U S GLOBAL INVESTORS INC
10-K/A, 1997-10-23
INVESTMENT ADVICE
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                                    FORM 10-K
                                 Amendment No. 1
    

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark
 One)
   
/ X /         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                     FOR THE FISCAL YEAR ENDED JUNE 30, 1997
                            AMENDED OCTOBER 23, 1997
    
                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
            OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                    FOR THE TRANSITION PERIOD FROM / / TO / /

                         Commission File Number 0-13928

                           U.S. GLOBAL INVESTORS, INC.
             (Exact name of registrant as specified in its charter)

                   7900 CALLAGHAN ROAD, SAN ANTONIO, TX 78229
               (Address of Principal Executive Offices) (Zip Code)

        Registrant's telephone number, including area code: 210-308-1234

         TEXAS                                          74-1598370
(State of Organization)                    (I.R.S. Employer Identification No.)

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                CLASS A COMMON STOCK, PAR VALUE $0.05 PER SHARE

Indicate by check mark whether the Company (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 (ss.229.405 of this chapter) 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  non-affiliates  of
Registrant on September 8, 1997, was $251,769  Registrant's only voting stock is
class C common  stock,  par value $0.05 per share,  for which there is no active
market.  The 106,008 shares of class C common stock held by non-affiliates  were
valued at the last sale on September  8, 1997,  of  Registrant's  class A common
stock as reported by NASDAQ, which was $2.375 per share.

On September 8, 1997,  there were 496,860 shares of Registrant's  class C common
stock  outstanding,  no shares of Registrant's  class B non-voting common shares
outstanding,  and 6,292,414  shares of Registrant's  class A common stock issued
and  6,105,730   shares  of  Registrant's   class  A  common  stock  issued  and
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the fiscal year ended June 30,
1997, are incorporated by reference in Part I, Item 1 and Part II, Items 6, 7, 8
and 13 of this Form 10-K.

<PAGE>
- --------------------------------------------------------------------------------

SEE ANNUAL  REPORT ON FORM 10-K  FILED  SEPTEMBER  29,  1997,  ACCESSION  NUMBER
0000754811-97-000013, FOR REMAINING SECTIONS AND EXHIBITS.

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

ITEM 11. EXECUTIVE COMPENSATION

INCENTIVE COMPENSATION
   
During the last fiscal year, the individuals  listed in the  compensation  table
received  the  majority  of  their  bonuses  from  individual   performance  pay
arrangements.  Mr. Flores, as head of the Investment Division,  received bonuses
based on a formula  comparing  performance of mutual funds he managed,  or share
management,  to various  indices,  peer  rankings/comparisons,  and  duration of
sustained  performance.  Ms.  McGee  and  Mr.  Tays,  as  members  of the  Legal
Department,  receive  a bonus  based  on  timing,  accuracy  and  completion  of
materials  for  the  various  boards  of  directors/trustees  supported  by  the
department and regulatory  filings for the various  entities.  Mr. Tays' program
also provides a bonus for results of regulatory  examinations,  fund  accounting
and complete  registration  of new mutual funds.  Mr. Duncan  received  monthly,
quarterly  and/or  annual  bonuses based on the quality and timing of regulatory
filings and company audits.  The Investment  Division  program has been in place
and is  adjusted  from time to time.  The other  arrangements  were  implemented
during the second half of fiscal 1996.
    
The named  executive  officers,  except  for  Messrs.  Flores and  Holmes,  also
participated in a team  performance pay program based on each employee's  annual
salary to recognize  monthly  completion of  departmental  goals.  During fiscal
1995,  1996 and 1997,  a portion of the team bonus was payable in the  Company's
class A common  stock.  The  portion  of the team  performance  program  paid in
Company stock was suspended at the  beginning of fiscal 1998,  and  alternatives
are  being  considered.  In  addition,  the  individuals  listed  could  receive
semiannual perfect attendance awards based on employee classification.

PROFIT SHARING PLAN

In June 1983,  the Company  adopted a profit sharing plan in which all qualified
employees  who have  completed  one year of  employment  with  the  Company  are
included.  Subject to Board action,  the Company may contribute up to 15% of its
net income  before taxes during each fiscal year,  limited to 15% of  qualifying
salaries,  to a profit sharing plan, the beneficiaries of which are the eligible
employees  of the  Company.  The  Company's  contribution  to the  plan  is then
apportioned  to each  employee's  account in the plan in an amount  equal to the
percentage of the total basic  compensation paid to all eligible employees which
each employee's individual basic compensation represents.  An employee generally
becomes eligible to receive a distribution  from the plan upon the occurrence of
retirement,  death,  total  disability  or  termination.   Distributions  of  an
employee's  account may be made either in one lump sum or in installments over a
period not  exceeding  15 years.  For the fiscal year ended June 30,  1997,  the
Company  contributed  $59,093 or 9.59% of net income  before taxes to the profit
sharing plan. There have been no recent material changes to the plan.

401(K) PLAN

The  Company  adopted  a 401(k)  plan in  October  1990 for the  benefit  of all
employees.  The Company will contribute 50 cents for every $1.00 of the first 4%
of an employee's pay deferment.  The Company will make contributions to employee
accounts at the end of each plan year if the employee is still  employed on that
date. New employees may enroll on any quarterly  entry date following six months
of  employment.  The Plan offers  numerous  investment  options which  represent
different levels of risk and return. Employees have the option to invest in most
of the USGIF and USGAF funds offered and the Company's class A common stock. For
the fiscal year ended June 30,  1997,  the  Company has accrued  $50,158 for its
401(k) plan matching contribution.

SAVINGS PLANS

The Company has  continued  the program  pursuant to which it offers  employees,
including its executive  officers,  an  opportunity  to  participate  in savings
programs  utilizing  managed  investment   companies,   which  was  accepted  by
essentially all such employees.  Limited employee contributions to an Individual
Retirement  Account are matched by the  Company.  Similarly,  if such  employees
contribute  monthly to the U.S.  Tax Free Fund,  the  Company  will match  these
contributions  on a limited  basis.  Beginning in fiscal 1997 a similar  savings
plan  utilizing  UGMA  accounts  has been offered to employees to save for their
children's  education.  Under  each  program,  if the  employee  ceases  to make
personal  contributions  or  withdraws  the money,  their  participation  in the
program is terminated and they may not participate in the future. For the fiscal
year ended June 30, 1997, the Company match aggregated to $67,152,  reflected in
base salary expense.

STOCK OPTION PLANS

In March 1985, the Board of Directors of the Company  adopted an Incentive Stock
Option Plan ("1985 Plan") which was approved by the  shareholders of the Company
on April 2, 1985. Under the terms of the 1985 Plan,  certain  executives and key
salaried  employees of the Company and its subsidiaries  were granted options to
purchase  shares of the Company's  class A common stock.  The maximum  number of
shares of class A common stock  authorized  for issuance under the 1985 Plan was
200,000 shares  (subject to adjustment in the event of  reorganization,  merger,
consolidation,  liquidation,  recapitalization, or stock splits). Shares subject
to  purchase  pursuant  to an option  granted  under the 1985 Plan may be either
authorized but unissued shares or shares that were once issued and  subsequently
reacquired by the Company.

The 1985 Plan was amended on November 7, 1989 and December 6, 1991.  In December
1991 it was amended to provide  provisions  to cause the plan and future  grants
under  the  plan to  qualify  under  1934  Act Rule  16b-3.  The  1985  Plan was
administered  by a committee  consisting of the two outside members of the Board
of Directors of the Company. The 1985 Plan terminated on December 31, 1994.
   
Options  granted under the 1985 Plan were granted for a term of up to five years
in the case of employees who own in excess of 10% of the total  combined  voting
power of all  classes of the  Company's  stock and for up to ten years for other
employees.  The options were granted at an exercise  price of not less than 100%
of the fair market value as of the date of the grant, or 110% of the fair market
value in the case of any  officer  or  employee  holding in excess of 10% of the
combined voting power of the Company's stock. The aggregate fair market value of
the class A common  stock for which any  employee  was  granted  options  in any
calendar  year  could not exceed  $100,000  plus any  unused  carry-over  from a
preceding  year. All of the options were granted at or above market price on the
date of the grant. As of September 8, 1997, option grants covering 85,500 shares
have been exercised  under the 1985 Plan; and grants covering 32,000 shares have
expired.

In November  1989 the Board of Directors  adopted the 1989  Non-Qualified  Stock
Option Plan (the "1989  Plan")  which  provides  for the  granting of options to
purchase shares of the Company's class A common stock to directors, officers and
employees  of the Company and its  subsidiaries.  On December 6, 1991,  the 1989
Plan was approved by shareholders and amended to provide provisions to cause the
plan and future grants under the plan to qualify under 1934 Act Rule 16b-3.  The
1989 Plan is  administered  by a committee  consisting of two outside members of
the Board of  Directors.  The maximum  number of shares of class A common  stock
initially  approved for issuance under the 1989 Plan is 800,000  shares.  During
the fiscal year ended June 30, 1997, there were grants covering 30,000 shares at
an  exercise  price of $2.00 per share.  All  options  were  granted at or above
market  price on the date of grant.  As of September  8, 1997,  grants  covering
393,000  shares have been  exercised  under the 1989 Plan;  and grants  covering
80,400 shares have expired.
    
The Board of  Directors,  at a meeting held on July 14, 1992,  amended the Stock
Option  Agreement for stock options  granted during November 1989 to provide for
an option period of ten years. The amendment was accepted by all optionees.

In April  1997,  the Board of  Directors  adopted the 1997  Non-Qualified  Stock
Option Plan (the "1997 Plan"),  which was approved by  shareholders on April 25,
1997,  provides for the granting of stock  appreciation  rights  ("SARs") and/or
options to purchase  shares of the Company's  class A common stock to directors,
officers  and  employees  of the  Company  and its  subsidiaries.  The 1997 Plan
expressly  requires  that all grants under the plan qualify  under 1934 Act Rule
16b-3.  The 1997 Plan is administered  by a committee  consisting of two outside
members  of the  Board of  Directors.  The  maximum  number of shares of class A
common stock  initially  approved  for  issuance  under the 1997 Plan is 200,000
shares.  During the fiscal year ended June 30, 1997,  there were grants covering
50,000  shares at an  exercise  price of $2.00 and 98,500  shares at an exercise
price of $1.82. All options were granted at or above market price on the date of
grant. To date, no options have been exercised and no options have expired.

The following  table shows,  as to each of the officers of the Company listed in
the cash  compensation  table,  grants of stock options and  freestanding  stock
appreciation rights ("SARs") made during the last fiscal year.


<TABLE>
<CAPTION>

                                                                                                     POTENTIAL REALIZED
                                                                                                      VALUE AT ASSUMED
                                                                                                           ANNUAL
                                                                                                    RATES OF STOCK PRICE
                                                                                                        APPRECIATION
                                       INDIVIDUAL GRANTS                                              FOR OPTION TERM
- -----------------------------------------------------------------------------------------------  --------------------------
         (A)                    (B)               (C)             (D)              (E)                (F)          (G)
- ----------------------  ------------------- ---------------  ------------- --------------------  ------------- ------------
                             NUMBER OF        % OF TOTAL
                            SECURITIES       OPTIONS/SARS
                            UNDERLYING        GRANTED TO      EXERCISE OR
                           OPTIONS/SARS       EMPLOYEES IN       BASE
         NAME               GRANTED (#)       FISCAL YEAR    PRICE ($/SH)    EXPIRATION DATE        5% ($)       10% ($)
- ----------------------  ------------------- ---------------  ------------- --------------------  ------------- ------------
<S>                          <C>                <C>              <C>           <C>                  <C>          <C>    
Frank E. Holmes                 0/0               --              --                --                --            --
Thomas D. Tays                5,000/0            5.00%           $1.82         June 4, 2007         $5,723       $14,505
Susan B. McGee               25,000/0           25.38%           $1.82         June 4, 2007         $28,620      $72,525
Bobby D. Duncan                 0/0               --              --                --                --            --
Victor Flores                   0/0               --              --                --                --            --

The following  table shows,  as to each of the officers of the Company listed in
the cash compensation table,  aggregated option exercises during the last fiscal
year and fiscal year-end option values.

- ---------------------------------------------------------------------------------------------------------------------------
            (a)                        (b)                     (c)                  (d)                   (e)
- ---------------------------------------------------------------------------------------------------------------------------
                                                                                 NUMBER OF        
                                                                                 SECURITIES       
                                                                                 UNDERLYING       VALUE OF UNEXERCISED  
                                                                                UNEXERCISED           IN THE MONEY      
                                                                                OPTIONS/SARS        OPTIONS/SARS AT     
                                                                                AT FY-END (#)          FY-END($)        
                                     SHARES                                                                             
                                   ACQUIRED ON                VALUE             EXERCISABLE/         EXERCISABLE/     
            NAME                   EXERCISE (#)               REALIZED          UNEXERCISABLE        UNEXERCISABLE     
- ---------------------------- -----------------------  ---------------------- ------------------ ------------------------
<S>                                     <C>                     <C>             <C>                    <C>                         
Frank E. Holmes                         0                       0               201,000/0              12,250/0
Thomas D. Tays                          0                       0               2,500/5,000            0/900
Susan B. McGee                          0                       0               11,500/25,000          0/4,500
Bobby D. Duncan                         0                       0               96,000/0               10,000/0
Victor Flores                           0                       0               51,000/0               500/0

</TABLE>

COMPENSATION OF DIRECTORS

The  Company  pays  non-employee  directors  $500 per meeting and may grant them
options under the Company's 1989 and 1997 Stock Option Plans. Their compensation
is subject to a minimum of $3,000 in any  quarter  paid in arrears.  Messrs.  J.
Stephen Penner and Thomas F. Lydon Jr. were elected as non-employee directors on
May 15,  1997,  and  June 1,  1997,  respectively.  Mr.  Bobby D.  Duncan  was a
non-employee director for a portion of the fiscal year following his termination
of  employment  with  the  Company.  Messrs.  Jerold  H.  Rubinstein  and Roy D.
Terracina  were  non-employee  directors  for the full fiscal  year.  During the
fiscal year ended June 30, 1997, Messrs.  Terracina and Rubinstein each received
cash  compensation  of $12,000;  Messrs.  Penner and Lydon  received  $1,500 and
$1,000  respectively.  Mr.  Duncan  received  $2,000.  Mr.  Terracina  is also a
director of STFC where he received cash  compensation  of $2,400.  Directors are
reimbursed for  reasonable  travel  expenses  incurred in attending the meetings
held by the Board of Directors.  During fiscal year 1997, Messrs.  Penner, Lydon
and Rubinstein  were each awarded stock options  covering  10,000 shares and Mr.
Terracina was awarded stock options covering 50,000 shares

REPORT ON EXECUTIVE COMPENSATION

The Board appointed Messrs.  Holmes,  Terracina and Rubinstein as members of the
Executive  Compensation Committee during fiscal 1996, and they continue to serve
on the  committee.  There are no  compensation  committee  interlocks or insider
participations  to report.  The  Company's  program  regarding  compensation  of
executive officers is different from most public  corporations'  programs due to
the  concentration  of control in one  individual.  Mr. Holmes'  compensation is
reviewed by the Board of Directors.  Mr.  Holmes,  Chairman and Chief  Executive
Officer of the Company,  currently  owns 77.95% of the Company's  class C common
stock.  He  informs  the Board of  Directors  as to the  amount of his  proposed
remuneration  and that of the Company's  other  executive  officers.  Mr. Holmes
recognizes  that  Registrant is a small business and believes that an acceptable
base  compensation  should  reflect an amount  competitive  with industry  peers
taking into account the relative cost of living in San Antonio,  Texas. The base
pay of the executives is relatively fixed, but the executive has the opportunity
to increase his/her  compensation by (1) participating in team building programs
in order to enhance operational and fiscal  efficiencies  throughout the Company
with  a  percent  of  resulting  savings  flowing  to  the  executive;  and  (2)
participating  directly in retirement and savings  programs  whereby the Company
will contribute amounts relative to the executive's contribution.

The Company has utilized  option grants under the 1985 Plan,  the 1989 Plan, and
the 1997 Plan to induce  qualified  individuals  to join the Company with a base
pay consistent with the  foregoing--providing the individual with an opportunity
to benefit if there is significant Company growth. Similarly,  options have been
utilized  to reward  existing  employees  for long and  faithful  service and to
encourage  them to stay  with the  Company.  Messrs.  Rubinstein  and  Terracina
constitute the Stock Option Committee of the Board of Directors.  This Committee
acts  upon  recommendations  of  the  Chief  Executive  Officer,  President  and
Executive  Vice  President.  Shares  available for stock option grants under the
1989  Plan and the 1997 Plan  aggregate  to  approximately  101,700  and  51,000
shares, respectively, on September 8, 1997. There were grants from the 1989 Plan
during the fiscal year to directors of the Company.

[GRAPHIC: LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]

                                       US GLOBAL         S&P         S&P
                                     INVESTORS INC.      500      FINANCIALS
                                        -36.00%        116.87%     181.26%
                                     --------------    -------    ----------
   Jun 92 .................. ......     100.00         100.00       100.00
   Jul 92 .................. ......     104.00         103.94       102.52
   Aug 92 .................. ......      96.00         101.44        97.65
   Sep 92 .................. ......     112.00         102.37       100.87
   Oct 92 .................. .......    110.02         102.58       103.19
   Nov 92 .................. .......    104.00         105.69       109.94
   Dec 92 .................. .......     98.02         106.76       114.54
   Jan 93 .................. .......     96.00         107.51       118.35
   Feb 93 .................. .......     96.00         108.63       120.64
   Mar 93 .................. .......    120.00         110.67       125.21
   Apr 93 .................. .......    168.00         107.85       120.95
   May 93 .................. .......    168.00         110.30       120.42
   Jun 93 .................. .......    160.00         110.39       117.31
   Jul 93 .................. .......    180.00         109.80       128.80
   Aug 93 .................. .......    152.00         113.58       131.96
   Sep 93 .................. .......    128.00         112.44       134.34
   Oct 93 .................. .......    152.00         114.62       126.39
   Nov 93 .................. .......    156.00         113.14       121.85
   Dec 93 .................. .......    180.00         114.29       124.01
   Jan 94 .................. .......    184.00         117.99       130.11
   Feb 94 .................. .......    168.00         114.46       123.00
   Mar 94 .................. .......    172.00         109.22       117.73
   Apr 94 .................. .......    140.00         110.48       121.57
   May 94 .................. .......    156.00         111.85       127.76
   Jun 94 .................. .......    148.00         108.85       123.75
   Jul 94 .................. .......    136.00         112.28       126.39
   Aug 94 .................. .......    136.00         116.50       130.50
   Sep 94 .................. .......    148.00         113.37       120.78
   Oct 94 .................. .......    132.00         115.73       122.49
   Nov 94 .................. .......    120.00         111.16       114.96
   Dec 94 .................. .......    104.00         112.53       115.99
   Jan 95 .................. .......    108.00         115.26       123.05
   Feb 95 .................. .......    108.00         119.42       129.52
   Mar 95 .................. .......    108.00         122.68       129.69
   Apr 95 .................. .......    108.00         126.11       134.06
   May 95 .................. .......     88.00         130.69       144.09
   Jun 95 .................. .......     84.00         133.47       144.62
   Jul 95 .................. .......     84.00         137.71       148.49
   Aug 95 .................. .......     80.00         137.67       156.52
   Sep 95 .................. .......     84.00         143.19       166.19
   Oct 95 .................. .......     68.00         142.48       160.95
   Nov 95 .................. .......     60.00         148.32       172.16
   Dec 95 .................. .......     52.00         150.91       173.59
   Jan 96 .................. .......     96.00         155.83       182.27
   Feb 96 .................. .......     92.00         156.91       185.29
   Mar 96 .................. .......     87.49         158.16       187.07
   Apr 96 .................. .......     88.00         160.28       183.36
   May 96 .................. .......    108.00         163.94       186.92
   Jun 96 .................. .......     92.00         164.31       188.60
   Jul 96 .................. .......     76.00         156.80       184.31
   Aug 96 .................. .......     80.00         159.75       190.14
   Sep 96 .................. .......     86.02         168.41       202.73
   Oct 96 .................. .......     76.00         172.80       217.42
   Nov 96 .................. .......     76.00         185.48       237.90
   Dec 96 .................. .......     76.00         181.49       228.88
   Jan 97 .................. .......     88.00         192.62       247.34
   Feb 97 .................. .......     76.00         193.76       256.67
   Mar 97 .................. .......     66.02         185.50       238.04
   Apr 97 .................. .......     56.00         196.34       254.65
   May 97 .................. .......     58.02         207.84       266.13
   Jun 97 .................. .......     64.00         216.87       281.26

COMPANY PERFORMANCE PRESENTATION

The graph at right compares the cumulative  total return for the Company's class
A common stock to the  cumulative  total return for the S&P 500 Composite  Index
and the S&P Financial Index for the Company's last five fiscal years.  The graph
assumes an  investment  of $100 in the class A common stock and in each index as
of June 30, 1992, and that all dividends were reinvested.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

CLASS C COMMON STOCK (VOTING  STOCK).  At September 8, 1997,  there were 496,860
shares of the Company's  Class C common stock  outstanding.  The following table
sets forth, as of such date,  information  regarding the beneficial ownership of
the Company's Class C common stock by each person known by the Company to own 5%
or more of the outstanding shares of Class C common stock.

                                 CLASS C                          PERCENT OF
NAME AND ADDRESS              COMMON SHARES       OUTSTANDING    SHARES ISSUED
OF BENEFICIAL OWNER         BENEFICIALLY OWNED    SHARES OWNED    OUTSTANDING
- -------------------------   ------------------    ------------   -------------
Frank E. Holmes               1,373,402(1)          387,280         77.95%
7900 Callaghan Road
San Antonio, TX 78229

Marleau, Lemire Inc.             72,720             72,720          14.64%
1 Place Ville Marie
Suite 3601
Montreal, Quebec H3B 3P2

- -------------------
(1) Includes  586,122  shares  of  Class C  common  stock  underlying  presently
    exercisable  Class C common  stock  warrants  held by Mr.  Holmes  and F. E.
    Holmes Organization Inc., a corporation wholly owned by Mr. Holmes;  102,280
    shares of Class C common  stock  owned by F. E.  Holmes  Organization  Inc.;
    400,000  shares  obtainable  upon  exercise of a Class C common stock option
    issued to Mr. Holmes; and 285,000 shares owned directly by Mr. Holmes.


CLASS A COMMON  STOCK  (NON-VOTING  STOCK).  At  September  8, 1997,  there were
6,105,730  shares of the Company's Class A common stock issued and  outstanding.
The  following  table sets forth,  as of such date,  information  regarding  the
beneficial  ownership of the Company's Class A common stock by each person known
by the  Company  to own 5% or more of the  outstanding  shares of Class A common
stock.

                                          CLASS A 
        NAME AND ADDRESS OF            COMMON SHARES
        BENEFICIAL OWNER             BENEFICIALLY OWNED   PERCENT OF CLASS
        ------------------------     ------------------   ----------------
        Robertson Stephens & Co.        1,562,620(1)           25.590%
        San Francisco, CA

        Quest Management Co.              407,205(2)            6.670%
        New York, NY

        Frank E. Holmes                   361,899(3)            5.572%
        San Antonio, TX

        Constable Partners, L.P.          670,000(4)           10.970%
        Radnor, PA

        Mason Hill Asset                  409,000(5)            6.700%
        Management, Inc.                  
        New York, NY

        --------------------
        (1) Information is from Schedule 13D, dated December 16,1996, filed with
            the SEC, covering  Robertson  Stephens & Co., the Robertson Stephens
            Orphan Fund and the Robertson Stephens Contrarian Fund.

        (2) Charles M. Royce controls Quest Advisory Corp.  Quest Advisory Corp.
            owns 407,205 shares, or 6.67% of the Company's Class A common stock.
            Combined,  Mr.  Royce  controls  9.73% of the  Class A common  stock
            outstanding.  Information is from Schedule 13G filed with the SEC on
            February 15, 1997.

        (3) Detail of  beneficial  ownership  set forth  below  under  "Security
            Ownership of Management."

        (4) Information is from Schedule 13D, dated May 9, 1996,  filed with the
            SEC.

        (5) Mason Hill Asset  Management,  Inc.  owns  250,500  shares or 4.02%.
            Equinox Partners,  LP owns 158,500 shares or 2.55%. Mason Hill Asset
            Management,  Inc.  and Equinox  Partners,  L.P.  may be deemed to be
            under the common  control of William W. Strong.  Information is from
            Schedule 13D filed with the SEC on March 26, 1996.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth, as of September 8, 1997,  information  regarding
the  beneficial  ownership of the Company's  Class A and Class C common stock by
each director and by all directors and officers as a group.  Except as otherwise
indicated in the notes below each  director  owns  directly the number of shares
indicated in the table and has the sole voting power and  investment  power with
respect to all such shares.

                                 CLASS C                    -CLASS A
BENEFICIAL OWNER              COMMON STOCK        %       COMMON STOCK(1)    %
- ---------------------------   ------------     ------     --------------   -----
   
Bobby D. Duncan                    4,931        0.99%      116,652         1.84%
J. Stephen Penner                      0        0.00%       10,000         0.16%
Frank E. Holmes                1,373,402(2)    92.61%      361,899(3)      5.57%
Jerold H. Rubinstein                  --        0.00%       89,000         0.79%
Roy D. Terracina                      --        0.00%       10,000         1.40%
All directors and
officers as a
group (15 persons              1,378,333       92.94%      755,377(4)     11.12%
                               ---------       -----       -------         ---- 

- -------------------  
(1) Includes  shares of Class A common stock  underlying  presently  exercisable
    options held directly by each individual  director as follows:  Mr. Holmes -
    201,000 shares;  Mr. Duncan - 96,000 shares;  Mr. Rubinstein -50,000 shares;
    and Mr. Terracina - 51,000 shares.
    
(2) Includes  586,122  shares  of  Class C  common  stock  underlying  presently
    exercisable  Class C common  stock  warrants  held by Mr.  Holmes  and F. E.
    Holmes Organization Inc., a corporation wholly owned by Mr. Holmes;  400,000
    shares  underlying  a presently  exercisable  option  held by Mr.  Holmes to
    purchase Class C common stock;  102,280 shares of Class C common stock owned
    by F. E. Holmes Organization Inc.; and 285,000 shares owned directly by Mr. 
    Holmes.

(3) Includes  60,899  shares  and  options to obtain  201,000  shares of class A
    common stock as well as 100,000  shares of class A common stock held by F.E.
    Holmes  Organization,  Inc. a corporation  wholly owned by Mr.  Holmes.  Mr.
    Holmes'  60,899  shares also  include  1,300  shares of Class A common stock
    owned  separately by Mr.  Holmes'  wife.  Mr.  Holmes  disclaims  beneficial
    ownership of these 1,300 shares of Class A common stock.

(4) Includes the shares  underlying  presently  exercisable  options held by the
    directors and officers listed above and an additional 37,300 shares of Class
    A common stock  underlying  presently  exercisable  options held by officers
    other than those listed above.

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

                                   SIGNATURES

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

                                            U.S. GLOBAL INVESTORS, INC.

                                            BY:  /s/ David J. Clark
                                            --------------------------
                                                 DAVID J. CLARK
Date:   October 23, 1997                         CHIEF 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  registrant and
in the capacities and on the dates indicated.


SIGNATURE                       CAPACITY IN WHICH SIGNED      DATE
- ------------------------        ------------------------      ------------------



                                Director                      October 23, 1997
- ------------------------      
JEROLD H. RUBINSTEIN



* /s/ Roy D. Terracina          Director                      October 23, 1997
- ------------------------
ROY D. TERRACINA



* /s/ Frank E. Holmes           Chairman of the Board         October 23, 1997
- ------------------------        of Directors               
FRANK E. HOLMES                 Chief Executive Officer



* /s/ Bobby D. Duncan           Director                      October 23, 1997
- ------------------------
BOBBY D. DUNCAN

                                              

* /s/ J. Stephen Penner         Director                      October 23, 1997
- ------------------------
J. STEPHEN PENNER



* /s/ Thomas F. Lydon, Jr.      Director                      October 23, 1997
- ------------------------
THOMAS F. LYDON, JR.



/s/ David J. Clark              Chief Financial Officer       October 23, 1997
- ------------------------
DAVID J. CLARK



/s/ J. Michael Edwards          Chief Accounting Officer      October 23, 1997
- ------------------------
J. MICHAEL EDWARDS

* BY:

/s/ Susan B. McGee
- ------------------------
SUSAN B. MC GEE
Executive Vice President, Corporate Secretary
Power of Attorney



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

EXHIBIT 13--ANNUAL REPORT

                                TABLE OF CONTENTS
                               FOR FIELD POSITIONS

THE COMPANY
     Investment Management Services......................................... 2
     Transfer Agent And Other Services...................................... 4
     Mailing Services....................................................... 5
     Trust Company Services................................................. 5
     Employees.............................................................. 5
     Competition............................................................ 5
     Supervision And Regulation............................................. 6
     Relationships With The Funds........................................... 6

ANNUAL STATUS REPORT
     Diversification Strategy............................................... 7
     Results Of Operations.................................................. 7
     Government Securities.................................................. 8
     Investment Activities.................................................. 9
     Operating Revenues..................................................... 9
     Expenses...............................................................10
     Liquidity And Capital Resources........................................10
         Liquidity..........................................................10
         Tax Loss Carryforwards.............................................11
         Settlement Pool....................................................11
         Decision To Outsource..............................................11

SELECTED FINANCIAL DATA.....................................................12

FINANCIAL STATEMENTS
     Report Of Independent Accountants......................................13
     Auditors' Report To The Members Of U.S. Global 
       Investors (Guernsey) Limited [Formerly U.S. 
       Advisors (Guernsey) Limited].........................................14
     Auditors' Report To The Shareholders Of U.S. 
       Global Strategies Fund Limited.......................................15
     Consolidated Balance Sheets............................................16
     Consolidated Statements Of Operations..................................19
     Consolidated Statements Of Cash Flow...................................22
     Consolidated Statements of Shareholder's Equity .......................23
     Notes To Consolidated Financial Statements.............................24

<PAGE>

                                                                        Page 20
- --------------------------------------------------------------------------------

                                   THE COMPANY

U.S.  Global  Investors,  Inc.,  a Texas  corporation  organized  in  1968  (the
"Company" or "USGI"),  and its wholly owned  subsidiaries are in the mutual fund
management business.  The Company provides:  (1) investment advisory services to
institutions  (namely,  mutual funds) and other persons; (2) transfer agency and
record keeping services; (3) mailing services; and, (4) through its wholly owned
trust company, custodial and administrative services for IRAs and other types of
retirement  plans.  The  provision  of  investment  advisory,   transfer  agent,
administrative  and  custodial  services and  investment  income are the primary
sources of the Company's  revenue.  (See  Consolidated  Statements of Operations
included in this Annual Report.)

The Company is a registered investment adviser under the Investment Advisers Act
of 1940 and is  principally  engaged in the  business  of  providing  investment
advisory and other services to U.S.  Global  Investors  Funds ("USGIF") and U.S.
Global   Accolade  Funds   ("USGAF"),   both   Massachusetts   business   trusts
(collectively,  the  "Trusts"  or  "Funds").  USGIF  and  USGAF  are  investment
companies  offering shares of eleven and four mutual funds,  respectively,  on a
no-load basis.

The  Company  organized  U.S.  Global  Investors   (Guernsey)  Limited  ("USGG")
(formerly  U.S.  Advisors  (Guernsey)  Ltd.) in August  1993 for the  purpose of
acting as investment  adviser for investment  companies whose shares are offered
to  non-U.S.   citizens.   USGG  has  delegated  its  administrative  duties  to
Butterfield Fund Managers  (Guernsey) Limited and its investment advisory duties
to USGI.

The Company's  one-third  interest in United  Services  Advisors,  Canada,  Inc.
("USACI"), which was formed in July of 1994 to offer mutual funds in Canada, was
sold in June 1997 to the USACI  management  group  which  now  controls  100% of
USACI. The Company will provide investment advisory services to USACI.

In addition to providing  mutual fund  management  services to its clients,  the
Company  utilizes a diversified  venture capital approach in trading for its own
account  in an  effort  to add  growth  value  to  its  cash  position.  Typical
investments  include,  among other  things,  early stage or start-up  businesses
seeking initial  financing as well as more mature  businesses in need of capital
for  expansion,  acquisitions,  management  buyouts,  or  recapitalizations.  In
addition,  the  Company  may  utilize  investment  techniques  such as  "private
placement arbitrage," which technique involves the contemporaneous purchase of a
quantity of an issuer's  securities  at a discount in a private  placement and a
short  sale of the same,  or  substantially  the same,  security  in the  public
market. The activities are reviewed by Company compliance personnel and reported
to investment advisory clients.


INVESTMENT MANAGEMENT SERVICES

The mutual funds are managed by the Company pursuant to advisory agreements (the
"Advisory Agreements").

The Company  furnishes  an  investment  program for each of the mutual  funds it
manages  and  determines,  subject to the  overall  supervision  by the Board of
Trustees of the funds,  the funds'  investments.  Consistent with the investment
restrictions,  objectives  and policies of the  particular  fund,  the portfolio
manager for each fund determines what investments should be purchased,  sold and
held, and makes changes in the portfolio  deemed to be necessary or appropriate.
In the Advisory  Agreements the Company is charged with seeking the best overall
terms in executing portfolio transactions and selecting brokers or dealers.

The Company also manages,  supervises and conducts  certain other affairs of the
funds,  subject to the control of the Boards of Trustees.  The Company  provides
office space,  facilities and certain  business  equipment and also provides the
services of executive,  clerical and accounting  personnel for administering the
affairs of the mutual  funds.  The Company  and its  affiliates  compensate  all
personnel,  officers,  directors  and  interested  Trustees of the funds if such
persons are also employees of the Company or its affiliates.  However, the funds
are required to reimburse the Company for a portion of the  compensation  of the
Company's  employees  who  perform  certain  state and  federal  securities  law
regulatory  compliance  work on behalf of the funds based upon the time spent on
such matters.  The Company is responsible  for costs  associated  with marketing
fund shares.

As required by the Investment  Company Act of 1940, the Advisory  Agreements are
subject to annual renewal and are terminable upon 60 days' notice.  The Board of
Trustees of USGIF and of USGAF will consider renewal of the applicable agreement
in October 1997 and March 1998,  respectively.  Management  anticipates that the
Advisory Agreements will be renewed.


<PAGE>

                                                                        Page 21
- --------------------------------------------------------------------------------

Investment company net assets under management (in thousands) at fiscal year end
for the past five years were:
<TABLE>
<CAPTION>

                                   1997         1996         1995         1994         1993
                                ----------   ----------   ----------   ----------   ---------- 
<S>                             <C>          <C>          <C>          <C>          <C>       
USGIF Money Markets             $  923,704   $  777,252   $  719,745   $  774,937   $  588,306
USGIF Gold Related                 297,267      427,155      414,096      488,266      433,552
USGIF Other                        116,791       84,245       87,179       99,941       82,421
                                ----------   ----------   ----------   ----------   ---------- 
USGIF Total                      1,337,762    1,288,652    1,221,020    1,363,144    1,104,279
USGAF Total                        127,851       86,302       13,842         --           --
                                ----------   ----------   ----------   ----------   ---------- 
Total Assets Under Management   $1,465,613   $1,374,954   $1,234,862   $1,363,144   $1,104,279 
                                ==========   ==========   ==========   ==========   ========== 
</TABLE>

Under the  Advisory  Agreements,  the Company  receives an advisory fee for each
mutual fund computed and accrued daily based upon the net assets  represented by
the particular  fund on that day. The fees range from 0.375% to 1.25% of average
net assets and are paid monthly.

As is set  forth in detail in Note D to the  Consolidated  Financial  Statements
included in this Annual Report, the Company has agreed to waive its fee revenues
and/or pay expenses for certain USGIF funds for purposes of enhancing the funds'
competitive market positions.

Investment advisory and administration fees (net of expenses paid by the Company
or voluntary waivers) for the past three fiscal years were approximately:

                               1997           1996           1995
                            ----------     ----------     ----------
     USGIF Money Market     $  826,000     $  835,000     $  895,000
     USGIF Gold Related      3,835,000      4,185,000      4,089,000
     USGIF Other               656,000        475,000        485,000
                            ----------     ----------     ----------
     USGIF Total             5,317,000      5,495,000      5,469,000
     USGAF Total             1,072,000        409,000         13,000
                            ----------     ----------     ----------
     Total                  $6,389,000     $5,904,000     $5,482,000
                            ==========     ==========     ==========


TRANSFER AGENT AND OTHER SERVICES

The  Company's  wholly-owned  subsidiary,   United  Shareholder  Services,  Inc.
("USSI"),  is a transfer agent registered  under the Securities  Exchange Act of
1934,  and  provides  transfer  agency,  bookkeeping,  accounting,  lockbox  and
printing services to investment company clients.  The transfer agency utilizes a
coordinated   internal   system   connecting  the  Company's  fund   shareholder
communication  network with computer equipment and software designed to meet the
operating requirements of a mutual fund transfer agency.

The  transfer  agency's  duties  encompass:  (1)  acting as  servicing  agent in
connection with dividend and distribution functions;  (2) performing shareholder
account and  administrative  agent  functions in  connection  with the issuance,
transfer and redemption or repurchase of shares; (3) maintaining such records as
are  necessary  to document  transactions  in the funds'  shares;  (4) acting as
servicing  agent in  connection  with  mailing  of  shareholder  communications,
including reports to shareholders,  dividend and distribution notices, and proxy
materials for  shareholder  meetings;  and (5)  investigating  and answering all
shareholder account inquiries.

The transfer agency agreements  provide that USSI will receive,  as compensation
for services  rendered as transfer agent, an annual fee per account,  except for
money market accounts with monthly zero balances, and will be reimbursed


<PAGE>

                                                                        Page 22
- --------------------------------------------------------------------------------

out-of-pocket  expenses. In connection with  obtaining/providing  administrative
services to the  beneficial  owners of fund shares  through  institutions  which
provide such services and maintain an omnibus  account with USSI, each fund pays
a monthly fee based on the number of accounts and the value of the shares of the
fund held in accounts at the institution  which payment shall not exceed the per
account charge on an annual basis.

The number of  shareholder  accounts  at fiscal year end for the past five years
are:

                               1997      1996      1995      1994      1993
                             -------   -------   -------   -------   -------
   USGIF Money Markets        35,577    35,019    34,998    32,769    27,493
   USGIF Gold Related         63,664    68,688    77,120    82,156    82,350
   USGIF Other                12,803    11,695    12,637    14,445    12,189
                             -------   -------   -------   -------   -------
   USGIF Total               112,044   115,402   124,755   129,370   122,032
   USGAF Total                 8,856     5,075     1,444      --        --
                             -------   -------   -------   -------   -------
   TOTAL                     120,900   120,477   126,199   129,370   122,032
                             =======   =======   =======   =======   =======
   Shareholder Accounts at
   Schwab, Fidelity and
   Jack White                 14,841    13,534     9,543     9,921   Unavailable

For the three fiscal years ended June 30, 1997,  1996, and 1995,  total transfer
agency fees (net of waivers) were approximately $3.3 million,  $3.3 million, and
$3.2 million, respectively.

The transfer agency agreements with USGIF and USGAF are subject to renewal on an
annual basis and are  terminable  upon 60 days notice.  The  agreements  will be
considered  by the Boards of Trustees  of USGIF and of USGAF for renewal  during
October 1997 and March 1998,  respectively,  and management anticipates that the
agreements will be renewed.

USSI also maintains the books and records of each trust and of each fund of each
trust,  including  calculations  of the  daily net asset  value per  share.  The
services  are  currently  provided  for an asset based fee on a tiered  level of
average net assets  --subject to an annual minimum fee of at least  $24,000.  As
discussed in the Annual Status Report portion of this annual report,  management
has  concluded  that it is in the best  interest of the Company to terminate the
provision  of these  services  and taken  steps to  effect  such  decision.  The
agreements  may be terminated  by either party without  penalty by giving 60-day
written  notice.  For the  three  years  ended  June 30,  1997,  1996,  and 1995
bookkeeping  and  accounting  fees net of waivers were  approximately  $731,000,
$524,000, and $421,000, respectively.


MAILING SERVICES

A&B Mailers,  Inc., a  wholly-owned  subsidiary  of the Company,  provides  mail
handling services to various persons. A&B Mailers' primary customers include the
Company in  connection  with its efforts to promote the funds and the  Company's
investment company clients in connection with required mailings. Each service is
priced separately.  For the three years ended June 30, 1997, 1996, and 1995, A&B
Mailers' revenues,  after intercompany  eliminating entries,  were approximately
$282,000, $231,000, and $170,000 respectively.


TRUST COMPANY SERVICES

Security Trust and Financial  Company ("STFC"),  a wholly-owned  state chartered
trust company  provides  custodial and tax reporting  services for IRA and other
retirement plans funded with shares issued by the funds advised and administered
by the Company.  STFC also actively markets 401(k) and other  retirement  plans.
The custodial fees are generally paid to STFC at year-end upon separate  invoice
to the customer,  not the fund.  For the three years ended June 30, 1997,  1996,
and 1995  custodial  fee revenues were  approximately  $530,000,  $545,000,  and
$503,000, respectively.


<PAGE>

                                                                        Page 23
- --------------------------------------------------------------------------------


EMPLOYEES

As of June 30,  1997,  the Company and its  subsidiaries  employed 91  full-time
employees  and 8 part-time  employees;  and as of June 30, 1996,  it employed 99
full-time  employees  and 8  part-time  employees.  The  Company  considers  its
relationship  with its  employees to be  excellent.  Because of the  outsourcing
discussed in the Annual  Status  Report,  a portion of the  employees  providing
those services will be terminated.


COMPETITION

The mutual fund industry is highly competitive.  As of June 30, 1997, there were
over 8,000 registered open-end management  investment companies of varying sizes
and  investment  policies  whose  shares  were  being  offered  to  the  public.
Generally,  there  are two types of  mutual  funds:  "load"  and  "no-load."  In
addition  there  are both  no-load  and load  funds  which  have  "12b-1"  plans
authorizing the payment of  distribution  costs of the funds out of fund assets,
such as USGAF.  Load funds are typically  sold through or sponsored by brokerage
firms,  and a sales  commission  is  charged  on the  amount of the  investment.
No-load funds, such as USGIF's and USGAF's,  however,  may be purchased directly
from the particular  mutual fund  organization  and thus no sales  commission is
charged.

In addition  to  competition  from other  mutual fund  managers  and  investment
advisers,  the Company  and the mutual fund  industry  are in  competition  with
various  investment   alternatives  offered  by  insurance   companies,   banks,
securities dealers and other financial institutions.  Many of these institutions
are able to engage in more liberal  advertising  than mutual funds and may offer
accounts at competitive interest rates, which are insured by federally chartered
corporations  such  as  the  Federal  Deposit  Insurance   Corporation.   Recent
regulatory  pronouncements  related to the Glass-Steagall  Act, the statute that
has  prohibited  banks from  engaging  in  various  securities  activities,  are
enabling banks to compete with the Company in a variety of areas.

A number of mutual fund groups are  significantly  larger than the funds managed
by the Company,  offer a greater variety of investment  objectives and have more
experience  and greater  resources to promote the sale of  investments  therein.
However,  the Company  believes it has the resources,  products and personnel to
compete with these other mutual funds.  Competition  for sales of fund shares is
influenced by various factors,  including investment objectives and performance,
advertising and sales promotional efforts,  distribution  channels and the types
and quality of services offered to fund shareholders.

Success in the investment advisory and mutual fund share distribution businesses
is substantially dependent on the funds' investment performance,  the quality of
services  provided to  shareholders  and the  Company's  efforts to  effectively
market the performance.  In other words, good performance combined with a strong
public relations program heightens investor  awareness,  stimulates sales of the
funds' shares and tends to keep redemptions low. Sales of funds' shares generate
management fees (which are based on assets of the funds) and transfer agent fees
(which are based on the number of fund accounts). Good performance also attracts
private  institutional  accounts to the  Company.  Conversely,  relatively  poor
performance  results in decreased sales and increased  redemptions of the funds'
shares  and the  loss of  private  accounts,  with  corresponding  decreases  in
revenues to the Company.


SUPERVISION AND REGULATION

The Company,  USSI,  and the  investment  companies  it manages and  administers
operate  under  certain  laws,  including  federal  and state  securities  laws,
governing their organization,  registration, operation, legal, financial and tax
status.  STFC  operates  under  certain  laws,  including  Texas  banking  laws,
governing its organization,  registration,  operation,  legal, financial and tax
status. Among the penalties for violation of the laws and regulations applicable
to the  Company  and its  subsidiaries  are  fines,  imprisonment,  injunctions,
revocation of registration and certain additional  administrative  sanctions.  A
determination  that the Company or its management had violated  applicable  laws
and  regulations  could have a material  adverse  effect on the  business of the
Company.  Moreover,  there  is no  assurance  that  changes  to  existing  laws,
regulations or rulings promulgated by governmental  entities having jurisdiction
over the  Company and the funds will not have a material  adverse  effect on the
business of the Company.

The Company is a registered investment adviser subject to regulation by the U.S.
Securities and Exchange  Commission ("SEC") pursuant to the Investment  Advisers
Act of 1940, the Investment Company Act of 1940 and the Securities  Exchange Act
of 1934 (the "1934 Act").  USSI is also subject to  regulation  by the SEC under
the 1934 Act. The Company and USSI


<PAGE>

                                                                        Page 24
- --------------------------------------------------------------------------------

are required to keep and maintain certain reports and records which must be made
available to the SEC upon  request.  Moreover,  the funds managed by the Company
are subject to regulation and periodic  reporting  under the Investment  Company
Act of 1940 and, with respect to their continuous public offering of shares, the
registration provisions of the Securities Act of 1933.


RELATIONSHIPS WITH THE FUNDS

The businesses of the Company are to a very  significant  degree  dependent upon
their  associations and contractual  relationships with the Trusts. In the event
the  advisory or transfer  agent  services  agreements  with USGIF or USGAF were
canceled or not  renewed  pursuant to the terms  thereof,  the Company  would be
substantially  adversely  affected.  The Company,  USSI and STFC consider  their
relationships with the Trusts to be good and they have no reason to believe that
their  management  and  service  contracts  will not be renewed  in the  future;
however,  there is no  assurance  that the Trusts will  choose to  continue  its
relationships with the Company, USSI, and STFC.


<PAGE>

                                                                        Page 25
- --------------------------------------------------------------------------------


                              ANNUAL STATUS REPORT

DIVERSIFICATION STRATEGY

A key  objective  of  management  since  fiscal 1990 has been to  diversify  the
Company's core asset base toward a more balanced product offering.  As a result,
non  gold-related  assets have  increased as a percentage  of average net assets
under  management  from 34% in  fiscal  1990 to 71% in  fiscal  1997.  The graph
illustrates this positive trend.

While  this  strategy  has  required  the  use of  significant  resources,  thus
impacting  short-term  earnings,  management  is pleased  that it has provided a
foundation  for  the  Company's  long-term  earnings  prospects.   For  example,
notwithstanding  the highly  volatile and uncertain  gold market,  including the
fact that gold hit an 11-year  low of $314.60 an ounce in July 1997,  investment
advisory fees have increased 60% since fiscal 1990.

[GRAPHIC: LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]

<TABLE>
<CAPTION>

                       1990        1991        1992        1993         1994         1995         1996         1997
                     ---------   ---------   ---------   ---------   ----------   ----------   ----------   ----------
<S>                  <C>         <C>         <C>         <C>         <C>          <C>          <C>          <C>      
Average Net Assets
  Under Management   659873000   606857000   623244000   782363000   1285067000   1326203000   1345332000   1452020000
Gold-Related         436255000   363954000   331452000   263344000    479206000    482034000    481364000    425292000
Non-Gold Related     223618000   242903000   291792000   519019000    805861000    844169000    947799000   1026728000
</TABLE>

RESULTS OF OPERATIONS

During the fiscal year ended June 30,  1997,  the  Company  posted net after tax
earnings of $0.04 per share. Its core business  generated the revenue  necessary
to meet ongoing  expenses and obligations  associated with increasing its mutual
fund operations and to meet the expenses  associated with the significant events
that occurred during fiscal 1995.  Management  believes the Company's  financial
condition  is  stable  and  the  Company  is  positioned  to take  advantage  of
opportunities  for future growth.  The discussion  below provides  detail of the
Company's results of operations and its liquidity and capital resources.

A snapshot of the Company's operations is outlined in the following table, which
sets forth for the periods indicated,  the increase  (decrease) by item from the
previous  period and key revenue expense items as percentages of total revenues.
"General and  Administrative"  expenses are detailed for  comparative  purposes.
Expenses associated with "Government  Securities," which are discussed in detail
below, are combined.
                                                       
                                    Period-to-Period   |     Percentage of      
                                         Change        |     Total Revenues     
                                    ----------------   |  ----------------------
                                     1997       1996   |   Years Ended June 30, 
                                   Compared   Compared |  ----------------------
                                   to 1996    to 1995  |  1997     1996    1995
                                    -----      -----   |  ----     ----    -----
Revenues:                                              |
Investment Advisory Fee              12.7%       7.7%  | 47.7%    29.4%    34.9%
Transfer Agent Fee                    0.9%       3.8%  | 23.8%    16.4%    20.2%
Accounting Fee                       39.6%      24.3%  |  5.2%     2.6%     2.7%
Exchange Fee                        -12.2%       4.6%  |  1.8%     1.4%     1.7%
Custodial Fee                        -2.8%       8.3%  |  3.8%     2.7%     3.2%
Investment Income                   -67.1%    1075.9%  |  7.4%    15.6%     1.7%
Gains on Changes of                                    |
  Interest in Affiliate             -98.1%       100%  |  0.1%     2.8%     0.0%
Government Security Income          -80.8%       3.9%  |  7.6%    27.5%    33.9%
Other                                 0.8%      39.8%  |  2.6%     1.6%     1.7%
                                    -----      -----   |  ----     ----    -----
                                                       |
Total Revenues                      -30.7%      28.2%  |  100%     100%     100%
                                    -----      -----   |  ----     ----    -----
                                                       |
Expenses:                                              |
Salaries, Wages & Benefits           15.0%       5.3%  | 41.2%    24.8%    30.2%

<PAGE>

                                                                        Page 26
- --------------------------------------------------------------------------------

                                    Period-to-Period   |     Percentage of      
                                         Change        |     Total Revenues     
                                    ----------------   | ---------------------- 
                                     1997       1996   |  Years Ended June 30,  
                                   Compared   Compared | ---------------------- 
                                   to 1996    to 1995  | 1997     1996     1995
                                    -----      -----   | ----     ----     ----
Fund Expenses                       -69.1%      -0.2%  |  1.5%     3.3%     4.2%
Marketing & Distribution             21.4%       3.7%  | 13.1%     7.5%     9.2%
Other General & Administrative       15.0%      32.3%  | 27.3%    16.5%    16.0%
Interest & Finance                    3.9%     -52.4%  |  0.9%     0.6%     1.7%
Depreciation & Amortization          13.2%     -20.8%  |  3.4%     2.1%     3.4%
Reduction in Carrying Value                            |
  of Investment in JV              -100.0%     100.0%  |  0.0%     3.1%     0.0%
Government Security Expenses        -80.6%     -51.4%  |  7.7%    27.5%    72.7%
                                    -----      -----   | ----     ----    ----- 
Total Expenses                      -22.8%     -20.3%  | 95.1%    85.4%   137.4%
                                    -----      -----   | ----     ----    ----- 
                                                       
                                                       
NET INCOME                                             
                                                       
U.S.  Global's  net income  has had  dramatic  fluctuations  over the past three
years.  The Company  posted net after tax  earnings of $.28  million  ($0.04 per
share) for fiscal 1997,  $1.98 million  ($0.30 per share) for fiscal 1996, and a
net after tax loss of $3.85  million  ($0.64 per share)  for  fiscal  1995.  The
short-term  fluctuations are a result of the Company's  purchase of certain U.S.
Government securities during fiscal 1995, as well as other factors that are more
fully discussed below.

Total  consolidated  revenues for fiscal 1997 decreased  approximately  31% over
fiscal 1996,  primarily  due to a 67% decrease in  investment  income and an 81%
decrease in interest  income and  accretion on the U.S.  Government  securities.
Total  consolidated  revenues for fiscal 1996 increased  approximately  28% over
fiscal 1995, primarily due to investment income and gains on changes of interest
in an affiliate.


GOVERNMENT SECURITIES

Fiscal 1995 was a year of  tremendous  challenges  that  required a  significant
commitment of management's  time and Company  resources in order to overcome the
effects  of  unusual  and  unexpected   rising  interest  rates  and  regulatory
pronouncements,  the  consequences  of which  had a direct  bearing  on  USGIF's
largest fund, the U.S.  Government  Securities Savings Fund ("USG").  As part of
U.S.  Global's  response to this rise and these  pronouncements  issued to money
market  funds in general,  during  fiscal  1995,  U.S.  Global  arranged for the
purchase  and/or  purchased  directly  approximately  $130.5  million  par value
adjustable  rate U.S.  Government  agency notes  ("Notes") from USG. These Notes
were confused with high risk securities like options, futures, structured notes,
exotic  floaters,   or  CMOs,  which  contain  a  multiplicity  of  complex  and
undeterminable  risks,  including extension,  prepayment,  and coupon cap risks.
U.S.  Global  acquired  the Notes from its top  performing  money market fund in
order to calm any derivative-induced fears and to maintain the confidence of our
shareholders by assuring a stable one dollar per share net asset value.

The purchases have had a dramatic impact on the Company's financial  statements.
"Government  Security Income" (interest and accretion)  represented 8%, 28%, and
34% of total revenue during fiscal 1997, 1996, and 1995,  respectively.  Related
expenses  (including  the fiscal 1995  non-cash  charges of  approximately  $5.4
million)  represented 8%, 28%, and 73% of total revenues for fiscal 1997,  1996,
and 1995, respectively.

The Company  purchased the Notes at USG's  amortized  cost of over $130 million,
but recorded the Notes at their fair value,  approximately  $125  million.  As a
consequence,  the Company  recorded a pretax  non-cash  charge to the results of
operations of  approximately  $5.4 million  during fiscal 1995. The Company also
recognized  approximately $.3 million, $1.4 million and $1.5 million in non-cash
income during fiscal 1997, 1996, and 1995, respectively, due to accretion of the
discount.

U.S.  Global  financed  the  original  acquisition  of the Notes as follows:  1)
approximately  $120.9 million was provided by third party  broker-dealers  under
reverse  repurchase   agreements;   2)  U.S.  Global  issued  a  $6  million  8%
subordinated  debenture  to  Marleau,  Lemire  Inc.  ("ML"),  the terms of which
required  principal  payments  as  the  Notes  matured  and  quarterly  interest
payments; and 3) U.S. Global used approximately $3.6 million of its own cash.

During  fiscal  1997,  the  balance of the Notes  matured  and the  subordinated
debenture  was paid in full.  The issues  involved with the purchase and sale of
the Notes no longer  demand  management's  attention  and,  except  for the debt
associated  with the  purchase  of U.S.  Global's  corporate  headquarters,  the
Company is now essentially debt free.


<PAGE>

                                                                        Page 27
- --------------------------------------------------------------------------------

INVESTMENT ACTIVITIES

Management has been  aggressively  and  effectively  managing the Company's cash
position by using a diversified venture capital approach to investing.  As shown
in the table,  investment income constituted 7%, 16%, and 2%,  respectively,  of
U.S. Global's revenue in fiscal 1997, 1996, and 1995. This source of revenues is
dependent  on market  fluctuations,  the  Company's  ability to  participate  in
investment opportunities,  and timing of transactions. As shown by the table, it
does not provide a consistent level of revenue.

The fiscal  1997  decrease  resulted  primarily  from the fact that the  Company
recognized $1.9 million less in realized gains on the sale of investments during
the year.  The fiscal  1996  increase  was due to the Company  recognizing  $2.8
million more in realized gains on the sale of investments during the year. Also,
fiscal 1996  unrealized  holding  gains from  trading  securities  increased  by
approximately  $335,000.  Included  in fiscal  1996  revenue  was  approximately
$556,000  reflecting  the  accounting  treatment  for  changes of interest in an
affiliated  company (namely,  unrealized gains of the offshore fund sponsored by
the Company).  Revenues from changes of interest in an affiliated company during
1997  approximated  $10,000.  The Company expects such revenues will continue to
fluctuate  in the future as changes in  ownership of the  affiliate  occur;  the
magnitude of such amounts will be affected by  fluctuations  in the market value
of the affiliate's investments.

As of June 30,  1997,  1996,  and 1995,  the  Company  held  approximately  $1.9
million,   $3.9  million,   and  $3.9  million,   respectively,   in  securities
(restricted, trading and available-for-sale categories) other than the Notes and
USGIF money market mutual fund shares. In addition to market factors, the amount
invested in such securities decreased during fiscal 1997 when they were sold and
proceeds were  utilized to retire debt  associated  with holding the  Government
securities.   The  Company's  investment  activities  are  reviewed  by  Company
compliance personnel and reported to investment advisory clients.


OPERATING REVENUES

The Company's  principal  business is managing,  creating and  marketing  mutual
funds and providing  management  and other  services to such  institutions.  Its
primary  sources of revenues from  operations are  investment  advisory fees and
transfer agency fees. The Company's  investment advisory fee revenue is based on
a percentage of average net assets under management; and the transfer agency fee
revenue  is  based  on  the  number  of  shareholder  accounts  being  serviced.
Therefore,  fluctuations  in financial  markets  impact  revenues and results of
operations.

Assets  under  management  for USGIF for the fiscal  years ended June 30,  1997,
1996, and 1995 have averaged $1.33  billion,  $1.30 billion,  and $1.32 billion,
respectively. Additionally, assets under management for the U.S. Global Accolade
Funds  ("USGAF"),  which  commenced  operations in October  1994,  averaged $122
million, $48 million, and $5.6 million for those fiscal years, respectively.  As
a result, in fiscal 1997 investment advisory fee revenue increased approximately
13% over  fiscal  1996,  and fiscal  1996  investment  advisory  fees  increased
approximately 8% over fiscal 1995.

Shareholder  accounts  serviced,  on the other  hand,  peaked  in  fiscal  1994.
Accounts  serviced for fiscal years ended June 30, 1997,  1996,  and 1995,  were
120,901, 120,477, and 126,199,  respectively.  Management believes that, to some
extent,  this  change  may be  attributed  to  investors  shifting  from  direct
investment  in the  funds  to  omnibus  accounts  through  mutual  fund  trading
facilities  offered by broker-dealers  such as Schwab,  Fidelity and Jack White.
Notwithstanding  such, as is reflected in the table,  transfer agent fee revenue
increased year over year.


EXPENSES

Total  consolidated  expenses for fiscal 1997 decreased  approximately  23% over
fiscal 1996.  This  decrease  was the direct  result of: 1)  approximately  $4.2
million less in interest  expense relating to the Notes, and 2) $260,610 less in
interest  expense  related to the  subordinated  debenture.  Total  consolidated
expenses for fiscal 1996  decreased  approximately  20% over fiscal  1995.  This
decrease  was the  direct  result  of:  1) a  non-recurring  non-cash  charge of
approximately $5.4 million relating to the purchase of the Notes during 1995; 2)
lower  interest  expense of  approximately  $414,000  on  securities  sold under
agreement to repurchase with  broker-dealers;  and 3) lower interest  expense of
approximately $100,000 related to the subordinated debenture.


<PAGE>

                                                                        Page 28
- --------------------------------------------------------------------------------

Exclusive of the  expenses  attributable  to the  purchase and  financing of the
Notes and  exclusive of the  reduction of the carrying  value of  investment  in
joint venture,  expenses of the Company  increased  approximately  11% in fiscal
1997 over fiscal 1996 and increased  almost 14% in fiscal 1996 over fiscal 1995.
As shown on the table, excluding expenses associated with the Notes,  "salaries,
wages and benefits"  are the largest  component of Company  expenses.  In fiscal
1997,  salaries,  wages and benefits increased 15% over 1996, and in fiscal 1996
this  expense item  increased  over 5% from fiscal 1995.  The  increases  relate
primarily  to  the  Company's  need  to pay  market-driven  salaries  to  retain
qualified  employees and to provide incentive  compensation and savings plans to
reward  employee  contributions.  It is  anticipated  that  salaries,  wages and
benefits should remain stable at fiscal 1997 levels.

Marketing and distribution expenses represented approximately 13%, 8%, and 9% of
total  revenues  during  fiscal  1997,  1996,  and  1995,  respectively.  It  is
anticipated that 1998 marketing and distribution  expenditures  will approximate
fiscal 1997 levels.

As shown in the table,  1997 fund  expenses,  net of fee waivers,  decreased 69%
compared to 1996.  In this regard,  the Company has agreed to waive a portion of
its fee revenues and/or pay for expenses of certain mutual funds for purposes of
enhancing the funds' competitive  market position.  Should assets of these funds
increase,  fund expenses  borne by the Company would  increase,  but only to the
extent that such expenses exceed any expense caps in place.  The Company expects
to  continue  to waive fees  and/or pay for fund  expenses as long as market and
economic conditions  warrant.  However,  subject to the Company's  commitment to
certain funds with respect to fee waivers and expense  limitations,  the Company
may reduce the amount of fund expenses it is bearing.

The 1996 reduction in carrying value in the table relates to the U.S.  Global-ML
joint venture  agreement to offer mutual funds in Canada.  During June 1996, the
USACI  management  group acquired a one-third  interest in USACI. As a result of
this  negotiated  sale,  which diluted U.S.  Global's  interest from one-half to
one-third,  and other  factors,  the Company  reduced the carrying  value of the
asset  by  approximately  $620,000.  During  June  1997,  the  Company  sold its
remaining  interest  in USACI for  approximately  $134,000.  U.S.  Global  will,
however,  continue to provide  investment  advisory services through USACI for a
fee. For a more detailed  discussion,  see Note H to the Consolidated  Financial
Statements.


LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

At year end, the Company had working capital of approximately $2.4 million and a
current  ratio  of 2.76 to 1.  With  approximately  $722,000  in cash  and  cash
equivalents, more than $1.3 million in marketable securities, and a $1.0 million
line of credit, the Company has adequate liquidity.  Total shareholders'  equity
was approximately  $8.0  million--with  cash, cash  equivalents,  and marketable
securities comprising 18% of total assets.  Moreover, the Company's cash flow is
sufficient to cover current expenses, including debt service.

Except  for  ongoing  expenses  of  operations,   the  Company's  only  material
commitment is the mortgage on its corporate headquarters (a long-term debt).


TAX LOSS CARRYFORWARDS

Management  assessed the likelihood of realization of the recorded  deferred tax
asset at June 30, 1997. Net operating losses ("NOLs") of $2.5 million, primarily
resulting  from the non-cash  charge to earnings  related to the purchase of the
Notes during fiscal 1995, do not expire until fiscal 2010.  Based on the current
level of earnings  and  management's  expectations  for the  future,  management
believes that  operating  income will not generate the minimum  amount of future
taxable  income  necessary to fully  realize the  deferred tax assets.  As such,
management  has  included a  valuation  allowance  of $66,458 at June 30,  1997,
providing for the  utilization  of charitable  contributions  and investment tax
credit carryovers against future taxable income.


SETTLEMENT POOL

In June  1992,  the  Company  made its  final  payment  to the  settlement  pool
established  under the June 1988 settlement  agreement  relating to the original
Prospector  Fund (now  operating as the U.S.  Global  Resources  Fund);  and the
settlement pool made the final payout to "Eligible Shareholders" thereof in June
1992. See Note G to the Consolidated Financial


<PAGE>

                                                                        Page 29
- --------------------------------------------------------------------------------

Statements for additional  detail.  Under the agreement,  any amounts payable to
"Eligible  Shareholders" who cannot be located,  together with interest thereon,
will be held  until  June 30,  1998.  At that time,  such  amounts  will be made
available to all persons  claiming  subrogation.  The Company has first right of
subrogation  to the  amounts.  The  amount  of cash held at June 30,  1997,  was
approximately $641,000.  Management believes the Company will receive a sum that
will equal or exceed the amount  currently  recorded as the  Company's  residual
equity interest, $217,861.


DECISION TO OUTSOURCE

To continue to provide competitive and technologically  advanced fund accounting
and shareholder record keeping services to its mutual fund clients,  the Company
has made the decision to: 1) outsource the bookkeeping and accounting  functions
currently  performed by its wholly owned  subsidiary,  USSI,  to Brown  Brothers
Harriman & Co. (BBH),  and 2) license DST's mutual fund software  system for its
transfer agent/shareholder record keeping functions.

It is anticipated that the conversion to BBH will be completed during the second
quarter of fiscal 1998. While the Company will forego accounting fees associated
with this  function,  the company will  experience  corresponding  reductions in
current  direct  departmental   expenses,   estimated  costs  required  to  hire
additional  personnel,  and  expenses to  maintain  and  upgrade  equipment.  In
addition, the decision to engage BBH will allow the Company to take advantage of
BBH's established  international network with on-site contacts in the markets in
which the Company invests.

The decision to remotely  utilize the DST transfer  agent and  image-based  work
management  system  allows the Company to transfer  the  inherent  technological
risks and associated  significant  capital  expenditures  required to update and
maintain a transfer agency system. It is expected that the conversion to the DST
mutual fund software will be completed by the end of the third quarter of fiscal
1998.

Management  believes  current cash  reserves,  plus  financing  obtained  and/or
available,  and cash flow from operations will be sufficient to meet foreseeable
cash needs or capital necessary for the above mentioned  activities,  as well as
allow  the  Company  to take  advantage  of  investment  opportunities  whenever
available.


<PAGE>

                                                                        Page 30
- --------------------------------------------------------------------------------


                             SELECTED FINANCIAL DATA

The following  selected  financial data is qualified by reference to, and should
be read in conjunction with, the Company's Consolidated Financial Statements and
related notes and the Annual Status Report --- that is, Management's  discussion
and analysis of financial condition and results of operations, contained in this
Annual Report.  The selected financial data as of June 30, 1993 through June 30,
1997,  and the years  then  ended is  derived  from the  Company's  Consolidated
Financial  Statements which were examined by Price  Waterhouse LLP,  independent
public accountants.

<TABLE>
<CAPTION>

                                                                      YEAR ENDED JUNE 30,
SELECTED EARNINGS DATA               -----------------------------------------------------------------------------------
                                           1997             1996               1995              1994           1993
                                       -----------      -----------         -----------      -----------     ----------
<S>                                    <C>              <C>              <C>                 <C>             <C>       
Revenues                               $14,009,131      $20,214,546         $15,770,738      $10,879,156     $7,393,502
Expenses                                13,329,439       17,261,592          21,666,598       10,108,181      7,302,036
Earnings (loss) before minority
interest, equity interest, income
taxes, extra-ordinary item and
cumulative effect                          679,692        2,952,954         (5,895,860)          770,975         91,466
                                       -----------      -----------         -----------      -----------     ----------
Income taxes and extraordinary
items                                      331,976        1,013,517         (2,005,142)        (178,665)            --
                                       -----------      -----------         -----------      -----------     ----------
Minority interest                               --         (55,098)                 --               --             --
Equity in net loss of joint venture       (196,535)             --                  --               --             --
Equity in earnings of affiliate            132,968         102,728                  --               --             --
                                       -----------      -----------         -----------      -----------     ----------
Cumulative effect of change in
accounting                                      --              --             43,284           200,420             --
                                       -----------      -----------         -----------      -----------     ----------
Net earnings (loss)                        284,149       1,987,067         (3,847,434)        1,150,060          91,466
Earnings (loss) per share                     0.04            0.30              (0.64)             0.19            0.02
Working capital                          2,440,198       1,316,006(1)    (106,863,206)(1)     3,391,974       2,952,737
Total assets                            10,712,775      39,307,196        128,073,122         9,143,448       7,224,495
Long-term obligations                    1,359,308       1,410,479          6,016,617         1,619,989       1,718,818
Shareholders' equity                     7,966,407       8,544,072          8,661,223         6,730,003       5,055,567

- --------------------
(1)  Working  capital  includes  amounts  due to  broker-dealers  under  reverse
     repurchase  agreements  related to the  Company's  purchase of certain U.S.
     Government securities but  does not include the securities  collateralizing
     the obligations.  (See "Government  Securities" discussed in Item 7 of this
     Form 10-K and/or Note F to the Consolidated Financial Statements, Item 8 of
     this Form 10-K.)

</TABLE>
<PAGE>

                                                                        Page 31
- --------------------------------------------------------------------------------


                              FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of U. S. Global Investors, Inc.

In our  opinion,  based upon our audits and the reports of other  auditors,  the
accompanying consolidated balance sheets and the related consolidated statements
of  operations,  cash flows and  shareholders'  equity  present  fairly,  in all
material respects,  the financial  position of U. S. Global Investors,  Inc. and
its  subsidiaries at June 30, 1997 and 1996, and the results of their operations
and their  cash flows for each of the three  years in the period  ended June 30,
1997,  in  conformity  with  generally  accepted  accounting  principles.  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 did not audit the financial  statements of U. S. Global Investors
(Guernsey) Limited, a wholly-owned  subsidiary,  or U. S. Global Strategies Fund
Limited,  an equity  investment,  which  statements  collectively  reflect total
assets and revenues constituting 21 percent and 9 percent,  respectively, of the
related  consolidated totals at June 30, 1997 and for the year then ended. Those
statements  were  audited by other  auditors  whose  reports  thereon  have been
furnished to us, and our opinion expressed herein,  insofar as it relates to the
amounts included for U. S. Global Investors  (Guernsey) Limited and U. S. Global
Strategies  Fund  Limited  before  adjustments  to conform  with the  accounting
principles used by U.S. Global  Investors,  Inc., is based solely on the reports
of the other auditors. We conducted our audits of these statements in accordance
with  generally  accepted  auditing  standards  which  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We  believe  that our  audits  and the  reports  of  other  auditors  provide  a
reasonable basis for the opinion expressed above.

As  discussed in Note B to the  financial  statements,  the Company  changed its
method of accounting for  investments in debt and equity  securities  during the
year ended June 30, 1995.

PRICE WATERHOUSE LLP


/s/ Price Waterhouse LLP


San Antonio, Texas
September 29, 1997


<PAGE>

                                                                        Page 32
- --------------------------------------------------------------------------------

AUDITORS'  REPORT TO THE MEMBERS OF U.S.  GLOBAL  INVESTORS  (GUERNSEY)  LIMITED
[FORMERLY U.S. ADVISORS (GUERNSEY) LIMITED]


We have  audited  the  financial  statements  on pages 4 to 12 which  have  been
prepared under the historical cost convention as modified for the revaluation of
investments and the accounting policies set out on page 7.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

As  described  on  page  2 the  Company's  Directors  are  responsible  for  the
preparation  of  financial  statements.  It is our  responsibility  to  form  an
independent  opinion,  based on our audit, on those statements and to report our
opinion to you.

BASIS OF OPINION

We conducted  our audit in  accordance  with  Auditing  Standards  issued by the
Auditing Practices Board in the United Kingdom.  An audit includes  examination,
on a test basis,  of evidence  relevant  to the amounts and  disclosures  in the
financial  statements.  It  also  includes  an  assessment  of  the  significant
estimates  and  judgments  made  by  the  Directors  in the  preparation  of the
financial  statements,  and of whether the accounting polices are appropriate to
the Company's circumstances, consistently applied and adequately disclosed.

We  planned  and  performed  our audit so as to obtain all the  information  and
explanations  which  we  considered  necessary  in  order  to  provide  us  with
sufficient evidence to give reasonable  assurance that the financial  statements
are  free  from  material  misstatements,  whether  caused  by  fraud  or  other
irregularity  or error.  In forming  our opinion we also  evaluated  the overall
adequacy of the presentation of information in the financial statements.

OPINION

In our opinion the financial  statements  give a true and fair view of the state
of the Company's affairs as at 30th of June, 1997 and of its profit for the year
then ended and have been  properly  prepared in  accordance  with the  Companies
(Guernsey) Law, 1994.


/s/ Coopers & Lybrand


COOPERS & LYBRAND
PO Box 321
National Westminster House,
Le Truchot,
St Peter Port,
Guernsey, GY1 4ND
Channel Islands.

Date: 29th September, 1997


<PAGE>

                                                                        Page 33
- --------------------------------------------------------------------------------

AUDITORS'  REPORT TO THE  SHAREHOLDERS OF U.S. GLOBAL  STRATEGIES FUND LIMITED


We have audited the financial statements on pages 20 to 29.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

As  described  on  page  3 the  company's  directors  are  responsible  for  the
preparation  of  financial  statements.  It is our  responsibility  to  form  an
independent  opinion,  based on our audit, on those statements and to report our
opinion to you.

BASIS OF OPINION

We conducted  our audit in  accordance  with  Auditing  Standards  issued by the
Auditing Practices Board in the United Kingdom.  An audit includes  examination,
on a test basis,  of evidence  relevant  to the amounts and  disclosures  in the
financial  statements.  It  also  includes  an  assessment  of  the  significant
estimates  and  judgments  made  by  the  directors  in the  preparation  of the
financial statements,  and of whether the accounting policies are appropriate to
the company's circumstances, consistently applied and adequately disclosed.

We  planned  and  performed  our audit so as to obtain all the  information  and
explanations  which  we  considered  necessary  in  order  to  provide  us  with
sufficient evidence to give reasonable  assurance that the financial  statements
are  free  from  material  misstatements,  whether  caused  by  fraud  or  other
irregularity  or error.  In forming  our opinion we also  evaluated  the overall
adequacy of the presentation of information in the financial statements.

OPINION

In our opinion the financial  statements  give a true and fair view of the state
of the  Company's  affairs as at 30th June,  1997 and of its net revenue for the
year  then  ended  and  have  been  properly  prepared  in  accordance  with The
Protection  of Investors  (Bailiwick  of Guernsey)  Law,  1987 and the Companies
(Guernsey) Law, 1994.


/s/ Coopers & Lybrand
  

COOPERS & LYBRAND
PO Box 321
National Westminister House
Le Truchot
St Peter Port
Guernsey
GY1 4ND

Date: 29th September, 1997

<PAGE>

                                                                        Page 34
- --------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS

   
                                    ASSETS
                                                              JUNE 30,
                                                     -------------------------
                                                         1997          1996
                                                     -----------   -----------  
CURRENT ASSETS
    Cash and cash equivalents (Notes A & O)          $   722,121   $   666,250
    Trading securities, at fair value (Notes A & C)      721,954       999,500
    Government securities available-for-sale
     at fair value (Notes F and K)                            --    26,324,125
    Receivables:
       Mutual funds (Note D)                           1,080,046     1,092,961
       Accrued interest                                       --        95,847
       Custodial fees                                    199,062       163,296
       Employees                                          63,700        92,765
       Receivable from brokers                           240,709        75,054
       Other                                             220,850       704,286
    Prepaid expenses                                     475,577       454,567
    Deferred tax asset (Note P)                          103,239            --
                                                     -----------   -----------
         TOTAL CURRENT ASSETS                          3,827,258    30,668,651
                                                     -----------   -----------
NET PROPERTY AND EQUIPMENT  (NOTES A & E)              2,536,081     2,621,052
                                                     -----------   -----------
OTHER ASSETS
    Restricted investments (Notes A, J & Q)              642,528       642,380
    Long-term receivables                                424,026       368,742
    Long-term deferred tax asset (Note P)              1,102,531     1,096,268
    Residual equity interest (Note G)                    217,861       217,861
    Investment in joint venture (Note H)                      --       255,500
    Investment securities available-for-sale,
     at fair value (Notes A & C)                         557,315     2,210,657
    Equity investment in affiliate (Note A)            1,322,032     1,164,415
    Other                                                 83,143        61,670
                                                     -----------   -----------
           TOTAL OTHER ASSETS                          4,349,436     6,017,493
                                                     -----------   -----------
                                                     $10,712,775   $39,307,196
                                                     ===========   ===========
    

 
     The  accompanying  notes are an integral  part of this statement.

<PAGE>
                                                                        Page 35
- --------------------------------------------------------------------------------

Consolidated Balance Sheets (Continued)


                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                              JUNE 30,
                                                   ----------------------------
                                                        1997            1996
                                                   ------------    ------------
CURRENT LIABILITIES
    Current portion of capital lease
       obligation (Note E)                         $      9,614    $     24,354
    Current portion of notes payable (Note I)            44,899          41,695
    Current portion of annuity and contractual
       obligation (Note J)                               18,000          18,000
    Subordinated debenture held by a related
       party (Note M)                                        --       1,533,131
    Securities sold under agreements to
       repurchase (Note K)                                   --      26,404,375
    Accounts payable                                    367,163         276,116
    Accrued interest payable to third parties                --          16,685
    Accrued interest payable to related
       party (Notes M & O)                                   --          70,017
    Accrued compensation and related costs              223,639         204,911
    Accrued profit sharing and 401(k) (Note L)          109,251         110,489
    Accrued vacation pay                                107,369          75,959
    Accrued legal fees                                   62,493          70,536
    Deferred tax liability (Note P)                          --          11,312
    Litigation accrual (Note  Q)                        300,000         300,000
    Other accrued expenses                              144,632         195,065
                                                   ------------    ------------
    TOTAL CURRENT LIABILITIES                         1,387,060      29,352,645
                                                   ------------    ------------
Notes Payable-Net of Current Portion (Note I)         1,215,386       1,260,137
Annuity and Contractual Obligations (Note J)            143,922         150,342
                                                   ------------    ------------
    TOTAL NON-CURRENT LIABILITIES                     1,359,308       1,410,479
                                                   ------------    ------------
    TOTAL LIABILITIES                                 2,746,368      30,763,124
                                                   ------------    ------------
Commitments and contingent liabilities
(Notes J & I)

SHAREHOLDERS' EQUITY (NOTE N)

Common stock (class A) (formerly preferred
   stock) --$0.05 par value; non-voting;
   authorized, 7,000,000  shares; 6,227,074
   and 6,219,422 issued and outstanding
   in 1997 and 1996, respectively                       311,354         310,971
Common stock (class C) (formerly class A)
   --$.05 par value; authorized, 1,750,000 
   shares; 562,000 and 564,352 issued and
   outstanding in 1997 and 1996, 
   respectively                                          28,110          28,218
Additional paid-in-capital                           10,587,909      10,586,666
Treasury stock at cost; 186,684 and 199,582
   shares held in 1997 and 1996, respectively          (514,770)       (530,384)
Net unrealized gain (loss) on available-for-
   sale securities (net of tax of $91,212 and
   $294,993, respectively)                             (177,058)        572,634
Equity in net unrealized gain on available-for-
   sale securities held by affiliate (net of
   tax of $10,237 and $76,823, respectively)             19,873         149,127
Retained earnings (deficit)                          (2,289,011)     (2,573,160)
                                                   ------------    ------------
TOTAL SHAREHOLDERS' EQUITY                            7,966,407       8,544,072
                                                   ------------    ------------
                                                   $ 10,712,775     $39,307,196
                                                   ============    ============


       The accompanying notes are an integral part of this statement.
<PAGE>

                                                                        Page 36
- -------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS 
                 
                                                 YEAR ENDED JUNE 30,
                                   --------------------------------------------
                                       1997            1996            1995
                                   ------------    ------------    ------------
REVENUE (NOTE D)
  Investment advisory fee          $  6,686,769    $  5,934,133    $  5,508,482
  Transfer agent fee                  3,336,376       3,306,568       3,187,037
  Accounting fee                        730,625         523,465         421,190
  Exchange fee                          248,112         282,651         270,105
  Custodial fees                        530,030         545,018         503,225
  Investment income                   1,033,982       3,144,062         267,379
  Mailroom operations                   282,267         230,550         169,743
  Government security income
    (Note F)                          1,067,050       5,559,879       5,353,709
  Gains on changes of interest
    in affiliate (Note A)                10,490         555,905            --
  Other                                  83,430         132,315          89,868
                                   ------------    ------------    ------------
                                     14,009,131      20,214,546      15,770,738
                                   ------------    ------------    ------------
EXPENSES
  General and administrative         11,636,195      10,520,912       9,405,031
  Depreciation and amortization         481,510         425,301         536,920
  Interest expense-note payable
    and other                           131,633         126,732         266,222
  Government security non-cash
    charge (Note F)                        --              --         5,375,269
  Interest expense-securities
    sold under agreement
    to repurchase (Notes F & K)       1,007,099       5,235,535       5,650,020
  Interest expense-subordinated
    debenture to a related party
    (Notes M & O)                        73,002         333,612         433,136
  Reduction in carrying value of
    investment in joint venture
    (Note H)                               --           619,500            --
                                   ------------    ------------    ------------
                                     13,329,439      17,261,592      21,666,598
                                   ------------    ------------    ------------
EARNINGS (LOSS) BEFORE MINORITY
  INTEREST, EQUITY INTEREST,
  INCOME TAXES, AND CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING        679,692       2,952,954      (5,895,860)
                                   ------------    ------------    ------------

Minority Interest in Consolidated
  Company (Note A)                         --           (55,098)           --
Equity in Net Loss of Joint
  Venture (Note A)                     (196,535)           --              --
Equity In Net Earnings of
  affiliate (Note A)                    132,968         102,728            --
                                   ------------    ------------    ------------

EARNINGS (LOSS) BEFORE INCOME
  TAXES, AND CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING        616,125       3,000,584      (5,895,860)

PROVISION (BENEFIT) FOR FEDERAL
  INCOME TAXES (NOTE P)
  Current                                  --            61,000            --
  Deferred                              331,976         952,517      (2,005,142)
                                   ------------    ------------    ------------
                                        331,976       1,013,517      (2,005,142)
                                   ------------    ------------    ------------

NET EARNINGS (LOSS) BEFORE
  CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING                  284,149       1,987,067      (3,890,718)

Cumulative Effect of Change in
  Accounting for Marketable
  Securities (net of taxes
  of $22,298) (Note B)                     --              --            43,284
                                   ------------    ------------    ------------

NET EARNINGS (LOSS)                $    284,149    $  1,987,067    $ (3,847,434)
                                   ============    ============    ============


         The accompanying notes are an integral part of this statement.

<PAGE>
                                                                        Page 37
- --------------------------------------------------------------------------------

Consolidated Statements of Operations (Continued)

                                                 YEAR ENDED JUNE 30,
                                   --------------------------------------------
                                       1997            1996            1995
                                   ------------    ------------    ------------
PER SHARE AMOUNTS
  Primary and fully diluted
  Continuing operations            $       0.04    $       0.30    $      (0.65)
  Cumulative effect of change
     in accounting                         --              --              0.01
                                   ------------    ------------    ------------
Net Earnings                       $       0.04    $       0.30    $      (0.64)
                                   ============    ============    ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
  Primary and fully diluted           6,664,324       6,601,074       6,013,393
                                   ============    ============    ============


           The accompanying notes are an integral part of this statement.

<PAGE>

                                                                        Page 38
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOW

                                                  YEAR ENDED JUNE 30,
                                      ----------------------------------------- 
                                         1997           1996*          1995
                                      -----------    -----------    ----------- 
Cash Flow From Operating
  Activities:
    Net earnings (loss)                $  284,149   $  1,987,067   $ (3,847,434)
    Adjustments to reconcile to
      net cash provided by
      operating activities:
      Depreciation and amortization       481,510        425,301        536,920
      Government security accretion      (306,926)    (1,363,051)    (1,499,521)
      Government security charge             --             --        5,375,269
      Net gain on sales of securities
        (net of minority interest)       (934,123)    (2,723,738)      (248,661)
      Gain on disposal of equipment           (64)          (296)        (1,100)
      Reduction in carrying value
        of investment in joint
        venture                              --          619,500           --
      Cumulative effect of change
        in accounting                        --             --          (43,284)
      Gain on changes of interest
        in affiliate                      (10,490)      (555,905)          --
      Treasury Stock reissued             346,163        139,595         32,381
  Changes in assets and
    liabilities, impacting cash
    from operations:
      Restricted investments                 (148)       255,176       (443,908)
      Accounts receivable                 364,558       (675,974)      (793,395)
      Deferred tax asset                  331,976        952,517     (2,005,142)
      Prepaid expenses and other         (134,789)    (1,065,278)       177,487
      Trading securities                2,034,637      2,674,344        894,453
      Accounts payable                     91,047        108,518        (50,240)
      Accrued expenses                    (96,276)       167,429        457,365
                                      -----------    -----------    ----------- 
      Total adjustments                 2,167,075     (1,041,862)     2,388,624
                                      -----------    -----------    ----------- 
NET CASH PROVIDED BY (USED IN)
OPERATIONS                              2,451,224        945,205     (1,458,810)
                                      -----------    -----------    ----------- 
CASH FLOW FROM INVESTING 
ACTIVITIES:
  Purchase of building and land              --             --          (27,461)
  Purchase of furniture and equipment    (392,436)      (372,211)      (402,190)
  Proceeds on sale of equipment               800            469          1,100
  Purchase of available-for-sale
    securities                           (399,472)      (896,791)    (1,023,721)
  Purchase of government securities
    held-to-maturity                         --             --     (130,113,712)
  Proceeds on sale of government
    securities available-for-sale            --       89,884,250           --
  Proceeds on sale of government
    securities held-to-maturity        26,725,000           --       12,945,530
                                      -----------    -----------    ----------- 
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES                   25,933,892     88,615,717   (118,620,454)
                                      -----------    -----------    ----------- 
CASH FLOW FROM FINANCING 
ACTIVITIES:
  Payments on annuity                      (6,420)        (5,986)        (5,584)
  Payments on note payable to bank        (41,547)       (38,216)       (35,337)
  Proceeds from capital lease              25,330           --             --
  Principal payments on capital
    lease obligation                      (40,070)       (93,658)      (103,431)
    Net proceeds from securities
    sold under agreement to
    repurchase                            420,844        871,231    124,794,309
  Proceeds from issuance of
    subordinated debenture to
    related party                            --             --        6,000,000
  Payments on subordinated debenture
    to related party                   (1,533,131)    (3,001,081)    (1,465,788)
  Net payments on securities sold
    under agreement to repurchase     (26,825,219)   (86,668,325)   (12,592,840)
  Proceeds from issuance of
    preferred stock, warrants,
    and options                             8,250        295,875        144,274


        The accompanying notes are an integral part of this statement.


<PAGE>
                                                                       Page 39
- ------------------------------------------------------------------------------

Consolidated Statements Of Cash Flow (Continued)

                                                 YEAR ENDED JUNE 30,
                                     ------------------------------------------
                                         1997           1996*          1995
                                     ------------   ------------   ------------
  Proceeds from issuance of common
    stock (class B) to related
    party                                    --             --        4,964,271
  Purchase of common stock
    (class B) from related party             --       (2,538,945)          --
  Purchase of Treasury stock
    and warrants                         (337,282)      (487,788)      (106,988)
                                     ------------   ------------   ------------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES               (28,329,245)   (91,666,893)   121,592,886
                                     ------------   ------------   ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS                       55,871     (2,105,971)     1,513,622

BEGINNING CASH AND CASH
EQUIVALENTS                               666,250      2,772,221      1,258,599
                                     ------------   ------------   ------------
ENDING CASH AND CASH EQUIVALENTS     $    722,121   $    666,250   $  2,772,221
                                     ============   ============   ============
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
  Purchase of equipment under
    capital lease                    $     25,330   $       --     $       --
  Issuance of shares for
    investment in joint venture              --             --          510,000

SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
  Cash paid for interest             $  1,283,891   $  6,088,853   $  5,848,689
                                     
- --------------------
*  Reclassed for comparative purposes

         The accompanying notes are an integral part of this statement.

<PAGE>

                                                                        Page 40
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

<TABLE>
<CAPTION>
                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                                                                                                  PRE-
                                                              COMMON     COMMON       COMMON                     FERRED
                                                PREFERRED      STOCK      STOCK        STOCK         PAID-IN      WAR-   EARNINGS
                                                  STOCK      (CLASS A)  (CLASS B)    (CLASS C)       CAPITAL     RANTS   (DEFICIT)
                                                ---------    --------   --------    -----------    ------------  ------ ----------- 
<S>                                             <C>          <C>        <C>         <C>            <C>             <C>  <C>         
Balance at June 30, 1994 (4,867,557 shares
of Preferred stock; 576,217 shares of
Common stock (Class A))                         $ 243,378    $      0   $      0    $    28,811    $  7,305,344    $0   ($  712,793)

Purchase of 35,000 shares of Preferred
treasury stock                                       --          --         --             --              --      --          --   

Reissuance of 11,200 shares of Preferred
treasury stock                                       --          --         --             --           (10,978)   --          --   

Issuance of 198,500 shares of Preferred
stock                                               9,925        --         --             --           644,349    --          --   

Issuance of 1,000,000 shares of Common
stock (Class B)                                      --          --       50,000           --         4,914,271    --          --   

Conversion of 5,438 shares of Common stock
(Class A) to Preferred stock                          272        --         --             (272)           --      --          --   

Unrealized gain (loss) on securities
available-for-sale (net of tax)
upon adoption of SFAS 115                            --          --         --             --              --      --          --   

Unrealized gain (loss) on securities
available-for-sale (net of tax)                      --          --         --             --              --      --          --   

Net Earnings                                         --          --         --             --              --      --    (3,847,434)
                                                ---------    --------   --------    -----------    ------------    --   ----------- 

Balance at June 30, 1995 (5,071,495 shares
of Preferred stock; 570,779 shares of Common
stock (Class A))                                $ 253,575    $      0   $ 50,000    $    28,539    $ 12,852,986    $0   ($4,560,227)

Conversion of Preferred Stock to Common Stock
Common Stock (Class A)                           (253,575)    253,575       --             --              --      --          --   

Purchase of 175,475 shares of Common Stock
(Class A)                                            --          --         --             --              --      --          --   

Reissuance of 68,393 shares of Common Stock
(Class A)                                            --          --         --             --           (16,175)   --          --   

Conversion of 6,427 shares of Common stock
(Class C) to Common Stock (Class A)                  --           321       --             (321)           --      --          --   

Conversion of 1,000,000 shares of Common
stock (Class B) to Common Stock (Class A)            --        50,000    (50,000)          --              --      --          --   

Purchase of Common Stock (Class B) from
related party (Note N)                               --          --         --             --        (2,538,945)   --          --   

Exercise of 142,500 Stock Options                    --         7,075       --             --           288,800    --          --   

Unrealized loss on Notes transferred from
held-to-maturity to available-for-sale,
at date of transfer (net of tax)                     --          --         --             --              --      --          --   

Unrealized gain (loss) on securities
available-for-sale (net of tax)                      --          --         --             --              --       --          --  

Equity in Unrealized gain (loss) on
available-for-sale securities of affiliated
company (net of tax)                                 --          --         --             --              --      --          --   

Net Earnings                                         --          --         --             --              --      --     1,987,067
                                                ---------    --------   --------    -----------    ------------    --   -----------

Balance at June 30, 1996 (6,219,422
shares of Preferred stock;
564,352 shares of Common stock (Class A))       $       0    $310,971   $      0    $    28,218    $ 10,586,666    $0   ($2,573,160)

Purchase of 141,250 shares of Common
Stock (Class A)                                      --          --         --             --              --      --          --   

Reissuance of 154,148 shares of Common
Stock (Class A)                                      --          --         --             --            (6,732)   --          --   

Exercise of 5,500 Stock Options                      --           275       --             --             7,975    --          --   

Conversion of 2,152 shares of Common stock
(Class C) to Common Stock (Class A)                  --           108       --             (108)           --      --          --   

Unrealized gain (loss) on securities
available-for-sale (net of tax)                      --          --         --             --              --      --          --   

Equity in Unrealized gain (loss) on
available-for-sale securities of
affiliated company (net of tax)                      --          --         --             --              --      --          --   

Net Earnings                                         --          --         --             --              --      --       284,149
                                                ---------    --------   --------    -----------    ------------    --   -----------

Balance at June 30, 1997 (6,227,074 shares
of Class A (formerly preferred stock);
562,200 shares of Class C (formerly
Class A))                                       $       0    $311,354   $      0    $    28,110    $ 10,587,909    $0   ($2,289,011)



                                                             UNREALIZED                       
                                                             GAIN (LOSS)                      
                                                                ON
                                                             SECURITIES                    
                                                 TREASURY    AVAILABLE                     
                                                  STOCK       FOR SALE       TOTAL
                                                ---------    ---------    -----------
<S>                                               <C>          <C>          <C>        
Balance at June 30, 1994 (4,867,557 shares
of Preferred stock; 576,217 shares of
Common stock (Class A))                         ($134,737)   $       0    $ 6,730,003

Purchase of 35,000 shares of Preferred
treasury stock                                   (106,988)        --         (106,988)

Reissuance of 11,200 shares of Preferred
treasury stock                                     43,359         --           32,381

Issuance of 198,500 shares of Preferred
stock                                                --           --          654,274

Issuance of 1,000,000 shares of Common
stock (Class B)                                      --           --        4,964,271

Conversion of 5,438 shares of Common stock
(Class A) to Preferred stock                         --           --             --   

Unrealized gain (loss) on securities
available-for-sale (net of tax)
upon adoption of SFAS 115                            --        197,009        197,009

Unrealized gain (loss) on securities
available-for-sale (net of tax)                      --         37,707         37,707

Net Earnings                                         --           --       (3,847,434)
                                                ---------    ---------    -----------

Balance at June 30, 1995 (5,071,495 shares
of Preferred stock; 570,779 shares of Common
stock (Class A))                                ($198,366)   $ 234,716    $ 8,661,223

Conversion of Preferred Stock to Common Stock
Common Stock (Class A)                               --           --             --   

Purchase of 175,475 shares of Common Stock
(Class A)                                        (487,678)        --         (487,678)

Reissuance of 68,393 shares of Common Stock
(Class A)                                         155,660         --          139,485

Conversion of 6,427 shares of Common stock
(Class C) to Common Stock (Class A)                  --           --             --   

Conversion of 1,000,000 shares of Common
stock (Class B) to Common Stock (Class A)            --           --             --   

Purchase of Common Stock (Class B) from
related party (Note N)                               --           --       (2,538,945)

Exercise of 142,500 Stock Options                    --           --          295,875

Unrealized loss on Notes transferred from
held-to-maturity to available-for-sale,
at date of transfer (net of tax)                     --        (62,006)       (62,006)

Unrealized gain (loss) on securities
available-for-sale (net of tax)                      --        399,924        399,924

Equity in Unrealized gain (loss) on
available-for-sale securities of affiliated
company (net of tax)                                 --        149,127        149,127

Net Earnings                                         --           --        1,987,067
                                                ---------    ---------    -----------

Balance at June 30, 1996 (6,219,422
shares of Preferred stock;
564,352 shares of Common stock (Class A))       ($530,384)   $ 721,761    $ 8,544,072

Purchase of 141,250 shares of Common
Stock (Class A)                                  (337,282)        --         (337,282

Reissuance of 154,148 shares of Common
Stock (Class A)                                   352,896         --          346,164

Exercise of 5,500 Stock Options                      --           --            8,250

Conversion of 2,152 shares of Common stock
(Class C) to Common Stock (Class A)                  --           --                0

Unrealized gain (loss) on securities
available-for-sale (net of tax)                      --       (749,692)      (749,692)

Equity in Unrealized gain (loss) on
available-for-sale securities of
affiliated company (net of tax)                      --       (129,254)      (129,254)

Net Earnings                                         --           --          284,149
                                                ---------    ---------    -----------

Balance at June 30, 1997 (6,227,074 shares
of Class A (formerly preferred stock);
562,200 shares of Class C (formerly
Class A))                                       ($514,770)   ($157,185)   $ 7,966,407

</TABLE>
                                              
         The accompanying notes are an integral part of this statement.

<PAGE>

                                                                        Page 41
- --------------------------------------------------------------------------------


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A.  SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION.  U.S.  Global  Investors,  Inc. ("the  Company" or "U.S.  Global")
serves as  investment  adviser,  investment  manager and transfer  agent to U.S.
Global  Investors Funds  ("USGIF"),  formerly  United  Services Funds,  and U.S.
Global Accolade Funds ("USGAF"),  formerly  Accolade Funds,  both  Massachusetts
business trusts which are no-load, open-end investment companies offering shares
in numerous  mutual  funds to the  investing  public.  The Company has served as
investment  adviser  and  manager  since  the  inception  of USGIF and USGAF and
assumed the transfer  agency  function of USGIF in November 1984 and of USGAF in
October 1994, the  commencement of operations.  For these services,  the Company
receives fees from USGIF and USGAF.

The Company has formed a limited  liability  company which was  incorporated  in
Guernsey on August 20, 1993.  This company,  U.S.  Global  Investors  (Guernsey)
Limited  ("USGG"),  formerly  U.S.  Advisors  (Guernsey)  Limited,  manages  the
portfolio  of an offshore  fund,  U.S.  Global  Strategies  Fund  Limited  ("the
Guernsey Fund").

The Company's  one-third  interest in United  Services  Advisors,  Canada,  Inc.
("USACI"), which was formed in July of 1994 to offer mutual funds in Canada, was
sold in June 1997 to the USACI  Management  group  which  now  controls  100% of
USACI.

The Company,  through its wholly owned  subsidiary,  Security  Trust & Financial
Company,  also serves as custodian for  retirement  accounts  invested in USGIF,
USGAF, and other mutual funds.

On June 1, 1996 the Company changed its name from United Services Advisors, Inc.
to U.S. Global Investors, Inc.


PRINCIPLES OF CONSOLIDATION.  The consolidated  financial statements include the
accounts of the Company and its wholly owned  subsidiaries,  United  Shareholder
Services,  Inc.  ("USSI"),  Security Trust and Financial Company  ("STFC"),  A&B
Mailers,  Inc.  ("A&B"),  and USGG. During the fourth quarter of fiscal 1996 the
Company's  interest  in the  Guernsey  Fund  declined  below  50%  and it  began
accounting  for its  investment  in the Guernsey Fund using the equity method of
accounting.  At June  30,  1997,  and  1996,  the  Company  held a 14% and a 26%
interest  in  the  Guernsey  Fund,  respectively.  The  aggregate  value  of the
Company's  investment at June 30, 1997,  and 1996,  based on quoted market value
was $1,322,032 and $1,164,415, respectively.

The  Guernsey  Fund  issued  48,188 and 30,644  net  additional  shares for cash
amounting to  $5,616,825  and  $3,080,272  to  investors  other than the Company
during fiscal 1997 and 1996,  respectively.  The Company accounts for changes in
interest of its investment in the Guernsey Fund by charging or crediting  income
for the effects of such  transactions  when  consummated.  The Company  recorded
$10,490 and $555,905 in gains on such transactions  during fiscal 1997 and 1996,
respectively,  which are included as a separate line in the accompanying  income
statement. Deferred income taxes have been provided on these gains.

All significant  inter-company balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified for comparative purposes.


CASH AND CASH  EQUIVALENTS.  Cash consists of cash on hand and cash  equivalents
with original  maturities of three months or less. Cash and cash  equivalents at
June 30, 1997, and at June 30, 1996 include $690,543 and $596,605, respectively,
in USGIF money market  mutual funds (see Note O). This  investment  is valued at
amortized  cost which  approximates  market.  Restricted  cash of  $618,169  and
$633,169,  at June 30, 1997, and 1996,  respectively,  is included in restricted
investments (see Notes J and Q).


FIXED ASSETS. Fixed assets are recorded at cost including  capitalized interest.
Depreciation  for owned fixed  assets and capital  leases is recorded  using the
straight-line  method over the  estimated  useful life of each asset as follows:
leasehold  improvements,  furniture and equipment are depreciated  over 3 years;
capitalized leased phone equipment is depreciated over 5 years; and the building
is depreciated over 31.5 years.


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INCOME TAXES.  Provisions for income taxes include  deferred taxes for temporary
differences  in the  bases of  assets  and  liabilities  for  financial  and tax
purposes,  resulting  from the use of the  liability  method of  accounting  for
income taxes.  The liability method requires that deferred tax assets be reduced
by a  valuation  allowance  in cases  where it is more  likely than not that the
assets will not be realized.


EARNINGS PER SHARE.  Primary and fully  diluted  earnings per share are based on
the weighted  average number of shares of class A common stock class B and class
C common stock outstanding during the year. All classes of common are considered
equivalent  in the  calculation  of  earnings  per share  since  each  share has
essentially  equivalent  interests  in the income of the  Company.  Warrants and
options are included to the extent dilutive.


SECURITY INVESTMENTS.  The Company accounts for its investments in securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain  Investments in Debt and Equity  Securities"  ("SFAS 115") (see Note
B).

Under  SFAS 115,  the  Company  classifies  its  investments  in equity and debt
securities  into  three  categories.   Management   determines  the  appropriate
classification  of  securities  at the time of  purchase  and  reevaluates  such
designation as of each reporting period date (see Note C).

Securities  that are purchased and held  principally  for the purpose of selling
them in the near term are classified as trading  securities and reported at fair
value. Unrealized gains and losses on these securities are included in earnings.

Investments in debt securities for which the Company has the positive intent and
ability to hold to  maturity  are  classified  as  held-to-maturity  securities.
Held-to-maturity  securities  are  reported at amortized  cost.  Discount to par
value  is  accreted,  and  recognized  as  income,  over the  remaining  term to
maturity.

Investments  not  classified  as  trading  securities  nor  as  held-to-maturity
securities are classified as available-for-sale  securities and reported at fair
value.  Unrealized  gains  and  losses on these  securities  are  excluded  from
earnings and  reported,  net of tax, as a separate  component  of  shareholders'
equity and are recorded in earnings on trade date.  Realized gains (losses) from
security  transactions are calculated on the  first-in/first-out  cost basis and
are recorded in earnings on trade date.


FOREIGN  CURRENCY  TRANSACTIONS.  Transactions  between  the Company and foreign
entities are  converted to U.S.  dollars  using the exchange rate on the date of
the  transactions.   Security  investments  valued  in  foreign  currencies  are
translated  to  U.S.  dollars  using  the  applicable  exchange  rate  as of the
reporting  date.  Foreign  currency  gain (loss) is  included as a component  of
investment income.


ORGANIZATION  COSTS.  Organization costs in the amount of $175 and $5,013 net of
amortization  at June 30,  1997,  and 1996,  respectively,  which  relate to the
organization  of STFC and USGG, are amortized on a  straight-line  basis over 60
months.  These costs are  included in other assets on the  consolidated  balance
sheet.


ACCOUNTING  PRONOUNCEMENTS.  In March 1997, the Financial  Accounting  Standards
Board ("FASB") issued Statement No. 128, Earnings per Share ("SFAS 128"),  which
establishes  standards for computing and  presenting  earnings per share ("EPS")
and applies to entities  with  publicly  held common stock or  potential  common
stock.  This  Statement  simplifies  the standards for computing EPS  previously
found in APB Opinion No 15,  EARNINGS PER SHARE,  and makes them  comparable  to
international EPS standards.  It replaces the presentation of primary EPS on the
face of the income  statement for all entities with complex  capital  structures
and requires a reconciliation  of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation. The
Company  will  adopt SFAS 128 in the first  quarter of fiscal  1998 and does not
believe that  adoption  will have a material  impact on the EPS  computation  or
disclosure. Upon adoption, prior-period EPS data will be restated.

In March 1997,  the FASB issued  Statement No. 129,  Disclosure  of  Information
about  Capital  Structure  ("SFAS  129").  SFAS 129  establishes  standards  for
disclosing  information  about an entity's capital  structure.  The Company will
adopt  SFAS 129  fiscal  1998 and does not  believe  that  adoption  will have a
material effect on financial statement disclosures.

In June 1997, the FASB issued Statements No. 130, Reporting Comprehensive Income
("SFAS  130").  SFAS 130  establishes  standards  for  reporting  and display of
comprehensive income and its components (revenues,  expenses, gains, and losses)
in a full set of general-purpose  financial statements.  This Statement requires
that all items that are recognized under  accounting  standards as components of
comprehensive  income be  reported  in a  statement  of  financial  performance.
Although  the  Statement  does not  address  disclosure  format,  it requires an
enterprise to (a) represent total comprehensive


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                                                                        Page 43
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income for the financial statement period and a per share amount for that total,
(b) classify items of other comprehensive  income by their nature in a financial
statement and (c) display the accumulated balance of other comprehensive  income
separately from retained  earnings and additional  paid-in capital in the equity
section of a statement of financial  position.  This  Statement is effective for
fiscal years  beginning after December 15, 1997.  Reclassification  of financial
statements for earlier periods  provided for  comparative  purposes is required.
The  Company  plans to adopt  SFAS 130 in fiscal  1999.  Management  has not yet
determined the manner in which comprehensive income might be displayed.

In June 1997, the FASB issued Statement No. 131,  Disclosures  about Segments of
an  Enterprise  and  Related  Information  ("SFAS  131").  SFAS 131  establishes
standards for reporting  information in the annual financial  statements about a
public entity's  operating  segments and requires that those enterprises  report
selected  information  about  operating  segments in interim  financial  reports
issued  to  shareholders.  SFAS  131  also  establishes  standards  for  related
disclosures  regarding  products  and  services,  geographic  areas,  and  major
customers.  This  Statement is effective  for financial  statements  for periods
beginning  after  December  15,  1997.  In  the  initial  year  of  application,
comparative  information for earlier years is to be restated.  The Company plans
to  adopt  SFAS  131 in  fiscal  1999.  Management  has  not yet  completed  its
determination of what, if any, impact the "management approach" will have on its
financial statement disclosures.


NOTE B.  CHANGE IN ACCOUNTING PRINCIPLE

In the first quarter of fiscal 1995, the Company  adopted SFAS 115,  "Accounting
for Certain Investments in Debt and Equity Securities,"  effective July 1, 1994.
The  adoption of SFAS 115 changed the method of  accounting  and  reporting  for
investments in equity securities that have readily  determinable fair values and
for all investments in debt  securities.  The Company  recognized the cumulative
effect of adopting the  pronouncement  in the first  quarter of fiscal 1995 as a
change in accounting principle.  The financial impact of adopting SFAS 115 was a
net  increase in earnings of $43,284 (net of taxes of $22,298) or $.01 per share
representing net unrealized gains on securities classified as trading securities
and $197,009  (net of taxes of $101,489) on net  unrealized  gains on securities
classified as available  for sale which was reported as a separate  component of
equity.


NOTE C.  INVESTMENTS

The cost and market value of investments classified as trading are as follows:

                      DATE             COST       MARKET VALUE
                  -------------     ----------    ------------
                  June 30, 1997     $  772,630     $  721,954
                  June 30, 1996     $1,034,398     $  999,500
                  June 30, 1995     $1,661,113     $1,510,316                  

The net change in the unrealized  holding gain (loss) on trading securities held
at June  30,  1997,  that has been  included  in  earnings  for the  period  was
($15,778), $115,899, and ($150,797) for the period ended June 30, 1997, 1996 and
1995, respectively.

The   cost   of   investments   in   securities,   which   are   classified   as
available-for-sale,  which may not be readily  marketable at June 30, 1997,  was
$825,585.  These investments are reflected as non-current assets on the June 30,
1997,  consolidated  balance  sheet at their  fair  value at June 30,  1997,  of
$557,315 with  $177,058,  net of tax, in unrealized  losses being  recorded as a
separate  component of shareholders'  equity.  These  investments are in private
placements  which are restricted for sale as of June 30, 1997. It is anticipated
the  securities  obtained in these private  placements  will become free trading
within one year.  During fiscal 1997,  the Company  recorded  income  related to
realized gains of $218,860 and unrealized  gains of $100,349 on securities which
were  transferred from the  available-for-sale  category to the trading category
upon becoming free trading.

The   cost  of   investments   in   securities,   which   were   classified   as
available-for-sale,  which  were not  readily  marketable  at June 30,  1996 was
$1,249,081.  These investments were reflected as non-current  assets on the June
30,  1996  consolidated   balance  sheet.  These  investments  were  in  private
placements which were restricted for sale as of June 30, 1996. The fair value of
the investments classified as non-current  available-for-sale securities at June
30, 1996 was $2,210,657 with $572,634,  net of tax, in unrealized gains recorded
as a separate component of shareholders' equity. Additionally,  the Company held
certain notes with a fair value of $26,324,125  (amortized  cost of $26,418,074)
which were classified as


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current available-for-sale securities resulting in an unrealized loss of $93,949
as of June 30, 1996.  (See further  discussion  of these  securities at Note F).
During fiscal 1996,  the Company  recorded in income  realized gains of $780,492
and  unrealized  gains  of  approximately  $122,000  on  securities  which  were
transferred  from the  available-for-sale  category to the trading category upon
becoming free trading.

During  fiscal  1995,  the  Company  recorded  realized  gains of  $202,441,  on
securities which were transferred from available- for-sale securities to trading
securities  upon  becoming free  trading.  The Company also recorded  unrealized
gains of $158,498 and  unrealized  losses of $188,124 on  securities  which were
transferred  from  available-for-sale  securities  to  trading  securities  upon
becoming free trading during the fiscal year 1995.


NOTE D.  INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES

The Company serves as investment  adviser to USGIF,  USGAF and the Guernsey Fund
and  receives  a fee  based  on a  specified  percentage  of  net  assets  under
management.  The Company  also  serves as transfer  agent to USGIF and USGAF and
receives a fee based on the number of  shareholder  accounts.  The Company  also
provides in-house legal and accounting  services to USGIF and USGAF. The Company
also  receives  exchange,  maintenance,  closing and small account fees directly
from USGIF and USGAF shareholders.

The Company receives  additional  revenue from several sources  including:  STFC
custodian  and  administrative  fee  revenues,  gains on  marketable  securities
transactions,  revenues from miscellaneous  transfer agency activities including
lockbox functions as well as mailroom operations (A&B).

Investment advisory fees, transfer agency fees,  accounting fees, custodian fees
and all other fees  earned by the  Company  are  recorded  as income  during the
period in which services are performed.

The Company has  voluntarily  waived or lowered its advisory fees and is bearing
expenses on several funds within USGIF and USGAF.

The  Company  has  unconditionally  guaranteed  that the  total  fund  operating
expenses  (as a  percentage  of  average  net  assets)  of the  U.S.  Government
Securities  Savings Fund will not exceed 0.40% on an  annualized  basis  through
June 30, 1998 or such later date as the Company determines.

The  Company  has  unconditionally  guaranteed  that the  total  fund  operating
expenses (as a  percentage  of average net assets) of the U.S. Tax Free Fund and
United  Services  Near-Term Tax Free Fund will not exceed 0.70% on an annualized
basis through June 30, 1998 or such later date as the Company determines.

The  Company  has  unconditionally  guaranteed  that the  total  fund  operating
expenses (as a percentage of average net assets) of the U.S. All American Equity
will not exceed 1.00% on an annualized basis through June 30, 1998 or such later
date as the Company determines.

The  Company  has  unconditionally  guaranteed  that the  total  fund  operating
expenses (as a percentage of average net assets) of the Regent Eastern  European
Fund will not exceed 3.25% on an annualized  basis through June 30, 1998 or such
later date as the Company determines.

The aggregate amount of fees waived or expenses  voluntarily  reimbursed totaled
$3,250,786, $3,362,050, and $3,568,151 in 1997, 1996, and 1995, respectively.

The following funds accounted for more than 10% of revenue [excluding government
security income (Note F)] in the years indicated: YEAR ENDED JUNE 30,

                                                 1997    1996    1995
                                                 ----    ----    ----
           U.S. Gold Shares Fund                  17%     21%     32%
           U.S. World Gold Fund                   24%     21%     25%
           U.S. Treasury Securities Cash Fund      9%      9%     13%

Receivables from mutual funds represent amounts due the Company,  and its wholly
owned   subsidiaries,   for  investment  advisory  fees,  transfer  agent  fees,
accounting fees, and exchange fees, net of amounts payable to the mutual funds.


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The investment  advisory  contract and related contracts between the Company and
USGIF expire on or about October 6, 1997, and the contracts  between the Company
and USGAF expire on or about March 8, 1998. Management  anticipates the Trustees
of both USGIF and USGAF will renew the contracts.


NOTE E.  PROPERTY AND EQUIPMENT

Property and equipment are composed of the following:

                                                           JUNE 30,
                                                ----------------------------
                                                    1997             1996
                                                -----------      -----------
  Leasehold improvements                        $   182,887      $   182,887
  Capitalized leased equipment                      519,768          519,768
  Furniture and equipment                         4,514,171        4,125,349
  Building and land                               2,203,757        2,203,757
                                                -----------      -----------
                                                  7,420,583        7,031,761
  Accumulated depreciation and amortization      (4,884,502)      (4,410,709)
                                                -----------      -----------
  Net property and equipment                    $ 2,536,081      $ 2,621,052
                                                ===========      ===========


At June 30, 1997,  and 1996  accumulated  amortization  for  capitalized  leased
equipment  was $519,769 and  $510,961,  respectively.  Amortization  expense for
capitalized leased equipment was $8,808,  $60,658, and $125,198,  for the fiscal
years ended June 30, 1997, 1996, and 1995, respectively.  Minimum lease payments
required by obligations under capital leases are $9,614 in fiscal 1998.

The building and land is pledged as collateral for the financing used to acquire
the building (see Note I).


NOTE F.  GOVERNMENT SECURITIES

The U.S.  Government  Securities  Savings Fund ("USG"),  a USGIF fund,  from its
inception had invested in, among other types of Government  securities,  certain
Government   agency  notes  whose  interest  rates  reset  monthly  based  on  a
cost-of-funds  index  ("Notes").  This reset  feature lags changes in short-term
interest rates.

During  fiscal  1995,  due to such  rates  rising  dramatically  and  regulatory
directives  issued to money  market  funds in general,  the market  value of the
Notes was  adversely  effected.  To reduce  USG's  exposure to said Notes and in
order to maintain a $1.00 per share net asset value, U.S. Global decided, in the
first  quarter of fiscal 1995, to arrange for USG to sell $40 million par amount
of Notes at USG's  amortized  cost of  approximately  $39,777,000  plus  accrued
interest to Marleau,  Lemire  Inc. ("ML").  Thereafter, U.S.  Global  decided to
purchase  directly from the fund  $90,525,000  par amount of Notes  ($53,275,000
during the first quarter of fiscal 1995 and $37,250,000 during the third quarter
of  fiscal  1995) at USG's  amortized  cost of  approximately  $90,337,000  plus
accrued interest.  Additionally,  in connection with such decision,  U.S. Global
purchased the Notes from ML for approximately  $39,777,000 plus accrued interest
during the first quarter of fiscal 1995.

U.S.  Global  recorded  the  Notes at their  fair  value.  As the  Notes  had an
aggregate  fair value of  approximately  $124,739,000  on the dates U.S.  Global
acquired the securities,  the Company  recorded  pre-tax non-cash charges to the
results of operations of approximately  $2,574,000  during the first quarter and
$2,800,000  during  the third  quarter of fiscal  1995.  The  Company  initially
classified the Notes as held-to-maturity  securities and in addition to periodic
receipts of interest income, U.S. Global recognized  $306,926,  $1,363,051,  and
$1,499,521 in non-cash income during fiscal 1997, 1996, and 1995, respectively.

In  December  1995,  $63,800,000  par value  Notes  were  reclassified  from the
held-to-maturity category to the available-for- sale category in accordance with
the  one-time  reassessment  allowed  by the  FASB  GUIDE TO  IMPLEMENTATION  OF
STATEMENT  115  ON  ACCOUNTING  FOR  CERTAIN  INVESTMENTS  IN  DEBT  AND  EQUITY
SECURITIES.   The  remaining   $53,725,000   par  value  Notes   retained  their
held-to-maturity  status as defined by SFAS 115  until June 1996 when these were
re-classified to available-for- sale securities. Upon this re-classification the
Company began  recording  these Notes at fair value with any unrealized  gain or
loss excluded from earnings and reported, net of tax, as a separate component of
shareholders'  equity. At the June 1996  re-classification  date, the unrealized
loss approximated the amount recorded at June 30, 1996 ($93,949).


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U.S. Global financed the original acquisition of the Notes,  including purchased
accrued interest,  as follows:  1) approximately  $120.9 million was provided by
third party broker-dealers under reverse repurchase  agreements (see Note K); 2)
U.S. Global issued a $6.0 million 8% subordinated  debenture to ML, the terms of
which  require  principal  payments as the Notes  mature and  interest  payments
quarterly (see Note M); and 3) U.S. Global utilized approximately  $3,563,000 of
its own cash.

The Company has sold the following Notes during the fiscal years 1996 and 1995:

                                                  REALIZED GAIN
                  DATE SOLD        PAR VALUE          (LOSS)
                -------------     ------------     -----------
                June 1995         $ 13,000,000     ($   32,073)
                December 1995     $ 47,250,000     $ 1,235,986
                May 1996          $ 16,550,000     $     1,267
                June 1996         $ 27,000,000     ($   74,766)
                                  ------------     -----------
                                  $103,800,000     $ 1,130,414
                                  ============     ===========

The remaining  Notes acquired by U.S. Global matured during fiscal 1997 at their
aggregate  $26,725,000 par amount and the Company made the final payments on the
reverse repurchase agreements and the subordinated debenture.


NOTE G.      RESIDUAL EQUITY INTEREST

In June  1992  the  Company  made  its  final  payment  to the  Settlement  Pool
established  under the June 1988 Settlement  Agreement  relating to the original
Prospector  Fund (now  operating as the U.S.  Global  Resources  Fund);  and the
Settlement Pool made the final payout to "Eligible Shareholders" thereof in June
1992.  Under the 1988  Settlement  Agreement,  any amounts  payable to "Eligible
Shareholders"  who cannot be located,  together with interest  thereon,  will be
held  for six  years  after  the  final  payout  against  the  claims  of  those
shareholders.  At the end of six years,  such amounts will be made  available to
all persons claiming subrogation.  The Company has first right of subrogation to
the amounts. The amount of cash held at June 30, 1997, was $640,890.  Management
believes  the Company  will  receive a sum which will equal or exceed the amount
currently recorded as the Company's residual equity interest, $217,861.


NOTE H.      INVESTMENT IN JOINT VENTURE

During the fiscal 1995, U.S. Global and ML, a Canadian  brokerage firm,  entered
into a joint venture agreement whereby U.S. Global and ML agreed to undertake to
offer mutual funds in Canada,  primarily  through ML's broker network located in
Toronto,  Montreal,  Vancouver,  and Victoria. As part of the agreement to enter
into a joint venture,  U.S.  Global issued 120,000 shares of its preferred stock
to ML. The estimated  value of the stock upon  issuance was $510,000,  which the
Company recorded as its investment in the joint venture during the first quarter
of fiscal 1995. In conjunction with this joint venture, United Services Advisors
Wealth Management Corp. was incorporated during the third quarter of fiscal 1995
with a 50% ownership  to each U.S.  Global and ML. The joint venture was renamed
United Services Advisors,  Canada, Inc. ("USACI") during fiscal 1996. Also, U.S.
Global agreed to incur the initial  organization and development  costs.  During
June 1996 the USACI management group acquired a one-third  interest in USACI. As
a result of this  negotiated  sale,  which diluted U.S.  Global's  interest from
one-half  to  one-third,  delays  associated  with the  joint  venture  becoming
operational,  and the  Company's  reduced  expectations  of the joint  venture's
profitability, management reassessed the recoverability of its carrying value in
the joint  venture.  The Company  determined  that the carrying  value should be
reduced by $619,500 which  decreased the carrying value to reflect the amount of
the Company's  proportionate  one-third  share of the  underlying  equity in net
assets of USACI of $255,500 at June 30, 1996.

The joint  venture  became  operational  during  August  1996,  and the Company,
utilizing  the equity  method of  accounting,  recorded  a net loss of  $196,535
during  fiscal 1997. In June 1997,  the Company sold its  remaining  interest in
USACI for approximately $134,000 to the USACI management group which resulted in
a net charge to income of approximately $100,000.


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NOTE I.  NOTE PAYABLE AND LINE OF CREDIT

The  Company  has a note  payable to a bank which is secured by land,  an office
building and related improvements.  As of June 30, 1997, the balance on the note
was $1,260,285.  The loan is currently amortizing over a twenty-year period with
payments of both  principal  and interest  due monthly  based on a fixed rate of
7.75%. The current monthly payment is $11,750. The loan matures July 2001. Under
this agreement,  the Company must maintain certain financial covenants.  Because
of events  described in Note F, the Company  obtained a waiver of the  covenants
from the bank through June 30, 1995 and subsequently  negotiated an amendment to
the loan  agreement and covenants with the bank to cover periods beyond June 30,
1996. The Company is in compliance with all loan covenants at June 30, 1997.

Future  principal  payments  to be made  over the next five  years  based on the
amount outstanding at June 30, 1997, are as follows:

                              FISCAL
                               YEAR       AMOUNT
                              ------    ----------
                               1998     $   44,899
                               1999         48,504
                               2000         52,273
                               2001      1,114,609
                                        ----------
                              Total     $1,260,285
                                        ==========

During the current fiscal year, the Company obtained a $1 million line of credit
("LOC") under which there was no balance  outstanding as of June 30, 1997.  This
LOC was  obtained  to provide  financing  for the working  capital  needs of the
Company and expires in March  1998.  Borrowings  under the LOC are at a floating
interest rate  comprising of the Bank One,  Texas N.A. Base Rate + 3/4%,  plus a
commitment fee of 15 basis points on the unused  portion of the LOC amount.  The
Company  has the  ability to renew the LOC.  Total  commitment  fees paid on the
unused LOC amounted to $425 for fiscal 1997.


NOTE J.  ANNUITY AND CONTRACTUAL OBLIGATIONS

On February 6, 1989, the Company  entered into an agreement with Clark Aylsworth
("Aylsworth")  related to his  retirement on December 31, 1988.  This  agreement
provided  for the payment to  Aylsworth  of a monthly  annuity of $1,500 for the
remainder of his life or his wife's life, if he predeceases her. The Company has
recorded an obligation related to this agreement.

On December 30, 1990,  the Company  entered into a  non-compete/non-interference
agreement,  an  executory  contract,  pursuant  to which it pays the  Aylsworths
$4,500  monthly,  such amount to continue for the longer of  Aylsworth's  or his
wife's  life.  The Company  determined  that the  executory  contract  should be
expensed as payments  are made.  The Company  placed cash in escrow to cover the
Company's  obligation to the  Aylsworths if the Company  defaults.  The escrowed
amount decreases $15,000 annually and amounted to $285,000 at June 30, 1997.


NOTE K.    SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

As discussed in Note F, U.S.  Global  financed the  acquisition  of the Notes by
entering   into   agreements   to   repurchase   securities   with  third  party
broker-dealers.  The terms with the  broker-dealers  provided  that the  reverse
repurchase agreements must be collateralized by the Notes and/or cash. The Notes
described in Note F were held by the  broker-dealers  as collateral.  Due to the
maturation  of the Notes  discussed  in Note F, there are no reverse  repurchase
agreements  outstanding  at June 30,  1997.  As of June  30,  1996,  there  were
$26,404,375 in reverse repurchase agreements outstanding.


NOTE L.  BENEFIT PLANS

The Company and its  subsidiaries  have a  contributory  profit-sharing  plan in
which all qualified employees who have completed one year of employment with the
Company  are  included.  The  amount of the annual  contribution,  which may not
exceed 15% of earnings before income taxes, is determined by the Company's Board
of  Directors.  At June 30,  1997,  and June 30,  1996,  the Company has accrued
$59,093 and $60,000 for the fiscal 1997 and 1996 contributions, respectively.


<PAGE>

                                                                        Page 48
- --------------------------------------------------------------------------------

The  Company  and its  subsidiaries  also have a  savings  and  investment  plan
qualified  under Section 401(k) of the Internal  Revenue Code. The Company makes
contributions  on behalf of eligible  employees to fund this plan. In connection
with this 401(k) Plan,  participants  can  voluntarily  contribute  up to 15% of
their  compensation to this plan, and the Company will match their  contribution
up to 2%. At June 30, 1997, and June 30, 1996,  the Company has accrued  $50,158
and $50,000, respectively, for this matching contribution.

Additionally,  the Company self-funds its employee health care plan. The Company
has obtained  reinsurance with both a specific and an aggregate stop-loss in the
event of  catastrophic  claims.  At June 30,  1997,  the  Company has accrued an
amount representing the Company's estimate of incurred but not reported claims.


NOTE M.   SUBORDINATED DEBENTURE

In conjunction with the purchase of the Notes previously described,  U.S. Global
issued a $6 million 8% subordinated  debenture to ML, the terms of which require
monthly principal  payments and quarterly  interest payments as the Notes mature
with the balance due upon maturation of the notes.  Due to the maturation of the
Notes during the year, the remaining principal payments were made and no balance
on the debenture remained outstanding at June 30, 1997. As of June 30, 1996, the
balance of the subordinated debenture outstanding was $1,533,131.


NOTE N.   SHAREHOLDERS' EQUITY

During June of 1996 the Company reclassified its class A common stock as class C
common stock and  reclassified  its preferred stock as class A common stock with
no change in existing  rights,  privileges,  or preferences  of each  respective
class.  Class B common stock remains  unchanged.  The  descriptions in this note
have been changed to reflect these reclassifications.

In a private  placement on October 27, 1989, Frank E. Holmes and the F.E. Holmes
Organization, Inc. acquired control of the Company by purchasing for $2,200,000,
550,000 shares of the Company's  class C common stock and warrants to acquire an
additional  550,000  shares of class C common  stock at $4.00 per  share.  These
warrants  include a  provision  for  adjustment  to the number of  warrants  and
exercise price in the event additional  securities are issued at an amount below
the exercise price of such  outstanding  warrants.  At June 30, 1994, there were
outstanding  class C common stock  warrants to purchase  586,122 shares at $3.75
per share expiring  October 1994.  Effective  August 11, 1994 such warrants were
canceled and new  agreements  were  approved  providing  for warrants to acquire
586,122  shares of common stock at the August 11, 1994 market price of $4.00 per
share  expiring  October 1999.  These  warrants were  outstanding as of June 30,
1997.

In December 1991,  the Company issued to Mr. Holmes options to purchase  400,000
shares of class C common stock at $2.625 per share which equaled or exceeded the
fair value of the stock on the date of grant.  These options  vested  six months
after the issuance date and expire on December 6, 2001.  During fiscal 1992, the
Board of Directors  approved  the  issuance of 100,000  shares of class A common
stock to F.E.  Holmes  Organization,  Inc. in exchange for 100,000 shares of its
class C common stock.  At June 30, 1997, Mr. Holmes owned  approximately  69% of
the outstanding  shares of the Company's class C common stock, which is the only
class of the Company's stock having voting rights.

In March 1985,  the Board of Directors  adopted an  Incentive  Stock Option Plan
(the "1985 Plan"),  amended in November 1989 and December  1991,  which provides
for the granting of options to purchase  200,000 shares of the Company's class A
common  stock,  at or above fair market  value,  to certain  executives  and key
salaried  employees of the Company and its subsidiaries.  Options under the 1985
Plan may be granted for a term of up to five years in the case of employees  who
own in excess of 10% of the total  combined  voting  power of all classes of the
Company's  stock and up to ten years for other  employees.  Options issued under
the 1985 Plan vest six months  from the grant date or 20% on the first,  second,
third,  fourth and fifth  anniversaries of the grant date. Since adoption of the
1985 plan,  options have been granted at prices  ranging from $1.50 to $4.50 per
share, which equaled or exceeded the fair market value at date of grant.  During
fiscal year 1995,  options  covering  42,500  shares were granted at an exercise
price of $2.625 per share. As of June 30, 1997,  options  covering 85,500 shares
have been exercised and options  covering  13,500 shares have expired.  The 1985
plan  expired  December  31, 1994;  as a  consequence,  there will be no further
option grants under the 1985 plan.

In November 1989, the Board of Directors  adopted the 1989  Non-Qualified  Stock
Option Plan (the "1989 Plan"),  amended in December 1991, which provides for the
granting of options to purchase  800,000 shares of the Company's  class A common
stock to directors,  officers and employees of the Company and its subsidiaries.
Since adoption of the 1989 Plan, options have


<PAGE>

                                                                        Page 49
- --------------------------------------------------------------------------------

been granted at prices  ranging from $1.50 to $5.69 per share,  which equaled or
exceeded  the fair  market  value at date of grant.  During the fiscal year 1995
options  covering  7,000  shares were  granted at exercise  prices  ranging from
$2.625 to $3.375 per share.  During fiscal 1996 options  covering  44,700 shares
were granted at exercise prices ranging from $2.1875 to $2.625 per share. During
fiscal 1997, options covering 30,000 shares were granted at an exercise price of
$2.00 per share.  Options  issued  under the 1989 Plan vest six months  from the
grant date or 20% on the first, second, third, fourth and fifth anniversaries of
the grant date. As of June 30, 1997,  options  covering 393,000 shares have been
exercised under this plan and options covering 55,400 shares have expired.

In April  1997,  the Board of  Directors  adopted the 1997  Non-Qualified  Stock
Option  Plan  (the  "1997  Plan")  which  provides  for the  granting  of  stock
appreciation  rights ("SARs")  and/or options to purchase  200,000 shares of the
Company's  class A common  stock to  directors,  officers  and  employees of the
Company  and its  subsidiaries.  During the fiscal year 1997,  options  covering
148,500  shares were granted at exercise  prices ranging from $1.82 to $2.00 per
share. As of June 30, 1997, no options have been exercised or have expired.

On a per share basis, the holders of the class C common stock and the non-voting
class A common  stock  participate  equally  in  dividends  as  declared  by the
Company's  Board of Directors,  with the exception  that any dividends  declared
must  first be paid to the  holders  of the class A stock to the extent of 5% of
the Company's after-tax prior year net earnings.

The holders of the class A stock have a liquidation  preference equal to the par
value of $.05 per  share.  Certain  class C common  stock is  exchangeable  on a
one-for-one basis for class A stock.

Stock option  transactions  under the various stock option plans are  summarized
below:

                                                     WEIGHTED AVERAGE
                                         SHARES       EXERCISE PRICE
                                        ---------    ----------------
          Outstanding July 1, 1994      1,071,500        $   2.48
          Granted                          49,500        $   3.35
          Canceled                            700        $   2.63
          Exercised                        78,500        $   1.84
                                        ---------        
          Outstanding June 30, 1995     1,041,800        $   2.57
                                                     
          Granted                          44,700        $   2.76
          Canceled                         25,700        $   2.63
          Exercised                       141,500        $   2.09
                                        ---------        
          Outstanding June 30, 1996       919,300        $   2.65
                                                     
                                                     
          Granted                         178,500        $   1.90
          Canceled                         33,500        $   2.67
          Exercised                         5,500        $   1.50
                                        ---------        
          Outstanding June 30, 1997     1,058,800        $   2.53
                                        =========        
                                                    
As of June 30,  1997,  1996  and  1995,  exercisable  stock  totaled  1,027,140,
851,150,  and 973,125 shares and had weighted  average exercise prices of $2.51,
$2.59, and $2.47 per share, respectively.

The Company applies Accounting  Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees"  and related  interpretations  in accounting  for its
stock option plans as allowed under Statement of Financial  Accounting Standards
No. 123, "Accounting for Stock-Based  Compensation"  ("SFAS 123").  Accordingly,
the  Company  has not  recognized  compensation  expense  for its stock  options
granted  subsequent to December 15, 1994,  the effective  date of the statement.
Had compensation  expense for the Company's stock options granted in fiscal 1997
and 1996 been determined  based on the fair value at the grant dates  consistent
with the methodology of SFAS 123, such compensation expense, net of tax benefit,
would have been $134,532 and $25,493, respectively, and the pro forma net income
and income per share would have been as follows:

<PAGE>

                                                                        Page 50
- --------------------------------------------------------------------------------

                                         FISCAL YEAR ENDED JUNE 30,
                                         ---------------------------
                                           1997             1996
                                         ---------     -------------
         Pro Forma Net Income            $ 149,615     $   1,961,574            
         Pro Forma Income Per Share:
           Primary and Fully Diluted     $    0.02     $        0.30

The weighted average fair value of options granted during the fiscal years ended
June 30, 1997, and 1996 was $1.10 and $1.78,  respectively.  Because SFAS 123 is
applicable  only to options  granted in fiscal  years  beginning  subsequent  to
December 15, 1994, its pro forma effect will not be fully reflected until fiscal
2001 due to vesting requirements.

For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options'  vesting period.  The fair value of these
options  was  estimated  at the date of the grant using a  Black-Scholes  option
pricing model with the following weighted-average assumptions:

                                        FISCAL YEAR ENDED JUNE 30,
                                     --------------------------------
                                         1997               1996
                                     -------------     --------------
         Expected Volatility           0.50 - 0.55       0.52 - 0.55
         Expected Dividend Yield                --                --
         Expected Life (Term)              8 Years           8 Years
         Risk-Free Interest Rate     5.07% - 5.47%     5.18% - 5.47%

Class A and class C common stock options outstanding and exercisable at June 30,
1997, were as follows:
<TABLE>
<CAPTION>

                              OPTIONS OUTSTANDING                                             OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------       -------------------------
                                                             WEIGHTED       WEIGHTED                        WEIGHTED
                                                              AVERAGE        AVERAGE                         AVERAGE
                DATE OF       OPTION         NUMBER          REMAINING       OPTION          NUMBER          OPTION
                 GRANT         PRICE       OUTSTANDING     LIFE IN YEARS      PRICE        EXERCISABLE        PRICE
                --------      -------      -----------     -------------     -------       -----------       -------
<S>             <C>           <C>            <C>                <C>          <C>             <C>             <C>    
1985 Plan       11/07/89      $  1.65        35,000             2.35         $  1.65         35,000          $  1.65
Class A         11/07/89      $  1.50        24,000             2.35         $  1.50         24,000          $  1.50
                09/13/93      $  4.25        10,000             1.20         $  4.25         25,500          $  4.25
                10/05/94      $  4.50        17,000             7.26         $  4.50          6,800          $  4.50
                12/15/94      $  2.63        18,000             7.46         $  2.63          7,200          $  2.63
                              -------       -------             ----         -------        -------          -------
                                                                           
                          $1.50 - $4.50     104,000             3.93         $  2.50         98,500          $  2.55
                                                                         
1989 Plan       11/07/89      $  1.50             0              n/a         $  1.50              0          $  1.50
Class A         11/13/89      $  2.25        90,000             2.37         $  2.25         90,000          $  2.25
                12/06/91      $  2.63       217,600             4.43         $  2.63        217,600          $  2.63
                08/24/92      $  3.00         5,000             5.15         $  3.00          5,000          $  3.00
                02/14/94      $  5.69        20,000             1.62         $  5.69         12,000          $  5.69
                05/16/94      $  4.75         2,000             1.87         $  4.75          1,200          $  4.75
                12/15/94      $  2.63             0              n/a         $  2.63              0          $  2.63
                02/24/95      $  3.38             0              n/a         $  3.38              0          $  3.38
                09/05/95      $  2.63        16,500             8.18         $  2.63          3,300          $  2.63
                11/07/95      $  2.19         5,200             8.35         $  2.19          1,040          $  2.19
                05/24/96      $  3.06        20,000             8.90         $  3.06         20,000          $  3.06
                06/04/97      $  2.00        30,000             9.93         $  2.00         30,000          $  2.00
                              -------       -------             ----         -------        -------          -------                
                                                                                                          
                          $1.50 - $5.69     406,300             4.66         $  2.68        380,140          $  2.62

1997 Plan       06/04/97      $  1.82        98,500             9.93         $  1.82         98,500          $  1.82
Class A         06/04/97      $  2.00        50,000             9.93         $  2.00         50,000          $  2.00
                              -------       -------             ----         -------        -------          -------                

                          $1.82 - $2.00     148,500             9.93         $  1.88        148,500          $  1.88

Class C         12/06/91      $  2.63       400,000             4.43         $  2.63        400,000          $  2.63
                              -------       -------             ----         -------        -------          -------

All Plans     11/89-6/97  $1.50 - $5.69   1,058,800             5.24         $  2.53      1,027,140          $  2.51
              ==========  =====   =====   =========             ====         =======      =========          =======
</TABLE>

During the fiscal  years ended June 30,  1997,  and June 30,  1996,  the Company
purchased  141,250 and 175,475  shares of its class A common stock at an average
price of $2.39 and $2.78 per share, respectively.

At the end of September 1994, the Company and ML entered into a letter of intent
pursuant  to which ML would  purchase a  significant  ownership  interest in the
Company.  On December 7, 1994,  the  Company  and ML entered  into an  agreement
whereby the Company  issued to ML one million shares of new class of convertible
non-voting  common stock (class B) at $5.00 per share and warrant to purchase an
additional   one  million  shares  of  capital  stock  at  $6.00  per  share  in
consideration of an investment of $5 million.

On August 3,  1995,  U.S.  Global  shareholders  approved  an  amendment  to the
Company's  Restated  Articles of Incorporation  providing for an increase in the
number of  shares  of class A that the  Company  is  authorized  to issue by one
million shares.

ML could only  convert  its class B shares to class C shares  after  mutual fund
shareholders approve continuation of the investment advisory agreements with the
Company  because  the  agreements  contain  a  statutory  contractual  provision
providing  for  automatic  termination  upon  an  assignment  of the  investment
advisory  agreement.  Such  conversion  would be deemed a change in control and,
thereby, an assignment of the contract.

As part of the transaction,  Mr. Frank E. Holmes, Chairman, President and CEO of
the Company,  exchanged  72,720  shares of the Company  class C common Stock for
164,347 shares of ML common stock. In addition,  subject to certain  conditions,
including obtaining mutual fund shareholder  approvals in the future, Mr. Holmes
would exchange an additional 177,280 class C common shares for 400,653 shares of
ML,  and ML would  convert  its class B shares to class C shares,  whereupon  ML
would own more  that 50% of the  issued  and  outstanding  voting  shares of the
Company, and Mr. Holmes would then own approximately 3% of the total outstanding
common shares of ML.

U.S.  Global and ML closed a  transaction  on  December  29, 1995  covering  the
issuance of class A stock and the repurchase of convertible  non-voting  class B
common  stock and closely  related  items as  discussed  below.  Pursuant to the
agreement:  (1) ML no longer  has a right to return  its one  million  shares of
class  B  common  stock  to  the  Company  at its  original  purchase  price  of
$5,000,000;  (2) in this connection,  the Company eliminated any future interest
costs it might have borne had ML converted its  investment to debt;  and (3) the
Company  canceled  ML's  warrant and options to acquire  additional  shares thus
reducing future dilution by approximately 1.65 million shares.

In connection with the December 1995  transaction,  ML received  $2,500,000 cash
and  1,000,000  shares of class A stock in exchange for USGI  canceling (a) ML's
1,000,000  shares of USGI's class B common  shares,  (b) a warrant giving ML the
right to acquire 1,000,000 shares of USGI's voting class C common stock or class
A common  stock,  (c) ML's  option  to  convert  the  remaining  balance  of its
subordinated  debenture into  approximately  648,000 shares of USGI's  preferred
stock, and (d) other rights under the December 1994 agreements  relating to ML's
original purchase, including its right to obtain voting control of U.S. Global.

As a result of the December 1995  transaction:  (1) Messrs.  Hubert  Marleau and
Richard  Renaud,  ML's  representatives,  resigned from U.S.  Global's  Board of
Directors and Frank E. Holmes,  U.S. Global's Chief Executive Officer,  resigned
from ML's Board of Directors;  (2) U.S.  Global  committed to prepay $50,000 per
month toward the principal  balance  outstanding  on the debenture held by ML in
accordance  with  the  prepayment  clause  set  forth  in  the  U.S.   Global-ML
Subordinated Debenture Agreement ("Debenture"); (3) The Debenture was amended to
provide  that in the event that  voting  control  of U.S.  Global  changes,  the
balance  owing ML under the  Debenture  shall  become due and  payable  prior to
closing on the change in control and the  registration  statement  covering ML's
1,000,000 shares of preferred stock shall be declared effective by the SEC prior
to said closing; (4) ML transferred the assets and the management contract(s) of
ML's Small Cap Fund ("Small  Cap") from ML to USACI with all revenues  generated
by Small  Cap,  effective  January 1, 1996,  whether  the assets and  management
contracts have been transferred or not,  becoming the revenue of USACI; (5) U.S.
Global  agreed to bear up to the next Cdn  $250,000  in costs  with  respect  to
USACI;  and (6) the requirement  that Mr. Holmes exchange 177,280 shares of U.S.
Global's  class C common  stock for 400,633  shares of ML (133,551  consolidated
shares  based  upon 1 new for 3 old)  was  canceled  in its  entirety;  with the
understanding, however, that the 72,720 class C common shares held by ML and the
ML shares held by Mr. Holmes are not subject to this cancellation.


<PAGE>
 
                                                                        Page 52
- --------------------------------------------------------------------------------

As discussed in Note P, certain changes in the Company's ownership may trigger a
limitation on the amount of net operating losses ("NOLs") that could be utilized
under Section 382 of the Internal Revenue Code. The Company reviewed Section 382
and determined that no change in control/ownership  existed upon issuance of the
shares and warrants to ML therefore not  triggering a Section 382  limitation on
the Company's NOLs.


NOTE O.   RELATED PARTY TRANSACTIONS

In addition  to the  Company's  receivable  from USGIF  relating  to  investment
management, transfer agent and other fees (see Note D), the Company had $690,543
and $596,605  invested in USGIF money market mutual funds at June 30, 1997,  and
1996,  respectively.  Dividend  income  earned from these  investments  in USGIF
totaled $83,317,  $113,904, and $132,881 for the years ended June 30, 1997, 1996
and 1995, respectively.


TRANSACTIONS  WITH  ML.  During  fiscal  1996,  U.S.  Global  and  ML  closed  a
transaction covering the issuance of class A common stock ( Note N).

During the year ended June 30, 1996,  U.S.  Global  purchased 7,100 shares of ML
common  stock  through  U.S.  Global's  brokerage  account  at  Marleau,  Lemire
Securities Inc. ("MLSI"),  a subsidiary of ML, increasing U.S. Global's position
to 42,219  shares.  Prior to fiscal 1996 year end,  U.S.  Global sold its entire
position of ML common shares.

During fiscal 1996, the Company purchased 175 put options on Eurodollar  futures
("Options") for premiums of $73,938 through  Marleau,  Lemire Futures which is a
division of MLSI. Options were exchange traded and required no cash requirements
other than the initial  premiums  paid.  All Options  were  sold/expired  during
fiscal 1996 resulting in realized losses of approximately  $50,000. In addition,
the Company purchased other securities at an aggregate price of $269,847 through
MLSI from July 1995 through December 1995.

During fiscal 1996, pursuant to agreements with ML (Note N), U.S. Global filed a
post-effective amendment to the Registration Statement on Form S-3 covering ML's
offering  of 120,000  shares of U.S.  Global  stock  filed in fiscal  1995 and a
Registration Statement on Form S-3 covering ML's offering of 1,000,000 shares of
U.S.  Global stock,  which  offerings  were completed  during fiscal 1996.  USGI
incurred  approximately  $21,000 in fiscal 1996 in costs  associated  with these
offerings.

Further,  during this period,  ML sold 18,225  shares of class A common stock to
STFC at the  direction  of the  beneficial  owners  of  various  STFC  custodial
retirement  accounts,  and 6,775 shares for $17,784 to U.S. Global, which shares
are included in treasury stock as of June 30, 1996.

As  of  June  30,  1996,  U.S.  Global  had  accrued  approximately  $70,000  in
subordinated debenture interest payable to ML. Additionally,  in connection with
the sale of the Notes  discussed  in Note F, U.S.  Global  repaid  approximately
$2,700,000  in principal on the  subordinated  debenture  during the year ending
June 30,  1996.  U.S.  Global  also paid an  additional  $300,000  in  principal
payments on the subordinated debenture during the year ended June 30, 1996.

There were additional related party transactions involving ML related to a joint
venture to market  mutual  funds in Canada (see Note H) and the purchase of U.S.
Government securities (see Note F).


OTHER TRANSACTIONS. During fiscal 1996, Mr. Jerold Rubinstein, a director of the
Company,  exercised options covering 25,000 shares at $1.50 per share and 25,000
shares at $2.25 per share.  U.S.  Global  purchased  the shares  issued from the
exercise of Mr.  Rubinstein's  stock  options  for $3.375 per share,  the market
price on the day of exercise,  which shares are included in treasury stock as of
June 30,  1996.  Additionally,  during  fiscal 1996,  Mr. John Budden,  a former
director of the Company who resigned during the fiscal 1996,  exercised  options
covering 25,000 shares at $1.50 per share,  25,000 shares at $2.25 per share and
40,000 shares at $2.625 per share.


NOTE P.  INCOME TAXES

The differences in income taxes attributable to continuing operations determined
by applying the U.S. federal  statutory rate of 34% and the Company's  effective
tax rate are summarized as follows:


<PAGE>

                                                                        Page 53
- --------------------------------------------------------------------------------

                                                YEAR ENDED JUNE 30,
                                   ------------------------------------------- 
                                       1997            1996            1995
                                   -----------     -----------     ----------- 
Tax expense at statutory rate      $   209,483     $ 1,020,198     $(2,004,592)
Exercise of non-qualified stock
  options treated as equity for
  financial statements                  (2,412)        (61,487)        (59,885)
Non-deductible membership dues          13,713          14,112          13,825
Non-deductible meals &
  entertainment                         25,419          23,090          17,668
Valuation allowance                     66,458            --              --
Other                                   19,315          17,604          50,140
                                   -----------     -----------     ----------- 
                                   $   331,976     $ 1,013,517     $(1,982,844)
                                   ===========     ===========     ===========

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying amount of assets and  liabilities  for financial  reporting
purposes and the amounts used for income tax purposes.  The tax effects of these
temporary  differences  that give rise to the deferred  tax asset are  presented
below:

                                         JUNE 30,       JUNE 30,       JUNE 30,
                                          1997           1996           1995
                                      -----------    -----------    -----------
Book/tax differences in the 
balance sheet:
  Trading securities                  $    55,917    $      --      $    33,995
  Accumulated depreciation                 93,113        108,744        106,100
  Accrued expenses                         47,323         14,800         29,776
  Available-for-sale
     securities                            91,212           --             --
  Reduction in carrying
     value of joint venture                  --          210,630           --
  Annuity obligations                      55,053         57,236         59,272
  Net unrealized holding
     gain (affiliated)                     10,237         76,823           --
  Net unrealized holding gain                --          294,993        120,914
                                      -----------    -----------    -----------
                                          352,855        763,226        350,057
Tax carryovers:
  Net operating loss
     ("NOL") carryover                    855,211        957,154      2,044,251
  Contributions carryover                  57,709         66,459         44,635
  Investment credit carryover                --           34,472         34,472
  Minimum tax credits                     114,270        117,786         56,786
                                      -----------    -----------    -----------
                                        1,027,190      1,175,871      2,180,144
                                      -----------    -----------    -----------
Total gross deferred tax asset          1,380,045      1,939,097      2,530,201
                                      -----------    -----------    -----------
Affiliated Investment                    (164,038)      (153,032)          --
Trading Securities                           --          (34,302)          --
Available-for-sale securities                --         (294,993)      (120,914)
Net unrealized holding loss               (91,212)          --             --
                                      -----------    -----------    -----------
Total gross deferred tax
  liability                              (255,250)      (482,327)      (120,914)
                                      -----------    -----------    -----------
Net deferred tax asset                $ 1,124,795    $ 1,456,770    $ 2,409,287
                                      ===========    ===========    ===========


For  federal  income tax  purposes  at June 30,  1997,  the  Company has NOLs of
approximately   $2,500,000   which  will  expire  in  fiscal  2010,   charitable
contribution  carryovers  of  approximately  $264,000  expiring  1999-2001,  and
minimum tax credits of $114,270 with indefinite expirations.  If certain changes
in the Company's  ownership should occur, there could be an annual limitation on
the amount of NOLs that could be utilized.

A  valuation  allowance  is  provided  when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management has included
a valuation allowance of $66,458 at June 30, 1997, providing for the utilization
of charitable  contributions and investment tax credit carryovers against future
taxable income.


NOTE Q.    LITIGATION ACCRUAL

On June 17,  1994,  Gerald C. Letch sued the  Company  in state  district  court
located in San  Antonio,  Texas for breach of  contract.  Mr. Letch asked for an
unspecified  amount of damages  based upon an alleged oral promise by a deceased
Company  officer to pay a finder's fee for  introducing  certain  parties to the
Company  leading to the  organization  of  Pauze'/Swanson  United Services Funds
("PSUSF").  During  August 1994 Mr. Letch amended his complaint to include PSUSF
and


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                                                                        Page 54
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allegations of fraud and conspiracy  between USGI and PSUSF.  During June 1995 a
summary judgment was rendered in favor of PSUSF, which did not exist at the time
the alleged cause of action arose.

On November 21,  1995, a judgment was entered in favor of Letch.  While the jury
verdict found that there was no fraud,  conspiracy or malice,  the jury did find
that:  (1) the Company had an oral  agreement  to pay Letch a fee equal to 1% of
assets  existing in the  particular  fund after it had been in existence for one
year;  (2)  $187,000  is the amount of damages  due Letch for breach of the oral
agreement (plus an additional  $16,137 for prejudgment  interest);  and (3) that
Letch is entitled to 50% of said  damages  ($93,500)  as  reasonable  attorney's
fees. Total damages therefore aggregate $296,637.

The Company is currently  pursuing an appeal and has posted a bond in connection
with  perfecting  the  appeal.  The bond is secured by a letter of credit in the
amount of $333,169,  which,  in turn, is secured by restricted cash of $333,169.
The Company has no balance outstanding on this letter of credit and has no plans
to draw upon it at any time in the future as the  letter of credit was  obtained
solely to perfect the appeal.

The Company accrued  approximately  $100,000  (management's best estimate of the
fees and expenses  necessary to fund an appeal) and  $300,000  (the  approximate
amount of the judgment)  which were both recorded in the Company's  Consolidated
Statement of Operations in fiscal 1996. The remaining balances at June 30, 1997,
are approximately $50,000 and $300,000, respectively.



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