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 12/31/96                  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.      $2,351.00

State the  aggregate  market value of the voting  stock held by non-  affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock as of a  specified  date  within the past 60
days
                                        $10,997,878

State the  number  of  shares  outstanding  of each of  issuers  class of common
equity, as of the latest practical date. 91,583,020 as of March 29, 1997

              DOCUMENTS INCORPORATED BY REFERENCE IN PART III - SIX

Prospectus,  dated December 16, 1996, contained in the Registration Statement of
the Company on Form SB-2  declared  effective  by the  Securities  and  Exchange
Commission on December 18, 1996.  Transitional Small Business  Disclosure Format
(check one) Yes____ No X



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                                     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 28 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").  The Company has also acquired an interest in the  so-called  Mogul Mine
(the  "Mogul  Mine"),  which  consists of the Mogul  Tunnel and the  surrounding
claims  located  in the  Spencer  Mountain  region  through  its  investment  in
Newmineco,  LLC, a Colorado limited liability company ("Newmineco").  While none
of its  properties  were  operational  in fiscal year 1996, the Company has made
significant  strides in  rehabilitating  certain of its  mining  properties  and
expanding its holdings through its relationship  with its joint venture partner,
Gems and Minerals Corp. a Nevada corporation ("Gems").

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.


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<PAGE>


     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.  The specific terms of the  partnership  were set
forth in an agreement (the "Zeus Joint Venture  Agreement")  which,  among other
things, ( i) required Island to provide both technical and financial  support to
the Joint Venture,  (ii) required the Company to contribute to the Joint Venture
the rights to the exclusive use of its assets and leasehold interests related to
the Franklin Mines and Franklin Mill and (iii) provided that after the return of
any initial capital  contributions  and certain  priority  payments,  Island and
Franklin  would  receive  50% of any  partnership  income  until  each party had
received  $15,000,000;  Island  and the  Company  would  receive  73%  and  27%,
respectively, of any partnership income thereafter. On November 12, 1992, Island
formed Gems for the purpose of  acquiring  interests in and  developing  mineral
resource  properties and remained inactive until Island assigned its interest in
the Zeus Joint Venture to Gems in May, 1993.

The Zeus Joint Venture Agreement

     In July,  1993, the Company and Island entered into a letter of intent (the
"Letter of Intent") which  anticipated  the exchange of various assets of Island
for 81% of the issued and outstanding shares of the Company. The transaction was
subject to, among other things, the negotiation and consummation of a definitive
acquisition  agreement  between the  parties.  A  definitive  agreement  was not
consummated and the Letter of Intent was terminated effective August 31, 1993.

     On August 31, 1994,  the Company and Island  agreed to amend the Zeus Joint
Venture  Agreement to provide  for,  among other  things,  the waiver of certain
priority  payments  due to Island under prior  agreements  of the parties and an
adjustment  of the  distribution  arrangements  of future  income or loss of the
Joint Venture to each of the Company and Gems. The Zeus Joint Venture Agreement,
as amended, required (i) Gems to provide both technical and financial support to
the Joint  Venture;  (ii) the  Company to  contribute  to the Joint  Venture the
rights to the exclusive use of its leasehold  interests and other assets related
to the Franklin  Mines and Franklin  Mill;  (iii) the potential  transfer of the
Company's  assets  to the  Joint  Venture  under  certain  conditions;  (iv) the
issuance to Gems of 6,000,000 shares of common stock of the Company,  subject to
shareholders  approval of a  sufficient  increase in the  capitalization  of the
Company and certain other  conditions;  and (v) the allocation of 70% and 30% of
the Joint Venture's income or loss to Gems and the Company, respectively.

     On or about December 31, 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,  a
majority of their assets for  approximately  270,000,000  newly issued shares of
the Company.  The shares would have certain  demand and  piggyback  registration
rights and anti-dilution rights. The Exchange Agreement further provided that if
a definitive  agreement  setting forth the specific  terms of the asset exchange
was not consummated in a timely fashion,  then the Company would be obligated to
issue  6,000,000  shares to Gems or, if the  Company  was  unable to issue  such
shares,  pay Gems at least  $1,500,000 as a priority  payment (the "Upset Fee").
Any shares  issued in  accordance  with these  provisions  would have demand and
piggyback registration rights attached thereto. If the transactions contemplated
by the Exchange Agreement were to have 


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<PAGE>


been  consummated,  it was anticipated that Gems would own  approximately 85% of
the issued and outstanding shares of common stock of the Company.

     In September  1995, the Company,  Island and Gems entered into an agreement
(the  "Settlement   Agreement")  whereby  the  parties   acknowledged  that  the
transactions contemplated by the Exchange Agreement were not timely consummated.
Pursuant to the terms of the Settlement  Agreement,  the Company agreed to cause
6,000,000  shares  of  its  common  stock  to be  issued  to  Gems  or,  in  the
alternative,  to pay the Upset Fee. The Company  further  agreed to use its best
efforts  to cause its  shareholders  to approve an  increase  in its  authorized
capital from  50,000,000 to 100,000,000  its annual meeting of  shareholders  in
November 1995 in order to, among other things, permit the issuance of the shares
to Gems. In the event that the Company, after using its best efforts, was unable
to obtain the requisite approval of its shareholders,  Gems agreed to reduce the
Upset  Fee  to  $600,000.   The  parties  further  agreed  to  convert  $249,600
intercompany  advances  into  3,200,000  additional  shares of its common stock.
Finally,  as  further  consideration  for  settlement  of their  disputes,  Gems
interest in the joint venture was increased to 82.5% and the Company's  interest
reduced to 17.5%. Gems was also given certain demand and piggyback  registration
rights with respect to any shares  issued  under the  Settlement  Agreement.  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 an aggregate of 9,200,000 shares.

     In January,  1996,  the Company and Gems  executed an amendment to the Zeus
Joint Venture  Agreement  whereby the parties (i) restated and clarified various
amendments to the Zeus Joint  Venture  Agreement  agreed to in prior  agreements
between the parties, (ii) agreed to further clarify the composition of the Board
of Managers of Zeus, (iii) confirmed Gems as the Company's  partner in the Joint
Venture and (iv) restated the general purposes of the Joint Venture.

     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%,  which of the Company  together with the 18% then held by Gems
would equal  approximately  85% of the  outstanding  shares of the Company.  The
assets  included  Gems'  82.5%  interest in the Zeus Joint  Venture,  the Hayden
interest in the  Hayden/Kennec  Leases for which Gems  contracted  to acquire in
December 1995, the Rugg/Mogul Lease relating to the Mogul Mine and the Gold Hill
Mill. The consummation of the  transactions  were predicated upon the completion
of customary due  diligence,  obtaining  required  consents,  and/or  regulatory
approvals  necessary to consummate the transaction,  the execution of definitive
agreements,   the   approval  of  Franklin   stockholders   of  an  increase  in
capitalization  of the Company and the approval of the stockholders of Gems, and
each of the parties's  respective  boards of directors of the transactions on or
before  September 3, 1996. 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 interest in the Zeus Joint
Venture  to  Nuco  Venture,  Inc.,  a  Delaware  corporation  and  wholly  owned
subsidiary  of Gems  ("Nuco")  in  exchange  for  500,000  shares of Nuco  which
constitutes  100% of the  outstanding  shares of Nuco. Gems and Nuco continue to
act as the Company's joint venture  partners.  The Company  anticipates  that it
will continue to rely upon its Joint  Venture 


                                       4
<PAGE>

partners,  specifically  Gems,  to  provide  the  funding,  technical  data  and
personnel  necessary to continue its business  plan at its  properties  in Idaho
Springs until such time as the Franklin Mines and/or  Franklin Mill shall become
operational.

Operations at the Company's Mining Properties

     Fiscal Year Ended 1994

     In 1994,  Gems advised the Company that all work  necessary to preserve the
Company's 112D Mining Permit M83-083 (the "Franklin Permit") had been completed.
The technical  revisions and remedial work performed in 1994 were in response to
the Colorado  Division of Minerals and Geology  ("DMG")  requirements  that Zeus
address  erosion,  sedimentation  and  run-off  matters  arising  from the upper
pyritic tailings pond located at the Idaho Springs  property.  The tailings pond
is the location  where waste products from the Franklin Mill are to be deposited
after the milling  process is  completed.  During the latter part of 1994,  Zeus
continued  its efforts  toward  conducting  a  comprehensive  core  drilling and
analysis  program (the "Analysis  Program") to ascertain the scope and extent of
proven and probable ore reserves containing  economically  recoverable  minerals
not previously  identified or reported.  In December  1994, the Company  entered
into a Standard Drilling Contract with American Mine Services,  Inc. to commence
a drilling  program to prove  additional ore reserves.  As of December 31, 1994,
Island   reported  to  the  Company  that  it  had  incurred   expenditures   of
approximately  $1,200,000,  including  approximately  $781,000  in mine and mill
improvements.

     Fiscal Year ended 1995

     The Analysis Program commenced in January,  1995 and was completed in early
summer of that year. Based upon the reports  generated from the Analysis Program
and  available  geological  data and reports,  Gems advised the Company that the
proven and probable  reserves at the Franklin Mines  previously  reported by the
Company  were  accurate.  Gems further  confirmed  that the  application  of its
proprietary  technologies  and processes  should result in  economically  viable
operations.  Specifically,  the Company confirmed, through the Analysis Program,
proven ore reserves  estimated  at 166,698 tons having a grade of  approximately
 .315 per  ounce of gold and  6.740  per  ounce of  silver  per ton  computed  in
accordance with SX standards.  Moreover, it was further determined that the dump
sites  at  the  Franklin  Mines  may  provide  an  additional   opportunity  for
production.  The Company has been advised by consultants retained by Gems and/or
Zeus that the Franklin  dump sites are estimated to contain in excess of 100,000
tons of dump material with a grade estimated at .15 to .25 ounces per ton.

     In addition to the Analysis Program, Zeus continued to perform the remedial
work  and   technical   revisions   commenced   in  1994   addressing   erosion,
sedimentation,  run-off  matters  and  other  items  which the DMG  required  in
connection with the Franklin  Permit.  As of December 31, 1995, Gems reported to
the Company that it had incurred expenses of approximately $1,250,000, including
approximately $781,000 attributable to mine and mill improvements through fiscal
year 1995.


                                       5
<PAGE>


     Fiscal Year ended 1996

     (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 Franklin Permit to date. 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 pond located adjacent to the Franklin Mill (the "Lined Tailings Pond").
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 Pond was no longer functional.  The
DMG further claimed that acidic water had been observed during inspections to be
seeping  from the Lined  Tailings  Pond 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  Pond 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  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 


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<PAGE>

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.

     Reclamation  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  reclamation
bond of the Company was  recalculated.  To help reduce  reclamation  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  reclamation.  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  reclamation  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.  For  further  information  regarding  the
Company's reclamation bond, See Item 3. Litigation Environmental Matters.

     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 Reclamation Board ("MLRB") and
the DMG, the Company received a temporary cease and desist order  prohibiting it
from  conducting  mining and/or  milling  operations at the Franklin Mines until
such time as all past violations cited by the DMG were satisfied.

     For the  remainder of fiscal year 1996 and into the first  quarter of 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 instituted plans for
groundwater  monitoring  which included  surface water and groundwater  sampling
plans,  took steps to correct the run-off  problem  associated with the Disposal
Area,  submitted and  implemented  plans to reclaim  tailings  ponds 1, 4 and 5,
commenced  preliminary plans for the installation of a paste backfill system for
tailings disposal in the


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<PAGE>

remaining ponds on the site and 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.  Moreover,  the
reclamation  work  performed  during  fiscal  year 1996  will  permit it to make
application to the DMG to reduce its current reclamation bond.

     In addition to the work performed in connection with the Franklin  Permits,
the  Company  was  required  to develop  and submit 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 must also
include 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 Company  submitted its proposed plan to the DMG on or about
September 12, 1996. On or about  November 12, 1996, the DMG notified the Company
that certain  information needed to bring addressed and revisions were needed to
bring the  Company's  Environmental  Protection  Plan into  compliance  with DMG
regulations.  The DMG has  extended  the time period by which the  Company  must
submit its final Environmental Protection Plan and the Company is in the process
of completing its plan for submission.

     On January 31,  1997,  the Company  received  approval  from the DMG of its
March 6, 1996 amendment application to the Franklin Permit. This approval brings
the Company in compliance with current  environmental  and regulatory  standards
and will allow the Company to pursue its estimated annual production levels. 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.
Additionally, the reclamation plan of the Company was further revised to include
the  closure  plan  for  tailings  pond,  1, 2 and 5.  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 it
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  components  of the Surface
Water  Control Plan approved  during the amendment  process must be installed no
later than April 15, 1997 and (iii) the closure  plans for Ponds 1 and 2 must be
completed  to the  satisfaction  of the DMG by spring  runoff  and no later than
April 15. Finally,  the schedule for the completion of the closure plan for 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.

     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, 1996.  During fiscal year 1996, the
Company has expended  approximately  $85,000 on mine and mill  improvements  and
$30,000  on  maintenance  expenses.  This  is in  addition  to  the  approximate
$12,000,000  spent by the Company  since its  inception on various  exploration,
remediation  and  rehabilitation  programs as well as costs  associated with the
reconstruction  and restoration of some of the shafts and tunnels located in the
Franklin Mines.  Therefore,  the Company remains in the development stage. Based
on information  developed through the 


                                        8
<PAGE>


Analysis  Program and  previously  available  geological  data and reports,  the
management  of Gems has informed the Company and the Company is hopeful that the
application of proprietary  technologies and processes of Gems through the Joint
Venture should result in economically viable commercial mining operations at the
Idaho Springs mining facilities in the future.  Moreover,  the Company continues
to work closely with Colorado state mining regulatory agencies to further modify
and update the Franklin  Permit in preparation  and  anticipation  of full scale
operations at the Franklin Mines and Franklin Mill.

     (2)  Newmineco and Operations at the Mogul Mine.

     On or about February 1, 1996,  Island together with Wayne Tatman ("Tatman")
and Thomas  Hartley  ("Hartley")  formed  Newmineco,  LLC,  a  Colorado  limited
liability  company  (the "LLC")  which had an  agreement in principal to acquire
ownership  interests in the Lincoln Mine, a Colorado mining  property  ("Lincoln
Mine") and the Gold Hill Mill.  The Lincoln  mine was  controlled  by Tatman and
Hartley and the Gold Hill mill was owned by an  unaffiliated  third party at the
time.  Island  originally  maintained a 51% interest in the LLC. The managers of
the LLC were the same  individuals  who  comprised the  management  committee of
Zeus. In addition,  the LLC acquired an exclusive assignable contract to receive
and process, at cost, all of the ore produced from the Mogul Mine, the rights to
which were then leased by each of Hartley and Durango Metals, Inc.  ("Durango"),
a company  controlled  by  Hartley,  and a 10% profit  interest  in net  smelter
returns  received  from the ore mined from the Mogul  Mine (the  "Process/Profit
Interest Contract").  The leasehold rights which were to be assigned pursuant to
the Process/Profit Interest Contract were mining rights leased pursuant to (i) a
mining lease  agreement,  dated  November 9, 1992,  between  Charles R. Rugg and
Cindy McCollum, as lessor (collectively, the "Ruggs") and Hartley as lessee (the
"Original  Rugg/Hartley  Lease"), (ii) the mining lease, dated January 31, 1995,
between David C. Sutton, et al., as lessor and Hartley, as lessee, and (iii) the
mining  lease,  dated  October 24, 1995,  between  Jane A. Wood and Durango.  No
operations  were  being  conducted  at the  Mogul  Mine  at the  time  of  these
agreements. In exchange for the Process/Profit Interest Contract, the LLC agreed
to  finance  future  mining  operations  at  the  Mogul  Mine,  satisfy  certain
obligations  owed by Durango to a third party and obtain the exclusive  right to
hire Durango to conduct the mining  operations at the Lincoln and Franklin Mines
at cost plus 10%,  subject  to  management  and  control  of all  mining/milling
operations by the Company.  The Process/Profit  Interest Contract was thereafter
to be assigned to the Joint  Venture and the Company was to retain the exclusive
right to mill and process all ore produced  from Durango  mining  properties  as
well as all mines owned  and/or  controlled  by each of the LLC and/or the Joint
Venture.

     Under the operational  structure  described above, it was anticipated that,
once the mining properties became  operational,  the Franklin Mill would process
the ore from each of the Mogul Mine,  the Franklin Mines and the Lincoln Mine in
return for which the Joint Venture  would  receive a 10% profit  interest in all
monies  realized  by the LLC in the Mogul  Mine (of which the Joint  Venture  is
entitled to 10% of net smelter  returns)  and the Lincoln  Mine  operations  (of
which  the  Joint  Venture  is  entitled  to 100% of all net  smelter  returns).
Moreover,  the LLC had agreed to perform  any and all work  required to increase
the milling capacity at the Franklin Mill from 150 tons per day to 1000 tons per
day without cost to the Company.  The Company would retain its 17.5% interest in
profits under the Zeus Joint Venture thereby entitling it to receive its portion
of all monies  realized by Zeus in connection with the  Process/Profit  Interest
Contract as well as any future contractual arrangements of Zeus.


                                        9
<PAGE>


     On or about February 9, 1996, the Company received  permission from the DMG
to commence prospecting and testing procedures at the Franklin Mill with respect
to ore  being  shipped  to the  Franklin  Mill  from  the  Mogul  Mine  under  a
prospecting  permit issued to Durango (the "Durango  Prospecting  Permit").  The
Durango  Prospecting  Permit  allowed  limited  operations  at the Mogul Mine in
amounts  not to exceed  250 tons per day and the mining of not more than a total
1800 tons of ore for prospecting and testing purposes.  It was expected that the
Franklin Mill would begin  crushing ore from the Mogul Mine on the limited basis
in accordance with the parameters of the Durango Prospecting Permit.

     Gems  thereafter  advised the  Company  that,  on or about April 10,  1996,
Island successfully  completed the acquisition of 100% of the outstanding shares
of Colina Oro Molina, Inc. ("COM,  Inc."), the company which owned the Gold Hill
Mill.  In addition,  the Company has been further  advised that Island  acquired
certain  of the  mining  rights  to  the  Mogul  Mine  covered  by the  original
Rugg/Hartley  of the Mogul Mine  Properties  through the execution of a Novation
Agreement,  dated March 18, 1996, among the Ruggs, Hartley,  Durango and Island.
Pursuant to the  Novation  Agreement,  the parties  agreed that  Hartley/Durango
would be exonerated and released from the original Rugg/Hartley lease and Island
would assume all of the obligations of Hartley/Durango thereunder. Subsequently,
each of the Ruggs and Island  executed a new lease,  dated  March 18,  1996 (the
"Rugg/Mogul  Lease"),  which further  clarified the terms and  conditions of the
agreements between the Ruggs and Island. The acquisition by Island of the rights
evidenced by the  Rugg/Mogul  Lease  permitted  the Company,  Island and Gems to
recommence  negotiations with the remaining lessors lease in an effort to obtain
more favorable  terms  regarding  profits to be generated by the Mogul Mine. The
Company was further  advised by Island that the exclusive  rights granted to the
Joint Venture pursuant to the  Process/Profit  Interest Contract were sufficient
to allow the LLC and other related parties to proceed with its operational plans
at the Mogul Mine.

     In Spring,  1996, the Company was notified by Gems that Island  intended to
recommence  production at the Mogul Mine.  The Mogul Mine is located in a region
known as a historic gold resource and produced  during bulk testing an estimated
100 tons of gold ore with an  average  grade of  approximately  1 ounce per ton.
Gems also informed the Company that a target  production  rate of  approximately
100 tons per day was  anticipated  and such  materials were to be transported to
the  Franklin  Mill for crushing and  processing.  Prior to that time,  in March
1996, the Company  received a cease and desist order from the DMG prohibiting it
from conducting mining and/or milling operations at the Franklin Mine;  however,
crushing activities  conducted at the Franklin Mill with respect to ore from the
Mogul Mine would be performed under the Durango  Prospecting Permit and would be
excluded from such order.

     In May,  1996,  Island and Gems  notified  the Company  that certain of the
participants in the LLC structure had defaulted on their agreements with Island.
As a result, the Island terminated the joint venture  arrangements with Durango,
Hartley and Tatman and Island  thereafter  assigned its interest in Newmineco to
Gems,  which  subsequently  sold 20% of Newmineco to the Company and contributed
29% to Nuco, its wholly owned  subsidiary.  Due to the  termination of the Joint
Venture arrangements with Durango,  Tatman and Hartley,  Newmineco was unable to
acquire  the Lincoln  Mine as  previously  contemplated  in the  original  Joint
Venture Structure.


                                       10
<PAGE>


     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
are to be made quarterly,  the first payment being due on December 31, 1996. The
principal  amount of the note is due on June 30,  1997.  The Company may, at its
option,  convert the principal and interest payments due under the note into the
Company's  Common Stock on or after January 1, 1997 at a conversion rate of .078
per share.  The shares into which the Newmineco  Note converts will have certain
registration  rights attached  thereto.  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 Mogul Note.

     In late 1996,  the Company  entered into  discussions  with Gems  regarding
certain  title  issues  with  respect  to the  rights to mine the Mogul Mine and
litigation which was commenced  against various parties,  including the Company,
in connection  therewith.  In an effort to resolve these disputes,  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 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.

     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.  Although such shares have not
been issued,  the Company is committed to issue an aggregate of 7,692,308 shares
to such assignees in full satisfaction of the Newmineco Note.

     The Mogul Mine is being operated pursuant to the Durango Prospecting Permit
originally  issued  to  Durango,  the  original  lessee  under  the terms of the
original  Rugg/Hartley  Lease. After the transfer of the leasehold to Island and
later to  Newmineco,  the Mogul  Mine  continued  to operate  under the  Durango
Prospecting  Permit.  Moreover,  Durango  had  made  application  to the DMG for
issuance  of a 110 permit for the Mogul Mine (the "Mogul  Permit").  The Company
had been advised by the management of Newmineco that Island and later  Newmineco
provided funding and technical  support to continue  Durango's efforts to secure
the Mogul Permit.



                                       11
<PAGE>


     As a result of the disputes  arising  between the parties to the  Newmineco
agreements,  Durango  and  Hartley  filed a series  of liens on  certain  of the
properties of the Company and thereafter, on or about October 15, 1996, Durango,
Hartley and certain other related parties  instituted suit against each of Gems,
Island and the Company to quiet  title to certain  claims  comprising  the Mogul
Mine. In connection with such  litigation,  Durango withdrew its application for
the Mogul Permit but  specifically  stated that any operations  conducted at the
Mogul Mine would  continue  pursuant to the Durango  Prospecting  Permit then in
effect.  Thus,  the Company has been advised by the management of Newmineco that
it is permitted to continue  prospecting  operations at the Mogul Mine under the
Durango  Prospecting  Permit as a successor in interest thereto.  Moreover,  the
Company has been further  advised by the  management  of  Newmineco  that it has
taken  steps to apply  for the  Mogul  Permit  in the name of  Newmineco  and is
optimistic  that it will be able to secure  such  permit  to allow for  expanded
operations  at the Mogul Mine  separate and apart from  Durango.  The Company as
been further  advised by Newmineco that it is in discussion  with the lessors of
the  Mogul  Mine and the DMG to  resolve  any  pending  claims  and  outstanding
requirements with regard to the Mogul Mine permitting process. Moreover, as part
of its  efforts to secure the Mogul  Permit,  the  Company  arranged to post the
required  bond in the amount of $33,000 in an effort to further  the  permitting
process.  For more information  regarding the disputes with Durango, See Item 3.
Litigation-Durango Litigation.

     During  the early  part of 1996 and again in the  latter  part of the year,
mining  commenced at the Mogul Mine in accordance  with 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  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 monies  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.

     (3)  The Gold Hill Mill

     As an  alternative  to the  acquisition  structure  outlined  in the June 5
Letter of Intent,  the Company acquired the Gold Hill Mill from COM, Inc. is for
$2,500,000  interest only note (the "Gold Hill Note").  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 $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,  (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


                                       12
<PAGE>

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 certain assets
from third  parties in exchange for Common Stock of the Company,  Com,  Inc. and
its  affiliates  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 $450,000 plus accrued and unpaid interest
in  accordance  with the  agreements  reached  with  respect to reduction of the
purchase price of the Company's Newmineco  interest.  As of the date hereof, the
Company has defaulted on each of its October and January interest payments under
the Note. 

     The Gold Hill Mill is located within close  proximity to the Franklin Mines
and Mill as well as the Mogul Mine and will afford the  Company the  opportunity
to  expand  its  geographic  reach  into  the Gold  Hill  Mining  region.  It is
contemplated  that in the  future  milling  will occur at the Gold Hill Mill and
Franklin  Mill at a  combined  initial  rate of 200 tons per  day.  The  Company
anticipates  that  such  capacity  will be  increased  in the  future  upon  the
installation  of  additional  equipment  at the  facilities  and  obtaining  the
appropriate  regulatory  approvals.  The Company has not  conducted  any milling
activities at the Gold Hill Mill to date.

     On July 8,  1996,  the  Company  had been  advised  by Gems  that the Joint
Venture  acquired the rights to certain  agreements which would allow it 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 agreements afforded
the Zeus Joint  Venture  the right to mill or process  the Gold Hill Dumps which
the  Company  has  been  advised  are  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.

     As part of this  agreement,  the  lessor  of the Gold  Hill  Dumps and Zeus
agreed to perform  certain  sample  testing of the dump  material and , upon the
completion of such  testing,  Zeus would make a $30,000  payment to lessor.  The
dump material was to be screened on site,  separating  the coarse barren and low
grade fine material from that material to be milled.  Gems had further  informed
the Company that its consultants  estimated that  approximately 50% of the total
dump  material,  or  approximately  295,000  tons,  can be  milled at a grade of
approximately  0.26 opt gold. Gems further estimated that the operating costs at
the Gold Hill Mill would be approximately  $196 per ounce of gold recovered.  In
the fourth quarter 1996, Gems has advised the Company that due to the failure of
the parties to act on the terms of this  agreement it has  terminated.  However,
Gems has informed the Company that it is presently  engaged in discussions  with
the lessee to develop an alternative  business arrangement for the processing of
the Gold Hill Dumps.  Additionally,  as part of its future financing  prospects,
the Company is exploring the  possibility of obtaining  financing using the Gold
Hill Mill as collateral for such financing.



                                       13
<PAGE>


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, 1996, 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,  it is the sole  responsibility  of Gems to supply the Joint  Venture with
technical personnel and other qualified consultants and experts on a contract or
consulting  basis  pursuant  to  the  terms  of  the  Joint  Venture  Agreement.
Management  anticipates  that as the  Company's  business  develops,  additional
technical administrative staff may be hired and has been advised by Gems that it
believes it will be able to obtain the  services  of  qualified  geological  and
technical consultants as needed.


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.


                                       14
<PAGE>


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.

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.


                                       15
<PAGE>


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.

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.




                                       16
<PAGE>

Proven (Measured) Reserves              Reserves   for  which  (a)  quantity  is
                                        computed  from  dimensions  revealed  in
                                        outcrops,  trenches,  workings  or drill
                                        holes; grade and/or 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.

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.

                                       17
<PAGE>

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 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 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 paid approximately $480,000 in royalties.

     On  November  19,  1996,  the  Company  entered  into an  amendment  to the
Hayden/Kennec  Leases with respect to the portion of the leasehold  attributable
to 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,


                                       18
<PAGE>


having an aggregate market value at the time of issuance of $13,000.  All of the
payments  made under the Kennec  Amendment  plus the value of the shares  issued
thereunder  will be further  applied  against the buy-out  price of the property
under the original  Hayden/Kennec  Leases.  As of March 31, 1997, the Company is
current on its payments to Mrs. Kennec under the Kennec Amendment.

     While the Company has extended  the term of the  Hayden/Kennec  leases,  as
amended  through  November  1997, 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 lessor would have to
reclaim the property in accordance  with DMG  requirements in effect at the time
of such expiration or termination, as the case may be. Thus, the likelihood that
the Company  would recover  fixtures and other  equipment on the property may be
minimal.

     The future  success of the Joint  Venture is  dependent  on its  ability to
preserve and utilize the mineral rights leased under the Hayden/Kennec Leases as
amended by the Kennec  Amendment  and/or to otherwise  acquire the rights to the
use of such properties and the extraction of the related  resources.  To further
secure the  ability of the Joint  Venture to exploit  the Idaho  Springs  mining
properties,  Gems  entered  into an  agreement  on December 21, 1995 to purchase
Audrey Hayden's interest in the Hayden/Kennec  Leases and her ownership interest
in the mining claims  subject  thereto (the "Hayden  Interests")  for a purchase
price of $75,000 (the "Purchase Agreement").  The Purchase Agreement was further
amended and restated in September, 1996 pursuant to which the parties reaffirmed
the $75,000 purchase price and Gems agreed to pay to Hayden $1,000 per month for
a  period  of  12  months.  Hayden  also  agreed  to  extend  the  term  of  the
Hayden/Kennec  Leases to December 1997 as the same relates to her portion of the
lease.  On the date upon which the final  $1,000  installment  is due to Hayden,
Gems will pay the remaining  principal  balance of the purchase price which will
consist of $75,000 less an initial  payment of $5,000 advanced by Gems under the
original Purchase Agreement for back payments on the Hayden/Kennec  Leases. Gems
has  informed  the Company  that it believes  that with the  acquisition  of the
Hayden Interests, together with the portion of the Hayden/Kennec Leases owned by
Dorothy  Kennec,  the Joint  Venture will have  adequate  access to the minerals
during the remainder of the term of the Hayden/Kennec Leases and on a continuing
basis even if the Hayden/Kennec Leases as amended by the Kennec amendment should
expire and not be renewed by Mrs. Kennec.

     Rugg/Mogul Lease

     The Rugg/Mogul Lease, dated March 18, 1996, entered into between Island, as
lessee, and the Ruggs (McCollum being the lessor/optionor as to the muscott Lode
claim only), as lessor, was contributed to Newmineco prior to the acquisition by
the Company of 20% of the LLC. The Rugg/Mogul  Lease  provided  that,  after the
remittance of a $100,000 guaranteed  payment,  Newmineco would pay an additional
$50,000 to the Ruggs, on either the sixth month anniversary date of the lease or
any monthly  anniversary date thereafter when the Mogul Mines become operational
(but not later than  eighteen  months from the date of the  commencement  of the
lease.) In addition,  the  Rugg/Mogul  Lease  provides for a royalty  payment of
$2,000  per  month  which  increases  to  $5,000  once the  Mogul  Mines  become
operational.  The Rugg/Mogul  Lease was to expire on May 17, 2006 at which time,
or at any time during the term of the lease,  Newmineco  may purchase the mining
rights  under the  Rugg/Mogul  Lease for a  purchase  price of  $1,500,000  less
certain of the royalty payments made


                                       19
<PAGE>


during the term of the lease.

     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 notification  further stated
that failure to pay such amounts  within the time  prescribed  would result in a
termination  of the agreement.  However,  it has been the position of Island and
Newmineco  that the Ruggs are the party in default and  certain of the  payments
claimed  to be owed to the Ruggs were not made due to such  defaults.  Moreover,
according to the terms of the  Rugg/Mogul  Lease,  in the event that both lessor
and lessee had potentially  breached the agreements set forth therein,  the cure
period for such breach is extended to 90 days.  Further, if lessee disputes such
claims of default,  the lease may only be  terminated  if lessor shall obtain an
adverse judgment rendered by a court of competent  jurisdiction and lessee fails
to, subject to such judgment, diligently and in good faith attempt to remedy the
default recognized by the court. No such judgement has been obtained.

     Island  and  Newmineco  advised  the  Company  that  lessor  made false and
misleading  representations  and provided  Newmineco and Island with  fraudulent
and/or misleading  information with respect to the Mogul Mine properties and the
leasehold rights.  Additionally,  lessor was to supply  Island/Newmineco  with a
title report and a title  insurance  policy.  Notwithstanding  their  failure to
provide title  insurance,  Island/Newmineco,  in good faith and in reliance upon
promises of cooperation by the Ruggs  continued to finance  improvements  at the
Mogul Mine and complied  with DMG  requests in  connection  with the  permitting
process.  The Company has been advised by Newmineco  and Island that the parties
are negotiating in good faith to resolve all of the disputes  outlined above and
that they are hopeful that a resolution will be reached shortly.  However, there
can be no  assurance  that  the  Rugg/Mogul  Lease  will be  renegotiated,  that
litigation  will not  ensue as a result  of the  current  disputes  between  the
parties  or that  these  disputes  will not have a  material  adverse  effect on
Newmineco's rights to exploit the Mogul Mine..

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 Laramide  Period  Orogeny.  Ores  exploited  from this
region have 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 


                                       20
<PAGE>


the smaller veins located in the area pinched out at moderate  depth,  some have
shown strong mineralization at greater depth.

     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.

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 and dips vary,  being  steeper in higher
levels and  flattening  at depth.  On the ninth  level  general  dip is about 50
degrees to the north.

     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.
Subsidiary to the J.L.  Emerson  Fault are a multitude of veins  crossing at low
angles and  meandering  in and out of the main break.  Most of these  subsidiary
faults are ore conduits;  when more than one of these happen to meet at the same
location,  the result is a large body of ore. These large ore bodies are, within
the observed  area served at present by the  Franklin 73 shaft,  as much as 22.5
feet wide and at least 60 feet long. It has been reliably  reported that some of
the large ore body stopes  within the Gems  workings  adjoining to the west (and
part of the property)  were as wide as 105 feet.  Some of the  individual  veins
carry names of the claims,  such as Franklin,  Gem,  Washington and  Freighter's
Friend.

Estimated Ore Reserves

     The Franklin Mines

     The lodes at the Franklin Mines consist of the minerals associated with the
Gem, the Freighter and the Franklin mine veins and specifically,  those minerals
associated  with  the  "Main  Trunk"  element  of the  J.L.  Emerson  Fault.  No
representations  have been made  regarding the  potential of mineral  structures
situated  adjacent to, or off the "Main Trunk", as these are considered to be of
marginal importance at this time.

     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 structure of the veins.  Blocks were sampled on three
or four sides and at times  within by raise or winze.  Those  blocks  which were
already  heavily  mined were  entered  through  open  stopes,  both  pillars and
"backfill" being sampled.



                                       21
<PAGE>

     The Franklin ore body is generally a tabular structure in shape, consisting
of  several  parallel  to  sub-parallel   veins.  The  evaluation   process,  by
concentrating  on primarily one vein,  obviously  by-passed  additional  mineral
potential.

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

     The ore  structures  in the  Franklin  Mines are often  large,  but  poorly
defined.  It was suggested that a core drilling be conducted in these  locations
in order to determine economic potential and establish 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%:

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

The Gems Assay Map indicated  possible reserves of 167,500 tons. No assay values
are indicated on these reserves.

     The Mogul Mines

     With respect to the Mogul Mines, there is very little published  geological
information and no Company  reports  covering the Mogul Tunnel area. Most of the
information  available  about the ore  bodies in the Mogul  Mines can be derived
from  local  newspaper  reports  between  1898 and 1904 and from mine  inspector
reports for the years 1897, 1898 and 1901. The newspaper and inspection  reports
are useful to indicate the  approximate  size and grade of deposits,  veins,  or
production but are not considered by the Company to be hard fact.


                                       22
<PAGE>


     Although  there are no known ore  reserves  in the Mogul  Mines,  proven or
probable,  there are considerable good exploration targets. The Company has been
informed by Newmineco  that it is hopeful that it will be successful in locating
richer shoots which could yield a profitable amount of ore. Thus,  Newmineco has
informed the Company that it has begun a  comprehensive  program to substantiate
ore reserves at the Mogul Mines and target areas for future production.

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  18%  of  the  weight  of  the  ore.
Approximately 30% 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  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 joint
venture operator with recovery of 85% of gold.  However,  additional  testing is
required and is expected to be undertaken. About 5% of the gold was contained in
refractory slimes and were lost in the tails during the milling process.

     Conventional  milling  procedures by Zeus are to be followed with selective
flotation  of lead,  silver,  gold and zinc and  gravity  concentration  of gold
bearing pyrite.  Concentration  of tailings slimes by slime cone and recovery of
fine gold and silver from slimes are to be  achieved by  cyanidation  and carbon
pulp in closed  circuit.  Average  recovery of the combined  precious  metals is
estimated at  approximately  90% of the total based upon  preliminary  test data
developed by Zeus.

     In the  past,  the  Franklin  Mill  operated  on a limited  schedule  while
exploration and  development  was taking place.  While the Franklin Mill has not
been operational with respect to milling of ore, crushing  activities have begun
at the Franklin Mill for the limited  purpose of prospecting  and testing in the
early part of 1996. Thus, any prior milling activity and the crushing  currently
being done at the Franklin Mill can be characterized as "development" in nature.

     The Gold Hill Mill is a fully permitted modern milling  facility.  With the
exception of test milling approximately 4,000 tons of ore by the previous owner,
the Gold Hill Mill has not been operational with respect to the milling of ore.


                                       23
<PAGE>


New York Office

     The Company  maintains its executive  offices,  consisting of approximately
500 square feet, at 76 Beaver Street, Suite 500, New York, New York. The Company
has agreed to rent this space for a monthly  rental of  $670.50  pursuant  to an
oral agreement with a non-affiliate.  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

Friedman Litigation

     On or about June 28, 1995, the Company issued a promissory note for $90,000
(the "Friedman  Note") and a share warrant  exercisable for up to 500,000 shares
of  the  Company  (the  "Friedman   Warrant")  to  Charles  J.  Friedman,   P.C.
("Friedman"),  a former  corporate  counsel of the Company,  as payment of legal
fees. On or about  February 14, 1996,  Friedman  commenced an action against the
Company in the  District  Court for Clear  Creek  County,  Colorado  claiming an
alleged default by the Company of its obligations pursuant to the Friedman Note.
Friedman sought payment of damages in the principal  amount of the Friedman Note
plus interest,  costs and attorney's fees and retained  certain of the Company's
books, records and other material  documentation  subject to an attorney's lien.
The Company  retained local counsel in this matter and was granted its motion to
remove the case from the Clear  Creek  County  District  Court to United  States
District Court for the State of Colorado.  The Company denied the allegations in
the complaint and asserted  counterclaims  against Friedman for damages suffered
as a result of its failure to timely  perform legal  services and its refusal to
return the Company's books, records and material documentation. The Company also
demanded a full accounting of all Company materials in Friedman's possession and
the immediate return of such material.

     On March 5, 1997,  the Court  entered a judgment  against  the  Company for
$90,000 in favor of Friedman  after the dismissal  with prejudice on January 10,
1997 of all the Company's  counterclaims (the "Friedman Judgment").  Pursuant to
the Friedman  Judgment,  the parties  stipulated  to a stay of execution of such
judgment  for  forty-five  (45) days to  provide  the  Company  with time to pay
Friedman $45,000 in full and complete satisfaction of the Friedman Judgment.

     Notwithstanding,  the Company was further required,  on or before March 21,
1997, (i) to issue to Friedman  1,000,000  shares of the Company's  Common Stock
which have  certain  piggyback  and demand  registration  rights (the  "Friedman
Stock"),  (ii) to execute a Financing  Statement  and Security  Agreement on the
appropriate UCC forms (the "UCC Filings") with respect to the Company's  assets,
(iii) to file with the SEC a Current  Report on Form 8-K  setting  forth in full
and accurate detail the terms of the Friedman  Judgment  against the Company and
the terms of the stay of execution.  The Friedman  Stock,  the UCC Filings,  the
Friedman Note and the Friedman  Warrant were  deposited into the Registry of the
Court  pending  expiration  of the stay of execution or payment of $45,000.  The
Company  also  filed  its  current  report  on Form 8-K  immediately  after  the
execution of the order by the District Court Judge.



                                       24
<PAGE>


     Additionally,  the Company  was  required,  as soon as  possible  after the
completion  of its audit for the  fiscal  year ended 1996 and the filing of this
Report,  but no later than April 30, 1997,  to file with the SEC a  Registration
Statement on the  appropriate  form covering the Friedman Stock so that upon the
effective date thereof, such shares would be fully registered. In the event that
the Company made the $45,000  payment on or before  April 21,  1997,  all of the
documentation  being held in the  Registry of the Court would be returned to the
Company and Friedman would  surrender all files and other  documentation  of the
Company on or before May 2, 1997.  In the event that the  Company  failed to pay
the $45,000 within the time period of the stay of execution,  the Friedman Stock
and the UCC Filings will be  thereafter  released from the Registry of the Court
to Friedman and Friedman  would be free to enforce the  Friedman  Judgment.  All
proceeds  from the sale of the  Friedman  Stock  after  April 21,  1997 would be
applied to the outstanding amount of the Friedman Judgment.

     On April 21, 1997,  the Company  delivered to its local counsel in Colorado
$45,000  to be paid in full  satisfaction  of the  Friedman  Judgment  and  such
payment  was  thereafter  timely  delivered  to Friedman as per the terms of the
Judgement..  Upon execution of the necessary  releases and stipulations and upon
delivery of the funds to  Friedman,  the  certificate  evidencing  the  Friedman
Stock, the UCC Financing Statement,  the Friedman Note, the Friedman Warrant and
all of the Company's corporate papers and records subject to Friedman's attorney
lien will be returned to the Company.

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/Trustee  that the  Company's  SEC filings were  current.  Thereafter,  the
Company became current on its SEC filings;  however,  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 is in default  under the terms of the  Indenture,  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  


                                       25
<PAGE>


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 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  reclamation  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, 1996, the accrued and unpaid interest on the
Debentures is $31,084.

     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.  Although  the  Company has not been
formally served with papers from the Hopis Trust or any other Debenture  Holder,
its  continued  default and failure to comply  with the 1994 and  December  1995
agreements  may result in Company being subject to formal legal  proceedings  by
the Transfer  Agent/Trustee  under the Indenture or from other  holders  seeking
immediate payment of the $145,000 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  Debenture
holders.

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,


                                       26
<PAGE>


(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 pursuant to a Security  Agreement,  dated August 23, 1996.
Any default under the notes  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  the  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  intends to  vigorously 


                                       27
<PAGE>


defend the claims of Golder in the arbitration proceeding.  The Company has been
advised by Zeus and Gems that Golder had not  adequately  performed the services
for which it had invoiced the Joint Venture.  Based upon the  representations of
Zeus and  Gems,  management  is  hopeful  that  this  dispute  will be  resolved
favorably.

Environmental Matters

     On November 4, 1993,  the Company was  notified by the DMG that the Company
failed to timely file a plan in the form of a technical  revision in  connection
with continuation of the Company's state mining permit.  Such technical revision
plan was required to address erosion,  sedimentation and run-off matters arising
from the upper pyritic  tailings  pile located at the property.  The DMG set the
matter down for a hearing to determine if a violation existed in connection with
the Company's permit and what, if any, action was required.  As a result of such
hearing,  the Company  increased its existing land reclamation bond from $29,000
to $45,000.  In  addition,  the Company was  required to take  certain  remedial
action to address the erosion,  sedimentation  and run-off concerns which action
had been taken and approved by the DMG. A formal hearing was held in June,  1994
to  determine  what,  if any,  fine should be levied  against the Company in the
matter. A fine of $5,000 was assessed and paid by the Company.

     In August,  1994, the Company  received an informal  notice from the DMG of
additional  violations  at the Franklin  Mine relating to water run-off from the
upper  pyritic  tailings  and a filled  sediment  pond.  The Company  thereafter
attempted to rectify such  violations in a timely manner,  however,  in order to
complete certain of the remedial work required to correct such  violations,  the
Company was  required to perform  work  outside  the  boundaries  of its current
permits.  Therefore,  in order to perform the required technical and remediation
work,  the Company was first  required to formally  amend its current  permit to
extend its boundaries to include those  sections of the mining  properties to be
used in the performance of the remediation work. In subsequent meetings with the
DMG,  the Company and the Joint  Venture had  received  positive  feedback  with
respect to its plans to comply with the  above-referenced  violations.  Further,
the  Company  had  agreed  that it would  refrain  from any  mining  or  milling
operations  at the Franklin  Mine until such time as the DMG shall (I) amend the
Company's permit to perform the required technical and remediation work and (ii)
determine that all the Company's required work was properly completed.

     In March,  1996,  the Company was notified  that it would be  required,  to
further  increase its land  reclamation  bond.  In an effort to comply with such
requests,   the  Company  posted  an  additional  $48,000  increasing  its  land
reclamation  bond from  $45,000  to  $93,000.  On or about  March 28,  1996 at a
hearing before the MLRB and the DMG, the Company  received a temporary cease and
desist order prohibiting it from conducting mining and/or milling  operations at
the  Franklin  Mines until such time as all of the  violations  cited by the DMG
were satisfied. Additionally, the MLRB determined that the Company's reclamation
bond should be increased to approximately $252,000 on or before April 5, 1996.

     The Company was able to post the required  bond with the DMG in May of 1996
and has received  verbal  assurances from such agency that all of the violations
at the Franklin Mines with respect to the reclamation bonding have been remedied
and the  Cease  and  Desist  is no longer  in  effect.  The DMG  confirmed  such
assurances through official notification thereof on or about June 7, 1996.



                                       28
<PAGE>


     In January,  1997,  the DMG  requested a further  increase in the Company's
reclamation  bond by $11,500.  Subsequent  to this  notification,  a  consultant
engaged by Zeus for the  purpose of  complying  with all  permitting  issues had
discussions with representatives of the DMG regarding the Company's  reclamation
bond.  Due to the  compliance  work performed by the Company in fiscal year 1996
and the first  quarter of 1997,  the Company  believes  that it is entitled to a
reduction  in its  reclamation  bond and is in the  process  of  preparing  such
application.  In light of this application,  the DMG orally agreed not to pursue
the increase  request further until such time as the bond reduction  application
is submitted and reviewed. The Company is hopeful that it will be able to submit
its application during the second quarter of 1997.

     As of the date  hereof,  the Company has no formal  violations  outstanding
against it with respect to the Franklin Mines and Franklin Mill. The Company has
recently  completed all of the  documentation  required to expand its permits to
increase the capacity of  production  at the Franklin Mill and continues to take
remedial  action with respect to the  tailings and sediment  pond to correct any
remaining run-off problems.  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  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.

Joint Venture Obligations

     As of  December  31,  1996,  the  Company  has no  outstanding  obligations
regarding the Joint Venture;  however,  cumulative  losses  attributable  to the
Company totaled $133,220 and as a General Partner,  the Company may be liable to
creditors or others for  unsatisfied  debts and  unspecified  liabilities of the
Zeus Joint Venture. Additionally, as of December 31, 1996, the Company owed Gems
approximately  $957,700 which includes (i) $609,683  attributed to principal and
accrued but unpaid interest on the Gold Hill Note;  (ii) $ 614,250  attributable
to  principal  and accrued but unpaid  interest on the Mogul Note and (iii) less
$ 266,438 attributable to intercompany loans from the Company to Gems.

Delinquent Real Property Taxes

     As set forth in the  Hayden/Kennec  Leases,  the Company is required to pay
all real property  taxes  assessed to the  properties  covered by such leasehold
agreement.  As of December 31, 1996,  the real estate  taxes  presently  due and
owing  on  the  properties  that  comprise  the  Franklin  Mines  and  Mill  are
approximately  $59,684 for the years ended 1993, 1994, 1995 and 1996.  Moreover,
the  taxes  assessed  for  the  year  ended  1993  and  1994  in the  amount  of
approximately  $24,000 have been sold at auction to a third  party.  The Company
has been informed by the requisite taxing  authorities that it must pay the 1993
and 1994 amounts on or before August 1997 to avoid being subject to  enforcement
proceedings  to collect  such  obligations.  On April 28, 1997 the Company  paid
approximately  $50,700 to Clear  Creek  County  against the  aforementioned  tax
liabilities.



                                       29
<PAGE>


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,  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,  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,  the  parties  have agreed and have
submitted a proposed  order to discharge  all liens


                                       30
<PAGE>


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.

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

None.


                                       31
<PAGE>

                                     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").

     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

     As of March  29,  1997,  the  approximate  number of  recordholders  of the
Company's  Common  Stock is 3,100  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
outstanding  is  91,583,020  as of March 29, 1996. No dividends on Common Shares
have  ever  been  paid by the  Company,  nor does the  Company  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

                                       32
<PAGE>


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 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  


                                       33
<PAGE>


$10,000. The shares were issued pursuant to an exemption from registration 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.  The  shares  were  issued  pursuant  an  exemption  from
registration 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  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 $.01 per share. In
November,  1996,  Redstone  exercised  its option to purchase  2,500,000  of the
3,000,000  shares  of  common  stock  and the  Company  issued  such  shares  in
accordance with an exemption from registration under the Act.


                                       34
<PAGE>


     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 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.  Although such shares have
not yet been  issued to the  assignees  of the  Newmineco  Note,  the Company is
obligated to issue 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 Company  intends to issue such shares in accordance with an
exemption from registration 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.  The  Company  holds a 17.5%
interest in the Zeus Joint Venture which has been  developing the Franklin Mines
and the Franklin  Mill.  The Company  acquired a 20% interest in Newmineco,  LLC
from its Joint Venture partner in September 1996, which is a newly-formed entity
that has commenced the development of the Mogul Mines. In addition,  the Company
purchased  the Gold  Hill  Mill in July  1996,  which is an  inactive  permitted
milling  facility  that the Company  will  attempt to develop and operate in the
future.

     During 1996, remediation work was performed and substantially  completed at
the Franklin Mines and the Franklin Mill in preparation for the  commencement of
mining operations at both the Franklin Mines and the Mogul Mines.  Approximately
200 tons of ore were mined at the Mogul Mines and shipped to the  Franklin  site
where the ore was  crushed  and milled.  The  management  of the Company is very
satisfied with the mineral content of the assays taken.

     The Company and its  investees  are in the  development  stage and have not
generated significant revenues on a sustained basis since the inception of their
respective  relationships.  The Company will not recognize any revenues based on
sales made by the Zeus Joint Venture and  Newmineco;  instead,  the Company will
recognize income or losses based primarily on its proportionate  equity interest
in the net income or loss of each of the  investees.  Accordingly,  the  Company
will not recognize any income from such  investments  until such time, if any as
the Zeus Joint  Venture or  Newmineco  begins  production  and  generates  sales
revenues and net profits.

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.  The Company has derived no income
from its mining and milling  investments  which are comprised of the  following:
(1) the  investments  in the assets and rights related to the Franklin Mines and
Franklin  Mill,  which are being 


                                       35
<PAGE>


developed and will be operated by Gems,  the Company's  principal  Joint Venture
partner in the Zeus Joint Venture in which the Company holds at 17.5%  interest;
(2) the  investment  in the assets of the Gold Hill Mill,  the  development  and
operation of which are currently the responsibility of the Company;  and (3) the
20% interest in Newmineco, LLC, which holds the assets and rights related to the
Mogul Mine whose  development and operations will also be the  responsibility of
Gems.  At December  31, 1996,  the  Company's  only liquid  asset was cash,  the
balance  of which  decreased  from  $118,176  at  December  31,  1995 to $127 at
December 31, 1996.

     During  1996,  the  Company  used  common  stock as its  principal  capital
resource.  It issued a total of  21,447,100  shares of common  stock and certain
notes for cash, the  acquisition  of services and mining and milling  properties
and the liquidation of debt, as further described below.

     In December 1995, the Company commenced an offering pursuant to Rule 505 of
Regulation D of 15% Secured Notes (the "15% Notes") in the  aggregate  principal
amount of  $1,500,000  that were  convertible  into shares of Common  Stock at a
conversion price of $.0975 per share to raise funds for operations.  The Company
terminated  this  offering on  February  5, 1996 after  selling 15% Notes in the
aggregate  principal amount of $400,000.  During the second quarter of 1996, the
Company  issued  4,294,770 of Common Stock upon the conversion of all of the 15%
Notes  based  on  the  total  balance  of the  principal  and  accrued  interest
outstanding of $418,740 and the conversion price of $.0975 per share.

     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.

     On July 3, 1996,  the  Company  acquired  the Gold Hill Mill  facility  for
$2,500,000 through a noncash  transaction  whereby it issued an 8% mortgage note
(the "8% Mortgage  Note") to a subsidiary of Gems which  requires the payment of
the entire principal balance no later than July 3, 1999. The 8% Mortgage Note is
secured by the Gold Hill Mill.

     Additionally,   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 the 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.

     In July 1996,  the Company  commenced  an  offering of its Common  Stock to
accredited  investors  only  pursuant  to  Rule  505 of  Regulation  D to  raise
additional  funds for  operating  purposes.  The  offering was on a best efforts
basis. Due to market  conditions at the time of the offering,  the Selling Agent
was only able to sell 800,000  shares of Common Stock and raised  $95,000 before
the offering was terminated on September 15, 1996.



                                       36
<PAGE>


     In September  1996,  the Company  acquired its 20% interest in Newmineco by
issuing a 9.5% note (the "9.5 Note) payable to Gems with a principal  balance of
$600,000. As a result of problems concerning permitting and various other issues
related to the Mogul Mines,  the purchase  price was  reduced,  effectively,  to
$150,000 on December 31, 1996. The $450,000  reduction in the purchase price was
effectuated  through an equivalent  reduction in the principal balance of the 8%
Mortgage Note. 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.  Pursuant  to the  agreement  with the other  investors  in
Newmineco,  the Company will be entitled to the first $500,000 of any profits to
be distributed by Newmineco and 20% of any of its profits thereafter.

     During 1996,  the Company also issued  3,716,000  shares of Common Stock in
exchange  for  financial  consulting  and other  services and for the payment of
accrued interest.

     The Company had 100,000,000  shares of Common Stock authorized for issuance
as of December 31, 1996 of which 90,583,020 were outstanding. As a result of the
conversion of the 9.5% Note during  February 1997, the Company's  ability to use
its Common Stock as a capital  resource will be limited unless its  stockholders
authorize an increase in capital or approve a reverse stock split.

     The  Company  had total  current  liabilities  as of  December  31, 1996 of
$1,378,883,  including  convertible  debentures  with  a  principal  balance  of
$145,000 and other notes payable with a principal  balance of $80,000.  Although
Gems will be responsible for providing the remaining capital resources that will
be needed for the commencement of operations at the Franklin Mines and the Mogul
Mine,  the Company will be  responsible  for  obtaining  the  remaining  capital
resources  that will be needed for the  commencement  of  operations at the Gold
Hill Mill.  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  $25,000 per month during
1997.

     As explained  above,  the Company's only liquid resource was a cash balance
of $127 at December 31, 1996.  Although the Company is entitled to distributions
of 17.5% of any net profits  generated from the operations of the Franklin Mines
by the Zeus Joint Venture,  any net profits  generated by the Gold Hill Mill and
the first $500,000 of any profits  generated through the operations of the Mogul
Mine by Newmineco plus 20% of any profits thereafter, all such operations are in
the development  stage and have been  generating  losses and negative cash flows
and management  cannot assure that those  operations  will generate any positive
cash flows during 1997.

     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 Gems,  which Gems is required to provide  pursuant to
the Joint Venture Agreement.  Management believes,  but cannot assure, that such
financing and the financing needed to


                                       37
<PAGE>


commence operations at the Franklin Mines and the Mogul Mine will be provided by
Gems during  1997,  and that the  Company  will  remain  dependent  on its Joint
Venture partner as its primary source of financing for its operations until such
time, if any, as the Company begins to receive cash flows from its investments.

     During the first four months of 1997, Gems repaid advances from the Company
and made advances to the Company totaling approximately $300,000. These advances
were used,  among other things,  to pay legal and accounting  fees in connection
with the  Company's  public  filings  to  satisfy  obligations  arising  under a
settlement  of certain  litigation  to pay  delinquent  real estate taxes and to
satisfy  obligations  for remedial work at the Franklin Mines and Franklin Mill.
The  management  of the Company  believes that Gems will continue to fulfill its
commitment and make such advances until such time, if any, as the Company begins
to receive cash flows from its investments.

     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 and/or the Mogul Mines during the
third  quarter of 1997.  The  management of the Company has been informed by the
management  of Gems that Gems has or will  provide the funds  needed to complete
the  rehabilitation  and  upgrading of the existing  plant,  equipment  and mine
workings to facilitate the commencement of such operations.

     Although the ultimate goal is to have both the Franklin Mines and the Mogul
Mine in operation simultaneously, no definitive plans have been made as to which
mine will be operated first.  Based on limited operations at the Mogul Mines and
initial assay  reports,  management  believes that the Mogul Mines may produce a
higher grade of ore than that produced by the Franklin  Mines and,  accordingly,
management  anticipates  that  operations  will commence  initially at the Mogul
Mine. Any cash flow generated  would then be used to assist in the  commencement
of operations at the Franklin Mines.

     With the addition of the Gold Hill Mill,  the Company will own the only two
permitted  mills in its mining district once the Franklin Mill and the Gold Hill
Mill become operational.  To be able to commence milling operations, the Company
will have to obtain  sufficient  working  capital 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.

     In addition to funds committed by Gems,  management is considering  raising
capital by mortgaging the Gold Hill Mill property. The management of the Company
believes that,  based on the fair value of the Gold Hill Mill  property,  it can
raise a minimum  of  $1,000,000  using  conventional  mortgage  financing,  with
guarantees from Gems and its principals.  Such funds would be used to supply the
working capital  initially  needed to commence  operations at the Gold Hill Mill
and as an  alternative  means of financing  operations  at the  Franklin  Mines,
Franklin Mill and the Mogul Mine.


                                       38
<PAGE>

     Management  also believes  that, at a minimum,  the Company will be able to
obtain  sufficient  financing  from Gems and/or  mortgage loans on the Gold Hill
Mill property to enable it to meet its working capital  requirements  through at
least December 31, 1997.

Results of Operations

     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 expenses in 1996 of $505,414 offset by
the  effects  of a  nonrecurring,  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  expenses 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 Mines 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.




                                       39
<PAGE>


Item 7. Financial Statements and Supplementary Data

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



                                       40


<PAGE>

                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)





                          INDEX TO FINANCIAL STATEMENTS
                                    (Item 7)


                                                                          PAGE
                                                                          ----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                   F-2

BALANCE SHEETS
  DECEMBER 31, 1996 AND 1995                                               F-3

STATEMENTS OF OPERATIONS
  YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
  PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
  DECEMBER 31, 1996                                                        F-4

STATEMENTS OF STOCKHOLDERS' EQUITY
  YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
  PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
  DECEMBER 31, 1996                                                      F-5/11

STATEMENTS OF CASH FLOWS
  YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
  PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
  DECEMBER 31, 1996                                                      F-12/13

NOTES TO FINANCIAL STATEMENTS                                            F-14/37




                                      * * *

                                       F-1


<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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


We have audited the accompanying balance sheets of FRANKLIN  CONSOLIDATED MINING
CO., INC. (A Development Stage Enterprise) as of December 31, 1996 and 1995, and
the related  statements of operations,  stockholders'  equity and cash flows for
the years then ended and for the period  from  December 1, 1976  (inception)  to
December 31, 1996.  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 audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Franklin  Consolidated  Mining
Co., Inc. as of December 31, 1996 and 1995,  and its results of  operations  and
cash flows for the years then ended and for the  period  from  December  1, 1976
(inception)  to  December  31,  1996,  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 further 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,  1996,  has a  substantial  working  capital
deficiency. As a result, it was in default with respect to payments on a secured
promissory note and on convertible debentures and substantially dependent on its
joint venture partner 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.

                                     J. H. COHN LLP

Roseland, New Jersey
April 3, 1997, except for
  Note 11 as to which the
  date is April 30, 1997

                                       F-2


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995

                      ASSETS                           1996           1995
                      ------                       ------------    ------------

Current assets:
  Cash                                             $        127    $    118,176
   Prepaid expenses                                     107,979
   Advances from joint venture partner                  266,438
                                                   ------------    ------------
         Total current assets                           374,544         118,176

Mining, milling and other property and
   equipment, net of accumulated depre-
   ciation and depletion of $1,837,180
   and $1,715,194                                     6,311,128       3,848,114
Investment in equity investee                           150,000
Mining reclamation bonds                                126,875          45,000
                                                   ------------    ------------

         Totals                                    $  6,962,547    $  4,011,290
                                                   ============    ============


     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   12.25% convertible debentures                   $    145,000    $    145,000
   9.5% convertible note payable to joint
    venture partner                                     600,000
   Other notes payable                                   80,000
   Accounts payable and accrued expenses                553,883         298,016
   Advances to joint venture partner                                    313,688
                                                   ------------    ------------
         Total current liabilities                    1,378,883         756,704

8% mortgage note payable to joint venture
  partner                                               586,419
15% convertible notes                                                   200,000
Excess of equity in net losses of joint ven-
   ture over investment                                 133,220         120,270
                                                   ------------    ------------
        Total liabilities                             2,098,522       1,076,974
                                                   ------------    ------------

Commitments and contingencies

Stockholders' equity:
   Common stock, par value $.01 per share;
     100,000,000 shares authorized;
      90,583,020 and 69,135,920 shares issued
      and outstanding                                   905,830         691,359
   Additional paid-in capital                        15,154,264      12,471,502
   Deficit accumulated in the development
      stage                                         (11,196,069)    (10,228,545)
                                                   ------------    ------------
         Total stockholders' equity                   4,864,025       2,934,316
                                                   ------------    ------------

         Totals                                    $  6,962,547    $  4,011,290
                                                   ============    ============


See Notes to Financial Statements.

                                       F-3


<PAGE>

                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                            STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                                                            Cumulative
                                                                               from
                                               1996            1995          Inception
                                           ------------    ------------    ------------
<S>                                        <C>             <C>                  <C>    
Revenues:
   Sales                                                                   $    876,082
   Interest income                         $      2,351    $      1,060         540,887
   Other income                                                                  75,000
                                           ------------    ------------    ------------
         Totals                                   2,351           1,060       1,491,969
                                           ------------    ------------    ------------

Expenses:
   Mine expenses                                                              3,360,793
   Write-down of inventories                                                    223,049
   Depreciation and depletion                   121,986         122,143       2,032,529
   General and administrative
      expenses                                  732,701         227,287       5,030,432
   Interest expense                             102,238          92,434         595,838
   Amortization of debt issuance
      expense                                                                   683,047
   Equity in net loss of joint
      venture                                    12,950          15,540         133,220
   Loss on settlement of claims
      by joint venture partner                                  468,000         468,000
   Loss on settlement of litigation                                             100,000
   Loss on investment in oil and
      gas wells                                                                  61,130
                                           ------------    ------------    ------------
         Totals                                 969,875         925,404      12,688,038
                                           ------------    ------------    ------------

Net loss                                   $   (967,524)   $   (924,344)   $(11,196,069)
                                           ============    ============    ============


Weighted average shares outstanding          74,284,324      49,035,351
                                           ============    ============

Net loss per common share                         $(.01)          $(.02)
                                                  =====           =====
</TABLE>



See Notes to Financial Statements.

                                       F-4


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                        Accumulated
                                                                         Additional       in 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
   Noncash:
   Related par-
        ties                              925,000            9,250                                                            9,250
      In exchange
        for shares
        of Gold
        Developers
        and Pro-
        ducers,
        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 com-
   mon stock:
   Pursuant to
      public offer-
      ing, net of
      underwriting
      expenses of
      $11,026                             588,200            5,882          278,113                                         283,995
   Cash                                   225,000            2,250          240,627                                         242,877
   Noncash                                  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
   Noncash - re-
      lated parties                        40,000              400           59,600                                          60,000
   Noncash - 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 com-
   mon stock:
   Cash                                   289,750            2,898          837,102                                         840,000
   Noncash                                 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
</TABLE>


                                               F-5


<PAGE>

                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                        Accumulated
                                                                         Additional       in the
                                                         Common           Paid-in       Development       Treasury
                                          Shares          Stock           Capital          Stage            Stock           Total
                                        ---------      -----------      -----------     -----------      -----------     -----------
<S>                                       <C>          <C>              <C>             <C>               <C>           <C>        
Issuance of com-
   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
   Noncash                                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

Issuance of common
   stock:
   Cash                                   861,006           8,610         755,516                                           764,126
   Noncash                                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 com-
   mon stock:
   Cash                                 1,273,134          12,732       1,176,818                                         1,189,550
   Noncash                                 70,834             708          70,126                                            70,834
   Exercise of
      stock op-
      tions by:
      Related par-
         ties                             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
</TABLE>

                                               F-6


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996



<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                        Accumulated
                                                                         Additional       in the
                                                         Common           Paid-in       Development       Treasury
                                          Shares          Stock           Capital          Stage            Stock           Total
                                        ---------      -----------      -----------     -----------      -----------     -----------
<S>                                       <C>          <C>              <C>             <C>               <C>           <C>        
Issuance of common
   stock:
   Cash                                  1,201,700     $    12,017     $ 1,139,683                                      $ 1,151,700
   Noncash                                  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 com-
   mon stock:
   Cash                                    421,308           4,213         295,866                                          300,079
   Noncash                                  10,000             100           7,400                                            7,500
   Exercise of
      stock op-
      tions by:
      Related par-
         ties                              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

Issuance of common
   stock:
   Cash                                    569,000           5,690         294,810                                          300,500
   Noncash - re-
      lated parties                        160,000           1,600          78,400                                           80,000
   Noncash - 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
</TABLE>


                                               F-7


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                                                                         Deficit
                                                                                       Accumulated
                                                                      Additional         in the
                                                      Common            Paid-in        Development        Treasury
                                       Shares          Stock            Capital           Stage            Stock           Total
                                     ---------       -----------      -----------      -----------      -----------     -----------
<S>                                  <C>             <C>               <C>             <C>               <C>            <C>        
Issuance of common
   stock:
   Cash                              2,604,368      $    26,044      $ 1,261,257                                        $ 1,287,301
   Noncash - re-
      lated parties                    202,000            2,020           68,880                                             70,900
   Noncash - 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 - noncash
   - related par-
   ties                                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, 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
   Noncash - others                    283,666            2,836           31,030                                             33,866
   Noncash - re-
      lated parties                    210,000            2,100           29,400                                             31,500
   Private place-
      ment:
      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)
</TABLE>


                                               F-8


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996



<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                        Accumulated
                                                                         Additional       in the
                                                         Common           Paid-in       Development       Treasury
                                          Shares          Stock           Capital          Stage            Stock           Total
                                        ---------      -----------      -----------     -----------      -----------     -----------
<S>                                    <C>              <C>              <C>             <C>             <C>            <C>        
Compensation re-
   sulting 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

Sale of Under-
   writer's stock
   warrants                                                                      100                                            100

Issuance of common
   stock:
   Cash                                    335,000            3,350           41,875                                         45,225
   Noncash - 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
   Noncash -
      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
   Noncash -
      others                             1,729,609           17,296          348,762                                        366,058
   Noncash - re-
      lated parties                         12,120              121              485                                            606
</TABLE>

                                               F-9


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996



<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                        Accumulated
                                                                         Additional       in the
                                                         Common           Paid-in       Development       Treasury
                                          Shares          Stock           Capital          Stage            Stock           Total
                                        ---------      -----------      -----------     -----------      -----------     -----------
<S>                                  <C>            <C>              <C>             <C>              <C>              <C>

   Noncash - exer-
      cise of op-
      tions by re-
      lated 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 com-
      mon stock -
      related par-
      ties                                                                 (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
   Noncash - others                     150,000            1,500           13,500                                            15,000
   Noncash - set-
      tlement of
      litigation                      1,000,000           10,000           90,000                                           100,000
   Noncash - exer-
      cise of op-
      tions by re-
      lated 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

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

</TABLE>

                                               F-10


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996



<TABLE>
<CAPTION>
                                                                                            Deficit
                                                                                           Accumulated
                                                                            Additional       in the
                                                         Common              Paid-in       Development    Treasury
                                               Shares         Stock          Capital          Stage         Stock         Total
                                              ---------    -----------     ------------    -----------   -----------   -----------
<S>                                           <C>          <C>             <C>             <C>           <C>            <C>
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 par-
      ties and
      accrued in-
      terest                                  8,679,797          86,798         590,227                                     677,025
   Exchange of
      shares for
      profit parti-
      cipation in-
      terests                                 2,700,000          27,000         (27,000)
   Net loss                                                                                $   (924,344)                   (924,344)
                                             ----------    ------------    ------------    ------------                 ----------- 

   Balance, Decem-
      ber 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 con-
   vertible notes                             4,294,770          42,948         375,792                                      418,740
Repayments of loan
   from joint ven-
   ture 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, Decem-
   ber 31, 1996                              90,583,020    $    905,830    $ 15,154,264      11,196,069)   $     --     $ 4,864,025
                                           ============    ============    ============    ============    ==========   =========== 
</TABLE>


See Notes to Financial Statements 

                                               F-11


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996



<TABLE>
<CAPTION>
                                                                                                                         Cumulative
                                                                                                                            from
                                                                             1996                    1995                Inception
                                                                       ------------            -------------           -------------
<S>                                                                    <C>                     <C>                     <C>          
Operating activities:
   Net loss                                                            $   (967,524)           $   (924,344)           $(11,196,069)
   Adjustments to reconcile net
      loss to net cash used in operat-
      ing activities:
      Depreciation and depletion                                            121,986                 122,143               2,032,529
      Amortization of debt issuance
         expense                                                                                                            683,047
      Value of common stock issued
         for:
         Services and interest                                              355,437                                       1,325,714
         Settlement of litigation                                                                                           100,000
         Settlement of claims by joint
            venture partner                                                                         468,000                 468,000
      Compensation resulting from
         stock options granted                                                                                              311,900
      Value of stock options granted
         for services                                                                                                       112,500
      Equity in net loss of joint
         venture                                                             12,950                  15,540                 133,220
      Other                                                                                                                  (7,123)
      Changes in operating assets
         and liabilities:
         Prepaid expenses                                                  (107,979)                                       (107,979)
         Other current assets                                                                            71
        Interest accrued on mining
          reclamation bonds                                                  (1,875)                                         (1,875)
         Accounts payable and accrued
            expenses                                                        274,607                 138,305                 736,356
                                                                       ------------            ------------            ------------
               Net cash used in operat-
                 ing activities                                            (312,398)               (180,285)             (5,409,780)
                                                                       ------------            ------------            ------------

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                                                                           (234,435)               (255,319)
                                                                       ------------            ------------            ------------
               Net cash used in invest-
                 ing activities                                            (165,000)               (234,435)             (5,500,673)
                                                                       ------------            ------------            ------------
</TABLE>


                                               F-12


<PAGE>




                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                  AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
                              TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                        Cumulative
                                                                                           from
                                                      1996             1995             Inception
                                                   ---------         ---------         ------------
<S>                                                <C>                                 <C>         

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 under-
      writing costs                                                                         (63,814)
   Proceeds from exercise of
      stock options                                                                         306,300
   Issuance of convertible de-
      bentures and notes                             200,000         $ 200,000            1,505,000
   Proceeds of advances from joint
      venture partner                                                  331,980              526,288
   Advances to joint venture
      partner                                       (218,251)                              (218,251)
   Payments of debt issuance
      expenses                                                                             (164,233)
   Proceeds of other notes and
      loans payable                                   80,000                                768,000
      Repayments of other notes and
      loans payable                                                                        (120,000)
   Proceeds of loans from affiliate                                                          55,954
   Repayments of loans from affili-
      ate                                                                                   (48,661)
                                                   ---------         ---------         ------------
         Net cash provided by financ-
            ing activities                           359,349           531,980           10,910,580
                                                   ---------         ---------         ------------

Increase (decrease) in cash                         (118,049)          117,260                  127

Cash, beginning of period                            118,176               916                 --
                                                   ---------         ---------         ------------

Cash, end of period                                $     127         $ 118,176         $        127
                                                   =========         =========         ============


Supplemental disclosure of cash flow data:
   Interest paid                                   $    --           $   4,441         $   298,868
                                                   =========         =========         ============
</TABLE>





See Notes to Financial Statements.

                                               F-13


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation:

     Organization:

          Franklin  Consolidated  Mining Co.,  Inc. (the  "Company"),  which was
          originally  incorporated  on  December  1, 1976  under the laws of the
          State  of  Delaware,   is  principally  engaged  in  the  exploration,
          development  and mining of precious and nonferrous  metals,  including
          gold, silver,  lead, copper and zinc. The Company owns directly or has
          an indirect  interest in a number of precious  and  nonferrous  metals
          properties.

          The Company holds the exclusive  right to explore,  develop,  mine and
          extract all minerals  located in 28 patented mining claims  comprising
          approximately  322  acres,  in which  the  Company  holds  100%  lease
          interests  (the  "Hayden/Kennec  Leases") and 23  additional  owned or
          leased mining properties  (collectively,  the "Franklin Mine"), all of
          which are located near Idaho Springs in Clear Creek County,  Colorado.
          It also  constructed a crushing and flotation mill which is located on
          the site of the Franklin Mine (the "Franklin Mill").

          During 1996, as further  explained in Note 3, the Company acquired (i)
          the Gold Hill Mill,  a fully  permitted  milling  facility  located in
          Boulder  County,  Colorado and (ii) a 20% interest in  Newmineco,  LLC
          ("Newmineco"),  a Colorado limited liability company,  which holds the
          exclusive   mining  rights   related  to  the  Mogul  Tunnel  and  the
          surrounding  claims located in the Spencer Mountains of Colorado known
          as the "Mogul Mines."

          During  February  1993,  the  Company  entered  into a  Joint  Venture
          Agreement with Island Investment Corp.  ("Island"),  which at the time
          was an unaffiliated  company,  and formed Zeus No. 1 Investments  (the
          "Joint Venture"), a California general partnership, for the purpose of
          developing  the Franklin Mine and Mill.  Among other things,  the Zeus
          Joint Venture  Agreement (i) required Island to provide both technical
          and financial support to the Joint Venture,  (ii) required the Company
          to  contribute to the Joint Venture the rights to the exclusive use of
          its assets  (including  its lease  interests)  related to the Franklin
          Mine and Mill and (iii)  originally  provided that after the return of
          any  initial  capital  contributions  and certain  priority  payments,
          Island and the Company  would  receive 50% of any  partnership  income
          until each party had received  $15,000,000;  thereafter Island and the
          Company would receive 73% and 27%,  respectively,  of any  partnership
          income. In May 1993, Island assigned its interest in the Joint Venture
          to its 91%-owned subsidiary, Gems & Minerals Corp. ("Gems").


                                      F-14


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation (continued):

     Organization (concluded):

          Effective in August 1994,  the Company and Island  agreed to amend the
          Zeus Joint Venture  Agreement to provide for, among other things,  the
          waiver of priority  payments  and an  adjustment  to the  distribution
          arrangement  whereby 70% and 30% of the Joint Venture's income or loss
          (as defined) would be allocated to Gems and the Company, respectively.
          Effective in September  1995,  the Company,  Island and Gems agreed to
          further amend the Zeus Joint Venture  Agreement to provide for,  among
          other things, the allocation of 82.5% and 17.5% of the Joint Venture's
          income or loss (as defined) to Gems and the Company, respectively (see
          Note 5).

          During 1993,  operations at the mining properties  consisted primarily
          of the efforts by the Joint  Venture to develop  and  improve  mineral
          recovery  methodology,  which were financed primarily by Island's cash
          capital  contributions  of approximately  $430,000.  During 1994, such
          operations  consisted  primarily  of repair  and  remediation  work to
          comply  with  environmental  regulatory  requirements,   further  site
          preparation, metallurgical analysis and the planning of an exploratory
          drilling program to further prove the Company's reserves. During 1995,
          such operations  consisted  primarily of a comprehensive core drilling
          and  analysis  program (the  "Analysis  Program").  During 1996,  such
          operations  consisted  primarily of additional  repair and remediation
          work needed to comply with environmental regulatory requirements.

          Although  there are extensive  shafts,  tunnels and a mill in place on
          the Franklin Mine site, which management  believes would support a 150
          ton per day  operation,  the Joint  Venture  and the  Company  had not
          conducted any significant  commercial mining or milling  operations at
          that site through December 31, 1996. In addition,  the Company had not
          conducted any milling  operations at the Gold Hill Mill, and Newmineco
          had not conducted any significant  commercial mining operations at the
          Mogul Mine site,  through December 31, 1996.  Therefore,  the Company,
          the Joint Venture and  Newmineco  had not  generated  any  significant
          revenues through, and were still in the development stage, at December
          31, 1996.


                                      F-15


<PAGE>


                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                         NOTES TO FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation (continued): 

     Basis of presentation:

          The accompanying financial statements have been prepared assuming that
          the Company will continue as a going  concern.  However,  as explained
          above, the Company is a development  stage enterprise whose operations
          have generated  recurring losses and cash flow  deficiencies  from its
          inception.  As of December 31, 1996, the Company had a cash balance of
          $127, an accumulated  deficit of  approximately  $11,196,000,  current
          liabilities  of  $1,379,000  and  a  working  capital   deficiency  of
          $1,004,000,  and,  as  explained  in Notes 6 and 7, the Company was in
          default with respect to the payment of the  principal  balance and the
          accrued interest on its outstanding secured promissory note and 12.25%
          convertible  debentures.  Certain accounts payable were also past due.
          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  $25,000 per month during 1997.  Although the Company is
          entitled to distributions  of 17.5% of any net profits  generated from
          the operations of the Franklin  Mines by the Zeus Joint  Venture,  any
          net profits  generated by the Gold Hill Mill and the first $500,000 of
          any profits  generated  through the  operations  of the Mogul Mines by
          Newmineco plus 20% of any profits thereafter,  all such operations are
          in the development  stage and have been generating losses and negative
          cash flows and  management  cannot assure that those  operations  will
          generate any  positive  cash flows  during  1997.  Such matters  raise
          substantial  doubt about the Company's  ability to continue as a going
          concern.

          Gems, the Company's  Joint Venture  partner,  will be responsible  for
          providing the remaining  capital resources that will be needed for the
          commencement  of  operations at the Franklin Mine and the Mogul Mines,
          and the  Company  will be  responsible  for  obtaining  the  remaining
          capital  resources  that  will  be  needed  for  the  commencement  of
          operations at the Gold Hill Mill. 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 as a going concern will be dependent  upon
          the provision of financing by Gems,  which Gems is required to provide
          pursuant to the Joint Venture Agreement,  the continued forbearance of
          the holders of its secured promissory note and convertible  debentures
          and, ultimately,  the ability of the Joint Venture, the Gold Hill Mill
          and Newmineco to conduct profitable mining and milling operations on a
          sustained basis.


                                      F-16


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation (concluded):

     Basis of presentation (concluded):

          Management  believes,  but cannot assure,  that such financing and the
          financing needed to commence  operations at the Franklin Mines and the
          Mogul Mines will be provided by Gems during 1997, and that the Company
          will  remain  dependent  on its Joint  Venture  partner as its primary
          source of financing for its operations until such time, if any, as the
          Company begins to receive cash flows from its investments.  During the
          first four months of 1997,  Gems repaid  advances from the Company and
          made  advances to the Company  totaling  approximately  $300,000.  The
          management of the Company  believes that Gems will continue to fulfill
          its  commitment and make such advances until such time, if any, as the
          Company begins to receive cash flows from its investments.

          In addition to funds  committed  by Gems,  management  is  considering
          raising  capital by mortgaging the Gold Hill property.  The management
          of the Company believes that, based on the fair value of the Gold Hill
          property,  it can raise a minimum  of  $1,000,000  using  conventional
          mortgage financing, with guarantees from Gems and its principals. Such
          funds would be used to supply the working capital  initially needed to
          commence  operations at the Gold Hill Mill and as an alternative means
          of financing  operations at the Franklin  Mines and Mill and the Mogul
          Mines.

          Management also believes that, at a minimum,  the Company will be able
          to obtain sufficient  financing from Gems and/or mortgage loans on the
          Gold Hill  property to enable the Company to meet its working  capital
          requirements through at least December 31, 1997.


                                      F-17


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 2 - Summary of significant accounting policies:

     Use of estimates:

          The  preparation of financial  statements in conformity with generally
          accepted  accounting  principles requires management to make estimates
          and assumptions  that affect certain reported amounts and disclosures.
          Accordingly, actual results could differ from those estimates.

     Mining, milling and other property and equipment:

          Mining,  milling and other property and equipment is recorded at cost.
          Costs  incurred to improve and develop  mining and milling  properties
          are capitalized.  Mine development expenditures incurred substantially
          in advance of production are capitalized.

          Depletion  of mining and  milling  improvements  and mine  development
          expenditures is computed using the units of production method based on
          probable  reserves  (there were no charges for  depletion  in 1996 and
          1995 since the  Company's  mining and milling  facilities  were not in
          operation).   Depreciation   of  equipment   is  computed   using  the
          straight-line  method over the  estimated  useful lives of the related
          assets.

     Impairment of long-lived assets:

          Effective as of January 1, 1996, the Company adopted the provisions of
          Statement of Financial  Accounting  Standards No. 121, "Accounting for
          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 are then measured by comparing the fair
          value of assets to their  carrying  amounts.  The adoption of SFAS 121
          had no material effect on the Company's 1996 financial statements.

     Joint Venture:

          The Company  accounts for its investment in the Joint Venture pursuant
          to the equity method.  As a general partner in the Joint Venture,  the
          Company would be liable to creditors and certain other parties for any
          obligations  the Joint Venture might  ultimately be unable to satisfy.
          Accordingly,  the Company  records its equity in the net losses of the
          Joint Venture even though they exceed the Company's total investment.


                                      F-18


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 2 - Summary of significant accounting policies (concluded):

     Revenue recognition:

          Revenues from sales of mineral  concentrates will be recognized by the
          Company and the Joint  Venture only upon  receipt of final  settlement
          funds from the smelter.

     Environmental remediation:

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

     Income taxes:

          The  Company  accounts  for income  taxes  pursuant  to  Statement  of
          Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
          which utilizes an asset and liability approach to financial accounting
          and reporting for income taxes.  Under this approach,  deferred income
          tax  assets  and  liabilities  are  computed  annually  for  temporary
          differences  between the  financial  statement and tax bases of assets
          and liabilities  that will result in taxable or deductible  amounts in
          the  future  based on  enacted  tax laws and rates  applicable  to the
          periods  in which the  differences  are  expected  to  affect  taxable
          income.  Valuation allowances are established when necessary to reduce
          deferred tax assets to the amount expected to be realized.  The income
          tax  provision  or credit is the tax  payable  or  refundable  for the
          period  plus or minus the change  during the  period in  deferred  tax
          assets and liabilities.


                                      F-19


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



Note 3 - Acquisitions of mining and milling properties:

          On July 3,  1996,  the  Company  acquired  the Gold  Hill  Mill from a
          wholly-owned  subsidiary of Gems, the Company's Joint Venture partner,
          in exchange for an 8% mortgage note with an initial  principal balance
          of  $2,500,000  (see  Notes 7 and 10).  The Gold  Hill Mill is a fully
          permitted  milling facility located in Boulder County,  Colorado.  The
          Company will be responsible  for the  development and operation of the
          Gold Hill Mill.

          On  September  26,  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. Newmineco was a newly-formed, inactive company at
          the time the Company  acquired its 20% interest.  Newmineco  holds the
          exclusive  mining  rights  related to the Mogul  Mines  located in the
          Spencer  Mountains  of  Colorado.  Gems  will be  responsible  for the
          development  and operation of the Mogul Mines. As a result of problems
          concerning  permitting  and various other issues  related to the Mogul
          Mines,  the purchase  price for the Company's 20% interest was reduced
          to $150,000 on,  effectively,  December 31, 1996 (see Notes 7 and 10).
          Pursuant to the agreement with the other  investors in Newmineco,  the
          Company  will be  entitled  to the first  $500,000  of any profits (as
          defined) to be  distributed by Newmineco and 20% of any of its profits
          thereafter.


                                      F-20


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



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  consisted of the
          following at December 31, 1996 and 1995:

                                                              1996       1995
                                                         ----------   ----------
                         Land                            $  345,000
                         Machinery and equipment          2,217,220   $1,219,220
                         Mine and mill improvements       5,490,278    4,248,278
                         Furniture and fixtures              11,714       11,714
                         Automotive equipment                84,096       84,096
                                                         ----------   ----------
                                                          8,148,308    5,563,308
                         Less accumulated depreciation
                            and depletion                 1,837,180    1,715,194
                                                         ----------   ----------

                              Total                      $6,311,128   $3,848,114
                                                         ==========   ==========



                                      F-21


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 5 - Status of the Zeus Joint Venture Agreement:

          The Zeus Joint  Venture  Agreement,  as amended  effective  August 31,
          1994,  required  (i) Gems to  provide  both  technical  and  financial
          support to the Joint  Venture;  (ii) the Company to  contribute to the
          Joint Venture the rights to the  exclusive use of its lease  interests
          and other  assets  related to the  mining  properties  in Clear  Creek
          County, Colorado; (iii) the potential transfer of the Company's assets
          to the Joint  Venture;  (iv) the issuance to Gems of 6,000,000  common
          shares  of  the  Company,   subject  to  the   authorization   by  the
          stockholders of the Company of a sufficient  number of shares for such
          issuance and certain other  conditions;  and (v) the allocation of 70%
          and 30% of the Joint Venture's income or loss (as defined) to Gems and
          the Company, respectively.

          During the latter part of 1994,  the  management  of Gems informed the
          Board of Directors of the Company that prior to allocating substantial
          additional  resources  to the mining  facilities  owned by the Company
          (which  the Joint  Venture  is  responsible  for  developing)  and the
          commencement of commercial  mining  operations,  it wished to (i) more
          clearly define the relationships between the parties to the Zeus Joint
          Venture  Agreement,  as amended  effective  August 31, 1994,  and (ii)
          conduct  the  Analysis  Program to  ascertain  the scope and extent of
          proven  and  probable  reserves  of mine ore  containing  economically
          recoverable minerals not previously identified or reported.

          Effective in December 1994, the Company,  Island and Gems entered into
          a Binding Exchange Letter Agreement. Pursuant to such Binding Exchange
          Letter  Agreement,  Gems agreed  that,  upon  consummation  of a final
          agreement,  it would transfer, in a tax free exchange,  certain of its
          assets for approximately 270,000,000 newly issued common shares of the
          Company,  together  with  certain  demand and  piggyback  registration
          rights and anti-dilution  rights. The assets that were to be exchanged
          by Gems included (i) Gems' 70% interest in the Joint Venture; (ii) the
          exclusive   rights  to  the  use  of  Gems'   proprietary   processes,
          technologies  and  techniques;  and (iii) property  rights acquired by
          Gems pursuant to a November 1994 agreement in principle related to the
          Hayden lease (see Note 8).

          The Binding  Exchange  Letter  Agreement  further  provided  that if a
          definitive  Exchange Agreement was not consummated and approval of the
          Company's  stockholders was not obtained in a timely fashion, then the
          Company  would be obligated to issue  6,000,000  shares to Gems or, if
          that were not  possible,  pay Gems at least  $1,500,000  as a priority
          payment.



                                      F-22


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 5 - Status of the Zeus Joint Venture Agreement (continued)

          The Company was unable to obtain the approval of its stockholders in a
          timely fashion and Gems made certain claims for compensation under the
          Exchange  Agreement.  As a result,  in  September  1995,  the Company,
          Island and Gems entered into an agreement (the "Settlement Agreement")
          whereby the parties  acknowledged that the Exchange  Agreement was not
          timely  consummated  due to the  failure of the  Company to obtain the
          approval of its stockholders for an increase in its authorized capital
          stock in a timely manner. In settlement of the parties' claims against
          the Company for such failure to perform,  the Company  agreed to issue
          6,000,000  shares of its common stock to Gems or, in the  alternative,
          to pay $1,500,000 as upset compensation to Gems (the "Upset Fee"). The
          Company   further  agreed  to  use  its  best  efforts  to  cause  its
          stockholders  to approve an increase in its  authorized  capital stock
          from  50,000,000  to  100,000,000  shares of common stock at an annual
          meeting of  stockholders  in  November  1995 to enable the  Company to
          issue the shares to Gems.  In the event that the Company,  after using
          its best efforts,  was unable to obtain the requisite  approval of its
          stockholders,  Gems  agreed to reduce the Upset Fee to  $600,000.  The
          parties  further  agreed  to  convert  $249,600  of the  total  amount
          previously advanced to the Company by Gems to cover operating expenses
          into 3,200,000  additional shares of its common stock,  subject to the
          approval  of  the  Company's  stockholders  of  the  increase  in  its
          authorized  capital  stock  referred  to above.  Finally,  as  further
          consideration  for the  settlement of their claims,  Gems' interest in
          the Joint Venture was  increased to 82.5% and the  Company's  interest
          was reduced to 17.5%. Gems was also given certain demand and piggyback
          registration  rights  with  respect  to shares to be issued  under the
          Settlement Agreement.

          On November 30, 1995,  the  stockholders  of the Company  approved the
          proposed increase in the authorized  capital stock of the Company and,
          as required by the Settlement Agreement, in December 1995, the Company
          issued  to  Gems  3,200,000  shares  of its  common  stock  to  reduce
          outstanding  advances by $249,600 and  6,000,000  shares of its common
          stock as  additional  consideration  for the  settlement  of claims by
          Gems.  Based on an estimated fair market value of $.078 per share, the
          Company recognized a loss on settlement of claims by its Joint Venture
          partner of $468,000 for the issuance of the 6,000,000 shares to Gems.



                                      F-23


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                         NOTES TO FINANCIAL STATEMENTS


Note 5 - Status of the Zeus Joint Venture Agreement (concluded):

          Based on  information  developed  through  the  Analysis  Program  and
          previously  available  geological data and reports,  the management of
          the Joint  Venture  believes  that the  application  of the  Company's
          proprietary  technologies  and processes should result in economically
          viable commercial mining operations at the Franklin Mine.

          The Company's  investment in the Joint Venture as of December 31, 1996
          and 1995, and the Joint Venture's  results of operations for the years
          then ended, in relation to those of the Company, were not material.

          From  time to time,  the  Company  receives  advances  from and  makes
          advances  to Gems.  Pursuant  to the Joint  Venture  agreement,  these
          advances are noninterest bearing and without a specific due date. As a
          result of such advances, the Company had a receivable of $266,438 from
          Gems at  December  31,  1996  and a  payable  of  $313,688  to Gems at
          December 31, 1995.

          During 1996,  the Company issued  2,316,000  shares of common stock to
          Gems and reduced the balance of its advances payable by $361,875 based
          on the estimated fair value of the shares issued.



                                      F-24


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



Note 6 - Other notes payable:

          Other notes payable was comprised as follows at December 31, 1996:

             12% unsecured demand note                               $20,000
             Secured promissory note (a)                              60,000
                                                                     -------

               Total                                                 $80,000
                                                                     =======

          (a)  The outstanding  principal  balance of the note became payable on
               July 18, 1996 and is overdue (see Note 8). The note is guaranteed
               by the Company's  Joint Venture  partner and certain  individuals
               and  is  collateralized   through  a  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.

                                      F-25


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS

Note 7 - Convertible and mortgage debt:

          The Company's convertible debt at December 31, 1996 and 1995 consisted
          of the following:


                                                      1996       1995
                                                    --------   --------
              12.25% convertible debentures (a)     $145,000   $145,000
              9.5% convertible secured promissory
                note payable to Joint Venture
                partner (b)                          600,000
              15% convertible notes (c)                         200,000
                                                    --------   --------

                   Totals                           $745,000   $345,000
                                                    ========   ========

          (a)  As of December 31, 1995,  the Company was in default with respect
               to  the  payment  of  the  $145,000   principal  balance  of  the
               debentures  and  accrued   interest   payable  for  the  quarters
               subsequent  to March 31,  1995.  The Company  sent notices to its
               debentureholders  in December  1995  asking for their  consent by
               February 15, 1996 to the further  extension of the maturity  date
               to December 31, 1996. It was also  contemplated  that  conversion
               rights  would also be extended at the  previous  rate of $.50 per
               share.  The Company  also agreed that it would make all  interest
               payments due to such holders  through  December 31, 1995,  prepay
               interest which will become due at the end of the first quarter of
               1996 and set up a fund  with the  Trustee  to secure  the  timely
               payment of the  principal  balance of the  debentures on December
               31,  1996.  Only one holder of a $1,000  debenture  rejected  the
               Company's request.

               While it was the  intention  of  management  and the  Company  to
               comply   with   the   terms   of   the   agreements    with   the
               debentureholders,  the  Company  has been  unable  to comply as a
               result of the liquidity and cash flow problems  described in Note
               1. As a result of its default and its continued failure to comply
               with the December 1995 agreements,  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  penalties.  Management
               cannot assure that there will be funds available for the required
               payments  or what the  effects  of any  actions  brought by or on
               behalf of the debentureholders will be.



                                      F-26


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



Note 7 - Convertible and mortgage debt (continued):

          (b)  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.   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,  effectively,
               December 31, 1996.  The $450,000  reduction in the purchase price
               was effectuated through an equivalent  reduction in the principal
               balance of the 8% mortgage  note that is also  payable to 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.

          (c)  In December 1995, the Company  commenced an offering  exempt from
               registration  pursuant  to Rule  505 of  Regulation  D of the 15%
               secured  convertible  promissory notes in the aggregate principal
               amount of  $1,500,000.  The Company  terminated  the  offering on
               February 5, 1996 after selling convertible notes in the aggregate
               principal  amount of $400,000,  of which $200,000 was outstanding
               at December 31, 1995 as shown above.  Each  convertible  note was
               scheduled to mature 18 months from the date of its issuance.  The
               notes were  convertible into shares of the Company's common stock
               after  April 1, 1996 at a  conversion  price  based on 75% of the
               average  market price of the Company's  common stock (as defined)
               for a specified  period  prior to  conversion.  During the second
               quarter of 1996,  the Company issued  4,294,770  shares of common
               stock upon the  conversion of all of the notes based on the total
               balance of the  principal  and accrued  interest  outstanding  of
               $418,740 and the conversion price of $.0975 per share.


                                      F-27


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



Note 7 - Convertible and mortgage debt (concluded):

          The $586,419  principal balance of the 8% mortgage note payable to the
          Joint Venture partner at December 31, 1996 represents the remainder of
          the $2,500,000  principal balance of the note issued by the Company to
          a  subsidiary  of Gems on July 3,  1996 as the  consideration  for the
          acquisition of the Gold Hill Mill facility.  In July 1996, the Company
          commenced  an offering  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  (see Note
          10). Upon  completion of the 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.  Effective December 31,
          1996, the principal balance was reduced by $450,000 as a result of the
          adjustment  to the purchase  price of its 20% interest in Newmineco as
          explained above.

          Accounts  payable and accrued  expenses at December 31, 1996  includes
          accrued interest on the 8% mortgage,  a portion of which was due as of
          September 30, 1996. The entire remaining  principal  balance of the 8%
          mortgage note,  which is due no later than July 3, 1999, is secured by
          the property and equipment related to the Gold Hill Mill.



                                      F-28


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



Note 8 - Commitments and contingencies:

     Lease commitments:

          The  Joint  Venture  was  primarily   formed  to  develop  the  mining
          properties  pursuant to the Company's  rights under the  Hayden/Kennec
          Leases,  and the future  success of its operations is dependent on its
          ability to utilize and extend those lease  rights  and/or to otherwise
          acquire the rights to the use of such properties and the extraction of
          the related resources.

          The Company entered into the Hayden/Kennec  Leases with the fee owners
          of 28 patented  mining  claims in Clear Creek  County on November  12,
          1976. Under the provisions of these leases, Franklin has the exclusive
          right to explore  for,  develop and mine and to extract  any  minerals
          found in the  mines,  lodes,  veins  and  dumps  located  thereon.  In
          addition, Franklin has certain water and mill operating rights.

          The  initial  terms of the  Hayden/Kennec  Leases were for 20 years at
          aggregate  monthly  rentals  equal to the  greater  of $2,000 or 5% of
          realized  proceeds  from the sale of minerals  derived from the leased
          property.  In  addition,  the  Company is  required to pay all related
          property  taxes and insurance  costs.  Rentals  amounted to $24,000 in
          1996 and 1995 and were paid by the Joint Venture.

          On November  19,  1996,  the Company  entered into an amendment to the
          Hayden/Kennec  Leases  with  respect to the  portion of the  leasehold
          attributable to Dorothy Kennec (the "Kennec  Amendment").  Pursuant to
          the terms of the Kennec  Amendment,  Kennec agreed to extend the terms
          of the  Hayden/Kennec  Leases as they  related  to her  portion of the
          leasehold  rights for one year.  The extension will expire on November
          12, 1997. In consideration  for such extension,  the Company agreed to
          increase the rental payment to Kennec under the original Hayden/Kennec
          Leases  from  $1,000 to $2,000 per  month.  Kennec  will also  receive
          104,000 shares of the common stock of the Company. All of the payments
          made under the Kennec  Amendment,  plus the value of the shares issued
          thereunder,  will be further  applied against the buy-out price of the
          property under the original Hayden/Kennec Leases.

          The  Hayden/Kennec  Leases grant the Company the right to purchase the
          mineral  rights to the leased  property upon the payment of $1,250,000
          less any previous rental payments.


                                      F-29


<PAGE>


                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note  8  -  Commitments  and   contingencies   (continued):

     Lease commitments(concluded):

          In the  event  that  the  Hayden/Kennec  Leases  are  terminated,  any
          leasehold or other improvements on the mining properties made by Gems,
          the Joint  Venture or the Company  become the  property of the lessors
          without  compensation  to Gems, the Joint Venture or the Company.  The
          Company has the right to assignment under the lease.

          To further secure the ability of the Joint Venture partners to exploit
          the  Clear  Creek  County  mining  properties,  Gems  entered  into an
          agreement  on December  21,  1995  (which was amended and  restated in
          September  1996) to purchase  all of the right  title and  interest of
          Audry Hayden in and to all mining claims and properties located on the
          property  which  is  subject  to the  Hayden/Kennec  Lease  as well as
          Hayden's interest under the Hayden Lease with the Company (the "Hayden
          Interests") for a purchase price of $75,000. In addition,  Gems agreed
          to pay Hayden $5,000 representing payment in full of back payments due
          and owing to Hayden by the  Company  on the Hayden  Lease and  further
          agreed  to pay to  Hayden  $1,000  per month for a period of 12 months
          commencing  on the date of the  Purchase  Agreement.  On the date upon
          which the final $1,000 installment is due to Hayden, Gems will pay the
          remaining  principal  balance of the purchase price which will consist
          of  $75,000  less the  initial  payment  of $5,000  advanced  for back
          payments on the Hayden Lease.  The management of Gems has informed the
          Company that it believes  that as a result of the  acquisition  of the
          Hayden  Interests,  the  interest  in the  surface  rights held by the
          Hayden  Lease and the  provisions  of the Kennec Lease that permit the
          exploration  and  development  of such  properties  by any  method  of
          mining,  the Joint Venture will have  adequate  access to the minerals
          during the term of the Kennec Lease and on a continuing  basis even if
          the Kennec Lease should expire and not be renewed by the Company.

     Environmental matters:

          During  November  1993,  the  Company  was  notified  by the  State of
          Colorado  Division of Minerals  and Geology (the "DMG") that the Joint
          Venture had failed to file a plan in the form of a Technical  Revision
          to address erosion,  sedimentation and run-off matters at the Franklin
          Mine in connection  with  continuation  of the Company's  state mining
          permit. As a result, the Company had to take certain remedial actions,
          increase its reclamation bond from $29,000 to $45,000 and pay a $5,000
          fine during 1994.



                                      F-30


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS

Note 8 - Commitments and contingencies (continued):

     Environmental matters (continued):
              
          In August 1994, the Company  received an informal  notice from the DMG
          of an  additional  violation  at the  Franklin  Mine  related to water
          run-off matters. The Company attempted to rectify the violations cited
          by the DMG but was  unable to do so in a timely  manner  because  such
          corrections required performance of work outside the boundaries of its
          then current permit. The Company agreed that it would refrain from any
          mining or milling  operations  at the Franklin  Mine until the DMG (i)
          amended  the  Company's  permit to enable it to perform  the  required
          technical and  remediation  work and (ii) determined that all required
          work was completed.

          In February 1996,  the DMG permitted the Company to commence  crushing
          activity at the Franklin Mine pursuant to another  prospecting permit.
          In March 1996,  the Company was notified  that it would be required to
          increase  its  land  reclamation  bond  by an  amount  that  would  be
          determined subsequently. In an effort to comply, the Company increased
          its  reclamation  bond from $45,000 to $93,000.  On or about March 28,
          1996,  the  Company  received  a  temporary  cease  and  desist  order
          prohibiting it from  conducting  mining and milling  operations at the
          Franklin  Mine until such time as all of the  violations  cited by the
          DMG were corrected.  In addition, the Mined Land Reclamation Bureau of
          Colorado (the "MLRB")  determined that the Company's  reclamation bond
          should be further increased to approximately $252,000.

          On April 24, 1996,  the Company was able to obtain the  $252,000  bond
          required by the MLRB from an independent  bonding  company in exchange
          for the deposit by the Company's  Joint Venture partner of $125,000 in
          a trust  account  maintained  for the benefit of the bonding  company,
          guarantees   from  the  Joint  Venture  partner  and  certain  of  its
          principals  and 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,  the cease and desist order
          was  vacated  on June 7,  1996 and the  Company  received  refunds  of
          approximately  $93,000  during  the  second  quarter  of 1996 from the
          mining reclamation bonds it had posted.

          On January 31, 1997, the Company received approval from the DMG of its
          March  6,  1996  amended  application  to  its  permit.  As a  result,
          management   believes   that   substantially   all  of  the  necessary
          environmental  and  regulatory  approvals  have been obtained that are
          needed to enable the Company to commence mining and milling operations
          at the Franklin Mine and/or the Mogul Mines during 1997.


                                      F-31


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 8 - Commitments and contingencies (concluded):

     Environmental matters (concluded):
               

          The amended permit,  among other things,  increases the permitted area
          of the Franklin  Mine to 42.5 acres and allows for the  processing  of
          ore on an unlimited basis. The amended permit further contemplates 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.

     Litigation:

          The Company is involved in various litigation as explained below:

          a)   The  Company,  the Joint  Venture,  Gems,  Island  and others are
               defendants  in an  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.

          b)   The  Company,  Island,  Newmineco  and others are  defendants  in
               litigation  involving  title to the  mining  claims  at the Mogul
               Mines.  This action was  instituted  by the former owners of such
               claims.  The Company intends to vigorously contest the action. In
               the opinion of legal counsel,  the defendants have valid defenses
               to all claims.

          c)   In April 1997,  the Company was notified by the Superior Court of
               New  Jersey  that it had  received a copy of a  complaint  by the
               holder of the $60,000 secured note,  which was due and payable in
               July 1996 (see  Note 6).  The  complaint  demanded,  among  other
               things,  payment of all  principal  and interest due. As of April
               14, 1997, the Company had not received service of such complaint.

          Management  believes  that,  to the extent  that any of the claims are
          finally  determined  to have  merit,  the  Company  has made  adequate
          provision for any amounts that may be due.  However,  management  also
          believes  that it is too early in the process to evaluate the possible
          outcome  of  these  claims  or  estimate  the  amount  or range of any
          additional  loss  or  the  likelihood  of  such  loss  occurring.   An
          unfavorable  resolution  of these  matters  could  result in  material
          liabilities  and/or  charges  which  have  not been  reflected  in the
          accompanying financial statements.



                                      F-32


<PAGE>


                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS

Note 9 - Income taxes:

          As  of  December  31,  1996,   the  Company  had  net  operating  loss
          carryforwards of approximately  $9,844,000  available to reduce future
          Federal  taxable  income  which,  if not used,  will expire at various
          dates  through  December 31, 2011.  Due to changes in the ownership of
          the  Company,  the  utilization  of these  loss  carryforwards  may be
          subject to substantial annual limitations.

          The  Company  has  offset  the  deferred   tax  asset  of   $3,347,000
          attributable  to the potential  benefits from such net operating  loss
          carryforwards  as of  December  31,  1996 by an  equivalent  valuation
          allowance due to the uncertainties related to the extent and timing of
          its future  taxable  income.  There were no other  material  temporary
          differences as of that date.

          The  expected  Federal  income  tax  benefit,  computed  based  on the
          Company's  pre-tax  losses in 1996 and 1995 and the statutory  Federal
          income tax rate, is reconciled to the actual tax benefit  reflected in
          the accompanying financial statements as follows:

                                                   1996         1995
                                                ---------    ---------

           Expected tax benefit at statutory
              rates                             $ 329,000    $ 314,000

           Decrease resulting from valuation
              allowance for benefits from net
              operating loss carryforwards       (329,000)    (314,000)
                                                ---------    ---------

                 Totals                         $      --    $      --
                                                =========    =========


                                      F-33


<PAGE>


                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS

Note 10- Stockholders' equity:

     Issuances of common stock:

          In May  1992,  the  Company  issued a series  of  promissory  notes to
          related  parties  and  others  in the  aggregate  principal  amount of
          $504,000  that bore  interest at 3% above a specified  prime rate.  In
          addition,  the  holders of notes in the  principal  amount of $450,000
          were  entitled,  under  certain  conditions,  to a 1%  interest in the
          profits (as  defined) of the  Company  for each  $50,000 of  principal
          amount  held  and,   accordingly,   held  total  profit  participation
          interests  of 9%.  In  July  1993,  Gems  was  assigned  notes  in the
          principal  amount of $200,000 and the related 4% profit  participation
          interests.

          During 1995, the Company entered into agreements for the conversion of
          all  of the  notes,  the  accrued  interest  thereon  and  the  profit
          participation  interests  whereby (i) the entire principal balance and
          the accrued  interest  payable at the  respective  dates of conversion
          which totaled $677,025 was converted at $.078 per share (the estimated
          fair  market  value  of  the  unregistered  shares)  into a  total  of
          8,679,797   shares  of  common  stock  and  (ii)  all  of  the  profit
          participation  interests  were converted at the rate of 300,000 shares
          for  each 1%  profit  participation  interest  held  into a  total  of
          2,700,000  shares of common  stock.  These  conversions  were  noncash
          transactions  and,   accordingly,   they  are  not  reflected  in  the
          accompanying 1995 statement of cash flows.


                                      F-34


<PAGE>


                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS


Note 10- Stockholders' equity (continued):

     Issuances of common stock (continued):

          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.

          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 the 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 7).

          In July 1996, the Company  commenced  another offering to unaffiliated
          parties  pursuant to  Regulation D of up to  10,000,000  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.



                                      F-35


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



Note 10- Stockholders' equity (concluded):

     Issuances of common stock (concluded):
                  
          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.

     Warrants issued for services:

          During 1995, the Company  issued  warrants for the purchase of 500,000
          shares of common stock at an exercise  price of $.01 per share as part
          of the  consideration  for services  provided to the  Company.  In the
          opinion of management, the fair value of the warrants was not material
          and  the  Company  did  not  recognize  any  expense  related  to such
          issuance. These warrants were returned to the Company in April 1997.

     Common stock reserved for issuance:

          At  December  31,  1996,  there were  290,000  shares of common  stock
          reserved  for  issuance  upon the  exercise of the 12.25%  convertible
          debentures  and  7,692,608  shares  reserved  for  issuance  upon  the
          exercise of the 9.5% note payable  that was  exercised on February 10,
          1997 (see Note 7).


                                      F-36


<PAGE>



                     FRANKLIN CONSOLIDATED MINING CO., INC.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS



Note 11- Subsequent events:

     Real estate taxes:

          As of  December  31,  1996,  the  Company  was  delinquent  in  paying
          approximately  $50,700 of the required taxes due (including  interest)
          on the  Franklin  Mine.  Clear  Creek  County had filed liens on those
          taxes in  arrears.  Certain of the liens  were sold  under  auction in
          October 1994.

          On April 30, 1997, the Company paid all of the delinquent  taxes which
          will cause the liens to be removed.

     Litigation:

          In April 1997,  the Company paid $45,000 in full  settlement of a case
          involving a fee dispute with a former legal counsel to the Company. As
          part of the settlement,  the plaintiff,  among other things,  returned
          warrants to purchase  500,000  shares of the  Company's  common  stock
          which had been issued to him in prior years.


                                      F-37


<PAGE>


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

     On December 26, 1995, the Company  notified  Wolinetz,  Gottlieb & Lafazan,
P.C. ("WGL") of its decision to dismiss the firm as its independent auditors and
of its intention to retain J.H. Cohn & Company ("J.H.  Cohn") as its independent
accountants  for year ended  December  1995.  The  decision  to dismiss  WGL was
approved by the Board of Directors of the Company.

     During  the two  most  recent  fiscal  years  of the  Company  prior to the
dismissal, none of the reports of WGL 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, WGL had modified
its  reports on the  financial  statements  of the  Company as a going  concern.
During  the two most  recent  fiscal  years and the  subsequent  interim  period
preceding the dismissal of WGL, there were no disagreements with the Company and
WGL  concerning   accounting   principles  or  practices,   financial  statement
disclosure, or auditing scope or procedure which would have caused WGL to make a
reference to the subject matter thereof in its report had such  disagreement not
been resolved to the satisfaction of WGL. The Company  thereafter  retained J.H.
Cohn & Company to act as their independent auditors in February, 1996.



                                       41
<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              49                 Chairman, President
                                                  Treasurer, Director

Robert Waligunda               50                 Secretary, Director

Robert J. Levin                50                 Vice President-Finance

Richard Brannon                47                 Vice President-West Coast
                                                  Operations

     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 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 has served as the Vice  President-Finance  of the
Company since  December,  1995.  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.


                                       42
<PAGE>



     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.

     To the Company's  knowledge and based solely on a review of such  materials
as are  required  by the  Securities  and  Exchange  Commission,  each  officer,
director or beneficial  holder of more than ten percent of the Company's  issued
and  outstanding  shares  of Common  stock  timely  filed all forms and  reports
required to be filed  pursuant to Section 16(a) of the  Securities  and Exchange
Act of 1934, as amended, during the fiscal year ended December 31, 1995; except,
with respect to Messrs. Brannon and Levin who have not made any required filings
under Section 16(a) and with respect to Mr. Anderson who has not filed an annual
report on Form 5 for fiscal year ended 1995 indicating the acquisition by him of
restricted securities in connection with the Anderson Note.

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.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     (a)  Certain Beneficial Owners of Common Stock

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

Gems & Minerals
Corp.; Island Investment
Corp.; Whitey Bear Trust,
 as a group (1)(2)            10,827,577                          11.8%

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

(1)  Gems  has the sole  right  to  direct  the  voting  or  disposition  of the
10,827,577  shares of the Common  Stock and to receive or direct the  receipt of
dividends  from, or the proceeds from the sale of, any such shares.  Through its
ownership of the controlling interest in Gems (91% of the voting stock),  Island
has the power to direct Gem's  actions with respect to such shares.  Through its
ownership of the controlling  interest in Island (91% of the voting stock),  the
Trust indirectly has the same power.  Such power of the Trust would be exercised
by the Trustee in his capacity as sole  Trustee of the Trust. 

(2) The amount of shares owned by Gems is as of December  31, 1996.  As of March
28, 1997, Gems had disposed of 7,200,000 additional shares, leaving 3,627,577 or
4% of the issued outstanding shares of common stock of the Company.


                                       43
<PAGE>


(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%


Directors and Executive
Officers as a Group                 4,381,660                           4.8%

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

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.


                                       44
<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.)



                             45
<PAGE>


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)

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.)

                             46
<PAGE>


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.)

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)

                             47
<PAGE>

*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.

*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.

*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.

*10.21         Letter of Intent, date June 5, 1996, by and
               between the Company and Gems & Minerals Corp.

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, 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, 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,
               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, 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.


                             48
<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.

*10.28         First Amendment to the Joint Venture
               Agreement of Zeus No. 1 Investments, a
               California general partnership, dated August
               15, 1996.

*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.

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, 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, 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.

*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.

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)


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<PAGE>


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.)

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.)



                             50
<PAGE>




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

* Filed herewith
Reports on Form 8-K

         Current Report on Form 8K, dated February 5, 1996.







                                       51
<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.


May  1, 1997               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       May 1, 1997
-----------------------          and Treasurer
J. Terry Anderson                     

/s/ Robert Waligunda             Director/Secretary                 May 1, 1997
-----------------------
Robert Waligunda

/s/ Robert Levin                 Vice President-Finance             May 1, 1997
-----------------------
Robert Levin

/s/ Richard Brannon              Vice President-West Coast          May 1, 1997
-----------------------          Operations
Richard Brannon                             



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