UNITED STATES
                  SECURITIES AND EXCHANGE COMMISSION
                       Washington, D.C.  20549

                              FORM 10-K/A

   (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                        EXCHANGE ACT OF 1934

              For the fiscal year ended March 31, 1997

                   Commission File Number 1-7375

                        COMMERCE GROUP CORP.

       (Exact name of registrant as specified in its charter)

          DELAWARE                                39-6050862
(State or other jurisdiction of      (I.R.S. Employer Identification No.)
 incorporation or organization)

                        6001 North 91st Street
                   Milwaukee, Wisconsin 53225-1795
         (Address of principal executive offices) (Zip Code)

   Registrant's telephone number, including area code: (414) 462-5310

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

                                              Name of each exchange
          Title of each class                 on which registered
          -------------------                ----------------------
     Common Shares $0.10 par value            Boston Stock Exchange
                                         National Association of Security
                                        Dealers Automated Systems (NASDAQ)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for 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

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

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant based on the quote of the NASDAQ Small Cap Issue on May 13, 1997, was
approximately $17,023,171.

Common shares outstanding as of March 31, 1997, were 9,193,042.

DOCUMENTS INCORPORATED BY REFERENCE

Part III  incorporated  by  reference  from the  registrant's  definitive  Proxy
Statement  for its  Annual  Meeting of  Shareholders  to be filed,  pursuant  to
Regulation  14A,  no later  than 120 days  after the  close of the  registrant's
fiscal year.

<PAGE>

                              COMMERCE GROUP CORP.
                          1997 FORM 10-K ANNUAL REPORT
                    For the Fiscal Year Ended March 31, 1997

                                TABLE OF CONTENTS

                                                                            Page

Glossary of Mining and Financial Terms . . . . . . . . . . . . . . . 3

                                     PART I

Item 1.     Business . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2.     Properties . . . . . . . . . . . . . . . . . . . . . . .29
Item 3.     Legal Proceedings. . . . . . . . . . . . . . . . . . . .47
Item 4.     Submission of Matters to a Vote of Security Holders. . .48
Item 4(a).  Executive Officers of the Company. . . . . . . . . . . .48

                                     PART II

Item 5.     Market for the Company's Common Equity and Related
            Stockholders' Matters  . . . . . . . . . . . . . . . . .50
Item 6.     Selected Financial Data. . . . . . . . . . . . . . . . .51
Item 7.     Management's Discussion and Analysis of Financial
            Condition and Results of Operations. . . . . . . . . . .51
Item 8.     Financial Statements and Supplementary Data. . . . . . .57
Item 9.     Changes in and Disagreements on Accounting and
            Financial Disclosure   . . . . . . . . . . . . . . . . .79

                                    PART III

Item 10.    Directors and Executive Officers of the Registrant . . .79
Item 11.    Management Remuneration and Transactions . . . . . . . .79
Item 12.    Security Ownership of Certain Beneficial Owners and
            Management . . . . . . . . . . . . . . . . . . . . . . .79
Item 13.    Certain Relationships and Related Transactions . . . . .79

                                     PART IV

Item 14.    Exhibits, Financial Statement Schedules and Reports on
            Form 8-K   . . . . . . . . . . . . . . . . . . . . . . .80

The Company will furnish a copy of any exhibit filed as a part of this report to
any shareholder of record upon receipt of a written request from such person and
payment of the  Company's  reasonable  expenses  for  furnishing  such  exhibit.
Requests should be made to the Assistant Secretary of the Company at the address
set forth on the cover page of this report.

This document includes certain  "forward-looking  statements" within the meaning
of Section 21E of the United States Securities Exchange Act of 1934, as amended.
All  statements,  other than  statements of historical  fact,  included  herein,
including without limitation,  statements regarding potential mineralization and
reserves, exploration results, and future plans and objectives of Commerce Group
Corp.  ("Commerce"),  are forward-looking  statements that involve various risks
and uncertainties.  There can be no assurance that such statements will prove to
be accurate,  and actual results and future events could differ  materially from
those anticipated in such statements.  Important factors that could cause actual
results to differ  materially from Commerce's  expectations  are disclosed under
various  sections of this and other  documents  filed from time to time with the
United States  Securities and Exchange  Commission,  the Boston Stock  Exchange,
Inc., and the National Association of Security Dealers Automated Systems.

<PAGE>

Glossary of Mining and Financial Terms

Adit - horizontal or nearly  horizontal  passage driven from the surface for the
working or unwatering  of a mine. If driven  through the hill or mountain to the
surface on the opposite side it would be a tunnel.  A passage driven into a mine
from the side of a hill.

Agitated  leaching - vigorous  stirring of pulp in a tank by low-pressure air or
mechanical  means to prevent  settlement  used in the leaching of gold and other
minerals from finely ground  aqueous  suspension in which oxygen is essential to
chemical reaction, for example, the cyanide process.

Breccia - fragmental  rock, the components of which are angular,  and therefore,
it is  distinguished  from  a  conglomerate  in  that  its  components  are  not
waterworn.  There are friction or fault breccias,  talus breccias,  and eruptive
breccias.  Any rock formation  essentially  composed of  uncemented,  or loosely
consolidated, small angular-shaped fragments.

Carbon adsorption - extracting  dissolved gold and silver from solvents in which
soluble  complexes  of gold and silver  physically  adhere to  activated  carbon
particles.

CIL -  carbon-in-leach,  a process for the recovery of gold from the ore. Ore is
ground  finely and mixed with a dilute  sodium-cyanide  solution to dissolve the
gold which is absorbed onto carbon.  The gold enriched carbon is stripped of the
gold and the gold is recovered either through electrolysis or precipitation.

CIP -  carbon-in-pulp,  a process  similar to CIL except that the ore is leached
with cyanide prior to carbon loading.

Contained  ounces - estimate of the total number of ounces of gold  contained in
an ore body, a portion of which are not recoverable.

Country rock - rock  traversed by or adjacent to an ore deposit.  Applied to the
rocks  surrounding and penetrated by mineral veins or invaded by and surrounding
an igneous  intrusion.  The rock in which a mineral  deposit or an  intrusion is
enclosed.

Cross section or cross cut - profile  portraying an interpretation of a vertical
section of the earth  explored  by  geophysical  and/or  geological  methods.  A
cutting or a section across. A section at right angles to, especially the longer
axis of anything.

Dore - gold and silver  bullion which  remains in a cupelling  furnace after the
lead has been oxidized and skimmed off. An unrefined  bar of bullion  containing
an alloy of gold, silver and impurities.

Drill rig - a drill  machine  complete  with all tools and  accessory  equipment
needed to drill boreholes.

Drilling  - act or  process  of making a  circular  hole with a drill.  Use of a
compressed-air rock drill to prepare rock for blasting.  The operation of making
deep holes with a drill for prospecting, exploration, or valuation.

  Blasthole  drilling - drilling of holes in rock to insert an explosive charge.
  The drill holes are usually 3-8 meters apart.  The blast breaks up the rock so
  it can be dug out.

  Diamond  drilling - drilling with a hollow bit which has a diamond cutting rim
  to produce a cylindrical  core that is used for  geological  study and assays.
  Used in exploration.

<PAGE>

  Infill drilling - drilling at shorter intervals between holes, used to provide
  greater geological detail and to help establish reserve estimates.

  Rotary  drilling - drilling  with a bit that breaks the rock into chips rather
  than core. Faster and cheaper than diamond  drilling,  the chips are forced by
  water and air to the surface of examination.

  Reverse   circulation   drilling  -  type  of  rotary  drilling  that  uses  a
  double-walled  drill pipe.  Compressed air, water, or other drilling medium is
  forced  down the space  between the two pipes to the drill bit and the drilled
  chips are flushed back up to the surface  through the center tube of the drill
  pipe.

Dump  material  -  spoil  heap  at the  surface  of a mine  stored  for  further
reclamation.

Electrowinning  -  recovery  of metal  from an ore by  means of  electrochemical
processes.

Extraction - process of mining and removal of ore from a mine. The separation of
a metal or valuable mineral from an ore or concentrate.

Fire assay - assaying  of metallic  ores,  usually  gold and silver,  by methods
requiring a furnace heat. It commonly  involves the processes of  scorification,
cupellation, etc.

Flotation - method of mineral  separation in which a froth created in water by a
variety of reagents floats some finely crushed minerals,  whereas other minerals
sink.

Footwall - wall or rock under a vein. It is called the floor in bedded deposits.
Opposite  wall from hanging  wall.  the underside of vein or lens in relation to
dip of ore deposit.  In metal  mining,  that part of the country rock which lies
below the ore deposit.

Grade - classification of an ore according to the desired or worthless  material
in it or according to value.

Hanging wall - rock on the upper side of a mineral vein or deposit.

Heap  leaching - economical  process used for the recovery of ore. Ore is placed
in a heap on an  impermeable  pad and  cyanide  is  sprinkled  over the heap and
collected at the bottom after  percolating  through the ore and  dissolving  the
metals.

Heap leach pad ("heap") - large,  impermeable  foundation  or pad used as a base
for ore during  heap  leaching.  The leach  solution is  collected  and does not
escape from the circuit.

Leach - to wash or to drain by percolation.  To dissolve  minerals or metals out
of the ore, as by the use of cyanide or chlorine solutions, acids, or water.

Leaching - removal in  solution  of the more  soluble  minerals  by  percolating
waters.  Extracting  soluble  metallic  compound  from  an  ore  by  selectively
dissolving  it in a  suitable  solvent.  The  solvent is  usually  recovered  by
precipitation of the metal or by other methods.

Leach  material  -  material   sufficiently   mineralized  to  be   economically
recoverable by selectively dissolving the wanted mineral in a suitable solvent.

<PAGE>

Leach pad - pad used as base for ore; the pad prevents the leach  solution  from
escaping and can be used continually.

Leach pile - mineralized materials stacked so as to permit wanted minerals to be
effectively and selectively dissolved by application of suitable solute.

Merrill-Crowe  process - process  utilized  to recover  soluble  gold and silver
values from a sodium-cyanide  leaching solution by precipitating  with zinc dust
after the leaching solution is clarified and deoxygenated by vacuum treatment.

Metric  conversion  - 1 acre = 0.4047  hectare  1 foot = 0.3048  meters 1 mile =
  1.6093 kilometers 1 ton = 0.9072 tonne 1 troy ounce = 31.1034 grams
  1 ounce per ton = 34.2848 grams per tonne

Mill -reducing  plant where ore is  concentrated  and/or metals  recovered.  The
whole mineral  treatment  plant in which  crushing,  wet  grinding,  and further
treatment of the ore is conducted.

Mineralization  - process of converting or being converted into a mineral,  as a
metal into an oxide,  sulfide,  etc. The  processes  taking place in the earth's
crust resulting in the formation of valuable minerals or ore bodies.

Mineralized  zone -  mineral-bearing  belt or area extending across or through a
district.  It is usually  distinguished  from a vein or lode as being wide,  the
mineralization  extending  in some  cases  hundreds  of feet from a  fissure  of
contact plane.

Mining  lease - legal  contract  for the  right to work a mine and  extract  the
mineral or other valuable deposits from it under prescribed  conditions of time,
price, rental or royalties. Also called mineral lease.

Open-pit mining - form of operation  designed to extract  minerals that lie near
the surface.

Ore  reserves  -the  term is  usually  restricted  to ore of which the grade and
tonnage have been  established  with reasonable  assurance by drilling and other
means. The total tonnage and average value of proved ore, plus the total tonnage
and value (assumed) of the probable ore.

Ounce - troy ounce, which is equivalent to 31.1034 grams

Pyrites - the term pyrites as frequently used,  literally,  means a mineral that
strikes fire. It is applied to any of a number of metallic-looking  sulfides, of
which iron pyrites (pyrite) are the most common.

Recovery - amount of gold ore metal,  expressed in weight or money per ton which
is obtained from the treatment of ore.

Shaft - excavation of limited area compared with its depth,  made for finding or
mining ore or ventilating  underground workings.  The term is often specifically
applied to approximately  vertical shafts,  as distinguished  from an incline or
inclined  shaft.  A shaft in metal  mining may be sunk upon a vein,  even if the
inclination is but slight.

<PAGE>

Stope -  excavation  from  which  ore has been  excavated  in a series of steps.
Usually  applied to highly inclined or verticle veins. To excavate ore in a vein
by driving  horizontally upon it a series of workings,  one immediately over the
other, or vice versa.  Each horizontal  working is called a stope. Also workings
in a mine,  or the  activity by which ore is broken from blocks in ore  reserves
and other areas.

Sulfate - a salt or an ester of sulfuric acid, of which most of the salts except
those of barium, lead, strontium, and calcium are fairly soluble in water.

Sulfide - a compound of sulfur with more than one element. A salt or an ester of
hydrogen  sulfide.  Except for the sulfides of the alkali  metals,  the metallic
sulfides are usually insoluble in water and occur in many cases as minerals.

Tailings - material  removed  from a milling  circuit  after  separation  of the
valuable minerals.

Waste  material - a part of the ore  deposit  too low in grade to be of economic
value at the time,  but this material may be stored  separately in the hope that
it can be profitably treated later.

Winze - a vertical or inclined opening , or excavation, connecting two levels in
a mine,  differing from a raise only in construction.  A winze is sunk underhand
and a rise is put up overhand.  When the  connection  is  completed,  and one is
standing at the top,  the  opening is  referred  to as a winze,  and when at the
bottom,  as a raise,  or rise.  Also,  it is usually a  connection  between  two
levels, and is sunk in the ore body; interior mine shaft.

<PAGE>


                                     PART I


Item 1.  Business

Introduction

Commerce Group Corp.  ("Commerce," the "Company,"  and/or the "Registrant") is a
developmental  stage  Delaware   corporation  based  in  Milwaukee,   Wisconsin,
primarily  engaged in the business of developing mines and producing gold in the
Republic of El Salvador,  Central  America,  through its  Commerce/Sanseb  Joint
Venture  ("Joint  Venture").  Commerce holds a nearly 100% interest in the Joint
Venture (detailed below) which owns the concession rights to extract gold in the
San Sebastian  Gold Mine  ("SSGM").  It is exploring  four other  potential gold
prospects located in El Salvador.  There are approximately 1.7 million ounces of
proven and estimated gold ore reserves at the SSGM, and at three of the other El
Salvador  gold  mines  (see chart on page 9).  Currently  and for all  financial
statement  periods  presented  herein,  SSGM is the  only  one of the  Company's
properties  which has  generated  revenues,  although  there are strong  initial
indications of gold ore present at the other sites.

Currently the Joint Venture is processing on a limited  basis, a blend of virgin
gold ore and tailings at its San Cristobal  Mill and Plant (SCMP).  The gold ore
is from the open pit and the tailings are waste material left as a by-product of
past mining  operations at the SSGM. The SCMP is located  approximately 13 miles
from the SSGM.  Commerce  acquired this  facility on February 23, 1993,  and the
Joint Venture  thereafter made substantial  renovations and modifications to the
plant  and  equipment  before  and  after  placing  this  facility  in a limited
operation.  From March 31,  1995,  and during the fiscal year  ending  March 31,
1996,  5,993 ounces of bullion  containing 3,161 ounces of gold and 1,489 ounces
of silver were produced at this facility from these  tailings and virgin ore. In
the fiscal year ended March 31, 1997,  3,653 ounces of bullion  containing 2,492
ounces of gold and 430  ounces  of  silver  were  produced.  Revenues  from this
production  were used  primarily  to fund  further  exploration  of  virgin  ore
reserves  at the  SSGM,  to  fund  the  development  of the  four  other  mining
prospects, and to fund improvements at the SCMP.

Commerce's   current   business  plan  is  to  secure   sufficient   capital  to
substantially increase its production of gold to at least 40,000 ounces per year
and to develop  additional  gold ore reserves.  The Company  expects to increase
production by developing  an open-pit mine  heap-leach  operation on site at the
SSGM and by  acquiring  additional  mining  equipment  which  will  permit it to
process  virgin  ore at  the  SCMP.  The  heap-leach  operation  will  have  the
capability   of  producing   (through   processing  a  higher   volume  of  ore)
significantly  more gold than could be  produced at the SCMP which has a present
capacity of processing 400 tons of tailings per day. Commerce will also continue
to drill test holes at previously  unexplored  areas at the site of the SSGM and
it plans to drill its four other potential mining prospects.

Aside  from its  mining  operations,  Commerce  independently  and  through  its
partially and  wholly-owned  subsidiaries  conducts other  business  activities,
which at present are substantially less significant than its gold production and
exploration in El Salvador:  (1) land  acquisition  and real estate  development
through  its  wholly-owned  subsidiaries,  San Luis  Estates,  Inc.  ("SLE") and
Universal  Developers,   Inc.  ("UDI");  (2)  real  estate  sales,  through  its
wholly-owned  subsidiary,  Homespan  Realty  Co.,  Inc.  ("Homespan");  (3)  the
operation of a 331-acre  campground known as Standing Rock Campground,  which is
owned by Homespan and operated by the Company; and (4) advertising,  through its
wholly-owned subsidiary, Piccadilly Advertising Agency, Inc. ("Piccadilly").

<PAGE>

Commerce was  incorporated  in Wisconsin in September 1962, and it merged into a
Delaware  corporation in July 1971. Its common shares have been publicly  traded
since 1968. Commerce acquired 82 1/2% of the authorized and issued shares of San
Sebastian Gold Mines,  Inc.  ("Sanseb"),  a Nevada  corporation.  The balance of
Sanseb's shares are held by approximately 200 unrelated shareholders.  From 1969
forward,  Commerce has  provided  substantially  all of the capital  required to
develop a mining operation at the SSGM, to fund exploration,  and to acquire and
refurbish the SCMP.

On  September  22,  1987,  Commerce  and  Sanseb  entered  into a joint  venture
agreement (named the  "Commerce/Sanseb  Joint Venture" and sometimes referred to
herein as the "Joint Venture" or "Comseb") to formalize the relationship between
Commerce  and Sanseb with  respect to the mining  venture and to divide  profits
commensurately  with  Commerce's  substantial  investment.  The  terms  of  this
agreement  authorize  Commerce to  supervise  and  control  all of the  business
affairs  of the Joint  Venture.  Under  this  agreement  90% of the net  pre-tax
profits of the Joint Venture will be  distributed to Commerce and ten percent to
Sanseb, and because Commerce owns 82 1/2% of the authorized and issued shares of
Sanseb,  Commerce in effect has an over 98%  interest in the  activities  of the
Joint Venture.

The Joint  Venture  leases the SSGM from a  52%-owned  subsidiary,  Mineral  San
Sebastian,  S.A.  de C.V.  ("Misanse"),  an El  Salvador  corporation.  Although
Misanse  owns  the  real  estate  comprising  the site of the  SSGM,  the  lease
agreement  grants  Comseb the right to all gold  produced in exchange for a five
percent  royalty  over a term of 25 years  beginning  on the  first  day gold is
produced,  which Comseb may, at its option,  extend for an  additional 25 years.
Because Commerce owns 52% of Misanse,  Comseb in effect pays a royalty amounting
to less than two and one-half percent of the SSGM gold production.

The Joint  Venture is  registered  as an operating  entity to do business in the
State of Wisconsin,  U.S.A. and in the Republic of El Salvador, Central America.
Under the Joint Venture Agreement,  Commerce is authorized to sign agreements on
behalf of the Joint Venture.

As of March 31, 1997, the total investment in the El Salvador mining projects by
Commerce, three of Commerce's wholly-owned  subsidiaries,  Sanseb, and the Joint
Venture amounted to $42,098,447.  The  profitability  and viability of the Joint
Venture is dependent upon, not only the price of gold in the world market (which
can be unstable),  but also upon the political  stability of El Salvador and the
availability  of  adequate  funding  for either the SCMP  operation  or the SSGM
open-pit, heap-leaching operation or for the four other exploration projects.

The Company's organizational  structure is as follows:  Commerce Group Corp. was
originally  a  Wisconsin  Corporation  (September  14,  1962) that merged into a
Delaware Corporation on July 26, 1971. It owns 52% of Mineral San Sebastian S.A.
de C.V. (Misanse),  an El Salvadoran corporation that was formed on May 8, 1960,
reinstated  on January  25, 1975 and  reincorporated  on October 22, 1993 and it
owns 82 1/2% of the San Sebastian Gold Mines, Inc. (SSGM).  Misanse has a mining
concession  with the  government  of El Salvador and is the real estate owner of
the SSGM.  Misanse  also has a gold  mine  lease and  assignment  of the  mining
concession with the Commerce/Sanseb Joint Venture (Comseb),  the mining operator
formed on September  22, 1987,  and with SSGM,  a Nevada  corporation  formed on
September 4, 1968.  Comseb operates the SCMP (the gold  processing  plant in the
City  of El  Divisadero  acquired  on  February  23,  1993)  and  has  conducted
exploration and exploitation in its five El Salvador gold mines as follows: SSGM
(in the City of Santa Rosa de Lima since October 1968), Potosi (near the City of
El Potosi since September 1993) as well as its extension  Capulin (near the City
of El Potosi since May 1995);  Modesto (near the City of El Paisnal since August
1993);  Hormiguero  (near  the  City of  Comacaron  since  September  1993)  and
Montemayor (northwest of SSGM since March 1995).

<PAGE>

The Mining Properties

The Company,  through the Comseb  Joint  Venture,  is  currently  engaged in the
mining activities at five separate sites in the country of El Salvador. From its
first  involvement  with  Sanseb in 1968 and until  1993,  all of the  Company's
exploration and development of its mining activities took place at one site, the
San  Sebastian  Gold Mine.  On February 23, 1993,  the Company  acquired the San
Cristobal Mill and Plant, which is located approximately 13 miles from the SSGM.
Subsequently the Company applied for certain  exploration  rights to sites known
as the Modesto (August 1993),  the San Felipe-El  Potosi  (September  1993), the
Hormiguero  (September  1993)  and the  Montemayor  (March  1995).  The  Company
maintains a business  office in San Miguel,  El  Salvador,  and employs over 318
professionals and skilled, semi-skilled,  mill personnel and miners at the sites
of its operations.

At  the  current  stage  of  the  exploration  and  development,  the  Company's
geologists have defined the following gold reserves:

                                                      Contained     Oz.
                                    Tons     Grade       Ounces  Probable
                                    ----     -----    ---------  --------
1. San Sebastian Gold Mine
   (a) Tailings                    10,000    0.030          300
   (b) Dump waste (av. grade)     960,000    0.100       96,000
   (c) Stope fill               1,000,000    0.340                340,000
   (d) Open pit-virgin ore     13,400,000    0.087    1,165,800
                               ----------             ---------   -------
                               15,370,000             1,262,100   340,000
2. San Felipe-El Potosi
   (a) Tailings                   185,000    0.060       11,100
3. Modesto Mine                    80,000    0.235       12,800     6,000
4. Hormiguero Mine
   (a) Tailings                   150,000    0.0644       9,600
                               ----------             ---------   -------
   Total Contained Ounces      15,785,000             1,295,600   346,000
                               ==========             =========   =======


In management's  opinion,  the Company's ongoing  exploration,  exploitation and
development at the five sites will  significantly  increase the Company's proven
ore reserves.

The San Sebastian Gold Mine

The SSGM is situated on a mountainous  tract of land consisting of approximately
1,470 acres of explored and  unexplored  mining  prospects.  The SSGM is located
approximately two and one-half miles off of the Pan American Highway,  northwest
of the City of Santa  Rosa de Lima,  El  Salvador.  The tract is  typical of the
numerous volcanic mountains of the coast range of southeastern El Salvador.  The
topography is mountainous  with elevations  ranging from 300 to 1,500 feet above
sea level. The mountain slopes are steep, the gulches are well defined,  and the
drainage is excellent.

The tailings,  dump material, and stope fill at the SSGM, are the by-products of
past mining  operations.  The  tailings are the residue of higher grade ore once
milled and processed to recover the then economically  feasible fraction of gold
present in the  material.  The dump material is actually gold ore which has been
mined in the search for higher  grades of gold ore and piled to the side of past
excavations as it was considered at that time to be too low of a grade of ore to
process  economically.  The stope  fill also was  considered  to be too low of a
grade of ore to process economically therefore it was primarily used to fill the
voids in the  underground  workings of the past SSGM mining  activities.  Virgin
gold ore, as the term is used in this  report,  is gold ore which is in the open
pit and readily  available  for  processing;  it also  includes the  undeveloped
underground gold ore.

<PAGE>

Virgin  gold ore at the SSGM  represents  the  majority  of the  material  (13.4
million  tons)  included in the  Company's  reserves.  The Company  plans to use
open-pit  mining  and  truck  the  gold  ore to one or more  heap-leaching  pads
developed on site at the SSGM site. The use of open-pit mining and heap-leaching
techniques  will enable the Company to process a higher  volume of gold ore than
can be  processed  at the SCMP or  through  underground  operations  used by the
Company  and others in the past.  The  Company  plans to continue to operate the
SCMP after  developing a leach-pad  operation at the SSGM, using the facility to
process the higher grade ore it  encounters in the course of mining at the SSGM.
The  milling  operation  at the SCMP is expected to return a higher rate of gold
recovery than can be expected from heap-leaching techniques.

The 960,000 tons of dump  material  present at the SSGM site has grades  ranging
from 0.082 to 0.178  ounces of gold per ton.  An  analysis of the stope fill was
made by the Company's  consulting  geologist who has confirmed  that about seven
percent of the stope fill had been removed and  processed  during the  1973-1978
period.  The grade of the stope fill averages 0.34 ounces of gold per ton. It is
estimated that there are about one million tons available for treatment from the
underground  operations.  It is necessary to remove the material which has caved
in the adits to reach the stope fill areas.

All residue from the  contemplated  operations  will be stockpiled for potential
future processing dependent upon the price of gold,  improvements in technology,
and the depletion of better grading material.

There is good access to the SSGM.  The City of Santa Rosa de Lima  (three  miles
from the SSGM) is a substantial  trading center.  The SSGM is  approximately  30
miles  from  San  Miguel,  which  is El  Salvador's  second  largest  city,  and
approximately  108 miles southeast of El Salvador's  capital city, San Salvador.
SSGM is also approximately 26 miles from the City of La Union which has port and
railroad  facilities.  Three major United States'  commercial  airlines  provide
daily scheduled  flights to San Salvador.  An airline  commuter service provides
daily flights to the cities of Santa Rosa de Lima, San Miguel, and La Union.

The Company (through the Comseb Joint Venture) leases the SSGM from
Mineral San Sebastian, S. A.  ("Misanse"), an El Salvadoran corporation.
The Company owns 52% of the total of Misanse's issued and outstanding
shares.  The balance of the shares are owned by about 100 El Salvador,
Central American and United States' citizens.  (Reference is made to Note
6 of the financial statements for related party interests.)

Misanse Mining Lease

On July 28,  1975,  an amended  lease  agreement  between  Misanse as lessor and
Sanseb  as  tenant  was  executed  by the  parties  giving  the  tenant  all the
possessions  and mining  rights that pertain to the SSGM as well as other claims
that may  already  have or could be claimed in the future  within the 1,470 acre
plat of land  encompassing  the  SSGM.  The  lease was  further  amended  to run
concurrently with the concession described herein and may be extended for one or
more equal periods by the tenant as long as the tenant has paid the rent and has
complied with other  obligations  under the lease and the concession.  The lease
further  provides  that the tenant  will pay rent to equal  five  percent of the
gross gold production revenues obtained from the leased SSGM and further commits
itself to maintain production taking into consideration market,  political,  and
other conditions.  In no case will the rent be less than 1,800 colones per month
(approximately  $206 per  month at the  current  rate of  exchange).  The  lease
further  provides that, in the event the lessor wishes to sell the property,  it
must first give  preference to the tenant;  the lease further  provides that the
tenant must give  preference to employ its former  mining  employees and Misanse
shareholders.

<PAGE>

The lease is freely  assignable by the Joint Venture  without notice to Misanse.
The lease may also be cancelled  by the Joint  Venture on thirty day's notice to
Misanse and thereafter all legal obligations thereunder shall cease.

In the event that new  extended  bodies of ore are  discovered,  Misanse  may be
required to make  proper  claim for them  through the  Ministry of Economy of El
Salvador's Department of Energy, Mines and Hydrocarbons, and include such claims
in the present lease.  Such addition to the lease is required to be made without
additional rental payment, except that the expenses for procuring the concession
shall be borne by the Joint Venture.

Misanse Concession Agreement

On July 23, 1987, in an official  ceremony in the City of Santa Rosa de Lima, El
Salvador,  President  Jose  Napoleon  Duarte  of the  Republic  of El  Salvador,
presented  the  "concession"  which is the official  decree  granting  rights to
extract gold ore from the SSGM.  In order to obtain the mining  concession  from
the  Government  of El Salvador,  on December  22, 1986,  the Company and Sanseb
entered  into an  agreement  (incorporated  by  reference  to  Exhibit  I of the
Company's  S.E.C.  Form 10-K filed for the  period  ended  March 31,  1988) with
Misanse as follows:

Under the terms of the San  Sebastian  Gold Mine  concession  and the  agreement
referred to in the concession, the Joint Venture has agreed to the following:

(a)  The Joint Venture will pay to approximately 270 former El Salvador
     employees pursuant  to a settlement agreement dated June 1985, as
     follows:  A sum of approximately 500,000 colones (approximately U.S.
     $57,208 at the current rate of exchange) in three (3) installments
     contingent upon the production and sale of gold, to wit:  one-third
     is to be paid from the sale of the first production of gold;
     one-third is to be paid one (1) year thereafter; and one-third is to
     be paid two (2) years after the first payment.  The entire amount
     due has been paid or is held in escrow for those persons that cannot
     be located.

(b)  Preference  is to be given  to the  former  Sanseb  employees  and  Misanse
     shareholders  in filling any job vacancies,  providing that there is a need
     for their skills or services.

(c)  From the SSGM profits  earned,  five percent of the gross wages paid to the
     full-time employees shall be paid into a newly created pension fund for the
     benefit of the employees.

(d)  From the SSGM profits earned, a sum of 500,000 colones annually (equivalent
     to  $57,143  at the  present  rate of  exchange)  will be paid by the Joint
     Venture as a social tax for the benefit of the  community  in the SSGM area
     which  said  funds  are  to be  used  for  social,  economic,  educational,
     recreational,  health,  welfare,  medical  or  for  such  other  beneficial
     community services as determined by the Joint Venture.

(e)  At such time as the Government of El Salvador  forms a cooperative  for the
     benefit of the employees,  the Joint Venture has agreed to contribute  from
     its  annual  pre-tax  earnings,  the sum of  five  percent  of its  pre-tax
     profits,  but, in any event,  not less than a minimum  amount equal to five
     percent of eight percent of the total assets.

(f)  Pursuant to an agreement with the El Salvador Minister of Economy,
     at the request of the Company to the El Salvador Central Reserve
     Bank and/or office of the El Salvador Minister of Foreign Commerce,
     it will be able to convert the El Salvador currency into United
     States' currency for the payment of its loans, interest, and any
     other obligations, including the payment of dividends.  Presently,
     there are no restrictions in converting the El Salvador colones into
     United States' currency.  The Company, as a foreign investor, may
     hold dollar accounts in El Salvador banks and may use these accounts
     to obtain local financing.

<PAGE>

(g)  On November 30, 1987, the El Salvador Minister of Foreign Commerce issued a
     project  approval for the gold mining operation which was ratified on April
     15, 1988.

(h)  In consideration for the obligations agreed to by the Joint Venture,
     the Government of El Salvador agreed to exempt the Joint Venture
     from the payment of all import duty, fiscal or municipal taxes
     whatsoever.  The El Salvador Department of Customs refused to
     recognize this exemption.  On November 15, 1993, the Joint Venture's
     attorneys filed a declaratory proceeding with the El Salvador
     Constitutional Supreme Court ("Court") informing the Court that the
     Joint Venture's rights were being violated and that the Court should
     restrain the Department of Customs from attempting to collect any
     duty.

On May 18,  1994,  the El  Salvador  Constitutional  Supreme  Court  of  Justice
declared  that the Joint Venture is entitled to be  temporarily  exempt from the
payment of all import duty, fiscal and municipal taxes on the import of any item
relating to the needs of the SSGM  pending its review of the  petition  filed on
November 15, 1993, and that the Company's Joint Venture's  constitutional rights
are to be preserved. The El Salvador Department of Customs takes a position that
the Supreme  Court could deny the  exemption,  therefore,  in lieu of paying the
Custom's  duty,  it is  accepting  a  payment  bond or cash in an  amount of the
Custom's duty until a final decision is made. It is charging the Company the 13%
added  value  tax as of July  1995,  which is  refundable  to the  extent of six
percent of the value of the Joint Venture's exports.  The Joint Venture plans to
export all of its gold.

Misanse Mineral Concession-Government of El Salvador

On  January  27,  1987,  the  Government  granted  a right  to the  SSGM  mining
concession ("concession") to Misanse which was subject to the performance of the
El Salvador Mining law requirements.  These rights were simultaneously  assigned
to the Joint Venture.

On July 23,  1987,  the  Government  of El  Salvador  delivered  and  granted to
Misanse,  possession of the mining concession.  This is the right to extract and
export minerals for a term of 25 years (plus a 25-year renewal option) beginning
on the first day of production  from the real estate which  encompasses the SSGM
owned by Misanse.  Misanse assigned this concession to the Joint Venture.  Under
the  concession  and the then  applicable El Salvador law, the Joint Venture has
the right to export said minerals for five years beginning with the first day of
production  without imposition of mineral or export taxes. It also has the right
to import free of duty,  equipment and all other items  necessary to operate the
SSGM.

During  February 1996, and effective 120 days  thereafter,  the Government of El
Salvador  adopted a revised mining law. This law grants longer  exploration  and
exploitation  terms. It also contains a provision that three percent of the gold
receipts will be paid to the  Government  of El Salvador and an  additional  one
percent is to be paid to the municipality where the mine is located.

The  concession,  or the right to mine gold, is subject to  cancellation  by the
Government of El Salvador if there is an  abandonment of the property such as if
there is no  demonstration  that the  concession  holder  intends  to carry  out
exploration, exploitation, or development of the property in good faith during a
six-month  period after the concession is granted or if the work of exploration,
exploitation  or development is suspended for six months or if the  exploration,
exploitation  or development is reduced to an extent that the effort used cannot
be regarded as being  reasonable in relation to the  importance and resources of
the mining property.

In the event of public disaster or disturbance of the public order, all mines in
the given locality shall be regarded as being in  exploration,  exploitation  or
development without the necessity of any special formality. Such event did occur
when, on November 11, 1989, the guerrillas  attempted to seize the Country of El
Salvador.  On January 16,  1992,  a peace accord and  cease-fire  agreement  was
entered into by the Government of El Salvador and its opposition. The transition
from war to peace was effected  without any serious  occurrences and final peace
was declared on December 15, 1992,  with a three-year  period to comply with the
terms of the peace pact.

<PAGE>

The work of a concession may be suspended by permission of a competent authority
for a reasonable period not to exceed one year. An exception would be in case of
acts  of God  or  force  majeure  in  which  case  the  period  may be  extended
successively as long as such reasons exist.

A concession may be fortified for lack of security measure,  or if its condition
would endanger the lives of workers, or for failure to comply with provisions of
the  Mining  Code or other  provisions  enacted  with  respect  to any aspect of
exploitation  in the  mining  industry,  unless  corrected  within a  reasonable
period.

The Complimentary  Mining Law states that, in addition to the cases mentioned in
the El Salvador Mining Code, abandonment of the mine will be presumed if after a
significant  reduction or exhaustion of the veins,  beds, or other  formation in
exploitation, three months is allowed to pass without adequate efforts either to
exploit other  deposits  existing in the  concession or to discover new deposits
suitable for exploitation.

A concession  may be granted for an unlimited  time,  as long as the  concession
holder  complies  with  the  conditions  imposed  by law.  The  Joint  Venture's
concession is for a period of twenty-five  years,  beginning on the first day of
production, and with a right to extend it for an additional twenty-five years.

In addition,  the El Salvador  Constitution  contains certain  provisions which,
although not referring  specifically to mining, are applicable thereto.  Article
138, for  example,  prohibits  confiscation  of property as a penalty or for any
other reasons,  but, in the event that any authority  violates this prohibition,
the confiscated property is imprescriptible.

Proposed Mining, Mill, Heap-Leaching and Exploration Operations

San Cristobal Mill and Plant ("SCMP") Recovery and Processing Systems

On February 23, 1993, the Company, on behalf of the Joint Venture acquired SCMP,
a precious  metals'  cyanide  leaching  mill and plant  rated with a capacity of
processing  200 tons per day  which  utilized  the  following  unit  operations:
crushing, grinding,  thickening,  agitated leaching, counter current decantation
of  leach  solution,   recovery  of  precious   metals  by  zinc   precipitation
(Merrill-Crowe),  and direct smelting of precipitates to produce precious metals
as dore and tailings' disposal.

The Company's  engineers  recommended that this processing system be retrofitted
and  converted  to process the SSGM  tailings by a  cyanidation  carbon-in-leach
(CIL)  system to recover the  residual  cyanide  soluble  precious  metals.  The
retrofitting  has been  completed  and the first pouring of gold on a test basis
took place on March 31,  1995.  The SCMP is being  operated on a  "start-up  and
build-up" to a gradual full capacity  system during this trial and  modification
period.

Although the Joint Venture owns the mill, plant and related  equipment,  it does
not own the land and certain  buildings.  Since  February  23,  1993,  the Joint
Venture attempted to either lease or purchase this real estate from an Agency of
the El Salvador Government,  Corporacion Salvadorena de Inversiones ("Corsain").
On November 12, 1993,  the Joint Venture  entered into an agreement with Corsain
to lease  approximately  166 acres of land and the buildings for a period of ten
years.  The annual rental charge is U.S.  $11,500 payable in advance and subject
to annual  increases  based on the United States'  percentage rate of inflation.
Also as agreed,  an $11,500  security  deposit was  required and this deposit is
subject to an annual increase based on the U.S. inflation rate. The premises are
strategically  located to process  gold ore from three of the four other  mining
prospects that are in the exploration stage.

<PAGE>

SCMP Project Operating Plan

Production Schedule

Preproduction  development,  consisting  primarily  of  expansive  road and site
improvements to the mine and mill sites,  and delivery of tailings'  reclaim and
expansive  mill equipment  modifications,  has taken place during the last year.
Initial  production was from the SSGM tailings.  Since the tailings' resource is
almost exhausted,  virgin gold ore is excavated from the SSGM surface and hauled
to the SCMP site.

The Joint  Venture  dedicated  extraordinary  efforts to attain  its  production
goals,  but there were delays in  establishing  the SCMP in a mode to accomplish
its expectations.  Substantial  modifications had to take place and a completely
new force of labor had to be  seasoned  to operate  the SCMP.  An unusual  rainy
aftermath of the hurricane season caused hauling problems and many metallurgical
differences  were  encountered  due to the unbalance of the tailings'  grade and
consistency;  in the handling of the tailings,  coarse  material  separation was
encountered  creating  difficulties  in achieving  its  production  goal.  Other
related   factors   delayed  the  Joint   Venture  from   realizing  its  goals.
Nevertheless,  the operations, if recorded on a profit or loss basis, would have
reflected a nominal  profit.  It is  expected  that the  ongoing  technical  and
mechanical  changes  should  activate  the  increase  of the profits to meet the
projections.

The  other  sources  of gold ore from the SSGM to be used at the SCMP  operation
will be obtained  from the stope fill or higher  grade gold ore after  obtaining
access through the  underground  workings from the main ore body.  This gold ore
will have to be crushed and  pulverized  which  increases the cost, but then the
yield is expected to be at a 92% recovery.  The income,  dependent on the market
price  of  gold  from  the  higher  grade  and  recovery  of gold  ore,  will be
substantially more than the cost involved,  providing that the world gold market
price does not decline below $200 an ounce.

SCMP Continued Operating Plans

The virgin ore and/or  tailings  are  referred to herein as "gold ore." The gold
ore from the SSGM open-pit is loaded onto 20-25 ton dump trucks for transport to
the SCMP.  Trucks then haul the gold ore  approximately  15 miles from the SSGM.
Mine  employees  are  responsible  for  the  mining  activities   including  the
determination of areas to be excavated,  trucking and loading  operations,  head
sampling and sample analysis.

The gold ore is received at the SCMP where it is weighed,  logged,  and sampled.
Weighing  is  performed  utilizing  a conveyor  belt scale  and/or a truck scale
located on the SCMP site.  The excess gold ore is then unloaded at the SCMP site
and  stockpiled  in an area which was  developed  to allow  storage of more than
15,000 tons.

SSGM  gold ore is  transferred  from the  stockpile  to a feed bin  utilizing  a
rubber-tired wheel loader. The feed bin has a capacity of approximately 10 cubic
yards (13.5 tons).  The feed is fed at a controlled rate onto a conveyor,  which
transfers the ore to the next part of the process.  The conveyor includes a belt
scale (weightometer) for instantaneous determination of feed rate and totalizing
of tonnage fed to the process.

<PAGE>

The conveyor  discharges  into a chute and transports the material into the ball
mills which serve as a repulper for the  tailings and as a grinding  process for
the virgin ore. Virgin ore is fed through the first ball mill for grinding.  The
pulp is pumped to a cyclone where it is  classified.  The underflow  goes to the
second  ball mill for  regrinding  and the  overflow  (fines)  goes to a 20 mesh
static  sieve bend screen to remove any oversize or trash  material.  The second
ball mill discharges a product and joins the first ball mill sump pumping making
it a closed circuit with the use of the cyclone. Water is added to the solids in
the ball mill to a pulp density of  approximately  32% solids by weight and lime
is added to raise the  alkalinity of the pulp to  approximately  PH 10.5.  After
grinding,  the slurry is  transferred  into the  thickener.  The excess water is
removed from the thickener to raise the pulp density to approximately 45% solids
which is an ideal density for the cyanidation  process.  The pulp is transferred
by pump to the CIL  system's #1 tank.  Lime and liquid  cyanide are added to the
first  leach tank to  dissolve  the gold.  It then enters into a series of seven
agitated  leach tanks utilized for cyanide  leaching of the pulp.  This provides
approximately  24 hours of leach retention time. An eighth tank is maintained in
operable condition as a standby unit.

Precious  metals recovery is  accomplished  by utilizing  carbon-in-leach  (CIL)
methods where activated carbon is utilized to adsorb the gold from the solution.
Each leach tank is equipped with an air lift pump for inter-stage advancement of
carbon,  and an air swept cylindrical  stationary  interstage screen (.030 mesh)
for  retention  of carbon and  downstream  gravity  transfer of pulp.  A 24 mesh
carbon  safety  screen is attached to the end of the  leaching  circuit.  An air
blower provides air for operation of the air lifts and air sweep on the screens.
Pulp  loaded with  precious  metals in the carbon from the CIL process is passed
over a carbon recovery  screen where the carbon is retained and washed,  and the
pulp is directed back to the CIL process. The carbon is moved counter-current to
the pulp flow in order that the highest  possible gold loadings are obtained and
highly active fresh carbon is maintained in the last leach tanks.

Liquid ferrous sulfate is added to the tailings to destroy any residual cyanide.
Tailings  from the CIL process are directed to the  tailings'  impoundment  area
using a slurry  transfer  pump.  Tailings are stored in a tailings'  impoundment
area with tailings' water reclaimed as required.

Loaded (gold  containing)  carbon is transferred from the carbon recovery screen
to  the  strip  and  acid  wash  circuits.  The  carbon  is  stripped  utilizing
atmospheric Zadra desorption methods, with the resulting pregnant strip solution
reporting to  electrowinning,  where gold containing sludge is formed,  which is
pyrometallurgically  refined on-site to dore metal. The carbon is acid washed to
remove  detrimental  impurities  prior  to  being  transferred  back  to the CIL
circuit.

Reagents (cyanide, lime) are made up in separate agitated mix tanks. The cyanide
mix tank  holds up to three days worth of 20%  cyanide by weight  solution.  The
lime mix tank holds up to a supply of three eight-hour  shifts worth of 20% lime
by weight  slurry.  The lime is pumped to the  repulp  tank and CIL  process  as
required for  alkalinity  control.  The cyanide is pumped to the CIL process and
carbon strip circuit as required.

Process  water is  provided  from mine  sources  and stored in a 40'  thickener.
Process water is pumped from the thickener to various  locations  throughout the
process. If water treatment is required it is done by utilizing the thickener as
a mixing/precipitation device.

Electricity  is  supplied  by local  public  utilities.  In the  event  power is
discontinued for any reason whatsoever,  an emergency generator to produce power
is on site to maintain and provide the power needed.

<PAGE>

SCMP Personnel

The SCMP employees,  during this past year's start-up testing period  (including
its own  trained  security  personnel)  totals  about 144  persons.  The SCMP is
operated 24 hours per day, seven days per week and 52 weeks per year.

SSGM Open-Pit, Heap-Leaching Operation

The Joint Venture has placed the SCMP into a limited  operation.  It now intends
to obtain a sum of $6 million or more to  commence  an  open-pit,  heap-leaching
operation at the SSGM site.  An additional $7 million or more is estimated to be
required for the crushing system and mining  equipment if the Joint Venture were
unable to lease  this  equipment.  After  these  funds are  obtained,  the Joint
Venture  intends to start  processing gold ore from its open pit at a production
level of 2,000 tons per day. During the second year, the production  level plans
are to expand  production  to 3,000 tons per day (the  funds for this  expansion
could be generated from profits).  An increase to process 4,000 tons of gold ore
per day would take place during the third year and another  expansion to process
6,000 tons per day would take place at the beginning of the fifth year,  and all
funds for this  expansion  should be available  through a combination  of earned
profits, borrowings, equity sales, or other sources. The independent feasibility
study and the Company's Project Summary report comfortably  support this program
as the  estimated  projected  production  costs are  substantially  lower than a
current $340 per ounce market price of gold. Pursuant to the geologists' report,
the total  volume of proven gold ore reserves  from the open-pit  area amount to
13.4  million tons with an average  grade of 0.087 ounces of gold per ton.  With
the anticipated  production  volume,  there is at least an eight-year  supply of
gold ore.  More gold ore would be developed  during this period of time as it is
believed that a substantial amount of gold ore can be proven.

The leach pad site  consisting of  approximately  3.7 acres on the SSGM property
was chosen  because of the  relatively  even  grade  level,  the access to water
supply,  electric  power,  roads,  telephone  service,  and because of its close
proximity to the open-pit area.

Gold ore will be crushed to produce  stones of a size which will  maximize  gold
recovery. If required, lime and cement will be added "agglomerated" to such gold
bearing  material  that will require  this  process to assist the  heap-leaching
operation, in accordance with metallurgical recommendations.

A leach pad will be constructed with a plastic liner  sandwiched  between layers
of gravel to protect its  integrity.  On top, the liner will be protected with a
six-foot layer of one-inch gravel comprised of gold-bearing  material.  Material
to be processed and  agglomerated  if necessary  will,  in stages,  be heaped an
additional 20 feet on top of this protective  layer, and then removed at the end
of the leaching cycle.

Basically,  this process involves the placement of material containing gold onto
a  "pad"  which  is  impermeable  to  liquids,  sprinkling  the  "heap"  with  a
water-based  chemical  solution  which will  dissolve the gold as it  percolates
through the  material,  collecting  the solution at the bottom of the heap as it
runs off the pad, and then  recovering the gold from the solution.  The chemical
solution  is  actually  recycled  through  the  heap  many  times  before  it is
processed,  in  order to  maximize  the  recovery  of gold  and to  recycle  the
chemicals.

Gold laden  cyanide  solution  will be collected at the base of the pad and then
will be  filtered  through a series of carbon  adsorption  columns  (a series of
open-topped  tanks)  where the gold will be drawn out of the  solution  and into
beds of granular  activated  carbon.  Next,  the carbon from the columns will be
washed  with  acid to strip the gold from the  carbon  into a more  concentrated
solution.  Lastly,  gold will be removed from this acid solution by electrolysis
(the same process used in  gold-plating)  first by collecting  the gold on steel
wool type  cathodes,  and then by  electrolytically  transferring  the gold to a
charged  metal plate in another acid  solution.  After their use in processing a
batch of gold, the cyanide and acid  solutions,  as well as the carbon,  will be
replenished and recycled to process the next batch. This procedure is similar to
the existing SCMP process.

<PAGE>

Exploration Projects

The Joint  Venture  is  performing  exploration  at the  following  El  Salvador
locations:

(1) At the SSGM site  which is  located  approximately  two and  one-half  miles
    northwest  of the City of Santa  Rosa de Lima,  Department  of La Union,  El
    Salvador.

(2) At the San  Felipe-El  Potosi Mine and its  extension,  the El Capulin Mine,
    which are located  near the City of Potosi,  Department  of San  Miguel,  El
    Salvador (approximately 18 miles northwest of the City of San Miguel).

(3) At the  Hormiguero  Mine which is located about five miles  southeast of the
    SCMP  near  the City of  Comacaron  in the  Departments  of San  Miguel  and
    Morazan, El Salvador.

(4) At the Modesto  Mine which is located  near the City of El Paisnal  about 19
    miles north of San  Salvador,  the  Capital  City in the  Department  of San
    Salvador, El Salvador.

(5) At the  Montemayor  Mine which is located about 14 miles  northeast of SCMP,
    about six miles  northwest of SSGM,  and two and one-half  miles east of the
    City of San Francisco Gotera in the Department of Morazan.

All of the above mines were formerly in  production  and did produce gold and/or
silver.  In addition to the channel  trenching,  test pit holes, and underground
adit  openings,  the Joint Venture has acquired its own diamond  drilling rig to
explore in depth, the above described  potential targets.  All of the properties
have promising  geologic  prospects and  alternations,  and  historical  records
evidence that all have been mined and produced gold in the past.

Also,  the Joint  Venture has its own SSGM on-site  laboratory  with  full-time,
trained  personnel  working three shifts to fire assay the gold ore samples.  It
also has two full-time surveying crews consisting of ten persons.  (Reference is
made to Item 2. Properties for additional detailed information.)

Gold Prices, Sales, Marketing and Competition

Since the Joint Venture is in operation and producing gold on a limited start-up
basis, its revenues,  profitability and cash flow will be greatly  influenced by
the price of gold. The gold world market price is  unpredictable,  can fluctuate
widely  and is  affected  by  numerous  factors  beyond the  Company's  control,
including, but not limited to, expectations for inflation, the relative strength
of the United  States' dollar in relation to other major  currencies,  political
and economic conditions,  and production costs in major gold-producing  regions.
The supply and demand for gold also  affects the price.  The Company has not and
does  not  expect  in the  forseeable  future  to  engage  in  hedging  or other
transactions  to minimize the risk of fluctuations in gold prices or currencies.
Gold and silver can be sold on numerous  markets  throughout the world,  and the
market price is readily  ascertainable  for such metal.  There are many refiners
and smelters available to process these precious metals. Refined gold and silver
can also be sold to a large number of precious  metal  dealers on a  competitive
basis.  The Joint  Venture's  SCMP  operation  which produces dore is refined by
Handy & Harman's refinery located in the United States.

At this time the Joint  Venture  believes  it will not be a major gold  producer
based on the size of existing gold mining companies and its financial  capacity.
The Company  believes  no single  gold-producing  Company has a large  impact to
offset  either the price or supply of gold in the world  market.  There are many
companies  in  the  world   producing   gold.   Many  of  these  companies  have
substantially greater technical, financial resources and large gold ore reserves
than the Company. The Company believes that the expertise of the Joint Venture's
experienced key personnel employees, its ability to train its employees, its low
overhead,  its gold ore resources and its projected low cost of production  will
allow it to compete effectively and to produce reasonable profits.

<PAGE>

To date,  inflation,  currency and  interest  rate  fluctuations  have not had a
material impact on the Company or its results of operations.

Environmental Matters

In order to make  certain  that the  exploration,  development,  mining  and ore
processing  do  meet   acceptable   environmental   impact   acceptability,   an
environmental  impact study has been prepared by an  independent  consultant and
submitted for review to the Government of El Salvador.

The Joint Venture's  consultant  believes that the report relating to the safety
precautions,  employee health and safety,  air quality  standards,  pollution of
stream and fresh water sources,  waste  material,  odor,  noise,  dust and other
reasonable environmental protection practices contained in this report will meet
the Government of El Salvador's approval.

Political Environment in El Salvador

The following  information is an excerpt from a report from the American Embassy
San  Salvador,   Economic/Commercial  /Agriculture  Section  entitled,  "Country
Commercial Guide, August 1996":

"Chapter III - POLITICAL ENVIRONMENT

"A major  milestone in El Salvador's  peace process was reached in the Spring of
1994 with peaceful presidential,  legislative, and municipal elections, in which
the political party of the ex-guerrillas, the FMLN, participated.  Though losing
the  presidential  election,  the FMLN emerged as the second  largest  political
party in the 84-seat legislative assembly.  The presidential election was won by
Armando Calderon Sol, the candidate of the  right-of-center  ARENA party,  which
won 39  seats in the  Assembly.  While  most of the  requirements  of the  peace
accords have been fulfilled, some commitments are still pending; for example, in
the area of land distribution, human settlements, and legal and judicial reform.
In recognition of the progress in fulfilling the accords, the U.N.
monitoring presence has been steadily reduced.

"Since its early inception as an anti-communist nationalistic party in the early
1980s,  ARENA has  moderated  its  policies,  particularly  during the  previous
administration of President Alfredo  Cristiani.  Under his  administration,  the
government  ended the 12-year  civil war,  greatly  liberalized  the economy and
reduced corruption. President Calderon Sol has continued these policies.

"Shortly after the 1994  elections the FMLN split into two parties,  one keeping
the FMLN name and the other naming itself the Democratic  Party (PD). The PD has
advocated a more  moderate  political  line than the FMLN.  While  taking a more
radical  tone,  the FMLN has strongly  supported  the  democratic  process.  The
center-left  Christian  Democratic Party (PDC) has seen its support slowly erode
since  controlling  the  Presidency  and  Assembly in the  mid-1980s.  There are
several  other  small  parties,  the  largest  of which,  the  Social  Christian
Revolution Party (PRSC), is a PDC breakaway.

<PAGE>

"El Salvador has an excellent relationship with the United States, solidified by
12 years of close  cooperation  during the Salvadoran  civil war and strong U.S.
support for reconstruction and reconciliation in the aftermath of the 1992 peace
accords.  Leaders of the FMLN have  established  close  relations  with the U.S.
government,  seeing it as an honest  broker during the peace  process.  The vast
majority  of  Salvadoran  people  also view the U.S.  in a  favorable  light,  a
sentiment  augmented by the fact that almost a million  Salvadorans  live in the
U.S. The  political  environment  is expected to remain stable over the next ten
years."

Economy Status

The following selected  information on El Salvador was obtained from excerpts of
the "The World Factbook page on El Salvador" on the internet:

"Economy

"Economic overview: El Salvador possesses a fast-growing entrepreneurial
economy in which 90% of economic activity is in private hands, with
growth averaging 5% since 1990.  Yet, because the 1980s were a decade of
civil war and stagnation, per capita GDP has not regained the level of
the late 1970s.  The rebound in the 1990s stems from the government
program, in conjunction with the IMF, of privatization, deregulation, and
fiscal stabilization.  The economy now is oriented more toward
manufacturing and services compared with agriculture.  The sizable trade
deficits are in the main covered by remittances from the large number of
Salvadorans abroad.
GDP: purchasing power parity - $11.4 billion (1995 est.)
GDP real growth rate: 6.3% (1995 est.)
GDP per capita: $1,950 (1995 est.)
GDP composition by sector:
agriculture: NA%
industry: NA%
services: NA%
Inflation rate (consumer prices): 11.4% (1995 est.)
Labor force: 1.7 million (1982 est.)
by occupation: agriculture 40%, commerce 16%, manufacturing 15%,
government 13%, financial services 9%, transportation
6%, other 1%
Unemployment rate: 6.7% (1993)
Budget:
revenues: $846 million
expenditures: $890 million, including capital expenditures of $NA
(1992 est.)
Industries: food processing, beverages, petroleum, tobacco,
chemicals, textiles, furniture
Industrial production growth rate: 7.6% (1993)
Electricity:
capacity: 750,000 kW
production: 2.4 billion kWh
consumption per capita: 408 kWh (1993)
Agriculture: coffee, sugarcane, corn, rice, beans, oilseed; beef, dairy
products; shrimp . . .
Exports: $1.6 billion (f.o.b., 1995 est.)
commodities: coffee, sugarcane, shrimp
partners: US, Guatemala, Costa Rica, Germany
Imports: $3.3 billion (c.i.f., 1995 est.)
commodities: raw materials, consumer goods, capital goods
partners: US, Guatemala, Mexico, Venezuela, Germany
External debt: $2.6 billion (December 1992)
Economic aid:
recipient: ODA, $777 million (1993)
note: US has committed $250 million in aid to El Salvador for 1992-96
Currency: 1 Salvadoran colon (C) = 100 centavos
Exchange rates: Salvadoran colones (C) per US$1 - 8.755 (December 1995),
8.755 (1995), 8.750 (1994), 8.670 (1993),  9.170 (1992), 8.080 (1991)
Fiscal year: calendar year."

<PAGE>

Investment Climate in El Salvador

The following  information is an excerpt from a report from the American Embassy
San  Salvador,   Economic/Commercial  /Agriculture  Section  entitled,  "Country
Commercial Guide, August 1996":

"Chapter VII - INVESTMENT CLIMATE

" Openness to Foreign Investment

"The  Salvadoran  Government  is committed  to  attracting  foreign  investment.
Companies from the United States,  Canada,  Germany,  Korea,  Taiwan, and Mexico
have made  investments  here with  favorable  results.  The primary  legislation
governing foreign investment in El Salvador is the 1990 Export Reactivation Law;
and the 1988 Foreign Investment Promotion and
Guarantee law.

"The 1988 Foreign  Investment and Promotion Law is a comprehensive  statute.  To
investors who register with the Ministry of Economy this law provides:

"--Unrestricted remittance of net profits for investors in industrial
activities.

"--Remittance  of net  profits  up to fifty  percent of the  registered  foreign
capital  per year  for  investors  in  commercial  and  service  activities.  In
practice, however, there is free convertibility of capital.

"--Unrestricted  remittance of funds obtained from the liquidation of a business
in proportion to the foreign funds invested.

"--Unrestricted  remittance  of royalties  and fees for use of foreign  patents,
trademarks, technical assistance and other similar services.

"--Foreign investors may hold dollar accounts in El Salvador and may use
these accounts to obtain local financing. . . .

"Under the Export  Reactivation Law of 1990, firms not located in free zones and
exporting  less than one hundred  percent of their  production may apply for tax
rebates of six percent of the FOB value of these exports. However, the paperwork
to obtain this rebate is cumbersome.

"In 1994 the government  announced that it was setting up a one-stop  office for
foreign  investment  in the Ministry of Economy,  where  investors  now register
their investments.  To date, no concrete steps have been taken towards this end.
The  registration  process  is  supposed  to be  non-discriminatory  and  is not
considered an impediment to investment.

<PAGE>

"It is not  necessary  to have a local  partner  in El  Salvador.  Some  maquila
operations  are  completely  foreign-owned.  Three  multinational  oil companies
operate in El Salvador,  and two of these companies share a small refinery.  Two
U.S.  banks have  offices in El Salvador.  The banking law has been  modified to
encourage other foreign banks to enter the country and to remove restrictions on
ownership of newly-privatized  banks. There are now no restrictions on ownership
of banks.

"Investment Climate

"Privatization

"The Government of El Salvador is proceeding with the  privatization of both the
telephone company (ANTEL) and the electric distribution  companies.  In February
1996  the  Privatization   Commission   request  proposals  from   international
consulting firms  principally  investment  banks,  for advisory  services on the
privatization process. Six banks including American,  Swiss, British, German and
French firms were asked to participate.  An American firm was selected to act in
an advisory capacity on this privatization project.

"The  privatization  of the electric  company (CEL) is also moving  ahead.  Four
distribution  companies  are being formed and will be sold off by the end of the
fourth  quarter of 1996. The remainder of CEL will be broken up and sold in 1997
under a scheme that encourages  maximum  competition.  The privatization  should
provide good opportunities for U.S. investors and exporters.

The GOES still lacks approval from the Legislative Assembly for the
privatization process.  Legislation was introduced in May 1996 outlining
duties and powers of a proposed Regulatory Entity.  It would be modeled
after a Public Utilities Commission and would oversee telecommunications,
electricity, ports, airports, railroads, and future tollroads. . . .

"Conversion and Transfer Policies

"El Salvador has a freely convertible currency that trades at approximately 8.75
colones per dollar.  This currency is buoyed by family remittances of nearly one
billion  dollars per year from  Salvadorans  who reside outside the nation.  The
nation's  banks and many foreign  exchange  houses  actively  trade  dollars and
colons.  Foreign businesses freely remit profits,  repatriate capital, and bring
in capital for additional investments.  Banks publish their exchange rates daily
in local newspapers.

"Expropriation and Compensation

"The last case of expropriation began in 1986, when the government  nationalized
the assets of CAESS, San Salvador's  electric  distribution  company.  Six years
later,  shareholders received the first payment of ten million dollars. In March
1993,  the  government  concluded  payments  of cash and  bonds and the case was
settled to the satisfaction of all parties.

"In 1960 the United States and Salvadoran governments signed an
investment guarantee treaty, which guaranteed U.S. investors against
losses that could arise from currency inconvertibility or expropriation.
As of July 1995, the US and El Salvador have nearly completed negotiating
a bilateral investment treaty (BIT) that would encompass all aspects of
investment.  It has not been signed for technical reasons.  . . .

"Political Violence (as it may affect investments)

<PAGE>

"El Salvador  continues its transition to a peacetime  society after 12 years of
civil conflict.  There have been few confirmed acts of political  violence since
the  elections in mid-1994.  Although  general  crime levels are high and are of
concern  to the  business  community,  there  has not  been  political  violence
specifically aimed at foreign investors, their businesses or their property.

"Performance Requirements

"El  Salvador's  investment  legislation  does not require  investors  to export
specific amounts, transfer technology,  incorporate set levels of local content,
or fulfill other performance criteria.

"Right to Private Ownership and Establishment

"Foreign  citizens and private  companies can freely establish  businesses in El
Salvador.  However,  foreigners are prohibited from operating  small  businesses
with start-up capital of less than the equivalent of USD 25,000 dollars. This is
not  seen as an  impediment  to  foreign  investment,  and  does  not seem to be
strictly  enforced.  There are several  sectors  shielded from foreign and local
private investment or competition.  The national telephone company (ANTEL),  the
water and sewer company (ANDA),  and the electric company (CEL) are owned by the
state, but their monopolies are slowly being  dismantled.  For example,  private
power  generation is now allowed  (although for practical  purposes,  it must be
sold to CEL for distribution),  and a U.S. company has formed a partnership with
ANTEL to operate the country's  cellular phone system.  Artesanal fishing within
12 miles of the coast is limited to citizens of El Salvador.  Commercial fishing
between 12 to 200 miles from the coast can be undertaken by Salvadoran citizens,
foreigners legally residing in El Salvador, or joint ventures legally registered
with  the  government.   Commercial  fishing  licenses  must  be  obtained  from
CENDEPESCA, a government entity.  Foreigners may engage in sport fishing without
restriction in any of El Salvador's coastal waters. . . .

"Regulatory System (laws and procedures as they pertain to investment)

"The laws and policies of El Salvador are relatively  transparent  and generally
foster competition.  Bureaucratic procedures, although cumbersome, have improved
in recent years and are  relatively  streamline for foreign  investors.  Sectors
that are still regulated or owned by the state,  such as electricity,  water and
telecommunications,  are scheduled to be  privatized  in 1996 under  competitive
rules that allow for foreign  involvement and investment.  The superintendent of
Banks supervises the banking system, but interest rates are determined by market
forces.  Banking-law reforms have attracted two new foreign banks to the country
in the last year, and several new financial  institutions  have been established
by Salvadoran investors.  Gasoline prices are controlled' by the government, but
are actually based on an average of U.S. Gulf Coast refinery prices.

"Bilateral Investment Treaties

"The United States and El Salvador signed an investment guarantee treaty in 1960
designed  to  protect  U.S.   investors   against   expropriation   or  currency
inconvertibility.  The  United  States  and El  Salvador  also have a  framework
agreement  for  a  Trade  and  Investment  Council  (TIC).  An  all-encompassing
bilateral  investment  treaty  which  would  address  issues  such  as  national
treatment for foreign investors, transfers, expropriation,  investment disputes,
tax policies,  etc., is being negotiated,  but has not been signed for technical
reasons. The US and Salvadoran  governments are working towards but have not yet
reached agreement on a Tax Information Exchange Agreement.

<PAGE>

"El  Salvador  is a  member  of the  Central  American  Common  Market,  and has
approximately 50 commercial and technical  cooperation treaties in effect. Three
of these treaties (Mexico,  Spain, and Venezuela) look to promote  coinvestment.
El Salvador is a member of the World Trade Organization.

"OPIC

"The Overseas  Investment  Corporation (OPIC) has a bilateral  agreement with El
Salvador.  OPIC has approved insurance coverage for the expansion of a U.S. bank
in El Salvador, and is considering several other projects. OPIC insures currency
inconvertibility,   expropriation   and  civil  strife,  as  well  as  corporate
financing.  El Salvador is also  participating  in the  Multilateral  Investment
Guarantee Agency (MIGA).

"Labor

"Of El Salvador's labor force of approximately  1.5 million workers,  34 percent
work in the  agricultural  sector.  This is followed by services  (21  percent),
commerce (18 percent) and  manufacturing  (15 percent).  The minimum wage in the
industrial and commerce  sectors is 1050 colons[.]  roughly 120 dollars a month.
Urban employees with minimal skills  generally earn at least twenty percent more
than the  minimum  wage.  Although  the  minimum  wage is less for  agricultural
workers, coffee plantation owners report that they pay above the minimum wage to
attract workers during the harvest.

"According  to a Planning  Ministry  survey of 5,000  urban and rural  families,
unemployment in 1995 was 7.7 percent.  Underemployment  is probably much higher,
although there are no reliable estimates. However, some construction contractors
cannot  find  sufficient  skilled  workers,  due to the number of  projects  now
underway in El Salvador.  According to the above survey, 150,000 more people are
employed in 1994 than 1993. The  statistics  from this survey are not considered
precise, but do indicate trends.

"Salvadoran  labor is  perceived  as hard  working  and  trainable.  The general
educational  level is low,  which may  inhibit  the  development  of  industries
needing  skilled,  educated  labor.  In  addition,  there  is a lack  of  middle
management-level  talent,  which often results in foreigners being brought in to
perform such tasks.

"The Constitution of December 1983 guarantees the right of employees to
organize into associations and unions.  Employers are free to hire union
or non-union labor.  Closed shops are illegal. . . .

"Capital Outflow Policy

"There are no restrictions on capital outflow for Salvadorans, nor are there any
specific incentives to invest capital outside El Salvador.  Regarding investment
outflow, Salvadoran investors have interests in hotels, real estate and industry
in  Mexico,  Guatemala,  Honduras,  Costa  Rica,  Panama  and the U.S.  Accurate
statistics about the size of these investments are not available.

"Major Foreign Investors

"Coastal  Technologies - owner/operators of the Nejapa  power-generating  plant.
Estimated value over USD 140 million dollars.

"Kimberley Clark de C.A. - owns a paper products factory.

"Texaco Caribbean - fuel storage and lubricant  blending plant in Acajutla,  and
service station/grocery markets throughout the country.

<PAGE>

"Esso Standard Oil - together with Shell, owns and operates a small oil refinery
in Acajutla. Also own service station/grocery marts throughout the country.

"Shell  El  Salvador  - shares  an oil  refinery  with  Esso,  and owns  service
station/grocery marts throughout the country.

"Bayer de El Salvador - owns a modern pharmaceutical processing plant.

"Sara Lee Knit Products - owns a clothing assembly plant in the El Pedregal free
trade zone.

"Xerox de El Salvador - sells and services office equipment and
computers.

"Western Petroleum - produces and exports alcohol to the U.S.

"British American Tobacco - manufactures cigarettes."

Efforts to Obtain Capital

Substantial  consideration,  time and  effort  continue  to be  given to  secure
investment  capital through various financial  arrangements for the operation of
the SCMP, the SSGM, and the other exploration projects. The Company, Sanseb, and
the Joint Venture have considered the past political situation in El Salvador to
have been unstable and a great deterrent to the investment community. The stigma
of the past political unrest still continues as a barrier to investors.

The Company has been successful in obtaining investment funds that were required
to retrofit and operate its SCMP,  conduct its various  exploration and drilling
program,  and for its current  needs.  It also  raised  capital in a sum of $2.5
million  during 1997 to purchase a crushing  system and to perform  diamond core
drilling at the SSGM site.  It believes that it will be able to obtain the funds
it will require to conduct its business  affairs until the Joint Venture  begins
earning profits and has adequate cash flow. An investment of approximately  U.S.
$13 million will be needed for its  contemplated  SSGM  open-pit,  heap-leaching
operation.  It is estimated  that an  additional $2 million would be required to
expand the SCMP  facilities and $10 million is needed for a drilling  program on
the five exploration projects.  Plans, time and effort for obtaining these funds
are in process.

Land Acquisition and Development

During the past years, the Company has  substantially  reduced its activities in
the business of land acquisition and real estate development which was conducted
principally through its two wholly-owned  subsidiaries,  San Luis Estates,  Inc.
("SLE"),  a Colorado  Corporation,  and Universal  Developers,  Inc. ("UDI"),  a
Wisconsin Corporation.

SLE had been the developer of a large tract of land for  recreation,  retirement
and other individual  purposes  consisting of approximately  7,000 acres of land
which was  subdivided  in the San Luis  North  Estates  Subdivision  located  in
Costilla County, Colorado, which abuts the Town of San Luis, Colorado, and which
lies  between  the San Juan and  Sangre de Cristo  mountain  ranges in  southern
Colorado.  This tract of land had been subdivided into 1,205 five-acre or larger
parcels,  unimproved  except for gravel roads now maintained by Costilla County,
however,  drainage,  survey,  staking,  and water rights  adjudication have been
completed.

As of March 31, 1997,  there  remained an  inventory of 40 five-acre  parcels of
real estate which  represents less than four percent of the total lots developed
in this  subdivision.  It is the intent of the Company to sell the remaining lot
inventory  as a bulk  sale for cash or to  exchange  it for  other  assets or to
reduce its debts. This land inventory is not considered  material or significant
to the Company's operations.

<PAGE>

SLE believes that it is in compliance with the requirements of the Department of
Housing and Urban development ("HUD") to sell its remaining lots in the San Luis
North Estates Subdivision; if necessary, it intends to maintain its registration
effective with HUD in anticipation of selling its remaining lots unless it finds
that it is exempt from the HUD rules and regulations.

SLE also owns twelve improved lots located in the City of Fort Garland, Costilla
County,  Colorado.  The assets of SLE have served as a source of collateral  for
funds advanced to the Company and its majority-owned subsidiaries.

The Company's  wholly-owned  subsidiary,  Homespan,  owns a 331-acre  campground
known as Standing  Rock  Campground  located in Camden  County,  Missouri.  This
recreational  resort  includes  approximately  three  quarters of a mile of lake
frontage on the Lake of the Ozarks, 130 campsites of which 120 campsites include
hook ups for  electricity,  water,  sewer,  and a pad for  recreational  vehicle
parking.  A clubhouse and also several ancillary  buildings are on the premises.
The Company is the operator of the  campground  and is leasing  space to campers
and others on a daily, weekly, or monthly basis.

Misanse, the Company's majority-owned subsidiary (52%) owns the SSGM real estate
consisting of approximately  1,470 acres which is located  approximately two and
one-half  miles  northwest  of the  City of Santa  Rosa de Lima,  off of the Pan
American  Highway,  and about 108 miles  southeast  of the  Capital  City of San
Salvador,  El  Salvador,  and it is about 11 miles  west from the  border of the
Country of  Honduras.  It is also about 26 miles from the City of La Union which
has railroad and port  facilities.  An airline  commuter  service provides daily
scheduled flights to the City of Santa Rosa de Lima.

The Company  owns 52 acres of land on the Modesto Mine site which is located due
north of the City of Paisnal and  approximately  19 miles north of San Salvador,
the capital city of El Salvador.

Reference is made to "Item 2.  Properties," for additional information.

Real Estate Sales

Homespan, the local real estate marketing subsidiary of the Company is presently
inactive.  It has no  significant  activity and is not material to the Company's
operation.  Homespan  holds the title to the real estate located in Colorado and
the Standing Rock Campground ("SRC"),  located in the Lake of the Ozarks. SRC is
operated  by the  Company.  Assets of  Homespan  have also served as a source of
collateral for funds loaned to the Company and its majority-owned subsidiaries.

Advertising

The Company owns 100% of the outstanding common stock of Piccadilly  Advertising
Agency, Inc. ("Piccadilly"), a Wisconsin corporation.  Piccadilly provides, when
required,  advertising  services to the Company and its other  subsidiaries when
they are needed.  It was and still may be able to obtain  advertising  discounts
because of its agency status.  Piccadilly's  operations  are not  significant or
material to the Company's operations.

<PAGE>

Patents and License Agreements

On July 23,  1987,  the  Government  of El  Salvador  delivered  and  granted to
Misanse,  possession of a mining  concession.  On September  25, 1996,  the SSGM
concession was reconfirmed to comply with the 1996 El Salvadoran Mining Law. The
Joint  Venture  believes  that its  SSGM  concession  begins  on the date it was
issued--July  1987.  The pending case with the El  Salvadoran  Supreme Court may
determine  the  outcome  of which  set of mining  regulations  will  apply.  The
concession  provides  the right to extract and export  minerals for a term of 25
years (plus a 25-year renewal  option)  beginning on the first day of production
from the real  estate  owned by  Misanse  and  encompassing  the  SSGM.  Misanse
assigned  this  concession  to the  Joint  Venture.  Under  the  concession  and
applicable El Salvador law, including a bi-lateral agreement,  the Joint Venture
has the right to export said  minerals for five years  beginning  with the first
day of production,  without imposition of mineral, export, or any taxes. It also
has the right to import free of duty, equipment and all other items necessary to
operate the SSGM. (Reference is made to "Item 1.
Concession Agreement")

The Joint Venture has  applications  pending with the El Salvador  Department of
Energy,  Mines and  Hydrocarbons  for the exploration  rights under the February
1996 Mining Law for the following mining properties located in El Salvador:  San
Felipe-El  Potosi Mine, and its  extension,  the El Capulin Mine, the Hormiguero
Mine,  the  Modesto  Mine,  and  the  Montemayor   Mine.  The  Company  and  its
subsidiaries hold no patents or trademarks.

Significant Customers

The Company presently has no individual  significant customers in which the loss
of one or more would have an adverse  effect on any segment of its operations or
from whom the Company  has  received  more than ten percent of its  consolidated
revenues  except for the sale of gold which the Joint Venture is producing.  The
gold in dore  form is  refined  and then  sold at the  world  market  price to a
refinery located in the United States.

Miscellaneous

Backlog orders are not significant to either the Company's or its majority-owned
subsidiaries'  areas of  operations,  or at this  time is any  portion  of their
operations  subject to  renegotiation  of profits or termination of contracts at
the election of the United States' Government.

Neither the Company nor its  majority-owned  subsidiaries  conduct any  material
research  and  development  activities,  except as indicated in this report with
respect  to the  Joint  Venture  and its  mining  exploration  and  exploitation
programs.

The Company believes that the federal, state and local provisions regulating the
discharge of materials into the environment should not have a substantial effect
on the capital expenditures,  earnings or competitive position of the Company or
any of its  majority-owned  subsidiaries as the Company does not have any mining
activity in the United States.

Financial Information About Industry Segments Lines of Business

Operation

Campground:  For the years ended March 31, 1997,  1996 and 1995,  revenues  have
been  generated  from  the  campground  business.  Although  Homespan  owns  the
campground real estate, the Company is the campground operator.

<PAGE>

Land Sales

The Company intends to sell its remaining lots in Colorado on a bulk basis.

Mining

The Company's  primary strategy,  through its Joint Venture,  is to use its SCMP
facilities  to  process  gold ore  transported  from SSGM and other  exploration
opportunities  located in the  Republic of El  Salvador.  The Joint  Venture has
produced gold from its SCMP operations during this start-up period. At such time
as funds are available,  the Company intends to process its SSGM gold ore via an
open-pit, heap-leaching system.

The Company  anticipates that the capital required for the purchase of equipment
and working  capital can be  obtained  from the sale of its common or  preferred
shares,  bonds,  equity  offerings,  loans,  leases,  partial  sale of its  gold
reserves,  sale of gold,  or from a  combination  of these  and  other  creative
funding possibilities.

Competition

The Company believes that neither it, nor any other  competitor,  has a material
effect on the precious metal markets,  and that the price that the Joint Venture
will receive for its sale of gold is dependent upon world market conditions over
which neither it nor any other single competitor has control.

Employees

As of March 31, 1997,  the Joint Venture  employed  approximately  318 full-time
persons  from  El  Salvador  to  perform  its  exploration,   exploitation,  and
development  programs;  to produce gold from its SCMP facilities;  and to handle
the administration of its activities. None of these employees are covered by any
collective  bargaining  agreements.  It has developed a harmonious  relationship
with  its   employees,   and  it  believes   that  it  is  the  largest   single
non-agricultural  employer in the El Salvador  Eastern Zone.  Also,  the Company
employs approximately four persons (plus part-time help) in the United States.

Insurance

The Joint Venture has in existence  insurance  through an El Salvador  insurance
company with the following  coverage:  general liability,  vehicle liability and
extended coverage,  fire, explosion,  hurricane,  cyclone,  tornado,  windstorm,
hail,    flood,    storm,    earthquake,    tremor   or    volcanic    eruption,
politically-motivated  violence,  terrorism,  strikes,  work  stoppages,  riots,
uprisings,  malicious acts, vandalism, and related acts. As additional equipment
and assets are acquired or improvements are made, the insurance  coverage can be
increased accordingly.

<PAGE>

                                Industry Segments

1. Unaffiliated Sales                           Year Ended March 31,
   ------------------                           --------------------

   Industry     Location                      1997          1996          1995
   --------     --------               -----------  ------------   -----------
   Mining (*a)  El Salvador            $         0  $          0   $         0
   Campground   Missouri, USA               59,009        55,692        54,600
   Real Estate  Colorado, USA                    0             0         9,000

2. There Were No Intersegment Sales
   --------------------------------

3. Total Revenues                               Year Ended March 31,
   ---------------                              --------------------

   Industry     Location                      1997          1996          1995
   --------     --------               -----------  ------------   -----------
   Mining (*a)  El Salvador            $         0  $          0   $         0
   Campground   Missouri, USA               59,009        55,692        54,600
   Real Estate  Colorado, USA                    0             0         9,000
   Other        Delaware/Wis., USA       1,571,207     1,289,568       759,581
                                       -----------   -----------   -----------
                               Total:  $ 1,630,216   $ 1,345,260   $   823,181

4. Operating Profit (Loss)                      Year Ended March 31,
   -----------------------                      --------------------

   Industry     Location                      1997          1996          1995
   --------     --------               -----------   -----------   -----------
   Mining (*a)  El Salvador            $         0   $         0   $         0
   Campground   Missouri, USA               (1,976)       (6,741)       (7,336)
   Real Estate  Colorado, USA                    0             0         7,676
   Interest     El Salvador/Delaware
    Income      Wisconsin, USA           1,009,574       794,543       274,407
                                       -----------   -----------   -----------
                               Total:  $ 1,007,598   $   787,802   $   274,747

5. Identifiable Assets                          Year Ended March 31,
   -------------------                          --------------------

   Industry     Location                      1997          1996          1995
   --------     --------               -----------   -----------   -----------
   Mining (*a)  El Salvador            $22,733,462   $18,838,770   $15,692,668
   Campground   Missouri, USA            1,135,500     1,135,500     1,135,500
   Real Estate  Colorado, USA               21,000        21,000        21,000
   Corporate Assets                      1,177,372       517,845       768,305
                                       -----------   -----------   -----------
                               Total:  $25,067,334   $20,513,115   $17,617,473

(*a) The proceeds from the sale of gold and the gold inventory received from the
Joint Venture  ($2,150,000--$969,721-1997;  $1,180,279-1996) were used to reduce
the advances to the Joint Venture account.

<PAGE>

Item 2.  Properties

Corporate Headquarters

The Company  leases  approximately  4,032  square  feet of office  space for its
corporate  headquarters on the second floor of the building known as the General
Building located at 6001 North 91st Street,  Milwaukee,  Wisconsin, at a monthly
rental charge of $2,789 on a month-to-month  basis. The lessor is General Lumber
& Supply Co., Inc. ("General Lumber"),  a Wisconsin  corporation.  The Company's
President,  Edward L. Machulak  owns 55% of the common stock of General  Lumber.
Edward L.  Machulak  disclaims  any  interest in the  balance of General  Lumber
common stock which is owned by two of Mr. Machulak's  brothers,  his wife, and a
trust  for  the  benefit  of his  children.  In  addition,  the  Company  shares
proportionately  any increase in real property taxes and any increase in general
fire and extended coverage  insurance on the property.  In lieu of cash payment,
the  Lessor  has  agreed  to  apply  the  monthly  rental  payments  owed to the
open-ended, secured, on-demand promissory note(s) due to it.

Real Estate Holdings

A description  of the Company's  real estate  holdings are set forth in "Item 1.
Land Acquisition and Development." Real estate assets have served as a source of
collateral  for funds  loaned to the Company and its wholly and  partially-owned
subsidiaries.

San Sebastian Gold Mine ("SSGM")

Tailings from the SSGM were, and now virgin gold ore is being transported to the
SCMP site to  produce  gold.  SCMP is  gradually  being  expanded  and  improved
technically  to increase its virgin ore tonnage  process to a capacity of 300 to
400 tons per day. It is mining virgin gold ore from its open pit and it plans to
extract the stope fill from  underground  to produce gold on the SSGM site.  The
property consists of 1,470 acres. SSGM is located approximately two and one-half
miles northwest of the City of Santa Rosa de Lima in the Department of La Union,
Republic of El Salvador, Central America.

SSGM Current Status

The Company,  through its Joint Venture is conducting the following  activities:
It is in the  development  and  pre-production  mining  stage which  consists of
completing its survey, mapping, site preparation, infrastructure,  construction,
planning,  and in the  performance  of the  auxiliary  work needed to begin gold
production at the SSGM site. The Joint Venture's geologists have determined that
SSGM has minable gold ore reserves via an open pit of approximately 13.4 million
tons of gold ore which should  contain  approximately  1.166  million  ounces of
gold. In addition, it has approximately 960,000 tons of dump material, and about
one million  tons of stope fill.  Presently,  the Company is seeking  funding to
purchase equipment,  to purchase  inventory,  and to use for working capital for
its on-site proposed open-pit, heap-leaching operation. In addition, the Company
is actively  engaged in the  exploration  and development of the peripheral area
(including diamond core drilling) surrounding the main body of gold ore in order
to increase its gold ore reserves.

The Company's main objective and plan, through the Joint Venture,  is to operate
a moderate tonnage, low-grade, open-pit, heap-leaching operation to produce gold
on its SSGM site.  Dependent on the  funding,  the grade of ore, and the tonnage
processed,  it  anticipates  producing  more than 40,000 ounces of gold from its
open-pit, heap-leaching operations during the first twelve full operating months
and more thereafter.

<PAGE>

In 1997, a diamond drilling program with an independent contractor was initiated
at the SSGM mine area to substantiate and expand the gold reserves.  At the same
time, pit walls were excavated and the old vein system was exposed to facilitate
systematic sampling of the wallrock.  This program demonstrated that true widths
of up to 100 feet of altered and  mineralized  trachyte occur  frequently in the
open-pit  and  adjacent  areas.  Panel and  surface  channel  sampling  of these
exposures  revealed  assays  in the 0.03 to 0.20  ounce per ton gold  range.  In
addition,  under  ground  workings  on the Limon,  Guaramal,  Santa  Elena,  and
Taladron veins are being rehabilitated.

SSGM Geology

The ore deposit consists of contact-fissure  veins carrying gold-bearing pyrite.
The  veins  occur at the  contact  between  quartz-monzonite  porphyry  dike and
surrounding eruptives which are basalt capped by trachyte.  All the rocks are of
recent  age,  probably  late  tertiary.  The SSGM lies within a  silicified  and
hydrothermally  altered  zone  of acid  to  basic  volcanoes  roughly  within  a
two-square kilometer area.

The  occurrence  is  typical  of  the  late  stage  deposition  associated  with
instrusives in Island Arc plate  tectonics  dating millions of years (four to 65
million) ago. These are typically polymetallic precious metal-base deposits with
high grade  veining in large haloes of low grade  resembling  in part the Kuroko
deposits in Japan.  The dike is shaped like a  flattened  "s" and  consists of a
2,800 foot long essentially  vertical  east-west  segment,  a northwest striking
western  section  "dragged"  sharply  north for 800 feet and  dipping 70 degrees
northeast and a vertical south-east striking east.

The geology of the SSGM deposit is integrally linked to the presence of a quartz
monzonite  intrusive.  This quartz  monzonite has the appearance of being a high
level sill and is probably coeval with the  surrounding  tertiary aged trachytes
that  form the main  SSGM  ridge.  The  geometric  configuration  of the  quartz
monzonite  controls  the  localization  of quartz  veins and  alteration  of the
trachytes.  The overall structural  control is east-west;  according to historic
mine records,  the monzonite  contacts with depth,  but  successive  level plans
suggest a funnel  shaped  structure  plunging  to the  southeast.  On a detailed
scale,  the  quartz  veins are  controlled  by a master  set of  parallel  veins
preferentially  oriented east-west.  The vein branch generally dips north and is
interconnected by southeast  dipping diagonal veins of variable strike.  Mapping
records describe veins as sinuous,  further  suggesting brittle stress regimens,
with veins occupying  dilational zones. These fissure style veins are up to five
feet in  width,  and  generally  occur in  trachyte  or at the  contact  between
trachyte and monzonite.

Pre and post mineral faulting is common  throughout the deposit.  The deposit is
said to diminish  when a basalt  "basement"  contact is  approached  at a depth,
however basalt on top of San Juan Hill is also  recognized.  The funnel shape of
the deposit, suggests however a potential synvolcanic structural control, with a
source  to the  southeast.  The San  Juan  area has not been  tested  by  modern
exploration techniques.

Based on data available at present,  the hydrothermal system focused on SSGM has
a dimension of approximately 3,500 feet in strike, a vertical extension of 1,100
feet   (minimum)  and  an   approximate   width  of  500  feet.  The  volume  of
hydrothermally  altered  rocks in the system  prior to erosion is likely to have
been in the magnitude of up to 200 million tons.

Gold occurs in the native form and also occurs rarely as a telluride.  Pyrite is
the predominant  sulphide  mineral in the deposit and it is the most common host
to the fine grained  gold.  Copper  minerals  including  bormite,  chalcopyrite,
chalcocite,  tetrahedrite,  enargite and  luzonite  have been  identified.  Gold
mineralization is accompanied by  silicification;  other gangue minerals include
kaolimite  and  sericite  and more rarely  barite.  High grade gold  streaks are
associated with barite.

<PAGE>

The SSGM deposit  represents a bonanza gold system  formed  within a coeval high
level alkaline  intrusive-extrusive  complex.  Mineralization is more consistent
with an acid sulphate system generated within an intracratonic  caldera setting.
The  potential  for SSGM to host  millions of ounces of gold is considered to be
excellent.

SSGM Ore Reserves

As of March 31,  1997,  the SSGM has  approximately  13.4 million tons of virgin
proven gold ore reserves,  grading  0.087 ounces of gold per ton and  containing
about 1.2 million ounces of gold.  Overall the stripping  ratio is low,  ranging
from zero in the Coseguina Hill area which is highly mineralized and consists of
a series of high angle  vertical veins to a possible  stripping  ratio of 1:3 to
1:8. It is planned to use these reserves; they will be screened, crushed and, if
required,  they will be  agglomerated  and placed on a proposed leach pad on the
SSGM site.  About one million tons of stope fill with a grade of 0.34 ounces per
ton and  approximately  960,000 tons of dump  material  with an average grade of
0.10 ounces of gold per ton. (For additional  information,  reference is made to
"Item 1. Proposed Mining, Mill, Heap-Leaching and Exploration Operations.")

Since July 1987  through  March 31, 1997,  the  following  exploration  has been
performed on the SSGM site:  surface channel  trenching,  34,594 meters (114,160
feet/21.6 miles); test pit hole excavations, 655 vertical meters (2,162 feet/.41
miles);  underground  workings and adit openings,  1,054 meters (3,478  feet/.66
miles). The surface samples from the trenching averaged 0.026 ounces of gold per
ton over an area approximately  1,000 feet in width and approximately 5,000 feet
in length.  A total of 46,619  SSGM gold ore  samples  were fire  assayed at the
Joint Venture laboratory.

SSGM Diamond Drilling Program

The Joint Venture has completed eight diamond drill holes at the SSGM site. Five
were on the San Juan Hill  which  ranged in depth  from 106 feet to 172 feet and
the grade varied (dependent on the rock encountered) from 0.01 to 0.15 ounces of
gold per ton.  Three drill holes were drilled in the Coseguina area from 62 feet
to 255 feet.  The grade of gold from 402 fire assay samples  varied from 0.01 to
0.54 ounces of gold per ton. In some areas former adits were  encountered  which
prevented the drilling to go to a deeper depth.

SSGM Proposed Mining Open-Pit, Heap-Leaching Operations at the SSGM Site

The open-pit  ore will be loaded into trucks by wheel  loaders and hauled to the
recovery plant area. The ore will then be placed into a vibrating  screen hopper
which will  remove  gold ore larger  than 3/4 inches in size.  Lime,  cement and
cyanide solution will be added if needed to this crushed ore. If needed, it will
then be placed  into an  agglomerator  to convert the fine  material  into small
stable pellets saturated with cyanide solution. The material will be conveyed to
the leach pad and stacked using conveyors.

The first step will be to load the first  sections  of the pad with the  crushed
ore. Belt conveyors will be used to transfer ore to a stacking conveyor to build
a heap.  After  loading is  completed,  the ore cures and the top surface of the
heap will be manually  levelled.  Leaching of the heap proceeds by  distributing
barren  sodium  cyanide  leach  solution to the heap with  sprinklers or by drip
irrigation.

The gold will be recovered  via a carbon  column  system where the porous carbon
recovers  the solvent  gold by  adsorption.  The carbon will be stripped and the
solution will flow through an  electrowinning  cell where gold will be recovered
from the strip solution by electroplating onto stainless steel wool cathodes.

<PAGE>

Gold  laden  steel  wool  cathodes  will  be   periodically   removed  from  the
electrowinning  cells and  transferred  to the replating  cell. In the replating
cell the gold will be  electrolytically  stripped from the steel wool and plated
onto stainless steel cathode sheets.

The gold will be recovered  from the  cathodes,  mixed with fluxes,  placed in a
crucible,  and heated in a furnace  until  melted.  The gold will then be poured
into molds to form dore bars.

SSGM Ownership of the Property

The San Sebastian Gold Mine real estate consisting of approximately 1,470 acres,
is owned by Misanse, a Salvadoran  Corporation.  The Company owns 52% of Misanse
common shares that are issued and outstanding.

History and Development-SSGM

The  San   Sebastian   Gold  Mine  has  a  long  history  of  gold   production.
Unquestionably,  the  SSGM  deposit  was the  jewel  of the El  Salvador  mining
industry and one of the most prolific gold mines in Central America.

Prior  to  1880,  the SSGM was  probably  known to the  natives  of the area and
Spaniards,  and may have produced gold during colonial days; however, no records
of  production  exist.  Numerous  artifacts  in the Santa Rosa  River  below the
present day SSGM provide mute evidence of primitive early day mining operations.

In 1883, an American  company hired Mr. Charles Butters to conduct  experimental
metallurgical  tests  on ore from the SSGM in his  laboratory  in New  York.  He
determined that amalgamation and gravity  concentration could not be effectively
employed, but that the gold was amenable to recovery by chlorination.

From 1885-1888, the first effective exploration work at the SSGM was done by the
above-mentioned  American  company.  Mr.  Butters  was  contracted  to  build  a
30-ton-per-day  chlorination  plant at the SSGM site. This small scale operation
proved unsuccessful, and the SSGM ceased production.

In 1898, the property was purchased by General Lisandro Letona.

In 1904, Mr. Butters,  believing that the SSGM was a valuable property which had
been grossly mismanaged,  acquired the property in association with Mr. David J.
Pullinger  of  Johannesburg,  South  Africa,  for  $100,000.  Within  a year  of
acquisition,  Mr.  Butters had  established  ore reserves of 42,560 tons with an
average  content of 2.75 ounces per ton. Their  operations  mined  approximately
$1,000,000  worth of gold from ore bearing gold at two and three quarter  ounces
or more per ton.

From  1904 to 1908,  three  investigations  were  made at the  SSGM  site by Mr.
Butters and his staff regarding the type of beneficiation process best suited to
the SSGM ores. It was determined that roasting, followed by cyanidation, and the
recovery of the gold by means of combined  electrolytic and zinc  precipitation,
was the  most  effective  method.  In  later  years,  roasting  of the  ores was
discontinued.

(During the period 1890-1898,  Mr. Butters had been active in the development of
cyanidation  of gold ores at the Rand Mine in South Africa,  and  recognized the
process as a revolutionary metallurgical practice.)

Continuous  operations at the SSGM by Butters Salvador Mines were performed from
1908 to 1917,  at which time  operations  ceased due to  exhaustion of what they
believed  to be all of the high grade  (two  ounces or more of gold per ton) ore
body. Butters Salvador Mines was voluntarily liquidated in October 1917.

<PAGE>

Initially,  mill  capacity  was 20 tons per day; it later  increased to 40 tons,
then to 100 tons, and finally,  120 tons per day. For a period of several years,
mill  heads  averaged  no less  than two  ounces  of gold per ton.  The SSGM was
considered  among the richest gold mines in the world.  During the peak years of
operation (1908-1917),  more than 1,500 people were employed at the SSGM. During
this interval of time,  the SSGM is reported to have produced  950,000 ounces of
gold.

From 1917 to 1921,  small  operations  at the SSGM,  under the  direction of Mr.
Butters, yielded approximately 150,000 ounces of gold.

In 1924, Mr. G. Swanquist, a former member of Mr. Butters' staff,
obtained the rights to develop the SSGM, but did no work worthy of
mention.

From 1933 to 1953,  owing to the increase in the world price of gold from $20.67
per ounce to $35.00 per ounce, operations were renewed under the name of Butters
Salvador Mines, Ltd.  Initially,  only the richest ore shoots were mined; later,
level and  shaft  pillars  were  exploited.  In 1933,  the rate of  milling  was
approximately  40 tons per day.  Diminishing  grade  and labor  problems  forced
closure in 1953. During the period 1933 to 1945, approximately 150,000 ounces of
gold were produced, and from 1945 to 1953, 30,000 ounces of gold were produced.

In 1953, when Butters  Salvador Mines,  Ltd. ceased  operations,  members of the
labor union  acquired the property in lieu of a severance  pay  settlement.  The
members of the union organized Misanse, an El Salvador Corporation,  and managed
monthly  shipments of approximately 70 tons of surface oxide ore and old fill to
the nearby Mina Lola mill.

In 1964, a ten-ton-per-day  flotation and cyanide plant operated  intermittently
on an unprofitable basis.

From 1967 to 1968, there were unprofitable  small-scale  high-grading operations
on an intermittent basis by various local miners working under a contract system
with Misanse.

The Company's investment in Sanseb dates back to 1969. Sanseb acquired its lease
to mine gold from Misanse in 1968.  During March of 1973,  the Company  acquired
control of Sanseb,  and since then,  owns 2,002,037 (82 1/2%) of Sanseb's issued
and outstanding common shares.

From 1969 to 1972, work advanced in reopening collapsed SSGM adits,  tunnels and
workings, with limited mining-milling  operations.  A straight cyanidation plant
was  installed  using zinc box  (shavings)  precipitation  and  operating  on an
intermittent basis with limited daily production.

From February of 1973 to 1978, reorganization of Sanseb under the control of the
Company,  with continuous and increased  production from the SSGM, was commenced
along with extensive plant modifications,  including conversion to Merrill Crowe
type (zinc dust)  precipitation.  The existing mill was upgraded to 100 tons per
day when this plant was  installed.  The  underground  tunnels and workings were
rehabilitated.  While the SSGM produced significant  revenue,  heavy exploration
and development costs strained the cash flow of the operation.

On February 6, 1978, Sanseb ordered  operations at the SSGM suspended due to the
unavailability  of investment  capital and the lack of continuity in management,
primarily due to the political  unrest,  particularly  in the Eastern Zone of El
Salvador where the SSGM is located.  On May 6, 1978, as a result of the decision
to suspend  operations,  former  employees  of Sanseb  claimed  that  Sanseb was
obligated  under El Salvador law for the payment of severance  pay to its former
employees.  Sanseb's legal position was that it temporarily suspended operations
due to the political  instability and since it did not terminate all activities,
it was not liable at that time for the  severance  pay.  In  January of 1979,  a
lower El Salvador  Court  awarded  possession of the mining rights (not the real
estate) to the former  employees.  It is believed that the Court had no right to
award a  concession  as only the  Government  of El Salvador  has this right and
authority.

<PAGE>

During 1979, when the embargo was in effect, Mr. Robert Villatoro  contracted to
operate the SSGM.  From the reports  provided by his  employees,  it is believed
that he  extracted  more  than  10,000  ounces  of gold.  Mr.  Villatoro  ceased
operations  during 1981 or 1982 when the guerrillas were extremely active in the
eastern part of El Salvador which includes the SSGM area.

During this time a dramatic  increase in the world  market price of gold (a peak
of over  $800/oz.  in 1980) as well as  developments  in the  technology of gold
extraction presented new opportunities for the Company and Sanseb at the SSGM.

In February  1985,  the Company made an on-site  inspection of the mill and SSGM
site,  which disclosed that the buildings,  offices,  machine shop,  laboratory,
mill and  equipment  were  completely  destroyed.  Also,  the SSGM  tunnels  and
workings consisting of approximately 37 miles were demolished and collapsed. The
Company  consulted  with  geologists  and  engineers  to  develop  a new plan of
extracting  gold from the reserves  developed in the Company's  exploration  and
development  program  and  to  process  gold  via  an  open-pit,   heap-leaching
operation.

In June 1985,  the  Company and Sanseb  settled  the claims of  Sanseb's  former
employees by agreeing to  compensate  them for the  severance  pay with proceeds
attained from future gold  production.  The El Salvador  Court, on June 6, 1985,
had decreed,  in a  non-appealable  order, to the  nullification of all previous
acts of the previous Court's orders, and removed the embargo previously decreed.
In  addition,  the El  Salvador  Court  ordered the return of all of the assets,
rights and everything else whatsoever  previously owned by the Company,  Misanse
and Sanseb.

The Company had no  significant  activity  at the SSGM site from  February  1978
through  January 1987.  The present  status is that,  since  January  1987,  the
Company, through the Joint Venture, has completed certain of the required mining
pre-production  preliminary  stages in the minable proven gold ore reserve area,
and it is active in attempting to obtain  financing for the project.  It is also
engaged in the exploration and the expansion program to develop  additional gold
ore reserves in the area surrounding the minable gold ore reserves.

On July 27, 1987, El Salvador  President  Jose Napoleon  Duarte,  at an official
ceremony  in the City of Santa  Rosa de Lima,  personally  presented  the mining
concession to Misanse, which simultaneously was assigned to Commerce Group Corp.
and San Sebastian Gold Mines, Inc.

In September  1987 the  Commerce/Sanseb  Joint Venture was formed to conduct and
manage the El Salvadoran business operations.

During October 1989, the Joint Venture set up in the City of San Miguel, its own
laboratory  equipment and began  performance of assays from its SSGM ore sample.
It trained its personnel to use this modern  laboratory  which was equipped with
modern technical equipment.

Since 1990 to present date,  extensive surface channel trenching,  adit openings
and test pit excavations  developed  thousands of fire assay samples.  They were
assayed at the Joint  Venture  laboratory.  This  laboratory  was relocated to a
Company-owned  site  near the  SSGM.  Extensive  dirt  roads  and a bridge  were
constructed.  Electric lines to the laboratory were restored. A diamond drilling
program  has been  initiated  to  determine  if there  are  additional  gold ore
reserves on this site.

<PAGE>

During this  twelve-month  period ended March 31, 1997, the Company has advanced
funds, performed services, and allocated its general and administrative costs to
the Joint Venture.

San Cristobal Mill and Plant ("SCMP") Recovery and Processing System

SCMP Location

SCMP is  located  near  the  City  of El  Divisadero  (off  of the Pan  American
Highway),  and is  approximately  13 miles east of the City of San  Miguel,  the
second largest City in the Republic of El Salvador, Central America.

SCMP Lease Agreement

On  November  12,  1993,  the  Joint  Venture  entered  into an  agreement  with
Corporacion Salvadorena de Inversiones ("Corsain"),  a governmental agency of El
Salvador,  to lease for a period of ten years,  approximately  166 acres of land
and buildings on which its gold processing mill, plant and related equipment are
located,  and which is  approximately 15 miles east of the SSGM site. The annual
lease  payment  is U.S.  $11,500  (payable  in El  Salvador  colones at the then
current rate of exchange), payable annually in advance, and subject to an annual
increase  based on the annual  United  States'  inflation  rate.  As  agreed,  a
security  deposit of U.S.  $11,500  was paid on the same date which also will be
increased annually to correspond with the annual U.S. inflation rate.

SCMP Mill and Plant Process Description

On February 23, 1993, at a foreclosure auction held by an El Salvador Court, the
Company, on behalf of the Joint Venture,  was the successful bidder in acquiring
SCMP, a precious  metals' cyanide  leaching mill and plant rated with a capacity
of processing  200 tons of virgin ore per day  consisting of the following  unit
operations:  crushing, grinding, thickening,  agitated leaching, counter current
decantation of leach solution, recovery of precious metals by zinc precipitation
(Merrill-Crowe),  and direct smelting of precipitates to produce precious metals
as dore and tailings' disposal.

Instead of utilizing the existing recovery system, the Joint Venture's engineers
have designed a carbon-in-leach (CIL) process which is described in detail under
Project Operating Plan.

The Joint Venture completed a certain stage of the retrofitting, rehabilitation,
repairing  and  restoring  of the SCMP's  plant and it continues to perform such
plant and equipment  alterations,  modifications  and improvements to expand the
SCMP's  capacity to process  300/400 tons of virgin ore per day. It presently is
producing gold on a limited  production  basis by processing the virgin ore from
its SSGM.

SCMP Gold Ore Sources

The Joint  Venture has several  sources of gold ore to process at the SCMP:  the
185,000 tons of Potosi  tailings  which have an average  grade of 0.06 ounces of
gold per ton; the SSGM open-pit  virgin ore; the dump material;  and the ore and
stope fill from the underground workings.

The other sources of gold ore to be used at the SCMP  operations  are the higher
grade gold ore (0.13 ounces or higher)  which could be  processed  with an up to
92% recovery  grade or better at a rate of 300/400 tons per day. The income from
the higher recovery of gold ore will be substantially more than the greater cost
involved in this process.  There is a sufficient amount of dump material,  stope
fill and higher grade  virgin gold ore that could be used via the SCMP  crushing
and grinding  process to recover up to 92% or more of the gold which recovery is
substantially   more  than  the  expected  60%  recovery  of  gold  through  the
heap-leaching  process.  The Joint Venture's  geologists estimate that there are
more than one million tons of higher grade ore from the stope fill (underground)
to be processed via the SCMP.

<PAGE>

Current Status

The start-up,  testing and  adjustment  stage of processing  the remaining  SSGM
tailings via trucking  this ore to the SCMP has  commenced and the Joint Venture
is in this preliminary  stage of producing gold. The SCMP is designed to process
400 tons per day by utilizing  12-hour cycles that should recover  approximately
70% of the gold from the  tailings.  The average  grade was about 0.08 ounces of
gold per ton.

During this fiscal year the Joint Venture did process at the SCMP  approximately
75,000 dry tons (approximately 101,000 wet tons) of tailings which yielded 4,332
ounces of dore and  accounted for 2,595 ounces of gold and 594 ounces of silver.
The gross receipts amounted to $969,721.  The proceeds from the sale of gold and
silver were used to reduce the amount of Company advances to the Joint Venture.

San Felipe-El Potosi Mine ("Potosi") and its extension the El Capulin
Mine ("El Capulin")

Potosi Location

The Joint Venture has commenced an  exploration  program on the Potosi  property
which is located approximately 18 miles northwest of the City of San Miguel, the
second largest city in the Republic of El Salvador,  on a paved road 15 miles to
the City of  Chapalteque  and then west three miles on a gravel road to the City
of Potosi.  The historical  records  indicate that the potential of developing a
gold mine is above average.

Potosi Historical Information

Historical  records  evidence that exploration and production of gold took place
in 1899 and that Potosi was worked  intermittently  from 1906 through 1952.  The
main production  period in six levels was from 1938 through 1952 at a rate of 35
to 50 tons per day.  Production  data  avouch  that  30,000  ounces of gold were
produced from 1945 through 1952 after which the mine became dormant. During this
time a  limited  underground  exploration  program  confirmed  that the gold ore
reserves were of commercial value. The gold assays from some of the former drill
hole  samples  on the  southern  extension  of the  north-south  portion of this
property showed a grade of 0.10 to 0.35 ounces of gold per ton of ore.

Potosi Geology

The  Potosi  vein  type   occurrences   are  very   strong,   persistent,   poor
quartz-calcite  fissure  fillings from two to ten feet wide and up to 3,400 feet
in length.  On a regional  scale,  the veins are  fairly  straight-forward  type
structures but in detail they can be complicated.  Dips in the north-south veins
are steeper than in the lattice  systems such as the 50 degrees to 90 degrees in
the Potosi type.  The  proportion  of  gold-to-silver  increases in  north-south
striking veins or in veins of any orientation  whose dips more closely  approach
the vertical.

Two relatively narrow north-south veins, 450 feet apart, have been worked in the
past by vertical and an inclined shaft for up to 2,100 feet along the strike and
to depths of between 180 and 440 feet below  surface on four to six levels.  The
veins are contained in coarse-grained augite andesites.  The larger of the veins
is up to ten feet in width,  dipping 55 degrees to 75 degrees  west.  The second
vein is weaker in structure  and about three feet in width.  Gold values seem to
be indiscriminately associated with quartz and do not seem to diminish at depth.
Assay plans and ore reserve  sections  completed  in 1952 show 30 blocks with an
average grade of 0.6563 ounces of gold per ton. Holes drilled from the projected
extension  of the  north-south  portion  of one of the  veins  returned  various
five-foot  sludge samples grading 0.10 to 0.35 ounces of gold per ton with a one
foot of core length  grading at 0.39 ounces of gold per ton. It appears that the
deposition took place at higher temperatures than attributed to silver, thus the
vertical zoning of gold deposition is deeper or has a larger vertical  dimension
than silver;  therefore the  possibility of  considerable  ore below levels is a
realistic one. The age  mineralization is past laramide with the host rock being
rhyolite. The previous gold-silver ratio was 0.3:1.

<PAGE>

Potosi Tailings' Reserve

Since October 25, 1993,  Comseb has had a full-time crew,  ranging from 25 to 30
employees,  conducting an  exploration  program  consisting of surveys,  channel
trenching,  adit  openings,  test pit  holes,  excavation  and  drilling  of the
tailings to determine its gold content.

Twenty-four  test pit hole  excavations  have been  plotted  and drilled on this
four-acre site of tailings. The depth to the bottom of the tailings' pile varied
from 7.00 to 10.2  meters (23 to 34 vertical  feet) and a total of 137.6  meters
(454  feet) of test pit hole  excavations  were  completed.  The 573 fire  assay
samples (tailings) indicated an average grade of gold per ounce to be 0.06 (0.06
times  185,000 tons should  contain  11,100  ounces of gold times a 70% recovery
should yield about 7,770 ounces of gold).

Potosi and El Capulin Exploration Undertakings

A total of 2,100 meters (6,930 feet) of channel  trenching was excavated  with a
grade  ranging from 0.01 to 0.50 per ton. A total of 686 meters  (2,264 feet) of
adits has been  restored for entry into the old  workings.  A tabulation  of the
work completed by the Joint Venture is as follows:

1. Surface

   a. An exploration  consisting of twenty-seven  surface channel  trenches were
      excavated  consisting  of  1,010  meters  (3,333  feet).  A total of 1,232
      samples  were fire  assayed  reflecting  an average  grade of gold of 0.02
      ounces per ton. Two veins were  intercepted  which assays  averaged  0.051
      ounces of gold per ton. One vein  encountered was 3.50 meters (11.55 feet)
      in width, while the other was 0.70 meters (2.31 feet) in width.

2. Potosi Underground Workings

   a. Guayabito  Adit:  This adit was opened for a distance of 132.9 meters (439
      feet) and a cross cut was  encountered  at 25 meters (83 feet)  running to
      the  west  at  which  point  a 0.40  meter  (1.32  feet)  thick  vein  was
      intercepted.  The 399 samples that were fire assayed  reflected an average
      grade of gold of 0.012 ounces per ton.

   b. Guarumo  Adit:  At a point south 15 degrees  east a 1.70 meter (5.61 feet)
      thick  vein dips 60 degrees  to the west.  This adit is all vein  area.  A
      total of seven  meters  (23 feet) was  cleaned  and the three  fire  assay
      samples proved an average of 0.05 ounces of gold per ton.

   c. San Isidro Adit: A total of 158 meters (521 feet) was cleaned and from the
      entrance a sub level 25 meters (83 feet) was  developed  on a vein running
      south 13 degrees  east.  This sub level is located  5.65  meters (19 feet)
      below the entry  level.  The vein is 2.80  meters  (nine  feet) thick from
      which more than 243 samples  reflected  an average  grade of gold of 0.022
      ounces per ton.

 <PAGE>

   d. Cacho de Oro Adit:  A total of 57 meters  (188  feet) was  cleaned in this
      adit. At a point 34 meters (112 feet),  a crosscut was  encountered  which
      was  advanced  23  meters  (76  feet).  A total of 59 fire  assay  samples
      reflected an average grade of 0.07 ounces of gold per ton.

   e. Canon 821:  Exploration  progress  continues at Canon 821 Adit, Winze 821,
      the  General  Winze and Adit 2A.  Pillars  were found in Adit 2A about 105
      meters (347 feet) from the entry.

3. The El Capulin Mine

   a. A total of more than 29 surface  trenches was excavated over a distance of
      537 meters (1,772 feet) and the 404 fire assay samples revealed an average
      grade of 0.10  ounces of gold per ton.  A backlog  of  samples  are in the
      process of being assayed.

   b. In the Capulin  adit,  a total of 188 meters (620 feet) was  cleaned;  the
      goal is to reach the Capulin vein. The seven fire assay samples averaged a
      grade of 0.25 ounces of gold per ton.

4. Tailings

The 573 samples that were fire assayed  reflected a grade of gold of 0.06 ounces
per ton.

Exploration on this property will continue with channel trenching, re-opening of
former adits, and to include diamond core and/or reverse  circulation  drilling,
mapping and sampling of the known mineralized areas to determine if there is any
commercial  gold  mineralization  on  this  property.  Diamond  drilling  may be
utilized to outline the more  promising  shoots and to check for  continuity  of
gold.

Potosi Exploration Concession

The exploration  concession application was filed on September 6, 1993, with the
Department of Energy,  Mines and  Hydrocarbons,  a division of the El Salvador's
Minister of Economy's office, by the owners of the real estate,  the Cooperative
San Felipe-El Potosi. An application for an exploration  concession was filed on
May 8, 1997 in order to comply with the current  mining  regulations  adopted by
the  Government  of El Salvador in February  1996.  The  concession  consists of
approximately 6,100 acres.

While the  concession  application  is  pending,  it  precludes  any others from
performing  exploration  on this site.  Upon  assessing  that the  property  has
potential  mining  prospects,  the Joint  Venture has the right to apply for the
mining concession.

Potosi Lease Agreement

The Joint  Venture  entered into a lease  agreement  with the San Felipe  Potosi
Cooperative  ("Cooperative") of the City of Potosi, El Salvador on July 6, 1993,
to lease  the real  estate  for a period of 30 years and with an option to renew
the lease for an additional 25 years,  for the purpose of mining and  extracting
minerals and under the following basic terms and conditions:

1. The term of the  lease  will be for a period  of 30 years  plus an  option to
   automatically extend the lease for an additional 25 years.

2. The lease payment will be five percent of the gross receipts derived from the
   production of precious metals from this site and will be payable monthly.

<PAGE>

3. The Joint  Venture  will  advance to the  Cooperative  the funds  required to
   obtain the mining concession from the El Salvador Department of Energy, Mines
   and  Hydrocarbons  and all related  costs will be reimbursed or will become a
   deduction from future rental payments.

4. The  Joint  Venture  will,  when it is in  production,  employ  all of the 45
   qualified  members  of the  Cooperative,  providing  that there is a need for
   their particular skill or service.

5. The Joint Venture will furnish  medicine and first aid medical  assistance to
   all of its employees to the extent that such benefits are not provided by the
   El Salvador Social Security System.

6. An employee life insurance program is to be seriously considered by the Joint
   Venture when production commences,  providing that the cost of such insurance
   is not excessive.

Modesto Mine

Modesto Mine Location

The Modesto  Mine is located due north of the town of El Paisnal,  approximately
19 miles north of the Capital City,  San Salvador.  The Joint Venture  considers
this  property as a good gold mining  prospect  and since  August  1993,  it has
proceeded with an exploration program.

Modesto Mine Geology and History

From its  geologist  and from the records  available to the Joint  Venture,  the
following information was obtained:

Two persistent veins "Paredon" and "Chicharron"  outcrop along the crests of two
parallel hogback ridges 1,900 meters apart, and are composed of thick flat-lying
andesite flows capped by discontinuous patches of rhyolite.  These were examined
in  1948-1950  by M. Buell along  strike (45 degrees) for 2,240 meters and 2,760
meters  respectively and down dip (60 degrees to 80 degrees southeast) a maximum
of 25 meters. The Paredon vein was barren but the north-eastern  1,320 meters of
the Chicharron returned the following values:

1. "D" winze,  five meters  deep,  northeast  end:  0.46 ounces of silver,  0.82
   ounces of gold over 61  meters  horizontally;  0.71  ounces of  silver,  0.61
   ounces  of gold  over 3.1  meters  vertically  from  quartz  of  undetermined
   orientation  in rhyolite;  0.30 ounces of silver,  1.20 ounces of gold from a
   15-ton dump and a value of $14.653 per ton from a ten-ton  dump.  (The market
   price of gold was pegged at $35 an ounce.)

2. "S" winze, 420 meters southwest of "D" winze:  no values.

3. "5" winze, 882 meters southwest of "D" winze:  1.85 ounces of silver,
   0.65 ounces of gold over an average of 1.0 meter to a depth of 11
   meters below outcrop.  A 30-ton dump ran 2.28 ounces of silver and
   0.82 ounces of gold.

4. "14" winze, 1,320 meters southwest of "D": 0.78 ounces of silver, 0.22 ounces
   of gold to 19 meters below outcrop.  A 60-ton dump ran 0.15 ounces of silver,
   1.14 ounces of gold;  average of six dump  samples was 0.68 ounces of silver,
   0.31 ounces of gold. A surface sample  representing a ten-meter width of vein
   structure  gave 0.06  ounces of silver,  0.09 ounces of gold,  including  1.5
   meters of 0.40 ounces of silver and 0.50 ounces of gold on the footwall.

<PAGE>

A 155 meter crosscut,  driven to intersect the vein 62 meters  vertically  below
surface  and 80 meters  northeast  of "14" winze  encountered  only weak  quartz
mineralization.  Of 20 samples taken in 45 meters of drift,  one returned  10.25
ounces of silver and 0.35 ounces of gold over 1.20 meters and the  remaining  19
averaged less than 0.40 ounces of silver and 0.05 ounces of gold.

On 30 meters of drifting up to seven meters below surface at "5" winze,  1,095.6
tons grading 1.66 ounces of silver and 0.505 ounces of gold were indicated.

The  mineralization  is the Potosi type, very finely banded,  milky,  aphanitic,
sulfide-free quartz, with a gold-silver ratio similar to El Dorado's. No calcite
was seen on the  dumps.  Wall rock  alteration  is not  noticeable  on  surface,
however fine grained  silicification and pyritization of the andesite appears on
the "5" winze dumps.

Modesto Mine Ore Reserves and Exploration Results

The exploration  through March 31, 1997, has  accomplished  the following:  Four
bodies of gold ore have been blocked which contain  approximately  18,800 ounces
of a proven  and  probable  grade of gold in 80,000  tons of ore with an average
grade of 0.235 ounces of gold per ton.

The Modesto Mine appears to be a very good gold  prospect.  Since  October 1993,
three veins were discovered which extend over a length of one and one-half miles
and a width  of  about  one  mile.  The  width  of this  area  has a  series  of
perpendicular and oblique tiny veins well dispersed which is a desirable ore for
an open-pit operation. A total of 84 surface channel trenches was excavated; the
2,369 fire assay samples revealed an average grade of 0.035 ounces per ton.

The status of the three vein systems is as follows:

(1) Chicharron  Vein:  Over a length of 2,550 meters  (8,415  feet),  69 surface
    channel  trenches  were dug  consisting  of 567.0 lineal meters (1,871 feet)
    from which 2,015 samples were taken which averaged a grade of 0.05 ounces of
    gold per ton.  This vein  strike is at north 50  degrees  east with a dip 70
    degrees and consists of milky,  brownish grey and white quartz surrounded by
    andesite.

(2) Intermidy Vein: This vein is at an offset angle to the Paredon vein. A total
    of 495 meters  (1,634 feet) of surface  channel  trenching was excavated and
    265 assay  samples  reflected  an average  grade of 0.025 ounces of gold per
    ton.

(3) Paredon  Vein:  This vein was explored by  excavating  five surface  channel
    trenches over 1,200 meters (3,960 feet) and 89 fire assay samples  reflected
    an average grade of 0.015 ounces of gold per ton.

Underground workings:

(1) Taladron  Adit:  From this adit entrance to a point of 257 meters (848 feet)
    along the north 85 degrees west  strike,  all of the blockage was removed to
    penetrate  it. A total of 80 fire assay samples were taken in the basalt and
    barren quartz monzonite  veinlits which assays averaged 0.035 ounces of gold
    per ton.  This adit changed its  direction to south 70 degrees west and at a
    point of 131  meters  (423  feet) a broken  vein  with a  basalt  horse  was
    intercepted.  The former vein was found at the end of this adit which turned
    to the west and  encountered  the Chicharron vein which at this point was 13
    meters  (43 feet) in width and 26 meters (86 feet) from the top of the hill.
    More than 20 assay samples are waiting to be fire assayed.

<PAGE>

(2) Adit No. 10: This adit is above the Taladron Adit and it is the highest adit
    on this property. A total of 47 meters (155 feet) has been excavated and the
    310 fire assay samples confirmed an average grade of 0.03 ounces of gold per
    ton.  This adit follows a strike vein south 50 degrees west with a 55 degree
    easterly dip and encounters a vein at a width of 4.50 meters or 15 feet.

(3) Shaft No. 5: From the adit  entrance,  a total of 13.4  meters (44 feet) was
    cleaned.  A sub level was discovered and this was cleaned at both ends north
    and south for a distance of 95.7 meters (316 feet) and 327 samples were fire
    assayed  disclosing an average grade of 0.37 ounces of gold per ton. A total
    of 490  samples  were  taken  from this sub  level and from  interconnecting
    levels.  75 samples  were fire assayed  revealing  an average  grade of 0.11
    ounces of gold per ton.

(4) Shaft No. 7: This adit was recently opened to follow a vein and it is
    too premature to provide meaningful results.

The  Joint  Venture  employs  from 25 to 30  employees  to  work  at  this  mine
exploration program.

Modesto Mine Present Status

After  completing  the  necessary  surveying,  mapping and  planning,  the Joint
Venture proceeded to clean and trench the surface and adit vein exposure.  Since
August 1993,  3,084 metric feet of surface channel  trenching  (10,177 feet) and
866 meters  (2,858 feet) of adit  cleaning  were  completed.  In addition,  four
inclines  have  been  completed.  A total  of  4,027  fire  assay  samples  were
performed.  The Joint  Venture  will  continue  the  channel  trenching  and the
reopening of the former adits as well as to formalize its own drilling program.

Modesto Mine Concession/Ownership

On or about  September 2, 1993, the Joint Venture  through one of its employees,
filed an  application  with the El  Salvador  Department  of  Energy,  Mines and
Hydrocarbons  to explore the 4,000  hectares  (9,800 acres) of property known as
the Modesto  Mine.  The  application,  together with the consent to explore this
area from the  property  owners  owning  more than 25% of total  area,  has been
submitted to the El Salvador Director of Energy,  Mines and Hydrocarbons.  Also,
the Joint Venture had submitted its original plan to this governmental agency on
January 24, 1994, outlining its exploration program. In order to comply with the
current  mining  regulations  adopted by the  Government  of El Salvador  during
February 1996, the Joint Venture filed an exploration  concession application on
April 21, 1997.

Hormiguero Mine ("Hormiguero")

Hormiguero Location

The Hormiguero is located  approximately  five miles  southeast from SCMP off of
the Pan American Highway in the Departments of San Miguel and Morazan, Comacaran
Jurisdiction, in the Republic of El Salvador. The Joint Venture plans to survey,
map, plat, plan and develop an exploration program.

Hormiguero Current Status

The Joint Venture continues to develop an exploration  program on the 5,000 acre
site. An application  for  exploration  has been filed on September 6, 1993 with
the Department of Energy, Mines and Hydrocarbons,  a division of the El Salvador
Minister of Economy's  office.  In order to comply with the El Salvadoran Mining
Law adopted during February 1996, a current exploration application was filed on
April 21, 1997.

<PAGE>

The  Hormiguero  property  continues  to  be  in  the  stages  of  being  mapped
geologically and topographically on a referenced grid in order to provide a base
to plan a drilling program with the objective to prove that a commercial body of
ore may extend below the bottom of the former workings.  This drilling  activity
would also  determine if the faulted north end of the Gallardo  vein  continues.
Further drilling could evidence the mineralization of unexplored veins.

1. Tailings:  In an area of  approximately  15,744 square meters  (approximately
   four  acres) 35 test pit holes at a total  depth of 322 meters  (1,063  feet)
   were  excavated and the 705 samples that were fire assayed  showed an average
   of 0.064  ounces of gold per ton times  150,000  tons  should  contain  9,600
   ounces of gold.

2. A total of 11 surface channel trenches  consisting of 310 meters (1,023 feet)
   were dug perpendicular to the Guadalupe vein and from a total of 155 samples,
   96 samples verified an average grade of 0.0177 ounces of gold per ton.

3. Taladron Adit: The purpose is to clean this adit in an attempt to
   intercept the Guadalupe vein at 61 meters (201 feet) below surface.
   So far 35 meters (116 feet) have been cleaned.

Hormiguero Geology and Historical Information

The following  information  was obtained from a report  entitled,  "Mining in El
Salvador-United Nations Development Programs 1968-1971,":

". . . From 1913 to 1918 the Comacaran Gold Mining Co. produced 607,062
ounces of silver and 72,142 ounces of gold from 208,096 tons.
(Swanquist), and when this company liquidated in 1919 the El Salvador
Silver Mining Co., formed by some of the Butters Co. personnel, continued
operations on a small scale until 1921.  In 1930 the mine was reopened by
the original property owners, the Gonzalez family, and functioned
periodically until 1948, producing during the last 3 years about 21,000
ounces of silver and 3700 ounces of gold.  "Straight arithmetic averaging
from the production figures gives an overall recovered grade of 0.351 oz.
gold and 2.92 oz. silver for the period 1913-1918, or assuming a 10% mill
less, a mill head of 0.386 oz. gold and 3.21 oz. silver.  Mill records
for 1917, the only surviving technical data, give a bullion production of
139,369.36 ounces of silver and 17,193.84 ounces of gold from 61,890
tons.  A mill head calculated from this, again at 10% mill loss, was
probably 0.30 ounces gold and 2.47 ounces silver."

  "Although  known  locally . . . as  Hormiguero'  the  deposit  is  actually  a
composite of three separate  sections,  the Gallardo,  Guadalupe and Hormiguero,
all in coarse-grained  andesite,  grouped about and formerly connected by aerial
tramway  to  a  central  mill  situated  immediately  southwest  of  the  Canton
Hormiguero.  The Gallardo and Guadalupe veins are strong,  persistent structures
striking  045 degrees and 020 degrees  respectively  and forming thin ridges 500
feet east and 1,750  feet  west of the  central  mill.  Both are  composite  and
slightly  braided  structures  composed  of two main  parallel  branches 70 feet
apart,  and several  interconnecting  sub-branches,  all dipping greater than 60
degrees west. Vein material is banded and crustiform  quartz-calcite,  secondary
manganese  oxides and  probaly  [sic]  rhodochrosite,  weakly  mineralized  with
pyrite, spalerite, galena and chalcopyrite.  Strong proplylitization accompanied
by  considerable  pyrite has attacked the  andesites  outward for about ten feet
from the walls  resulting in the formation of yellowish  red,  clayey  oxidation
products on surface.

<PAGE>

  "The Gallardo has been worked on six levels for 2050 feet along strike and 400
feet vertically.  Access was through the Benjamin adit at the extreme  southwest
end and an inclined  (61  degrees)  shaft 350 feet from the  northeast  end. Two
vertically  plunging  ore shoots 300 and 600 long and 500 feet apart were stoped
to the 5th level where the larger  bottomed,  according  to  notations on a long
section made by the El Salvador Silver Mining Co. in 1920. Limited stoping above
the Benjamin adit suggests a third shoot in that area and a possible  unexplored
prolongation  of the vein towards the southwest.  An abrupt cut-off of the north
(larger)  ore  shoot  coincident  with the  north  end of the mine may be due to
lateral fault  displacement;  an undeveloped segment of the vein might therefore
be anticipated further north.

  "Horizontal development of the Guadalupe vein opened a 1600 foot strike length
on both a hanging wall and footwall branch,  but the dip, exposed on five levels
to 350 feet has been  examined  in an  unsystematic  manner  more  suitable  for
exploration  than  exploitation.   Little  ore  has  in  fact  been  taken  from
underground;  most of the  production  appears to have come from open cuts.  The
only regular mining has been confined to a 400 foot lens on the footwall branch,
150 feet south of the main  three-compartment  production shaft,  which was from
surface 200 feet vertically to the third level, and from a small irregular shoot
directly  opposite it in the footwall branch.  Outside of these, the underground
layout  leaves  the  general  impression  that  the  distribution  of ore  grade
mineralization is highly erratic and randomly dispersed.

  "1100 feet, and north of the Gallardo and Guadalupe mines,  five steeply north
(?) dipping,  parallel,  curving veins (Emilio, Oriente Emilio,  Hormiguero, San
Francisco and 4 de Julio) evenly spaced over a width of 200 feet, constitute the
separate   Hormiguero  mine.  They  lie  between  the   hypothetical   northward
prolongation of the Gallardo and Guadalupe  structures and have been worked over
an aggregate  strike  length of 1200 feet starting from a point 700 feet west of
the Guadalupe  projection  first 500 feet  east-west then through a 700 foot arc
curving to the southwest into alignment  width,  and 900 feet north of the north
end of the Gallardo  vein.  At least 7 levels were  developed to a depth of over
400 feet from a vertical 2 compartment  shaft. The amount of stoping is unknown;
the available  data show that  irregular 100 to 200 foot long shoots were worked
to  depths of 300 and 400 feet on the  east-west  striking  portions  of the San
Francisco and 4 Julio veins.

  "Four  other  virtually  unexplored  veins  known as La Gloria  or  Esperanza,
Victoria or Tilden,  Tecolote  and El Dorado,  occur 500 to 900 feet west of the
Gallardo and Hormiguero  mines.  The Gloria and Tecolote strike  east-west;  the
remaing [sic] two are roughly parallel to the Gallardo.  In a letter dated 1919,
a geologist named Mr. Swanquist states that initial exploration and very limited
mining obtained encouraging results' from the Tecolote and fair ore' from the El
Dorado.

  "The same letter  mentions two additional  prospects,  the Consuelo of unknown
location  but 700 feet from the plant and just being opened up' and the La Posa,
on the Las Garzas  river,  north of Canton  Hormiguero  from  which ore  grading
$10.92 per ton ($20.00 gold and $1.11?  [.385]  silver),  with values  mainly in
silver, was mined over 4 to 5 foot widths, in a 35 foot winze."

In 1921,  i.e.  during El Salvador  Silver Mine's final year of  operation,  the
following ore reserves were blocked out:

<PAGE>

Proven:  (U.S. dollar values based on a $20.00 per ounce gold price and a
$0.385 per ounce silver price.)

                               Tons        Grade     Dollar Value Per Ton
                              ------       -----     --------------------
Guadalupe Hanging Wall Vein   11,208       0.353            $7.06
Guadalupe Footwall Vein        7,528       0.319            $6.37
Hormiguero and Gallardo       10,000       0.400            $8.00
                              ------
                   Total:     28,736
Probable:
                               Tons        Grade     Dollar Value Per Ton
                              ------       -----     --------------------
Guadalupe Hanging Wall Vein   21,900       0.295            $5.89
Guadalupe Footwall Vein       23,556       0.340            $6.80
                              ------
                    Total:    45,456


(Proven and probable gold and silver ore reserves total 74,192 tons.)

Exploration  should  center on the  undeveloped  veins,  on the  possibility  of
extending  the  Hormiguero  veins  farther  to the  east  and  west,  and on the
unexplored ground between the north end of the Gallardo vein and the Hormiguero.

Hormiguero Ownership

The surface is owned by various individuals and families.

Montemayor Mine ("Montemayor")

Montemayor Location/Ownership

The Joint Venture has obtained permission from a number of property owners which
permits the Joint Venture to enter their  property for the purpose of exploring,
exploiting  and  developing  the  property and then,  if  feasible,  to mine and
extract  minerals  from this  property.  The term of this  permission  is for an
infinite period. Montemayor is located about 14 miles northeast of the SCMP, six
miles  northwest  of the  SSGM  and  about  two  miles  east of the  City of San
Francisco  Gotera  in  the  Department  of  Morazan,  Republic  of El  Salvador.
Historical  records  evidence that the potential for the Montemayor to become an
exploration and development gold-producing prospect is good.

Montemayor Geology and Historical Information

The following  information  was obtained from a report  entitled,  "Mining in El
Salvador-United Nations Development Program 1968-1971":

"Montemayor-Lola Area

"The eastern and northeastern  limits of the Three Corners area are defined by a
scattering  of three small mines and numerous  prospects  distributed  along the
course of the south-flowing Rio Montemayor in a system of parallel normal faults
collectively  known as the  Montemayor  lineament'.  Consistent  with the origin
proposed under General  Geology' these have been probably  induced by subsidence
along the northern  margin of the central  graben,  resulting  in a  progressive
tensional  failure  that has  sliced  the  pyroclastic  rocks of the area into a
series of  tabular  blocks  stepped  successively  upward to the  northeast  end
culminating in the steep serrated ridges of the Copetillos escarpment.  This has
resulted in the creation of a 13,000 foot-wide  regional  sheeted' zone composed
of closely spaced, northwest striking, west dipping parallel faults,  stretching
for five miles  northeast along the river and has imported to the river gorge an
assymetric  cross section whose higher,  northeast  slope is underlain by deeply
dissected  acid to basic  tuffs and  lower  southwest  slope by the low  rolling
andesitic, Three Corners terrain.

<PAGE>

"Extensive  veining in the fragmentals has produced a lengthy  mineralized  zone
 roughly  coincident with the sheating,'  which includes the Montemayor  deposit
 near  the  headwaters  of the  river  and,  arranged  in  en-echelon  alignment
 downstream, the Tebanco, Lola, and Tepeyac occurrences and the minor Salamanca,
 Jimerito, Mina Grande, Copetilla and La Joya showings.

"The veins, which dip almost universally 50 degrees to 80 degrees southwest, are
normal  quartz-calcite,  sulfide-poor fracture fillings,  distinguished by their
remarkable lateral  persistence and unfortunate  paucity of workable ore shoots.
Sporadically  distributed  in lenses three to eight feet wide and up to 200 feet
long and  separated  by longer  stretches  of barren  ground,  these have so far
yielded enough tonnage to sustain  mining  operations  only at the marginal Mina
Lola. On the whole, however, the area is little explored.

"Montemayor

"The Montemayor  property  embraces a group of small mine openings and prospects
aligned along a series of parallel southeast striking veins following the course
of the Montemayor river for 16,000 feet, from its headwaters to the beginning of
the pronounced S' bend  enclosing the old Tabanco mine.  Some confusion over the
names and  locations  of these  various  workings  has always  existed;  for the
purpose of this report, the following  nomenclature,  adapted from early maps of
the district, will be employed. Proceeding upstreams [sic], the workings are:

"(a) Montemayor-comprises   the   Montemayor,   Montanita  and  Santa  Gertrudis
     sections, extending for 2700 feet upstream from the Caserio Montemayor.

"(b)  Tempisque-4800  feet north of the Caserio  Montemayor and 1200 feet up the
east bank of the river.

"(c) Banadero-Carao-Carago-4500 to 8000 feet upstream from Tempisque.

"Mining was  confined to  Montemayor;  appreciable  underground  exploration  to
Montemayor and Tempisque. No motor road reaches the properties; access is either
by five kms.  of the mule trail along the  southwest  bank of the river from the
end of the Santa Rosa de Lima-Caserio El Tabanco road or cross-country about the
same distance by mule trail from a north branch of the Gigante road. Trails also
lead into the headwater area from the town of Sociedad.

"Historical information is sketchy.  The area was almost certainly worked
in conjunction with the Tabanco mine, first by the English company until
about 1855, then the Cia. Francesa de Minas de El Salvador who operated
it some time between 1856 and 1882 (Guzman).  Until 1914 (?) no
information is forthcoming; then the mine was comprehensively sampled by
the Butters Co. and its successors between 1915 and 1921 and by the R.W.
Habard Co. and Central American Mines around 1936.  Apparently the only
production from 1856 to 1936 was obtained by the English and French
companies but the figures are unknown.

"Roberts and Irving  report that the mine was again  functioning  at 60 tons per
day in 1945 under Sr.  Benjamin  Gonzalez,  yielded a value of  $233,818  over a
three year period.  Grebe (1955) does not confirm this and the data may refer to
the Hormiguero mine which Sr.  Gonzalez had in production at that time.  Finally
in 1963  the  principal  showings  were  taken up by a local  enterprise,  Minas
Montemayor, S.A. and received a little more attention up until 1967.

<PAGE>

"The vein system is  apparently  controlled  by a simple set of poorly  exposed,
northwest striking faults paralleling the river and outcropping  occasionally in
the river bed and rarely on the steep east slope of the river gorge. Dips are to
the  southwest  between  50  degrees  and 60  degrees.  Vein  mineralization  is
quartz-calcite   with  weak   disseminated   pyrite  and  a  small  quantity  of
chalcopyrite,  spalerite  and galena.  The host rocks are a succession of coarse
andesitic tuffs and agglomerates,  fine acid tuffs and flows  propylitized along
the  veins,  and  locally  silicified  towards  the  north  end of the  zone  of
mineralization.

"Formal  mining was  confined  to three  parallel  veins  spaced over a 500 foot
interval up the east bank from the creek, at Montemayor.  The footwall Montanita
vein was opened for 200 and 250 feet  respectively  on two levels  about 70 feet
apart,  served by a winze and two crosscuts,  and stoped over 100(?) feet on the
upper level and 200(?) feet on the lower.  Two levels opened at 115 and 215 feet
off a 2 compartment  shaft traced the middle  (Montemayor) vein for 640 feet and
disclosed a 200 foot long ore shoot,  centered on the shaft and partially stoped
before  1917,  that might have  graded  around 12 ounces  silver and 0.29 ounces
gold. On this same structure, 1250 feet north of the shaft in the separate Santa
Gertrudis  section,  perhaps 9000 tons grading  $31.00 at gold and silver $0.507
were extracted from a 90 by 220 foot area,  averaging 7 feet wide,  developed on
four levels through a second vertical shaft.

"The  hanging  wall  sulfide'  vein  located 40 feet west of the  Montemayor  is
apparently  more  heavily  mineralized  but  contained  no ore  over  75 feet of
drifting driven from the lower Montemayor level.

"On the Tempisque showing, two levels, 30 feet apart vertically and
served by two adits, have revealed 520 feet of the Tempisque vein running
5.49 oz. silver and 0.14 oz gold over a 2.7 foot width, according to
sampling by the R.W. Hebard Co. in 1936.  Check sampling by the present
owners in 1966 returned an indicated grade of 3.68 oz. silver and 0.115
oz. gold over four feet, on the lower level.

"Work on the Carago  section has been  purely  exploratory;  the only  surviving
records (map MM-8) show an average  width of 2.3 feet of 9.95 ounces  silver and
0.16 ounces  gold in a 60 foot shaft and a 160 foot long drift,  spaced 280 feet
apart."

Montemayor Current Status

1. Surface channel  trenching:  From July 19, 1995, 55 surface channel  trenches
   were  excavated  over a 920 meter (3,036 feet) length . In the Banadero area,
   from 29 trenches,  375 fire assay samples contained an average grade of 0.036
   ounces of gold per ton.

   The remaining 26 surface  channel  trenches were  excavated in the Montemayor
   area: the 103 fire assay samples averaged 0.022 ounces of gold per ton.

<PAGE>

2.   Underground adits and workings:                                   Av.
                                                      Advancement      Assay
                                                                    No. of Grade
        Adit Name                  Comments       Meters  Feet Samples /Ton
        ---------                  --------       ------  ---- ------- ------
A. Montemayor Mine
   1. Polvorera Adit No. 1                          56.0  185     15    0.016
   2. Polvorera Adit No. 2 Crosscut encountered    140.0  462     27    0.010
   3. Lechuza Adit         Crosscut encountered    136.0  449     42    0.010
   4. Cablote Adit #2      Used to explore
                            Montanita vein           7.0   23
   5. Montanita Stope #2   Unaccessible entry
      a. Communication 1   Along side of Montanita 107.0  353     79    0.150
      b. Communication 2   Along side of Montanita   8.5   28      8    0.040
   6. Guascanal Adit                                19.0   63     11  no assays
   7. Sirena Adit          All in barren andesitic
                            rock                    90.0  297
   8. Sirena Adit No. 2                              7.0   23
   9. El Indio Adit        All in barren andesitic
                            rock                    29.0   96
  10. Guaruma Winze                                 21.7   72     22    0.03
  11. Tempisque Sub level  .90 meter (three feet)
                               vein                  9.0   30      8
  12. El Indio             Winze-excessive cave-ins 29.0   96
  13. Limon Adit                                     6.0   20
  14. La Encajonada Adit                            12.0   40
                                                   ----- ----    ---
       Totals:                                     677.2 2237    212
                                                   ===== ====    ===
B. El Banadero Mine        3.5 kilometers
                               (2.2 miles) west of
                            Montemayor
   1. Saravia Adit         Crosscut with .70 meters
                            (2.31 feet) vein        44.4  147
   2. Caraguito No. 1                               14.0   46
   3. Caraguito No. 2                               30.0   99
   4. Demetrio Adit        1.1 meter (3.63 feet)
                             vein                    5.0   17
   5. El Salto Adit                                 12.0   40
                                                   -----  ---
                 Totals:                           105.4  349
                                                   =====  ===

Approximately 20 to 25 employees are employed at this site. On April 22, 1997, a
current  exploration  concession was filed with the Minister of Economy's office
in order to comply with the El Salvadoran Mining Law adopted on February 1996.

Comseb Laboratories (Lab)

The Joint Venture has two  laboratories:  one located at the SCMP facilities and
the other on real estate  owned by the Company  near the SSGM site.  At the SSGM
Lab,  the Joint  Venture  employs  four  employees  for each of the  twelve-hour
shifts.  A total of 58,924  samples of fire assays have been  completed  through
March  31,  1997.  Approximately  four  employees  are  working  during  the two
eight-hour shifts at the SCMP laboratory.

Item 3.  Legal Proceedings

The Company is not a party to any material legal proceedings.

<PAGE>

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

No matters  were  brought to a vote of  security  holders in the fourth  quarter
ended March 31, 1997.

Item 4(a).  Executive Officers and Managers of the Company

Listed  below are the names and ages of each of the present  executive  officers
and managers of the Company  together with the  principal  positions and offices
held by each as of the end of the Company's fiscal year ended March 31, 1997.
                                            Executive         Period
                          Age as of       Offices Held        Served
        Name           March 31, 1997    With Company (1)  In Office (2)
------------------     --------------    ----------------  -------------
Edward L. Machulak           70          President,
                                         Chief Executive
                                         Officer, and
                                         Operating
                                         and Financial
                                         Officer           09/14/62 to present
                                         Treasurer         06/78 to present

Edward A. Machulak           45          Executive Vice
(Son of President)                       President         10/16/92 to present
                                         Secretary         1/12/87 to present
                                         Assistant
                                         Secretary         4/15/86 to 1/12/87

Luis A. Limay                55          Project and Mine
                                         Manager           10/86 to 1995
                                         Manager of El
                                         Salvador
                                         Operations        03/95 to present

(1)  Neither have there been nor are there any arrangements  nor  understandings
     between any  Executive  Officer and any other person  pursuant to which any
     Executive Officer was elected as an Executive Officer.

(2)  Executive  Officers are elected by the Directors for a term expiring at the
     Directors' Annual Meeting and/or hold such positions until their successors
     have been elected and have qualified.

  Family Relationships

  Edward A. Machulak,  presently a Director,  Member of the Directors' Executive
  Committee,  Executive Vice President,  and Secretary,  is the son of Edward L.
  Machulak,  the  Company's  Chairman  of the Board of  Directors  who is also a
  Member  of the  Directors'  Executive  Committee,  and is  the  President  and
  Treasurer  of the  Company.  Attorney  John  E.  Machulak  (son of  Edward  L.
  Machulak) of the law firm of Machulak, Hutchinson,  Robertson, Dwyer & O'Dess,
  S.C. is the legal counsel for the Company.

  Directors', Officers', and Key Management's Experience

  The business experience of each of the Directors, Officers, and Key Management
  is as follows:

  <PAGE>

  Edward L. Machulak has been employed by the Company since  September 1962. Mr.
  Machulak has served as the President,  Director,  and Chairman of the Board of
  Directors of the Company since 1962,  Treasurer  since 1978,  and on March 11,
  1991, he was elected as a Member of the Directors' Executive Committee.

  He is a Director and the  President  for each of the  Company's  subsidiaries:
  Homespan  Realty Co.,  Inc.;  Piccadilly  Advertising  Agency,  Inc.; San Luis
  Estates, Inc.; San Sebastian Gold Mines, Inc.; and Universal Developers,  Inc.
  He is the authorized  representative of the Commerce/Sanseb  Joint Venture. He
  is a Director and Treasurer of Mineral San  Sebastian  S.A. de C.V. Also he is
  involved in various capacities with the following companies:  General Lumber &
  Supply Co., Inc., Director;  Edjo, Ltd., Director and Secretary;  and Landpak,
  Inc., Director and Secretary.

  Edward A. Machulak was elected as a Director and holds the  following  Company
  positions:  Director  as of  October  28,  1985;  a member  of the  Directors'
  Executive  Committee  as of March 11,  1991;  Executive  Vice  President as of
  October 16, 1992;  Secretary as of January 12, 1987;  and he was the Assistant
  Secretary  from  April  15,  1986  through  January  12,  1987.  His  business
  experience is as follows: Director and Corporate Secretary of General Lumber &
  Supply Co., Inc., a building material  wholesale and retail  distribution yard
  from April 1, 1970 to November 1983;  Director and President of Gamco, Inc., a
  marketing and advertising company, from November 1983 to present; Director and
  President of Circular Marketing,  Inc., an advertising and marketing business,
  from March 1986 to present;  Director and  President of Edjo,  Ltd., a company
  involved in the development, subdividing and sale of land and real estate from
  June  7,  1973  to  present;  Director  and  President  of  Landpak,  Inc.,  a
  corporation which owns, operates, manages and sells real estate from September
  1985 to present;  and he was involved in other  corporate real estate ventures
  and business activities since 1976.

  Clayton H. Tebo has been a Director of the Company  since March 11, 1991.  Mr.
  Tebo  had  been a  Director  of the  Company  from  the  Company's  inception,
  September  1962,  through March 1, 1969. Mr. Tebo has been retired since March
  6, 1969,  however,  he has been retained from time to time by the Company as a
  consultant  for special  projects.  He also was the special  assistant  to the
  President prior to and after his 1969 retirement.

  Luis Alfonso  Limay was  appointed to the position of Project and Mine Manager
  since  October 1986 and is  responsible  for managing the daily affairs of the
  Joint  Venture.  During March 1995, Mr. Limay was appointed to the position of
  Manager of El Salvador operations which now supersedes his position as Project
  and Mine  Manager.  Mr. Limay was  employed by Sanseb from 1977 through  March
  1978 as its chief  geologist.  He obtained  degrees in geology and engineering
  from the National University of San Marlos,  Lima, Peru, and the University of
  Toronto. He was employed as chief geologist by Rosario Resources in a Honduran
  underground  mining  operation  and he held the same  position  with  Canadian
  Javelin in El Salvador.

<PAGE>

                               PART II



Item 5.  Market for the Company's Common Stock and Related Stockholders'
Matters

(a)  Principal Market and Common Stock Price

The Company's  common shares are traded on the Boston Stock  Exchange  under the
symbol "CMG" or "CMG.BN," on a fully listed basis since  February 10, 1976,  and
on the National  Association of Securities  Dealers  Automated  Quotation System
Small-Cap Issue (NASDAQ) under the symbol "CGCO" since March 23, 1987.

The  following  table  reflects  the range of high and low  prices of the common
shares as reported by NASDAQ for the period ended March 31, 1996 and the highest
and lowest trade price  during each  quarter  through the period ended March 31,
1997.  The  quotations  reflect  inter-dealer  prices  without  retail  mark-up,
mark-down or commission, and do not necessarily represent actual transactions.

For the period ended                March 31, 1997    March 31, 1996
                                     High      Low     High      Low
                                    -----    -----    -----    -----
First quarter ending June 30        $4.38    $2.38    $4.63    $3.75
Second quarter ending September 30  $3.25    $2.38    $3.75    $3.00
Third quarter ending December 31    $3.25    $1.88    $3.25    $2.63
Fourth quarter ending March 31      $4.00    $1.88    $3.25    $2.75


(b)  Approximate Number of Holders of Common Shares

As of March  31,  1997,  the  common  shares  were held by  approximately  3,000
shareholders of which a high percentage are United States' residents.

As of March 31, 1997,  there were  approximately  2,138 holders of record of the
Company's  common  shares.  The  number  of  shareholders  of  the  Company  who
beneficially  own  shares  in  nominee  or  "street  name"  or  through  similar
arrangements are estimated by the Company to be approximately 862.

As of March 31, 1997,  there were  outstanding:  (a) 9,193,042  shares of common
stock;  (b)  1,591,360  stock options to purchase  common  stock;  and (c) 1,515
shares of Series A Convertible Preferred Stock which subsequently were converted
into 989,965 common shares.

(c)  Dividend History

Subject to the rights of holders of any outstanding  series of preferred  shares
to receive  preferential  dividends,  and to other  applicable  restrictions and
limitations,  holders  of  shares of  common  shares  are  entitled  to  receive
dividends if and when  declared by the Board of Directors  out of funds  legally
available. No dividends were payable during the last fiscal year ended March 31,
1997.  The  declaration  of future  dividends will be determined by the Board of
Directors  in light of the  Company's  earnings,  cash  requirements  and  other
relevant considerations.

<PAGE>

Item 6.  Selected Financial Data

The  following  table sets forth  certain  consolidated  financial  data for the
respective periods presented and should be read with the Consolidated  Financial
Statements  and the related  notes  thereto,  and  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations.


                                      Year Ended March 31,
                                      --------------------
                      1997        1996         1995        1994         1993
                  ----------- -----------  ----------- -----------  -----------
Income Statement Data
Total revenue     $ 1,630,211 $ 1,345,260  $   823,181 $   507,964  $   403,242
                  =========== ===========  =========== ===========  ===========
Income from
 continuing
 operations       $ 1,007,598 $   787,802  $   274,747 $    66,852  $    41,970
                  =========== ===========  =========== ===========  ===========
Income (loss) from
 continuing operations
 per share:
Primary           $      .124 $     0.107  $     0.046 $      0.01  $      0.01
                  =========== ===========  =========== ===========  ===========
Fully diluted     $      .104 $     0.106  $     0.045 $      0.01  $      0.01
                  =========== ===========  =========== ===========  ===========
Weighted average
 shares outstanding 8,136,286   7,368,058    5,941,950   4,828,496    4,451,853
                  =========== ===========  =========== ===========  ===========
Balance Sheet
 Working capital  $   660,596 $   (92,398) $   322,944 $   (90,620) $    67,772
                  =========== ===========  =========== ===========  ===========
 Total assets     $25,067,334 $20,513,115  $17,617,423 $14,204,563  $13,568,374
                  =========== ===========  =========== ===========  ===========
 Short-term
  obligations*    $ 5,594,557 $ 5,185,298  $ 4,250,139 $ 4,487,511  $ 3,927,365
                  =========== ===========  =========== ===========  ===========
 Long-term
  obligations     $   145,000 $    20,259  $   120,000 $   245,000  $   245,000
                  =========== ===========  =========== ===========  ===========
 Shareholders'
  equity          $19,208,219 $15,159,507  $13,024,911 $ 9,365,870  $ 8,928,591
                  =========== ===========  =========== ===========  ===========
 Cash dividends   $         0 $         0  $         0 $         0  $         0
                  =========== ===========  =========== ===========  ===========

*Most of the short-term obligations are owed to related parties.

Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations

The following  discussion provides  information on the results of operations for
the three years ended March 31, 1997, 1996 and 1995 and the financial condition,
liquidity and capital  resources for the same three-year  period.  The financial
statements of the Company and the notes  thereto  contain  detailed  information
that should be referred to in conjunction with this discussion.

Introduction

The Joint Venture is producing  gold on a limited basis from the virgin gold ore
and tailings it is  extracting at the SSGM and it  simultaneously  is performing
four separate  operations.  First, it has commenced a limited production of gold
by  processing  the SSGM tailings and now they are being blended with the virgin
ore at its SCMP facility which is located  approximately  15 miles from the SSGM
site.  Second, it is installing a pilot open-pit,  heap-leaching gold process on
the SSGM site. Third, it is continuing its SSGM site preparation,  the expansion
of its exploration and exploitation targets, and the enlargement and development
of its gold ore reserves. Fourth, it is exploring the potential of the four gold
mine prospects  identified as the San Felipe-El  Potosi Mine, and its extension,
the El Capulin Mine, the Hormiguero  Mine, the Montemayor  Mine, and the Modesto
Mine, all located in El Salvador, Central America.  Concurrently,  it also is in
the  process of  obtaining  the  necessary  funding  for each of these  separate
operations   while  it  continues  its  limited   production  of  gold  and  the
exploration, exploitation and development of its mining prospects. The more than
twelve-year  El Salvador war and the general  disbelief  that peace will prevail
had been a material  deterrent in obtaining  funding for the  resumption  of the
SSGM  operations  and for the  restoration  of the SCMP.  On December  15, 1992,
through the  auspices  of the United  Nations,  the end of the war was  declared
contingent  upon a three-year  term to comply with all of the conditions of this
pact. Presently peace prevails.

<PAGE>

Current Status

The Company,  on February 23, 1993, through its Joint Venture acquired the SCMP,
a precious  metals' leaching mill and plant which has the capacity of processing
200 tons of virgin gold ore and  precious  metals' ore per day.  While the Joint
Venture  did  achieve  at times to  operate  the  mill to its full  capacity  by
processing tailings,  it encountered  operational problems which compelled it to
operate the mill at a lower production rate.  Considerable  time and capital was
consumed to bring the SCMP to a favorable operating condition. A new labor force
had  to  be  trained  to  operate  the  SCMP;   mechanical   problems  occurred,
metallurgical  differences had to be resolved;  the rainy (hurricane) season was
unusually  severe;  the head grade varied and problems were encountered with the
handling of the  separation of the coarse  material.  Taking into account all of
the factors  affecting  the SCMP, if the Joint Venture had not offset all of the
revenues  ($969,721 - 1997;  $1,180,279  - 1996) from the gold sales by reducing
the advances to the Joint Venture, it would have reflected a nominal profit.

This  production of gold broadens the Company's  objectives  and now enables the
Company to commence a complementary  operation while  continuing its endeavor to
obtain sufficient funds for the SSGM open-pit, heap-leach operation which is its
major  and  original  goal and  presently  is in the  developmental  stage.  The
Company's main objective and plan,  through the Joint Venture,  is to operate at
the  SSGM  site,  a  moderate  tonnage,   low-grade   open-pit,   heap-leaching,
gold-producing mine and it intends to commence this major gold-mining  operation
as soon as  adequate  funding  is in place.  Dependent  on the grade of gold ore
processed,  it then anticipates  producing  approximately  12,000 ounces of gold
from the SCMP  operation  and  40,000  ounces  of gold  from its SSGM  open-pit,
heap-leaching operation during the first twelve full operating months. The Joint
Venture continues to conduct an exploration  program to develop  additional gold
ore  reserves  at the  SSGM  and at the  following  four  other  mines:  the San
Felipe-El Potosi, and its extension,  the El Capulin Mine, the Modesto Mine, the
Hormiguero Mine, and the Montemayor Mine; all located in El Salvador.

Since the Joint  Venture  commenced  producing  gold at the SCMP,  albeit a very
exiguous  operation,  and a  forerunner  of its  greater  goals,  the  Company's
revenues, profitability and cash flow will be greatly influenced by the price of
gold. Gold prices  fluctuate  widely and are affected by numerous  factors which
will be beyond the Company's control,  such as, expectations for inflation,  the
strength of the U.S. dollar, overproduction of gold, global and regional demand,
or political and economic  conditions.  The combined  effect of these factors is
difficult;  perhaps impossible to predict.  Should the market price of gold fall
below the Company's  production costs and remain at such level for any sustained
period,  the Company could experience  losses.  Under these  circumstances,  the
Company could choose to suspend operations in order to minimize losses.

The Company believes that neither it, nor any other  competitor,  has a material
effect on the precious  metal markets and that the price it will receive for its
production  is  dependent  upon  world  market  conditions  over which it has no
control.

Results of Operation Fiscal Years March 31, 1997 Compared to March 31,
1996

The Company had a net gain of  $1,007,598 or $.124 per share for its fiscal year
ended March 31,  1997  compared to a net gain of $787,802 or $.107 per share for
the previous  fiscal year or an increase of 28%. This increase was  attributable
primarily  to the  additional  interest  income  earned from the advances to the
Joint Venture.  This fiscal year the interest earned was $1,567,375  compared to
the prior  fiscal  year's  interest  earnings of  $1,286,733.  This gain results
primarily  from a charge of interest  due to the  advances to the Joint  Venture
which  amounted to  $15,693,766  for this period or a net increase of $3,894,692
(33%) from the last fiscal period which equalled $11,799,074. The total advances
to the Joint Venture  amounted to  $16,663,487  but were reduced by the $969,721
revenues received from the gold sales.

<PAGE>

Likewise the Company's  borrowings  have  increased  from  $3,583,480  (1996) to
$4,108,338  (1997) or  approximately  15% and the interest  expense for 1996 has
increased from $470,710 to $554,636 for the last year.

Almost all of the costs and expenses  incurred by the Company are  allocated and
charged to the Joint Venture.  The Joint Venture  capitalizes all of these costs
and expenses  and will  continue to do so until such time as it resumes its gold
mine operation.  At the time production commences,  these capitalized costs will
be charged as an expense  based on a per unit  basis.  If the  prospect  of gold
production becomes unlikely,  all of these costs will be written off in the year
that this occurs.

Results of Operation Fiscal Years March 31, 1996 Compared to March 31,
1995

The  Company  had a net gain of  $787,802  or $.11 per share for its fiscal year
ended March 31,  1996  compared to a net gain of $274,747 or $.046 per share for
the previous fiscal year or an increase of 187%. This increase was  attributable
primarily  to the  additional  interest  income  earned from the advances to the
Joint Venture.  This fiscal year the interest earned was $1,286,739  compared to
the prior  fiscal  year's  interest  earnings  of  $751,389.  This gain  results
primarily  from a charge of interest  due to the  advances to the Joint  Venture
which  amounted to  $11,799,074  for this period or a net increase of $3,122,766
(36%) from the last fiscal period which totalled $8,676,308.  The total advances
to the Joint Venture during this fiscal period  equalled  $12,979,353,  but were
reduced by the $1,180,279 revenues received from the gold sales.

Likewise the Company's  borrowings  have  increased  from  $2,725,014  (1995) to
$3,583,480  (1996) or  approximately  32% and the interest  expense for 1996 has
increased slightly from $466,604 to $470,710 for the last year.

Liquidity and Capital Resources

The Company  continues to be cognizant of its cash liquidity until it is able to
produce  adequate  profits from its gold  production.  It will attempt to obtain
sufficient funds to assist the Joint Venture in placing the SSGM into production
as the anticipated SCMP profits (unless  accumulated over a period of time) will
not be  sufficient  to meet the SSGM  capital and the other  mining  exploration
needs.  In order to  continue  obtaining  funds to conduct  the Joint  Venture's
exploration,  exploitation,  development, expansion programs, and the production
of gold from the SSGM open-pit, heap-leaching operation, it may be necessary for
the Company to obtain funds from other  sources.  The Company may be required to
borrow funds by issuing open-ended,  secured,  on-demand or unsecured promissory
notes or by selling its shares to its directors,  officers and other  interested
investors or by entering into a joint venture with other companies.

During the past, the Joint Venture was engaged in exploration,  exploitation and
development  programs designed to increase its gold ore reserves.  The prospects
of  expanding  the gold  reserves  are  positive.  The funds needed by the Joint
Venture were obtained  from the Company via net  advances:  $3,894,692 in fiscal
1997. The Company believes that these advances significantly  contributed to the
value of the SSGM and to the value of its other mining  prospects as the results
of the exploratory efforts evidence a potential substantial increase of gold ore
reserves,  which add value to the Joint Venture and to the Company.  The Company
was able to obtain sufficient funds to retrofit the SCMP, to purchase consumable
inventory,  to purchase  certain  hauling and loading  equipment,  to purchase a
crushing  system,  to perform  diamond  drilling on the SSGM, to upgrade and for
working  capital use. The Company has been able to obtain the funds required for
its and the Joint  Venture's  undertaking  via a debt and  equity  structure  of
funding.  Since  September  1987,  the  Company  and  three of its  wholly-owned
subsidiaries  advanced a sum of $15,693,766  to the Joint Venture,  exclusive of
gold sale proceeds.

<PAGE>

The  Company  estimates  that it will need at least U.S.  $13 million to start a
2,000 ton-per-day  open-pit,  heap-leaching  operation and over time to increase
the  production  capacity to 6,000 tons per day at the SSGM. The use of proceeds
is as follows: $7,000,000 for mining equipment and a crushing system; $3,689,776
for the processing  equipment and site and infrastructure  costs; and $2,310,224
for the working capital.

Advances to the Joint Venture

Advances to the Joint Venture  during the Company's  fiscal year ended March 31,
1997 were derived from the various sources including related parties as follows:

Funding Sources                           From
                                   Related      Other
                                   Parties     Sources      Total
                                -----------  ----------  ----------
Accounts payable &
 accruals etc.                  $  (59,524)  $  105,147  $   45,623
Notes payable                      377,159      147,699     524,858
 Equity                            890,921    2,150,193   3,041,114
Net income                                    1,007,598   1,007,598
                                ----------   ----------  ----------
Totals                          $1,208,556   $3,410,637  $4,619,193
Increase in cash
 & cash equivalents                            (724,501)   (724,501)
                                ----------   ----------  ----------
Advances to the Joint Venture   $1,208,556   $2,686,136  $3,894,692
                                ==========   ==========  ==========


Therefore,  the Company  continues to rely on its directors,  officers,  related
parties and others for its funding needs.  The Company  believes that it will be
able to obtain such short-term funds as are required from the same sources as it
has in the past.  In turn,  then it can advance the funds  required by the Joint
Venture to continue the  exploration,  exploitation and development of the SSGM,
and the other  exploration  prospects,  for the  operation of SCMP and for other
necessary  Company   expenditures.   Anticipated  profits  from  the  SCMP  gold
production provide a limited amount of cash for corporate  purposes.  It further
believes that the funding  needed to proceed with the continued  exploration  of
the five exploration targets for the purpose of increasing its gold ore reserves
should be $10 million.  These programs will involve airborne geophysics,  stream
chemistry, geological mapping trenching and drilling. The Joint Venture believes
that it may be able to joint venture these  exploration  costs with other mining
companies.

From  September  1987 through  March 31,  1997,  the Company has advanced to the
Joint Venture,  the sum of $15,103,501  and three of the Company's  wholly-owned
subsidiaries have advanced the sum of $590,265, for a total of $15,693,766.  The
funds  advanced to the Joint Venture were used  primarily  for the  exploration,
exploitation,  and  development of the SSGM, for the  construction  of the Joint
Venture laboratory  facilities on real estate owned by the Company near the SSGM
site, for the operation of the laboratory, for the purchase of a 200-ton per day
used  SCMP  precious   metals'  cyanide   leaching  mill  and  plant,   for  the
retrofitting,  repair,  modernization and expansion of its SCMP facilities,  for
consumable  inventory,  for working  capital to commence the production of gold,
for exploration costs for the San Felipe-El Potosi Mine, and its extension,  the
El Capulin Mine, the Modesto Mine, the Hormiguero Mine, and the Montemayor Mine,
for SSGM infrastructure, including rewiring and repairing about two miles of the
Company's  electric  lines to provide  electrical  service,  for the purchase of
equipment,  laboratory chemicals,  and supplies, for parts and supply inventory,
for the maintenance of the Company-owned  dam and reservoir,  for extensive road
extension and  preservation,  for its  participation  in the  construction  of a
community  bridge,  for community  telephone  building and  facilities,  for the
purchase and advance lease  payment of the real estate on the Modesto Mine,  for
the purchase of a crushing  system,  for diamond  drilling at the SSGM, and many
other related needs.

<PAGE>

SCMP Operations, SSGM & Other Mine Exploration

Items 1 and 2 of this report  describe  the  Company's  current  activities  and
status. The Company,  through its Joint Venture, has reduced its advances to the
Company  from its sale of gold,  therefore,  the  advances  reported  are  after
deducting  these gold sale  proceeds.  Presently  the Company  believes that the
additional  equipment  needed for the SCMP would  permit it to reach its goal of
processing up to 400 tons of virgin ore each day of operation.  In the event the
Joint Venture's goals are reached, then the profits and cash flow should provide
funds that could be used to commence the SSGM open-pit, heap-leaching operation.
The  Company  estimates  that it will need at least U.S.  $13 million to start a
2,000 ton-per-day  open-pit,  heap-leaching  operation and over time to increase
the  production  capacity to 6,000 tons per day at the SSGM. The profit and cash
flow projections reflect that the invested capital could be recovered during the
first 18 months of full  production.  It further believes that it should be able
to raise  adequate  funds to  proceed  with its  goals  which  include  the SCMP
expansion and the  installation of its crushing  system.  During the last fiscal
quarter  ended March 31, 1997,  the Company did raise the sum of $2.5 million by
issuing  Series A  Convertible  Preferred  Stock and the placement of additional
equity securities.

Employees

The Joint Venture employs  approximately  318 full-time persons from El Salvador
(up to 325 persons,  including part-time  employees) to perform its exploration,
exploitation,   and  development   programs;  to  produce  gold  from  its  SCMP
facilities;  and to handle the  administration of its activities.  None of these
employees are covered by any collective bargaining agreements.  It has developed
a continuous  harmonious  relationship with its employees.  It believes that the
Joint Venture is the largest single  non-agricultural  employer in El Salvador's
Eastern  Zone.  Also,  the Company  employs  approximately  four  persons  (plus
part-time help) in the United States.

Insurance

The Joint Venture has in existence  insurance  through an El Salvador  insurance
company  with  the  following  general  coverage:  general  liability,   vehicle
liability and extended coverage, fire, explosion,  hurricane,  cyclone, tornado,
windstorm,  hail,  flood,  storm,  earthquake,   tremor  or  volcanic  eruption,
politically-motivated  violence,  terrorism,  strikes,  work  stoppages,  riots,
uprisings,  malicious acts, vandalism, and related acts. As additional equipment
and assets are acquired or improvements are made, the insurance coverage will be
increased accordingly.

Related Party Loans, Obligations and Transactions

The  related  party  transactions  are  included  in  detail in the Notes to the
Consolidated Financial Statements.

Company Advances to the Joint Venture

Since  September  1987  through  March 31, 1997,  the Company,  and three of its
subsidiaries,  have advanced to the Joint Venture  $15,693,766.  Included in the
total  advances is the interest  charged to the Joint Venture by the Company and
this charge amounts to $5,234,795  through March 31, 1997. The Company furnishes
all of the funds required by the Joint Venture.

<PAGE>

Efforts to Obtain Capital

Since the  concession  was granted,  and through the present  time,  substantial
effort is exercised in securing  funding through various  sources,  all with the
purpose to resume and expand the operations of the SCMP and SSGM and to continue
the exploration of its other mining prospects.

The Company, Sanseb, and the Joint Venture consider the past political situation
in the Republic of El Salvador to have been unstable, and believe that the final
peace  declaration  on  December  16,  1992,  has put an end to war.  Presently,
interested  investors  continue  to be  apprehensive  and  skeptical  about  the
political  status of the  Republic of El Salvador and  therefore  continue to be
hesitant to invest the funds required. However, during the past fiscal year, the
Company  was able to invest a gross sum of  $4,864,413  which was reduced by the
$969,721  received from the sale of gold proceeds and reflected a net investment
of $3,894,692,  into the El Salvador operations. This includes allocation of the
Company's  expenditures.  The  Company  believes  that it will be able to obtain
adequate  financing  from the same sources as in the past to conduct the present
operations during the fiscal year ended March 31, 1998.

<PAGE>

Item 8.  Financial Statements and Supplementary Data

                Index to Consolidated Financial Statements
                        And Supplementary Financial Data

                                                                            Page

Report of Independent Certified Public Accountants . . . . . . . . . 58

Financial Statements:

Consolidated Balance Sheets, Years Ended March 31, 1997 and 1996 . . 59
Consolidated Statements of Income, Years Ended March 31, 1997, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Consolidated Statements of Changes in Shareholders' Equity Years
Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . 61
Consolidated Statements of Cash Flows, Years Ended March 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 63
Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . 77

Supplementary Financial Data:

Report of Independent Accountants on the Financial Statements
Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Financial  statements schedules other than those listed herein have been omitted
since  they  are  either  not  required,  are not  applicable,  or the  required
information is included in the financial statements and related notes.


<PAGE>


                REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders and Board of Directors of Commerce Group Corp. and
Consolidated Subsidiaries:

We have  audited  the  consolidated  balance  sheets  of  Commerce  Group  Corp.
("Company"), a Delaware Corporation, and its subsidiaries,  as of March 31, 1997
and 1996,  and the related  consolidated  statements of  operations,  changes in
shareholders'  equity and cash flows,  for each of the three fiscal years in the
periods ended March 31, 1997, 1996, and 1995. 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  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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Commerce Group Corp. and its subsidiaries as of March 31, 1997 and 1996, and the
consolidated  results of their  operations  and their cash flows for each of the
three  fiscal  years in the periods  ended March 31, 1997,  1996,  and 1995,  in
accordance with accounting principles generally accepted in the United States.

BRUCE M. REDLIN
Certified Public Accountants


Milwaukee, Wisconsin
April 28, 1997

<PAGE>

           COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
                  Consolidated Balance Sheets--March 31


                                                 1997              1996
                                          ------------    ---------------
                                 ASSETS
                                 ------

Current assets
 Cash                                    $     780,154     $       55,653
 Investments                                   194,888            198,982
 Accounts receivable                           112,382            143,476
 Inventories                                    88,250            118,748
 Prepaid items                                   1,698                986
                                         -------------     --------------
  Total current assets                       1,177,372            517,845

Real estate (Note 4)                         1,179,836          1,179,836
Advances to Joint Venture
 Net of Gold Sale Proceeds
 (Note 3)                                   15,693,766         11,799,074
Investment in Joint Venture
 (Note 3)                                    7,016,360          7,016,360
                                           -----------        -----------
Total assets                               $25,067,334        $20,513,115

                              LIABILITIES
                              -----------
Current liabilities
 Accounts payable                          $   119,558     $      148,051
 Notes and accrued interest
  payable to related parties
  (Note 5)                                   3,461,529          3,084,370
 Notes and accrued interest
  payable to others (Note 5)                   646,809            499,110
 Accrued salaries                            1,344,015          1,204,140
 Accrued legal fees                            137,069             76,883
 Other accrued expenses                        150,135            341,054
                                           -----------     --------------
   Total liabilities                         5,859,115          5,353,608

Commitments and contingencies (Notes 3, 5, 6, 7, 10 and 14)


                          SHAREHOLDERS' EQUITY
                          --------------------
Preferred Stock
 Preferred stock, $0.10 par value:
 Authorized 250,000 shares;
 Issued and outstanding
 1997-1,515 shares; 1996-none  (Note 10)   $ 1,515,000     $            0

Common  Stock,  $0.10  par  value:  Authorized  15,000,000  shares;  Issued  and
 outstanding:
 1997-9,193,042 (Note 10)                      919,304
 1996-7,792,209 (Note 10)                                          779,221
 Additional paid in capital                 14,359,037          12,973,006
Retained earnings (deficit)                  2,414,878           1,407,280
                                           -----------         -----------
 Total shareholders' equity                 19,208,219          15,159,507
                                           -----------         -----------
 Total liabilities and shareholders'
  equity                                   $25,067,334         $20,513,115
                                           ===========         ===========

 The  accompanying  notes are an  integral  part of the  consolidated  financial
 statements.

<PAGE>
        COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF OPERATIONS
             Consolidated Statements of Income--March 31

                                  1997             1996          1995
                            ----------       ----------    ----------
Revenues:
Campground income           $   59,009       $   55,692    $   54,600
Land sales                           0                0         9,000
Interest income                  3,832            2,669         6,172
Interest income Joint
 Venture (Notes 3 & 11)      1,567,375        1,286,739       751,389
Miscellaneous income                 0              160         2,020
                            ----------        ---------    ----------
  Total revenue              1,630,216        1,345,260       823,181

Expenses:
Cost of land sales                   0                0         1,325
General, administrative and
 campground expenses            67,982           86,748        80,505
Interest expense               554,636          470,710       466,604
                            ----------        ---------     ---------
  Total expenses               622,618          557,458       548,434
                            ----------        ---------     ---------
Net income (loss)            1,007,598          787,802       274,747
  Credit (charges) for
   income taxes                      0                0             0
                            ----------       ----------    ----------
Net income (loss) after income
  tax credit (charge)       $1,007,598       $  787,802       274,747
                            ==========       ==========     =========

Net income (loss) per share
 (Note 2)                   $     .124       $     .107     $    .046
                            ==========       ==========     =========

Weighted av. shares
 outstanding (Note 2)        8,136,286        7,368,058     5,941,950
                            ==========       ==========     =========

Fully diluted income per
 common share              $     .104        $    .106     $    .045
                           ==========        =========     =========

Weighted  average  diluted  number of shares and assuming all rights and options
were exercised on March 31
(Note 2)                    9,727,646        7,465,898     6,101,006
                           ==========        =========     =========

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

<PAGE>

                COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
             Consolidated Statement Of Changes in Shareholders' Equity
                 For the Years Ended March 31, 1997, 1996, and 1995

                                                  Common Stock
                                    ------------------------------------------
                                                        Capital in
                                                          Excess     Retained
                                    Number of    Par      of Par     Earnings
                                      Shares    Value      Value     (Deficit)
                                    --------- --------  ----------  ----------
Balance March 31, 1994              5,086,960 $508,696  $8,512,443  $ 344,731

Net Income for FY March 31, 1995                                      274,747


Common Shares Issued
 Dir./off./employee/services comp.    101,800   10,180     141,890
 Payment of debt                      859,076   85,908   1,543,359
 Stock options/rights                 978,066   97,807   1,005,151
 Cash/equipment lease/purchase        268,817   26,881     473,118
                                    ---------  -------  ----------   --------
Balance March 31, 1995              7,294,719  729,472  11,675,961    619,478

Net income for FY March 31, 1996                                      787,802

Common Shares Issued
 Dir./off./employee/services comp.     45,384    4,538     110,069
 Payment of debt                      248,468   24,847     739,090
 Stock options/rights                  60,260    6,026     139,624
 Cash/equipment lease/purchase        143,378   14,338     308,262
                                    ---------  -------  ----------  ---------

Balance March 31, 1996              7,792,209  779,221  12,973,006  1,407,280

Net income for FY March 31, 1997                                    1,007,598

Dir./off./employee/services comp.      66,563    6,656     122,875
Payment of debt                       381,043   38,104     762,792
Cash                                  953,227   95,323   1,526,927
Preferred conv. stock issuance costs:
 Current                                                  (404,466)
 Deferred                                                 (622,097)
                                    --------- -------- ----------- ----------
Balance March 31, 1997              9,193,042 $919,304 $14,359,037 $2,414,878
                                    ========= ======== =========== ==========
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

<PAGE>
        COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
           Consolidated Statements of Cash Flows
              For the Years Ended March 31
                                              1997       1996       1995
                                         ---------   --------   --------
Operating activities:
 Net income (loss)                      $1,007,598   $787,802   $274,747
Changes in other operating assets
 and liabilities (net):
 Accounts receivable and inventory          61,592   (262,224)         0
 Other assets                                3,382       (366)       973
 Accounts payable                          (28,493)   (74,372)   116,241
 Accrued salaries                          139,875    (53,050)   267,550
 Accrued directors' fees                         0    (47,950)    (6,850)
 Accrued legal fees                         60,186    (89,473)  (113,257)
 Accrued liabilities                      (190,919)   167,425     (1,260)
 Common stock issued for services          129,531    114,607    152,070
                                         ---------   --------   ---------
 Cash provided (used)
   by operating activities               1,182,752    542,399    690,214

Investing activities:
 Cash advances to Joint Venture         (3,027,882)(2,845,282)(1,865,869)
 Non cash advances to Joint Venture     (1,836,531)(1,457,763)(1,018,209)
                                         ---------  ---------  ---------
  Gross advances to Joint Venture       (4,864,413)(4,303,045)(2,884,078)
  Less:  gold sale proceeds                969,721  1,180,279          0
                                         ---------  ---------  ---------
Net advances to Joint Venture           (3,894,692)(3,122,766)(2,884,078)

Financing activities:
 Net borrowings                            524,858    858,466   (508,555)
 Preferred stock issued                  1,515,000          0          0
 Common stock issued                     1,396,583  1,232,187  3,232,224
                                         ---------  ---------  ---------
   Funds provided by financing
   activities                            3,436,441  2,090,653  2,723,669

Increase (decrease) in cash and
 cash equivalents                          724,501   (489,714)   529,805
Cash - beg. of year                         55,653    545,367     15,562
                                        ---------- ---------- ----------
Cash - end of year                      $  780,154 $   55,653 $  545,367
                                        ========== ========== ==========

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
<PAGE>


        COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES Notes to
           Consolidated Financial Statements March 31, 1997

(1) The Company and Basis of Presentation of Financial Statements

(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant") and its
    82 1/2% owned  subsidiary,  San Sebastian Gold Mines,  Inc.  ("Sanseb") have
    formed the  Commerce/Sanseb  Joint Venture ("Joint Venture") for the purpose
    of performing gold mining and related activities, including, but not limited
    to,  exploration,  exploitation,  development,  extraction and processing of
    precious  metals in the  Republic  of El  Salvador,  Central  America.  Gold
    bullion,  the Joint Venture's  principal product,  is produced (but not on a
    full  production  basis) in El  Salvador  and refined and sold in the United
    States.  Expansion of  exploration is taking place at the San Sebastian Gold
    Mine  ("SSGM")  which  is  located  near  the  City of  Santa  Rosa de Lima.
    Exploration  is also  taking  place at four  other  mining  properties,  all
    located in the Republic of El Salvador, Central America.

    Presently,  the Joint Venture is in the pre-production stage at the SSGM and
    it  simultaneously is performing four separate  programs:  it has started to
    produce gold on a start up (not full production)  basis at its San Cristobal
    Mill and Plant  ("SCMP")  which is located  approximately  15 miles from the
    SSGM  site;  the  second  program  is to begin its  open-pit,  heap-leaching
    process on the SSGM site;  the third  program is to  continue  its SSGM site
    preparation,  the expansion of its exploration and exploitation targets, and
    the  enlargement  and  development of its gold ore reserves;  and the fourth
    program is to explore the potential of four gold mine exploration  prospects
    identified  as the San  Felipe-El  Potosi Mine,  and its  extension,  the El
    Capulin Mine,  the  Hormiguero  Mine,  the Modesto Mine,  and the Montemayor
    Mine, all located in El Salvador, Central America.  Concurrently, it also is
    in the process of obtaining the necessary funding for each of these separate
    programs while its Joint Venture continues its gold production, exploration,
    exploitation and development operations.

(b) The  Company,  a United  States'  corporation  (incorporated  as a Wisconsin
    corporation in 1962 and consolidated  with a Delaware  corporation in 1971),
    presents its consolidated financial statements in U.S. dollars.

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

(d) The  investment  consists of precious  stones  which are stated at the lower
    cost or market value.

(e) Accounts  receivable consist of gold bullion shipped to the refinery pending
    the settlement date.

(f) Inventory consists of processed ores and  metal-in-process  which are stated
    at the lower of average cost or market.

<PAGE>

(2) Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the operations of the
Company and all of its majority-owned subsidiaries:  Homespan Realty Co.,
Inc. ("Homespan"); Piccadilly Advertising Agency, Inc. ("Piccadilly");
San Luis Estates, Inc. ("SLE"); Universal Developers, Inc. ("UDI"); San
Sebastian Gold Mines, Inc. ("Sanseb"); and Mineral San Sebastian, S.A. de
C.V. ("Misanse").  The Company does not include in its financial
statements the operations of the Joint Venture.  Other than the Joint
Venture, all significant intercompany accounts and transactions have been
eliminated.  For further information regarding consolidated subsidiaries
see Note 8.

Income Taxes

The Company files a consolidated Federal Income Tax return with its subsidiaries
(See Note 9).

Income (Loss) Per Common Share

Net income  per share is  calculated  based on the  weighted  average  number of
common shares issued and  outstanding  during this fiscal year. The Company does
not  include  in  this  calculation  any  common  stock  equivalent,  rights  or
contingent issuances of common stock.

In computing  the shares on a fully diluted  basis,  the net income per share is
based on the  assumption  that all rights and options were exercised on the last
day of the period that is being  reported.  No allowance was made for the common
shares  that will be issued  upon the  conversion  of the  Series A  Convertible
Preferred  Stock as the exact  number of shares to be issued are  undeterminable
until the conversion date.

If on March 31,  1997,  1,591,360  option  shares would be added to the weighted
average  calculated  number of shares  which  amounts  to  8,136,286  (under the
assumption  that all of the stock options would be exercised),  the total number
of the weighted average fully diluted shares would be 9,727,646,  and the profit
per share for the fiscal  year ended March 31,  1997,  would be $.104 per share.
The same assumptions were used for the same 1996 fiscal period.

Foreign Currency

The Company itself is not involved in any foreign  currency  transactions  as it
deposits U.S. funds primarily  through bank wire transfer of funds from its U.S.
bank  account  into the Joint  Venture's El Salvador  bank  accounts.  The Joint
Venture is obligated to repay the Company for funds advanced in U.S. dollars. El
Salvador has a freely  convertible  currency  that at present  trades about 8.75
colones per U.S. dollar. In this environment,  based on the free  convertibility
of the colon,  foreign businesses have no problem making remittances of profits,
repatriating capital or bringing in capital for additional investments. There is
no delay in exchanging dollars for colones or vice versa.

<PAGE>

Major Customer

The Joint  Venture  produces  gold and  silver.  It sells its gold to a refinery
located in the United States.  Given the nature of the precious  metals that are
sold, and because many potential  purchasers of gold and silver exist, it is not
believed that the loss of any customer would adversely affect either the Company
or the Joint Venture (Note 3).

(3) Commerce/Sanseb Joint Venture ("Joint Venture")

The  Company  is in a joint  venture  with and owns 82 1/2% of the total  common
stock  (2,002,037  shares) of Sanseb,  a U.S. State of Nevada  chartered  (1968)
corporation.  The  balance  of  Sanseb's  stock  is  held by  approximately  180
non-related shareholders,  including the President of the Company who owns 2,073
common  shares.  Sanseb was formed to explore,  exploit,  research,  and develop
adequate gold  reserves.  It produced gold from SSGM from 1972 through  February
1978.

On September  22,  1987,  the Company and Sanseb  entered  into a joint  venture
agreement to formalize their relationship with respect to the mining venture and
to account for the Company's  substantial  investment in Sanseb. Under the terms
of the agreement,  the Company is authorized to supervise and control all of the
business  affairs of the Joint  Venture and has the  authority to do all that is
necessary  to  resume  mining  operations  at the SSGM on  behalf  of the  Joint
Venture.  The net pre-tax  profits of the Joint Venture will be  distributed  as
follows:  Company  90%;  and Sanseb 10%.  Since the Company  owns 82 1/2% of the
authorized  and issued  shares of Sanseb,  the  Company in effect has over a 98%
interest in the Joint Venture activities.

The joint venture  agreement  further provides that the Company has the right to
be compensated  for its general and  administrative  expenses in connection with
managing the Joint Venture.

Under the joint  venture  agreement,  agreements  signed by the  Company for the
benefit of the Joint Venture create obligations binding upon the Joint Venture.

The Joint  Venture is registered to do business in the State of Wisconsin and in
the Republic of El Salvador, Central America.

Accounting Matters

The Joint  Venture  records all costs and  expenses  as capital  items which are
reduced by the gold sale proceeds and it will write off these  cumulative  costs
on a unit of production  method at such time as it begins producing gold derived
from the virgin gold ore on a full  production  basis.  If the  prospect of gold
production,  due to different conditions and circumstances becomes unlikely, all
of these costs may be written off in the year that this occurs.

Advances to Joint Venture

As of March 31, 1997, the Company's advances were $15,103,501,  and three of the
Company's  wholly-owned  subsidiaries'  advances  were  $590,265  for a total of
$15,693,766.

<PAGE>

Investment in El Salvador Mining Projects

During the fiscal year, the Company has advanced funds,  performed services, and
allocated its general and administrative costs to the Joint Venture.

As  of  March  31,  1997,  the  Company,  Sanseb  and  three  of  the  Company's
wholly-owned subsidiaries have invested (including carrying costs) the following
in its Joint Venture:

The Company's advances since 09/22/87                    $17,253,501
Less amounts received from gold sales                     (2,150,000)
The Company's net of gold sale proceeds
  advances since 09/22/87                                 15,103,501
The Company's initial investment                           3,508,180
Sanseb's investment in the Joint Venture                   3,508,180
Sanseb's investment in the mining projects
 and amount due to the Company                            19,388,321
                                                         -----------
Total:                                                    41,508,182
Advances by the Company's three subsidiaries                 590,265
                                                         -----------
Combined total investment                                $42,098,447
                                                         ===========

SSGM Activity

The Company had no  significant  activity  at the SSGM site from  February  1978
through  January 1987. The present  status is that,  the Company,  since January
1987, and  thereafter,  the Joint Venture,  since  September 1987, has completed
certain of the required mining pre-production  preliminary stages in the minable
proven gold ore reserve area,  and the Company is active in attempting to obtain
adequate financing for the proposed open-pit,  heap-leaching  operations on this
site.  The Joint  Venture is also engaged in the  exploration  and the expansion
program to develop  additional  gold ore  reserves in the area  surrounding  the
minable gold ore reserves and at four other El Salvador mining prospects. During
this fiscal  period gold is being  produced by trucking  the tailings and virgin
ore for processing at the SCMP.

Mineral San Sebastian S.A. de C.V. ("Misanse")

(a)  Misanse Corporate Structure

The SSGM real estate is owned by and leased to the Joint  Venture by Misanse,  a
Salvadoran chartered corporation. The Company owns 52% of the total of Misanse's
issued and outstanding shares. The balance is owned by approximately one hundred
El Salvador,  Central American, and United States' citizens. The Company has the
right to select six of Misanse's ten directors. (Note 6)

<PAGE>

(b)  SSGM Mining Lease

On July 28,  1975,  an amended  lease  agreement  between  Misanse as lessor and
Sanseb as tenant was signed by the parties giving the tenant all the possessions
and mining  rights that  pertain to the SSGM as well as other  claims to mineral
rights  that may already  have or could be claimed in the future  within the 595
hectares  (1,470 acres) plat of land  encompassing  the SSGM. The 25-year lease,
which  begins on the date gold  production  begins,  was further  amended to run
concurrently  with the  concession  described  herein and may be extended for an
additional  25 years by the  tenant as long as the  tenant has paid the rent and
has complied  with other  obligations  under the lease and the  concession.  The
lease further  provides that the tenant will pay rent equivalent to five percent
of the gross gold production  revenue  obtained from the leased SSGM and further
commits itself to maintain production taking into consideration market and other
conditions. In no case will the rent be less than eighteen hundred "colones" per
month (approximately $206 per month at the current rate of exchange).  The lease
further  provides that, in the event the lessor wishes to sell the property,  it
must first give  preference to the tenant;  the lease further  provides that the
tenant  must give  preference  to employ  former  mining  employees  and Misanse
shareholders,  providing  they  qualify for the  available  position.  The lease
agreement  was  assigned on January 29, 1987 to the Company and Sanseb  together
with the mining concession application.

The lease is freely  assignable by the Joint Venture  without notice to Misanse.
The lease may also be canceled by the Joint  Venture on thirty  day's  notice to
Misanse, and thereafter, all legal responsibilities thereunder shall cease.

In the event that additional gold ore is discovered, Misanse is required to make
proper  claim for it under the  jurisdiction  of the  Ministry  of Economy of El
Salvador's  Director of Energy,  Mines, and Hydrocarbons,  and include it in the
present  concession.  Such  addition to the lease is required to be made without
any changes to the rental  payment,  except that the expenses for  expanding the
concession shall be borne by the Joint Venture.

(c)  Mineral Concession

On January 27, 1987,  the  Government  granted a right to the mining  concession
("concession")  to  Misanse  which  was  subject  to the  performance  of the El
Salvador Mining law requirements.  These rights were simultaneously  assigned to
the Company and Sanseb.

On July 23, 1987,  the  Government  of El Salvador  delivered and granted to the
Company's 52% owned subsidiary,  Misanse,  possession of the mining  concession.
This is the right to extract and export  minerals for a term of 25 years (plus a
25-year renewal  option)  beginning on the first day of production from the real
estate  which  encompasses  the SSGM owned by  Misanse.  Misanse  assigned  this
concession to the Joint Venture.

Effective  February 1996, the Government of El Salvador  passed a law which will
require  mining  companies to pay to it three  percent of its gold sale receipts
and an  additional  one  percent is to be paid to the El  Salvador  municipality
which has jurisdiction of the mine site.

Under the terms of the concession and agreements  referred to in the concession,
the Joint Venture has agreed to the following:

(1)  The Joint Venture will pay to 270 former El Salvador  employees pursuant to
     a settlement  agreement dated June 1985, as follows: A sum of approximately
     500,000  colones  (approximately  U.S.  $57,143  at  the  current  rate  of
     exchange) in three (3) installments contingent upon the production and sale
     of  gold,  to wit:  one-third  is to be paid  from  the  sale of the  first
     production of gold;  one-third is to be paid one (1) year  thereafter;  and
     one-third is to be paid two (2) years after the first  payment.  The entire
     amount due has been paid or placed in escrow for those  persons that cannot
     be located.

<PAGE>

(2)  Preference  is to be given  to the  former  Sanseb  employees  and  Misanse
     shareholders  in filling any job vacancies,  providing that there is a need
     for their skills or services;

(3)  From the  profits  earned,  five  percent  of the gross  wages  paid to the
     full-time employees shall be paid into a pension fund;

(4)  From the profits earned, a sum of 500,000 colones annually
     (equivalent to $57,143 at the present rate of exchange) will be paid
     by the Joint Venture as a social tax for the benefit of the
     community in the SSGM area which said funds are to be used for
     social, economic, educational, recreational, health, welfare,
     medical or for such other beneficial community services as
     determined by the Joint Venture;

(5)  At such time as the Government of El Salvador  forms a cooperative  for the
     benefit of the employees,  the Joint Venture has agreed to contribute  from
     its  annual  pre-tax  earnings,  the sum of  five  percent  of its  pre-tax
     profits,  but, in any event,  not less than a minimum  amount equal to five
     percent of eight percent of the total assets;

(6)  Pursuant to an agreement with the El Salvador Minister of Economy,
     at the request of the Company or the Joint Venture to the El
     Salvador Central Reserve Bank and/or office of the El Salvador
     Minister of Foreign Commerce, it will be able to convert the El
     Salvador currency into United States' currency for the payment of
     its loans, interest, and any other obligations, including the
     payment of dividends.  Presently, there are no restrictions to
     convert the El Salvador colones into United States' currency.  (Note
     2)

On November  30, 1987,  the El Salvador  Minister of Foreign  Commerce  issued a
project  approval for the gold mining  operation which was ratified on April 15,
1988.

In  consideration  for  the  obligations  agreed  to by the  Joint  Venture  the
Government of El Salvador agreed to exempt the Joint Venture from the payment of
all  import  duty,  fiscal  or  municipal  taxes  whatsoever.  The  El  Salvador
Department of Customs refused to recognize this exemption. On November 15, 1993,
the  Joint  Venture's  attorneys  filed a  declaratory  proceeding  with  the El
Salvador  Constitutional  Supreme Court  ("Court")  informing the Court that the
Joint  Venture's  rights were being violated and that the Court should  restrain
the Department of Customs from attempting to collect any duty.

On May 18,  1994,  the El  Salvador  Constitutional  Supreme  Court  of  Justice
declared  that the Joint Venture is entitled to be  temporarily  exempt from the
payment of all fiscal and  municipal  taxes and import duty on the import of any
item relating to the needs of the SSGM pending its review of the petition  filed
on November 15, 1993,  and that the  Company's  constitutional  rights are to be
preserved.  The El  Salvador  Department  of Customs  takes a position  that the
Supreme  Court  could  deny the  exemption,  therefore,  in lieu of  paying  the
Custom's  duty,  it is  accepting a payment  guarantee  bond in an amount of the
Custom's  duty until a final  decision is made. It is charging the Company a ten
percent  added value tax prior to June 30,  1995,  and 13%  thereafter  which is
refundable  to the  extent of six  percent  of the value of the Joint  Venture's
exports. The Joint Venture intends to export all of its gold.

<PAGE>

Gold Ore Reserves

The Joint  Venture's  geologists  have determined that the minable and estimated
gold reserves are  approximately  15,785,000 tons which should contain 1,641,600
ounces of gold.  The  value of this gold ore  reserve  is not  reflected  in the
balance  sheet and since gold  production  has  commenced on a limited  start-up
basis these gold ore reserves will have a significant impact on future earnings.

SCMP Land and Building Lease

On  November  12,  1993,  the  Joint  Venture  entered  into an  agreement  with
Corporacion Salvadorena de Inversiones ("Corsain"),  a governmental agency of El
Salvador,  to lease for a period of ten years,  approximately  166 acres of land
and buildings on which its gold  processing  mill,  plant and related  equipment
(the SCMP) are  located,  and which is  approximately  15 miles east of the SSGM
site. The annual lease payment is U.S.  $11,500  (payable in El Salvador colones
at the then current rate of exchange),  payable annually in advance, and subject
to an annual  increase  based on the annual United  States'  inflation  rate. As
agreed,  a security  deposit of U.S.  $11,500 was paid on the same date and this
deposit will be subject to increases  based on any United  States'  inflationary
rate adjustments.

Modesto Mine

(a)  Real Estate

On August 26, 1994, the Company  entered into a fifteen-year  lease agreement to
lease  approximately  30 acres of key vacant land  located at the  Modesto  Mine
site,  near the  City of El  Paisnal,  El  Salvador,  at a cost of one  thousand
colones per manzana per year or approximately  U.S. $67 per acre. A condition of
the  lease  was  a  five-year   prepayment   provision  of  87,500   colones  or
approximately  U.S.  $10,011.  Also, the Company has a first right of refusal to
purchase this land.  On August 31, 1996,  the Company  purchased  this parcel of
land.  This land was used as  collateral  in  connection  with a mortgage  and a
promisssory note that was issued.

On  November  27,  1994,  the  Company  entered  into an  agreement  to purchase
approximately  22 acres of land  which  abuts  the land  formerly  leased at the
Modesto Mine site. The Company owns a total of 52 acres.

San Felipe-El Potosi Mine ("Potosi")

(a)  Real Estate Lease Agreement

The Joint Venture entered into a lease  agreement with the San Felipe-El  Potosi
Cooperative  ("Cooperative") of the City of Potosi, El Salvador on July 6, 1993,
to lease the real estate encompassing the San Felipe-El Potosi Mine for a period
of 30 years and with an option  to renew the lease for an  additional  25 years,
for the purpose of mining and extracting  minerals and under the following basic
terms and conditions:

1.   The lease payment will be five percent of the gross  receipts  derived from
     the  production  of  precious  metals  from this site which will be payable
     monthly.

<PAGE>

2.   The Joint  Venture will advance to the  Cooperative  the funds  required to
     obtain the mining  concession  from the El Salvador  Department  of Energy,
     Mines and  Hydrocarbons  and all related  costs which will be reimbursed or
     will become a deduction from future rental payments.

3.   The Joint  Venture  will,  when it is in  production,  employ all of the 45
     qualified  members of the  Cooperative  providing  that there is a need for
     their particular skill or service.

4.   The Joint Venture will furnish medicine and first aid medical assistance to
     all of its  employees to the extent that such  benefits are not provided by
     the Salvadoran Social Security System.

5.   An employee  life  insurance  program is to be seriously  considered by the
     Joint Venture when  production  commences,  providing that the cost of such
     insurance is not excessive.

(4)  Real Estate Ownership

The Company and its subsidiaries own a 331-acre  campground  located on the Lake
of the Ozarks,  Camden  County,  Missouri;  40 lots in the San Luis North Estate
Subdivision, Costilla County, Colorado; and 12 lots in the City of Fort Garland,
Costilla  County,  Colorado.  Misanse owns the 1,470 acre SSGM site located near
the City of Santa Rosa de Lima in the Department of La Union, El Salvador. Other
real estate  ownership or leases in El Salvador are as follows:  it owns a total
of approximately 52 acres at the Modesto Mine: the Joint Venture leases the SCMP
land and  buildings  on which its mill,  plant and  equipment  are  located.  In
addition  the Joint  Venture has entered  into lease  arrangements  based on the
production  of gold payable in the form of royalties  with one of the four other
mining prospects in the Republic of El Salvador. Reference is made to Note 3 for
other real estate ownership.

(5)  Notes Payable and Accrued Interest
                                                      March 31

Notes payable consist of the following:           1997         1996
                                            ----------  -----------

Mortgage and  promissory  notes to related  parties,  interest  ranging from one
percent to four percent over prime rate, but not less than 16%, payable monthly,
due on demand,  using the  undeveloped  land,  real estate and all other  assets
owned by the Company, its subsidiaries and the Joint Venture as
collateral (Note 6)                         $3,461,529   $3,084,370

Other  (consists  primarily of  short-term  notes and accrued  1996  interest of
$262,955 (1995,  $242,988.21) issued to trade creditors and others,  interest of
varying amounts, in lieu of actual cash payments) and a mortgage on a certain
parcel of land located in El Salvador.         646,809      499,110
                                            ----------   ----------
Total:                                      $4,108,338   $3,583,480
                                            ==========   ==========

<PAGE>

(6)  Related Party Transactions

The Company,  in an attempt to preserve  cash, had prevailed on its President to
accrue his salary for the past 16 years, for a total of $1,344,015.

In addition,  with the consent and approval of the  Directors,  the President of
the Company,  as an individual  and not as a Director or Officer of the Company,
entered into the following financial  transactions with the Company,  the status
of which is reflected as of March 31, 1997:

The amount of funds which the Company has borrowed from its President  from time
to time, together with accrued interest, amounts to $1,839,465. To evidence this
debt, the Company has issued to its President a series of  open-ended,  secured,
on-demand promissory notes, with interest payable monthly at the prime rate plus
two percent, but not less than 16% per annum.

The Company had  borrowed,  as of March 31,  1997,  an  aggregate  of  $400,919,
including accrued interest,  from the Company's  President's Rollover Individual
Retirement   Account  (RIRA).   These  loans  are  evidenced  by  the  Company's
open-ended, secured, on-demand promissory note, with interest payable monthly at
the prime rate plus four percent per annum, but not less than 16% per annum.

In order to satisfy  the  Company's  cash  requirements  from time to time,  the
Company's  President has sold or pledged as collateral for loans,  shares of the
Company's  common stock owned by him. In order to  compensate  its President for
selling or pledging his shares on behalf of the Company,  the Company has made a
practice  of  issuing  him the  number of  restricted  shares  of  common  stock
equivalent to the number of shares sold or pledged, plus an additional number of
shares equivalent to the amount of accrued interest calculated at the prime rate
plus three percent per annum.  The Company received all of the net cash proceeds
from the sale or from the pledge of these  shares.  The Company  returned all of
the shares  (58,900)  borrowed  from him during this fiscal period and it issued
26,887 of its common shares for the payment of interest for the shares loaned or
pledged as  collateral  for the benefit of the  Company.  It may owe  additional
common shares for such shares loaned or pledged by him for  collateral  purposes
to others for the benefit of the Company,  all in accordance  with the terms and
conditions of Director approved  open-ended loan agreements dated June 20, 1988,
October 14, 1988, May 17, 1989, and April 1, 1990.

On February 15, 1987, the Company granted its President, by unanimous consent of
the Board of Directors  compensation in the form of a bonus in the amount of two
percent of the pre-tax  profits  realized  by the  Company  from its gold mining
operations  in El  Salvador,  payable  annually  over a period of  twenty  years
commencing  on the  first  day of the month  following  the month in which  gold
production commences.

The President  presently owns a total of 467 Misanse common shares.  There are a
total of 2,600 Misanse shares issued and outstanding.

Also with the consent  and  approval  of the  Directors,  a company in which the
President has a 55% ownership  entered into the  following  agreements,  and the
status is reflected as of March 31, 1997.

<PAGE>

The Company leased approximately 4,032 square feet on a month-to-month basis for
its corporate  headquarters  office;  the monthly rental charge was $2,789.  The
annual  amount  charged for the past three  fiscal  years is as  follows:  1997,
$33,468; 1996, $28,316 and 1995, $25,740.

On June 10, 1996, in consideration for the partial cancellation of the Company's
debt due ($292,500) to this related party, 130,000 restricted common shares were
issued to it.

On January 10,  1997,  this  related  party  purchased  68,000 of the  Company's
restricted  common  shares  at a price  of  $2.00 a share.  It also  received  a
four-year  stock option  expiring on January 9, 2001, to purchase  68,000 of the
Company's  restricted  common  shares at a price of $3.00 for each  share.  This
transaction  had the same  terms as were  entered  into with  other  independent
arms-length transactions.

The same related company provides consulting,  administrative  services,  use of
data processing equipment, use of its vehicles and other property as required by
the Company.  Total charges for these  services were as follows:  1997,  $7,950;
1996, $7,920 and 1995, $7,620.

In lieu of cash  payments for the office  space  rental and for the  consulting,
administrative  services,  etc.,  these amounts due are added each month to this
related company's open-ended,  secured,  on-demand promissory note issued by the
Company.

In addition,  this related  company does use its credit  facilities  to purchase
items needed for the Joint Venture's mining needs.

This  related  company  has  been  issued  an  open-ended,   secured,  on-demand
promissory  note  which at March 31,  1997,  amounts  to  $963,152;  the  annual
interest rate is four percent plus the prime rate, but not less than 16%, and it
is payable monthly.

The Company's  Directors have consented and approved the following  transactions
which status are reflected as of March 31, 1997:

The President's  wife's Individual  Retirement Account ("IRA") has the Company's
open-ended,  secured,  on-demand promissory note in the sum $207,475 which bears
interest  at an annual rate of prime plus three  percent,  but not less than 16%
and the interest is payable monthly.  The President's wife on December 14, 1996,
purchased  83,900  restricted  common  shares,  $0.10  par  value,  for a sum of
$167,800.  She  simultaneously  acquired a  four-year  stock  option to purchase
83,900 of the Company's  restricted common shares at a price of $3.00 each which
expires December 13, 2001. This transaction is under the same terms entered into
with arms-length other purchases.

The Law Firm which  represents  the Company in which a son of the President is a
principal is owed the sum of $137,069 for legal services rendered throughout the
past years. Also, the son of the President and his son's wife have the Company's
open-ended, on-demand promissory note in the sum of $50,518 which bears interest
at an annual rate of 16% payable monthly.

<PAGE>

The Directors, by their agreement,  have deferred cash payment of their Director
fees beginning on January 1, 1981,  until such time as the Company's  operations
are profitable. Effective from October 1, 1996, the Director fees were increased
from $750 to $1,200 for each  quarterly  meeting and $400 for  attendance at any
other Directors'  meeting.  The Executive Committee Director fees were increased
from $250 to $400 for each  meeting.  The Directors and Officers have a right to
exchange the amount due to them for the Company's common shares.

On September 16, 1994, the Directors adopted a resolution offering the Directors
and Officers of the Company a right to exchange the compensation due to them for
the  Company's  common  shares  valued at the lowest bid quote  reflected in the
NASDAQ Monthly Statistical  Summaries during a twelve-month period preceding the
exercise  of this right.  As of March 31,  1997,  pursuant to the S.E.C.  Form 8
Registration  Statement  effective as of April 4, 1994,  the  Directors/Officers
exercised  their rights to purchase  8,613 shares at a price of $1.875 per share
in payment of all compensation due to them as of March 31, 1997.

The Company  advances  funds,  allocates  and charges its  expenses to the Joint
Venture. The Joint Venture in turn capitalizes all of these advances,  costs and
expenses  until  such  time as it  resumes  its gold mine  operation.  When full
production  commences,  these  capitalized  costs  will be charged as an expense
based on a per ton production  basis.  The Company also charges interest for its
advances to the Joint Venture which interest rate is established to be the prime
rate quoted on the first day of each month plus four  percent and said  interest
is payable monthly.

Company Net Advances to the Joint Venture

                                          Total          Interest
                                        Advances         Charges
                                       ----------        --------
Balance April 1, 1990                 $ 1,625,163         252,060
 Year Ended March 31, 1991                718,843         266,107
 Year Ended March 31, 1992                698,793         312,004
 Year Ended March 31, 1993              1,003,617         347,941
 Year Ended March 31, 1994              1,155,549         451,180
 Year Ended March 31, 1995              2,884,078         751,389
 Year Ended March 31, 1996              3,122,766       1,286,739
 Year Ended March 31, 1997              3,894,692       1,567,375
                                      -----------      ----------
Balance March 31, 1997                $15,103,501      $5,234,795

Advances by three of the Company's
 wholly-owned subsidiaries                590,265               0
                                      -----------      ----------
Total Net Advances March 31, 1997     $15,693,766      $5,234,795

(7)  Commitments

Reference is made to Notes (3), (5), (6), (10) and (14).

<PAGE>

(8)  Consolidated Subsidiaries

The following  subsidiaries,  all majority-owned by the Company, are included in
the consolidated  financial statements of the Company. All intercompany balances
and transactions have been eliminated.

                             Percentage of Ownership

      Homespan Realty Co., Inc.              100.0%
      Mineral San Sebastian, S.A. de C.V.     52.0%
      Piccadilly Advertising Agency, Inc.    100.0%
      San Luis Estates, Inc.                 100.0%
      San Sebastian Gold Mines, Inc.          82.5%
      Universal Developers, Inc.             100.0%

(9)  Income Taxes

At March  31,  1996,  the  Company  and its  subsidiaries,  excluding  the Joint
Venture, have estimated net operating losses remaining in a sum of approximately
$4,347,244 which may be carried forward to offset future taxable income; the net
operating losses expire at various times to the year of 2012.

(10) Description of Securities

a.   Common Stock

The Company's Certificate of Incorporation authorizes the issuance of 15,000,000
shares of common stock, $0.10 par value per share of which 9,193,042 shares were
outstanding as of March 31, 1997. Holders of shares of common stock are entitled
to one vote for each share on all  mattters to be voted on by the  shareholders.
Holders of common stock have no cumulative  voting rights.  Holders of shares of
common  stock are  entitled  to share  ratably in  dividends,  if any, as may be
declared,  from time to time by the Board of Directors in its  discretion,  from
funds legally available therefore. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of common stock are entitled to
share pro rata all assets  remaining  after payment in full of all  liabilities.
Holders of common  stock have no  preemptive  rights to purchase  the  Company's
common  stock.  There are no  conversion  rights or  redemption  or sinking fund
provisions with respect to the common stock.  All of the  outstanding  shares of
common stock are validly issued, fully paid and non-assessable.

b.  Preferred Stock

The Company's  Certificate of  Incorporation  authorizes the issuance of 250,000
shares of preferred  stock,  $0.10 par value,  of which 2,500 shares of Series A
Convertible  Preferred Stock were issued as of January 30, 1997, and as of March
31, 1997,  there remained 1,515 preferred shares issued and outstanding and none
were issued as of March 31, 1996.

The number of shares of common stock  issuable  upon  conversion  of each of the
2,500 shares of preferred stock,  and the consequent  number of shares of common
stock  available  for resale under this  prospectus,  is based upon a conversion
ratio  which is  $1,000  divided  by the  lower  of (a)  $2.90 or (b) 65% of the
closing bid price of the common stock on NASDAQ  averaged  over the five trading
days  immediately  prior to the date of  conversion.  The holders that converted
these Series A Convertible Preferred Shares received 655,227 common shares.

<PAGE>

The remaining  preferred shares are issuable in one or more series. The Board of
Directors is authorized to fix or alter the dividend rate, conversion rights (if
any), voting rights,  rights and terms of redemption (including any sinking fund
provisions),  redemption price or prices,  liquidation preferences and number of
shares constituting any wholly unissued series of preferred shares.


c.  Stock option activity during 1997, 1996, and 1995 was as follows:



                              03/31/97         03/31/96           03/31/95
                         ------------------  ---------------- ----------------
                                   Weighted          Weighted         Weighted
                                   Average           Average           Average
                           Amount   Price    Amount   Price    Amount   Price
                         --------   -----   -------   -----   -------   -----
Outstanding, beg. yr.      97,840   $2.66   154,850   $2.66   709,760   $1.51
Granted                 1,507,400   $3.38     3,250   $5.00    94,590   $2.56
Exercised                           $0.00   (60,260   $2.42  (649,500)  $1.46
Forfeited                 (13,880)  $3.00         0   $0.00         0   $0.00
Expired                         0   $0.00         0   $0.00         0   $0.00
                        ---------   -----    ------   -----   -------   -----
Outstanding, end of yr. 1,591,360   $3.22    97,840   $2.66   154,850   $2.34
                        =========   =====    ======   =====   =======   =====

A summary of the outstanding stock options as of March 21, 1997, follows:

                                      Weighted Average
    Range of            Amount           Remaining           Weighted Average
Exercise Prices      Outstanding      Contractual Life        Exercise Price
---------------      -----------      ----------------       ----------------
$2.00 to $2.99         490,000           1.14 years                $2.44
$3.00 to $5.00       1,101,360           2.43 years                $3.56

d.  Stock Rights - To The President

Reference  is made  to Note 6,  Related  Party  Transactions,  of the  Company's
financial  statements which disclose the terms and conditions of the share loans
to the Company by the President and the interest  which is payable to him by the
Company's issuance of its common shares.

Said interest payable is for shares loaned to the Company and/or for such shares
loaned or  pledged  for  collateral  purposes,  or for unpaid  interest,  all in
accordance  with the terms and conditions of Director  approved  open-ended loan
agreements  dated June 20,  1988,  October 14,  1988,  May 17, 1989 and April 1,
1990. <PAGE>

e.  Stock Rights - Others

The Company has agreed to issue up to 25,000 of its restricted  common shares in
connection with a certain funding agreement entered into on December 19, 1996.

f.  Share Loans - Others

A series of  borrowings  of the  Company's  common  shares  were made  under the
provision that the owners would sell said shares as the Company's designee, with
the proceeds  payable to the Company.  In  exchange,  the Company  agreed to pay
these  shares  loaned  within 31 days or less by issuing its  restricted  common
shares,  together with interest payable in restricted common shares payable at a
negotiated  rate of  interest  normally  payable in advance  for a period of two
years; no shares were borrowed from other non-related  parties during the period
ended March 31, 1997.

S.E.C. Form 8 Registration

On April 4, 1994, the Company filed its Securities and Exchange  Commission Form
8  Registration  Statement No.  33-77226  under the  Securities  Act of 1933, to
register 500,000 of the Company's $.10 par value common stock for the purpose of
distributing  shares  pursuant to the  guidelines of the Company's 1994 Services
and Consulting  Compensation Plan. From the 500,000 shares  registered,  258,747
were issued and 241,253 shares are authorized to be issued.

(11) Interest Income on Advances to the Joint Venture

From  time to time the  Company  advances  funds,  services,  etc.  to the Joint
Venture. The interest rate charged is the prime interest rate fixed on the first
day of each month plus four percent. The interest is payable monthly. (Note 6)

(12) Litigation

There is no litigation.

<PAGE>

(13) Quarterly Financial Data (Unaudited)

The following is a tabulation of unaudited selected quarterly  operating results
for March 31, 1997, and March 31, 1996:
                                                          Net Income
                                              Net Income    (Loss)
                                Revenues (a)  (Loss) (b)  Per Share
                                ------------ -----------  -----------
First quarter       06/30/95    $  299,687   $  173,459     $ .024
Second quarter      09/30/95       329,240      207,139       .028
Third quarter       12/31/95       355,729      206,487       .028
Fourth quarter      03/31/96       360,604      200,717       .027
                                ----------   ----------     ------
 Total as of        03/31/96    $1,345,260   $  787,802     $ .107
                                ==========   ==========     ======

First quarter       06/30/96    $  373,213   $  220,032     $ .030
Second quarter      09/30/96       401,758      250,608       .030
Third quarter       12/31/96       417,536      258,928       .030
Fourth quarter      03/31/97       437,709      278,030       .034
                                ----------   ----------     ------
 Total as of        03/31/97    $1,630,216   $1,007,598     $ .124
                                ==========   ==========     ======

(a)  Includes interest income from Joint Venture.

(b)  Includes  interest  expense incurred on funds borrowed and then advanced to
     the Joint Venture.

(14) Contingent Liabilities

In the event the El Salvador Constitutional Supreme Court should decide that the
Joint  Venture is subject to the payment of custom duty taxes,  then the Company
would have a  contingent  liability  as it has, on behalf of the Joint  Venture,
agreed to  reimburse  an El  Salvador  Insurance  Company  the funds that may be
disbursed to the El Salvador  customs'  office in connection with the payment of
guarantee bonds it has issued in lieu of cash payment for the import duties. The
total sum of payment  guarantee  bonds issued by the Insurance  Company  through
March 31, 1997, amounts to approximately $20,000.

<PAGE>

(15) Supplemental Cash Flow Information

Supplemental  disclosure of cash flow  information for the years ended March 31,
1997, 1996 and 1995 is as follows:


                                             1997        1996   1995
                                           ------     -------   ----
Cash paid during the year for:
Interest                                   $1,350     $     0     $0
Income taxes                               $    0     $     0     $0
Non-cash financing activities
Equipment capital leases                   $    0     $35,775     $0


<PAGE>

Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure

None


                             PART III

Item 10.  Directors and Executive Officers of the Registrant

The  information  called  for by  Item  10 is  incorporated  by  reference  from
information   under  the  caption  "Election  of  Directors"  in  the  Company's
definitive  proxy statement to be filed pursuant to Regulation 14A no later than
120 days  after the close of its  fiscal  year.  The  information  on  Executive
Officers is contained in Part I, Item 4(a) of this Form 10-K.

Item 11.  Executive Compensation

The  information  called  for by  Item  11 is  incorporated  by  reference  from
information  under  the  caption  "Executive   Compensation"  in  the  Company's
definitive  proxy statement to be filed pursuant to Regulation 14A no later than
120 days after the close of its fiscal year.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The  information  called  for by  Item  12 is  incorporated  by  reference  from
information  under the caption "Voting  Securities" and "Principal  Shareholders
and Ownership by Management" in the Company's  definitive  proxy statement to be
filed  pursuant to Regulation  14A no later than 120 days after the close of its
fiscal year.

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
executive  officers and directors and persons  beneficially  owning greater than
ten percent of the outstanding  shares, to file reports of ownership and changes
in ownership  with the  Securities  and Exchange  Commission.  Based solely on a
review of the copies of such forms  furnished to the Company or  representations
that no Form 5 was required,  the Company believes that all Section 16(a) filing
requirements were complied with as required.

Item 13.  Certain Relationships and Related Transactions

The  information  called  for by  Item  13 is  incorporated  by  reference  from
information under the caption "Certain  Relationships and Related  Transactions"
in the Company's  definitive  proxy statement to be filed pursuant to Regulation
14A no later than 120 days after the close of its fiscal year.

<PAGE>

                            PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  Financial Statements and Schedules

See index to Consolidated Financial Statements, Supplementary Data, Consolidated
Financial  Statements  of the  Registrant  and its  subsidiaries  and  Financial
Schedules in Part II, Item 8 of this report.

Report of Independent Accountants on the Financial Statement Schedules . . 86

Schedule IV (1) Indebtedness of Related Parties. . . . . . . . . . . . . . 87

Schedule IV (2) Indebtedness to Related Parties. . . . . . . . . . . . . . 88

Schedule X (1) Supplementary Income Statement Information March 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90

(b)  Reports on Form 8-K

Form 8-K dated June 11, 1996  regarding  the  Company's  acceptance of letter of
intent  with   National   Securities   Corporation   of   Seattle,   Washington.
(Incorporated by reference as this Form 8-K was filed electronically through the
EDGARLink Electronic Filing System on June 26, 1996.)

Form 8-K dated  January  30, 1997  regarding  the sale of  Regulation  S shares.
(Incorporated by reference as this Form 8-K was filed electronically through the
EDGARLink Electronic Filing System on February 11, 1997.)

Subsequent  to March  31,  1997,  a Form 8-K dated May 28,  1997  regarding  the
agreement   the  Company   entered  into  with  Teck   Corporation   was  filed.
(Incorporated by reference as this Form 8-K was filed electronically through the
EDGARLink Electronic Filing System on June 5, 1997.)

(c)  Exhibits

The exhibit numbers in the following list correspond to the numbers  assigned to
such  exhibits in Item 601 of  Regulation  S-K. The exhibit  numbers noted by an
asterisk (*) indicate  exhibits  actually  filed with this Annual Report on Form
10-K. All other exhibits are  incorporated  by reference into this Annual Report
on Form 10-K.

Exhibit No.          Description of Exhibit                   Page


3.1        Articles of Incorporation of the
           Company (Incorporated by reference to
           the Company's Registration Statement No.
           2-66932 on Form S-I filed on April 22, 1980.)

3.2        By-laws of the Company.  (Incorporated by
           reference to Exhibit 3.2 to the Company's
           Form 10-K for the year ended March 31, 1993.)

4          Instruments defining the rights of security
           holders, including indentures.

<PAGE>

4.1        Three-Year Stock Option Agreement dated
           May 27, 1994, (30,000 common shares).
           (Incorporated by reference to Exhibit 10.14 of
           the Company's Form 10-K for the year ended March 31, 1994.)

4.2        Three-Year Stock Option Agreement dated May 31, 1994,  (30,000 common
           shares). (Incorporated by reference to Exhibit 10.15 of the Company's
           Form 10-K for the year ended March 31, 1994.)

4.3        30-Month Stock Option  Agreement  dated March 22, 1995 (20,710 common
           shares).  (Incorporated by reference to Exhibit 4.14 of the Company's
           Form 10-K for the year ended March 31, 1995.)

4.4        Two-Year  Stock Option  Agreement  dated March 30, 1996 (1,375 common
           shares).  (Incorporated  by reference to Exhibit 4.9 of the Company's
           Form 10-K for the year ended March 31, 1996.)

4.5        Two-Year  Stock Option  Agreement  dated March 30, 1996 (1,875 common
           shares).  (Incorporated by reference to Exhibit 4.10 of the Company's
           Form 10-K for the year ended March 31, 1996.)


4.6*       Three-Year  Stock Option  Agreement dated October 1, 1996 to purchase
           22,500 common shares at $3.00 per share.

4.7*       Four-Year  Stock Option  Agreement dated December 9, 1996 to purchase
           3,000 common shares at $3.00 per share.

4.8*       Four-Year Stock Option  Agreement dated December 11, 1996 to purchase
           15,000 common shares at $3.00 per share.

4.9*       Four-Year Stock Option  Agreement dated December 11, 1996 to purchase
           60,000 common shares at $3.00 per share.

4.10*      Four-Year Stock Option  Agreement dated December 14, 1996 to purchase
           83,900 common shares at $3.00 per share.

4.11*      Four-Year Stock Option  Agreement dated December 27, 1996 to purchase
           30,000 common shares at $2.50 per share.

4.12*      Four-Year Stock Option  Agreement dated December 31, 1996 to purchase
           25,000 common shares at $3.00 per share.

4.13*      Four-Year  Stock Option  Agreement dated January 10, 1997 to purchase
           68,000 common shares at $3.00 per share.

<PAGE>

4.14       Two-Year  Stock  Option  Agreement  is to be issued  effective  as of
           January 30, 1997 to purchase 100,000 common shares at $3.22 per share
           and an additional 100,000 common shares at $4.22 per share.

4.15       One, Two, Three, Four and Five-Year Stock Option Agreements are to be
           issued  effective as of January 23, 1997, to purchase  200,000 shares
           each of the years  during a five-year  period as  follows:  year one,
           $2.25; year two $2.75;  year three,  $3.25; year four $3.75; and year
           five $4.25.

9          Voting Trust Agreement--not applicable.

10         Material contracts regarding sale of assets and deferred
           compensation.

10.1       Bonus   compensation,   Edward  L.   Machulak,   February  16,  1987.
           (Incorporated  by reference to Exhibit 7 of the  Company's  Form 10-K
           for the year ended March 31, 1987.)

10.2       Loan Agreement and Promissory Note, Edward L. Machulak,
           June 20, 1988.  (Incorporated by reference to Exhibit 10.2 of
           the Company's Form 10-K for the year ended March 31, 1993.)

10.3       Loan Agreement and Promissory Note, Edward L. Machulak,
           October 14, 1988.  (Incorporated by reference to Exhibit 10.3
           of the Company's Form 10-K for the year ended March 31, 1993.)

10.4       Loan Agreement and Promissory Note, Edward L. Machulak,
           May 17, 1989.  (Incorporated by reference to Exhibit 10.4 of
           the Company's Form 10-K for the year ended March 31, 1993.)

10.5       Loan Agreement and Promissory Note, Edward L. Machulak,
           April 1, 1990.  (Incorporated by reference to Exhibit
           10.5 of the Company's Form 10-K for the year ended March 31, 1993.)

10.6       Letter Agreement, Edward L. Machulak, October 10, 1989.
           (Incorporated by reference to Exhibit 10.6 of the
           Company's Form 10-K for the year ended March 31, 1993.)

10.7       Loan   Agreement  and   Promissory   Note  dated  January  19,  1994.
           (Incorporated  by reference to Exhibit  10.10 of the  Company's  Form
           10-K for the year ended March 31, 1995.)

10.8       John E. Machulak and Susan R. Robertson, Loan Agreement
           and Promissory Note dated June 3, 1994.  (Incorporated by
           reference to Exhibit 10.14 of the Company's Form 10-K
           for the year ended March 31, 1995.)

11*        Schedule of Computation of Net Income Per Share

<PAGE>

13         Annual Report to security holders, Form 10-Q or Quarterly
           Report to security holders:

           Annual  Report for the period ended March 31, 1997,  will include the
           Form 10-K and will be submitted 120 days within the fiscal year end.

21*        Subsidiaries of the Company.

23.1*      Consent of the independent auditors of the Company.

99.0       Additional Exhibits

99.1*      Confirmation agreement, General Lumber & Supply Co., Inc.,
           April 14, 1997.

99.2*      Confirmation Agreement, Edward L. Machulak, April 14, 1997.

99.3*      Confirmation Agreement, Edward L. Machulak Rollover Individual
           Retirement Account, April 14, 1997.

99.4*      Confirmation Agreement, Sylvia Machulak Rollover Individual
           Retirement Account, April 14, 1997.

99.5       Concession   Agreement   Assignment   to  the   Company   by  Misanse
           (Incorporated  by reference to Exhibit 1 of the  Company's  Form 10-K
           for the year ended March 31, 1988.)

99.6       Other Material Information: Restatement of prior period
           financial statements (Incorporated by reference to Item 7
           of the Company's Form 10-K for the year ended March 31, 1989.)

99.7       The El Salvador  Constitutional Supreme Court of Justice order issued
           on May 12,  1994,  suspending  immediately  any  charges to the Joint
           Venture  for  import  duty  taxes of any kind and dated May 18,  1994
           (English and Spanish.)  (Incorporated by reference to Exhibit 28.6 of
           the Company's Form 10-K for the year ended March 31, 1994.)

99.8       Form S-8 Registration Statement effective date April 4, 1994,
           File No. 33-77226.  (Incorporated by reference as this S-8
           Registration has been filed.)



99.9(d)(1)  *Commerce/Sanseb  Joint Venture certified  financial  statements for
            the fiscal year ending March 31, 1997.

99.10(d)(2) Individual  financial  statements of  majority-owned  companies have
            been omitted because these companies do not constitute a significant
            or material contribution to the Company.

<PAGE>

99.11       S.E.C. Form S-3 Registration Statement No. 333-23203 filed
            under the Securities Act of 1933 as amended and declared
            effective at 10:00 a.m. on March 26, 1997.

99.12       Preliminary  S.E.C.  Form S-3  Registration  Statement No. 333-25797
            filed  April 24,  1997,  and which  includes  the stock  options  to
            purchase one million two hundred  thousand of the  Company's  common
            shares  during a five-year  period  ending  November  29, 2001 at an
            issuance  price  ranging  from  $2.25 to $4.25  for each  restricted
            share.
<PAGE>



        COMMERCE GROUP CORP.  FORM 10-K - MARCH 31, 1997

                            PART IV

                           SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized on April 28, 1997.

                                           COMMERCE GROUP CORP.
                                           (Company)


                                     By:   /s/ Edward L. Machulak
                                           -----------------------
                                           Edward L. Machulak
                                           Director, Chairman of the
                                           Board of Directors,
                                           Member of Executive Committee,
                                           Director-Emeritus, President,
                                           Treasurer, Chief Executive,
                                           Operating and Financial
                                           Officer


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

          Name                     Office                       Date
          ----                     ------                       ----
/s/ Edward L. Machulak   Director, Chairman of the         April 28, 1997
-----------------------  Board of Directors
Edward L. Machulak       Member of Executive Committee,
                         Director-Emeritus,
                         President and Treasurer

/s/ Edward A. Machulak   Director, Member of Executive     April 28, 1997
-----------------------  Committee, Executive Vice President
Edward A. Machulak       and Secretary


/s/ Clayton H. Tebo      Director                          April 28, 1997
-----------------------
Clayton H. Tebo


<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULES



Our report on the consolidated  financial statements of Commerce Group Corp. for
its fiscal years ended March 31, 1997, 1996, 1995, 1994 and 1993, is included in
this Form 10-K. In connection with our audits of such financial  statements,  we
have also audited the following:  supplementary  income  statement  information,
selected  financial data report, and the related financial  statement  schedules
listed in Item 14(a) of this Form 10-K.

In our opinion, the consolidated  financial statement  information and schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole,  present  fairly,  in all material  respects,  the information
required to be included  therein,  all in accordance with accounting  principles
generally accepted in the United States.

BRUCE M. REDLIN
Certified Public Accountant



Milwaukee, Wisconsin
April 28, 1997

<PAGE>


               COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
                                 SCHEDULE IV (1)
                  INDEBTEDNESS OF RELATED PARTIES - NOT CURRENT
                   YEARS ENDED MARCH 31, 1997, 1996, AND 1995

                    Balance at    Additions to  Deletions to
                   Beginning of   Indebtedness  Indebtedness    Balance at
Name of Person (1)    Period          (2)           (3)         End of Period
------------------ ------------   ------------- -------------   -------------
Year ended
March 31, 1997
Joint Venture      $11,799,074     $3,894,682       $0          $15,693,766

Year ended
March 31, 1996
Joint Venture      $ 8,676,308     $3,122,766       $0          $11,799,074

Year ended
March 31, 1995
Joint Venture      $ 5,792,230     $2,884,078       $0           $8,676,308

(1) Commerce Group Corp. and San Sebastian Gold Mines, Inc., Joint Venture
    ("Joint Venture").

(2) The purpose of the advances is to continue the exploration, exploitation and
    development of the SSGM and the other mining prospects  managed by the Joint
    Venture  and which are  located  in the  Republic  of El  Salvador,  Central
    America.  Also,  funds were used to  retrofit,  rehabilitate,  repair and to
    renovate the San Cristobal  Mill and Plant acquired by the Joint Venture for
    the purpose of producing gold.

(3) Beginning  with  September  30, 1987,  the total  indebtedness  includes the
    advances of $590,265 from three of the Company's wholly-owned subsidiaries.


                    Balance at    Additions to  Deletions to    Balance at
                   Beginning of   Indebtedness  Indebtedness      End of
Name of Person (1)    Period          (2)           (3)           Period
------------------ ------------   ------------- -------------   -----------
Year ended
March 31, 1997
SSGM               $17,503,414     $1,884,907       $0           $19,388,321

Year ended
March 31, 1996
SSGM               $15,725,444     $1,777,970       $0           $17,503,414

Year ended
March 31, 1995
SSGM               $14,270,925     $1,454,519       $0           $15,725,444

<PAGE>


      COMMERCE GROUP CORP.  AND CONSOLIDATED SUBSIDIARIES

                         SCHEDULE IV(2)
                INDEBTEDNESS TO RELATED PARTIES
       CURRENT YEARS ENDED MARCH 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>

                      Balance at    Additions to  Deletions to     Balance at
Identity of Debtor   Beginning of   Indebtedness  Indebtedness      End of
      (1)                Period          (2)           (3)          Period
------------------    ------------   ------------- -------------   ----------
<S>                    <C>           <C>           <C>             <C>
Year ended
March 31, 1997
President of the
Company                $ 1,346,304   $   493,161(a) $         0    $  1,839,465
President's IRA            342,002        58,917(b)           0         400,919
President's Affiliated
Company                  1,175,984       215,668(c)     428,500(a)      963,152
Others                     220,080        37,913(d)           0         257,993
                       -----------   -------------- -------------- ------------
 Total, notes payable  $ 3,084,370   $   805,659    $   428,500    $  3,461,529
                       ===========   ============== =============  ============

President's Accrued
Salary                 $ 1,204,140   $   139,875(e) $         0    $  1,344,015
                       ===========   ============== =============  ============

Legal fees (President's
son is a Principal)    $    76,883   $    60,186(f) $         0    $    137,069
                       ===========   ============== =============  ============

Year ended
March 31, 1996
President of the
Company                $   841,168   $   651,386(a) $   146,250(a) $  1,346,304
President's IRA            291,617        50,385(b)           0         342,002
President's Affiliated
Company                    961,012       214,972(c)           0       1,175,984
Others                     163,037        70,668(d)      13,625(c)      220,080
                       -----------   -------------- -------------- ------------
 Total, notes payable  $ 2,256,834   $   987,411    $   159,875    $  3,084,370
                       ===========   ============== =============  ============

President's Accrued
Salary                 $ 1,089,390   $   114,750(e) $         0    $  1,204,140
                       ===========   ============== ============   ===========
Legal fees(President's
son is a principal)    $   166,355   $    36,178(f) $   125,650    $     76,883
                       ===========   ============== =============  ============

Year ended
March 31, 1995
President of the
Company                $ 1,275,561   $   188,755(a) $   623,148(a) $    841,168
President's IRA            248,763        42,854(b)           0         291,617
President's Affiliated
Company                    926,852       199,160(c)     165,000(c)      961,012
Others                     186,530        26,507(d)      50,000(d)      163,037
                       -----------   -------------- -------------- ------------
 Total, notes payable  $ 2,637,706   $   457,276    $   838,148    $  2,256,834
                       ===========   ============== =============  ============
President's Accrued
Salary                 $   974,640   $   114,750(e) $         0    $  1,089,390
                       ===========   ============== =============  ============
Legal fees (President's
son is a principal)    $   279,612   $     5,967    $   119,274(f) $    166,355
                       ===========   ============== =============  ============
<FN>

Additions to Indebtedness

(2)(a)(b) The additions to the open-ended,  secured,  on-demand promissory notes
          issued to the  President  of the  Company and his IRA result from cash
          advances and/or accrued interest.

(2)(c)    The President owns 55% of an Affiliated  Company's common shares.  The
          additions to the open-ended, secured, on-demand promissory note issued
          to an Affiliated Company result from cash advances,  accrued interest,
          accrued office rent,  vehicle rental,  computer use and other expenses
          paid on behalf of the Company.

(2)(d)   The  additions  by others  resulted  from  cash  advances  and  accrued
         interest.

(2)(e)   The President's salary was accrued for the entire fiscal year.

(2)(f)   The  addition  of the amounts  due to the Law Firm  results  from legal
         services rendered.

(3)      Deletions to Indebtedness:

(3)(a)   President's Affiliated Company.  Cancellation of debt in exchange
         for a purchase of 130,000 (06/10/96) and 68,000 (01/10/97) of the
         Company's restricted common shares.
</FN>
</TABLE>


             COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES

        SCHEDULE X (1) - SUPPLEMENTARY INCOME STATEMENT INFORMATION

                                              Years Ended March 31,
                                              ---------------------
                                              1997      1996      1995
                                           -------   -------   -------
Depreciation of property and equipment     $  0.00   $  0.00   $  0.00

Property taxes, other than income
     taxes and payroll                     $ 2,111   $ 2,065   $ 2,250

Advertising and promotion costs            $   965   $   679   $   100

Repairs and maintenance                    $13,054   $15,523   $15,535


Amounts for  amortization  of intangible  assets and similar  deferrals,  income
taxes, and royalties are not currently presented, as such amounts represent less
than one percent of total revenues or are not applicable.