates prior to notification.  The Company has been
given 90 calendar  days,  expiring May 28, 1998, in order to regain  compliance.
The Company would come into compliance in the event that its Common Stock trades
at or above the minimum  requirement of $1.00 for at least 10 consecutive  trade
days prior to May 28, 1998.  In the event that the  Company's  Common Stock does
not regain compliance within the 90 day period, NASDAQ will issue to the Company
a formal delisting letter which will identify the review procedures available to
it should the Company wish to contest the delisting of its Common Stock.

Management  believes that it is unlikely,  given past trends, that the Company's
Common Stock will  sustain  trading at minimum bid price of $1.00 or more for 10
consecutive trade days between now and May 28, 1998. Thus, it is likely that the
Company will receive formal delisting notification and that the Company's Common
Stock will no longer be listed  for  trading  on the  NASDAQ  Small Cap  Market.
However,  Management is hopeful that the Company's Common Stock will qualify for
trading on the  Over-The-Counter/Bulletin  Board ("OTC")  market and the Company
will make  every  effort to include  its  Common  Stock on the OTC in the likely
event of a delisting by NASDAQ.


                                       28
<PAGE>


In the event that the Company's Common Stock is traded on the OTC, it may become
subject to the "penny stock" trading rules. The penny stock trading rules impose
additional  duties  and  responsibilities  upon  broker-dealers  recommends  the
purchase of a penny stock (by a purchaser that is not an accredited  investor as
defined by Rule 501(a)  promulgated by the Commission  under the Securities Act)
or the sale of a penny  stock.  Among  such  duties and  responsibilities,  with
respect to a purchaser who has not previously  had an  established  account with
the  broker-dealer,  the  broker-dealer  is required  to (i) obtain  information
concerning the  purchaser's  financial  situation,  investment  experience,  and
investment objectives, (ii) make a reasonable determination that transactions in
the  penny  stock are  suitable  for the  purchaser  and the  purchaser  (or his
independent   adviser  in  such  transactions)  has  sufficient   knowledge  and
experience in financial matters and may be reasonably  capable of evaluating the
risks of such  transactions,  followed by receipt of a manually  signed  written
statement  which sets forth the basis for such  determination  and which informs
the purchaser  that its unlawful to effectuate a transaction  in the penny stock
without first  obtaining a written  agreement to the  transaction.  Furthermore,
until the purchaser becomes an established customer (i.e., having had an account
with the dealer for at least one year or, the dealer had effected three sales or
more of penny stocks on three or more  different  days  involving  three or more
different  issuers),  the broker-dealer must obtain from the purchaser a written
agreement  to purchase  the penny stock which sets forth the identity and number
of shares of units of the security to be purchased  prior to confirmation of the
purchase.  A dealer is obligated to provide certain  information  disclosures to
the purchaser of penny stock,  including (i) a generic risk disclosure  document
which  is  required  to  be  delivered  to  the  purchaser  before  the  initial
transaction in a penny stock,  (ii) a  transaction-related  disclosure  prior to
effecting  a  transaction  in  the  penny  stock  (i.e.,   confirmation  of  the
transaction) containing bid and asked information related to the penny stock and
the dealer's  and  salesperson's  compensation  (i.e.,  commissions,  commission
equivalents,  markups and markdowns) connection with the transaction,  and (iii)
the  purchaser-customer  must be furnished  account  statements,  generally on a
monthly basis, which include prescribed information relating to market and price
information  concerning  the penny stocks held in the  customer's  account.  The
penny  stock  trading  rules do not  apply to those  transactions  in which  the
broker-dealer or salesperson  does not make any purchase or sale  recommendation
to the purchaser or seller of the penny stock.

Required compliance with the penny stock trading rules affect or will affect the
ability  to resell  the  Common  Stock by a holder  principally  because  of the
additional  duties and  responsibilities  imposed  upon the  broker-dealers  and
salespersons  recommending and effecting sale and purchase  transactions in such
securities.  In addition,  many  broker-dealers  will not effect transactions in
penny stocks,  except on an unsolicited basis, in order to avoid compliance with
the penny stock trading rules.  The penny stock trading rules  consequently  may
materially  limit or restrict  the  liquidity  typically  associated  with other
publicly  traded equity  securities.  In this  connection,  the holder of Common
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control  the market in such  securities  and may set prices
that are not based on competitive forces.  Furthermore,  at times there may be a
lack of bid quotes which may mean that the market  among  dealers is not active,
in which case a holder of


                                       29
<PAGE>


Common Stock may be unable to sell such securities. Because market quotations in
the over-the-counter market are often subjected to negotiation among dealers and
often differ from the price at which  transactions  in securities  are effected,
the bid and asked quotations of the Common Stock may not be reliable.

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

None.

PART II

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

The principal  U.S.  market on which shares of the Company  Common Stock (all of
which are of one  class,  $.01 per  share)  are  traded is the over the  counter
market  on the  National  Association  of  Securities  Dealers,  Inc.  Automated
Quotation System (Symbol "FKCM").  For Information  regarding possible delisting
of the Company's Common Stock. See Item 3. Litigation NASDAQ Delisting.

The  following  table  sets  forth the  range of high and low bid  quotes of the
Company's  Common Stock per quarter  since the  beginning of fiscal year 1995 as
reported by the National  Quotation Bureau (which reflects  inter-dealer  prices
without  retail  mark-up,  mark-down  or  commission  and  may  not  necessarily
represent actual Transactions).


                                     High                      Low
Quarter Ended                      Bid Price                Bid Price
                                
March 31, 1995                      $.16                      $.13
June 30, 1995                       $.19                      $.16
September 30, 1995                  $.19                      $.16
December 31, 1995                   $.22                      $.16
                                
March 31, 1996                      $.25                      $.16
June 30, 1996                       $.25                      $.09
September 30, 1996                  $.13                      $.06
December 31, 1996                   $.16                      $.06
                                
March 31, 1997                      $.22                      $.16
June 30, 1997                       $.19                      $.16
September 30, 1997                  $.22                      $.16
December 31, 1997                   $.09375                   $.0625

As of  December  31,  1997,  the  approximate  number  of  recordholders  of the
Company's Common Stock is approximately 2,999 inclusive of those brokerage firms
and/or  clearing  houses holding the Company's  Common Shares in street name for
their  clientele  (with each such  brokerage  house and/or  clearing house being
considered as one holder). The aggregate number of shares of Common Stock issued
and


                                       30
<PAGE>


outstanding is 98,879,328 as of December 31, 1997. No dividends on Common Shares
have ever been paid by the  Company  due to the lack of excess  capital  and the
Company  does not  anticipate  that  dividends  will be paid in the  foreseeable
future.

Sales of Restricted Securities

Upon the  approval of the increase in the  capitalization  of the Company by its
shareholders on November 30, 1995, the Company was able to eliminate  certain of
its liabilities by converting  certain of its outstanding  debt at the time into
Common Stock.  In May, 1992, the Company  entered into a Loan Agreement with Mr.
Anderson,  an officer and  director of the  Company,  Mr.  Anderson's  brothers,
Anderson Chemical Company and Mr. Carlo Sgrizzi, an unaffiliated  individual and
Mr.  Anthony  DiMatteo  (the  "Anderson  Loans")  pursuant  to which the Company
borrowed an aggregate of $504,000 at an interest rate of 3% above the prime rate
of interest.  Additionally,  $450,000 of such loans were entitled, under certain
conditions,  to a 1% interest in profits (as defined in the Loan  Agreement)  of
the Company,  for each $50,000 of principal  amount held and,  accordingly,  the
lenders held a total profit  participation  interest of 9%. Such Loan Agreements
were further amended in July, 1993, whereby  replacement notes were issued which
permitted the  conversion  of the Anderson  Loans into shares of Common Stock of
the Company at a conversion  ratio of $.10 per share and granted  certain demand
an piggyback  registration  rights.  The Anderson Loans were  convertible into a
total of approximately  4,500,000 shares of Common Stock at each lenders option,
including,  all profit  interests which were convertible into 300,000 shares for
each 1% profit participation interest.

In August,  1995,  Gems,  as an assignee of Mr.  DiMatteo,  converted its 4% net
profits  interest  in the  Company to which it has  rights to receive  under the
terms of a Loan Agreement, into 300,000 shares per percentage point or 1,200,000
shares of the  Company.  Such shares were issued to Gems on or about  August 18,
1995. In September,  1995,  certain of the holders of the Anderson Loans,  other
than Gems,  agreed to convert their notes and accrued interest thereon at a rate
of $.078  per share  which  represents  50% of the  NASDAQ  quoted  price of the
Company's  shares  for the last 3 months,  the total  amount  of  principal  and
interest to be converted to be determined at the time of conversion. Thereafter,
on or about December 27, 1995, Gems was invited to convert its notes on the same
terms and  conditions as the other  holders,  thereby  satisfying  the Company's
obligations  under the Anderson Loans. Such shares were issued by the Company in
reliance on an exception  from  registration  afforded by Section 4(2) under the
Act.

In December,  1994, Island, Gems and the Company entered into a Binding Exchange
Letter Agreement (the "Exchange  Agreement"),  pursuant to which Island and Gems
would  transfer to the Company,  in a tax free  exchange,  assets having a value
equal to 270,000,000 shares of newly issued Common Stock or approximately 85% of
the Company. In the event that the Company was unable to perform its obligations
under the Exchange Agreement in a timely fashion, then the Company was obligated
to issue to Gems 6,000,000 shares of Common Stock, or in the alternative,  pay a
fee of approximately $1,500,000 to Gems (the "Upset Fee").


                                       31
<PAGE>


In  September,  1995,  the  Company,  Island and Gems  entered into a settlement
agreement (the "Settlement  Agreement") which acknowledged that the Transactions
contemplated by the Exchange  Agreement were not timely consummated and in which
the Company agreed to either issue 6,000,000  shares of its Common Stock to Gems
or pay the Upset Fee. The issuance of the Common Stock was  predicated  upon the
approval of the Company's  stockholders of an increase in the authorized capital
of the Company from 50,000,000 to 100,000,000.  In addition, the parties further
agreed to convert  $249,600  advances made by Gems to the Company into 3,200,000
shares of Common  Stock and to increase  Gems  interest in the Joint  Venture to
82.5%.  On November  30,  1995,  the  shareholders  of the  Company  approved an
increase in the Company's  authorized  capital stock and in accordance  with the
Settlement  Agreement,  the Company  issued to Gems and  aggregate  of 9,200,000
shares of Common  Stock in reliance  on an  exemption  afforded by Section  4(2)
under the Act.

In December  1995,  the Company  commenced  an offering  pursuant to Rule 505 of
Regulation D of the Act of $1,500,000  principal amount of its 15% Secured Notes
(the "Notes") Convertible into Shares of Common Stock of the Company. Such Notes
were  offered  by the  officers  and  directors  of the  Company  to  accredited
investors only, and had a maturity date of eighteen months from the date of each
Note so issued (the  "Maturity  Date").  The  conversion  rights  under the Note
become effective on or after April 1, 1996. The Company terminated this offering
on February 5, 1996 after selling an aggregate of $400,000 of the Notes.  During
the second  quarter of 1996,  all of the Notes  issued in the fourth  quarter of
1995 and the  first  quarter  of 1996  were  converted  and the  Company  issued
4,294,770 shares of Common Stock to such investors upon such conversion based on
the total balance of the principal and accrued interest outstanding on the Notes
equal to an  aggregate  amount of $418,740 at a  conversion  price of $.0975 per
share.

In late February,  1996,  the Company  commenced an offering of its Common Stock
through its designated officers and directors pursuant to Rule 505 of Regulation
D under the Act.  The  offering  was made to both  accredited  and  unaccredited
investors.  Subscribers of the offering purchased the Common Stock at a purchase
price  equal to 15% below the  market  price as quoted on NASDAQ at the close of
business  prior to the date of such  sales.  The  Company  raised  approximately
$202,600 and issued  953,411  shares of its Common Stock in connection  with the
offering.

On or about March 5, 1996, the Company issued to certain principals of Wolinetz,
Gottlieb &  Lafazan,  P.C.,  the  former  independent  auditors  of the  Company
("WGL"),  approximately  56,000  shares  of  Common  Stock  of  the  Company  in
satisfaction  of  outstanding  accounting  fees  owed by the  Company  to WGL of
approximately  $10,000.  The shares were issued  pursuant to an  exemption  from
registration  afforded  by  Section  4(2)  under the Act.  For more  information
concerning WGL, See  Item8-Chantges  In and  Disagreements  with  Accountants on
Accounting and Financial Disclosure.

On or about April 18, 1996, the Company  executed a promissory note payable to a
private  lender in the principal  amount of $60,000 and issued to lender 160,000
shares of Common  Stock of the Company as further  consideration  for  advancing
said loan.


                                       32
<PAGE>


The shares  were issued  pursuant an  exemption  from  registration  afforded by
Section 4(2) under the Act.

In July,  1996,  the  Company  commenced  an  offering  pursuant  to Rule 505 of
Regulation  D under the Act for the  issuance  of  shares  of Common  Stock at a
purchase price of approximately $.15625 per share in exchange for certain notes,
mortgages and other  obligations of its  affiliates  held by certain third party
unaffiliated  parties of the Company and Gems. At the completion of the offering
in July,  1996, the Company  purchased  obligations of its affiliates  having an
aggregated principal balance of approximately $1,400,000 through the issuance of
approximately  9,366,919 shares of Common Stock and thereafter  transferred such
debt  instruments  and  obligations  to COM, Inc., in exchange for an equivalent
reduction  in the  principal  amount  of the Gold  Hill  Note and  approximately
$191,875 through the issuance of 1,228,000 shares of Common Stock and thereafter
transferred  such debt  instruments  and  obligations to Gems in exchange for an
equivalent reduction in certain intercompany loans from Gems to the Company.

In Late July 1996,  the Company  commenced  an  offering  of it Common  Stock to
accredited  investors  only  pursuant to Rule 505 of  Regulation D under the Act
during which Stires & Co. acted as selling  agent on behalf of the Company.  The
offering  was on a best  efforts  basis and the  selling  agent was to receive a
commission of 5% of the aggregate gross proceeds to the sale of the Common Stock
to  investors.  In addition,  the Company  agreed to issue to the selling  agent
warrants  to  purchase  5% of the  total  shares  of  Common  Stock  sold in the
offering.  Due to market  conditions  at the time of the  offering,  the selling
agent was only able to sell  800,000  shares of Common  Stock of the Company and
raised $100,000. The offering was terminated on September 15, 1996.

Also in July,  1996,  the Company issued  1,000,000  shares of Common Stock to a
former officer and director of the Company in satisfaction of a finders fee owed
to Mr. Horing in connection  with the formation of the Zeus Joint  Venture.  The
shares were issued in accordance with an exemption from registration afforded by
Section 4(2) under the Act.

On August 28, 1996,  the Company  entered into an investment  banking  agreement
with Redstone Securities, Inc. ("Redstone") pursuant to which Redstone agreed to
perform certain investment banking services in exchange for a fee payable by the
granting of an option to Redstone to purchase up to  3,000,000  shares of Common
Stock of the Company at an exercise price of $.001 per share. In November, 1996,
Redstone  exercised its option to purchase  2,500,000 shares of Common Stock and
in January,  1997 exercised its option to purchase the remaining  500,000 shares
of Common Stock.  The Company issued such shares in accordance with an exemption
from registration afforded by Section 4(2) under the Act.

On or about August 29, 1996, the Company issued 1,088,000 shares of Common Stock
in  consideration  of the purchase price for certain real property  purchased by
Gems.  The shares were issued to seller in  accordance  with an  exemption  from
registration afforded by Section 4(2) under the Act.


                                       33
<PAGE>


In  consideration  of the  extension of the Kennec  portion of the Hayden Kennec
Leases,  the Company  issued to Dorothy  Kennec,  104,000  shares of the Company
Common Stock in {April 1997].  The stock was valued at $.125 per share having an
aggregate  value at the time of the extension  agreement of $13,000.  The shares
were  issued in  accordance  with an  exemption  from  registration  afforded by
Section 4(2) Under the Act.

On September  26, 1996,  the Company  acquired a 20% interest in Newmineco  from
Gems for a purchase price of $600,000 evidenced by an interest only note bearing
interest at 9.5% per annum.  On February 10, 1997, the Company made its election
to convert  the amounts  owing on the  Newmineco  Note into Common  Stock of the
Company at a  conversion  price of $.078 per share.  The Company  issued to such
holders and aggregate of 7,692,308 shares of Common Stock of the Company in full
satisfaction of the Company's  obligations  under the Newmineco Note. The shares
were  issued in  accordance  with an  exemption  from  registration  afforded by
Section 4(2) under the Act.

Item 6. Management's Discussion and Analysis or Plan of Operation

The Company is engaged in the business of  investing  and  participating  in the
development  of  commercial  mining and milling  operations  primarily at leased
properties in or near Idaho Springs, Colorado.

During  1996 and 1997,  remediation  work was  performed  and  completed  at the
Franklin  Mines and the Franklin Mill in  preparation  for the  commencement  of
mining  operations  at  the  Franklin  Mines  and  the  Mogul  Mines.  In  1996,
approximately  200 tons of ore were mined at the Mogul  Mines and shipped to the
Franklin site where the ore was crushed and milled. Management was encouraged by
the performance of the Mill during these operations.

The Company remains in the development  stage and has not generated  significant
revenues on a sustained  basis since its inception.  The Company did not realize
any revenues  based on sales made by the Zeus Joint Venture or Newmineco in 1996
and 1997.  Since the termination of the Zeus Joint Venture,  and the abandonment
of its  participation in Newmineco,  the Company will no longer recognize income
or  losses  based  on its  proportionate  equity  interest  in  these  entities.
Accordingly,  the  Company  will be  entitled  to  receive  100%  of the  income
generated from the Franklin Mines, if any, once production is commenced.

Liquidity and Capital Resources

Since its inception, the Company has financed its operations principally through
equity  and debt  financing,  including  such  financing  provided  through  its
relationships  with its Joint Venture partner in 1996 and early 1997 and through
its relationship with Martucci and the Martucci companies the remainder of 1997.
The Company has derived no income from its mining and milling  investments which
during 1997 were  comprised of  investments  in the assets and rights related to
the Franklin Mines and Mill,  the Gold Hill Mill and Newmineco.  At December 31,
1997, the Company's only liquid asset was


                                       34
<PAGE>


cash, the balance of which increased from $127 at December 31, 1996 to $1,078 at
December 31, 1997.

During 1997, the Company relied on its Joint Venture partner Gems, and later POS
and its affiliates as its principal capital resource. As of December,  1997, the
Company borrowed  approximately  $547,000 from POS and affiliates and assumed an
additional  $410,000  in  liabilities  for  funds  advanced  to  Gems by POS and
affiliates.

The Company had total current liabilities as of December 31, 1997 of $1,666,870,
including  $955,756   constituting  the  principal  balance  of  the  POS  Note,
convertible  debentures  with a  principal  amount of  $145,000  and other notes
payable with a principal balance of $167,000.  In addition to the payment of its
current  liabilities,  the Company incurred  general,  administrative  and other
costs and expenditures related to any mining and milling operations, at the rate
of  approximately  $60,000  per month in 1997 and  expects  to incur  additional
administrative  expenses of  approximately  $20,000  per month plus  interest in
1998.

During  1997,  POS and its  affiliates  advanced  approximately  $410,000 to the
Company  through Gems.  These monies were used to, among other  things,  pay for
legal and  accounting  fees in  connection  with public  filings  and  necessary
general and  administrative  expenses.  In November  1997,  USM  purchased  Gems
interest  in the Zeus Joint  Venture and  assigned  the rights to the Company in
exchange for the  assumption  of certain  liabilities.  This  transfer  gave the
Company 100% of net profits generated by operations at the Franklin Mines. Also,
in  November  1997,  USM entered  into a contract to purchase  50% of all of the
mineral rights from Audrey Hayden, a co-lessor to the Company.  In addition,  as
of December 31, 1997, USM/POS and/or its affiliates,  had advanced approximately
$955,756 including the $410,000  previously  advanced to the Company, by POS and
affiliates through Gems.

USM and its affiliates have pledged to provide financing to the Company on an as
needed basis until on or about January 1, 1999. It is anticipated that the funds
received from USM and its affiliates will cover the general,  administrative and
other costs which Management estimates will be approximately  $20,000 per month.
Management  further  anticipates,  but  cannot  insure,  that USM  will  provide
$750,000  of  funding  which  Management  estimates  will be needed to ready the
Franklin Mine and Milling  properties  for the  commencement  of extraction  and
milling.  Additional funding, however, will be needed to support operations once
mining and  milling  commence  to  finance  operations  as well as  upgrade  the
processing facilities to allow for an increase in ore processing capacity.

In the absence of liquid  resources,  cash flows from  operations  and any other
commitments for debt or equity financing,  Management  believes that the ability
of the Company to continue its  operations  will be dependent upon the provision
of financing by USM and its affiliate.  Management believes,  but cannot assure,
that such  financing  and the  financing  needed to commence  operations  at the
Franklin Mines will be provided by USM and its affiliates  during 1998, and that
the  Company  will remain  dependent  on USM and its  affiliates  as its primary
source of financing for its operations


                                       35
<PAGE>


until such time,  if any, as the Company  begins to receive  cash flows from the
Franklin Mine and Mill.

Management  believes that all necessary  environmental and regulatory  approvals
have been obtained and it anticipates  that mining and milling  operations  will
begin  at the  Franklin  Mines  during  1998.  To be  able to  commence  milling
operations,  the  Company  will have to obtain  sufficient  working  capital  of
approximately  $750,000  and hire  managerial  and other mill  personnel.  Other
nearby mines are not operating  currently due, in the opinion of management,  to
the lack of available milling facilities.  The Company intends to solicit owners
of those  mines to use the  Company's  mills to  process  their  ore in order to
augment  expected  revenues  from mining  operations.  However,  there can be no
assurance  that any  significant  cash flows  will be  generated  through  these
operations during 1998.

Plan of Operations

For the  remainder  of  fiscal  1998,  the  Company  plans to (i)  commence  the
extraction of minerals  from the Franklin Mine and full scale  operations at the
Franklin  Mill,  (ii) hire  personnel to adequately  staff the mine and mill and
(iii)  conclude  negotiations  of  milling  contracts  with  neighboring  mines.
Management  estimates that  approximately  $750,000 of capital will be needed to
achieve (i) and (ii).

In the event that the Company should acquire  additional  working capital,  then
the Company will  initiate a  reconfiguration  program at the  Franklin  Mill to
expend mill capacity to processing  300 tons of ore per day by the end of fiscal
year 1999 and initiate core drilling programs to substantiate  additional proven
ore reserves.

Results of Operations 1997 vs 1996

The Company had a net loss of  $1,908,475  for 1997 as compared to a net loss of
$967,524   during  1996.   This  increase  of  $940,951  or  97%  was  primarily
attributable  to a $1,200,000  write-down of mining,  milling and other property
and equipment  associated  with the Gold Hill Mine, no such costs were reflected
in  1996  by  the  Company.   In  addition,   during  1997,  mine  expenses  and
environmental remediation costs of $162,945 were incurred by the Company. During
1996,  these costs were  reflected on the books of the Joint Venture and/or Gems
and its affiliates.

Other than the write-down and the mine and environmental  remediation  expenses,
the loss from other  sources was $545,530 for 1997 compared to $967,524 for 1996
expenses.

General and administrative expenses declined from approximately $733,000 in 1996
to approximately  $368,000 in 1997. This reduction of approximately  $365,000 or
50% is attributable primarily to the following:

     *    Reduction in professional fees from approximately  $395,000 in 1996 to
          approximately  $179,000 in 1997, this $216,000  decrease  represents a
          55%  reduction.  Professional  fees consist of legal,  accounting  and
          engineering


                                       36
<PAGE>


          fees.  Professional  fees were  greater  in 1996 as  compared  to 1997
          because  of  expenses   incurred  in   connection   with  the  various
          litigation,  environmental  and financing matters described in items 1
          and 3.

     *    Investment banking fees decreased by $105,000 in 1997 from $213,000 to
          $108,000, a 49% decrease. All investment banking fees were incurred in
          connection with the Company's agreement with Redstone Securities. This
          agreement expired during 1997.

Other general and administrative  expenses during 1996 and 1997 included:  costs
associated with the Company's public filings, rent, office and other fees.

Interest  expenses for 1997 were  approximately  $33,000 as compared to $102,000
for 1996.  This  $69,000  decrease,  or 68% is  attributable  to the decrease in
obligations  payable  to  Gems  and its  affiliates.  Interest  associated  with
obligations  incurred and assumed  with respect to the $955,756  note payable to
POS and affiliates were  substantially  recorded during November and December of
1997.

During  1997,  the  Company  recognized  $9,249 in income  related  to the Joint
Venture. During 1996, the Company recorded a loss from Joint Venture of $12,950.

Other expenses reflected in 1997 of $35,000 were incurred in connection with the
Golder litigation (See Item 3).

Results of Operations 1996 vs. 1995

The  Company  and the  Zeus  Joint  Venture  had no  active  mining  or  milling
operations during 1996 and 1995.

The  Company  had a net loss of  $967,524  for 1996 as compared to a net loss of
$924,344 during 1995. This increase of $43,180 was primarily  attributable to an
increase in general and administrative expense in 1996 of $505,414 offset by the
effects of a non-recurring,  noncash charge in 1995 of $468,000 for the issuance
of stock to Gems to settle  claims  arising  from the  failure of the Company to
meet  its   obligations   under  the  Joint  Venture   Agreement.   General  and
administrative  expense were $732,710 for 1996 as compared with $227,287  during
1995 due  primarily to increases in  professional  fees and costs of  investment
banking  services.  Interest  expense  was  $102,238  during 1996 as compared to
$92,434 during 1995 due to increased  interest  incurred in connection  with the
issuance of notes in the Gold Hill Mill and Newmineco acquisitions.

Operations  of the Joint  Venture at the  Franklin  Mine and the  Franklin  Mill
during 1996 were restricted by the cease and desist order issued in March,  1996
by the DMG for permit  violations that were not vacated until June 7, 1996. As a
result,  the  Company's  equity in the net loss of the Zeus  Joint  Venture  was
$12,950 in 1996 compared to $15,540 in 1995.


                                       37
<PAGE>


Item 7. Financial Statements and Supplementary Data

The index to Financial Statements appears on page F-1.


                                       38
<PAGE>


                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)



                                    - INDEX -

<TABLE>
<CAPTION>
                                                                                                                Page(s)
                                                                                                                -------
<S>                                                                                                              <C>
Report of Independent Auditors                                                                                   F - 2
Report of Predecessor Independent Auditors                                                                       F - 3
Financial Statements:
      Balance Sheet, December 31, 1997                                                                           F - 4
      Statements of Operations, Years Ended December 31, 1997 and 1996 and
      Period From December 1, 1976 (Inception) to December 31, 1997                                              F - 5

      Statements of Stockholders' Equity, Years Ended December 31, 1997 and 1996 and
      Period From December 1, 1976 (Inception) to December 31, 1997                                              F - 6

      Statements of Cash Flows, Years Ended December 31, 1997 and 1996 and
      Period From December 1, 1976 (Inception) to December 31, 1997                                             F - 11

Notes to Financial Statements                                                                                   F - 13
</TABLE>


<PAGE>



                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders
Franklin Consolidated Mining Co., Inc.


We have audited the balance sheet of Franklin  Consolidated  Mining Co., Inc. as
of December 31,  1997,  and the related  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 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Consolidated Mining
Co.,  Inc. as of December 31, 1997,  and the 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  Note 1 to the
financial  statements,  the  Company is a  development  stage  enterprise  whose
operations  have  generated  recurring  losses and cash flow  deficiencies  from
inception  and, as of December  31,  1997,  has a  substantial  working  capital
deficiency.  As a result,  it was in default with respect to payments on several
notes and on  convertible  debentures  and  substantially  dependent  on outside
funding for financing.  Such matters raise substantial doubt about the Company's
ability to continue as a going  concern.  Management's  plans  concerning  these
matters are also  described in Note 1. The  financial  statements do not include
any adjustments that might result from the outcome of these uncertainties.




                                                        LAZAR LEVINE & FELIX LLP


New York, New York
April 20, 1998

                                      F - 2

<PAGE>
























                    PREDECESSOR INDEPENDENT AUDITORS' REPORT































                                      F - 3

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                                  BALANCE SHEET
                                DECEMBER 31, 1997

                                   - ASSETS -

<TABLE>
<S>                                                                          <C>         
CURRENT ASSETS:
    Cash and cash equivalents                                                $      1,078
                                                                             ------------

TOTAL CURRENT ASSETS                                                                1,078

    Mining, milling and other property and equipment, net of accumulated
      depreciation and depletion of $1,959,160                                  5,424,935
    Land - held for resale                                                        345,000
    Mining reclamation bonds                                                      130,681
                                                                             ------------

                                                                             $  5,901,694
                                                                             ============

                    - LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
    Accounts payable and accrued expenses                                    $    367,933
    Payroll and other taxes payable                                                31,181
    Convertible debentures                                                        145,000
    Notes payable - related party and others                                      167,000
    Note payable - related party                                                  955,756
                                                                             ------------

TOTAL CURRENT LIABILITIES                                                       1,666,870
                                                                             ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
    Common stock, par value $.01 per share; 100,000,000 shares authorized;
      98,879,328 shares issued and outstanding                                    988,793
    Additional paid-in capital                                                 16,350,575
    Deficit accumulated during the development stage                          (13,104,544)
                                                                             ------------
                                                                                4,234,824
                                                                             ------------

                                                                             $  5,901,694
                                                                             ============
</TABLE>






             See auditors' report and notes to financial statements.

                                      F - 4

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                            STATEMENTS OF OPERATIONS
                            ------------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                                            Cumulative
                                                                                                               from
                                                                                1997            1996         Inception
                                                                            ------------    ------------    ------------
<S>                                                                         <C>             <C>             <C>         
REVENUES:
    Sales                                                                   $       --      $       --      $    876,082
    Interest income                                                                3,888           2,351         544,775
    Other income                                                                    --              --            75,000
                                                                            ------------    ------------    ------------
                                                                                   3,888           2,351       1,495,857
                                                                            ------------    ------------    ------------

EXPENSES:
    Mine expenses and environmental remediation costs                            162,945            --         3,523,738
    Write-down of mining and milling and other property and equipment          1,200,000            --         1,200,000
    Depreciation and depletion                                                   121,980         121,986       2,154,509
    General and administrative expenses                                          368,353         732,701       5,398,785
    Interest expense                                                              33,334         102,238         629,172
    Amortization of debt issuance expense                                           --              --           683,047
    Equity in net (income) loss and settlement of claims of Joint Venture         (9,249)         12,950         591,971
    Other                                                                         35,000            --           419,179
                                                                            ------------    ------------    ------------
                                                                               1,912,363         969,875      14,600,401
                                                                            ------------    ------------    ------------

NET LOSS                                                                    $ (1,908,475)   $   (967,524)   $(13,104,544)
                                                                            ============    ============    ============


BASIC LOSS PER COMMON SHARE                                                 $       (.02)   $       (.01)
                                                                            ============    ============


WEIGHTED AVERAGE SHARES OUTSTANDING                                           98,500,000      74,284,324
                                                                            ============    ============
</TABLE>










             See auditors' report and notes to financial statements.

                                      F - 5

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY            Page 1 of 5
                       ----------------------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                        Accumulated
                                                                         Additional     During the
                                                              Common       Paid-in      Development    Treasury
                                               Shares         Stock        Capital         Stage         Stock        Total
                                            ------------   -----------   -----------    -----------    ---------   -----------
<S>                                              <C>       <C>           <C>            <C>            <C>         <C>        
Issuance of common stock:
    Cash                                         155,000   $     1,550   $    41,550    $      --      $    --     $    43,100
    Non-cash:
      Related parties                            925,000         9,250          --             --           --           9,250
      In exchange for shares of Gold
        Developers and Producers, Inc.         1,095,000        10,950         6,484           --           --          17,434
Net loss                                            --            --            --          (45,584)        --         (45,584)
                                            ------------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1977                     2,175,000        21,750        48,034        (45,584)        --          24,200

Issuance of common stock:
    Pursuant to public offering , net of
      underwriting expenses of $11,026           588,200         5,882       278,113           --           --         283,995
    Cash                                         225,000         2,250       240,627           --           --         242,877
    Non-cash                                       5,000            50         4,950           --           --           5,000
Net loss                                            --            --            --          (66,495)        --         (66,495)
                                            ------------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1978                     2,993,200        29,932       571,724       (112,079)        --         489,577

Issuance of common stock:
    Cash                                         231,850         2,318       438,932           --           --         441,250
    Non-cash - related parties                    40,000           400        59,600           --           --          60,000
    Non-cash - other                               6,675            67        13,283           --           --          13,350
Net loss                                            --            --            --         (128,242)        --        (128,242)
                                            ------------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1979                     3,271,725        32,717     1,083,539       (240,321)        --         875,935

Issuance of common stock:
    Cash                                         289,750         2,898       837,102           --           --         840,000
    Non-cash                                      59,500           595       118,405           --           --         119,000
Net loss                                            --            --            --         (219,021)        --        (219,021)
                                            ------------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1980                     3,620,975        36,210     2,039,046       (459,342)        --       1,615,914

Issuance of common stock:
    Cash                                          65,625           656       261,844           --           --         262,500
                                            ------------   -----------   -----------    -----------    ---------   -----------
Balance, pre-stock split                       3,686,600        36,866     2,300,890       (459,342)        --       1,878,414

Issuance of common stock:
    Pursuant to a four-for-one stock split    11,059,800       110,598      (110,598)          --           --            --
    Cash                                         578,000         5,780       552,220           --           --         558,000
    Non-cash                                     104,000         1,040       102,960           --           --         104,000
    Commission on sale of common stock              --            --         (57,300)          --           --         (57,300)
Net loss                                            --            --            --         (288,105)        --        (288,105)
                                            ------------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1981                    15,428,400       154,284     2,788,172       (747,447)        --       2,195,009

</TABLE>

     See auditors' report and notes to financial statements.

                                      F - 6

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY            Page 2 of 5
                       ----------------------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                        Deficit
                                                                                      Accumulated
                                                                        Additional    During the
                                                           Common        Paid-in      Development     Treasury
                                              Shares        Stock        Capital         Stage          Stock        Total
                                           -----------   -----------   -----------    -----------    ---------   -----------
<S>                                          <C>         <C>           <C>            <C>            <C>         <S>
Issuance of common stock:
    Cash                                       861,006   $     8,610   $   755,516    $      --      $    --     $   764,126
    Non-cash                                   162,000         1,620       160,380           --           --         162,000
    Commission on sale of common stock            --            --         (56,075)          --           --         (56,075)
Net loss                                          --            --            --         (287,291)        --        (287,291)
                                           -----------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1982                  16,451,406       164,514     3,647,993     (1,034,738)        --       2,777,769

Issuance of common stock:
    Cash                                     1,273,134        12,732     1,176,818           --           --       1,189,550
    Non-cash                                    70,834           708        70,126           --           --          70,834
    Exercise of stock options by:
      Related parties                          267,500         2,675       264,825           --           --         267,500
      Others                                     4,000            40         3,960           --           --           4,000
    Commission on sale of common stock            --            --        (124,830)          --           --        (124,830)
    Net loss                                      --            --            --         (749,166)        --        (749,166)
                                           -----------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1983                  18,066,874       180,669     5,038,892     (1,783,904)        --       3,435,657

Issuance of common stock:
    Cash                                     1,201,700        12,017     1,139,683           --           --       1,151,700
    Non-cash                                    27,500           275        27,225           --           --          27,500
    Exercise of stock options by related
      parties                                  200,000         2,000       198,000           --           --         200,000
    Commission on sale of common stock            --            --         (90,950)          --           --         (90,950)
    Net loss                                      --            --            --         (301,894)        --        (301,894)
                                           -----------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1984                  19,496,074       194,961     6,312,850     (2,085,798)        --       4,422,013

Issuance of common stock:
    Cash                                       421,308         4,213       295,866           --           --         300,079
    Non-cash                                    10,000           100         7,400           --           --           7,500
    Exercise of stock options by:
      Related parties                          200,000         2,000       148,000           --           --         150,000
      Others                                     1,000            10           740           --           --             750
    Commission on sale of common stock            --            --          (3,462)          --           --          (3,462)
    Net loss                                      --            --            --         (133,929)        --        (133,929)
                                           -----------   -----------   -----------    -----------    ---------   -----------
Balance, December 31, 1985                  20,128,382       201,284     6,761,394     (2,219,727)        --       4,742,951
</TABLE>

     See auditors' report and notes to financial statements.

                                      F - 7

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY            Page 3 of 5
                       ----------------------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                      Deficit
                                                                                    Accumulated
                                                                      Additional    During the
                                                          Common       Paid-in      Development     Treasury
                                            Shares        Stock        Capital         Stage          Stock          Total
                                         -----------   -----------   -----------    -----------    -----------    -----------
<S>                                       <C>          <C>           <C>            <C>            <C>             <C>      
Issuance of common stock:
    Cash                                     569,000   $     5,690   $   294,810    $      --      $      --      $   300,500
    Non-cash - related parties               160,000         1,600        78,400           --             --           80,000
    Non-cash - others                        135,000         1,350        52,650           --             --           54,000
    Net loss                                    --            --            --         (227,788)          --         (227,788)
                                         -----------   -----------   -----------    -----------    -----------    -----------
Balance, December 31, 1986                20,992,382       209,924     7,187,254     (2,447,515)          --        4,949,663

Issuance of common stock:
    Cash                                   2,604,368        26,044     1,261,257           --             --        1,287,301
    Non-cash - related parties               202,000         2,020        68,880           --             --           70,900
    Non-cash - other                          37,500           375        36,875           --             --           37,250
    Commission on sale of common stock          --            --        (110,243)          --             --         (110,243)
    Net loss                                    --            --            --         (730,116)          --         (730,116)
                                         -----------   -----------   -----------    -----------    -----------    -----------
Balance, December 31, 1987                23,836,250       238,363     8,444,023     (3,177,631)          --        5,504,755

Issuance of common stock - non-cash
    - related parties                        200,000         2,000        48,000           --             --           50,000
Net loss                                        --            --            --         (386,704)          --         (386,704)
Purchase of 50,000 shares of
    treasury stock - at cost                    --            --            --             --      $   (12,500)       (12,500)
                                         -----------   -----------   -----------    -----------    -----------    -----------
Balance, at December 31, 1988             24,036,250       240,363     8,492,023     (3,564,335)       (12,500)     5,155,551

Issuance of common stock:
    Cash                                     678,000         6,780       103,720           --             --          110,500
    Non-cash - others                        283,666         2,836        31,030           --             --           33,866
    Non-cash -related parties                210,000         2,100        29,400           --             --           31,500
    Private placement:
      Cash                                 2,275,000        22,750          --             --             --           22,750
      Debt issuance expense                     --            --         455,000           --             --          455,000
      Conversion of debentures             1,050,000        10,500        94,500           --             --          105,000
      Exercise of stock options              300,000         3,000        42,000           --             --           45,000
    Commission on sale of common stock          --            --          (1,500)          --             --           (1,500)
    Compensation resulting from stock
      options granted                           --            --          39,000           --             --           39,000
    Net loss                                    --            --            --       (1,279,804)          --       (1,279,804)
                                         -----------   -----------   -----------    -----------    -----------    -----------
Balance, December 31, 1989                28,832,916       288,329     9,285,173     (4,844,139)       (12,500)     4,716,863
</TABLE>

     See auditors' report and notes to financial statements.

                                      F - 8

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY            Page 4 of 5
                       ----------------------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                        Accumulated
                                                                        Additional      During the
                                                            Common        Paid-in       Development      Treasury
                                              Shares         Stock        Capital          Stage           Stock          Total
                                          ------------   ------------   ------------    ------------    ------------   ------------
<S>                                         <C>          <C>            <C>             <C>             <C>            <C>         
Sale of underwriter's stock warrants              --     $       --     $        100    $       --      $       --     $        100
Issuance of common stock:
    Cash                                       335,000          3,350         41,875            --              --           45,225
    Non-cash - others                           39,855            399          5,579            --              --            5,978
    Conversion of debentures                   160,000          1,600         30,400            --              --           32,000
    Net loss                                      --             --             --        (1,171,962)           --       (1,171,962)
                                          ------------   ------------   ------------    ------------    ------------   ------------
Balance, December 31, 1990                  29,367,771        293,678      9,363,127      (6,016,101)        (12,500)     3,628,204

Issuance of common stock:
    Cash - others                            1,799,576         17,996         78,935            --              --           96,931
    Cash - related parties                   1,800,000         18,000         72,000            --              --           90,000
    Non-cash - others                        1,183,724         11,837         47,350            --              --           59,187
    Conversion of debentures                 3,731,000         37,310        588,690            --              --          626,000
    Exercise of stock options                  250,000          2,500         10,000            --              --           12,500
    Conversion of notes payable                250,000          2,500         12,500            --              --           15,000
    Net loss                                      --             --             --          (764,926)           --         (764,926)
                                          ------------   ------------   ------------    ------------    ------------   ------------
Balance, December 31, 1991                  38,382,071        383,821     10,172,602      (6,781,027)        (12,500)     3,762,896

Issuance of common stock:
    Cash - others                            2,021,923         20,219        149,389            --              --          169,608
    Cash - related parties                     630,000          6,300         42,700            --              --           49,000
    Non-cash - others                        1,729,609         17,296        348,762            --              --          366,058
    Non-cash - related parties                  12,120            121            485            --              --              606
    Non-cash - exercise of options by
      related parties                        2,050,000         20,500         82,000            --              --          102,500
    Conversion of debentures                   540,000          5,400        156,600            --              --          162,000
    Commission on sale of common stock
      - related parties                           --             --           (7,123)           --              --           (7,123)
    Net loss                                      --             --             --        (1,343,959)           --       (1,343,959)
                                          ------------   ------------   ------------    ------------    ------------   ------------
Balance, December 31, 1992                  45,365,723        453,657     10,945,415      (8,124,986)        (12,500)     3,261,586

Issuance of common stock:
    Cash - others                              873,400          8,734        125,230            --              --          133,964
    Cash - related parties                     777,000          7,770         69,930            --              --           77,700
    Non-cash - others                          150,000          1,500         13,500            --              --           15,000
    Non-cash - settlement of litigation      1,000,000         10,000         90,000            --              --          100,000
    Non-cash - exercise of options by
      related parties                          200,000          2,000          8,000            --              --           10,000
    Conversion of debentures                   140,000          1,400         33,600            --              --           35,000
    Conversion of loan                         100,000          1,000          9,000            --              --           10,000
    Net loss                                      --             --             --          (797,619)           --         (797,619)
                                          ------------   ------------   ------------    ------------    ------------   ------------
Balance, December 31, 1993                  48,606,123        486,061     11,294,675      (8,922,605)        (12,500)     2,845,631
</TABLE>

             See auditors' report and notes to financial statements.

                                      F - 9

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY            Page 5 of 5
                       ----------------------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                           Deficit
                                                                                          Accumulated
                                                                           Additional     During the
                                                              Common        Paid-in       Development    Treasury
                                                Shares         Stock        Capital          Stage         Stock        Total
                                             ------------    ---------    -----------    ------------    ---------   ------------
<S>                                            <C>           <C>          <C>            <C>             <C>         <C> 
Retirement of treasury stock                      (50,000)   $    (500)   $   (12,000)   $       --      $  12,500   $       --
Net loss                                             --           --             --          (381,596)        --         (381,596)
                                             ------------    ---------    -----------    ------------    ---------   ------------
Balance, December 31, 1994                     48,556,123      485,561     11,282,675      (9,304,201)        --        2,464,035

Issuance of common stock:
    Settlement of claims by joint venture
      partner                                   6,000,000       60,000        408,000            --           --          468,000
    Repayments of loan from joint venture
      partner                                   3,200,000       32,000        217,600            --           --          249,600
    Repayments of long-term loans from
      related parties and accrued interest      8,679,797       86,798        590,227            --           --          677,025
    Exchange of shares for profit partici-
      pation interests                          2,700,000       27,000        (27,000)           --           --             --
    Net loss                                         --           --             --          (924,344)        --         (924,344)
                                             ------------    ---------    -----------    ------------    ---------   ------------
Balance, December 31, 1995                     69,135,920      691,359     12,471,502     (10,228,545)        --        2,934,316

Issuance of common stock for:
    Cash                                        1,753,411       17,534        280,066            --           --          297,600
    Services and interest                       3,716,000       37,160        318,277            --           --          355,437
    Conversion of convertible notes             4,294,770       42,948        375,792            --           --          418,740
    Repayments of loan from joint
      venture partner                           2,316,000       23,160        338,715            --           --          361,875
    Repayments of long-term loans from
      related party                             9,366,919       93,669      1,369,912            --           --        1,463,581
    Net loss                                         --           --             --          (967,524)        --         (967,524)
                                             ------------    ---------    -----------    ------------    ---------   ------------
Balance, December 31, 1996                     90,583,020      905,830     15,154,264     (11,196,069)        --        4,864,025

Issuance of common stock for:
    Extension of lease rights                     104,000        1,040         11,960            --           --           13,000
    Conversion of note payable                  7,692,308       76,923        523,077            --           --          600,000
    Conversion of debt                            500,000        5,000         45,500            --           --           50,500
    Acquisition of joint venture                     --           --          615,774            --           --          615,774
    Net loss                                         --           --             --        (1,908,475)        --       (1,908,475)
                                             ------------    ---------    -----------    ------------    ---------   ------------

BALANCE, DECEMBER 31, 1997                     98,879,328    $ 988,793    $16,350,575    $(13,104,544)   $    --     $  4,234,824
                                             ============    =========    ===========    ============    =========   ============
</TABLE>


             See auditors' report and notes to financial statements.

                                     F - 10

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                             STATEMENT OF CASH FLOWS
                             -----------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996          Page 1 of 2
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                                                  Cumulative
                                                                                                                     from
                                                                                      1997           1996          Inception
                                                                                  ------------    ------------    ------------
<S>                                                                               <C>             <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                      $ (1,908,475)   $   (967,524)   $(13,104,544)
    Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and depletion                                                       121,980         121,986       2,154,509
      Write-down of mining and milling and other property and equipment              1,200,000            --         1,200,000
      Amortization of debt issuance expense                                               --              --           683,047
    Value of common stock issued for:
      Services and interest                                                             13,000         355,437       1,338,714
      Settlement of litigation                                                            --              --           100,000
      Settlement of claims by joint venture partner                                       --              --           468,000
      Compensation resulting from stock options granted                                   --              --           311,900
      Value of stock options granted for services                                         --              --           112,500
      Equity in net (income) loss of joint venture                                      (9,249)         12,950         123,971
      Other                                                                               --              --            (7,123)
    Changes in operating assets and liabilities:
      Prepaid expenses                                                                 107,979        (107,979)           --
      Interest accrued on mining reclamation bonds                                      (3,806)         (1,875)         (5,681)
      Accounts payable and accrued expenses                                           (104,986)        274,607         631,370
                                                                                  ------------    ------------    ------------
        Net cash used in operating activities                                         (583,557)       (312,398)     (5,993,337)
                                                                                  ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases and additions to mining, milling and other property and
      equipment                                                                           --           (85,000)     (5,120,354)
    Purchases of mining reclamation bonds, net                                            --           (80,000)       (125,000)
    Deferred mine development costs and other expenses                                    --              --          (255,319)
                                                                                  ------------    ------------    ------------
        Net cash used in investing activities                                             --          (165,000)     (5,500,673)
                                                                                  ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuances of common stock                                                             --           297,600       8,758,257
    Issuance of underwriter's stock warrants                                              --              --               100
    Commissions on sales of common stock                                                  --              --          (381,860)
    Purchases of treasury stock                                                           --              --           (12,500)
    Payments of deferred underwriting costs                                               --              --           (63,814)
    Proceeds from exercise of stock options                                               --              --           306,300
    Issuance of convertible debentures and notes                                          --           200,000       1,505,000
    Proceeds of advances from joint venture partner                                       --              --           526,288
    Advances to joint venture partner                                                   37,234        (218,251)       (181,017)
    Payments of debt issuance expenses                                                    --              --          (164,233)
    Proceeds of other notes and loans payable                                          547,274          80,000       1,315,274
    Repayments of other notes and loans payable                                           --              --          (120,000)
    Proceeds of loans from affiliate                                                      --              --            55,954
    Repayments of loans from affiliate                                                    --              --           (48,661)
                                                                                  ------------    ------------    ------------
        Net cash provided by financing activities                                      584,508         359,349      11,495,088
                                                                                  ------------    ------------    ------------
</TABLE>

             See auditors' report and notes to financial statements.

                                     F - 11

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                             STATEMENT OF OPERATIONS                 Page 2 of 2
                             -----------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1997


                                                                      Cumulative
                                                                        from
                                                1997        1996      Inception
                                             ---------   ---------    ---------

INCREASE (DECREASE) IN CASH                  $     951   $(118,049)   $   1,078

    Cash, beginning of period                      127     118,176         --
                                             ---------   ---------    ---------

CASH, END OF PERIOD                          $   1,078   $     127    $   1,078
                                             =========   =========    =========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
    Interest paid                            $    --     $    --      $ 299,868
                                             =========   =========    =========


NON-CASH ITEMS:
During 1997: (1) the Company converted a
$600,000 note payable to a former joint
venture partner to 7,692,308 shares of
Company stock (2) the Company also issued
500,000 shares of common stock as
consideration for a liability of
approximately $50,000 due to an
unaffiliated third party (3) in connection
with the elimination of the Zeus Joint
Venture, the Company acquired net assets of
$615,774 and recorded additional paid-in
capital of the same amount and (4) the
Company wrote down the remaining $150,000
investment associated with the 20% purchase
of Newmineco and simultaneously reduced a
note payable to a party related to
Newmineco.












             See auditors' report and notes to financial statements.

                                     F - 12

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 1 -  ORGANIZATION AND BASIS OF PRESENTATION:

          Franklin Consolidated Mining Co., Inc. (the "Company") originally
          incorporated on December 1, 1976 under the laws of the State of
          Delaware, is engaged in the exploration, development and mining of
          precious and non-ferrous metals, including gold, silver, lead, copper
          and zinc. The Company owns or has an interest in a number of precious
          and non-ferrous metal properties. The Company's principal mining
          properties are (i) the Franklin Mines, located near Idaho Springs in
          Clear Creek County, Colorado, for which the Company acquired the
          exclusive right to explore, develop, mine, and extract all minerals
          located in approximately 51 mining claims (the "Franklin Mines"), (ii)
          the Franklin Mill, a crushing and flotation mill which is located on
          the site of the Franklin Mines (the "Franklin Mill"), and (iii) the
          Gold Hill Mill (see Note 2d), a fully permitted modern facility
          located in Boulder County, Colorado (the "Gold Hill Mill"). The
          Company is a development stage enterprise because it did not generate
          any significant revenues through December 31, 1997.

          In February 1993, the Company entered into a joint venture arrangement
          with Island Investment Corp., a Nevada corporation ("Island"),
          pursuant to which the parties formed Zeus No. 1 Investments, a
          California general partnership (the "Joint Venture"). The Company had
          a 17.5% interest in the Joint Venture, and Island had the remaining
          82.5% interest. The Joint Venture was formed to develop the Franklin
          Mines and related assets of the Company. In May 1993, Island assigned
          its interest in the Joint Ventures to Gems and Minerals Corp.,
          ("Gems") a wholly-owned subsidiary of Island. On July 15, 1996, Gems
          transferred 31.5% of its 82.5% interest in the Joint Venture to Nuco
          Ventures, Inc., a Delaware company and wholly-owned subsidiary of Gems
          ("Nuco").

          During 1997, in a step transaction, Gem's and Nuco's 82.5% interest in
          the Joint Venture was acquired by U.S. Mining, Inc., a New Jersey
          corporation ("USM"). USM assigned the acquired interest to the Company
          in exchange for the assumption by the Company of certain liabilities.
          Upon the acquisition of the 82.5% interest of the Joint Venture by the
          Company, the relationship with Gems was terminated and the Joint
          Venture was effectively dissolved.

          In conjunction with these transactions, the Company:

          o    Acquired mine and mill improvements having a net
               book value of (see Note 4)                               $780,787

          o    Eliminated the Joint Venture deficit of $123,971,
               after giving effect to equity in net income of
               Joint Venture of $9,249 for 1997                          123,971

          o    Eliminated a $458,567 liability which represented
               the remainder of a note and related accrued
               interest payable to a subsidiary of Gems in
               conjunction with the acquisition of the Gold Hill
               Mill                                                      458,567


                                     F - 13

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 1 -  ORGANIZATION AND BASIS OF PRESENTATION (Continued):

          o    Eliminated a $229,204 receivable from Gems             $(229,204)

          o    Assumed notes payable - other of $87,000 and
               related accrued interest on these notes of $16,858
               (see Note 5)                                            (103,858)

          o    Assumed a liability of $408,482 payable to POS
               Financial, Inc. (see Note 7)                            (408,482)

          o    Assumed a liability of $20,255 associated with the
               Joint Venture less other items of $14,248                 (6,007)
                                                                      ---------

               The net amount of $615,774 was credited to
               additional paid-in capital.                            $ 615,774
                                                                      =========

          Basis of Presentation:

          The accompanying financial statements have been prepared assuming the
          Company will continue as a going concern. However, the Company has had
          recurring losses and cash flow deficiencies since inception. As at
          December 31, 1997, the Company has a cash balance of $1,078, an
          accumulated deficit of $13,104,544, current liabilities of $1,666,870,
          and a working capital deficiency of $1,665,792, and its 1997
          operations used $ 583,557 of cash. Also, the Company was in default on
          the payment of the principal balance and accrued interest on certain
          notes and debentures (see Notes 5 and 6). Certain accounts payable
          also were past due, and the Company has possible permit and other
          violations. In addition to the payment of its current liabilities,
          management estimates that the Company will incur general,
          administrative, and other costs and expenditures, exclusive of any
          costs and expenditures related to any mining and milling operations,
          at the rate of approximately $20,000 per month plus interest during
          1998. Such matters raise substantial doubt about the Company's ability
          to continue as a going concern. The financial statements do not
          include any adjustments that may result from the outcome of the above
          uncertainty.

          U.S. Mining Co. and its affiliates have pledged to provide financing
          to the Company on an as needed basis until on or about January 1,
          1999. The funds received from USM and its affiliates will cover the
          general, administrative and other costs approximated at $20,000 per
          month plus interest. Additional monies raised from USM will help
          finance $750,000 of funds the Company estimates will be needed to
          ready the Franklin Mine and Milling properties for the commencement of
          extraction and milling. Additional funds will be needed to support the
          extraction and milling processes once underway as well as to upgrade
          the processing facilities to allow for an increase in ore processing
          capacity.


                                     F - 14

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 1 -  ORGANIZATION AND BASIS OF PRESENTATION (Continued):

          There can be no assurance that the Company will have adequate funds
          available to repay the funds advanced by USM and its affiliates. In
          the event that the Company defaults on its obligations, USM may
          foreclose on the assets secured by the POS note. Such foreclosure
          actions by USM would have a material adverse effect on the future
          operations of the Company and the Company's ability to explore the
          Franklin Mines.

          Substantially all of the $5,424,935 of mineral properties and
          equipment included in the accompanying balance sheet as of December
          31, 1997, is related to exploration properties. The ultimate
          realization of the Company's investment in exploration properties and
          equipment is dependent upon the success of future property sales, the
          existence of economically recoverable reserves, the ability of the
          Company to obtain financing or make other arrangements for
          development, and upon future profitable production.


NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          The Company's accounting policies are in accordance with generally
          accepted accounting principles. Outlined below are those policies that
          are considered particularly significant.

          (a)  Use of Estimates:

               To prepare financial statements in accordance with generally
               accepted accounting principles, management makes certain
               estimates and assumptions, where applicable, that affect the
               reported amounts of assets and liabilities at the date of the
               financial statements, as well as the reported amounts of revenues
               and expenses during the reporting period. While actual results
               could differ from those estimates, management does not expect
               such variances, if any, to have a material effect on the
               financial statements.

          (b)  Cash Equivalents:

               The Company defines cash equivalents as all short-term, highly
               liquid investments with original maturity dates less than 90
               days.


                                     F - 15

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

          (c)  Mining, Milling and Other Property and Equipment:

               Mining, milling and other property and equipment are recorded at
               cost. Costs incurred to acquire, explore, improve and develop
               mining and milling properties are capitalized and amortized in
               relation to the production of estimated reserves. Mine
               development expenditures incurred substantially in advance of
               production are deferred on an individual property basis until the
               viability of a property is determined. When a property is placed
               in commercial production, such deferred costs are depleted using
               the units-of-production method. General exploration costs and
               costs to maintain the mineral rights and leases are expensed as
               incurred. Management of the Company periodically reviews the
               recoverability of the capitalized mineral properties and mining
               equipment. Management takes into consideration various
               information including, but not limited to, historical production
               records taken from previous mine operations, results of
               exploration activities conducted to date, estimated future prices
               and reports and opinions of outside geologists, mine engineers,
               and consultants. When it is determined that a project or property
               will be abandoned or its carrying value has been impaired, a
               provision is made for any expected loss on the project or
               property.

               Post-closure reclamation and site restoration costs are estimated
               based upon environmental and regulatory requirements and accrued
               over the life of the mine using the units-of-production method.
               Current expenditures relating to ongoing environmental and
               reclamation programs are expensed as incurred.

               Depletion of mining and milling improvements and mine development
               expenditures is computed using the units of production method
               based on probable reserves (there was no charge for depletion in
               1997 and 1996 because the Company's mining and milling operations
               were not in operation during these years). Depreciation of
               equipment is computed using the straight-line method over the
               estimated useful lives of the related assets.

          (d)  Impairment of Long-Lived Assets:

               As of January 1, 1996, the Company adopted the provisions of FASB
               Statement of Financial Accounting Standards No. 121, "Accounting
               of the Impairment of Long-Lived Assets and for Long-Lived Assets
               to be Disposed Of" (SFAS 121). Under SFAS 121, impairment losses
               on long-lived assets are recognized when events or changes in
               circumstances indicate that the undiscounted cash flows estimated
               to be generated by such assets are less than their carrying value
               and, accordingly, all or a portion of such carrying value may not
               be recoverable. Impairment losses then are measured by comparing
               the fair value of assets to their carrying amounts. It is the
               Company's determination that due to certain restrictions
               associated with milling operations in Boulder County, Colorado,
               the Gold Hill Mill properties will not be placed into operation.
               The Company plans to sell the land and structural building and
               move and utilize the equipment to the Franklin properties. As a
               result, at December 31, 1997 the Company reduced by $1,200,000
               the carrying value of certain assets relating to its Gold Hill
               milling operations to $1,340,000, which approximates management's
               estimate of fair value.


                                     F - 16

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

          (e)  Joint Venture:

               The Company accounts for its investment in the Joint Venture
               under the equity method. As a general partner in the Joint
               Venture (until the Joint Venture's dissolution in November 1997
               see Note 1), the Company would be liable to creditors and certain
               other parties for any obligations the Joint Venture might
               ultimately be unable to satisfy. Accordingly, through November
               25, 1997, the Company recorded its equity in the net losses of
               the Joint Venture even though they exceeded the Company's total
               investment.

          (f)  Revenue Recognition:

               Revenues, if any, from the possible sales of mineral concentrates
               will be recognized by the Company only upon receipt of final
               settlement funds from the smelter.

          (g)  Environmental Remediation Costs:

               Environmental remediation costs are accrued based on estimates of
               known environmental remediation exposures, and, generally, are
               charged to expense when incurred.

          (h)  Income Taxes:

               Deferred income taxes are provided on transactions which are
               reported in the financial statements in different periods than
               for income tax purposes. The Company utilizes Financial
               Accounting Board Statement No. 109, "Accounting for Income
               Taxes," ("SFAS 109"). SFAS 109 requires recognition of deferred
               tax liabilities and assets for expected future tax consequences
               of events that have been included in the financial statements or
               tax returns. Under this method, deferred tax liabilities and
               assets are determined based on the difference between the
               financial statements and tax basis of assets and liabilities
               using enacted tax rates in effect for the year in which the
               difference is expected to reverse. Under SFAS 109, the effect on
               deferred tax assets and liabilities of a change in tax rates is
               recognized in income in the period that includes the enactment
               date. Valuation allowances are established when necessary to
               reduce deferred tax assets to the amount expected to be realized
               (see Note 9).


                                     F - 17

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

          (i)  Loss Per Common Share:

               The Company had adopted SFAS 128 "Earnings Per Share" ("SFAS
               128"), which has changed the method of calculating earnings per
               share. SFAS 128 requires the presentation of "basic" and
               "diluted" earnings per share on the face of the income statement.
               Prior period earnings per share data has been restated in
               accordance with Statment 128. Loss per common share is computed
               by dividing the net loss by the weighted average number of common
               shares outstanding during each period. Common stock equivalents
               have been excluded from the computations since the results would
               be anti-dilutive.

          (j)  Reclassifications:

               Prior years financial statements have been reclassified to
               conform with the current year presentation.

          (k)  Fair Value of Financial Investments:

               The carrying amount of the Company's borrowings approximate fair
               value.


NOTE 3 -  ACQUISITIONS OF MINING AND MILLING PROPERTIES:

          On December 26, 1976, the Company acquired Gold Developers and
          Producers Incorporated, a Colorado corporation which, prior to the
          acquisition, leased 28 patented mining claims from Audrey and David
          Hayden and Dorothy Kennec pursuant to a mining lease and option to
          purchase, dated November 12, 1976 (hereinafter collectively referred
          to as the "Hayden/Kennec Leases"). In 1981, the Company commenced a
          rehabilitation program to extend and rehabilitate the shafts and
          tunnels in place at the Franklin Mines, install the Franklin Mill, and
          search for and delineate a commercial ore body. In 1983, the Company
          completed the Franklin Mill.

          On July 3, 1996, the Company acquired the Gold Hill Mill from a
          wholly-owned subsidiary of Gems (see Note 1), in exchange for a 8%
          mortgage note with an initial principal balance of $2,500,000. The
          Gold Hill Mill is a fully permitted milling facility located in
          Boulder, Colorado. The Company is responsible for developing and
          operating the Gold Hill Mill.

          At December 31, 1997, the Company reduced by $1,200,000 the carrying
          value of certain of the Gold Hill Mill assets to $1,340,000 which
          approximates management's estimate of fair value . Land aggregating
          $345,000 of the remaining $1,340,000 in assets is classified on the
          balance sheet as land-held for resale with the balance classified as
          mining, milling and other property and equipment.


                                     F - 18

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 3 -  ACQUISITIONS OF MINING AND MILLING PROPERTIES (Continued):

          On September 26, 1996, the Company acquired a 20% interest in
          Newmineco, an inactive company by issuing a 9.5% note payable to Gems
          with a principal balance of $600,000. Newmineco represented that it
          held the exclusive mining rights related to the Mogul Mines in the
          Spencer Mountains of Colorado. Because of certain permitting and other
          problems in the Mogul Mines, the purchase price to the Company was
          reduced to $150,000 in 1996, and the investment was written down to
          zero as at December 31, 1997 (see Note 6).


NOTE 4 -  MINING, MILLING AND OTHER PROPERTY AND EQUIPMENT:

          Mining, milling and other property and equipment, at the Franklin
          Mines and the Franklin Mill and the Gold Hill Mill consist of the
          following at December 31, 1997:

          Machinery and equipment                           $2,217,220
          Mine and mill improvements (a)                     5,071,065
          Furniture and fixtures                                11,714
          Automotive equipment                                  84,096
                                                            ----------
                                                             7,384,095
          Less: accumulated depreciation and depletion       1,959,160
                                                            ----------
                                                            $5,424,935
                                                            ==========

          (a)  Includes mine and mill improvements of $780,787 in connection
               with the termination of the Joint Venture (see Note 1).

          During the years ended December 31, 1997 and 1996, the Company
          expended $162,945 and $- 0-, respectively on mine expenses and
          environmental remediation costs.



                                     F - 19

<PAGE>




                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 5 -  NOTES PAYABLE RELATED PARTY AND OTHERS:

          Notes payable related party and others consist of the following at
          December 31:

          12% unsecured demand note due to the Company's President   $ 20,000
          Secured promissory note (a)                                  60,000
          Unsecured promissory notes (b)                               87,000
                                                                     --------
                                                                     $167,000
                                                                     ========

          (a)  The outstanding principal balance of the note became payable on
               July 18, 1996 and the Company is in default. The note is
               guaranteed by certain officers of Gems and is collateralized
               through a subordinated security interest in the Company's mining
               reclamation bond. Interest on the note is payable based on the
               rate of interest applicable to the mining reclamation bond.

          (b)  This principal amount represents four unsecured promissory notes
               comprised of one $36,000 note and three $17,000 notes payable.
               These obligations were assumed by the Company on November 25,
               1997, as part of the acquisition from USM of the remaining
               interest in the Joint Venture (see Note 1). These notes were in
               default when assumed by the Company, and remain in default as of
               December 31, 1997. Interest is being accrued at rates between 8%
               and 17% per annum.

          Accrued interest on the above notes at December 31, 1997 aggregated
          approximately $21,000, including $3,750 payable to the Company's
          President.


NOTE 6 -  CONVERTIBLE DEBENTURES AND OTHER CONVERTIBLE DEBT:

          The Company's convertible debt at December 31, 1997 consist of:

             12.25% convertible debenture originally due 12/31/94       $145,000

          As of December 31, 1997, the Company was in default with respect to
          the payment of the $145,000 principal balance of the debenture and
          accrued interest of approximately $49,000. As a result of its default,
          the Company may be subject to legal proceedings by the Transfer
          Agent/Trustee under the Indenture Agreement or from debentureholders
          seeking immediate repayment of principal plus interest and other
          costs. Management cannot assure that there will be funds available for
          the required payments or what the effects will be of any actions
          brought by or on behalf of the debentureholders (see Note 8c).


                                     F - 20

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 6 -  CONVERTIBLE DEBENTURES AND OTHER CONVERTIBLE DEBT (Continued):

          In September 1996, the Company acquired its 20% interest in Newmineco
          by issuing a 9.5% note payable to Gems with a principal balance of
          $600,000. This note could be converted to common stock at the
          Company's option on or after January 1, 1997. As a result of problems
          concerning permitting and various other issues related to the Mogul
          Mines, the purchase price was reduced to $150,000 on December 31, 1996
          and to $-0- on December 31, 1997 (see Note 3). The $450,000 (1996) and
          $150,000 (1997) reductions in the purchase price were effectuated
          through an equivalent reduction in the principal balance of the 8%
          mortgage note that was payable to an affiliate of Gems by the Company.
          The 9.5% note was originally due on June 30, 1997. However, on
          February 7, 1997, Gems notified the Company that it had assigned its
          interest in the 9.5% note to certain third parties. On February 10,
          1997, the Company notified the assignees that it had elected to
          convert the principal balance of the 9.5% note into 7,692,308 shares
          of common stock based on the conversion rate of $.078 per share.


NOTE 7 -  NOTE PAYABLE - RELATED PARTY:

          The Company had outstanding a 8% promissory note balance of $955,756,
          at December 31, 1997, which represents monies advanced to the Company
          by POS Financial, Inc. ("POS"), a New Jersey corporation and
          obligations assumed in connection with the contributions of Joint
          Venture interests (see Note 1). The note is payable on May 4, 1998,
          and is secured by all the Company's mining claims and mining
          properties, as well as its interests in the Hayden/Kennec Leases. The
          note is subject to successive 30 day extensions throughout 1998 upon
          the mutual agreement of the maker and lender for no additional
          consideration. On March 5, 1998, POS assigned this note to USM. Both
          POS and USM are considered related parties because they can exert
          significant influence over the Company. Accrued interest at December
          31, 1997 was approximately $7,500.


NOTE 8 -  COMMITMENTS AND CONTINGENCIES:

          (a)  Lease Agreements:

               The original Hayden/Kennec Leases provided for payment by the
               Company of certain liabilities relating to the leased property
               and a minimum royalty payment of $2,000 per month or 5% of the
               Company's net smelter royalties realized from production,
               whichever is greater to Mrs. Hayden and Mrs. Kennec. The original
               Hayden/Kennec Leases expired in November 1996, at which time the
               Company had the option to purchase the leasehold rights for a
               purchase price of $1,250,000 less any royalties previously paid
               as of the expiration date. As of November 1996, the Company had
               paid approximately $480,000 in royalties.


                                     F - 21

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 8 -  COMMITMENTS AND CONTINGENCIES (Continued):

          (a)  Lease Agreements(continued):

               On November 19, 1996, the Company entered into an amendment to
               the Hayden/Kennec Leases with Dorothy Kennec (the "Kennec
               Amendment"). Pursuant to the terms of the Kennec Amendment,
               Kennec agreed to extend the term as it relates to her portion of
               the leasehold rights through November 12, 1997. In consideration
               for such extension, the Company agreed to increase the royalty
               payment due to Kennec under the original Hayden/Kennec Leases
               from $1,000 to $2,000 per month and to issue to Kennec 104,000
               shares of the common stock of the Company valued at $.125 per
               share, having an aggregate value of $13,000. All of the payments
               made under the Kennec Amendment plus the value of the shares
               issued thereunder are to be further applied against the buy-out
               price of the property under the original Hayden/Kennec Leases.
               The 104,000 shares of common stock were issued on April 9, 1997
               (see Note 10).

               To further secure the Company and the Joint Venture, Gems entered
               into an agreement on December 21, 1995 to purchase Hayden's
               interest thereto (the "Hayden Interests") for a purchase price of
               $75,000. Gems made an initial payment of $5,000 to Hayden and the
               remainder of the purchase price was to be paid on or prior to the
               expiration date of the Hayden/Kennec Leases. Gems advised the
               Company that under Colorado law, if an owner of 50% of mineral
               rights desired to exploit those rights, then the remaining 50%
               owner could not object to the exploitation of the rights,
               provided the non-participating owner received 50% of the net
               profits generated from such exploitation. Therefore, Gems
               informed the Company that it believed that with the acquisition
               of the Hayden interest, together with the portion of the
               Hayden/Kennec Leases owned by Kennec, the Company and the Joint
               Venture would have adequate access to the minerals during the
               remainder of the term of the Hayden/Kennec Leases on a continuing
               basis.

               On November 12, 1997, Gems had failed to comply with the terms of
               the Hayden/Kennec-Gems Purchase Agreement. On November 13, 1997,
               Hayden entered into an agreement to sell the Hayden interests to
               USM for a purchase price of $75,000 (the "Hayden-USM Purchase
               Agreement"). The purchase price is evidenced by a note, due on
               February 2, 1998. Payment on the note has been extended until USM
               receives a report of clear title. Upon the execution of the
               Hayden-USM Purchase Agreement, USM agreed to extend the
               Hayden/Kennec Leases upon the same terms and conditions currently
               in effect through March 13, 1998 (the "Extended Expiration
               Date"). The Company is currently in negotiations to extend these
               interests.


                                     F - 22

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 8 -  COMMITMENTS AND CONTINGENCIES (Continued):

          (a)  Lease Agreements (continued):

               While the Company has extended the term of the Hayden/Kennec
               Leases, as amended through March 13, 1998, in the event that it
               shall expire or otherwise terminate, any improvements made on the
               property become the property of the lessor without any further
               compensation to the Company and the lessor would have to reclaim
               the property in accordance with the State of Colorado Division of
               Minerals and Geology (the "DMG") requirements in effect at the
               time of such expiration or termination. Thus, the likelihood that
               the Company would recover fixtures and other equipment on the
               property may be minimal.

          (b)  Environmental Matters:

               On January 31, 1997, the Company received approval from the DMG
               of its March 6, 1996 amended application to its permit by
               obtaining the $252,000 bond required by the DMG from an
               independent bonding company in exchange for (i) the deposit by
               the Company of $125,000 in a trust account maintained for the
               benefit of the bonding company, (ii) guarantees from the Joint
               Venture partner and certain of its principals and (iii) the
               posting of a performance bond from an independent bonding company
               by one of the Joint Venture's contractors with respect to the
               completion of the technical and remediation work required by the
               regulatory authorities. As a result, management believes that
               substantially all of the necessary environmental and regulatory
               approvals have been obtained from DMG.

               The amended permit required among other things the submission of
               a final design for tailings disposal facilities, the installation
               of a Surface Water Control Plan previously approved by the DMG,
               the filing of an Environmental Protection Plan, and the
               completion of certain closure plans.

               As of December 31, 1997, the Company has no formal violations
               against it with respect to the Franklin Mines and Franklin Mill.
               However, there can be no assurance that the Company will be able
               to adequately comply with the conditions set forth in its permit
               approval or that future violations will not arise and that such
               violations will not lead to interruptions in operations at the
               Franklin Mines or Franklin Mill.

          (c)  Litigation:

               The Company is involved in various litigation as explained below:

               (i)  The Company and others are defendants in the action related
                    to a dispute over fees for engineering consulting services
                    supplied in the amount of approximately $268,000. The Court
                    has remanded the case to arbitration. The defendants plan to
                    vigorously defend their position asserting that the work was
                    never completed. An accrued liability of $35,000 which the
                    Company estimates to be its portion of the total claim has
                    been recorded in the accompanying financial statements and
                    is included in other expenses.

                                     F - 23

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 8 -  COMMITMENTS AND CONTINGENCIES (Continued):

          (c)  Litigation (continued):

               (ii) In September 1997, certain of the Company's 12.25%
                    Convertible Debenture holders instituted an action against
                    the Company for payment of approximately $42,500 principal
                    amount of its 12.25% Convertible Debentures plus accrued and
                    unpaid interest totaling approximately $13,000 and other
                    costs and expenses related thereto. The Company has answered
                    the aforesaid complaint.

               An unfavorable resolution of these matters could result in
               material liabilities or charges that have not been reflected in
               the accompanying financial statements.

          (c)  NASDAQ Notification:

               In 1996, the Securities and Exchange Commission approved certain
               amendments to the listing requirements for continued listing on
               the NASDAQ Small-Cap Market. On February 27, 1998, subsequent to
               the balance sheet date, the Company received a notification
               letter from NASDAQ informing the Company that as of that date,
               the Company's common stock is not in compliance with the new
               minimum bid price requirement of $1.00 which became effective on
               February 23, 1998. The review of the Company's common stock price
               was based upon the price data covering the previous 30
               consecutive trade dates. The Company has been given 90 calendar
               days, expiring May 28, 1998, in order to regain compliance. The
               Company would be able to regain compliance if its common stock
               trades at or above the minimum requirement of $1.00 for at least
               10 consecutive trade days. In the event that the Company's common
               stock does not regain compliance within the 90 day period, NASDAQ
               has advised the Company that it will issue a delisting letter
               which will identify the review procedures available to the
               Company.

               Management believes that it is unlikely, given past trends, that
               the Company's common stock will sustain a minimum bid price of
               $1.00 or more for 10 consecutive trade days between now and May
               28, 1998. Thus, it is likely that the Company will receive formal
               delisting notification and that the Company's common stock will
               no longer be listed for trading on the NASDAQ Small Cap Market.
               However, management believes that the Company's common stock will
               qualify for trading on the Over-The-Counter/Bulletin Board
               ("OTC") market and the Company will make every effort to include
               its common stock on the OTC in the likely event of a delisting by
               NASDAQ.

               The Company is unable to determine the effect, if any, a
               delisting by NASDAQ would have on the Company's ability to obtain
               additional equity or debt financing.




                                     F - 24

<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 9 -  INCOME TAXES:

          As of December 31, 1997, the Company had Federal net operating loss
          carryforwards of approximately $10,500,000 available to reduce future
          Federal taxable income which, if not used, will expire at various
          dates through December 31, 2012. Changes in the ownership of the
          Company may subject these loss carryforwards to substantial
          limitations.

          The Company also reduced the carrying value of its milling properties
          by $1,200,000 during 1997, resulting in a related deferred tax asset
          of approximately $408,000.

          The Company has offset the deferred tax asset attributable to the
          potential benefits from such net operating loss carryforwards and the
          reduction in carrying value by an equivalent valuation allowance due
          to the uncertainties related to the extent and timing of its future
          taxable income. There are no other material temporary differences.

<TABLE>
<CAPTION>
                                                                Deferred Tax  Valuation
                                                                   Asset      Allowance
                                                                ----------   ----------
<S>                                                             <C>          <C>       
          Balance at January 1, 1997, attributable to federal
            net operating loss carryforward                     $3,347,000   $3,347,000
          Increase in federal net operating loss, year ended
            December 31, 1997                                      231,000      231,000
          Write-down of mining, mineral and other property
            and equipment                                          408,000      408,000
                                                                ----------   ----------
          Balance at December 31, 1997                          $3,986,000   $3,986,000
                                                                ==========   ==========
</TABLE>


NOTE 10 - STOCKHOLDERS' EQUITY:

          Issuances of Common Stock:

          In February 1996, the Company commenced an offering pursuant to Rule
          505 of Regulation D of its common stock to accredited and unaccredited
          investors to raise funds for operations. Subscribers of the offering
          purchased the common stock at 15% below the market price as quoted on
          NASDAQ at the close of business on a specified date prior to the
          termination of the offering. The Company raised approximately $202,600
          from the sale of 953,411 shares at $.2125 per share.

          During the second quarter of 1996, the Company issued 4,294,770 shares
          of common stock upon the conversion of all of the 15% secured
          convertible promissory notes then outstanding based on the total
          balance of the principal and accrued interest outstanding of $418,740
          and the conversion price of $.0975 per share.


                                     F - 25

<PAGE>


                     FRANKLIN CONSOLIDATED MINING CO., INC.
                          (a Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE 10 - STOCKHOLDERS' EQUITY (Continued):

          Issuances of Common Stock (continued):

          In July 1996, the Company commenced an offering to unaffiliated
          parties pursuant to Regulation D for the issuance of shares of common
          stock at the equivalent of $.15625 per share in exchange for certain
          notes, mortgages and other obligations of Gems and its affiliates.
          Upon completion of this offering, the Company issued 9,366,919 shares
          of common stock to purchase obligations of Gems and its affiliates
          with an aggregate principal balance of $1,463,581, and canceled the
          obligations in exchange for an equivalent reduction in the principal
          balance of the 8% mortgage note payable to Gems (see Note 6).

          In July 1996, the Company commenced another offering to unaffiliated
          parties pursuant to Regulation D of up to 100,000,000 shares of its
          common stock at $.125 per share. The offering was on a best efforts
          basis. The Company sold 800,000 shares of common stock and raised
          $95,000 before the offering was terminated on September 15, 1996.

          During 1996, the Company issued 2,316,000 shares of common stock to
          Gems, with an estimated fair value of $361,875, to reduce the balance
          of advances payable and 3,716,000 shares of common stock, with an
          estimated fair value of $355,437, in exchange for financial consulting
          and other services and for the payment of accrued liabilities.

          The following three 1997 common stock issuances reflect security
          values that were established at the time the parties entered into
          arm's-length agreements in 1996, and represent the respective value of
          the security at those dates. The securities were issued pursuant to an
          exemption provided by Section 4(2) of the Securities Act of 1933, and
          are restricted securities.

          On February 10, 1997, the Company issued 7,692,308 common shares upon
          conversion of the $600,000 9.5% note at a conversion price of $.078
          per share (see Note 6).

          On April 9, 1997, the Company issued 104,000 common shares to Dorothy
          Kennec in exchange for extension of lease terms (see Note 8a) at an
          aggregate value of $13,000 or $.125 per share.

          On June 19, 1997, the Company issued 500,000 common shares to Redstone
          Securities as payment for approximately $50,000 in debt obligations.

          Common Stock Reserved for Issuance:

          At December 31, 1997 and 1996, there were 290,000 shares of common
          stock reserved for issuance upon the exercise of the 12.25% $145,000
          convertible debentures (see Note 6).




                                     F - 26

<PAGE>




Item 8.   Changes  In and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure

On February 23, 1998, the Company notified J.H. Cohn, LLP ("J.H.  Cohn, LLP") of
its decision to dismiss the firm as its  independent  auditors.  The decision to
dismiss J.H. Cohn, LLP was approved by the Board of Directors of the Company.

During the two most recent  fiscal years of the Company,  none of the reports of
J.H. Cohn, LLP on the financial  statements of the Company  contained an adverse
opinion or a  disclaimer  of opinion or was  qualified  or  modified as to audit
scope,  or  accounting  principles;  however,  J.H.  Cohn,  LLP has qualified or
modified  its  reports on the  financial  statements  of the  Company as a going
concern.  During the two most recent  fiscal  years and any  subsequent  interim
period  preceding the dismissal of J.H. Cohn,  LLP, there were no  disagreements
between the Company and J.H.  Cohn,  LLP  concerning  accounting  principles  or
practices,  financial statement disclosure, or auditing scope or procedure which
would have  caused J.H.  Cohn,  LLP to make a  reference  to the subject  matter
thereof  in  its  report  had  such   disagreement  not  been  resolved  to  the
satisfaction of J.H. Cohn, LLP.

The Company to retained Lazar Levine & Felix LLP as its independent auditors for
fiscal year 1997.


                                       39
<PAGE>


                                    PART III

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

Name                                Age                   Position
----                                ---                   --------
J. Terry Anderson                   50            Chairman, President Treasurer,
                                                  Director

Robert Waligunda                    51            Secretary, Director

Robert J. Levin                     51            Former Vice-President-Finance

Richard Brannon                     48            Vice-President-
                                                  West Coast Operations

Steven R. Schurman                  46            Director

George E. Otten                     71            Director

J. Terry  Anderson.  Mr.  Anderson has served as a director of the Company since
August,  1991, as the Company's  Chairman of the Board since June,  1993, as the
Company's  President  since June,  1994,  and as the Company's  Treasurer  since
August,  1995.  From 1977 to the present,  Mr.  Anderson has served as Chairman,
President,  a director and a principal stockholder of Anderson Chemical Company,
a  privately-held  company located in Litchfield,  Minnesota which is engaged in
the manufacturer and marketing of sanitation and water treatment chemicals.  Mr.
Anderson  has also  served as a member of the local  advisory  board of  Norwest
Bank, Minnesota Central,  N.A.,  Litchfield  Minnesota.  Mr. Anderson received a
Bachelor of Arts degree in theology from Ambassador  College in Big Sandy, Texas
in 1972.  Prior  to that  time,  Mr.  Anderson  pursued  a  degree  in  Business
Administration from the University of Minnesota from 1965 to 1968.

Robert L. Waligunda. Mr. Waligunda has served as a director of the Company since
1985 and as  Secretary  of the  Company  since  August  1995.  From  1965 to the
present,   Mr.  Waligunda  has  served  as  founder,   President  and  principal
stockholder  of Sky  Promotions,  Inc., a Pittstown,  New Jersey  marketing  and
management  company  involved in sales,  advertising  and  marketing  of hot air
balloons  and   inflatable   products.   He  is  the  founder  and  director  of
International  Professional  Balloon Pilots Racing Association,  a member of the
advisory board of Aerostar  International,  Inc., the world's oldest and largest
balloon  manufacturing   company,  and  a  member  of  the  National  Aeronautic
Association, the Experimental Aircraft Association, and the Airplane Owner


                                       40
<PAGE>

and Pilots  Association.  Mr. Waligunda  received a Masters of Science degree in
guidance and psychological services from Springfield College in 1968.

Robert J. Levin Mr.  Levin served as the Vice  President-Finance  of the Company
from December, 1995 through February, 1998. From January 1984 through July 1990,
Mr. Levin served as a Senior Partner in the accounting firm of Levin,  Pascale &
Co. From July, 1990, to December,  1995, Mr. Levin operated a private accounting
practice.  Mr. Levin is a Certified  Public  Accountant.  Mr. Levin resigned his
position as Vice President on February 20, 1998.

Richard  Brannon  Mr.  Brannon  has  served  as the  Vice  President-West  Coast
Operations  since  February,  1996.  Mr.  Brannon is a California  licensed real
estate  broker  and 100% owner of A Reel  Mortgage,  Inc.,  a mortgage  and loan
servicing  company  organized in 1991. Mr. Brannon is a founding director of the
California Trustee Mortgage Broker Association, a not-for-profit corporation.

Steven R.  Schurman Mr.  Schurman has served as a director of the Company  since
February,  1998.  From 1985 to present,  Mr. Schurman has served as president of
MinSearch,  Inc.,  a Denver  based  company,  specializing  in  mineral  project
evaluation, exploration, project permitting, mapping and drill testing of mines.
Mr. Schurman is a senior  exploration  geologist and is a member of the American
Institute of Professional Geologists, American Institute of Mining Engineers and
Denver Region Exploration Geologists.  Mr. Schurman has a BS in Geology from the
Colorado State University.

George E. Otten Mr. Otten has served as director of the Company since  February,
1998.  Mr.  Otten was the first  president of the Company from 1976 through 1985
and is the owner and operator of the Bates  Hunter Mine under the name  "Central
City  Consolidated  Mining  Company"  since 1985.  Since 1997,  Mr. Otten is the
president,  director and General  Operating  officer of all operations of Hunter
Gold Mining,  Inc.  Central City Colorado.  Mr. Otten holds a degree in Business
Administration from Adams State College, Alamosa, Colorado.

To the Company's knowledge and based solely on a review of such materials as are
required by the  Securities  and Exchange  Commission,  no officer,  director or
beneficial  holder  of  more  than  ten  percent  of the  Company's  issued  and
outstanding shares of Common Stock ("Beneficial  Owner") has filed any forms and
reports  required to be filed  pursuant to Section 16(a) of the  Securities  and
Exchange Act of 1934, as amended (the  "Exchange  Act"),  during the fiscal year
ended December 31, 1995; and no officer,  director or Beneficial  Holder has not
submitted  any  representation  letter to the Company  stating that they are not
subject to the filing  requirements  under  Section 16 of the  Exchange  Act for
fiscal year 1997.

Item 10. Executive Compensation

No  compensation  has been  awarded  to,  earned  by or paid to any of the named
executives or directors of the Company during the fiscal year ended 1996.


                                       41
<PAGE>


Item 11.  Security Ownership of Certain Beneficial Owners and Management

     (a)  Certain Beneficial Owners of Common Stock

               NONE

     (b)  Security Ownership of Management of Common Stock

    Name and                         Amount and                    Percentage
   Address of                         Nature of                     of Class
   Beneficial                        Beneficial
     Owner                             Owner

J. Terry Anderson                   4,189,660(1)                      4.6%

Robert L. Waligunda                   192,500(2)                       .2%

George E. Otten                         -0-                             0

Steven R. Schurman                      -0-                             0

Richard Brannan                         -0-                             0

Directors and Executive
Officers as a Group                 4,381,660                         4.8%
(5 persons)

----------
1. Includes 1,688,140 shares owned by Mr. Anderson, 10,000 shares owned by Bruce
E. Anderson Trust under which Mr. Anderson acts as Trustee and 2,491,  520 owned
by Anderson  Chemical  Company for which Mr.  Anderson  serves as a director and
president and owns  approximately  21% of the outstanding  shares.  Mr. Anderson
disclaims any  beneficial  ownership with respect to shares of the Company owned
by his brothers.
2. Includes 30,000 shares pledged as collateral to a non - affiliate individual.

Item 12. Certain Relationships and Related Transactions

In July 1996,  Anderson  Chemical  Company  advanced a loan to the  Company  for
working  capital  in the  amount  of  $20,000.  Such  loan  was  evidenced  by a
Promissory  Note bearing  interest at 12%. The principal  amount and all accrued
and unpaid interest is currently outstanding.

As of March 31, 1998,  J. Terry  Anderson  has loaned the Company an  additional
$40,000 for working capital.


                                       42
<PAGE>


                                     PART IV

Item 13.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

Exhibits

     The following  documents are filed as exhibits  herewith,  unless otherwise
     specified by an asterisk, and are incorporated herein by this reference:

   Exhibit                                                         Sequentially
    Number              Description of Exhibit                    Numbered Pages

     3.1    Amended and First Restated Certificate of
            Incorporation filed with the Delaware Secretary of
            State on December 4, 1995. (Incorporated by
            reference, Annual Report on Form 10KSB for year ended
            December 31, 1995)

     3.2     Amended and Restated By-Laws of the Company
            (Incorporated by reference, Annual Report on Form
            10-K for Year Ended December 31, 1994, Exhibit 3.2.)

     4.1    Form of Indenture dated January 2, 1990 (Incorporated
            by reference, Registration Statement on Form S-1,
            File No. 33-31418, Exhibit 4.1.)

    10.1    Mining Lease and Option to Purchase, dated November
            12, 1976, among Davis I. And Audrey I. Hayden,
            husband and wife, and Dorothy L. Kennec, a single
            woman and trustee for her children, and Gold
            Developers and Producers Incorporated (Incorporated
            by reference, Registration Statement on Form S-1,
            File No. 33-31418, Exhibit 10.1.)

    10.2    Indenture, dated August 2, 1982, by and between the
            Company and David I. and Dorothy I. Hayden.
            (Incorporated by reference, Registration Statement on
            Form S-1, File No. 33-31418, Exhibit 10.2.)

    10.3    Agreement, dated August 2, 1982, by and between the
            Company and David I. and Audrey I. Hayden.
            (Incorporated by reference, Registration Statement on
            Form S-1, File. No. 33-31418, Exhibit 10.3)


                               43
<PAGE>


    10.4    Loan Agreement, dated May 18, 1992, by and between
            the Company and various Lenders. (Incorporated by
            reference, current Report on Form 8-K dated July 19,
            1993, File No. 0-9416, Exhibit (d).)

    10.5    Zeus Joint Venture Agreement, dated February 26, 1993
            between the company and Island Investment Co.
            (Incorporated by reference, Current Report on Form
            8-K dated July 19, 1993, File No. 0-9416, Exhibit (a)
            filed as exhibit to Schedule 13D filed by Gems &
            Minerals Corp.)

    10.6    Amended Loan Agreement, dated as of July 15, 1993, by
            and between the Company and various Lenders.
            (Incorporated by reference, Current Report on Form
            8-K dated July 19, 1993, File No. 0-9416, Exhibit
            (c).)

    10.7    Scheduled 13D filed with the Commission on July 23,
            1993 by Gems & Minerals Corp. (Incorporated by
            reference, Current Report on Form 8-K dated July 19,
            1993, File No. 0-9416, Exhibit (a), filed with
            exhibits (I) February 26, 1993 Zeus Joint Venture
            Agreement and (ii) various Exchange Agreements
            between Gems & Minerals Corp. and Anthony DiMatteo,
            Cheryl Peterson, John DiMatteo and Joseph DiMatteo).

    10.8    Amendment to Zeus Joint Venture Agreement, dated as
            of August 31, 1993, by and between the Company and
            Island Investment Co. and Gems & Minerals Corp.
            (Incorporated by reference, Current Report on Form
            8-K, dated August 31, 1993, File No. 0-9416, Exhibit
            (a).)

    10.9    Exchange Letter Agreement, dated June 27, 1994, by
            and between the Company and Island Investment Corp.
            and Gems and Minerals Corp. (Incorporated by
            reference, Current Report on Form 8-K, dated June 27,
            1994, File No. 0-9416, Exhibit B.)

    10.10   Purchase Agreement, dated November 22, 1994, by and
            between Gems & Minerals Corp. and Audrey I. Hayden
            regarding certain portions of the Hayden/Kennec
            Leases (Incorporated by reference, Annual Report on
            Form 10-K for Year Ended December 31, 1994, Exhibit
            10.10.)


                               44
<PAGE>


    10.11   Binding Exchange Letter Agreement, dated as of
            December 14, 1994, by and between the Company and
            Island Investment Corp. and Gems & Minerals Corp
            (Incorporated by reference, Annual Report on Form
            10-K for Year Ended December 31, 1994, Exhibit
            10.11.)

    10.12   Standard Drilling Contract, dated December 15, 1994,
            by and between the Company and American Mine Services
            Inc. (Incorporated by reference, Annual Report on
            Form 10-K for Year Ended December 31, 1994, Exhibit
            10.12.)

    10.13   Schedule 13D filed with the Commission on March 20,
            1995 by Gems & Minerals Corp. (Incorporated by
            reference, Current Report on Form 8-K dated March 20,
            1995, File No. 0-9416, Exhibit (b).)

    10.14   Amendment, dated August 24, 1995, to the Binding
            Share Agreement, dated December 14, 1994.
            (Incorporated by reference, Current Report on Form
            8-K dated August 24, 1995, File No. 0-9416, Exhibit
            B.)

    10.15   Settlement Agreement, dated September 27, 1996, by
            and among the Company, Gems & Minerals Corp and
            Island Investment Corp. (Incorporated by reference,
            Current Report on Form 8-K dated September 27, 1995,
            File No. 0-9416, Exhibit A.)

    10.16   Agreement, dated September 26, 1995, among the
            Company, Bruce R. Anderson, J. Terry Anderson, Leif
            E. Anderson, Lindsay A. Anderson and Carlo Sgrizzi
            regarding conversion of Anderson Loans (Incorporated
            by reference, Current Report on Form 8-K dated
            September 27, 1995, File No. 0-9416, Exhibit B.)

    10.17   Schedule 13D filed with the Commission on December
            28, 1995 by Gems & Minerals Corp., Island Investment
            Corp. and Whitey Bear Trust, as a group.
            (Incorporated by reference, Current Report on Form
            8-K dated December 26, 1995, File No. 0-9416, Exhibit
            B)

    10.18   Assignment of the contract dated February 1, 1996, by
            and between Newmineco, LLC and Durango Metals, Inc.,
            by Newmineco, LLC to the Zeus Joint
            Venture.(Incorporated by reference, Annual Report on
            Form 10-KSB for year ended December 31, 1996 File No.
            0-9416, Exhibit 10.18)


                               45
<PAGE>


    10.19   Novation Agreement, dated March 18, 1996, between
            Charles R. Rugg (and Cindy McCullum, McCullum being
            the Lessor/Optioner as to the Mascott Lode Claim
            only), original party and Durango Metals, Inc.,
            discharged partly, and Island Investment Corporation,
            substantial party. (Incorporated by reference, Annual
            Report on Form 10-KSB for year ended December 31,
            1996, File No. 0-9416, Exhibit 10.19)

    10.20   Mining Lease, dated March 18, 1996 between Island
            Investment Corp. and Charles R. Rugg and Cindy
            McCullum (McCullum being the Lessor/Optioner as to
            the Mascott Lode claim only. (Incorporated by
            reference, Annual Report on Form 10-KSB for year
            ended December 31, 1996, File No. 0-9416, Exhibit
            10.20)

    10.21   Letter of Intent, date June 5, 1996, by and between
            the Company and Gems & Minerals Corp. (Incorporated
            by reference, Annual Report Form 10-KSB for year
            ended December 31, 1996, File No. 0-9416, Exhibit
            10.21)

    10.22   Deed of Trust, dated July 3, 1996, between the
            Company and Colina Oro Molina, Inc. (Incorporated by
            reference, Quarterly Report on Form 10-QSB for
            Quarter Ended June 30, 1996, File No. 0-9416, Exhibit
            B).

    10.23   Memorandum of Understanding, dated July 3, 1996,
            between the Company and Colina Oro Molina, Inc.
            (Incorporated by reference, Quarterly Report on Form
            10-QSB for Quarter Ended June 30, 1996, File No.
            0-9416, Exhibit B)

    10.25   Deed, dated July 3, 1996, between Colina Oro Molina,
            Inc. and the Company. (Incorporated by reference,
            Quarterly Report on Form 10-QSB, for the Quarter
            Ended June 30, 1996, File No. 0-9416, Exhibit B)

    10.24   Promissory Note, dated July 3, 1996, by the Company
            in favor of Colina Oro Molina, Inc. in the amount of
            $2,500,000 (Incorporated by reference, Quarterly
            Report on Form 10-QSB for Quarter Ended June 30,
            1996, File No. 0-9416, Exhibit B)

    10.26   Promissory Note, dated July 6, 1996 by the Company in
            favor of Anderson Chemical Co. in the aggregate
            principal amount of $20,000. (Incorporated by
            reference, Annual Report on Form 10-KSB for year
            ended December 31, 1996, File No. 0-9416, Exhibit
            10.26).


                               46
<PAGE>


    10.27   Amendment No. 1 to Schedule 13D, dated July 10, 1996,
            filed with the Commission by Gems & Minerals Corp.,
            Island Investment Corp. and Whitey Bear Trust, as a
            Group. (Incorporated by reference, Annual Report on
            Form 10-KSB for year ended December 31, 1996, File
            No. 0-9416, Exhibit 10.27).

    10.28   First Amendment to the Joint Venture Agreement of
            Zeus No. 1 Investments, a California general
            partnership, dated August 15, 1996. (Incorporated by
            reference, Annual Report on Form 10-KSB for year
            ended December 31, 1996, File No. 0-9416, Exhibit
            10.28)

    10.29   Letter Agreement, dated September 5, 1996, by and
            between Mrs. Audrey I. Hayden and Gems & Minerals
            Corp.; Letter Agreement dated September 12, 1996, by
            and between Mrs. Audrey I. Hayden and the Company.
            (Incorporated by reference, Annual Report on Form
            10-KSB for year ended December 31, 1996, File No.
            0-9416, Exhibit 10.29)

    10.30   Assignment, dated September 26, 1996, by Gems &
            Minerals Corp. in favor of the Company (incorporated
            by reference, Quarterly Report on Form 10-QSB for
            Quarter Ended September 30, 1996, File No. 0-9416,
            Exhibit A)

    10.31   Secured Promissory Note, dated September 26, 1996, by
            the Company in favor of Gems & Minerals Corp. in the
            principal amount of $600,000 (Incorporated by
            reference, Quarterly Report on Form 10-QSB, for the
            Quarter Ended September 30, 1996, File No. 0-9416,
            Exhibit B)

    10.32   Amendment dated November 19, 1996, mining lease and
            Option to Purchase, dated November 12, 1996, between
            the Company and Mrs. Dorothy Kennec. (Incorporated by
            reference, Annual Report on Form 10-KSB for year
            ended December 31, 1996, File No. 0-9416, Exhibit
            10.31).

    10.33   Amendment No. 2 to Schedule 13D, dated December 26,
            1996, filed with the Commission by Gems & Minerals
            Corp., Island Investment Corp. and Whitey Bear Trust
            as a group. (Incorporated by reference, Annual Report
            on Form 10-KSB for year ended December 31, 1996, File
            No. 0-9416, Exhibit 10.33

   *10.34   Lease Extension Agreement dated November 21, 1997
            between Dorothy L. Kennec, individually and Dorothy
            L. Kennec, Trustee and the Company.


                               47
<PAGE>


   *10.35   Assumption of Debt dated December 1, 1997 between the
            Company and Gems & Minerals Corp.

   *10.36   Promissory Note dated March 5, 1998 between the
            Company and POS Financial, Inc.

   *10.37   Termination Letter dated March 6, 1998 between
            William Martucci, POS Financial, Inc. and US Mining,
            Inc. and the Company.

    10.38   Letter of Intent, dated September 25, 1997, by and
            between the Company and William C. Martucci
            (Incorporated by reference on Form 8-K dated October
            20, 1997, File No. 0-9416, Exhibit A).

    13      Proxy Statement to Stockholders of the Company for
            the fiscal year ended December 31, 1994. Except for
            those portions of such Proxy Statement to
            Stockholders, expressly incorporated by reference
            into this Report, such Annual Report to Stockholders
            is solely for the information of the Securities and
            Exchange Commission and Shall not be deemed a "filed"
            document. (Incorporated by reference, Annual Report
            on Form 10-KSB for Year Ended December 31, 1995)

    24.1    Consent of Gifford A. Dieterle, dated June 3, 1994,
            as an Expert with respect to the geological reports
            dated December 7, 1993, and May 16, 1994 filed as
            supplemental information with the Company's Annual
            Report on Form 10-K for the year ended December 31,
            1994. (Incorporated by reference, Annual Report on
            Form 10-K for Year Ended December 31, 1993, File No.
            0-9416, Exhibit 23.)

    28.1    Maps and Geological Reports prepared by consultant
            Gifford A. Dieterle dated December 7, 1993 and May
            16, 1994. (Incorporated by reference, Annual Report
            on Form 10-K for Year Ended December 31, 1993, File
            No. 0-9416, Exhibit 23.)

    28.3    Letter from Messrs., Bruce, Terry, Leif and Lindsay
            Anderson dated June 2, 1994 waiving defaults under
            certain promissory notes. (Incorporated by reference,
            Annual Report on Form 10-K for Year Ended December
            31, 1993, File No. 0-9416, Exhibit 23.)

    28.4    Letter from Gems & Minerals Corp. dated June 4, 1994
            amending Zeus Joint Venture Agreement regarding
            waiver of joint venture defaults. (Incorporated by
            reference, Annual Report on Form 10-K for Year Ended
            December 31, 1993, File No. 0-9416, Exhibit 23.)


                               48
<PAGE>


    28.5    Letter from Gems & Minerals Corp. dated March 27,
            1995 amending Zeus Joint Venture Agreement regarding
            waiver of joint venture defaults and extending the
            upset date and promissory note due date.(Incorporated
            by reference, Annual Report on Form 10-K for Year
            Ended December 31, 1994, File No. 0-9416, Exhibit
            28.5.)

    28.6    Letter from Messrs., Bruce, Terry, Leif and Lindsay
            Anderson dated March 27, 1995 waiving defaults under
            certain promissory notes and extending due dates on
            such notes to September 30, 1995 (Incorporated by
            reference, Annual Report on Form 10-K for Year Ended
            December 31, 1994, File No. 0-9416, Exhibit 28.6.)

    28.7    Letter from Anderson Chemical Company dated March 27,
            1995 waiving defaults under certain promissory notes
            and extending due date on such notes to September 30,
            1995. (Incorporated by reference, Annual Report on
            Form 10-K for Year Ended December 31, 1994, File No.
            0-9416, Exhibit 28.6.)

--------
* Filed herewith

Reports on Form 8-K

Current Report on Form 8K, dated March 5, 1997.
Current Report on Form 8K, dated October 20, 1997


                                       49
<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities  and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized

                                        FRANKLIN CONSOLIDATED MINING CO. , INC.

April 28, 1998                          By:  /s/  J. Terry Anderson
                                             ----------------------------------
                                             J. Terry Anderson, Chairman,
                                             President and Director 
                                             (Principal Executive Officer)

Pursuant to the  requirements  of the Securities and Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.



/s/  J. Terry Anderson        Director/Chairman, President        April 28, 1998
-----------------------       and Treasurer
J. Terry Anderson


/s/  Robert Waligunda         Director/Secretary                  April 28, 1998
-----------------------
Robert Waligunda


/s/  Robert Levin             Vice President-Finance              April 28, 1998
-----------------------
Robert Levin


/s/  Richard Brannon          Vice President-West Coast           April 28, 1998
-----------------------       Operations
Richard Brannon


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