UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K




x
            Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934 for the fiscal year ended December 31,
  2009.


or


 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934 for the transition period from
                          
      to
                          .





Commission
file number: 001-32834




United
States Short Oil Fund, LP


(Exact
name of registrant as specified in its charter)




Delaware
              
              20-2830691(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)




1320
Harbor Bay Parkway, Suite 145


Alameda,
California 94502


(Address
of principal executive offices) (Zip code)




(510)
522-9600


(Registrant’s
telephone number, including area code)




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





Units
              NYSE
      Arca, Inc.(Title
      of each class)
              (Name
      of exchange on which
registered)




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




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    ̈
Yes    x No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.    ̈
Yes    x No





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   ̈
Yes     ̈ No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
      accelerated filer  ̈
              
              Accelerated
      filer ̈Non-accelerated
      filer   x
              
              Smaller
      reporting company  ̈(Do
      not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


 ̈
Yes    x No




The
aggregate market value of the registrant’s units held by non-affiliates of the
registrant as of June 30, 2009 was: $0.





The
registrant had 300,000 outstanding units as of March 29, 2010.




DOCUMENTS
INCORPORATED BY REFERENCE:


None.








UNITED
STATES SHORT OIL FUND, LP





Table
of Contents





PagePart
      I.Item
      1. Business.
                      
                      1Item
      1A. Risk Factors.
                      
                      49Item
      1B. Unresolved Staff Comments.
                      
                      65Item
      2. Properties.
                      
                      65Item
      3. Legal Proceedings.
                      
                      65Item
      4. Reserved
                      
                      65Part
      II.Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities.
                      
                      65Item
      6. Selected Financial Data.
                      
                      66Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
                      
                      66Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk.
                      
                      80Item
      8. Financial Statements and Supplementary Data.
                      
                      82Item
      9. Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure.
                      
                      116Item
      9A. Controls and Procedures.
                      
                      116Item
      9B. Other Information.
                      
                      116Part
      III.Item
      10. Directors, Executive Officers and Corporate
      Governance.
                      
                      116Item
      11. Executive Compensation.
                      
                      122Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters.
                      
                      122Item
      13. Certain Relationships and Related Transactions, and Director
      Independence.
                      
                      123Item
      14. Principal Accountant Fees and Services.
                      
                      123Part
      IV.Item
      15. Exhibits and Financial Statement Schedules.
                      
                      124Exhibit
      Index.
                      
                      124Signatures
                      
                      125










Part
I





Item 1.   Business.




What
is DNO?


The
United States Short Oil Fund, LP (“USSO”) is a Delaware limited
partnership organized on June 30, 2008. USSO maintains its main business office
at 1320 Harbor Bay Parkway, Suite 145, Alameda, California 94502. USSO is a
commodity pool that issues limited partnership interests (“units”) traded on the
NYSE Arca, Inc. (the “NYSE Arca”). It operates pursuant to the terms of the
Amended and Restated Agreement of Limited Partnership dated as of May 18,
2009 (the “LP Agreement”), as amended from time to time, which grants full
management control to United States Commodity Funds LLC (the “General
Partner”).





The
investment objective of USSO is for the changes in percentage terms of its
units’ net asset value (“NAV”) to inversely reflect the changes in percentage
terms of the spot price of light, sweet crude oil delivered to Cushing,
Oklahoma, as measured by the changes in the price of the futures contract for
light, sweet crude oil traded on the New York Mercantile Exchange (the
“NYMEX”), less USSO’s expenses. USSO began trading on September 24,
2009. The General Partner is the general partner of USSO and is responsible
for the management of USSO.





Who
is the General Partner?





The
General Partner is a single member limited liability company that was formed in
the state of Delaware on May 10, 2005. Prior to June 13, 2008, the General
Partner was known as Victoria Bay Asset Management, LLC. It maintains its main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. The General Partner is a wholly-owned subsidiary of Wainwright Holdings,
Inc., a Delaware corporation (“Wainwright”). Mr. Nicholas Gerber (discussed
below) controls Wainwright by virtue of his ownership of Wainwright’s shares.
Wainwright is a holding company.  Wainwright previously owned an
insurance company organized under Bermuda law, which has been liquidated, and a
registered investment adviser firm named Ameristock Corporation, which has been
distributed to Wainwright shareholders.  The General Partner is a
member of the National Futures Association (the “NFA”) and registered as a
commodity pool operator (“CPO”) with the Commodity Futures Trading Commission
(the “CFTC”) on December 1, 2005.





On May
12, 2005, the General Partner formed the United States Oil Fund, LP (“USOF”),
another limited partnership that is a commodity pool
and issues units traded on the NYSE Arca. The investment
objective of USOF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet
crude oil delivered to Cushing, Oklahoma, as measured by the changes in the
price of the futures contract for light, sweet crude oil traded on the NYMEX,
less USOF’s expenses. USOF’s units began trading on April 10, 2006. The General
Partner is the general partner of USOF and is responsible for the management of
USOF.





On
September 11, 2006, the General Partner formed the United States Natural Gas
Fund, LP (“USNG”), another limited partnership that is a commodity pool
and issues units traded on the NYSE Arca. The investment
objective of USNG is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of natural gas
delivered at the Henry Hub, Louisiana, as measured by the changes in the price
of the futures contract on natural gas traded on the NYMEX, less USNG’s
expenses. USNG’s units began trading on April 18, 2007. The General Partner is
the general partner of USNG and is responsible for the management of
USNG.




On June
27, 2007, the General Partner formed the United States 12 Month Oil Fund, LP
(“US12OF”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of US12OF is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as
measured by the changes in the average of the prices of 12 futures contracts on
light, sweet crude oil traded on the NYMEX, consisting of the near month
contract to expire and the contracts for the following 11 months, for a total of
12 consecutive months’ contracts, less US12OF’s expenses. US12OF’s units began
trading on December 6, 2007. The General Partner is the general partner of
US12OF and is responsible for the management of US12OF.




On April
12, 2007, the General Partner formed the United States Gasoline Fund, LP
(“UGA”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of UGA is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the spot price of unleaded gasoline delivered to the New York harbor, as
measured by the changes in the price of the futures contract on gasoline traded
on the NYMEX, less UGA’s expenses. UGA’s units began trading on February 26,
2008. The General Partner is the general partner of UGA and is responsible for
the management of UGA.


1





On April
13, 2007, the General Partner formed the United States Heating Oil Fund, LP
(“USHO”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of USHO is for the
changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the spot price of heating oil (also known as No. 2 fuel oil)
delivered to the New York harbor, as measured by the changes in the price of the
futures contract on heating oil traded on the NYMEX, less USHO’s expenses.
USHO’s units began trading on April 9, 2008. The General Partner is the
general partner of USHO and is responsible for the management of
USHO.





On June
27, 2007, the General Partner formed the United States 12 Month Natural Gas
Fund, LP (“US12NG”), also a limited partnership that is a commodity pool and
issues units traded on the NYSE Arca. The investment objective of US12NG is for
the changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the spot price of natural gas delivered at the Henry
Hub, Louisiana, as measured by the changes in the average of the prices of 12
futures contracts on natural gas traded on the NYMEX, consisting of the
near month contract to expire and the contracts for the following 11 months, for
a total of 12 consecutive months’ contracts, less US12NG’s
expenses.  US12NG’s units began trading on November 18, 2009. The
General Partner is the general partner of US12NG and is responsible for the
management of US12NG.





USOF,
USNG, US12OF, UGA, USHO and US12NG are collectively referred to herein as the
“Related Public Funds”.  For more information about each of the
Related Public Funds, investors in USSO may call 1-800-920-0259 or go online to
www.unitedstatescommodityfunds.com.





The
General Partner has filed a registration statement for two other exchange traded
security funds, the United States Brent Oil Fund, LP (“USBO”) and the United
States Commodity Index Funds Trust (“USCI”). The investment objective of USBO
will be for the daily changes in percentage terms of its units’ NAV to reflect
the daily changes in percentage terms of the spot price of Brent crude oil, as
measured by the changes in the price of the futures contract on Brent crude oil
traded on the ICE Futures, less USBO’s expenses.  The investment
objective of USCI will be for the daily changes in percentage terms of its
units’ NAV to reflect the daily changes in percentage terms of the SummerHaven
Dynamic Commodity Index (“SDCI”) Total Return, less USCI’s
expenses.





The
General Partner is required to evaluate the credit risk of USSO to the futures
commission merchant, oversee the purchase and sale of USSO’s units by certain
authorized purchasers (“Authorized Purchasers”), review daily positions and
margin requirements of USSO and manage USSO’s investments. The General Partner
also pays the fees of ALPS Distributors, Inc., which acts as the marketing agent
for USSO (the “Marketing Agent”), and Brown Brothers Harriman & Co.
(“BBH&Co.”), which acts as the administrator (the “Administrator”)
and the custodian (the “Custodian”) for USSO.




Limited
partners have no right to elect the General Partner on an annual or any other
continuing basis. If the General Partner voluntarily withdraws, however, the
holders of a majority of USSO’s outstanding units (excluding for purposes of
such determination units owned, if any, by the withdrawing General Partner
and its affiliates) may elect its successor. The General Partner may not be
removed as general partner except upon approval by the affirmative vote of the
holders of at least 66 and 2/3 percent of USSO’s outstanding units (excluding
units owned, if any, by the General Partner and its affiliates), subject to
the satisfaction of certain conditions set forth in the LP
Agreement.





The
business and affairs of the General Partner are managed by a board of directors
(the “Board”), which is comprised of four management directors, some of whom are
also its executive officers (the “Management Directors”), and three independent
directors who meet the independent director requirements established by the NYSE
Arca and the Securities Exchange Act of 1934, as amended ((the “Exchange Act”).
Notwithstanding the foregoing, the Management Directors have the authority to
manage the General Partner pursuant to its limited liability company agreement,
as amended from time to time.  Through its Management Directors, the
General Partner manages the day-to-day operations of USSO. The Board has an
audit committee which is made up of the three independent directors (Peter M.
Robinson, Gordon L. Ellis and Malcolm R. Fobes III). For additional information
relating to the audit committee, please see “Item 10. Directors, Executive
Officers and Corporate Governance – Audit Committee” in this annual report on
Form 10-K.


2





How
Does USSO Operate?





The net
assets of USSO consist primarily of investments in short positions in futures
contracts for light, sweet crude oil, but may also consist of other types
of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels
that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges
(collectively, “Futures Contracts”).  USSO may also take short
positions in other crude oil-related investments such as cash-settled options on
Futures Contracts, forward contracts for crude oil, and over-the-counter
transactions that are based on the price of crude oil and other petroleum-based
fuels, Futures Contracts and indices based on the foregoing (collectively,
“Other Crude Oil-Related Investments”). For convenience and unless otherwise
specified, Futures Contracts and Other Crude Oil-Related Investments
collectively are referred to as “Crude Oil Interests” in this annual report on
Form 10-K.  The General Partner is authorized by USSO in its sole
judgment to employ, establish the terms of employment for, and terminate
commodity trading advisors or futures commission merchants.





USSO
takes short positions in Crude Oil Interests to the fullest extent possible
without being leveraged or unable to satisfy its current or potential margin or
collateral obligations with respect to its investments in short positions in
Futures Contracts and Other Crude Oil-Related Investments. In pursuing this
objective, the primary focus of the General Partner will be taking short
positions in Futures Contracts and the management of investments in short-term
obligations of the United States of two years or less (“Treasuries”), cash
and/or cash equivalents for margining purposes and as collateral.





The
investment objective of USSO is to have the changes in percentage terms of its
units’ NAV inversely reflect the changes in percentage terms of the spot price
of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the
changes in the price of the futures contract on light, sweet crude oil as traded
on the NYMEX that is the near month contract to expire, except when the near
month contract is within two weeks of expiration, in which case the futures
contract will be the next month contract to expire (the “Benchmark Futures
Contract”), less USSO’s expenses. It is not the intent of USSO to be operated in
a fashion such that its NAV will equal, in dollar terms, the dollar price of
spot crude oil or any particular futures contract based on crude oil. USSO may
invest in interests other than the Benchmark Futures Contract to comply with
accountability levels and position limits.





USSO
seeks to achieve its investment objective by maintaining “short” positions in
the Futures Contracts and Other Crude-Oil Related Investments in which it
invests. A short position is one in which USSO has sold the Futures Contract or
Other Crude-Oil Related Investment and must buy it back or otherwise close out
the position in the future. As a result, a drop in the market value of the Crude
Oil Interest would lead to a potential gain for USSO, while an increase in the
market value of the Crude Oil Interest would lead to a potential loss for USSO.
Typically a short position will produce a result that is the inverse of buying
the Futures Contract or Other Crude-Oil Related Investment (an approach referred
to as being “long” the investment). The General Partner expects the performance
of USSO to generally be inverse to the performance of USOF, which seeks to have
the changes in percentage terms of its units NAV track the changes in percentage
terms in the spot price of light, sweet crude oil as traded in the United
States.





As a
specific benchmark, the General Partner endeavors to place USSO’s trades in
Futures Contracts and Other Crude Oil-Related Investments and otherwise manage
USSO’s investments so that A will be within plus/minus 10 percent of B,
where:





·
            A
      is the average daily change in USSO’s NAV for any period of 30 successive
      valuation days;i.e., any NYSE Arca trading day as of which USSO calculates its
      NAV, and


·
            B
      is the inverse of the average daily change in the price of the Benchmark
      Futures Contract over the same
period.





An
investment in the units is intended to allow both retail and institutional
investors to easily gain inverse or negative exposure to the crude oil market in
a cost-effective manner. The units are also expected to provide additional means
for diversifying an investor’s investments or hedging exposure to changes in
crude oil prices.


3


The
Benchmark Futures Contract is changed each month from the near month contract to
the next month contract over a four-day period.  The Benchmark Futures
Contract changes starting at the end of the day on the date two weeks prior to
expiration of the near month contract for that month. During the first three
days of the period, the applicable value of the Benchmark Futures Contract is
based on a combination of the near month contract and the next month contract as
follows: (1) day 1 consists of 75% of the then near month contract’s price
plus 25% of the price of the next month contract, divided by 75% of the near
month contract’s prior day’s price plus 25% of the price of the next month
contract,  (2) day 2 consists of 50% of the then near month contract’s
price plus 50% of the price of the next month contract, divided by 50% of the
near month contract’s prior day’s price plus 50% of the price of the next month
contract,  and (3) day 3 consists of 25% of the then near month
contract’s price plus 75% of the price of the next month contract, divided by
25% of the near month contract’s prior day’s price plus 75% of the price of the
next month contract.  On day 4, the Benchmark Futures Contract is the
next month contract to expire at that time and that contract remains the
Benchmark Futures Contract until the beginning of the following month’s change
in the Benchmark Futures Contract over a four-day period.





On each
day during the four-day period, the General Partner “rolls” USSO’s positions in
oil investments by closing, or selling, a percentage of USSO’s positions in
Crude Oil Interests and reinvesting the proceeds from closing those positions in
new Crude Oil Interests  that reflect the change in the Benchmark
Futures Contract.





The
anticipated dates that the monthly four-day roll period will commence for 2010
are posted on USSO’s website at www.unitedstatesshortoilfund.com, and will be
subject to change without notice.





The
General Partner believes that market arbitrage opportunities cause daily changes
in USSO’s unit price on the NYSE Arca to closely track daily changes in USSO’s
NAV per unit.  The General Partner further believes that changes in
USSO’s NAV in percentage terms will closely track the inverse of the changes in
percentage terms in the Benchmark Futures Contract in, less USSO’s
expenses.





The
expected correlation of the price of USSO’s units, USSO’s NAV and the price of
the Benchmark Futures Contract is illustrated in the following
diagram:











The
General Partner employs a “neutral” investment strategy intended to inversely
track changes in the price of the Benchmark Futures Contract regardless of
whether the price goes up or goes down. USSO’s “neutral” investment strategy is
designed to permit investors generally to purchase and sell USSO’s units for the
purpose of taking short positions indirectly in crude oil in a cost-effective
manner, and/or to permit participants in the crude oil or other industries to
hedge the risk of losses in their crude oil-related transactions. Accordingly,
depending on the investment objective of an individual investor, the risks
generally associated with taking short positions in crude oil and/or the risks
involved in hedging may exist. In addition, an investment in USSO involves the
risk that the changes in the price of USSO’s units will not accurately track the
inverse of changes in the Benchmark Futures Contract.


4





USSO’s
total portfolio composition is disclosed on its website each day that the NYSE
Arca is open for trading.  The website disclosure of portfolio
holdings is made daily and includes, as applicable, the name and value of each
Crude Oil Interest, the specific types of Other Crude Oil-Related Investments
and characteristics of such Other Crude Oil-Related Investments, Treasuries, and
amount of the cash and/or cash equivalents held in USSO’s portfolio. USSO’s
website is publicly accessible at no charge. USSO’s assets are held in
segregated accounts pursuant to the Commodity Exchange Act (the “CEA”) and CFTC
regulations.





The units
issued by USSO may only be purchased by Authorized Purchasers and only in blocks
of 100,000 units called Creation Baskets. The amount of the purchase payment for
a Creation Basket is equal to the aggregate NAV of units in the Creation Basket.
Similarly, only Authorized Purchasers may redeem units and only in blocks of
100,000 units called Redemption Baskets. The purchase price for Creation
Baskets, and the redemption price for Redemption Baskets is the actual NAV of
the units purchased or redeemed calculated at the end of the business day when
notice for a purchase or redemption is received by USSO. In addition, Authorized
Purchasers pay USSO a  $1,000 fee for each order placed to create one
or more Creation Baskets or redeem one or more Redemption
Baskets.  The NYSE Arca publishes an approximate NAV intra-day based
on the prior day’s NAV and the current price of the Benchmark Futures Contract,
but the basket price is determined based on the actual NAV at the end of the
day.





While
USSO issues units only in Creation Baskets, units may also be
purchased and sold in much smaller increments on the NYSE Arca. These
transactions, however, are effected at the bid and ask prices established
by specialist firm(s). Like any listed security, units can be purchased and sold
at any time a secondary market is open.





What
is USSO’s Investment Strategy?





In
managing USSO’s assets, the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs a
quantitative methodology whereby each time a Creation Basket is sold, the
General Partner takes corresponding short positions in Crude Oil Interests, such
as the Benchmark Futures Contract, that have an aggregate market value that
approximates the amount of Treasuries and/or cash received upon the issuance of
the Creation Basket.





As an
example, assume that a Creation Basket is sold by USSO, and that USSO’s closing
NAV per unit is $50.00. In that case, USSO would receive $5,000,000 in proceeds
from the sale of the Creation Basket ($50.00 NAV per unit multiplied by 100,000
units, and excluding the Creation Basket fee of $1,000). If one were to assume
further that the General Partner wants to invest the entire proceeds from the
Creation Basket in short positions in the Benchmark Futures Contract and that
the market value of the Benchmark Futures Contract is $141,370, USSO would be
unable to sell the exact number of Benchmark Futures Contracts with an aggregate
market value equal to $5,000,000. Instead, USSO would be able to sell 35
Benchmark Futures Contracts with an aggregate market value of $4,947,750.
Assuming a margin requirement equal to 10% of the value of the Benchmark Futures
Contract, USSO would be required to deposit $494,775 in Treasuries and cash with
the futures commission merchant through which the Benchmark Futures Contracts
were sold. The remainder of the proceeds from the sale of the Creation Basket
would remain invested in cash, cash equivalents, and Treasuries as determined by
the General Partner from time to time based on factors such as potential calls
for margin or anticipated redemptions.




The
specific Futures Contracts sold depends on various factors, including a judgment
by the General Partner as to the appropriate diversification of USSO’s
investments in futures contracts with respect to the month of expiration, and
the prevailing price volatility of particular contracts. While the General
Partner has made significant investments in NYMEX futures contracts, as USSO
reaches certain accountability levels or position limits on the NYMEX, or for
other reasons, it may invest in Futures Contracts traded on other exchanges or
may invest in Other Crude Oil-Related Investments such as contracts in the
“over-the-counter” market.


5





The
General Partner does not anticipate letting its Futures Contracts expire and
making delivery of the underlying crude oil. Instead, the General Partner closes
existing positions e.g., when it changes the
Benchmark Futures Contract or it otherwise determines it would be appropriate to
do so and reinvests the proceeds in new Futures Contracts. Positions may also be
closed out to meet orders for Redemption Baskets and in such case proceeds for
such baskets will not be reinvested.




By
remaining invested as fully as possible in short positions in Futures Contracts
or Other Crude Oil-Related Investments, the General Partner believes that the
changes in percentage terms in USSO’s NAV will continue to closely inversely
track the changes in percentage terms in the prices of the Futures Contracts in
which USSO invests. The General Partner believes that certain arbitrage
opportunities result in the price of the units traded on the NYSE Arca closely
tracking the NAV of USSO. Additionally, Futures Contracts traded on the NYMEX
have closely tracked the spot price of the underlying oil. Based on these
expected interrelationships, the General Partner believes that the changes in
the price of USSO’s units as traded on the NYSE Arca have closely tracked and
will continue to closely track the inverse of the changes in the spot price of
light, sweet crude oil.  For performance data relating to USSO’s
ability to track its benchmark, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Tracking USSO’s
Benchmark”.





What
are Futures Contracts?





Futures
contracts are agreements between two parties. One party agrees to buy a
commodity such as crude oil from the other party at a later date at a price and
quantity agreed upon when the contract is made. Futures contracts are traded on
futures exchanges, including the NYMEX. For example, crude oil Futures Contracts
are traded on the NYMEX in units of 1,000 barrels. The crude oil Futures
Contracts traded on the NYMEX are priced by floor brokers and other exchange
members both through an “open outcry” of offers to purchase or sell the
contracts and through an electronic, screen-based system that determines the
price by matching electronically offers to purchase and sell.





To
achieve its investment objective, USSO needs to maintain “short” positions in
the Futures Contracts and Other Crude Oil-Related Investments in which it
invests. A short position is one in which USSO has sold the Futures Contract or
Other Crude-Oil Related Investment and must buy it back or otherwise close out
the position in the future. As a result, a drop in the market value of the
investment would lead to a potential gain for USSO, while an increase in the
market value of the investment would lead to a potential loss for USSO.
Typically a short position will produce a result that is the inverse of buying
the Futures Contract or Other Crude-Oil Related Investment (an approach referred
to as being “long” the investment).





Certain
typical and significant characteristics of Futures Contracts are discussed
below. Additional risks of investing in or taking short positions in Futures
Contracts are included in “What are the Risk Factors Involved with an Investment
in USSO?”





Impact of Accountability Levels,
Position Limits and Price Fluctuation Limits.  Futures
contracts include typical and significant characteristics. Most significantly,
the CFTC and U.S. designated contract markets such as the NYMEX have established
accountability levels and position limits on the maximum net long or net short
Futures Contracts in commodity interests that any person or group of persons
under common trading control (other than as a hedge, which an investment by USSO
is not) may hold, own or control. The net position is the difference between an
individual or firm’s open long contracts and open short contracts in any one
commodity. In addition, most U.S. futures exchanges, such as the NYMEX, limit
the daily price fluctuation for futures contracts. Currently, the ICE Futures
imposes position and accountability limits that are similar to those imposed by
the NYMEX but does not limit the maximum daily price fluctuation.





The
accountability levels for the Benchmark Futures Contract and other Futures
Contracts traded on the NYMEX are not a fixed ceiling, but rather a threshold
above which the NYMEX may exercise greater scrutiny and control over an
investor’s positions. The current accountability level for any one month in the
Benchmark Futures Contract is 10,000 net contracts.  In addition, the
NYMEX imposes an accountability level for all months of 20,000 net futures
contracts for investments in futures contracts for light, sweet crude oil. If
USSO and the Related Public Funds exceed these accountability levels for
investments in the futures contract for light, sweet crude oil, the NYMEX will
monitor USSO’s and the Related Public Funds’ exposure and ask for further
information on their activities including the total size of all positions,
investment and trading strategy, and the extent of liquidity resources of USSO
and the Related Public Funds. If deemed necessary by the NYMEX, it could also
order USSO and the Related Public Funds to reduce their aggregate net position
back to the accountability level. In addition, the ICE Futures maintains the
same accountability levels, position limits and monitoring authority for its
light, sweet crude oil contract as the NYMEX.  As of December 31,
2009, USSO and the Related Public Funds held short positions in 166 NYMEX Crude
Oil Futures CL contracts.


6





If the
NYMEX or the ICE Futures orders USSO to reduce its position back to the
accountability level, or to an accountability level that the NYMEX or the ICE
Futures deems appropriate for USSO, such an accountability level may impact the
mix of short positions in Crude Oil Interests made by USSO. To illustrate,
assume that the Benchmark Futures Contract and the unit price of USSO are each
$10, and that the NYMEX has determined that USSO may not be short more than
10,000 Benchmark Futures Contracts.  In such case, USSO could take
short positions up to $1 billion of its daily net assets in the Benchmark
Futures Contract (i.e.,
$10 per contract multiplied by 1,000 (a Benchmark Futures Contract is a contract
for 1,000 barrels of oil multiplied by 10,000 contracts)) before reaching the
accountability level imposed by the NYMEX. Once the daily net assets of the
portfolio exceed $1 billion in the Benchmark Futures Contract, the portfolio may
not be able to take any further short positions in the Benchmark Futures
Contract. If the NYMEX were to impose limits at the $1 billion level (or another
level), USSO anticipates that it would invest the majority of its assets above
that level in a mix of other Futures Contracts or Other Crude Oil-Related
Investments in order to meet its investment objective.





See
“Risk Factors—Risks Associated With Investing Directly or Indirectly in Crude
Oil—Regulation of the commodity interests and energy markets is extensive and
constantly changing; future regulatory developments are impossible to predict
but may significantly and adversely affect USSO.”





In
addition to accountability levels, the NYMEX and the ICE Futures impose position
limits on contracts held in the last few days of trading in the near month
contract to expire. It is unlikely that USSO will run up against such position
limits because USSO’s investment strategy is to close out its positions and
“roll” from the near month contract to expire to the next month contract
beginning two weeks from expiration of the contract.





U.S.
futures exchanges, including the NYMEX, also limit the amount of price
fluctuation for Futures Contracts. For example, the NYMEX imposes a $10.00 per
barrel ($10,000 per contract) price fluctuation limit for Futures Contracts.
This limit is initially based off the previous trading day’s settlement price.
If any Futures Contract is traded, bid, or offered at the limit for five
minutes, trading is halted for five minutes. When trading resumes it begins at
the point where the limit was imposed and the limit is reset to be $10.00 per
barrel in either direction of that point. If another halt were triggered, the
market would continue to be expanded by $10.00 per barrel in either direction
after each successive five-minute trading halt. There is no maximum price
fluctuation limit during any one trading session.





U.S.
futures exchanges, including the NYMEX, currently do not implement fixed
position limits for Futures Contracts held outside of the last few days of
trading in the near month contract to expire.  However, on January 26,
2010, the CFTC published a proposed rule that, if implemented, would set fixed
position limits on energy Futures Contracts, including the NYMEX Light Sweet
crude oil futures contract, NYMEX RBOB gasoline futures contract, NYMEX Henry
Hub natural gas futures contract and NYMEX New York Harbor No. 2 heating oil
futures contract, along with any contract based upon these contracts. The
proposed position limits would be set as a percentage of the open interest in
these contracts for the spot month, any single month, and all months
combined.  Additionally, the proposed rule would aggregate positions
in the enumerated contracts and those based upon such contracts, including
contracts listed on separate exchanges.  This proposal is currently
undergoing a 90-day public comment period.





USSO
anticipates that to the extent it takes short positions in Futures Contracts
other than light, sweet crude oil contracts (such as Futures Contracts for Brent
crude oil, natural gas, heating oil, and gasoline) and Other Crude Oil-Related
Investments, it will enter into various non-exchange-traded derivative contracts
to hedge the short-term price movements of such Futures Contracts and Other
Crude Oil-Related Investments against the current Benchmark Futures
Contracts.


7





Examples
of the position and price limits imposed are as follows:




Futures
      Contract
                        
                        Position
      Accountability
                          Levels
      and Limits
                        
                        Maximum
      Daily
                          Price
      FluctuationNYMEX
      Light, Sweet Crude Oil
                          (physically
    settled)
                        
                        Any
      one month: 10,000 net futures / all months: 20,000 net futures, but not to
      exceed 3,000 contracts in the last three days of trading in the spot
      month.
                        
                        $10.00
      per barrel ($10,000 per contract) for all months. If any contract is
      traded, bid, or offered at the limit for five minutes, trading is halted
      for five minutes. When trading resumes, the limit is expanded by $10.00
      per barrel in either direction. If another halt were triggered, the market
      would continue to be expanded by $10.00 per barrel in either direction
      after each successive five-minute trading halt. There will be no maximum
      price fluctuation limits during any one trading session.NYMEX
      Light, Sweet Crude Oil
                          (financially
    settled)
                        
                        Any
      one month: 20,000 net futures / all months: 20,000 net futures, but not to
      exceed 2,000 contracts in the last three days of trading in the spot
      month.
                        
                        There
      is no maximum daily price fluctuation limit.ICE
      Brent Crude Futures
                          (physically settled)
                        
                        There
      are no position limits.
                        
                        There
      is no maximum daily price fluctuation limit.ICE
      West Texas Intermediate (“WTI”)Crude Futures(financially
      settled)
                        
                        Any
      one month: 10,000 net futures / all months: 20,000 net futures, but not to
      exceed 3,000 contracts in the last three days of trading in the spot
      month.
                        
                        There
      is no maximum daily price fluctuation.NYMEX
      Heating Oil
                          (physically
      settled)
                        
                        Any
      one month: 5,000 net futures / all months: 7,000 net futures, but not to
      exceed 1,000 contracts in the last three days of trading in the spot
      month.
                        
                        $0.25
      per gallon ($10,500 per contract) for all months. If any contract is
      traded, bid, or offered at the limit for five minutes, trading is halted
      for five minutes. When trading resumes, the limit is expanded by $0.25 per
      gallon in either direction. If another halt were triggered, the market
      would continue to be expanded by $0.25 per gallon in either direction
      after each successive five-minute trading halt. There will be no maximum
      price fluctuation limits during any one trading session.NYMEX
      Gasoline
                          (physically
    settled)
                        
                        Any
      one month: 5,000 net futures / all months: 7,000 net futures, but not to
      exceed 1,000 contracts in the last three days of trading in the spot
      month.
                        
                        $0.25
      per gallon ($10,500 per contract) for all months. If any contract is
      traded, bid, or offered at the limit for five minutes, trading is halted
      for five minutes. When trading resumes, the limit is expanded by $0.25 per
      gallon in either direction. If another halt were triggered, the market
      would continue to be expanded by $0.25 per gallon in either direction
      after each successive five-minute trading halt. There will be no maximum
      price fluctuation limits during any one trading
  session.


8





NYMEX
      Natural Gas
                (physically settled)
              
              Any
      one month: 6,000 net futures / all months: 12,000 net futures, but not to
      exceed 1,000 contracts in the last three days of trading in the spot
      month.
              
              $3.00
      per million British thermal units (“mmBtu”) ($30,000 per contract) for all
      months. If any contract is traded, bid, or offered at the limit for five
      minutes, trading is halted for five minutes. When trading resumes, the
      limit is expanded by $3.00 per mmBtu in either direction. If another halt
      were triggered, the market would continue to be expanded by $3.00 per
      mmBtu in either direction after each successive five-minute trading halt.
      There will be no maximum price fluctuation limits during any one trading
      session.





Price
Volatility.  Despite daily price limits, the price volatility
of Futures Contracts generally has been historically greater than that for
traditional securities such as stocks and bonds. Price volatility often is
greater day-to-day as opposed to intra-day. Futures Contracts tend to be more
volatile than stocks and bonds because price movements for crude oil are more
currently and directly influenced by economic factors for which current data is
available and are traded by crude oil futures traders throughout the day. These
economic factors include changes in interest rates; governmental, agricultural,
trade, fiscal, monetary and exchange control programs and policies; weather and
climate conditions; changing supply and demand relationships; changes in
balances of payments and trade; U.S. and international rates of inflation;
currency devaluations and revaluations; U.S. and international political and
economic events; and changes in philosophies and emotions of market
participants. Because USSO invests a significant portion of its assets in short
positions in Futures Contracts, the assets of USSO, and therefore the prices of
USSO units, may be subject to greater volatility than traditional
securities.





Marking-to-Market Futures
Positions.  Futures Contracts are marked to market at the end
of each trading day and the margin required with respect to such contracts is
adjusted accordingly. This process of marking-to-market is designed to prevent
losses from accumulating in any futures account. Therefore, if USSO’s futures
positions have declined in value, USSO may be required to post additional
variation margin to cover this decline. Alternatively, if USSO futures positions
have increased in value, this increase will be credited to USSO’s
account.





What
is the Crude Oil Market and the Petroleum-Based Fuel Market?





USSO may
take short positions in Futures Contracts traded on the NYMEX that are based on
light, sweet crude oil. It may also take short positions in contracts on other
exchanges, including the ICE Futures and the Singapore Exchange. The contracts
provide for delivery of several grades of domestic and internationally traded
foreign crudes, and, among other things, serve the diverse needs of the physical
market. In Europe, Brent crude oil is the standard for futures contracts and is
primarily traded on the ICE Futures. Brent crude oil is the price reference for
two-thirds of the world’s traded oil. The ICE Brent Futures is a deliverable
contract with an option to cash settle which trades in units of 1,000 barrels
(42,000 U.S. gallons). The ICE Futures also offers a WTI Futures contract which
trades in units of 1,000 barrels. The WTI Futures contract is cash settled
against the prevailing market price for U.S. light, sweet crude
oil.




Light, Sweet Crude
Oil.  Crude oil is the world’s most actively traded commodity.
The Futures Contracts for light, sweet crude oil that are traded on the NYMEX
are the world’s most liquid forum for crude oil trading, as well as the world’s
largest volume futures contract trading on a physical commodity. Due to the
liquidity and price transparency of light, sweet crude oil Futures Contracts,
they are used as a principal international pricing benchmark. The Futures
Contracts for light, sweet crude oil trade on the NYMEX in units of 1,000 U.S.
barrels and, if not closed out before maturity, will result in delivery of oil
to Cushing, Oklahoma, which is also accessible to the international spot markets
by two major interstate petroleum pipeline systems.


9


The price
of crude oil is established by the supply and demand conditions in the global
market overall, and more particularly, in the main refining centers of
Singapore, Northwest Europe, and the U.S. Gulf Coast. Demand for petroleum
products by consumers, as well as agricultural, manufacturing and transportation
industries, determines demand for crude oil by refiners. Since the precursors of
product demand are linked to economic activity, crude oil demand will tend to
reflect economic conditions. However, other factors such as weather also
influence product and crude oil demand.





The price
of light, sweet crude oil has historically exhibited periods of significant
volatility.





Heating
Oil.  Heating oil, also known as No. 2 fuel oil, accounts for
about 25% of the yield of a barrel of crude oil, the second largest “cut” from
oil after gasoline. The heating oil futures contract, listed and traded on the
NYMEX trades in units of 42,000 gallons (1,000 barrels) and is based on delivery
in the New York harbor, the principal cash market trading center. The price of
heating oil has historically been volatile.





Gasoline.  Gasoline
is the largest single volume refined product sold in the U.S. and accounts for
almost half of national oil consumption. The gasoline Futures Contract listed
and traded on the NYMEX trades in units of 42,000 gallons (1,000 barrels) and is
based on delivery at petroleum products terminals in the New York harbor, the
major East Coast trading center for imports and domestic shipments from
refineries in the New York harbor area or from the Gulf Coast refining centers.
The price of gasoline has historically been volatile.





Natural
Gas.  Natural gas accounts for almost a quarter of U.S. energy
consumption. The natural gas futures contract listed and traded on the NYMEX
trades in units of 10,000 mmBtu  and is based on delivery at the Henry Hub
in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems
that draw supplies from the region's prolific gas deposits. The pipelines serve
markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to
the Canadian border. The price of natural gas has historically been
volatile.





Why
Does USSO Purchase and Sell Futures Contracts?





The
investment objective of USSO is to have the changes in percentage terms of its
units’ NAV inversely reflect the changes in percentage terms of the spot price
of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the
changes in the price of the futures contract on light, sweet crude oil as traded
on the NYMEX that is the near month contract to expire, except when the near
month contract is within two weeks of expiration, in which case the futures
contract will be the next month contract to expire, less USSO’s expenses. USSO
seeks to have its aggregate NAV approximate at all times the aggregate market
value of the Futures Contracts and Other Crude Oil-Related Investments it
holds.





To
achieve its investment objective, USSO anticipates that it will need to maintain
“short” positions in the Futures Contracts and Other Crude-Oil Related
Investments in which it invests. A short position is one in which USSO will have
sold the Futures Contract or Other Crude-Oil Related Investment and must buy it
back or otherwise close out the position in the future. As a result, a drop in
the market value of the investment would lead to a potential gain for USSO,
while an increase in the market value of the investment would lead to a
potential loss for USSO. Typically a short position will produce a result that
is the inverse of buying the Futures Contract or Other Crude-Oil Related
Investment (an approach referred to as being “long” the investment). The General
Partner expects the performance of USSO to generally be inverse to the
performance of USOF, another commodity pool managed by the General Partner,
which seeks to have the changes in percentage terms of its units NAV track the
changes in percentage terms in the spot price of light, sweet crude oil as
traded in the United States.





Other
than taking short positions in Futures Contracts and Other Crude Oil-Related
Investments, USSO only invests in assets to support these investments in Crude
Oil Interests. At any given time, most of USSO’s investments are in Treasuries,
cash and/or cash equivalents that serve as segregated assets supporting USSO’s
positions in Futures Contracts and Other Crude Oil-Related Investments. For
example, the purchase of a Futures Contract with a stated value of $10 million
would not require USSO to pay $10 million upon entering into the contract;
rather, only a margin deposit, generally of 5% to 10% of the stated value of the
Futures Contract, would be required. To secure its Futures Contract obligations,
USSO would deposit the required margin with the futures commission merchant and
would separately hold, through its Custodian, Treasuries, cash and/or cash
equivalents in an amount equal to the balance of the current market value of the
contract, which at the contract’s inception would be $10 million minus the
amount of the margin deposit, or $8.5 million (assuming a 15%
margin).


10




As a
result of the foregoing, typically 5% to 10% of USSO’s assets are held as margin
in segregated accounts with a futures commission merchant. In addition to the
Treasuries or cash it posts with the futures commission merchant for the Futures
Contracts it owns, USSO holds, through the Custodian, Treasuries, cash and/or
cash equivalents that can be posted as margin or as collateral to support its
over-the-counter contracts. USSO earns interest income from the Treasuries
and/or cash equivalents that it purchases, and on the cash it holds through the
Custodian. USSO anticipates that the earned interest income will increase the
NAV and limited partners’ capital contribution accounts. USSO reinvests the
earned interest income, holds it in cash, or uses it to pay its expenses. If
USSO reinvests the earned interest income, it makes investments that are
consistent with its investment objective.





What
is the Flow of Units?










What
are the Trading Policies of USSO?




Liquidity




USSO
invests only in Futures Contracts and Other Crude Oil-Related Investments that
are traded in sufficient volume to permit, in the opinion of the General
Partner, ease of taking and liquidating positions in these financial
interests.




Spot
Commodities




While the
Futures Contracts traded on the NYMEX can be physically settled, USSO does not
intend to take or make physical delivery. USSO may from time to time trade in
Other Crude Oil-Related Investments, including contracts based on the spot
price of crude oil.




11





Leverage





While
USSO’s historical ratio of initial margin to total assets has generally ranged
from 5% to 10%, the General Partner endeavors to have the value of USSO’s
Treasuries, cash and cash equivalents, whether held by USSO or posted as margin
or collateral, at all times approximate the aggregate market value of its
obligations under USSO’s Futures Contracts and Other Crude Oil-Related
Investments.  While the General Partner does not intend to leverage
USSO’s assets, it is not prohibited from doing so under the LP
Agreement.





Borrowings





Borrowings
are not used by USSO unless USSO is required to borrow money in the event of
physical delivery, USSO trades in cash commodities, or for short-term needs
created by unexpected redemptions. USSO maintains the value of its Treasuries,
cash and/or cash equivalents, whether held by USSO or posted as margin or
collateral, to at all times approximate the aggregate market value of its
obligations under its Futures Contracts and Other Crude Oil-Related Investments.
USSO has not established and does not plan to establish credit
lines.





Over-the-Counter
Derivatives (Including Spreads and Straddles)





In
addition to Futures Contracts, there are also a number of listed options on the
Futures Contracts on the principal futures exchanges. These contracts offer
investors and hedgers another set of financial vehicles to use in managing
exposure to the crude oil market. Consequently, USSO may purchase options on
crude oil futures contracts on these exchanges in pursuing its investment
objective.





In
addition to the Futures Contracts and options on the Futures Contracts, there
also exists an active non-exchange-traded market in derivatives tied to crude
oil. These derivatives transactions (also known as over-the-counter contracts)
are usually entered into between two parties. Unlike most of the exchange-traded
Futures Contracts or exchange-traded options on the Futures Contracts, each
party to such contract bears the credit risk that the other party may not be
able to perform its obligations under its contract.





Some
crude oil-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other crude
oil-based derivatives have highly customized terms and conditions and are not as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of crude oil- or petroleum-based fuels that
have terms similar to the Futures Contracts. Others take the form of “swaps” in
which the two parties exchange cash flows based on pre-determined formulas tied
to the crude oil spot price, forward crude oil price, the Benchmark Futures
Contract price, or other crude oil futures contract price. For example, USSO may
enter into over-the-counter derivative contracts whose value will be tied to
changes in the difference between the crude oil spot price, the Benchmark
Futures Contract price, or some other futures contract price traded on the NYMEX
or ICE Futures and the price of other Futures Contracts that may be invested in
by USSO.





To
protect itself from the credit risk that arises in connection with such
contracts, USSO may enter into agreements with each counterparty that provide
for the netting of its overall exposure to its counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. USSO also may require that the counterparty be highly rated and/or provide
collateral or other credit support to address USSO’s exposure to the
counterparty.





The
General Partner assesses or reviews, as appropriate, the creditworthiness of
each potential or existing counterparty to an over-the-counter contract pursuant
to guidelines approved by the General Partner's Board of Directors. Furthermore,
the General Partner on behalf of USSO only enters into over-the-counter
contracts with counterparties who are, or are affiliates of, (a) banks regulated
by a United States federal bank regulator, (b) broker-dealers regulated by the
U.S. Securities and Exchange Commission (the “SEC”), (c) insurance companies
domiciled in the United States, or (d) producers, users or traders of energy,
whether or not regulated by the CFTC. Any entity acting as a counterparty shall
be regulated in either the United States or the United Kingdom unless otherwise
approved by the General Partner’s Board of Directors after consultation with its
legal counsel. Existing counterparties are also reviewed periodically by the
General Partner.


12


USSO may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the Benchmark Futures
Contract. USSO would use a spread when it chooses to take simultaneous long and
short positions in futures written on the same underlying asset, but with
different delivery months. The effect of holding such combined positions is to
adjust the sensitivity of USSO to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later.
USSO would use such a spread if the General Partner felt that taking such long
and short positions, when combined with the rest of its holdings, would more
closely track the investment goals of USSO, or if the General Partner felt it
would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in crude oil prices.





USSO
would enter into a straddle when it chooses to take an option position
consisting of a long (or short) position in both a call option and put option.
The economic effect of holding certain combinations of put options and call
options can be very similar to that of owning the underlying futures contracts.
USSO would make use of such a straddle approach if, in the opinion of the
General Partner, the resulting combination would more closely track the
investment goals of USSO or if it would lead to an overall lower cost of trading
to achieve a given level of economic exposure to movements in crude oil
prices.





USSO has
not employed any hedging methods since all of its investments have been made
over an exchange. Therefore, USSO has not been exposed to counterparty
risk.





Pyramiding




USSO has
not and will not employ the technique, commonly known as pyramiding, in which
the speculator uses unrealized profits on existing positions as variation margin
for the purchase or sale of additional positions in the same or another
commodity interest.




Who
are the Service Providers?




BBH&Co.
is the registrar and transfer agent for the units. BBH&Co. is also the
Custodian for USSO. In this capacity, BBH&Co. holds USSO’s Treasuries,
cash and/or cash equivalents pursuant to a custodial agreement. In
addition, in its capacity as Administrator for USSO, BBH&Co. performs
certain administrative and accounting services for USSO and prepares certain SEC
and CFTC reports on behalf of USSO. The General Partner pays BBH&Co.’s fees
for these services.





BBH&Co.’s
principal business address is 50 Milk Street, Boston, MA
02109-3661. BBH&Co., a private bank founded in 1818, is not a publicly
held company nor is it insured by the Federal Deposit Insurance Corporation.
BBH&Co. is authorized to conduct a commercial banking business in accordance
with the provisions of Article IV of the New York State Banking Law, New York
Banking Law §§160–181, and is subject to regulation, supervision, and
examination by the New York State Banking Department. BBH&Co. is also
licensed to conduct a commercial banking business by the Commonwealths of
Massachusetts and Pennsylvania and is subject to supervision and examination by
the banking supervisors of those states.





USSO also
employs ALPS Distributors, Inc. as a Marketing Agent. The General Partner
pays the Marketing Agent’s  fees. In no event may the aggregate
compensation paid to the Marketing Agent and any affiliate of the General
Partner for distribution-related services in connection with the offering of
units exceed ten percent (10%) of the gross proceeds of the
offering.





ALPS’s
principal business address is 1290 Broadway, Suite 1100, Denver, CO 
80203.  ALPS is the marketing agent for USSO. ALPS is a broker-dealer
registered with the Financial Industry Regulatory Authority (“FINRA”) and a
member of the Securities Investor Protection Corporation.





UBS
Securities LLC (“UBS Securities”) is USSO’s futures commission merchant. USSO
and UBS Securities have entered into an Institutional Futures Client Account
Agreement. This Agreement requires UBS Securities to provide services to USSO in
connection with the purchase and sale of Crude Oil Interests that may be
purchased or sold by or through UBS Securities for USSO’s account. USSO pays the
fees of UBS Securities.





UBS
Securities’s principal business address is 677 Washington Blvd, Stamford, CT
06901. UBS Securities is a futures clearing broker for USSO. UBS Securities is
registered in the U.S. with FINRA as a broker-dealer and with the CFTC as a
futures commission merchant. UBS Securities is a member of the NFA and of
various U.S. futures and securities exchanges.


13





UBS
Securities is the defendant in two purported securities class actions pending in
District Court of the Northern District of Alabama, brought by holders of stocks
and bonds of HealthSouth, captioned In re HealthSouth
Corporation Stockholder, No. CV-03-BE-1501-S and In re HealthSouth
Corporation Bondholder Litigation, No. CV-03-BE-1502-S. Both complaints
assert liability under the Exchange Act.





On June
27, 2007, the Securities Division of the Secretary of the Commonwealth of
Massachusetts (“Massachusetts Securities Division”) filed an administrative
complaint (the “Complaint”) and notice of adjudicatory proceeding against UBS
Securities LLC, captioned In The Matter of UBS Securities, LLC, Docket No.
E-2007-0049, which alleges, in sum and substance, that UBS Securities has been
violating the Massachusetts Uniform Securities Act (the “Act”) and related
regulations by providing the advisers for certain hedge funds with gifts and
gratuities in the form of below market office rents, personal loans with below
market interest rates, event tickets, and other perks, in order to induce those
hedge fund advisers to increase or retain their level of prime brokerage fees
paid to UBS Securities. The Complaint seeks a cease and desist order from
conduct that violates the Act and regulations, to censure UBS Securities, to
require UBS Securities to pay an administrative fine of an unspecified amount,
and to find as fact the allegations of the Complaint.





On June
26, 2008, the Massachusetts Securities Division filed an administrative
complaint and notice of adjudicatory proceeding against UBS Securities and UBS
Financial Services, Inc. (“UBS Financial”), captioned In the Matter of UBS
Securities, LLC and UBS Financial Services, Inc., Docket No. 2008-0045, which
alleged that UBS Securities and UBS Financial violated the Act in connection
with the marketing and sale of auction rate securities.





On July
22, 2008, the Texas State Securities board filed an administrative proceeding
against UBS Securities and UBS Financial captioned the Matter of the Dealer
Registrations of UBS Financial Services, Inc. and UBS Securities LLC, SOAH
Docket No. ###-##-####, SSB Docket No. 08-IC04, alleging violations of the
anti-fraud provision of the Texas Securities Act in connection with the
marketing and sale of auction rate securities.





On July
24, 2008 the New York Attorney General (“NYAG”) filed a complaint in Supreme
Court of the State of New York against UBS Securities and UBS Financial
captioned State of New York v. UBS Securities LLC and UBS Financial Services,
Inc., No. 650262/2008, in connection with UBS’s marketing and sale of auction
rate securities. The complaint alleges violations of the anti-fraud provisions
of New York state statutes and seeks a judgment ordering that the firm buy back
auction rate securities from investors at par, disgorgement, restitution and
other remedies.





On August
8, 2008, UBS Securities and UBS Financial reached agreements in principle with
the SEC, the NYAG, the Massachusetts Securities Division and other state
regulatory agencies represented by the North American Securities Administrators
Association (“NASAA”) to restore liquidity to all remaining client’s holdings of
auction rate securities by June 30, 2012. On August 20, 2008, the Texas
proceeding was dismissed and withdrawn. On October 2, 2008, UBS Securities and
UBS Financial entered into a final consent agreement with the Massachusetts
Securities Division settling all allegations in the Massachusetts Securities
Division’s administrative proceeding against UBS Securities and UBS Financial
with regards to the auction rate securities matter. On December 11, 2008, UBS
Securities and UBS Financial executed an Assurance of Discontinuance in the
auction rate securities settlement with the NYAG. On the same day, UBS
Securities and UBS Financial finalized settlements with the SEC.





On August
14, 2008, the New Hampshire Bureau of Securities Regulation filed an
administrative action against UBS Securities relating to a student loan issuer,
the New Hampshire Higher Education Loan Corp. (“NHHELCO”). The complaint alleges
fraudulent and unethical conduct in violation of New Hampshire state statues.
The complaint seeks an administrative fine, a cease and desist order, and
restitution to NHHELCO. The claim does not impact the global settlement with the
SEC, NYAG and NASAA relating to the marketing and sale of auction rate
securities to investors.


14


Further,
UBS Securities, like most full service investment banks and broker-dealers,
receives inquiries and is sometimes involved in investigations by the SEC,
FINRA, the New York Stock Exchange (the “NYSE”) and various other regulatory
organizations, exchanges and government agencies. UBS Securities fully
cooperates with the authorities in all such requests. UBS Securities regularly
discloses to the FINRA arbitration awards, disciplinary action and regulatory
events. These disclosures are publicly available on the FINRA’s website at www.finra.org. Actions with
respect to UBS Securities’ futures commission merchant business are publicly
available on the website of the National Futures Association (http://www.nfa.futures.org/).





UBS
Securities will act only as clearing broker for USSO and as such will be paid
commissions for executing and clearing trades on behalf of USSO. UBS Securities
has not passed upon the adequacy or accuracy of this annual report on Form 10-K.
UBS Securities neither will act in any supervisory capacity with respect to the
General Partner nor participate in the management of the General Partner or
USSO.





UBS
Securities is not affiliated with USSO or the General Partner. Therefore, USSO
does not believe that USSO has any conflicts of interest with UBS Securities or
their trading principals arising from their acting as USSO’s futures commission
merchant.





Currently,
the General Partner does not employ commodity trading advisors. If, in the
future, the General Partner does employ commodity trading advisors, it will
choose each advisor based on arm’s-length negotiations and will consider the
advisor’s experience, fees, and reputation.





Fees
of USSO





Fees
and Compensation Arrangements with the General Partner and Non-Affiliated
Service Providers*




Service
      Provider
                      
                      Compensation
      Paid by the General PartnerBrown
      Brothers Harriman & Co.,
                        Custodian
      and Administrator
                      
                      Minimum
      amount of $75,000 annually for its custody, fund accounting and fund
      administration services rendered to all funds, as well as a $20,000 annual
      fee for its transfer agency services. In addition, an asset-based charge
      of (a) 0.06% for the first $500 million of USSO’s and the Related Public
      Funds’ combined net assets, (b) 0.0465% for USSO’s and the Related Public
      Funds’ combined net assets greater than $500 million but less than $1
      billion, and (c) 0.035% once USSO’s and the Related Public Funds’ combined
      net assets exceed $1 billion.**ALPS
      Distributors, Inc., Marketing Agent
                      
                      $425,000
      per annum plus an incentive fee as follows: 0.0% on USSO’s assets from
      $0-500 million; 0.04% on USSO’s assets from $500 million-$4 billion; 0.03%
      on USSO’s assets in excess of $4
billion.




*
            The
      General Partner pays this
compensation.


**
            The
      annual minimum amount will not apply if the asset-based charge for all
      accounts in the aggregate exceeds $75,000. The General Partner also will
      pay transaction charge fees to BBH&Co., ranging from $7.00 to $15.00
      per transaction for the funds.




15





Compensation
to the General Partner





Assets
                        
                        Management FeeAll
      assets
                        
                        0.60%
      of
NAV





Fees are
calculated on a daily basis (accrued at 1/365 of the applicable percentage of
NAV on that day) and paid on a monthly basis. NAV is calculated by taking the
current market value of USSO’s total assets and subtracting any
liabilities.





Fees
and Compensation Arrangements between USSO and Non-Affiliated Service
Providers***





Service Provider
                        
                        Compensation Paid by
USSOUBS
      Securities LLC, Futures CommissionMerchant
                        
                        Approximately
      $4.00 per buy or sell; charges may varyNon-Affiliated
      Brokers
                        
                        Approximately
      0.14 % of
assets




***
            USSO
      pays this compensation.





New
York Mercantile Exchange Licensing Fee****





Assets
                      
                      Licensing FeeFirst
      $1,000,000,000
                      
                      0.04%
      of NAVAfter
      the first $1,000,000,000
                      
                      0.02%
      of
NAV





****
            Fees
      are calculated on a daily basis (accrued at 1/365 of the applicable
      percentage of NAV on that day) and paid on a monthly basis. USSO is
      responsible for its pro rata share of the assets held by USSO and the
      Related Public Funds.





Expenses
Paid by USSO through December 31, 2009 in dollar terms:





Expenses:
                        
                        Amount in Dollar TermsAmount
      Paid to General Partner:
                        
                        $
                        20,150Amount
      Paid in Portfolio Brokerage Commissions:
                        
                        $
                        4,695Other
      Amounts Paid *****:
                        
                        $
                        212,443Total
      Expenses Paid:
                        
                        $
                        237,288Expenses
      Waived ******:
                        
                        $
                        (206,444
                        )Total
      Expenses Paid or Accrued Including Expenses Waived:
                        
                        $
                        30,844





*****
            Includes expenses relating to
      legal fees, auditing fees, printing expenses, licensing fees and tax
      reporting fees and fees paid to the independent directors of the General
      Partner.


******
            The General Partner, though under
      no obligation to do so, agreed to pay certain expenses, to the extent that
      such expenses exceeded 0.15% (15 basis points) of USSO’s NAV, on an
      annualized basis. The General Partner has no obligation to continue such
      payment into subsequent
periods.





Expenses
Paid by USSO through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
                    
                    Amount
      as a Percentage
                      of Average Daily Net
  AssetsAmount
      Paid to General Partner:
                    
                    0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                    
                    0.14%
      annualizedOther
      Amounts Paid:
                    
                    6.33%
      annualizedTotal
      Expenses Paid:
                    
                    7.07%
      annualizedExpenses
      Waived:
                    
                    (6.15)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                    
                    0.92%
      annualized




16





Other
Fees.  USSO also pays the fees and expenses associated with its
tax accounting and reporting requirements with the exception of certain initial
implementation service fees and base service fees which are paid by the General
Partner.  These fees are estimated to be $211,500 for the fiscal year
ended December 31, 2009.  In addition, USSO is responsible for the
fees and expenses, which may include director and officers’ liability insurance,
of the independent directors of the General Partner in connection with their
activities with respect to USSO.  These director fees and expenses may
be shared with other funds managed by the General Partner.  These fees
and expenses for 2009 were $433,046, and USSO’s portion of such fees was
$167.





Form
of Units




Registered
Form. Units are issued in registered form in accordance with the LP
Agreement. The Administrator has been appointed registrar and transfer agent for
the purpose of transferring units in certificated form. The Administrator keeps
a record of all limited partners and holders of the units in certificated form
in the registry (the “Register”). The General Partner recognizes transfers of
units in certificated form only if done in accordance with the LP Agreement. The
beneficial interests in such units are held in book-entry form through
participants and/or accountholders in the Depository Trust Company
(“DTC”).




Book
Entry. Individual certificates are not issued for the units. Instead,
units are represented by one or more global certificates, which are deposited by
the Administrator with DTC and registered in the name of Cede & Co., as
nominee for DTC. The global certificates evidence all of the units outstanding
at any time. Unitholders are limited to (1) participants in DTC such as
banks, brokers, dealers and trust companies (“DTC Participants”), (2) those
who maintain, either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those banks, brokers,
dealers, trust companies and others who hold interests in the units through DTC
Participants or Indirect Participants, in each case who satisfy the requirements
for transfers of units. DTC Participants acting on behalf of investors holding
units through such participants’ accounts in DTC will follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds Settlement
System. Units are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.





DTC. DTC
is a limited purpose trust company organized under the laws of the State of New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange
Act.  DTC holds securities for DTC Participants and facilitates the
clearance and settlement of transactions between DTC Participants through
electronic book-entry changes in accounts of DTC Participants.





Transfer
of Units




Transfers of
Units Only Through DTC. The units are only transferable through the
book-entry system of DTC. Limited partners who are not DTC Participants may
transfer their units through DTC by instructing the DTC Participant holding
their units (or by instructing the Indirect Participant or other entity through
which their units are held) to transfer the units. Transfers are made in
accordance with standard securities industry practice.




Transfers
of interests in units with DTC are made in accordance with the usual rules and
operating procedures of DTC and the nature of the transfer. DTC has established
procedures to facilitate transfers among the participants and/or accountholders
of DTC. Because DTC can only act on behalf of DTC Participants, who in turn act
on behalf of Indirect Participants, the ability of a person or entity having an
interest in a global certificate to pledge such interest to persons or entities
that do not participate in DTC, or otherwise take actions in respect of such
interest, may be affected by the lack of a definitive security in respect of
such interest.




DTC has
advised USSO that it will take any action permitted to be taken by a unitholder
(including, without limitation, the presentation of a global certificate for
exchange) only at the direction of one or more DTC Participants in whose account
with DTC interests in global certificates are credited and only in respect of
such portion of the aggregate principal amount of the global certificate as to
which such DTC Participant or Participants has or have given such
direction.


17





Transfer/Application
Requirements.





All
purchasers of USSO’s units, and potentially any purchasers of units in the
future, who wish to become limited partners or other record holders and receive
cash distributions, if any, or have certain other rights, must deliver an
executed transfer application in which the purchaser or transferee must certify
that, among other things, he, she or it agrees to be bound by USSO’s LP
Agreement and is eligible to purchase USSO’s securities. Each purchaser of units
must execute a transfer application and certification. The obligation to provide
the form of transfer application is imposed on the seller of units or, if a
purchase of units is made through an exchange, the form may be obtained directly
through USSO. Further, the General Partner may request each record holder to
furnish certain information, including that holder’s nationality, citizenship or
other related status. A record holder is a unitholder that is, or has applied to
be, a limited partner. An investor who is not a U.S. resident may not be
eligible to become a record holder or one of USSO’s limited partners if that
investor’s ownership would subject USSO to the risk of cancellation or
forfeiture of any of USSO’s assets under any federal, state or local law or
regulation. If the record holder fails to furnish the information or if the
General Partner determines, on the basis of the information furnished by the
holder in response to the request, that such holder is not qualified to become
one of USSO’s limited partners, the General Partner may be substituted as a
holder for the record holder, who will then be treated as a non-citizen
assignee, and USSO will have the right to redeem those securities held by the
record holder.





A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. USSO may, at its discretion, treat the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.




A person
purchasing USSO’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the General
Partner obtained, USSO’s units are securities and are transferable according to
the laws governing transfers of securities.





Any
transfer of units will not be recorded by the transfer agent or recognized by
the General Partner unless a completed transfer application is delivered to the
General Partner or the Administrator. When acquiring units, the transferee of
such units that completes a transfer application will:




·
            be
      an assignee until admitted as a substituted limited partner upon the
      consent and sole discretion of the General Partner and the recording of
      the assignment on the books and records of the
  partnership;





·
            automatically
      request admission as a substituted limited
  partner;





·
            agree
      to be bound by the terms and conditions of, and execute, USSO’s LP
      Agreement;





·
            represent
      that such transferee has the capacity and authority to enter into USSO’s
      LP Agreement;





·
            grant
      powers of attorney to USSO’s General Partner and any liquidator of USSO;
      and





·
            make
      the consents and waivers contained in USSO’s LP
  Agreement.





An
assignee will become a limited partner in respect of the transferred units upon
the consent of USSO’s General Partner and the recordation of the name of the
assignee on USSO’s books and records. Such consent may be withheld in the sole
discretion of USSO’s General Partner.





If
consent of the General Partner is withheld, such transferee shall be an
assignee. An assignee shall have an interest in the partnership equivalent to
that of a limited partner with respect to allocations and distributions,
including, without limitation, liquidating distributions, of the partnership.
With respect to voting rights attributable to units that are held by assignees,
the General Partner shall be deemed to be the limited partner with respect
thereto and shall, in exercising the voting rights in respect of such units on
any matter, vote such units at the written direction of the assignee who is the
record holder of such units. If no such written direction is received, such
units will not be voted. An assignee shall have no other rights of a limited
partner.




18





Until a
unit has been transferred on USSO’s books, USSO and the transfer agent may treat
the record holder of the unit as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations.




Withdrawal
of Limited Partners




As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to withdraw
entirely from the partnership or to withdraw a portion of its partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal of all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited
partner’s ownership of units would result in the violation of any law or
regulations applicable to the partnership or a partner. In these circumstances,
the General Partner without notice may require the withdrawal at any time, or
retroactively. The limited partner thus designated shall withdraw from the
partnership or withdraw that portion of its partner capital account specified,
as the case may be, as of the close of business on such date as determined by
the General Partner. The limited partner thus designated shall be deemed to have
withdrawn from the partnership or to have made a partial withdrawal from its
partner capital account, as the case may be, without further action on the part
of the limited partner and the provisions of the LP Agreement shall
apply.





Calculating
NAV




USSO’s
NAV is calculated by:





·
            Taking
      the current market value of its total assets;
  and





·
            Subtracting
      any liabilities





BBH&Co.,
the Administrator, calculates the NAV of USSO once each NYSE Arca trading day.
The NAV for a particular trading day is released after 4:00 p.m. New York time.
Trading during the core trading session on the NYSE Arca typically closes at
4:00 p.m. New York time. The Administrator uses the NYMEX closing price
(determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time)
for the contracts traded on the NYMEX, but calculates or determines the value of
all other USSO investments as of the earlier of the close of the NYSE Arca or
4:00 p.m. New York time in accordance with the current Administrative Agency
Agreement among BBH&Co., USSO and the General Partner which is incorporated
by reference into this annual report on Form 10-K.





In
addition, in order to provide updated information relating to USSO for use by
investors and market professionals, the NYSE Arca calculates and disseminates
throughout the core trading session on each trading day an updated indicative
fund value. The indicative fund value is calculated by using the prior day’s
closing NAV per unit of USSO as a base and updating that value throughout the
trading day to reflect changes in the most recently reported trade price for the
active light, sweet Futures Contracts on the NYMEX. The prices reported for
those Futures Contract months are adjusted based on the prior day’s spread
differential between settlement values for the relevant contract and the spot
month contract. In the event that the spot month contract is also the Benchmark
Futures Contract, the last sale price for that contract is not adjusted. The
indicative fund value unit basis disseminated during NYSE Arca core trading
session hours should not be viewed as an actual real time update of the NAV,
because the NAV is calculated only once at the end of each trading day based
upon the relevant end of day values of USSO’s investments.





The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular NYSE Arca core trading session hours of 9:30 a.m. New York time
to 4:00 p.m. New York time. The normal trading hours of the NYMEX are 10:00 a.m.
New York time to 2:30 p.m. New York time. This means that there is a gap in time
at the beginning and the end of each day during which USSO’s units are traded on
the NYSE Arca, but real-time NYMEX trading prices for oil futures contracts
traded on the NYMEX are not available. As a result, during those gaps there will
be no update to the indicative fund value.


19





The NYSE
Arca disseminates the indicative fund value through the facilities of CTA/CQ
High Speed Lines. In addition, the indicative fund value is published on the
NYSE Arca’s website and is available through on-line information services such
as Bloomberg and Reuters.




Dissemination
of the indicative fund value provides additional information that is not
otherwise available to the public and is useful to investors and market
professionals in connection with the trading of USSO units on the NYSE Arca.
Investors and market professionals are able throughout the trading day to
compare the market price of USSO and the indicative fund value. If the market
price of USSO units diverges significantly from the indicative fund value,
market professionals will have an incentive to execute arbitrage trades. For
example, if USSO appears to be trading at a discount compared to the indicative
fund value, a market professional could buy USSO units on the NYSE Arca and sell
short oil futures contracts. Such arbitrage trades can tighten the tracking
between the market price of USSO and the indicative fund value and thus can be
beneficial to all market participants.





In
addition, other Futures Contracts, Other Crude Oil-Related Investments and
Treasuries held by USSO are valued by the Administrator, using rates and points
received from client approved third party vendors (such as Reuters and WM
Company) and advisor quotes. These investments are not included in the
indicative value. The indicative fund value is based on the prior day’s NAV and
moves up and down solely according to changes in near month Futures Contracts
for light, sweet crude oil traded on the NYMEX.





Creation
and Redemption of Units




USSO
creates and redeems units from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of baskets are only
made in exchange for delivery to USSO or the distribution by USSO of the amount
of Treasuries and any cash represented by the baskets being created or redeemed,
the amount of which is based on the combined NAV of the number of units included
in the baskets being created or redeemed determined after 4:00 p.m. New York
time on the day the order to create or redeem baskets is properly
received.




Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery of
the Treasuries and any cash required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached thereto may
be amended by USSO, without the consent of any limited partner or unitholder or
Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000 to
USSO for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with USSO in exchange for baskets
receive no fees, commissions or other form of compensation or inducement of any
kind from either USSO or the General Partner, and no such person will have any
obligation or responsibility to the General Partner or USSO to effect any sale
or resale of units. As of December 31, 2009, 7 Authorized Purchasers had entered
into agreements with USSO.  During the year ended December 31, 2009,
USSO issued 3 Creation Baskets and did not redeem any Redemption
Baskets.




Certain
Authorized Purchasers are expected to have the facility to participate directly
in the physical crude oil market and the crude oil futures market. In some
cases, an Authorized Purchaser or its affiliates may from time to time acquire
crude oil or sell crude oil and may profit in these instances. The General
Partner believes that the size and operation of the crude oil market make it
unlikely that an Authorized Purchaser’s direct activities in the crude oil or
securities markets will impact the price of crude oil, Futures Contracts, or the
price of the units.




Each
Authorized Purchaser is required to be registered as a broker-dealer under the
Exchange Act and is a member in good standing with FINRA, or exempt from being
or otherwise not required to be licensed as a broker-dealer or a member of
FINRA, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate in
light of its own regulatory regime.


20





Under the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify the
Authorized Purchasers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and to contribute to the payments the
Authorized Purchasers may be required to make in respect of those
liabilities.




The
following description of the procedures for the creation and redemption of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is incorporated by reference into this annual
report on Form 10-K.




Creation
Procedures




On any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other than a day when any of
the NYSE Arca, the NYMEX or the NYSE is closed for regular trading. Purchase
orders must be placed by 12:00 p.m. New York time or the close of regular
trading on the NYSE Arca, whichever is earlier. The day on which the Marketing
Agent receives a valid purchase order is the purchase order date.





By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries,
cash, or a combination of Treasuries and cash with USSO, as described below.
Prior to the delivery of baskets for a purchase order, the Authorized Purchaser
must also have wired to the Custodian the non-refundable transaction fee due for
the purchase order. Authorized Purchasers may not withdraw a creation
request.





Determination
of Required Deposits





The total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasuries and/or cash that is in the same proportion to the total assets of
USSO (net of estimated accrued but unpaid fees, expenses and other liabilities)
on the date the order to purchase is accepted as the number of units to be
created under the purchase order is in proportion to the total number of units
outstanding on the date the order is received. The General Partner determines,
directly in its sole discretion or in consultation with the Administrator, the
requirements for Treasuries and the amount of cash, including the maximum
permitted remaining maturity of a Treasury and proportions of Treasury and cash
that may be included in deposits to create baskets. The Marketing Agent will
publish such requirements at the beginning of each business day. The amount of
cash deposit required is the difference between the aggregate market value of
the Treasuries required to be included in a Creation Basket Deposit as of 4:00
p.m. New York time on the date the order to purchase is properly received and
the total required deposit.





Delivery
of Required Deposits





An
Authorized Purchaser who places a purchase order is responsible for transferring
to USSO’s account with the Custodian the required amount of Treasuries and cash
by the end of the third business day following the purchase order date. Upon
receipt of the deposit amount, the Administrator directs DTC to credit the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk of delivery
and ownership of Treasuries until such Treasuries have been received by the
Custodian on behalf of USSO is borne solely by the Authorized
Purchaser.





Because
orders to purchase baskets must be placed by 12:00 p.m., New York time, but the
total payment required to create a basket during the continuous offering period
will not be determined until after 4:00 p.m. New York time on the date the
purchase order is received, Authorized Purchasers will not know the total amount
of the payment required to create a basket at the time they submit an
irrevocable purchase order for the basket. USSO’s NAV and the total amount of
the payment required to create a basket could rise or fall substantially between
the time an irrevocable purchase order is submitted and the time the amount of
the purchase price in respect thereof is determined.


21




Rejection
of Purchase Orders
  The
General Partner acting by itself or through the Marketing Agent may reject a
purchase order or a Creation Basket Deposit if:


·
            it
      determines that the investment alternative available to USSO at that time
      will not enable it to meet its investment
  objective;





·
            it
      determines that the purchase order or the Creation Basket Deposit is not
      in proper form;





·
            it
      believes that the purchase order or the Creation Basket Deposit would have
      adverse tax consequences to USSO or its
  unitholders;





·
            the
      acceptance or receipt of the Creation Basket Deposit would, in the opinion
      of counsel to the General Partner, be unlawful;
  or





·
            circumstances
      outside the control of the General Partner, Marketing Agent or Custodian
      make it, for all practical purposes, not feasible to process creations of
      baskets.





None of
the General Partner, Marketing Agent or Custodian will be liable for the
rejection of any purchase order or Creation Basket Deposit.





Redemption
Procedures




The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the Marketing Agent to redeem one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York time or
the close of regular trading on the NYSE, whichever is earlier. A redemption
order so received will be effective on the date it is received in satisfactory
form by the Marketing Agent. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual unitholder to
redeem any units in an amount less than a Redemption Basket, or to redeem
baskets other than through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be redeemed
through DTC’s book-entry system to USSO not later than 3:00 p.m. New York time
on the third business day following the effective date of the redemption order.
Prior to the delivery of the redemption distribution for a redemption order, the
Authorized Purchaser must also have wired to USSO’s account at the Custodian the
non-refundable transaction fee due for the redemption order. Authorized
Purchasers may not withdraw a redemption request.





Determination
of Redemption Distribution





The
redemption distribution from USSO consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and cash that is in the same
proportion to the total assets of USSO (net of estimated accrued but unpaid
fees, expenses and other liabilities) on the date the order to redeem is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the date the
order is received. The General Partner, directly or in consultation with the
Administrator, determines the requirements for Treasuries and the amounts of
cash, including the maximum permitted remaining maturity of a Treasury, and the
proportions of Treasuries and cash that may be included in distributions to
redeem baskets. The Marketing Agent will publish such requirements as of 4:00
p.m. New York time on the redemption order date.





Delivery
of Redemption Distribution





The
redemption distribution due from USSO will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following the
redemption order date if, by 3:00 p.m. New York time on such third business day,
USSO’s DTC account has been credited with the baskets to be redeemed. If USSO’s
DTC account has not been credited with all of the baskets to be redeemed by such
time, the redemption distribution will be delivered to the extent of whole
baskets received. Any remainder of the redemption distribution will be delivered
on the next business day to the extent of remaining whole baskets received if
USSO receives the fee applicable to the extension of the redemption distribution
date which the General Partner may, from time to time, determine and the
remaining baskets to be redeemed are credited to USSO’s DTC account by 3:00 p.m.
New York time on such next business day. Any further outstanding amount of the
redemption order shall be cancelled. Pursuant to information from the General
Partner, the Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are not credited to
USSO’s DTC account by 3:00 p.m. New York time on the third business day
following the redemption order date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through DTC’s book
entry-system on such terms as the General Partner may from time to time
determine.


22


Suspension
or Rejection of Redemption Orders





The
General Partner may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during which the
NYSE Arca or the NYMEX is closed other than customary weekend or holiday
closings, or trading on the NYSE Arca or the NYMEX is suspended or restricted,
(2) for any period during which an emergency exists as a result of which
delivery, disposal or evaluation of Treasuries is not reasonably practicable, or
(3) for such other period as the General Partner determines to be necessary for
the protection of the limited partners. For example, the General Partner may
determine that it is necessary to suspend redemptions to allow for the orderly
liquidation of USSO’s assets at an appropriate value to fund a redemption. If
the General Partner has difficulty liquidating its positions, e.g., because of a market
disruption event in the futures markets, a suspension of trading by the exchange
where the futures contracts are listed or an unanticipated delay in the
liquidation of a position in an over the counter contract, it may be appropriate
to suspend redemptions until such time as such circumstances are rectified. None
of the General Partner, the Marketing Agent, the Administrator, or the Custodian
will be liable to any person or in any way for any loss or damages that may
result from any such suspension or postponement.





Redemption
orders must be made in whole baskets. The General Partner will reject a
redemption order if the order is not in proper form as described in the
Authorized Purchaser Agreement or if the fulfillment of the order, in the
opinion of its counsel, might be unlawful. The General Partner may also reject a
redemption order if the number of units being redeemed would reduce the
remaining outstanding units to 100,000 units (i.e., one basket) or less,
unless the General Partner has reason to believe that the placer of the
redemption order does in fact possess all the outstanding units and can deliver
them.




Creation
and Redemption Transaction Fee




To
compensate USSO for its expenses in connection with the creation and redemption
of baskets, an Authorized Purchaser is required to pay a transaction fee to USSO
of $1,000 per order to create or redeem baskets. An order may include multiple
baskets. The transaction fee may be reduced, increased or otherwise changed by
the General Partner. The General Partner shall notify DTC of any change in the
transaction fee and will not implement any increase in the fee for the
redemption of baskets until 30 days after the date of the
notice.





Tax
Responsibility





Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and USSO if they are required by law to pay any
such tax, together with any applicable penalties, additions to tax or interest
thereon.





Secondary
Market Transactions




As noted,
USSO creates and redeems units from time to time, but only in one or more
Creation Baskets or Redemption Baskets. The creation and redemption of baskets
are only made in exchange for delivery to USSO or the distribution by USSO of
the amount of Treasuries and cash represented by the baskets being created or
redeemed, the amount of which will be based on the aggregate NAV of the number
of units included in the baskets being created or redeemed determined on the day
the order to create or redeem baskets is properly received.


23


As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets they
create will do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the NYSE Arca, the NAV of
USSO at the time the Authorized Purchaser purchased the Creation Baskets and the
NAV of the units at the time of the offer of the units to the public, the supply
of and demand for units at the time of sale, and the liquidity of the Futures
Contract market and the market for Other Crude Oil-Related Investments. The
prices of units offered by Authorized Purchasers are expected to fall between
USSO’s NAV and the trading price of the units on the NYSE Arca at the time of
sale. Units initially comprising the same basket but offered by Authorized
Purchasers to the public at different times may have different offering prices.
An order for one or more baskets may be placed by an Authorized Purchaser on
behalf of multiple clients. Authorized Purchasers who make deposits with USSO in
exchange for baskets receive no fees, commissions or other form of compensation
or inducement of any kind from either USSO or the General Partner, and no such
person has any obligation or responsibility to the General Partner or USSO to
effect any sale or resale of units. Units trade in the secondary market on the
NYSE Arca. Units may trade in the secondary market at prices that are lower or
higher relative to their NAV per unit. The amount of the discount or premium in
the trading price relative to the NAV per unit may be influenced by various
factors, including the number of investors who seek to purchase or sell units in
the secondary market and the liquidity of the Futures Contracts market and the
market for Other Crude Oil-Related Investments. While the units trade during the
core trading session on the NYSE Arca until 4:00 p.m. New York time, liquidity
in the market for Futures Contracts and Other Crude Oil-Related Investments may
be reduced after the close of the NYMEX at 2:30 p.m. New York time. As a result,
during this time, trading spreads, and the resulting premium or discount, on the
units may widen.





Prior
Performance of USSO




USSO’s
units began trading on the NYSE Arca on September 24, 2009 and are offered on a
continuous basis. As of December 31, 2009, the total amount of money raised by
USSO from Authorized Purchasers was $14,290,534; the total number of Authorized
Purchasers was 7; the number of baskets purchased by Authorized Purchasers was
3; the number of baskets redeemed by Authorized Purchasers was 0; and the
aggregate amount of units purchased was 300,000.  For more information
on the performance of USSO, see the Performance Tables below.





Since its
initial offering of 25,000,000 units, USSO has not made any subsequent offering
of its units.  As of December 31, 2009, USSO had issued 300,000 units,
all of which were outstanding.  As of December 31, 2009, there
were 29,700,000 units registered but not yet issued.





Since the
offering of USSO units to the public on September 24, 2009 to December 31, 2009,
the simple average daily change in the inverse of its Benchmark Futures Contract
was -0.164%, while the simple average daily change in the NAV of USSO over the
same time period was -0.167%.  The average daily difference was 0.332%
(or .000332 basis points, where 1 basis point equals 1/100 of 1%).  As
a percentage of the daily movement of the Benchmark Futures Contract, the
average error in daily tracking by the NAV was 0.179%, meaning that over this
time period USSO’s tracking error was within the plus or minus 10% range
established as its benchmark tracking goal.





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered *:
                  
                  $
                  1,500,000,000Dollar
      Amount Raised:
                  
                  $
                  14,290,534Organizational
      and Offering Expenses **:SEC registration
    fee:
                  
                  $
                  49,125FINRA registration
      fee:
                  
                  $
                  75,500Listing fee:
                  
                  $
                  5,000Auditor’s
      fees and expenses
                  
                  $
                  0Legal
      fees and expenses:
                  
                  $
                  512,460Printing
expenses:
                  
                  $
                  23,945Length
      of USSO Offering:
                  
                  Continuous
  *
                    Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.
 **
                    These
      expenses were paid for by the General
Partner.




24




Compensation
to the General Partner and Other Compensation USSO:





Expenses
paid by USSO through December 31, 2009 in dollar terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  20,150Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  4,695Other
      Amounts Paid *:
                  
                  $
                  212,443Total
      Expenses Paid:
                  
                  $
                  237,288Expenses
      Waived **:
                  
                  $
                  (206,444
                  )Total
      Expenses Paid or Accrued Including Expenses Waived:
                  
                  $
                  30,844





*
            Includes
      expenses relating to legal fees, auditing fees, printing expenses,
      licensing fees and tax reporting fees and fees paid to the independent
      directors of the General Partner.


**
            The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of USSO’s NAV, on an annualized basis. The General
      Partner has no obligation to continue such payment into subsequent
      periods.





Expenses
paid by USSO through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
                      
                      
                      Amount
      as a Percentage
                        of Average Daily Net
  AssetsAmount
      Paid to General Partner:
                      
                      
                      0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                      
                      
                      0.14%
      annualizedOther
      Amounts Paid:
                      
                      
                      6.33%
      annualizedTotal
      Expenses Paid:
                      
                      
                      7.07%
      annualizedExpenses
      Waived:
                      
                      
                      (6.15)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                      
                      
                      0.92%
      annualized





USSO
      Performance:Name
      of Commodity Pool:
                                
                                USSOType
      of Commodity Pool:
                                
                                Exchange
      traded securityInception
      of Trading:
                                
                                September
      24, 2009Aggregate
      Subscriptions (from inception through December 31,2009):
                                
                                $
                                14,290,534Total
      Net Assets as of December 31, 2009:
                                
                                $
                                13,196,305Initial
      NAV per Unit as of Inception:
                                
                                $
                                50.00NAV
      per Unit as of December 31, 2009:
                                
                                $
                                43.99Worst
      Monthly Percentage Draw-down:
                                
                                October
      2009 (8.65)%Worst
      Peak-to-Valley Draw-down:
                                
                                September
      2009-December 2009 (12.02)%Number
      of Unitholders (as of December 31, 2009)
                                
                                
                                185




25


COMPOSITE
PERFORMANCE DATA FOR USSO


PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                    
                    2009January
                    
                    
                    –February
                    
                    
                    –March
                    
                    
                    –April
                    
                    
                    –May
                    
                    
                    –June
                    
                    
                    –July
                    
                    
                    –August
                    
                    
                    –September
                    
                    
                    (2.90
                    )%**October
                    
                    
                    (8.65
                    )%November
                    
                    
                    (0.25
                    )%December
                    
                    
                    (0.57
                    )%Annual
      Rate of Return
                    
                    
                    (12.02
                    )%**








*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.


**
            Partial
      from September 24, 2009.





Terms
      Used in Performance Tables





Draw-down: Losses experienced
over a specified period. Draw-down is measured on the basis of monthly returns
only and does not reflect intra-month figures.





Worst Monthly Percentage
Draw-down: The largest single month loss sustained since inception of
trading.





Worst Peak-to-Valley
Draw-down: The largest percentage decline in the NAV per unit over the
history of the fund. This need not be a continuous decline, but can be a series
of positive and negative returns where the negative returns are larger than the
positive returns.  Worst Peak-to-Valley Draw-down represents the
greatest percentage decline from any month-end NAV per unit that occurs without
such month-end NAV per unit being equaled or exceeded as of a subsequent
month-end. For example, if the NAV per unit declined by $1 in each of January
and February, increased by $1 in March and declined again by $2 in April, a
“peak-to-trough drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be still continuing and to be $3 in amount, whereas
if the NAV per unit had increased by $2 in March, the January-February drawdown
would have ended as of the end of February at the $2 level.





Prior
Performance of the Related Public Funds





The
General Partner is also currently the general partner of the Related Public
Funds. Each of the General Partner and the Related Public Funds is located in
California.





USOF is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USOF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet crude
oil delivered to Cushing, Oklahoma, as measured by the changes in the price of
the futures contract on light, sweet crude oil traded on the NYMEX, less USOF’s
expenses. USOF’s units began trading on April 10, 2006 and are offered on a
continuous basis. USOF may invest in a mixture of listed crude oil futures
contracts, other non-listed oil related investments, Treasuries, cash and cash
equivalents. As of December 31, 2009, the total amount of money raised by USOF
from its authorized purchasers was $24,257,292,570; the total number of
authorized purchasers of USOF was 17; the number of baskets purchased by
authorized purchasers of USOF was 4,752; the number of baskets redeemed by
authorized purchasers of USOF was 4,121; and the aggregate amount of units
purchased was 475,200,000. USOF employs an investment strategy in its operations
that is similar to the investment strategy of USSO, except that its benchmark is
the near month contract to expire for light, sweet crude oil delivered to
Cushing, Oklahoma.





Since the
offering of USOF units to the public on April 10, 2006 to December 31, 2009, the
simple average daily change in its benchmark oil futures contract was -0.027%,
while the simple average daily change in the NAV of USOF over the same time
period was -0.022%. The average daily difference was 0.005% (or 0.5 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark oil futures contract, the average error in daily
tracking by the NAV was 1.56%, meaning that over this time period USOF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.


26





USNG is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USNG is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of natural gas
delivered at the Henry Hub, Louisiana as measured by the changes in the price of
the futures contract for natural gas traded on the NYMEX, less USNG’s expenses.
USNG’s units began trading on April 18, 2007 and are offered on a continuous
basis. USNG may invest in a mixture of listed natural gas futures contracts,
other non-listed natural gas related investments, Treasuries, cash and cash
equivalents. As of December 31, 2009, the total amount of money raised by USNG
from its authorized purchasers was $10,435,093,775; the total number of
authorized purchasers of USNG was 14; the number of baskets purchased by
authorized purchasers of USNG was 5,821; the number of baskets redeemed by
authorized purchasers of USNG was 1,326; and the aggregate amount of units
purchased was 582,100,000. USNG employs an investment strategy in its operations
that is similar to the investment strategy of USSO, except its benchmark is the
near month contract for natural gas delivered at the Henry Hub,
Louisiana.





Since the
offering of USNG units to the public on April 18, 2007 to December 31, 2009, the
simple average daily change in its benchmark futures contract was -0.181%, while
the simple average daily change in the NAV of USNG over the same time period was
-0.179%. The average daily difference was 0.002% (or 0.2 basis points, where 1
basis point equals 1/100 of 1%). As a percentage of the daily movement of the
benchmark futures contract, the average error in daily tracking by the NAV was
0.392%, meaning that over this time period USNG’s tracking error was within the
plus or minus 10% range established as its benchmark tracking goal.




US12OF is
a commodity pool and issues units traded on the NYSE Arca. The investment
objective of US12OF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet crude
oil delivered to Cushing, Oklahoma, as measured by the changes in the average of
the prices of 12 futures contracts on light, sweet crude oil traded on the
NYMEX, consisting of the near month contract to expire and the contracts for the
following 11 months, for a total of 12 consecutive months’ contracts, less
US12OF’s expenses. US12OF’s units began trading on December 6, 2007 and are
offered on a continuous basis. US12OF invests in a mixture of listed crude oil
futures contracts, other non-listed oil related investments, Treasuries, cash
and cash equivalents. As of December 31, 2009, the total amount of money raised
by US12OF from its authorized purchasers was $224,069,815; the total number of
authorized purchasers of US12OF was 4; the number of baskets purchased by
authorized purchasers of US12OF was 75; the number of baskets redeemed by
authorized purchasers of US12OF was 34; and the aggregate amount of units
purchased was 7,500,000. US12OF employs an investment strategy in its operations
that is similar to the investment strategy of USSO, except that its benchmark is
the average of the prices of the near month contract to expire and the following
eleven months contracts for light, sweet crude oil delivered to Cushing,
Oklahoma.





Since the
offering of US12OF units to the public on December 6, 2007 to December 31, 2009,
the simple average daily change in its benchmark oil futures contract was
-0.004%, while the simple average daily change in the NAV of US12OF over the
same time period was -0.003%. The average daily difference was 0.001% (or 0.1
basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the
daily movement of the benchmark oil futures contract, the average error in daily
tracking by the NAV was -0.107%, meaning that over this time period US12OF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.





UGA is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of UGA is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms in the spot price of unleaded gasoline
for delivery to the New York harbor, as measured by the changes in the price of
the futures contract on gasoline traded on the NYMEX, less UGA’s expenses. UGA
may invest in a mixture of listed gasoline futures contracts, other non-listed
gasoline related investments, Treasuries, cash and cash equivalents. UGA’s units
began trading on February 26, 2008 and are offered on a continuous
basis. As of December 31, 2009, the total amount of money raised by UGA
from its authorized purchasers was $126,264,653; the total number of authorized
purchasers of UGA was 6; the number of baskets purchased by authorized
purchasers of UGA was 42; the number of baskets redeemed by authorized
purchasers of UGA was 23; and the aggregate amount of units purchased was
4,200,000.  UGA employs an investment strategy in its operations that
is similar to the investment strategy of USSO, except that its benchmark is the
near month contract for unleaded gasoline delivered to the New York
harbor.


27





Since the
offering of UGA units to the public on February 26, 2008 to December 31, 2009,
the simple average daily change in its benchmark futures contract was -0.011%,
while the simple average daily change in the NAV of UGA over the same time
period was -0.012%. The average daily difference was -0.001% (or -0.1 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.674%, meaning that over this time period UGA’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.





USHO is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USHO is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of heating oil for
delivery to the New York harbor, as measured by the changes in the price of the
futures contract on heating oil traded on the NYMEX, less USHO’s expenses. USHO
may invest in a mixture of listed heating oil futures contracts, other
non-listed heating oil-related investments, Treasuries, cash and cash
equivalents. USHO’s units began trading on April 9, 2008 and are offered on a
continuous basis. As of December 31, 2009, the total amount of money raised by
USHO from its authorized purchasers was $27,750,399; the total number of
authorized purchasers of USHO was 6; the number of baskets purchased by
authorized purchasers of USHO was 8; the number of baskets redeemed by
authorized purchasers of USHO was 2; and the aggregate amount of units purchased
was 800,000. USHO employs an investment strategy in its operations that is
similar to the investment strategy of USSO, except that its benchmark is the
near month contract for heating oil delivered to the New York
harbor.





Since the
offering of USHO units to the public on April 9, 2008 to December 31, 2009, the
simple average daily change in its benchmark futures contract was -0.093%, while
the simple average daily change in the NAV of USHO over the same time period was
-0.093%. The average daily difference was 0%. As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.696%, meaning that over this time period USHO’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.





US12NG is
a commodity pool and issues units traded on the NYSE Arca. The investment
objective of US12NG is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of natural gas
delivered at the Henry Hub, Louisiana, as measured by the changes in the average
of the prices of 12 futures contracts on natural gas traded on the NYMEX,
consisting of the near month contract to expire and the contracts for the
following 11 months, for a total of 12 consecutive months’ contracts, less
US12NG’s expenses. US12NG’s units began trading on November 18, 2009 and are
offered on a continuous basis. US12NG invests in a mixture of listed natural gas
futures contracts, other non-listed natural gas related investments, Treasuries,
cash and cash equivalents. As of December 31, 2009, the total amount of money
raised by US12NG from its authorized purchasers was $40,652,357; the total
number of authorized purchasers of US12NG was 2; the number of baskets purchased
by authorized purchasers of US12NG was 8; the number of baskets redeemed by
authorized purchasers of US12NG was 1; and the aggregate amount of units
purchased was 800,000. US12NG employs an investment strategy in its operations
that is similar to the investment strategy of USSO, except that its benchmark is
the average of the prices of the near month contract to expire and the following
eleven months contracts for natural gas delivered at the Henry Hub,
Louisiana.





Since the
offering of US12NG units to the public on November 18, 2009 to December 31,
2009, the simple average daily change in its benchmark futures contracts was
0.291%, while the simple average daily change in the NAV of US12NG over the same
time period was 0.287%. The average daily difference was -0.004% (or -0.4 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was 0.089%, meaning that over this time period US12NG’s tracking
error was within the plus or minus 10% range established as its benchmark
tracking goal.





The
General Partner has filed a registration statement for two other exchange traded
security funds, USBO and USCI. The investment objective of USBO will be for the
daily changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the spot price of Brent crude oil, as measured by the
changes in the price of the futures contract on Brent crude oil traded on the
ICE Futures, less USBO’s expenses. The investment objective of USCI will be for
the daily changes in percentage terms of its units’ NAV to reflect the daily
changes in percentage terms of the SDCI Total Return, less USCI’s
expenses.




28


There are
significant differences between investing in USSO and the Related Public Funds
and investing directly in the futures market. The General Partner’s results with
USSO and the Related Public Funds may not be representative of results that may
be experienced with a fund directly investing in futures contracts or other
managed funds investing in futures contracts. Moreover, given the different
investment objectives of USSO and the Related Public Funds, the performance of
USSO may not be representative of results that may be experienced by the other
Related Public Funds. For more information on the performance of the Related
Public Funds, see the Performance Tables below.





USOF:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered *:
                    
                    $
                    71,257,630,000Dollar
      Amount Raised:
                    
                    $
                    24,257,292,570Organizational
      and Offering Expenses **:SEC registration
    fee:
                    
                    $
                    2,480,174FINRA registration
      fee:
                    
                    $
                    603,500Listing fee:
                    
                    $
                    5,000Auditor’s fees and
      expenses:
                    
                    $
                    495,850Legal fees and
      expenses:
                    
                    $
                    2,040,875Printing
expenses:
                    
                    $
                    285,230Length
      of USOF Offering:
                    
                    Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            Through
      December 31, 2006, these expenses were paid for by an affiliate of the
      General Partner in connection with the initial public offering. Following
      December 31, 2006, USOF has recorded these
  expenses.





Compensation
to the General Partner and Other Compensation USOF:





Expenses
Paid by USOF through December 31, 2009 in dollar terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  20,842,027Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  7,159,498Other
      Amounts Paid *:
                  
                  $
                  8,770,873Total
      Expenses Paid:
                  
                  $
                  36,772,398





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.





Expenses
Paid by USOF through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
              
              Amount
      as a Percentage
                of Average Daily Net
  AssetsAmount
      Paid to General Partner:
              
              0.46%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
              
              0.16%
      annualizedOther
      Amounts Paid:
              
              0.19%
      annualizedTotal
      Expenses Paid:
              
              0.81%
      annualized





USOF
      Performance:Name
      of Commodity Pool:
                    
                    
                    USOFType
      of Commodity Pool:
                    
                    
                    Exchange
      traded securityInception
      of Trading:
                    
                    
                    April
      10, 2006Aggregate
      Subscriptions (from inceptionthrough
      December 31, 2009):
                    
                    $
                    24,257,292,570Total
      Net Assets as of December 31, 2009:
                    
                    $
                    2,471,252,817Initial
      NAV per Unit as of Inception:
                    
                    $
                    67.39NAV
      per Unit as of December 31, 2009:
                    
                    $
                    39.16Worst
      Monthly Percentage Draw-down:
                    
                    
                    October
      2008 (31.57)%Worst
      Peak-to-Valley Draw-down:
                    
                    
                    June 2008 – February 2009 (75.84)%Number
      of Unitholders (as of December 31, 2009)
                    
                    
                    84,835




29


COMPOSITE
PERFORMANCE DATA FOR USOF





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009January
                
                
                –
                
                
                
                (6.55
                )%
                
                
                (4.00
                )%
                
                
                (14.60
                )%February
                
                
                –
                
                
                
                5.63
                %
                
                
                11.03
                %
                
                
                (6.55
                )%March
                
                
                –
                
                
                
                4.61
                %
                
                
                0.63
                %
                
                
                7.23
                %April
                
                
                3.47
                %**
                
                
                (4.26
                )%
                
                
                12.38
                %
                
                
                (2.38
                )%May
                
                
                (2.91
                )%
                
                
                (4.91
                )%
                
                
                12.80
                %
                
                
                26.69
                %June
                
                
                3.16
                %
                
                
                9.06
                %
                
                
                9.90
                %
                
                
                4.16
                %July
                
                
                (0.50
                )%
                
                
                10.57
                %
                
                
                (11.72
                )%
                
                
                (2.30
                )%August
                
                
                (6.97
                )%
                
                
                (4.95
                )%
                
                
                (6.75
                )%
                
                
                (1.98
                )%September
                
                
                (11.72
                )%
                
                
                12.11
                %
                
                
                (12.97
                )%
                
                
                0.25
                %October
                
                
                (8.45
                )%
                
                
                16.98
                %
                
                
                (31.57
                )%
                
                
                8.43
                %November
                
                
                4.73
                %
                
                
                (4.82
                )%
                
                
                (20.65
                )%
                
                
                (0.51
                )%December
                
                
                (5.21
                )%
                
                
                8.67
                %
                
                
                (22.16
                )%
                
                
                (0.03
                )%Annual
      Rate of Return
                
                
                (23.03
                )%**
                
                
                46.17
                %
                
                
                (54.75
                )%
                
                
                14.14
                %





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.


**
            Partial
      from April 10, 2006.





For a
definition of draw-down, please see text below “Composite Performance Data for
USSO”.





USNG:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                  
                  $
                  24,056,500,000Dollar
      Amount Raised:
                  
                  $
                  10,435,093,775Organizational
      and Offering Expenses**:SEC registration
    fee:
                  
                  $
                  1,361,084FINRA registration
      fee:
                  
                  $
                  377,500Listing fee:
                  
                  $
                  5,000Auditor’s fees and
      expenses:
                  
                  $
                  274,350Legal fees and
      expenses:
                  
                  $
                  1,614,956Printing
expenses:
                  
                  $
                  73,270Length
      of USNG Offering:
                  
                  Continuous
  *
                    Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.
 **
                    Through
      April 18, 2007, these expenses were paid for by the General Partner.
      Following April 18, 2007, USNG has recorded these
  expenses.




30




Compensation
to the General Partner and Other Compensation USNG:





Expenses
paid by USNG through December 31, 2009 in dollar terms:





Expenses:
                    
                    Amount in Dollar TermsAmount
      Paid to General Partner:
                    
                    $
                    19,802,761Amount
      Paid in Portfolio Brokerage Commissions:
                    
                    $
                    12,603,078Other
      Amounts Paid*:
                    
                    $
                    8,074,997Total
      Expenses Paid:
                    
                    $
                    40,480,836





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.





Expenses
paid by USNG through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
              
              Amount
      as a Percentage
                of Average Daily Net
  AssetsAmount
      Paid to General Partner:
              
              0.55%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
              
              0.35%
      annualizedOther
      Amounts Paid:
              
              0.23%
      annualizedTotal
      Expenses Paid:
              
              1.13%
      annualized





USNG Performance:Name
      of Commodity Pool:
                                      
                                      
                                      USNGType
      of Commodity Pool:
                                      
                                      
                                      Exchange
      traded securityInception
      of Trading:
                                      
                                      
                                      April
      18, 2007Aggregate
      Subscriptions (from inception throughDecember
      31, 2009):
                                      
                                      
                                      $
                                      10,435,093,775Total
      Net Assets as of December 31, 2009:
                                      
                                      
                                      $
                                      4,525,107,163Initial
      NAV per Unit as of Inception:
                                      
                                      
                                      $
                                      50.00NAV
      per Unit as of December 31, 2009:
                                      
                                      
                                      $
                                      10.07Worst
      Monthly Percentage Draw-down:
                                      
                                      
                                      July
      2008 (32.13)%Worst
      Peak-to-Valley Draw-down:
                                      
                                      
                                      June 2008 – November 2009 (85.89)%Number of Unitholders (as of
      December 31, 2009)
                                      
                                      
                                      
                                      203,277





COMPOSITE
PERFORMANCE DATA FOR USNG





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009January
                    
                    
                    –
                    
                    
                    
                    8.87
                    %
                    
                    
                    (21.49
                    )%February
                    
                    
                    –
                    
                    
                    
                    15.87
                    %
                    
                    
                    (5.47
                    )%March
                    
                    
                    –
                    
                    
                    
                    6.90
                    %
                    
                    
                    (11.81
                    )%April
                    
                    
                    4.30
                    %**
                    
                    
                    6.42
                    %
                    
                    
                    (13.92
                    )%May
                    
                    
                    (0.84
                    )%
                    
                    
                    6.53
                    %
                    
                    
                    10.37
                    %June
                    
                    
                    (15.90
                    )%
                    
                    
                    13.29
                    %
                    
                    
                    (4.63
                    )%July
                    
                    
                    (9.68
                    )%
                    
                    
                    (32.13
                    )%
                    
                    
                    (8.70
                    )%August
                    
                    
                    (13.37
                    )%
                    
                    
                    (13.92
                    )%
                    
                    
                    (27.14
                    )%September
                    
                    
                    12.28
                    %
                    
                    
                    (9.67
                    )%
                    
                    
                    26.03
                    %October
                    
                    
                    12.09
                    %
                    
                    
                    (12.34
                    )%
                    
                    
                    (13.31
                    )%November
                    
                    
                    (16.16
                    )%
                    
                    
                    (6.31
                    )%
                    
                    
                    (11.86
                    )%December
                    
                    
                    0.75
                    %
                    
                    
                    (14.32
                    )%
                    
                    
                    13.91
                    %Annual
      Rate of Return
                    
                    
                    (27.64
                    )%**
                    
                    
                    (35.68
                    )%
                    
                    
                    (56.73
                    )%




*
              The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.
 **         Partial
from April 18, 2007.
  For a
definition of draw-down, please see text below “Composite Performance Data for
USSO”.




31





US12OF:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered *:
                  
                  $
                  3,718,000,000Dollar
      Amount Raised:
                  
                  $
                  224,069,815Organizational
      and Offering Expenses**:SEC registration
    fee:
                  
                  $
                  129,248FINRA registration
      fee:
                  
                  $
                  151,000Listing fee:
                  
                  $
                  5,000Auditor’s fees and
      expenses:
                  
                  $
                  60,700Legal fees and
      expenses:
                  
                  $
                  301,279Printing
expenses:
                  
                  $
                  44,402Length
      of US12OF Offering:
                  
                  Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            Through
      March 31, 2009, a portion of these expenses were paid for by an affiliate
      of the General Partner in connection with the initial public
      offering.  Following March 31, 2009, US12OF has recorded these
      expenses.





Compensation
to the General Partner and Other Compensation US12OF:





Expenses paid byUS12OF through December 31, 2009 in dollar
terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  922,534Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  52,790Other
      Amounts Paid *:
                  
                  $
                  798,777Total
      Expenses Paid or Accrued:
                  
                  $
                  1,774,101Expenses
      Waived**:
                  
                  $
                  (108,246
                  )Total
      Expenses Paid or Accrued IncludingExpenses
      Waived:
                  
                  $
                  1,665,855




*
              Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.
 **
              The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of US12OF’s NAV, on an annualized basis through March 31,
      2009, after which date such payments were no longer necessary. The
      General Partner has no obligation to continue such payment in subsequent
      periods.




32





Expenses paid byUS12OF through December 31, 2009 as a
Percentage of Average Daily Net Assets:





Expenses:
                
                Amount
      as a Percentage
                  of Average Daily Net
  AssetsAmount
      Paid to General Partner:
                
                0.60%
      annualizedAmount
      Paid in Portfolio BrokerageCommissions:
                
                0.03%
      annualizedOther
      Amounts Paid:
                
                0.52%
      annualizedTotal
      Expenses Paid or Accrued:
                
                1.15%
      annualizedExpenses
      Waived:
                
                (0.07)%
      annualizedTotal
      Expenses Paid or Accrued IncludingExpenses
      Waived:
                
                1.08%
      annualized




US12OF
      Performance:Name
      of Commodity Pool:
                      
                      
                      US12OFType
      of Commodity Pool:
                      
                      
                      Exchange
      traded securityInception
      of Trading:
                      
                      
                      December
      6, 2007Aggregate
      Subscriptions (from inception throughDecember
      31, 2009):
                      
                      $
                      224,069,815Total
      Net Assets as of December 31, 2009:
                      
                      $
                      165,523,309Initial
      NAV per Unit as of Inception:
                      
                      $
                      50.00NAV
      per Unit as of December 31, 2009:
                      
                      $
                      40.37Worst
      Monthly Percentage Draw-down:
                      
                      
                      October
      2008 (29.59)%Worst
      Peak-to-Valley Draw-down:
                      
                      
                      June 2008–February 2009 (66.97)%Number of Unitholders
      (as of December 31,2009)
                      
                      
                      6,875





COMPOSITE
PERFORMANCE DATA FOR US12OF





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                  
                  2007
                  
                  
                  2008
                  
                  
                  2009January
                  
                  
                  –
                  
                  
                  
                  (2.03
                  )%
                  
                  
                  (7.11
                  )%February
                  
                  
                  –
                  
                  
                  
                  10.48
                  %
                  
                  
                  (4.34
                  )%March
                  
                  
                  –
                  
                  
                  
                  (0.66
                  )%
                  
                  
                  9.22
                  %April
                  
                  
                  –
                  
                  
                  
                  11.87
                  %
                  
                  
                  (1.06
                  )%May
                  
                  
                  –
                  
                  
                  
                  15.47
                  %
                  
                  
                  20.40
                  %June
                  
                  
                  –
                  
                  
                  
                  11.59
                  %
                  
                  
                  4.51
                  %July
                  
                  
                  –
                  
                  
                  
                  (11.39
                  )%
                  
                  
                  1.22
                  %August
                  
                  
                  –
                  
                  
                  
                  (6.35
                  )%
                  
                  
                  (2.85
                  )%September
                  
                  
                  –
                  
                  
                  
                  (13.12
                  )%
                  
                  
                  (0.92
                  )%October
                  
                  
                  –
                  
                  
                  
                  (29.59
                  )%
                  
                  
                  8.48
                  %November
                  
                  
                  –
                  
                  
                  
                  (16.17
                  )%
                  
                  
                  2.31
                  %December
                  
                  
                  8.46
                  %**
                  
                  
                  (12.66
                  )%
                  
                  
                  (1.10
                  )%Annual
      Rate of Return
                  
                  
                  8.46
                  %**
                  
                  
                  (42.39
                  )%
                  
                  
                  29.23
                  %




*
              The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.
 **
              Partial
      from December 6, 2007.
  For a
definition of draw-down, please see text below “Composite Performance Data for
USSO”.




33


UGA:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                  
                  $
                  1,500,000,000Dollar
      Amount Raised:
                  
                  $
                  126,264,653Organizational
      and Offering Expenses**:SEC registration
    fee:
                  
                  $
                  184,224FINRA registration
      fee:
                  
                  $
                  151,000Listing fee:
                  
                  $
                  5,000Auditor’s fees and
      expenses:
                  
                  $
                  27,500Legal fees and
      expenses:
                  
                  $
                  217,078Printing
expenses:
                  
                  $
                  162,901Length
      of UGA Offering:
                  
                  Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            Through
      August 31, 2009, initial offering costs and a portion of ongoing expenses
      were paid for by the General Partner. Following August 31, 2009, UGA has
      recorded these expenses.





Compensation
to the General Partner and Other Compensation UGA:





Expenses paid by UGA through December 31, 2009 in dollar
terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  474,543Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  90,757Other
      Amounts Paid*:
                  
                  $
                  529,839Total
      Expenses Paid:
                  
                  $
                  1,095,139Expenses
      Waived**:
                  
                  $
                  (382,703
                  )Total
      Expenses Paid or Accrued Including Expenses Waived:
                  
                  $
                  712,436





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.


**
            The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of UGA’s NAV, on an annualized basis. The General Partner
      has no obligation to continue such payment into subsequent
      periods.




34




Expenses paid by UGA through December 31, 2009 as a
Percentage of Average Daily Net Assets:





Expenses:
                
                Amount
      as a Percentage
                  of Average Daily Net
  AssetsAmount
      Paid to General Partner:
                
                0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                
                0.11%
      annualizedOther
      Amounts Paid:
                
                0.67%
      annualizedTotal
      Expenses Paid:
                
                1.38%
      annualizedExpenses
      Waived:
                
                (0.48)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                
                0.90%
      annualized





UGA Performance:Name
      of Commodity Pool:
                    
                    UGAType
      of Commodity Pool:
                    
                    Exchange
      traded securityInception
      of Trading:
                    
                    February
      26, 2008Aggregate
      Subscriptions (from inception through December 31, 2009):
                    
                    $
                    126,263,653Total
      Net Assets as of December 31, 2009:
                    
                    $
                    69,185,740Initial
      NAV per Unit as of Inception:
                    
                    $
                    50.00NAV
      per Unit as of December 31, 2009:
                    
                    $
                    36.41Worst
      Monthly Percentage Draw-down:
                    
                    October
      2008 (38.48%)Worst
      Peak-to-Valley Draw-down:
                    
                    June 2008 – December 2008 (69.02%)Number
      of Unitholders (as of December31, 2009)
                    
                    
                    5,131





COMPOSITE
PERFORMANCE DATA FOR UGA





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                  
                  2008
                  
                  
                  2009January
                  
                  
                  –
                  
                  
                  
                  16.23
                  %February
                  
                  
                  (0.56
                  )%**
                  
                  
                  0.26
                  %March
                  
                  
                  (2.39
                  )%
                  
                  
                  2.59
                  %April
                  
                  
                  10.94
                  %
                  
                  
                  2.07
                  %May
                  
                  
                  15.60
                  %
                  
                  
                  30.41
                  %June
                  
                  
                  4.80
                  %
                  
                  
                  1.65
                  %July
                  
                  
                  (12.79
                  )%
                  
                  
                  6.24
                  %August
                  
                  
                  (3.88
                  )%
                  
                  
                  (3.71
                  )%September
                  
                  
                  (9.36
                  )%
                  
                  
                  (3.38
                  )%October
                  
                  
                  (38.48
                  )%
                  
                  
                  10.96
                  %November
                  
                  
                  (21.35
                  )%
                  
                  
                  1.00
                  %December
                  
                  
                  (15.72
                  )%
                  
                  
                  0.55
                  %Annual
      Rate of Return
                  
                  
                  (59.58
                  )%**
                  
                  
                  80.16
                  %





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.


**
              Partial
      from February 26, 2008.





For a
definition of draw-down, please see text below “Composite Performance Data for
USSO”.


35





USHO:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                  
                  $
                  500,000,000Dollar
      Amount Raised:
                  
                  $
                  27,750,399Organizational
      and Offering Expenses**:SEC registration
    fee:
                  
                  $
                  142,234FINRA registration
      fee:
                  
                  $
                  151,000Listing fee:
                  
                  $
                  5,000Auditor’s fees and
      expenses:
                  
                  $
                  27,500Legal fees and
      expenses:
                  
                  $
                  121,321Printing
expenses:
                  
                  $
                  106,584Length
      of USHO Offering:
                  
                  Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            Through
      August 31, 2009, initial offering costs and a portion of ongoing expenses
      were paid for by the General Partner. Following August 31, 2009, USHO has
      recorded these expenses.





Compensation
to the General Partner and Other Compensation USHO:





Expenses
paid by USHO through December 31, 2009 in dollar terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  109,681Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  18,418Other
      Amounts Paid*:
                  
                  $
                  333,904Total
      Expenses Paid:
                  
                  $
                  462,003Expenses
      Waived **:
                  
                  $
                  (299,225
                  )Total
      Expenses Paid or Accrued Including Expenses Waived:
                  
                  $
                  162,778





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.


**
            The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of USHO’s NAV, on an annualized basis. The General
      Partner has no obligation to continue such payment into subsequent
      periods.





Expenses
paid by USHO through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
              
              Amount
      as a Percentage
                of Average Daily Net
  AssetsAmount
      Paid to General Partner:
              
              0.60%
      annualizedAmount
      Paid in Portfolio BrokerageCommissions:
              
              0.10%
      annualizedOther
      Amounts Paid:
              
              1.83%
      annualizedTotal
      Expenses Paid:
              
              2.53%
      annualizedExpenses
      Waived:
              
              (1.64)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
              
              0.89%
      annualized




36





USHO Performance:Name
      of Commodity Pool:
                          
                          USHOType
      of Commodity Pool:
                          
                          Exchange
      traded securityInception
      of Trading:
                          
                          April
      9, 2008Aggregate
      Subscriptions (from inception through December31,
      2009):
                          
                          $
                          27,750,399Total
      Net Assets as of December 31, 2009:
                          
                          $
                          16,525,095Initial
      NAV per Unit as of Inception:
                          
                          $
                          50.00NAV
      per Unit as of December 31, 2009:
                          
                          $
                          27.54Worst
      Monthly Percentage Draw-down:
                          
                          October
      2008 (28.63)%Worst
      Peak-to-Valley Draw-down:
                          
                          June 2008 – February 2009 (69.17)%Number of
      Unitholders (as of December 31, 2009)
                          
                          
                          1,154





COMPOSITE
PERFORMANCE DATA FOR USHO





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                  
                  2008
                  
                  
                  2009January
                  
                  
                  –
                  
                  
                  
                  0.05
                  %February
                  
                  
                  –
                  
                  
                  
                  (11.34
                  )%March
                  
                  
                  –
                  
                  
                  
                  6.73
                  %April
                  
                  
                  2.84
                  %**
                  
                  
                  (3.85
                  )%May
                  
                  
                  15.93
                  %
                  
                  
                  23.13
                  %June
                  
                  
                  5.91
                  %
                  
                  
                  4.55
                  %July
                  
                  
                  (12.18
                  )%
                  
                  
                  0.39
                  %August
                  
                  
                  (8.41
                  )%
                  
                  
                  (2.71
                  )%September
                  
                  
                  (9.77
                  )%
                  
                  
                  (0.48
                  )%October
                  
                  
                  (28.63
                  )%
                  
                  
                  7.60
                  %November
                  
                  
                  (18.38
                  )%
                  
                  
                  0.19
                  %December
                  
                  
                  (17.80
                  )%
                  
                  
                  2.23
                  %Annual
      Rate of Return
                  
                  
                  (56.12
                  )%**
                  
                  
                  25.52
                  %





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.


**
            Partial
      from April 9, 2008.





For a
definition of draw-down, please see text below “Composite Performance Data for
USSO”.





US12NG:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered *:
                  
                  $
                  1,500,000,000Dollar
      Amount Raised:
                  
                  $
                  40,652,357Organizational
      and Offering Expenses **:SEC registration
    fee:
                  
                  $
                  82,445FINRA registration
      fee:
                  
                  $
                  75,500Listing fee:
                  
                  $
                  5,000Auditor’s fees and
      expenses:
                  
                  $
                  2,500Legal fees and
      expenses:
                  
                  $
                  202,252Printing
expenses:
                  
                  $
                  31,588Length
      of US12NG Offering:
                  
                  Continuous




*
              Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.
 **
              These
      expenses were paid for by the General
Partner.




37




Compensation
to the General Partner and Other Compensation US12NG:





Expenses
paid by US12NG through December 31, 2009 in dollar terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  16,490Amount
      Paid in Portfolio BrokerageCommissions:
                  
                  $
                  9,284Other
      Amounts Paid*:
                  
                  $
                  141,553Total
      Expenses Paid:
                  
                  $
                  167,327Expenses
      Waived **:
                  
                  $
                  (136,678
                  )Total
      Expenses Paid or Accrued IncludingExpenses
      Waived:
                  
                  $
                  30,649





*
            Includes
      expenses relating to legal fees, auditing fees, printing expenses,
      licensing fees and tax reporting fees and fees paid to the independent
      directors of the General Partner.


**
            The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of US12NG’s NAV, on an annualized basis. The General
      Partner has no obligation to continue such payment into subsequent
      periods.





Expenses
paid by US12NG through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
            
            Amount
      as a Percentage
              of Average Daily Net
  AssetsAmount
      Paid to General Partner:
            
            0.60%
      annualizedAmount
      Paid in Portfolio BrokerageCommissions:
            
            0.34%
      annualizedOther
      Amounts Paid:
            
            5.15%
      annualizedTotal
      Expenses Paid:
            
            6.09%
      annualizedExpenses
      Waived:
            
            (4.97)%
      annualizedTotal
      Expenses Paid or Accrued IncludingExpenses
      Waived:
            
            1.12%
      annualized





US12NGPerformance:Name
      of Commodity Pool:
                        
                        US12NGType
      of Commodity Pool:
                        
                        Exchange
      traded securityInception
      of Trading:
                        
                        November
      18, 2009Aggregate
      Subscriptions (from inceptionthrough
      December 31, 2009):
                        
                        $
                        40,652,357Total
      Net Assets as of December 31, 2009:
                        
                        $
                        37,637,148Initial
      NAV per Unit as of Inception:
                        
                        $
                        50.00NAV
      per Unit as of December 31, 2009:
                        
                        $
                        53.77Worst
      Monthly Percentage Draw-down:
                        
                        November
      2009 (0.02)%Worst
      Peak-to-Valley Draw-down:
                        
                        November
      2009 (0.02)%Number
      of Unitholders (as of December31,
      2009)
                        
                        
                        1,276




38


COMPOSITE
PERFORMANCE DATA FOR US12NG





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                    
                    2009January
                    
                    
                    –February
                    
                    
                    –March
                    
                    
                    –April
                    
                    
                    –May
                    
                    
                    –June
                    
                    
                    –July
                    
                    
                    –August
                    
                    
                    –September
                    
                    
                    –October
                    
                    
                    –November
                    
                    
                    (0.02
                    )%**December
                    
                    
                    7.56
                    %Annual
      Rate of Return
                    
                    
                    7.54
                    %**





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.


**
            Partial
      from November 18, 2009.





For a
definition of draw-down, please see text below “Composite Performance Data for
USSO”.





Other
Related Commodity Trading and Investment Management Experience





Until
December 31, 2009, Ameristock Corporation was an affiliate of the General
Partner.  Ameristock Corporation is a California-based registered
investment advisor registered under the Investment Advisers Act of 1940, as
amended, that has been sponsoring and providing portfolio management services to
mutual funds since 1995. Ameristock Corporation is the investment adviser to the
Ameristock Mutual Fund, Inc., a mutual fund registered under the Investment
Company Act of 1940, as amended (the “1940 Act”), that focuses on large cap U.S.
equities that has $219,616,809 in assets as of December 31, 2009. Ameristock
Corporation was also the investment advisor to the Ameristock ETF Trust, an
open-end management investment company registered under the 1940 Act that
consisted of five separate investment portfolios, each of which sought
investment results, before fees and expenses, that corresponded generally to the
price and yield performance of a particular U.S. Treasury securities index owned
and compiled by Ryan Holdings LLC and Ryan ALM, Inc.  The Ameristock
ETF Trust has liquidated each of its investment portfolios and has wound up its
affairs.





Investments





The
General Partner applies substantially all of USSO’s assets toward taking short
positions in Futures Contracts and Other Crude Oil-Related Investments and
investments in Treasuries, cash and/or cash equivalents. The General Partner has
sole authority to determine the percentage of assets that are:





·
            held
      on deposit with the futures commission merchant or other
      custodian,





·
            used
      for other investments, and





·
            held
      in bank accounts to pay current obligations and as
    reserves.


39





The
General Partner deposits substantially all of USSO’s net assets with the
Custodian or other custodian. When USSO sells or purchases a Futures Contract
and certain exchange traded Other Crude Oil-Related Investments, USSO is
required to deposit with the selling futures commission merchant on behalf of
the exchange a portion of the value of the contract or other interest as
security to ensure payment for the obligation under Crude Oil Interests at
maturity. This deposit is known as “margin.” USSO invests the remainder of its
assets equal to the difference between the margin deposited and the market value
of the futures contract in Treasuries, cash and/or cash
equivalents.




USSO’s
assets are held in segregated accounts pursuant to the CEA and CFTC regulations.
The General Partner believes that all entities that hold or trade USSO’s assets
are based in the United States and are subject to United States
regulations.




Approximately
5% to 10% of USSO’s assets have normally been committed as margin for commodity
Futures Contracts. However, from time to time, the percentage of assets
committed as margin may be substantially more, or less, than such range. The
General Partner invests the balance of USSO’s assets not invested in Crude Oil
Interests  or held in margin as reserves to be available for changes
in margin. All interest income is used for USSO’s benefit.




The
futures commission merchant, a government agency or a commodity exchange could
increase margins applicable to USSO to hold trading positions at any time.
Moreover, margin is merely a security deposit and has no bearing on the profit
or loss potential for any positions taken.




The
Commodity Interest Markets




General




The CEA
governs the regulation of commodity interest transactions, markets and
intermediaries. In December 2000, the CEA was amended by the Commodity Futures
Modernization Act of 2000 (the “CFMA”), which substantially revised the
regulatory framework governing certain commodity interest transactions and the
markets on which they trade. The CEA, as amended by the CFMA, now provides for
varying degrees of regulation of commodity interest transactions depending upon
the variables of the transaction. In general, these variables include (1) the
type of instrument being traded (e.g., contracts for future
delivery, options, swaps or spot contracts), (2) the type of commodity
underlying the instrument (distinctions are made between instruments based on
agricultural commodities, energy and metals commodities and financial
commodities), (3) the nature of the parties to the transaction (retail, eligible
contract participant, or eligible commercial entity), (4) whether the
transaction is entered into on a principal-to-principal or intermediated basis,
(5) the type of market on which the transaction occurs, and (6) whether the
transaction is subject to clearing through a clearing organization. Information
regarding commodity interest transactions, markets and intermediaries, and their
associated regulatory environment, is provided below.




Futures
Contracts




A futures
contract is a standardized contract traded on, or subject to the rules of, an
exchange that calls for the future delivery of a specified quantity and type of
a commodity at a specified time and place. Futures contracts are traded on a
wide variety of commodities, including agricultural products, bonds, stock
indices, interest rates, currencies, energy and metals. The size and terms of
futures contracts on a particular commodity are identical and are not subject to
any negotiation, other than with respect to price and the number of contracts
traded between the buyer and seller.




The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying commodity or by making an
offsetting sale or purchase of an identical futures contract on the same or
linked exchange before the designated date of delivery. The difference between
the price at which the futures contract is purchased or sold and the price paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts, such as
stock index contracts, settle in cash (reflecting the difference between the
contract purchase/sale price and the contract settlement price) rather than by
delivery of the underlying commodity.





In market
terminology, a trader who purchases a futures contract is long in the market and
a trader who sells a futures contract is short in the market. Before a trader
closes out his long or short position by an offsetting sale or purchase, his
outstanding contracts are known as open trades or open positions. The aggregate
amount of open positions held by traders in a particular contract is referred to
as the open interest in such contract.


40





Forward
Contracts




A forward
contract is a contractual obligation to purchase or sell a specified quantity of
a commodity at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract. Unlike futures
contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward contracts
for a given commodity are generally available for various amounts and maturities
and are subject to individual negotiation between the parties involved.
Moreover, generally there is no direct means of offsetting or closing out a
forward contract by taking an offsetting position as one would a futures
contract on a U.S. exchange. If a trader desires to close out a forward contract
position, he generally will establish an opposite position in the contract but
will settle and recognize the profit or loss on both positions simultaneously on
the delivery date. Thus, unlike in the futures contract market where a trader
who has offset positions will recognize profit or loss immediately, in the
forward market a trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and likewise a trader
with a position that has been offset at a loss will generally not have to pay
money until the delivery date. In recent years, however, the terms of forward
contracts have become more standardized, and in some instances such contracts
now provide a right of offset or cash settlement as an alternative to making or
taking delivery of the underlying commodity.





The
forward markets provide what has typically been a highly liquid market for
foreign exchange trading, and in certain cases the prices quoted for foreign
exchange forward contracts may be more favorable than the prices for foreign
exchange futures contracts traded on U.S. exchanges. The forward markets are
largely unregulated. Forward contracts are, in general, not cleared or
guaranteed by a third party. Commercial banks participating in trading foreign
exchange forward contracts often do not require margin deposits, but rely upon
internal credit limitations and their judgments regarding the creditworthiness
of their counterparties. In recent years, however, many over-the-counter market
participants in foreign exchange trading have begun to require that their
counterparties post margin.





Further,
as the result of the CFMA, over-the-counter derivative instruments such as
forward contracts and swap agreements (and options on forwards and physical
commodities) may begin to be traded on lightly-regulated exchanges or electronic
trading platforms that may, but are not required to, provide for clearing
facilities. Exchanges and electronic trading platforms on which over-the-counter
instruments may be traded and the regulation and criteria for that trading are
more fully described below under “Futures Exchanges and Clearing Organizations.”
Nonetheless, absent a clearing facility, USSO’s trading in foreign exchange and
other forward contracts is exposed to the creditworthiness of the counterparties
on the other side of the trade.





Options
on Futures Contracts




Options
on futures contracts are standardized contracts traded on an exchange. An option
on a futures contract gives the buyer of the option the right, but not the
obligation, to take a position at a specified price (the striking, strike, or
exercise price) in the underlying futures contract or underlying interest. The
buyer of a call option acquires the right, but not the obligation, to purchase
or take a long position in the underlying interest, and the buyer of a put
option acquires the right, but not the obligation, to sell or take a short
position in the underlying interest.




The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer if the
option is exercised. Thus, the seller of a call option must stand ready to take
a short position in the underlying interest at the strike price if the buyer
should exercise the option. The seller of a put option, on the other hand, must
stand ready to take a long position in the underlying interest at the strike
price.




A call
option is said to be in-the-money if the strike price is below current market
levels and out-of-the-money if the strike price is above current market levels.
Conversely, a put option is said to be in-the-money if the strike price is above
the current market levels and out-of-the-money if the strike price is below
current market levels.





Options
have limited life spans, usually tied to the delivery or settlement date of the
underlying interest. Some options, however, expire significantly in advance of
such date. The purchase price of an option is referred to as its premium, which
consists of its intrinsic value (which is related to the underlying market
value) plus its time value. As an option nears its expiration date, the time
value shrinks and the market and intrinsic values move into parity. An option
that is out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options simply
become worthless after their expiration date.


41




Regardless
of how much the market swings, the most an option buyer can lose is the option
premium. The option buyer deposits his premium with his broker, and the money
goes to the option seller. Option sellers, on the other hand, face risks similar
to participants in the futures markets. For example, since the seller of a call
option is assigned a short futures position if the option is exercised, his risk
is the same as someone who initially sold a futures contract. Because no one can
predict exactly how the market will move, the option seller posts margin to
demonstrate his ability to meet any potential contractual
obligations.





Options
on Forward Contracts or Commodities




Options
on forward contracts or commodities operate in a manner similar to options on
futures contracts. An option on a forward contract or commodity gives the buyer
of the option the right, but not the obligation, to take a position at a
specified price in the underlying forward contract or commodity. However,
similar to forward contracts, options on forward contracts or on commodities are
individually negotiated contracts between counterparties and are typically
traded in the over-the-counter market. Therefore, options on forward contracts
and physical commodities possess many of the same characteristics of forward
contracts with respect to offsetting positions and credit risk that are
described above.





Swap
Contracts




Swap
transactions generally involve contracts between two parties to exchange a
stream of payments computed by reference to a notional amount and the price of
the asset that is the subject of the swap. Swap contracts are principally traded
off-exchange, although recently, as a result of regulatory changes enacted as
part of the CFMA, certain swap contracts are now being traded in electronic
trading facilities and cleared through clearing organizations.





Swaps are
usually entered into on a net basis, that is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
agreement, with the parties receiving or paying, as the case may be, only the
net amount of the two payments. Swaps do not generally involve the delivery of
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps is generally limited to the net amount of payments that the party is
contractually obligated to make. In some swap transactions one or both parties
may require collateral deposits from the counterparty to support that
counterparty’s obligation under the swap agreement. If the counterparty to such
a swap defaults, the risk of loss consists of the net amount of payments that
the party is contractually entitled to receive less any collateral deposits
it is holding.





Some swap
transactions are cleared through central counterparties.  These
transactions, known as cleared swaps, involve two counterparties first agreeing
to the terms of a swap transaction, then submitting the transaction to a
clearing house that acts as the central counterparty. Once submitted to the
clearing house, the original swap transaction is novated and the central
counterparty becomes the counterparty to a trade with each of the original
parties based upon the trade terms determined in the original
transaction.  In this manner each individual swap counterparty reduces
its risk of loss due to counterparty nonperformance because the clearing house
acts as the counterparty to each transaction.





Participants




The two
broad classes of persons who trade commodities are hedgers and speculators.
Hedgers include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios, and
commercial market participants, such as farmers and manufacturers, that market
or process commodities. Hedging is a protective procedure designed to
effectively lock in prices that would otherwise change due to an adverse
movement in the price of the underlying commodity, for example, the adverse
price movement between the time a merchandiser or processor enters into a
contract to buy or sell a raw or processed commodity at a certain price and the
time he must perform the contract. In such a case, at the time the hedger
contracts to physically sell the commodity at a future date he will
simultaneously buy a futures or forward contract for the necessary equivalent
quantity of the commodity. At the time for performance of the contract, the
hedger may accept delivery under his futures contract and sell the commodity
quantity as required by his physical contract or he may buy the actual
commodity, sell it under the physical contract and close out his position by
making an offsetting sale of a futures contract.


42





The
commodity interest markets enable the hedger to shift the risk of price
fluctuations. The usual objective of the hedger is to protect the profit that he
expects to earn from farming, merchandising, or processing operations rather
than to profit from his trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives and hedgers can end
up paying higher prices than they would have, for example, if current market
prices are lower than the locked in price.





Unlike
the hedger, the speculator generally expects neither to make nor take delivery
of the underlying commodity. Instead, the speculator risks his capital with the
hope of making profits from price fluctuations in the commodities. The
speculator is, in effect, the risk bearer who assumes the risks that the hedger
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior to the
delivery date. Because the speculator may take either a long or short position
in commodities, it is possible for him to make profits or incur losses
regardless of whether prices go up or down.





Futures
Exchanges and Clearing Organizations




Futures
exchanges provide centralized market facilities in which multiple persons have
the ability to execute or trade contracts by accepting bids and offers from
multiple participants. Futures exchanges may provide for execution of trades at
a physical location utilizing trading pits and/or may provide for trading to be
done electronically through computerized matching of bids and offers pursuant to
various algorithms. Members of a particular exchange and the trades executed on
such exchange are subject to the rules of that exchange. Futures exchanges and
clearing organizations are given reasonable latitude in promulgating rules and
regulations to control and regulate their members. Examples of regulations by
exchanges and clearing organizations include the establishment of initial margin
levels, rules regarding trading practices, contract specifications, speculative
position limits, daily price fluctuation limits, and execution and clearing
fees.





Clearing
organizations provide services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange or other electronic trading
facility. Once trades made between members of an exchange or electronic trading
facility have been confirmed, the clearing organization becomes substituted for
the clearing member acting on behalf of each buyer and each seller of contracts
traded on the exchange or trading platform and in effect becomes the other party
to the trade. Thereafter, each clearing member party to the trade looks only to
the clearing organization for performance. The clearing organization generally
establishes some sort of security or guarantee fund to which all clearing
members of the exchange must contribute; this fund acts as an emergency buffer
that is intended to enable the clearing organization to meet its obligations
with regard to the other side of an insolvent clearing member’s contracts.
Furthermore, the clearing organization requires margin deposits and continuously
marks positions to market to provide some assurance that its members will be
able to fulfill their contractual obligations. Thus, a central function of the
clearing organization is to ensure the integrity of trades, and members
effecting transactions on an exchange need not concern themselves with the
solvency of the party on the opposite side of the trade; their only remaining
concerns are the respective solvencies of their own customers, their clearing
broker and the clearing organization. The clearing organizations do not deal
with customers, but only with their member firms and the guarantee of
performance for open positions provided by the clearing organization does not
run to customers.




U.S.
Futures Exchanges




Futures
exchanges in the United States are subject to varying degrees of regulation by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt board
of trade or an electronic trading facility.




A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail customers on
an unrestricted basis. To be designated as a contract market, the exchange must
demonstrate that it satisfies specified general criteria for designation, such
as having the ability to prevent market manipulation, rules and procedures to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection of market
participants. Among the principal designated contract markets in the United
States are the Chicago Board of Trade, the Chicago Mercantile Exchange and the
NYMEX. Each of the designated contract markets in the United States must provide
for the clearance and settlement of transactions with a CFTC-registered
derivatives clearing organization.


43





A
derivatives transaction execution facility (a “DTEF”) is a new type of exchange
that is subject to fewer regulatory requirements than a designated contract
market but is subject to both commodity interest and participant limitations.
DTEFs limit access to eligible traders that qualify as either eligible contract
participants or eligible commercial entities for futures and option contracts on
commodities that have a nearly inexhaustible deliverable supply, are highly
unlikely to be susceptible to the threat of manipulation, or have no cash
market, security futures products, and futures and option contracts on
commodities that the CFTC may determine, on a case-by-case basis, are highly
unlikely to be susceptible to the threat of manipulation. In addition, certain
commodity interests excluded or exempt from the CEA, such as swaps, etc. may be
traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures contracts, in
which case the clearing organization must be a securities clearing agency.
However, if futures contracts and options on futures contracts on a DTEF are
cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded on a DTEF
may be cleared through a clearing organization other than one registered with
the CFTC.




An exempt
board of trade is also a newly designated form of exchange. An exempt board of
trade is substantially unregulated, subject only to CFTC anti-fraud and
anti-manipulation authority. An exempt board of trade is permitted to trade
futures contracts and options on futures contracts provided that the underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board of trade
must qualify as eligible contract participants. Contracts deemed eligible to be
traded on an exempt board of trade include contracts on interest rates, exchange
rates, currencies, credit risks or measures, debt instruments, measures of
inflation, or other macroeconomic indices or measures. There is no requirement
that an exempt board of trade use a clearing organization. However, if contracts
on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade electing to
operate as an exempt board of trade must file a written notification with the
CFTC.





An
electronic trading facility is a new form of trading platform that operates by
means of an electronic or telecommunications network and maintains an automated
audit trail of bids, offers, and the matching of orders or the execution of
transactions on the electronic trading facility. The CEA does not apply to, and
the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject only to CFTC
anti-fraud and anti-manipulation authority. In general, excluded commodities
include interest rates, currencies, securities, securities indices or other
financial, economic or commercial indices or measures.




The
General Partner intends to monitor the development of and opportunities and
risks presented by the new less-regulated exchanges and exempt boards as well as
other trading platforms currently in place or that are being considered by
regulators and may, in the future, allocate a percentage of USSO’s assets to
trading in products on these exchanges. Provided USSO maintains assets exceeding
$5 million, USSO would qualify as an eligible contract participant and thus
would be able to trade on such exchanges.




Non-U.S.
Futures Exchanges




Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation by the
CFTC, but rather are regulated by their home country regulator. In contrast to
U.S. designated contract markets, some non-U.S. exchanges are principals’
markets, where trades remain the liability of the traders involved, and the
exchange or an affiliated clearing organization, if any, does not become
substituted for any party. Due to the absence of a clearing system, such
exchanges are significantly more susceptible to disruptions. Further,
participants in such markets must often satisfy themselves as to the individual
creditworthiness of each entity with which they enter into a trade. Trading on
non-U.S. exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, USSO is subject to the additional risk of fluctuations in the
exchange rate between such currencies and U.S. dollars and the possibility that
exchange controls could be imposed in the future. Trading on non-U.S. exchanges
may differ from trading on U.S. exchanges in a variety of ways and, accordingly,
may subject USSO to additional risks.


44





Accountability
Levels and Position Limits




The CFTC
and U.S. designated contract markets have established accountability levels and
position limits on the maximum net long or net short futures contracts in
commodity interests that any person or group of persons under common
trading control (other than a hedger, which USSO is not) may hold, own or
control. Among the purposes of accountability levels and position limits is to
prevent a corner or squeeze on a market or undue influence on prices by any
single trader or group of traders. The position limits currently established by
the CFTC apply to certain agricultural commodity interests, such as grains
(oats, barley, and flaxseed), soybeans, corn, wheat, cotton, eggs, rye, and
potatoes, but not to interests in energy products. In addition, U.S. exchanges
may set accountability levels and position limits for all commodity interests
traded on that exchange. For example, the current accountability level for
investments at any one time in Futures Contracts for light, sweet crude oil
(including investments in the Benchmark Futures Contract) on the NYMEX is 10,000
contracts for one month and 20,000 contracts for all months. The NYMEX also
imposes position limits on contracts held in the last few days of trading in the
near month contract to expire. The ICE Futures has recently adopted similar
accountability levels and position limits for certain of its Futures Contracts
that are traded on the ICE Futures and settled against the price of a contract
listed for trading on a U.S. designated contract market such as the NYMEX.
Certain exchanges or clearing organizations also set limits on the total net
positions that may be held by a clearing broker. In general, no position limits
are in effect in forward or other over-the-counter contract trading or in
trading on non-U.S. futures exchanges, although the principals with which USSO
and the clearing brokers may trade in such markets may impose such limits as a
matter of credit policy. For purposes of determining accountability levels and
position limits, USSO’s commodity interest positions will not be attributable to
investors in their own commodity interest trading.




On
January 26, 2010, the CFTC published a proposed rule that, if implemented, would
set fixed position limits on certain energy Futures Contracts, including the
NYMEX RBOB gasoline futures contract, NYMEX Henry Hub natural gas futures
contract, NYMEX Light Sweet crude oil futures contract and NYMEX New York Harbor
No. 2 heating oil futures contract, along with any contract based upon these
contracts.  The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined.  Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges.  This
proposal is currently undergoing a 90-day public comment period.





Daily
Price Limits




Most U.S.
futures exchanges (but generally not non-U.S. exchanges) may limit the amount of
fluctuation in some futures contract or options on a futures contract prices
during a single trading day by regulations. These regulations specify what are
referred to as daily price fluctuation limits or, more commonly, daily limits.
The daily limits establish the maximum amount that the price of a futures or
options on a futures contract may vary either up or down from the previous day’s
settlement price. Once the daily limit has been reached in a particular futures
or options on a futures contract, no trades may be made at a price beyond the
limit. Positions in the futures or options contract may then be taken or
liquidated, if at all, only at inordinate expense or if traders are willing to
effect trades at or within the limit during the period for trading on such day.
Because the daily limit rule governs price movement only for a particular
trading day, it does not limit losses and may in fact substantially increase
losses because it may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days, thus preventing prompt liquidation of positions and
subjecting the trader to substantial losses for those days. The concept of daily
price limits is not relevant to over-the-counter contracts, including forwards
and swaps, and thus such limits are not imposed by banks and others who deal in
those markets.




In
contrast, the NYMEX does not impose daily limits but rather limits the amount of
price fluctuation for Futures Contracts. For example, the NYMEX imposes a
$10.00 per barrel ($10,000 per contract) price fluctuation limit for the
Benchmark Futures Contract. This limit is initially based off the previous
trading day’s settlement price. If any Benchmark Futures Contract is traded,
bid, or offered at the limit for five minutes, trading is halted for five
minutes. When trading resumes it begins at the point where the limit was imposed
and the limit is reset to be $10.00 per barrel in either direction of that
point. If another halt were triggered, the market would continue to be expanded
by $10.00 per barrel in either direction after each successive five-minute
trading halt. There is no maximum price fluctuation limit during any one trading
session.


45





Commodity
Prices




Commodity
prices are volatile and, although ultimately determined by the interaction of
supply and demand, are subject to many other influences, including the
psychology of the marketplace and speculative assessments of future world and
economic events. Political climate, interest rates, treaties, balance of
payments, exchange controls and other governmental interventions as well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader to predict
reliably commodity prices.





Regulation




Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading facility. Derivatives
clearing organizations are also subject to the CEA and CFTC regulation. The CFTC
is the governmental agency charged with responsibility for regulation of futures
exchanges and commodity interest trading conducted on those exchanges. The
CFTC’s function is to implement the CEA’s objectives of preventing price
manipulation and excessive speculation and promoting orderly and efficient
commodity interest markets. In addition, the various exchanges and clearing
organizations themselves exercise regulatory and supervisory authority over
their member firms.




The CFTC
possesses exclusive jurisdiction to regulate the activities of CPOs and
commodity trading advisors and has adopted regulations with respect to the
activities of those persons and/or entities. Under the CEA, a registered CPO,
such as the General Partner, is required to make annual filings with the CFTC
describing its organization, capital structure, management and controlling
persons. In addition, the CEA authorizes the CFTC to require and review books
and records of, and documents prepared by, registered CPOs. Pursuant to this
authority, the CFTC requires CPOs to keep accurate, current and orderly records
for each pool that they operate. The CFTC may suspend the registration of a CPO
(1) if the CFTC finds that the operator’s trading practices tend to disrupt
orderly market conditions, (2) if any controlling person of the operator is
subject to an order of the CFTC denying such person trading privileges on any
exchange, and (3) in certain other circumstances. Suspension, restriction or
termination of the General Partner’s registration as a CPO would prevent it,
until that registration were to be reinstated, from managing USSO, and might
result in the termination of USSO. USSO itself is not required to be registered
with the CFTC in any capacity.




The CEA
gives the CFTC similar authority with respect to the activities of commodity
trading advisors. If a trading advisor’s commodity trading advisor registration
were to be terminated, restricted or suspended, the trading advisor would be
unable, until the registration were to be reinstated, to render trading advice
to USSO.





The CEA
requires all futures commission merchants, such as USSO’s clearing brokers, to
meet and maintain specified fitness and financial requirements, to segregate
customer funds from proprietary funds and account separately for all customers’
funds and positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority over
introducing brokers, or persons who solicit or accept orders for commodity
interest trades but who do not accept margin deposits for the execution of
trades. The CEA authorizes the CFTC to regulate trading by futures commission
merchants and by their officers and directors, permits the CFTC to require
action by exchanges in the event of market emergencies, and establishes an
administrative procedure under which customers may institute complaints for
damages arising from alleged violations of the CEA. The CEA also gives the
states powers to enforce its provisions and the regulations of the
CFTC.





USSO’s
investors are afforded prescribed rights for reparations under the CEA.
Investors may also be able to maintain a private right of action for violations
of the CEA. The CFTC has adopted rules implementing the reparation provisions of
the CEA, which provide that any person may file a complaint for a reparations
award with the CFTC for violation of the CEA against a floor broker or a futures
commission merchant, introducing broker, commodity trading advisor, CPO, and
their respective associated persons.


46


Pursuant
to authority in the CEA, the NFA has been formed and registered with the CFTC as
a registered futures association. At the present time, the NFA is the only
self-regulatory organization for commodity interest professionals, other than
futures exchanges. The CFTC has delegated to the NFA responsibility for the
registration of commodity trading advisors, CPOs, futures commission merchants,
introducing brokers, and their respective associated persons and floor brokers.
The General Partner, each trading advisor, the selling agents and the clearing
brokers are members of the NFA. As such, they are subject to NFA standards
relating to fair trade practices, financial condition and consumer protection.
USSO itself is not required to become a member of the NFA. As the
self-regulatory body of the commodity interest industry, the NFA promulgates
rules governing the conduct of professionals and disciplines those professionals
that do not comply with these rules. The NFA also arbitrates disputes between
members and their customers and conducts registration and fitness screening of
applicants for membership and audits of its existing members.





The
regulations of the CFTC and the NFA prohibit any representation by a person
registered with the CFTC or by any member of the NFA, that registration with the
CFTC, or membership in the NFA, in any respect indicates that the CFTC or the
NFA, as the case may be, has approved or endorsed that person or that person’s
trading program or objectives. The registrations and memberships of the parties
described in this summary must not be considered as constituting any such
approval or endorsement. Likewise, no futures exchange has given or will give
any similar approval or endorsement.




The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made in this
summary are subject to modification by legislative action and changes in the
rules and regulations of the CFTC, the NFA, the futures exchanges, clearing
organizations and other regulatory bodies.




The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among other
things, provides that the trading of commodity interest contracts generally must
be upon exchanges designated as contract markets or DTEFs and that all trading
on those exchanges must be done by or through exchange members. Under the CFMA,
commodity interest trading in some commodities between sophisticated persons may
be traded on a trading facility not regulated by the CFTC. As a general matter,
trading in spot contracts, forward contracts, options on forward contracts or
commodities, or swap contracts between eligible contract participants is not
within the jurisdiction of the CFTC and may therefore be effectively
unregulated. The trading advisors may engage in those transactions on behalf of
USSO in reliance on this exclusion from regulation.  However,
legislation currently under consideration by the U.S. Congress would remove the
exclusion provided to these transactions and place them under federal
regulation.  The proposed legislation would subject these contracts to
new capital, margin, recordkeeping, and reporting requirements.





In
general, the CFTC does not regulate the interbank and forward foreign currency
markets with respect to transactions in contracts between certain sophisticated
counterparties such as USSO or between certain regulated institutions and retail
investors. Although U.S. banks are regulated in various ways by the Federal
Reserve Board, the Comptroller of the Currency and other U.S. federal and state
banking officials, banking authorities do not regulate the forward
markets.




While the
U.S. government does not currently impose any restrictions on the movements of
currencies, it could choose to do so. The imposition or relaxation of exchange
controls in various jurisdictions could significantly affect the market for that
and other jurisdictions’ currencies. Trading in the interbank market also
exposes USSO to a risk of default since failure of a bank with which USSO had
entered into a forward contract would likely result in a default and thus
possibly substantial losses to USSO.




The CFTC
is prohibited by statute from regulating trading on non-U.S. futures exchanges
and markets. The CFTC, however, has adopted regulations relating to the
marketing of non-U.S. futures contracts in the United States. These regulations
permit certain contracts traded on non-U.S. exchanges to be offered and sold in
the United States.


47


Commodity
Margin




Original
or initial margin is the minimum amount of funds that must be deposited by a
commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount (generally
less than the original margin) to which a trader’s account may decline before he
must deliver additional margin. A margin deposit is like a cash performance
bond. It helps assure the trader’s performance of the futures contracts that he
or she purchases or sells. Futures contracts are customarily bought and sold on
initial margin that represents a very small percentage (ranging upward from less
than 2%) of the aggregate purchase or sales price of the contract. Because of
such low margin requirements, price fluctuations occurring in the futures
markets may create profits and losses that, in relation to the amount invested,
are greater than are customary in other forms of investment or speculation. As
discussed below, adverse price changes in the futures contract may result in
margin requirements that greatly exceed the initial margin. In addition, the
amount of margin required in connection with a particular futures contract is
set from time to time by the exchange on which the contract is traded and may be
modified from time to time by the exchange during the term of the
contract.





Brokerage
firms, such as USSO’s clearing brokers, carrying accounts for traders in
commodity interest contracts may not accept lower, and generally require higher,
amounts of margin as a matter of policy to further protect themselves. The
clearing brokers require USSO to make margin deposits equal to exchange minimum
levels for all commodity interest contracts. This requirement may be altered
from time to time in the clearing brokers’ discretion.




Trading
in the over-the-counter markets where no clearing facility is provided generally
does not require margin but generally does require the extension of credit
between counterparties.  This extension of credit generally takes the
form of transfers of collateral and/or independent amounts. Collateral is
transferred between counterparties during the term of an over-the-counter
transaction based upon the changing value of the transaction, while independent
amounts are fixed amounts posted by one or both counterparties at the start of
an over-the-counter transaction.




When a
trader purchases an option, there is no margin requirement; however, the option
premium must be paid in full. When a trader sells an option, on the other hand,
he or she is required to deposit margin in an amount determined by the margin
requirements established for the underlying interest and, in addition, an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the selling of options, although adjusted to reflect the
probability that out-of-the-money options will not be exercised, can in fact be
higher than those imposed in dealing in the futures markets directly.
Complicated margin requirements apply to spreads and conversions, which are
complex trading strategies in which a trader acquires a mixture of options
positions and positions in the underlying interest.




Margin
requirements are computed each day by a trader’s clearing broker. When the
market value of a particular open commodity interest position changes to a point
where the margin on deposit does not satisfy maintenance margin requirements, a
margin call is made by the broker. If the margin call is not met within a
reasonable time, the broker may close out the trader’s position. With respect to
USSO’s trading, USSO (and not its investors personally) is subject to margin
calls.




Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions held in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the total risk of
the combined positions.




SEC
Reports




USSO makes available,
free of charge, on its website, its annual reports on Form 10-K, its quarterly
reports on Form 10-Q, its current reports on Form 8-K and amendments to these
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after these forms are filed with, or
furnished to, the SEC. These reports are also available from the SEC though
its website at:www.sec.gov.





CFTC
Reports





USSO also
makes available its monthly reports and its annual reports required to be
prepared and filed with the NFA under the CFTC regulations.





Intellectual
Property





The
General Partner has filed trademark applications for UNITED STATES SHORT OIL
FUND (U.S. App. Serial No. 77849158) for “investment services in the field of
oil futures contracts and other oil related investments,” in use since September
18, 2009, and UNITED STATES SHORT OIL FUND (and Design) (U.S. App. Serial No.
77861399) for “investment services in the field of oil futures contracts and
other oil related investments” in use since September 18, 2009.  DNO
relies upon these trademarks through which it markets its services and strives
to build and maintain brand recognition in the market and among current and
potential investors.  So long as DNO continues to use these trademarks
to identify its services, without challenge from any third party, and properly
maintains and renews the resulting trademark registrations under applicable
laws, rules and regulations, it will continue to have indefinite protection for
these trademarks under current laws, rules and regulations.


48





A patent
application by the General Partner directed to the creation and operation of
USSO and one or more of the Related Public Funds is pending and the General
Partner’s registration of USSO’s trademarks is in process at the United States
Patent and Trademark Office. The patent application pertains to the structure of
USSO and one or more the Related Public Funds managed by the General Partner.
The General Partner does not believe that rejection or modification of the
patent application will have a material adverse effect on the operations of USSO
or the Related Public Funds.





Item 1A.    Risk
Factors.





The
risk factors should be read in connection with the other information included in
this annual report on Form 10-K, including Management’s Discussion and Analysis
of Financial Condition and Results of Operations and USSO’s financial statements
and the related notes.




Risks
Associated With Investing Directly or Indirectly in Crude Oil





Investing
in Crude Oil Interests subjects USSO to the risks of the crude oil industry and
this could result in large fluctuations in the price of USSO’s
units.





USSO is
subject to the risks and hazards of the crude oil industry because it intends to
take short positions in Crude Oil Interests. The risks and hazards that are
inherent in the crude oil industry may cause the price of crude oil to widely
fluctuate. If USSO’s units accurately track the percentage changes in the terms
of the Benchmark Futures Contract or the spot price of crude oil, then the price
of its units may also fluctuate. The exploration and production of crude oil are
uncertain processes with many risks. The cost of drilling, completing and
operating wells for crude oil is often uncertain, and a number of factors can
delay or prevent drilling operations or production of crude oil,
including:





·
            unexpected
      drilling conditions;





·
            pressure
      or irregularities in formations;





·
            equipment
      failures or repairs;





·
            fires
      or other accidents;





·
            adverse
      weather conditions;





·
            pipeline
      ruptures, spills or other supply disruptions;
  and





·
            shortages
      or delays in the availability of drilling rigs and the delivery of
      equipment.


49





Crude
oil transmission, distribution, gathering, and processing activities involve
numerous risks that may affect the price of crude oil.





There are
a variety of hazards inherent in crude oil transmission, distribution,
gathering, and processing, such as leaks, explosions, pollution, release of
toxic substances, adverse weather conditions (such as hurricanes and flooding),
pipeline failure, abnormal pressures, uncontrollable flows of crude oil,
scheduled and unscheduled maintenance, physical damage to the gathering or
transportation system, and other hazards which could affect the price of crude
oil. To the extent these hazards limit the supply or delivery of crude oil,
crude oil prices will increase.





Changes
in the political climate could have negative consequences for crude oil
prices.





Tensions
with Iran, the world’s fourth largest oil exporter, could put oil exports in
jeopardy. Other global concerns include civil unrest and sabotage affecting the
flow of oil from Nigeria, a large oil exporter. Meanwhile, friction continues
between the governments of the United States and Venezuela, a major exporter of
oil to the United States. Additionally, a series of production cuts by members
of OPEC followed by a refusal to subsequently increase oil production have
tightened world oil markets.




Fluctuations
in the reserve capacity of crude oil could impact future prices.




In the
past, a supply disruption in one area of the world was softened by the ability
of major oil-producing nations such as Saudi Arabia to increase output to make
up the difference. In recent years, much of that spare capacity has been
absorbed by increased demand. The current global economic downturn, however, has
led to a decrease in the demand for oil that lasted through 2009 and a
corresponding increase in spare capacities. According to the United States
Government’s Energy Information Administration, global oil demand is expected to
rise by 0.7 million barrels a day in 2010, compared with a decrease in demand of
1.8 million barrels a day in 2009 and largely unchanged demand in 2008.
Consumption of oil products continues to increase in certain parts of the world,
especially in rapidly growing countries such as India and China, which is now
the world’s second-largest energy user. The volatility of demand in the oil
market makes it difficult to predict the availability of spare
capacities.





The
price of USSO’s units may be influenced by factors such as the short-term supply
and demand for crude oil and the short-term supply and demand for USSO’s units.
This may cause the units to trade at a price that is above or below USSO’s NAV
per unit. Accordingly, changes in the price of units may substantially vary from
the changes in the spot price of light, sweet crude oil. If this variation
occurs, then investors may not be able to effectively use USSO as a way to hedge
against crude oil-related losses or as a way to indirectly invest in crude
oil.




While it
is expected that the trading prices of the units will fluctuate in accordance
with changes in USSO’s NAV, the prices of units may also be influenced by other
factors, including the short-term supply and demand for crude oil and the units.
There is no guarantee that the units will not trade at appreciable discounts
from, and/or premiums to, USSO’s NAV. This could cause changes in the price of
the units to substantially vary from changes in the spot price of light,
sweet crude oil. This may be harmful to investors because if changes in the
price of units vary substantially from changes in the spot price of light,
sweet crude oil, then investors may not be able to effectively use USSO as a way
to hedge the risk of losses in their crude oil-related transactions or as a way
to indirectly invest in crude oil.




Changes in USSO’s NAV may not
inversely correlate with
changes in the price of the Benchmark Futures Contract. If this were to
occur, investors may not be able to effectively use USSO as a way to hedge
against crude oil-related losses or as a way to indirectly invest inversely in
crude oil.





The
General Partner endeavors to invest USSO’s assets as fully as possible in
short-term Futures Contracts and Other Crude Oil-Related Investments so that the
changes in percentage terms of the NAV closely inversely correlate with the
changes in percentage terms in the price of the Benchmark Futures Contract.
However, changes in USSO’s NAV may not correlate with the changes in the price
of the Benchmark Futures Contract for several reasons as set forth
below:


50





·
            USSO
      (i) may not be able to sell/buy the exact amount of Futures Contracts and
      Other Crude Oil-Related Investments to have a perfect correlation with
      NAV; (ii) may not always be able to buy and sell Futures Contracts or
      Other Crude Oil-Related Investments at the market price; (iii) may not
      experience a perfect inverse correlation between the spot price
      of light, sweet crude oil and the underlying investments in Futures
      Contracts, Other Crude Oil-Related Investments and Treasuries, cash and/or
      cash equivalents; and (iv) is required to pay fees, including brokerage
      fees and  the management fee, which will have an effect on the
      correlation.





·
            Short-term
      supply and demand for light, sweet crude oil may cause the changes in
      the market price of the Benchmark Futures Contract to vary from the
      changes in USSO’s NAV if USSO has fully invested in Futures Contracts that
      do not reflect such supply and demand and it is unable to replace such
      contracts with Futures Contracts that do reflect such supply and demand.
      In addition, there are also technical differences between the two markets,
      e.g., one is a
      physical market while the other is a futures market traded on exchanges,
      that may cause variations between the spot price of crude oil and the
      prices of related futures
contracts.





·
            USSO
      plans to sell and buy only as many Futures Contracts and Other Crude
      Oil-Related Investments that it can to get the changes in percentage terms
      of the NAV as close as possible to the inverse of changes in percentage
      terms in the price of the Benchmark Futures Contract. The remainder of its
      assets will be invested in Treasuries, cash and/or cash equivalents and
      will be used to satisfy initial margin and additional margin requirements,
      if any, and to otherwise support its investments in Crude Oil Interests.
      Investments in Treasuries, cash and/or cash equivalents, both directly and
      as margin, will provide rates of return that will vary from changes in the
      value of the spot price of light, sweet crude oil and the price of
      the Benchmark Futures Contract.





·
            In
      addition, because USSO incurs certain expenses in connection with its
      investment activities, and holds most of its assets in more liquid
      short-term securities for margin and other liquidity purposes and for
      redemptions that may be necessary on an ongoing basis, the General Partner
      is generally not able to fully invest USSO’s assets in Futures Contracts
      or Other Crude Oil-Related Investments and there cannot be perfect
      correlation between changes in USSO’s NAV and changes in the price of the
      Benchmark Futures Contract.





·
            As
      USSO grows, there may be more or less correlation. For example, if USSO
      only has enough money to buy three Benchmark Futures Contracts and it
      needs to buy four contracts to track the price of oil then the correlation
      will be lower, but if it buys 20,000 Benchmark Futures Contracts and it
      needs to buy 20,001 contracts then the correlation will be higher. At
      certain asset levels, USSO may be limited in its ability to purchase the
      Benchmark Futures Contract or other Futures Contracts due to
      accountability levels imposed by the relevant exchanges. To the extent
      that USSO invests in these other Futures Contracts or Other Crude
      Oil-Related Investments, the correlation with the Benchmark Futures
      Contracts may be lower. If USSO is required to invest in other Futures
      Contracts and Other Crude Oil-Related Investments that are less correlated
      with the Benchmark Futures Contract, USSO would likely invest in
      over-the-counter contracts to increase the level of correlation of USSO’s
      assets. Over-the-counter contracts entail certain risks described below
      under “Over-the-Counter Contract
Risk.”





·
            USSO
      may not be able to sell or buy the exact number of short positions in
      Futures Contracts and Other Crude Oil-Related Investments to have a
      perfect inverse correlation with the Benchmark Futures Contract if the
      purchase price of the short positions in Futures Contracts required to be
      fully invested in such contracts is higher than the proceeds received for
      the sale of a Creation Basket on the day the basket was sold. In such
      case, USSO could not invest the entire proceeds from the purchase of the
      Creation Basket in such short positions (for example, assume USSO receives
      $5,000,000 for the sale of a Creation Basket and assume that the value of
      the short position in a Futures Contract for crude oil is $49,410 based on
      a price of $49.41 per barrel, then USSO could only invest in only 101
      short positions in such Futures Contracts with an aggregate value of
      $4,990,410), USSO would be required to invest a percentage of the proceeds
      in cash, Treasuries or other liquid securities to be deposited as margin
      with the futures commission merchant through which the contract was
      purchased. The remainder of the purchase price for the Creation Basket
      would remain invested in Treasuries, cash and/or cash equivalents or other
      liquid securities as determined by the General Partner from time to time
      based on factors such as potential calls for margin or anticipated
      redemptions. If the trading market for Futures Contracts is suspended or
      closed, USSO may not be able to sell or purchase these investments at the
      last reported price for such
investments.


51





If
changes in USSO’s NAV do not inversely correlate with changes in the price of
the Benchmark Futures Contract, then investing in USSO may not be an effective
way to hedge against oil-related losses or indirectly invest in
oil.




The
Benchmark Futures Contract may not correlate with the spot price of light,
sweet crude oil and this could cause changes in the price of the units to
substantially vary from the changes in the spot price of light, sweet crude oil.
If this were to occur, then investors may not be able to effectively use USSO as
a way to hedge against crude oil-related losses or as a way to indirectly invest
in crude oil.




When
using the Benchmark Futures Contract as a strategy to track the spot price
of light, sweet crude oil, at best the correlation between changes in
prices of such Crude Oil Interests and the spot price of crude oil can be
only approximate. The degree of imperfection of correlation depends upon
circumstances such as variations in the speculative oil market, supply of and
demand for such Crude Oil Interests and technical influences in oil futures
trading. If there is a weak correlation between the Crude Oil Interests and the
spot price of light, sweet crude oil, then the price of units may not
accurately track the spot price of light, sweet crude oil and investors may
not be able to effectively use USSO as a way to hedge the risk of losses in
their oil-related transactions or as a way to indirectly invest in crude
oil.





USSO
may experience a loss if it is required to sell Treasuries at a price lower than
the price at which they were acquired.




The value
of Treasuries generally moves inversely with movements in interest rates. If
USSO is required to sell Treasuries at a price lower than the price at which
they were acquired, USSO will experience a loss. This loss may adversely impact
the price of the units and may decrease the correlation between the price of the
units, the price of the Benchmark Futures Contracts and Other Crude Oil-Related
Investments, and the spot price of light, sweet crude oil.





Certain
of USSO’s investments could be illiquid which could cause large losses to
investors at any time or from time to time.




USSO may
not always be able to liquidate its positions in its investments at the desired
price. It is difficult to execute a trade at a specific price when there is a
relatively small volume of buy and sell orders in a market. A market disruption,
such as a foreign government taking political actions that disrupt the market in
its currency, its crude oil production or exports, or in another major export,
can also make it difficult to liquidate a position. Alternatively, limits
imposed by futures exchanges or other regulatory organizations, such as
accountability levels, position limits and daily price fluctuation limits, may
contribute to a lack of liquidity with respect to some commodity
interests.




Unexpected
market illiquidity may cause major losses to investors at any time or from time
to time. In addition, USSO has not and does not intend at this time to establish
a credit facility, which would provide an additional source of liquidity and
instead will rely only on the Treasuries, cash and/or cash equivalents that it
holds. The anticipated large value of the positions in Futures Contracts
that the General Partner will acquire or enter into for USSO increases the risk
of illiquidity. The Other Crude Oil-Related Investments that USSO invests in,
such as negotiated over-the-counter contracts, may have a greater
likelihood of being illiquid since they are contracts between two parties that
take into account not only market risk, but also the relative credit, tax, and
settlement risks under such contracts. Such contracts also have limited
transferability that results from such risks and the contract’s express
limitations.





Because
both Futures Contracts and Other Crude Oil-Related Investments may be illiquid,
USSO’s Crude Oil Interests may be more difficult to liquidate at favorable
prices in periods of illiquid markets and losses may be incurred during the
period in which positions are being liquidated.


52


If
the nature of hedgers and speculators in futures markets has shifted such that
crude oil purchasers are the predominant hedgers in the market, USSO might have
to reinvest at higher futures prices or choose Other Crude Oil-Related
Investments.





The
changing nature of the hedgers and speculators in the crude oil market
influences whether futures prices are above or below the expected future spot
price. In order to induce speculators to take the corresponding long side of the
same futures contract, crude oil producers must generally be willing to sell
futures contracts at prices that are below expected future spot prices.
Conversely, if the predominant hedgers in the futures market are the purchasers
of the crude oil who purchase futures contracts to hedge against a rise in
prices, then speculators will only take the short side of the futures contract
if the futures price is greater than the expected future spot price of crude
oil. This can have significant implications for USSO when it is time to reinvest
the proceeds from a maturing Futures Contract into a new Futures
Contract.





While
USSO does not intend to take physical delivery of oil under its Futures
Contracts, physical delivery under such contracts impacts the value of the
contracts.




While it
is not the current intention of USSO to take physical delivery of crude oil
under its Futures Contracts, futures contracts are not required to be
cash-settled and it is possible to take delivery under some of these contracts.
Storage costs associated with purchasing crude oil could result in costs and
other liabilities that could impact the value of Futures Contracts or Other
Crude Oil-Related Investments. Storage costs include the time value of money
invested in crude oil as a physical commodity plus the actual costs of storing
the crude oil less any benefits from ownership of crude oil that are not
obtained by the holder of a futures contract. In general, Futures Contracts have
a one-month delay for contract delivery and the back month (the back month is
any future delivery month other than the spot month) includes storage costs. To
the extent that these storage costs change for crude oil while USSO holds
Futures Contracts or Other Crude Oil-Related Investments, the value of the
Futures Contracts or Other Crude Oil-Related Investments, and therefore USSO’s
NAV, may change as well.





The
price relationship between the near month contract and the next month contract
that compose the Benchmark Futures Contract will vary and may impact both the
total return over time of USSO’s NAV, as well as the degree to which its total
return tracks other crude oil price indices’ total returns.




The
Benchmark Futures Contract is the near month contract to expire until the near
month contract is within two weeks of expiration, when it is sold and near month
contract is replaced with the next month contract to expire. In the event of a
crude oil futures market where near month contracts trade at a higher price than
next month contracts to expire, a situation described as “backwardation” in the
futures market, then absent the impact of the overall movement in crude oil
prices the value of the Benchmark Futures Contract would tend to rise as it
approaches expiration. As a result short positions in the Benchmark Futures
Contract would tend to track lower. Conversely, in the event of a crude oil
futures market where near month contracts trade at a lower price than next month
contracts to expire, a situation described as “contango” in the futures market,
then absent the impact of the overall movement in crude oil prices the value of
the Benchmark Futures Contract would tend to decline as it approaches
expiration. As a result short positions in the Benchmark Futures Contract would
tend to track higher. When compared to total return of other price indices, such
as the spot price of crude oil, the impact of backwardation and contango may
lead the total return of USSO’s NAV to vary significantly. In the event of a
prolonged period of backwardation, and absent the impact of rising or falling
crude oil prices, this could have a significant negative impact on USSO’s NAV
and total return.





Regulation
of the commodity interests and energy markets is extensive and constantly
changing; future regulatory developments are impossible to predict but may
significantly and adversely affect USSO.





The
futures markets are subject to comprehensive statutes, regulations, and margin
requirements. In addition, the CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency, including, for
example, the retroactive implementation of speculative position limits or higher
margin requirements, the establishment of daily price limits and the suspension
of trading. The regulation of futures transactions in the United States is a
rapidly changing area of law and is subject to modification by government and
judicial action.





The
regulation of commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by governmental and
judicial action. Considerable regulatory attention has been focused on
non-traditional investment pools which are publicly distributed in the United
States. There is a possibility of future regulatory changes altering, perhaps to
a material extent, the nature of an investment in USSO or the ability of USSO to
continue to implement its investment strategy. In addition, various national
governments have expressed concern regarding the disruptive effects of
speculative trading in the energy markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory change on
USSO is impossible to predict, but could be substantial and
adverse.


53





In the
wake of the economic crisis of 2008 and 2009, the Administration, federal
regulators and Congress are revisiting the regulation of the financial sector,
including securities and commodities markets. These efforts are likely to result
in significant changes in the regulation of these markets.





Currently,
a number of proposals that would alter the regulation of Oil Interests are being
considered by federal regulators and Congress. These proposals include the
imposition of fixed position limits on energy-based commodity futures contracts,
extension of position and accountability limits to futures contracts on non-U.S.
exchanges previously exempt from such limits, and the forced use of
clearinghouse mechanisms for all over-the-counter transactions. Certain
proposals would aggregate and limit all positions in energy futures held by a
single entity, whether such positions exist on U.S. futures exchanges, non-U.S.
futures exchanges, or in over-the-counter contracts. While it cannot be
predicted at this time what reforms will eventually be made or how they will
impact USSO, if any of the aforementioned proposals are implemented, USSO’s
ability to meet its investment objective may be negatively impacted and
investors could be adversely affected.





Additionally,
on January 26, 2010, the CFTC published a proposed rule that, if implemented,
would set fixed position limits on certain energy Futures Contracts including
the NYMEX Light Sweet crude oil futures contract, NYMEX RBOB gasoline futures
contract, NYMEX Henry Hub natural gas futures contract and NYMEX New York Harbor
No. 2 heating oil futures contract, along with any contract based upon these
contracts.  The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined.  Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges.  This
proposal is currently undergoing a 90-day public comment period.





Investing
in USSO for purposes of hedging may be subject to several risks including the
possibility of losing the benefit of favorable market movement.




Participants
in the crude oil or in other industries may use USSO as a vehicle to hedge the
risk of losses in their crude oil-related transactions. There are several risks
in connection with using USSO as a hedging device. While hedging can provide
protection against an adverse movement in market prices, it can also preclude a
hedger’s opportunity to benefit from a favorable market movement. In a hedging
transaction, the hedger may be concerned that the hedged item will increase in
price, but must recognize the risk that the price may instead decline and if
this happens he will have lost his opportunity to profit from the change in
price because the hedging transaction will result in a loss rather than a gain.
Thus, the hedger foregoes the opportunity to profit from favorable price
movements.




In
addition, if the hedge is not a perfect one, the hedger can lose on the hedging
transaction and not realize an offsetting gain in the value of the underlying
item being hedged.




When
using futures contracts as a hedging technique, at best, the correlation between
changes in prices of futures contracts and of the items being hedged can be only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative markets, demand for futures and
for crude oil products, technical influences in futures trading, and differences
between anticipated energy costs being hedged and the instruments underlying the
standard futures contracts available for trading. Even a well-conceived hedge
may be unsuccessful to some degree because of unexpected market behavior as well
as the expenses associated with creating the hedge.




In
addition, using an investment in USSO as a hedge for changes in energy costs
(e.g., investing in
crude oil, heating oil, gasoline, natural gas or other fuels, or electricity)
may not correlate because changes in the spot price of crude oil may vary from
changes in energy costs because the spot price may not be at the same rate as
changes in the price of other energy products, and, in any case, the price of
crude oil does not reflect the refining, transportation, and other costs that
may impact the hedger’s energy costs.


54





An
investment in USSO may provide little or no diversification benefits. Thus, in a
declining market, USSO may have no gains to offset losses from other
investments, and an investor may suffer losses on an investment in USSO while
incurring losses with respect to other asset classes.




Historically,
Futures Contracts and Other Crude Oil-Related Investments have generally been
non-correlated to the performance of other asset classes such as stocks and
bonds. Non-correlation means that there is a low statistically valid
relationship between the performance of futures and other commodity interest
transactions, on the one hand, and stocks or bonds, on the other hand. However,
there can be no assurance that such non-correlation will continue during future
periods. If, contrary to historic patterns, USSO’s performance were to move in
the same general direction as the financial markets, investors will obtain
little or no diversification benefits from an investment in the units. In such a
case, USSO may have no gains to offset losses from other investments, and
investors may suffer losses on their investment in USSO at the same time they
incur losses with respect to other investments.




Variables
such as drought, floods, weather, embargoes, tariffs and other political events
may have a larger impact on crude oil prices and crude oil-linked
instruments, including Futures Contracts and Other Crude Oil-Related
Investments, than on traditional securities. These additional variables may
create additional investment risks that subject USSO’s investments to greater
volatility than investments in traditional securities.




Non-correlation
should not be confused with negative correlation, where the performance of two
asset classes would be opposite of each other. There is no historic evidence
that the spot price of crude oil and prices of other financial assets, such
as stocks and bonds, are negatively correlated. In the absence of negative
correlation, USSO cannot be expected to be automatically profitable during
unfavorable periods for the stock market, or vice versa.




USSO’s
Operating Risks




USSO
is not a registered investment company so unitholders do not have the
protections of the 1940 Act.




USSO is
not an investment company subject to the 1940 Act. Accordingly, investors
do not have the protections afforded by that statute which, for example,
requires investment companies to have a majority of disinterested directors and
regulates the relationship between the investment company and its investment
manager.




The
General Partner is leanly staffed and relies heavily on key personnel to manage
trading activities.




In
managing and directing the day-to-day activities and affairs of USSO, the
General Partner relies heavily on Messrs. Howard Mah and John
Hyland.  If Messrs. Mah or Hyland were to leave or be unable to
carry out their present responsibilities, it may have an adverse effect on the
management of USSO. Furthermore, Messrs. Mah and Hyland are currently
involved in the management of the Related Public Funds, and the General Partner
has filed a registration statement for two other exchange traded security funds,
USBO and USCI. Mr. Mah is also employed by Ameristock Corporation, a registered
investment adviser that manages a public mutual fund. It is estimated that Mr.
Mah will spend approximately 90 of his time on USSO and Related Public Fund
matters.  Mr. Hyland will spend approximately 85% of his time on USSO and
Related Public Fund matters. To the extent that the General Partner establishes
additional funds, even greater demands will be placed on Messrs. Mah
and Hyland, as well as the other officers of the General Partner and its
Board of Directors.





Accountability
levels, position limits, and daily price fluctuation limits set by the exchanges
have the potential to cause a tracking error, which could cause the price of
units to substantially vary from the price of the Benchmark Futures Contract and
prevent investors from being able to effectively use USSO as a way to hedge
against crude oil-related losses or as a way to indirectly invest in crude
oil.




U.S.
designated contract markets such as the NYMEX have established accountability
levels and position limits on the maximum net long or net short futures
contracts in commodity interests that any person or group of persons under
common trading control (other than as a hedge, which an investment by USSO is
not) may hold, own or control. For example, the current accountability level for
investments at any one time in the Benchmark Futures Contract is 20,000.
While this is not a fixed ceiling, it is a threshold above which the NYMEX may
exercise greater scrutiny and control over an investor, including limiting an
investor to holding no more than 20,000 Benchmark Futures Contracts. With regard
to position limits, the NYMEX limits an investor from holding more than 3,000
net futures in the last 3 days of trading in the near month contract to
expire.


55





In
addition to accountability levels and position limits, the NYMEX also sets daily
price fluctuation limits on futures contracts. The daily price fluctuation limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day’s settlement price. Once the daily price
fluctuation limit has been reached in a particular futures contract, no trades
may be made at a price beyond that limit.




For
example, the NYMEX imposes a $10.00 per barrel ($10,000 per contract) price
fluctuation limit for the Benchmark Futures Contract. This limit is initially
based off of the previous trading day’s settlement price. If any Benchmark
Futures Contract is traded, bid, or offered at the limit for five minutes,
trading is halted for five minutes. When trading resumes it begins at the point
where the limit was imposed and the limit is reset to be $10.00 per barrel in
either direction of that point. If another halt were triggered, the market would
continue to be expanded by $10.00 per barrel in either direction after each
successive five-minute trading halt. There is no maximum price fluctuation limit
during any one trading session.




U.S.
futures exchanges, including the NYMEX, currently do not implement fixed
position limits for Futures Contracts held outside of the last few days of
trading in the near month contract to expire.  However, on January 26,
2010, the CFTC published a proposed rule that, if implemented, would set fixed
position limits on energy Futures Contracts, including the NYMEX Light Sweet
crude oil futures contract, NYMEX RBOB gasoline futures contract, NYMEX Henry
Hub natural gas futures contract and NYMEX New York Harbor No. 2 heating oil
futures contract, along with any contract based upon these
contracts.  The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined.  Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges.  This
proposal is currently undergoing a 90-day public comment period.





All of
these limits may potentially cause a tracking error between the price of the
units and the price of the Benchmark Futures Contract. This may in turn prevent
investors from being able to effectively use USSO as a way to hedge against
crude oil-related losses or as a way to indirectly invest in crude
oil.




USSO has
not limited the size of its offering and is committed to utilizing substantially
all of its proceeds to purchase short interests in Futures Contracts and Other
Crude Oil-Related Investments. If USSO encounters accountability levels,
position limits, or price fluctuation limits for Futures Contracts on the NYMEX,
it may then, if permitted under applicable regulatory requirements, purchase
Futures Contracts on the ICE Futures or other exchanges that trade listed crude
oil futures. The Futures Contracts available on the ICE Futures are comparable
to the contracts on the NYMEX, but they may have different underlying
commodities, sizes, deliveries, and prices. In addition, certain of the Futures
Contracts available on the ICE Futures are subject to accountability levels and
position limits.




There
are technical and fundamental risks inherent in the trading system the General
Partner intends to employ.




The
General Partner’s trading system is quantitative in nature and it is possible
that the General Partner might make a mathematical error. In addition, it is
also possible that a computer or software program may malfunction and cause an
error in computation.




To
the extent that the General Partner uses spreads and straddles as part of its
trading strategy, there is the risk that the NAV may not closely track the
changes in the Benchmark Futures Contract.





Spreads
combine simultaneous long and short positions in related futures contracts that
differ by commodity (e.g., long crude oil and
short gasoline), by market (e.g., long WTI crude futures,
short Brent crude futures), or by delivery month (e.g., long December, short
November). Spreads gain or lose value as a result of relative changes in price
between the long and short positions. Spreads often reduce risk to investors,
because the contracts tend to move up or down together. However, both legs of
the spread could move against an investor simultaneously, in which case the
spread would lose value. Certain types of spreads may face unlimited risk, e.g., because the price of a
futures contract underlying a short position can increase by an unlimited amount
and the investor would have to take delivery or offset at that
price.





A
commodity straddle takes both long and short option positions in the same
commodity in the same market and delivery month simultaneously. The buyer of a
straddle profits if either the long or the short leg of the straddle moves
further than the combined cost of both options. The seller of a straddle profits
if both the long and short positions do not trade beyond a range equal to the
combined premium for selling both options.


56





If the
General Partner were to utilize a spread or straddle position and the spread
performed differently than expected, the results could impact USSO’s tracking
error. This could affect USSO’s investment objective of having its NAV closely
track the changes in the Benchmark Futures Contract. Additionally, a loss on a
spread position would negatively impact USSO’s absolute return.





USSO
and the General Partner may have conflicts of interest, which may permit them to
favor their own interests to the detriment of unitholders.




USSO and
the General Partner may have inherent conflicts to the extent the General
Partner attempts to maintain USSO’s asset size in order to preserve its fee
income and this may not always be consistent with USSO’s objective of having the
value of its units’ NAV track changes in the Benchmark Futures Contract. The
General Partner’s officers, directors and employees do not devote their time
exclusively to USSO. These persons are directors, officers or employees of other
entities that may compete with USSO for their services. They could have a
conflict between their responsibilities to USSO and to those other
entities.





In
addition, the General Partner’s principals, officers, directors or employees may
trade futures and related contracts for their own account. A conflict of
interest may exist if their trades are in the same markets and at the same time
as USSO trades using the clearing broker to be used by USSO. A potential
conflict also may occur if the General Partner’s principals, officers, directors
or employees trade their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by
USSO.




The
General Partner has sole current authority to manage the investments and
operations of USSO, and this may allow it to act in a way that furthers its own
interests which may create a conflict with the best interests of investors.
Limited partners have limited voting control, which will limit the ability to
influence matters such as amendment of the LP Agreement, change in USSO’s basic
investment policy, dissolution of this fund, or the sale or distribution of
USSO’s assets.




The
General Partner serves as the general partner to each of USSO and the Related
Public Funds and will serve as the general partner for USBO and the sponsor for
USCI, if such funds offer their securities to the public or begin operations.
The General Partner may have a conflict to the extent that its trading decisions
for USSO may be influenced by the effect they would have on the other funds it
manages. These trading decisions may be influenced since the General Partner
also serves as the general partner for all of the funds and is required to meet
all of the funds’ investment objectives as well as USSO’s. If the General
Partner believes that a trading decision it made on behalf of USSO might (i)
impede its other funds from reaching their investment objectives, or (ii)
improve the likelihood of meeting its other funds’ objectives, then the General
Partner may choose to change its trading decision for USSO, which could either
impede or improve the opportunity for USSO to meet its investment objective. In
addition, the General Partner is required to indemnify the officers and
directors of its other funds if the need for indemnification arises. This
potential indemnification will cause the General Partner’s assets to decrease.
If the General Partner’s other sources of income are not sufficient to
compensate for the indemnification, then the General Partner may terminate and
investors could lose their investment.




Unitholders
may only vote on the removal of the General Partner and limited partners have
only limited voting rights. Unitholders and limited partners will not
participate in the management of USSO and do not control the General Partner so
they will not have influence over basic matters that affect USSO.




Unitholders
that have not applied to become limited partners have no voting rights, other
than to remove the General Partner. Limited partners will have limited voting
rights with respect to USSO’s affairs. Unitholders may remove the General
Partner only if 66 2/3% of the unitholders elect to do so. Unitholders and
limited partners will not be permitted to participate in the management or
control of USSO or the conduct of its business. Unitholders and limited partners
must therefore rely upon the duties and judgment of the General Partner to
manage USSO’s affairs.




57


The
General Partner may manage a large amount of assets and this could affect USSO’s
ability to trade profitably.




Increases
in assets under management may affect trading decisions. In general, the General
Partner does not intend to limit the amount of assets of USSO that it may
manage. The more assets the General Partner manages, the more difficult it may
be for it to trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance and of managing
risk associated with larger positions.




USSO
could terminate at any time and cause the liquidation and potential loss of an
investor’s investment and could upset the overall maturity and timing of an
investor’s investment portfolio.




USSO may
terminate at any time, regardless of whether USSO has incurred losses, subject
to the terms of the LP Agreement. In particular, unforeseen circumstances,
including the death, adjudication of incompetence, bankruptcy, dissolution, or
removal of the General Partner could cause USSO to terminate unless a majority
in interest of the limited partners within 90 days of the event elects to
continue the partnership and appoints a successor general partner, or the
affirmative vote of a majority in interest of the limited partners subject to
certain conditions. However, no level of losses will require the General Partner
to terminate USSO. USSO’s termination would cause the liquidation and potential
loss of an investor’s investment. Termination could also negatively affect the
overall maturity and timing of an investor’s investment
portfolio.





Limited
partners may not have limited liability in certain circumstances, including
potentially having liability for the return of wrongful
distributions.




Under
Delaware law, a limited partner might be held liable for USSO’s obligations as
if it were a General Partner if the limited partner participates in the control
of the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.





A limited
partner will not be liable for assessments in addition to its initial capital
investment in any of USSO’s capital securities representing units. However, a
limited partner may be required to repay to USSO any amounts wrongfully returned
or distributed to it under some circumstances. Under Delaware law, USSO may not
make a distribution to limited partners if the distribution causes USSO’s
liabilities (other than liabilities to partners on account of their partnership
interests and nonrecourse liabilities) to exceed the fair value of USSO’s
assets. Delaware law provides that a limited partner who receives such a
distribution and knew at the time of the distribution that the distribution
violated the law will be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution.




With
adequate notice, a limited partner may be required to withdraw from the
partnership for any reason.




If the
General Partner gives at least fifteen (15) days’ written notice to a limited
partner, then the General Partner may for any reason, in its sole discretion,
require any such limited partner to withdraw entirely from the partnership or to
withdraw a portion of its partner capital account. The General Partner may
require withdrawal even in situations where the limited partner has complied
completely with the provisions of the LP Agreement.




USSO’s
existing units are, and any units USSO issues in the future will be, subject to
restrictions on transfer. Failure to satisfy these requirements will preclude a
transferee from being able to have all the rights of a limited
partner.




No
transfer of any unit or interest therein may be made if such transfer would (a)
violate the then applicable federal or state securities laws or rules and
regulations of the SEC, any state securities commission, the CFTC or any other
governmental authority with jurisdiction over such transfer, or (b) cause USSO
to be taxable as a corporation or affect USSO’s existence or qualification as a
limited partnership. In addition, investors may only become limited partners if
they transfer their units to purchasers that meet certain conditions outlined in
the LP Agreement, which provides that each record holder or limited partner or
unitholder applying to become a limited partner (each a record holder) may be
required by the General Partner to furnish certain information, including that
holder’s nationality, citizenship or other related status. A transferee who is
not a U.S. resident may not be eligible to become a record holder or a limited
partner if its ownership would subject USSO to the risk of cancellation or
forfeiture of any of its assets under any federal, state or local law or
regulation. All purchasers of USSO’s units, who wish to become limited partners
or record holders, and receive cash distributions, if any, or have certain other
rights, must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it agrees to be
bound by USSO’s LP Agreement and is eligible to purchase USSO’s securities. Any
transfer of units will not be recorded by the transfer agent or recognized by
USSO unless a completed transfer application is delivered to the General Partner
or the Administrator. A person purchasing USSO’s existing units, who does not
execute a transfer application and certify that the purchaser is eligible to
purchase those securities acquires no rights in those securities other than the
right to resell those securities. Whether or not a transfer application is
received or the consent of the General Partner obtained, USSO’s units will be
securities and will be transferable according to the laws governing transfers of
securities. See “Transfer of Units.”


58




USSO
does not expect to make cash distributions.




The
General Partner has not previously made any cash distributions and intends to
re-invest any realized gains in additional Crude Oil Interests rather than
distributing cash to limited partners. Therefore, unlike mutual funds, commodity
pools or other investment pools that actively manage their investments in an
attempt to realize income and gains from their investing activities and
distribute such income and gains to their investors, USSO generally does not
expect to distribute cash to limited partners. An investor should not invest in
USSO if it will need cash distributions from USSO to pay taxes on its share of
income and gains of USSO, if any, or for any other reason. Although USSO does
not intend to make cash distributions, the income earned from its investments
held directly or posted as margin may reach levels that merit distribution,
e.g., at levels where
such income is not necessary to support its underlying investments in Crude Oil
Interests and investors adversely react to being taxed on such income without
receiving distributions that could be used to pay such tax. If this income
becomes significant then cash distributions may be made.





There
is a risk that USSO will not earn trading gains sufficient to compensate for the
fees and expenses that it must pay and as such USSO may not earn any
profit.




USSO pays
brokerage charges of approximately 0.14% based on futures commission merchant
fees of $4.00 per buy or sell, management fees of 0.60% of NAV on its average
net assets, and over-the-counter spreads and extraordinary expenses (e.g., subsequent offering
expenses, other expenses not in the ordinary course of business, including the
indemnification of any person against liabilities and obligations to the extent
permitted by law and required under the LP Agreement and under agreements
entered into by the General Partner on USSO’s behalf and the bringing and
defending of actions at law or in equity and otherwise engaging in the conduct
of litigation and the incurring of legal expenses and the settlement of claims
and litigation) that can not be quantified. These fees and expenses must be paid
in all cases regardless of whether USSO’s activities are profitable.
Accordingly, USSO must earn trading gains sufficient to compensate for these
fees and expenses before it can earn any profit.




If
offerings of the units do not raise sufficient funds to pay USSO’s future
expenses and no other source of funding of expenses is found, USSO may be forced
to terminate and investors may lose all or part of their
investment.





Prior to
the offering of units that commenced on September 24, 2009, all of USSO’s
expenses were funded by the General Partner and its affiliates. These payments
by the General Partner and its affiliates were designed to allow USSO the
ability to commence the public offering of its units. USSO now directly pays
certain of these fees and expenses. The General Partner will continue to
pay other fees and expenses, as set forth in the LP Agreement. If the General
Partner and USSO are unable to raise sufficient funds to cover their expenses or
locate any other source of funding, USSO may be forced to terminate and
investors may lose all or part of their investment.




USSO
may incur higher fees and expenses upon renewing existing or entering into new
contractual relationships.




The
clearing arrangements between the clearing brokers and USSO generally are
terminable by the clearing brokers once the clearing broker has given USSO
notice. Upon termination, the General Partner may be required to renegotiate or
make other arrangements for obtaining similar services if USSO intends to
continue trading in Futures Contracts or Other Oil Interest contracts at its
present level of capacity. The services of any clearing broker may not be
available, or even if available, these services may not be available on the
terms as favorable as those of the expired or terminated clearing
arrangements.




59


USSO
may miss certain trading opportunities because it will not receive the benefit
of the expertise of independent trading advisors.




The
General Partner does not employ trading advisors for USSO; however, it reserves
the right to employ them in the future. The only advisor to USSO is the General
Partner. A lack of independent trading advisors may be disadvantageous to USSO
because it will not receive the benefit of a trading advisor’s
expertise.




An
unanticipated number of redemption requests during a short period of time could
have an adverse effect on the NAV of USSO.




If a
substantial number of requests for redemption of Redemption Baskets are received
by USSO during a relatively short period of time, USSO may not be able to
satisfy the requests from USSO’s assets not committed to trading. As a
consequence, it could be necessary to liquidate positions in USSO’s trading
positions before the time that the trading strategies would otherwise dictate
liquidation.




The
financial markets are currently in a period of disruption and USSO does not
expect these conditions to improve in the near future.





Currently
and throughout 2008 and 2009, the financial markets have experienced very
difficult conditions and volatility as well as significant adverse trends. The
conditions in these markets have resulted in a decrease in availability of
corporate credit and liquidity and have led indirectly to the insolvency,
closure or acquisition of a number of major financial institutions and have
contributed to further consolidation within the financial services industry. A
continued recession or a depression could adversely affect the financial
condition and results of operations of USSO’s service providers and Authorized
Purchasers which would impact the ability of the General Partner to achieve
USSO’s investment objective.





The
failure or bankruptcy of a clearing broker could result in a substantial loss of
USSO’s assets; the clearing broker could be subject to proceedings that impair
its ability to execute USSO’s trades.




Under
CFTC regulations, a clearing broker maintains customers’ assets in a bulk
segregated account. If a clearing broker fails to do so, or is unable to satisfy
a substantial deficit in a customer account, its other customers may be subject
to risk of a substantial loss of their funds in the event of that clearing
broker’s bankruptcy. In that event, the clearing broker’s customers, such as
USSO, are entitled to recover, even in respect of property specifically
traceable to them, only a proportional share of all property available for
distribution to all of that clearing broker’s customers. The bankruptcy of a
clearing broker could result in the complete loss of USSO’s assets posted with
the clearing broker; though the vast majority of USSO’s assets are held in
Treasuries, cash and/or cash equivalents with USSO’s custodian and would not be
impacted by the bankruptcy of a clearing broker. USSO also may be subject to the
risk of the failure of, or delay in performance by, any exchanges and markets
and their clearing organizations, if any, on which commodity interest contracts
are traded.





From time
to time, the clearing brokers may be subject to legal or regulatory proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear USSO’s
trades.




The
failure or insolvency of USSO’s custodian could result in a substantial loss of
USSO’s assets.




As noted
above, the vast majority of USSO’s assets are held in Treasuries, cash and/or
cash equivalents with USSO’s custodian. The insolvency of the custodian could
result in a complete loss of USSO’s assets held by that custodian, which, at any
given time, would likely comprise a substantial portion of USSO’s total
assets.





Third
parties may infringe upon or otherwise violate intellectual property rights or
assert that the General Partner has infringed or otherwise violated their
intellectual property rights, which may result in significant costs and diverted
attention.




Third
parties may utilize USSO’s intellectual property or technology, including the
use of its business methods, trademarks and trading program software, without
permission. The General Partner has a patent pending for USSO’s business method
and it is registering its trademarks. USSO does not currently have any
proprietary software. However, if it obtains proprietary software in the future,
then any unauthorized use of USSO’s proprietary software and other technology
could also adversely affect its competitive advantage. USSO may have difficulty
monitoring unauthorized uses of its patents, trademarks, proprietary software
and other technology. Also, third parties may independently develop business
methods, trademarks or proprietary software and other technology similar to that
of the General Partner or claim that the General Partner has violated their
intellectual property rights, including their copyrights, trademark rights,
trade names, trade secrets and patent rights. As a result, the General Partner
may have to litigate in the future to protect its trade secrets, determine the
validity and scope of other parties’ proprietary rights, defend itself against
claims that it has infringed or otherwise violated other parties’ rights, or
defend itself against claims that its rights are invalid. Any litigation of this
type, even if the General Partner is successful and regardless of the merits,
may result in significant costs, divert its resources from USSO, or require it
to change its proprietary software and other technology or enter into royalty or
licensing agreements.




60


The
success of USSO depends on the ability of the General Partner to accurately
implement trading systems, and any failure to do so could subject USSO to losses
on such transactions.




The
General Partner uses mathematical formulas built into a generally available
spreadsheet program to decide whether it should buy or sell Crude Oil Interests
each day. Specifically, the General Partner uses the spreadsheet to make
mathematical calculations and to monitor positions in Crude Oil Interests and
Treasuries and correlations to the Benchmark Futures Contract. The General
Partner must accurately process the spreadsheets’ outputs and execute the
transactions called for by the formulas. In addition, USSO relies on the General
Partner to properly operate and maintain its computer and communications
systems. Execution of the formulas and operation of the systems are subject to
human error. Any failure, inaccuracy or delay in implementing any of the
formulas or systems and executing USSO’s transactions could impair its ability
to achieve USSO’s investment objective. It could also result in decisions to
undertake transactions based on inaccurate or incomplete information. This could
cause substantial losses on transactions.




USSO
may experience substantial losses on transactions if the computer or
communications system fails.




USSO’s
trading activities, including its risk management, depend on the integrity and
performance of the computer and communications systems supporting them.
Extraordinary transaction volume, hardware or software failure, power or
telecommunications failure, a natural disaster or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or even fail. Any
significant degradation or failure of the systems that the General Partner uses
to gather and analyze information, enter orders, process data, monitor risk
levels and otherwise engage in trading activities may result in substantial
losses on transactions, liability to other parties, lost profit opportunities,
damages to the General Partner’s and USSO’s reputations, increased operational
expenses and diversion of technical resources.




If
the computer and communications systems are not upgraded, USSO’s financial
condition could be harmed.




The
development of complex computer and communications systems and new technologies
may render the existing computer and communications systems supporting USSO’s
trading activities obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the systems of
exchanges, clearing brokers and the executing brokers. As a result, if these
third parties upgrade their systems, the General Partner will need to make
corresponding upgrades to continue effectively its trading activities. USSO’s
future success will depend on USSO’s ability to respond to changing technologies
on a timely and cost-effective basis.





USSO
depends on the reliable performance of the computer and communications systems
of third parties, such as brokers and futures exchanges, and may experience
substantial losses on transactions if they fail.




USSO
depends on the proper and timely function of complex computer and communications
systems maintained and operated by the futures exchanges, brokers and other data
providers that the General Partner uses to conduct trading activities. Failure
or inadequate performance of any of these systems could adversely affect the
General Partner’s ability to complete transactions, including its ability to
close out positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a material adverse
effect on revenues and materially reduce USSO’s available capital. For example,
unavailability of price quotations from third parties may make it difficult or
impossible for the General Partner to use its proprietary software that it
relies upon to conduct its trading activities. Unavailability of records from
brokerage firms may make it difficult or impossible for the General Partner to
accurately determine which transactions have been executed or the details,
including price and time, of any transaction executed. This unavailability of
information also may make it difficult or impossible for the General Partner to
reconcile its records of transactions with those of another party or to
accomplish settlement of executed transactions.


61


The
occurrence of a terrorist attack, or the outbreak, continuation or expansion of
war or other hostilities could disrupt USSO’s trading activity and materially
affect USSO’s profitability.




The
operations of USSO, the exchanges, brokers and counterparties with which USSO
does business, and the markets in which USSO does business could be severely
disrupted in the event of a major terrorist attack or the outbreak, continuation
or expansion of war or other hostilities. The terrorist attacks of September 11,
2001 and the war in Iraq, global anti-terrorism initiatives and political unrest
in the Middle East and Southeast Asia continue to fuel this
concern.




Risk
of Leverage and Volatility




If
the General Partner permits USSO to become leveraged, investors could lose all
or substantially all of their investment if USSO’s trading positions suddenly
turn unprofitable.




Commodity
pools’ trading positions in futures contracts or other commodity interests are
typically required to be secured by the deposit of margin funds that represent
only a small percentage of a futures contract’s (or other commodity interests’)
entire market value. This feature permits commodity pools to “leverage” their
assets by purchasing or selling futures contracts (or other commodity interests)
with an aggregate value in excess of the commodity pool’s assets. While this
leverage can increase the pool’s profits, relatively small adverse movements in
the price of the pool’s futures contracts can cause significant losses to the
pool. While the General Partner has not and does not currently intend to
leverage USSO’s assets, it is not prohibited from doing so under the LP
Agreement or otherwise.




The
price of crude oil is volatile which could cause large fluctuations in the price
of units.





Movements
in the price of crude oil may be the result of factors outside of the General
Partner’s control and may not be anticipated by the General Partner. Among the
factors that can cause volatility in the price of crude oil are:





·
            worldwide
      or regional demand for energy, which is affected by economic
      conditions;





·
            the
      domestic and foreign supply and inventories of oil and
  gas;





·
            weather
      conditions, including abnormally mild winter or summer weather, and
      abnormally harsh winter or summer
weather;





·
            availability
      and adequacy of pipeline and other transportation
    facilities;





·
            domestic
      and foreign governmental regulations and
taxes;





·
            political
      conditions in gas or oil producing
regions;





·
            technological
      advances relating to energy usage or relating to technology for
      exploration, production, refining and petrochemical
      manufacturing;





·
            the
      ability of members of OPEC to agree upon and maintain oil prices and
      production levels;





·
            the
      price and availability of alternative fuels;
and





·
            the
      impact of energy conservation
efforts.





62





The
impact of environmental and other governmental laws and regulations may affect
the price of crude oil.





Environmental
and other governmental laws and regulations have increased the costs to plan,
design, drill, install, operate and abandon oil wells. Other laws have prevented
exploration and drilling of crude oil in certain environmentally sensitive
federal lands and waters. Several environmental laws that have a direct or an
indirect impact on the price of crude oil include, but are not limited to, the
Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, and the
Comprehensive Environmental Response, Compensation and Liability Act of
1980.





The
limited method for transporting and storing crude oil may cause the price of
crude oil to increase.





Crude oil
is transported throughout the United States by way of pipelines, barges,
tankers, trucks and rail cars and is stored in aboveground and underground
storage facilities. These systems may not be adequate to meet demand, especially
in times of peak demand or in areas of the United States where crude oil service
is already limited due to minimal pipeline and storage infrastructure. As a
result of the limited method for transporting and storing crude oil, the price
of crude oil may increase.





Over-the-Counter
Contract Risk




Over-the-counter
transactions are subject to little, if any, regulation.




A portion
of USSO’s assets may be used to trade over-the-counter crude oil interest
contracts, such as forward contracts or swap or spot contracts. Over-the-counter
contracts are typically traded on a principal-to-principal basis through dealer
markets that are dominated by major money center and investment banks and other
institutions and are essentially unregulated by the CFTC. Investors therefore do
not receive the protection of CFTC regulation or the statutory scheme of the CEA
in connection with this trading activity by USSO. The markets for
over-the-counter contracts rely upon the integrity of market participants in
lieu of the additional regulation imposed by the CFTC on participants in the
futures markets. The lack of regulation in these markets could expose USSO in
certain circumstances to significant losses in the event of trading abuses or
financial failure by participants.





USSO
will be subject to credit risk with respect to counterparties to
over-the-counter contracts entered into by USSO or held by special purpose or
structured vehicles.




USSO also
faces the risk of non-performance by the counterparties to the over-the-counter
contracts. Unlike in futures contracts, the counterparty to these contracts is
generally a single bank or other financial institution, rather than a clearing
organization backed by a group of financial institutions. As a result, there
will be greater counterparty credit risk in these transactions. A counterparty
may not be able to meet its obligations to USSO, in which case USSO could suffer
significant losses on these contracts.




If a
counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, USSO may experience significant delays in obtaining
any recovery in a bankruptcy or other reorganization proceeding. USSO may obtain
only limited recovery or may obtain no recovery in such
circumstances.




USSO
may be subject to liquidity risk with respect to its over-the-counter
contracts.




Over-the-counter
contracts may have terms that make them less marketable than Futures Contracts.
Over-the-counter contracts are less marketable because they are not traded on an
exchange, do not have uniform terms and conditions, and are entered into based
upon the creditworthiness of the parties and the availability of credit support,
such as collateral, and in general, they are not transferable without the
consent of the counterparty. These conditions diminish the ability to realize
the full value of such contracts.  In addition, even if collateral is
used to reduce counterparty credit risk, sudden changes in the value of
over-the-counter transactions may leave a party open to financial risk due to a
counterparty default since the collateral held may not cover a party’s exposure
on the transaction in such situations.




63


Risk
of Trading in International Markets
  Trading
in international markets could expose USSO to credit and regulatory
risk.




The
General Partner invests primarily in short interests in Futures Contracts, a
significant portion of which are traded on United States exchanges, including
the NYMEX. However, a portion of USSO’s trades may take place on markets and
exchanges outside the United States. Some non-U.S. markets present risks because
they are not subject to the same degree of regulation as their U.S.
counterparts. None of the CFTC, NFA, or any domestic exchange regulates
activities of any foreign boards of trade or exchanges, including the execution,
delivery and clearing of transactions, nor has the power to compel enforcement
of the rules of a foreign board of trade or exchange or of any applicable
non-U.S. laws. Similarly, the rights of market participants, such as USSO, in
the event of the insolvency or bankruptcy of a non-U.S. market or broker are
also likely to be more limited than in the case of U.S. markets or brokers. As a
result, in these markets, USSO has less legal and regulatory protection than it
does when it trades domestically.




In some
of these non-U.S. markets, the performance on a contract is the responsibility
of the counterparty and is not backed by an exchange or clearing corporation and
therefore exposes USSO to credit risk. Trading in non-U.S. markets also leaves
USSO susceptible to swings in the value of the local currency against the U.S.
dollar. Additionally, trading on non-U.S. exchanges is subject to the risks
presented by exchange controls, expropriation, increased tax burdens and
exposure to local economic declines and political instability. An adverse
development with respect to any of these variables could reduce the profit or
increase the loss earned on trades in the affected international
markets.





International
trading activities subject USSO to foreign exchange risk.





The price
of any non-U.S. Futures Contract, option on any non-U.S. Futures Contract, or
other non-U.S. Other Oil Interest and, therefore, the potential profit and loss
on such contract, may be affected by any variance in the foreign exchange rate
between the time the order is placed and the time it is liquidated, offset or
exercised. As a result, changes in the value of the local currency relative to
the U.S. dollar may cause losses to USSO even if the contract traded is
profitable.




USSO’s
international trading could expose it to losses resulting from non-U.S.
exchanges that are less developed or less reliable than United States
exchanges.




Some
non-U.S. exchanges may be in a more developmental stage so that prior price
histories may not be indicative of current price dynamics. In addition, USSO may
not have the same access to certain positions on foreign trading exchanges as do
local traders, and the historical market data on which the General Partner bases
its strategies may not be as reliable or accessible as it is for U.S.
exchanges.




Tax
Risk




An
investor’s tax liability may exceed the amount of distributions, if any, on its
units.




Cash or
property will be distributed at the sole discretion of the General Partner. The
General Partner has not and does not currently intend to make cash or other
distributions with respect to units. Investors will be required to pay U.S.
federal income tax and, in some cases, state, local, or foreign income tax, on
their allocable share of USSO’s taxable income, without regard to whether they
receive distributions or the amount of any distributions. Therefore, the tax
liability of an investor with respect to its units may exceed the amount of
cash or value of property (if any) distributed.




An
investor’s allocable share of taxable income or loss may differ from its
economic income or loss on its units.




Due to
the application of the assumptions and conventions applied by USSO in making
allocations for tax purposes and other factors, an investor’s allocable share of
USSO’s income, gain, deduction or loss may be different than its economic profit
or loss from its units for a taxable year. This difference could be temporary or
permanent and, if permanent, could result in it being taxed on amounts in excess
of its economic income.


64


Items
of income, gain, deduction, loss and credit with respect to units could be
reallocated if the IRS does not accept the assumptions and conventions applied
by USSO in allocating those items, with potential adverse consequences for an
investor.




The U.S.
tax rules pertaining to partnerships are complex and their application to large,
publicly traded partnerships such as USSO is in many respects uncertain. USSO
applies certain assumptions and conventions in an attempt to comply with the
intent of the applicable rules and to report taxable income, gains, deductions,
losses and credits in a manner that properly reflects unitholders’ economic
gains and losses. These assumptions and conventions may not fully comply with
all aspects of the Internal Revenue Code (the “Code”) and applicable Treasury
Regulations, however, and it is possible that the U.S. Internal Revenue Service
will successfully challenge USSO’s allocation methods and require USSO to
reallocate items of income, gain, deduction, loss or credit in a manner that
adversely affects investors. If this occurs, investors may be required to file
an amended tax return and to pay additional taxes plus deficiency
interest.





USSO
could be treated as a corporation for federal income tax purposes, which may
substantially reduce the value of the units.




USSO has
received an opinion of counsel that, under current U.S. federal income tax laws,
USSO will be treated as a partnership that is not taxable as a corporation for
U.S. federal income tax purposes, provided that (i) at least 90 percent of
USSO’s annual gross income consists of “qualifying income” as defined in the
Code, (ii) USSO is organized and operated in accordance with its governing
agreements and applicable law and (iii) USSO does not elect to be taxed as a
corporation for federal income tax purposes. Although the General Partner
anticipates that USSO has satisfied and will continue to satisfy the “qualifying
income” requirement for all of its taxable years, that result cannot be assured.
USSO has not requested and will not request any ruling from the IRS with respect
to its classification as a partnership not taxable as a corporation for federal
income tax purposes. If the IRS were to successfully assert that USSO is taxable
as a corporation for federal income tax purposes in any taxable year, rather
than passing through its income, gains, losses and deductions proportionately to
unitholders, USSO would be subject to tax on its net income for the year at
corporate tax rates. In addition, although the General Partner does not
currently intend to make distributions with respect to units, any distributions
would be taxable to unitholders as dividend income. Taxation of USSO as a
corporation could materially reduce the after-tax return on an investment in
units and could substantially reduce the value of the units.





Item 1B.    Unresolved
Staff Comments.





Not
applicable.





Item
2.       Properties.





Not
applicable.




Item
3.       Legal Proceedings.




Although
USSO may, from time to time, be involved in litigation arising out of its
operations in the normal course of business or otherwise, USSO is currently not
a party to any pending material legal proceedings.





Item
4.       Reserved.


65




Part
II
  Item 5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
  Price
Range of Units
  USSO’s units have traded on the NYSE Arca under the
symbol “DNO” since September 24, 2009.  The following table sets forth
the range of reported high and low sales prices of the units as reported on the
NYSE Arca for the periods indicated below.


High
                      
                      
                      LowFiscal year 2009Third
      quarter (beginning September 24, 2009)
                      
                      $
                      52.20
                      
                      
                      $
                      48.79Fourth
      quarter
                      
                      $
                      49.24
                      
                      
                      $
                      42.26





As of
December 31, 2009, USSO had 185 holders of units.





Dividends





USSO has
not made and does not currently intend to make cash distributions to its
unitholders.





Issuer
Purchases of Equity Securities





USSO does
not purchase units directly from its unitholders; however, in connection with
its redemption of baskets held by Authorized Purchasers, USSO did not redeem any
baskets during the period ended December 31, 2009.





Item
6.       Selected Financial
Data.





Financial
Highlights (for the year ended December 31, 2009 and the period from June 30,
2008 (inception) to December 31, 2008)


(Dollar
amounts in 000’s except for per unit information)





Year
      ended
                    December
      31, 2009
                  
                  
                  For
      the period from
                    June
      30, 2008 to
                    December
      31, 2008Total
      assets
                  
                  $
                  13,416
                  
                  
                  $
                  1Net
      realized and unrealized loss on futurestransactions,
      inclusive of commissions
                  
                  $
                  (1,071
                  )
                  
                  $
                  -Net
      loss
                  
                  $
                  (1,094
                  )
                  
                  $
                  -Weighted-average
      limited partnership units
                  
                  
                  272,727
                  
                  
                  
                  -Net
      loss per unit
                  
                  $
                  (6.01
                  )
                  
                  $
                  -Net
      loss per weighted average unit
                  
                  $
                  (4.01
                  )
                  
                  $
                  -Cash
      and cash equivalents at end of year/period
                  
                  $
                  11,690
                  
                  
                  $
                  1





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




The
following discussion should be read in conjunction with the financial statements
and the notes thereto of USSO included elsewhere in this annual report on
Form 10-K.




Forward-Looking
Information




This
annual report on Form 10-K, including this “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” contains forward-looking
statements regarding the plans and objectives of management for future
operations. This information may involve known and unknown risks, uncertainties
and other factors that may cause USSO’s actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe USSO’s
future plans, strategies and expectations, are generally identifiable by use of
the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project,” the negative of these words, other
variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and USSO cannot
assure investors that the projections included in these forward-looking
statements will come to pass. USSO’s actual results could differ materially
from those expressed or implied by the forward-looking statements as a result of
various factors.




USSO has
based the forward-looking statements included in this annual report on Form 10-K
on information available to it on the date of this annual report on Form
10-K, and USSO assumes no obligation to update any such forward-looking
statements. Although USSO undertakes no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, investors are advised to consult any additional disclosures
that USSO may make directly to them or through reports that USSO in the
future files with the SEC, including annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K.


66


Introduction
 
 USSO, a
Delaware limited partnership, is a commodity pool that issues units that may be
purchased and sold on the NYSE Arca. The investment objective of USSO is for the
changes in percentage terms of its units’ NAV to inversely reflect the changes
in percentage terms of the spot price of light, sweet crude oil delivered to
Cushing, Oklahoma, as measured by the changes in the price of the futures
contract for light, sweet crude oil traded on the NYMEX that is the near
month contract to expire, except when the near month contract is within two
weeks of expiration, in which case it will be measured by the futures contract
that is the next month contract to expire, less USSO’s expenses.
 
 USSO
seeks to achieve its investment objective by investing in short positions in a
combination of Futures Contracts and Other Crude Oil-Related Investments such
that changes in its NAV, measured in percentage terms, will closely track the
inverse of the changes in the price of the Benchmark Futures Contract, also
measured in percentage terms. USSO’s General Partner believes the Benchmark
Futures Contract historically has exhibited a close correlation with the
spot price of light, sweet crude oil. It is not the intent of USSO to be
operated in a fashion such that the NAV will equal, in dollar terms, the spot
price of light, sweet crude oil or any particular futures contract based on
light, sweet crude oil. Management believes that it is not practical to manage
the portfolio to achieve such an investment goal when investing in listed
Futures Contracts and Other Crude Oil-Related Investments.
 
 On any
valuation day, the Benchmark Futures Contract is the near month futures contract
for light, sweet crude oil traded on the NYMEX unless the near month
contract is within two weeks of expiration in which case the Benchmark Futures
Contract becomes, over a 4-day period, the next month contract for light, sweet
crude oil traded on the NYMEX. “Near month contract” means the next contract
traded on the NYMEX due to expire. “Next month contract” means the first
contract traded on the NYMEX due to expire after the near month
contract.
 
 The
regulation of Crude Oil Interests in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental and judicial
action.  As stated under the heading, “Risk Factors” in Item 1A of
this annual report on Form 10-K, regulation of the commodity interests and
energy markets is extensive and constantly changing; future regulatory
developments in the commodity interests and energy markets are impossible to
predict but may significantly and adversely affect USSO.
 
 Currently,
a number of proposals to alter the regulation of Crude Oil Interests are being
considered by federal regulators and legislators. These proposals include the
imposition of hard position limits on energy-based commodity futures contracts,
the extension of position and accountability limits to futures contracts on
non-U.S. exchanges previously exempt from such limits, and the forced use of
clearinghouse mechanisms for all over-the-counter transactions. An additional
proposal would aggregate and limit all positions in energy futures held by a
single entity, whether such positions exist on U.S. futures exchanges, non-U.S.
futures exchanges, or in over-the-counter contracts. The CFTC has also recently
published a proposed rule that would impose fixed position limits on certain
energy futures contracts without the need for any new legislation to be
passed.  If any of the aforementioned proposals is implemented, USSO’s
ability to meet its investment objective may be negatively impacted and
investors could be adversely affected.
 
 USSO may
also invest in other Futures Contracts and Other Crude Oil-Related
Investments. The General Partner of USSO, which is registered as a CPO with the
CFTC, is authorized by the LP Agreement to manage USSO. The General Partner
is authorized by USSO in its sole judgment to employ and establish the terms of
employment for, and termination of, commodity trading advisors or futures
commission merchants.
 
 Crude oil
futures prices were volatile during the period from September 24, 2009 to
December 31, 2009 and exhibited wide daily swings along with an uneven upward
trend from late September 2009 to late December 2009. The price of the Benchmark
Futures Contract started the period at the $68.97 per barrel level. The low of
the period was on September 24, 2009 when prices dropped to $65.89 per barrel.
Prices rose over the course of the period and hit a peak on October 21, 2009 of
$81.37 per barrel. The period ended with the Benchmark Futures Contract at
$79.36 per barrel, up approximately 15.06% over the period.  USSO’s
NAV rose during the period from a starting level of $50.00 per unit and reached
its high for the period on September 24, 2009 at $52.23 per
unit.  USSO’s NAV reached its low for the period on October 21, 2009
at $42.13 per unit.  USSO’s NAV on December 31, 2009 was $43.99, down
approximately 12.02% over the period. The Benchmark Futures Contract prices
listed above begin with the November 2009 contract and end with the February
2010 contract.  The return of approximately 15.06% on the Benchmark
Futures Contract listed above is a hypothetical return only and could not
actually be achieved by an investor holding futures contracts. An investment in
oil futures contracts would need to be rolled forward during the time period
described in order to achieve such a result.
  67
  The
prices of front month contract was also lower than the prices of second month
contract during the period from September 24, 2009 to December 31, 2009, a
condition in the futures markets referred to as “contango”.  A
contango market is one in which the price of the near month crude oil futures
contract is less than the price of the next month crude oil futures contract, or
contracts further away from expiration. For a discussion of the impact of
backwardation and contango on total returns, see “Term Structure of Crude Oil
Prices and the Impact on Total Returns”.
 
 Valuation
of Crude Futures Contracts and the Computation of the NAV
 
 The NAV
of USSO units is calculated once each NYSE Arca trading day.  The NAV
for a particular trading day is released after 4:00 p.m. New York
time.  Trading during the core trading session on the NYSE Arca
typically closes at 4:00 p.m. New York time.  The Administrator uses
the NYMEX closing price (determined at the earlier of the close of the NYMEX or
2:30 p.m. New York time) for the contracts held on the NYMEX, but
calculates or determines the value of all other USSO investments, including ICE
Futures contracts or other futures contracts, as of the earlier of the close of
the NYSE Arca or 4:00 p.m. New York time.
 
 Results
of Operations and the Crude Oil Market
 
 Results of
Operations. On September 24, 2009, USSO listed its units on
the NYSE Arca under the ticker symbol “DNO.” On that day, USSO established its
initial offering price at $50.00 per unit and issued 200,000 units to the
initial authorized purchaser, Deutsche Bank Securities Inc., in exchange for
$10,000,000 in cash.
 
 Since its
initial offering of 25,000,000 units, USSO has not made any subsequent offerings
of its units.  As of December 31, 2009, USSO had issued 300,000
units, all of which were outstanding.  As of December 31,
2009, there were 29,700,000 units registered but not yet issued.
 
 More
units may have been issued by USSO than are outstanding due to the redemption of
units. Unlike funds that are registered under the 1940 Act, units that have been
redeemed by USSO cannot be resold by USSO. As a result, USSO contemplates that
additional offerings of its units will be registered with the SEC in the future
in anticipation of additional issuances and redemptions.
 
 For the Period ended
December 31, 2009
 
 As of
December 31, 2009, the total unrealized loss on short positions in Futures
Contracts owned or held on that day was $1,024,370 and USSO established
cash deposits, including cash investments in money market funds, that were equal
to $14,233,832. USSO held 82.13% of its cash assets in overnight deposits and
money market funds at the Custodian, while 17.87% of the cash balance was held
as margin deposits for the Futures Contracts purchased. The ending per unit NAV
on December 31, 2009 was $43.99.
 
 Portfolio Expenses. USSO’s
expenses consist of investment management fees, brokerage
fees and commissions, certain offering costs, licensing fees and the fees
and expenses of the independent directors of the General Partner.  The
management fee that USSO pays to the General Partner is calculated as a
percentage of the total net assets of USSO.  USSO pays the General
Partner a management fee of 0.60% on its average net assets. The fee is accrued
daily.
 
 During
the period ended December 31, 2009, the daily average total net assets of USSO
were $12,381,681. The management fee paid by USSO during the period
amounted to $20,150. Management fees as a percentage of total net assets
averaged 0.60% over the course of the period ended December 31,
2009.
 
 In
addition to the management fee, USSO pays all brokerage fees, taxes and
other expenses, including certain tax reporting costs, licensing fees for the
use of intellectual property, ongoing registration or other fees paid to the
SEC, FINRA and any other regulatory agency in connection
with offers and sales of its units subsequent to the initial offering and
all legal, accounting, printing and other expenses associated therewith. The
total of these fees, taxes and expenses for the period ended December 31, 2009
was $217,138. For the period ended December 31, 2009, USSO did not incur
any ongoing registration fees and other expenses relating to the registration
and offering of additional units.
  68
 
 USSO is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. USSO shares these fees and expenses with the
Related Public Funds based on the relative assets of each fund computed on a
daily basis. These fees and expenses for calendar year 2009 amounted to a total
of $433,046 for all funds, and USSO’s portion of such fees and expenses was
$167.
 
 USSO also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Crude Oil-Related Investments or Treasuries. During the period ended
December 31, 2009, total commissions paid to brokers amounted to $4,695. As an
annualized percentage of total net assets, the figure for the period ended
December 31, 2009 represents approximately 0.14% of total net assets. However,
there can be no assurance that commission costs and portfolio turnover will not
cause commission expenses to rise in future quarters.
 
 The fees
and expenses associated with USSO’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees which were borne by the General Partner, are
paid by USSO. These costs are estimated to be $211,500 for the period ended
December 31, 2009.
 
 Interest Income. USSO seeks
to invest its assets such that it holds Futures Contracts and Other Crude
Oil-Related Investments in an amount equal to the total net assets of its
portfolio. Typically, such investments do not require USSO to pay the full
amount of the contract value at the time of purchase, but rather require USSO to
post an amount as a margin deposit against the eventual settlement of the
contract. As a result, USSO retains an amount that is approximately equal to its
total net assets, which USSO invests in Treasuries, cash and/or cash
equivalents. This includes both the amount on deposit with the futures
commission merchant as margin, as well as unrestricted cash and cash equivalents
held with USSO’s Custodian. The Treasuries, cash and/or cash equivalents earn
interest that accrues on a daily basis. For the period ended December 31, 2009,
USSO earned $1,715 in interest income on such cash holdings. Based on USSO’s
average daily total net assets, this was equivalent to an annualized yield of
0.05%. USSO did not purchase Treasuries during the period ended December
31, 2009 and held all of its funds in cash and/or cash equivalents during this
time period.
 
 Tracking USSO’s Benchmark.
USSO seeks to manage its portfolio such that changes in its average daily NAV,
on a percentage basis, closely track the inverse of the changes in the average
daily price of the Benchmark Futures Contract, also on a percentage basis.
Specifically, USSO seeks to manage the portfolio such that over any rolling
period of 30 valuation days, the average daily change in the NAV is within a
range of 90% to 110% (0.9 to 1.1) of the inverse of the average daily change in
the price of the Benchmark Futures Contract. As an example, if the average daily
movement of the price of the Benchmark Futures Contract for a particular 30-day
time period was 0.5% per day, USSO management would attempt to manage the
portfolio such that the average daily movement of the NAV during that same time
period fell between -0.45% and -0.55% (i.e., between -0.9 and -1.1
of the benchmark’s results). USSO’s portfolio management goals do not include
trying to make the nominal price of USSO’s NAV equal to the nominal price of the
current Benchmark Futures Contract or the spot price for light, sweet crude oil.
Management believes that it is not practical to manage the portfolio to achieve
such an investment goal when investing in listed Futures Contracts.
 
 For the
30 valuation days ended December 31, 2009, the simple average daily change in
the Benchmark Futures Contract was -0.090%, while the inverse of the simple
average daily change in the NAV of USSO over the same time period was
-0.087%.  The average daily difference was -0.003% (or 0.00003 basis
points, where 1 basis point equals 1/100 of 1%).  As a percentage of
the daily movement of the Benchmark Futures Contract, the average error in daily
tracking by the NAV was 0.18%, meaning that over this time period USSO’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal. The first chart below shows the daily movement of
USSO’s NAV versus the inverse of the daily movement of the Benchmark Futures
Contract for the 30-day period ended December 31, 2009.
  69
 
 
 
 *PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 
 
 
 *PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
  70
 
 Since the
offering of USSO’s units to the public on September 24, 2009 to December
31, 2009, the inverse of the simple average daily change in the Benchmark
Futures Contract was -0.164%, while the simple average daily change in the NAV
of USSO over the same time period was -0.167%. The average daily difference was
-0.332% (or 0.00332 basis points, where 1 basis point equals 1/100 of 1%). As a
percentage of the daily movement of the Benchmark Futures Contract, the average
error in daily tracking by the NAV was -0.179%, meaning that over this time
period USSO’s tracking error was within the plus or minus 10% range established
as its benchmark tracking goal.
 
 An
alternative tracking measurement of the return performance of USSO versus the
inverse of the return of its Benchmark Futures Contract can be calculated by
comparing the actual return of USSO, measured by changes in its NAV, versus
the expected changes in its NAV under the assumption that USSO’s returns had
been exactly inverse to the daily changes in its Benchmark Futures
Contract.
 
 For the
period ended December 31, 2009, the actual total return of USSO as measured by
changes in its NAV was    -12.02%.  This is based
on an initial NAV of $50.00 on September 24, 2009 and an ending NAV as
of December 31, 2009 of $43.99.  During this time period, USSO made no
distributions to its unitholders. However, if USSO’s daily changes in its NAV
had instead exactly tracked the inverse of the changes in the daily return of
the Benchmark Futures Contract, USSO would have ended 2009 with an estimated NAV
of $44.16, for a total return over the relevant time period of -11.68%. The
difference between the actual NAV total return of USSO of -12.02% and the
expected total return based on the Benchmark Futures Contract of -11.68% was an
error over the time period
of        -0.34%, which is to say that
USSO’s actual total return trailed the benchmark result by that percentage.
Management believes that a portion of the difference between the actual
return and the expected benchmark return can be attributed to the net impact of
the expenses and the interest that USSO collects on its cash and cash equivalent
holdings. During the period ended December 31, 2009, USSO received interest
income of $1,715, which is equivalent to a weighted average interest rate of
0.05% for 2009. In addition, during the period ended December 31, 2009, USSO
also collected $1,000 from its Authorized Purchasers creating or redeeming
baskets of units. This income also contributed to USSO’s actual return. However,
if the total assets of USSO continue to increase, management believes that the
impact on total returns of these fees from creations and redemptions will
diminish as a percentage of the total return. During the period ended December
31, 2009, USSO incurred net expenses of $30,844. Income from interest and
Authorized Purchaser collections net of expenses was $(28,129) which is
equivalent to a weighted average net interest rate of (0.87)% for the period
ended December 31, 2009.
 
 There are
currently three factors that have impacted or are most likely
to impact USSO’s ability to accurately track its Benchmark Futures
Contract.
 
 First,
USSO may buy or sell its holdings in the then current Benchmark Futures Contract
at a price other than the closing settlement price of that contract on the day
during which USSO executes the trade. In that case, USSO may pay a price that is
higher, or lower, than that of the Benchmark Futures Contract, which could
cause the changes in the daily NAV of USSO to either be too high or too low
relative to the changes in the Benchmark Futures Contract. In 2009, management
attempted to minimize the effect of these transactions by seeking to execute its
purchase or sale of the Benchmark Futures Contract at, or as close as possible
to, the end of the day settlement price. However, it may not always be possible
for USSO to obtain the closing settlement price and there is no assurance that
failure to obtain the closing settlement price in the future will not adversely
impact USSO’s attempt to inversely track the Benchmark Futures Contract over
time.
 
 Second,
USSO earns interest on its cash, cash equivalents and Treasury
holdings. USSO is not required to distribute any portion of its income to its
unitholders and did not make any distributions to unitholders in 2009. Interest
payments, and any other income, were retained within the portfolio and added to
USSO’s NAV. When this income exceeds the level of USSO’s expenses for its
management fee, brokerage commissions and other expenses (including ongoing
registration fees, licensing fees and the fees and expenses of the
independent directors of the General Partner), USSO will realize a net yield
that will tend to cause daily changes in the NAV of USSO to track slightly
higher than the inverse of the daily changes in the Benchmark Futures Contract.
During the period ended December 31, 2009, USSO earned, on an annualized basis,
approximately 0.05% on its cash holdings. It also incurred cash expenses on an
annualized basis of 0.60% for management fees and approximately 0.14% in
brokerage commission costs related to the purchase and sale of futures
contracts, and 0.18% for other expenses. The foregoing fees and expenses
resulted in a net yield on an annualized basis of approximately (0.84)% and
affected USSO’s ability to track its benchmark. If short-term interest rates
rise above the current levels, the level of deviation created by the yield would
decrease. Conversely, if short-term interest rates were to decline, the amount
of error created by the yield would increase. When short-term yields drop to a
level lower than the combined expenses of the management fee and the brokerage
commissions, then the tracking error becomes a negative number and would tend to
cause the daily returns of the NAV to underperform the daily returns of the
Benchmark Futures Contract.
  71
 
 Third,
USSO may hold Other Crude Oil-Related Investments in its portfolio that may
fail to closely track the inverse of the Benchmark Futures Contract’s total
return movements. In that case, the error in tracking the Benchmark Futures
Contract could result in daily changes in the NAV of USSO that are either too
high, or too low, relative to the inverse of the daily changes in the Benchmark
Futures Contract. During 2009, USSO did not hold any Other Crude Oil-Related
Investments. However, there can be no assurance that in the future USSO will not
make use of such Other Crude Oil-Related Investments which may have the effect
of increasing transaction related expense and result in increased tracking
error.
 
 Term Structure of Crude Futures
Prices and the Impact on Total Returns.Several factors determine the
total return from investing in a futures contract position. One factor that
impacts the total return that will result from investing in near month
crude oil futures contracts and “rolling” those contracts forward each month is
the price relationship between the current near month contract and the next
month contract. For example, if the price of the near month contract is higher
than the next month contract (a situation referred to as “backwardation” in the
futures market), then absent any other change there is a tendency for the price
of a next month contract to rise in value as it becomes the near month contract
and approaches expiration. Conversely, if the price of a near month contract is
lower than the next month contract (a situation referred to as “contango” in the
futures market), then absent any other change there is a tendency for the price
of a next month contract to decline in value as it becomes the near month
contract and approaches expiration.
 
 As an
example, assume that the price of crude oil for immediate delivery (the “spot”
price), was $50 per barrel, and the value of a position in the near month
futures contract was also $50. Over time, the price of the barrel of crude oil
will fluctuate based on a number of market factors, including demand for
oil relative to its supply. The value of the near month contract will likewise
fluctuate in reaction to a number of market factors. If investors seek to
maintain their position in a near month contract and not take delivery of the
oil, every month they must sell their current near month contract as it
approaches expiration and invest in the next month contract.
 
 If the
futures market is in backwardation, e.g., when the expected price
of crude oil in the future would be less, the investor would be buying a next
month contract for a lower price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing crude oil
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on Treasuries, cash and/or cash equivalents), the value of the
next month contract would rise as it approaches expiration and becomes the new
near month contract. In this example, the value of the $50 investment would tend
to rise faster than the spot price of crude oil, or fall slower. As a result, it
would be possible in this hypothetical example for the spot price of crude oil
to have risen to $60 after some period of time, while the value of the
investment in the futures contract would have risen to $65, assuming
backwardation is large enough or enough time has elapsed. Similarly, the spot
price of crude oil could have fallen to $40 while the value of an investment in
the futures contract could have fallen to only $45. Over time, if backwardation
remained constant, the difference would continue to increase.
 
 If the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing crude oil
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on cash), the value of the next month contract would fall as it
approaches expiration and becomes the new near month contract. In this example,
it would mean that the value of the $50 investment would tend to rise slower
than the spot price of crude oil, or fall faster. As a result, it would be
possible in this hypothetical example for the spot price of crude oil to
have risen to $60 after some period of time, while the value of the investment
in the futures contract will have risen to only $55, assuming contango is large
enough or enough time has elapsed. Similarly, the spot price of crude oil could
have fallen to $45 while the value of an investment in the futures contract
could have fallen to $40. Over time, if contango remained constant, the
difference would continue to increase.
  72
 
 The chart
below compares the price of the near month contract to the average price of the
near 12 months over the last 10 years (2000-2009) for light, sweet crude oil.
When the price of the near month contract is higher than the average price of
the near 12 month contracts, the market would be described as being in
backwardation. When the price of the near month contract is lower than the
average price of the near 12 month contracts, the market would be described as
being in contango. Although the prices of the near month contract and the
average price of the near 12 month contracts do tend to move up or down
together, it can be seen that at times the near month prices are clearly higher
than the average price of the near 12 month contracts (backwardation), and other
times they are below the average price of the near 12 month contracts
(contango).
 
 
 
 *PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 
 An
alternative way to view the same data is to subtract the dollar price of the
average dollar price of the near 12 month contracts for light, sweet crude oil
from the dollar price of the near month contract for light, sweet crude oil. If
the resulting number is a positive number, then the near month price is higher
than the average price of the near 12 months and the market could be described
as being in backwardation. If the resulting number is a negative number, then
the near month price is lower than the average price of the near 12 months and
the market could be described as being in contango. The chart below shows the
results from subtracting the average dollar price of the near 12 month contracts
from the near month price for the 10 year period between 2000 and
2009.
  73
 
 
 
 *PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 
 An
investment in a portfolio that involved owning only the near month contract
would likely produce a different result than an investment in a portfolio that
owned an equal number of each of the near 12 months’ worth of contracts.
Generally speaking, when the crude oil futures market is in backwardation, the
near month only portfolio would tend to have a higher total return than the 12
month portfolio. Conversely, if the crude oil futures market was in contango,
the portfolio containing 12 months’ worth of contracts would tend to outperform
the near month only portfolio. The chart below shows the annual results of
owning a portfolio consisting of the near month contract and a portfolio
containing the near 12 months’ worth of contracts. In addition, the chart shows
the annual change in the spot price of light, sweet crude oil. In this example,
each month, the near month only portfolio would sell the near month contract at
expiration and buy the next month out contract. The portfolio holding an equal
number of the near 12 months’ worth of contracts would sell the near month
contract at expiration and replace it with the contract that becomes the new
twelfth month contract.
  74
 
 
 
 *PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 
 As seen
in the chart above, there have been periods of both positive and negative annual
total returns for both hypothetical portfolios over the last 10 years. In
addition, there have been periods during which the near month only approach had
higher returns, and periods where the 12 month approach had higher total
returns. The above chart does not represent the performance history of USSO or
any affiliated funds.
 
 Periods
of contango or backwardation do not materially impact USSO’s investment
objective of having the percentage changes in its per unit NAV inversely track
the percentage changes in the price of the Benchmark Futures Contract since the
impact of backwardation and contango tended to equally impact the percentage
changes in price of both USSO’s units and the Benchmark Futures Contract.
It is impossible to predict with any degree of certainty whether backwardation
or contango will occur in the future. It is likely that both conditions will
occur during different periods.
 
 Crude Oil Market. During the
period ended December 31, 2009, crude oil prices were impacted by several
factors. On the consumption side, demand remained weak inside and outside the
United States as global economic growth, including emerging economies such as
China and India, remained weak to negative for the first quarter of the year. On
the supply side, efforts to reduce production by OPEC to more closely match
global consumption were only partially successful. This divergence between
production and consumption has led to large build-ups in crude oil inventories
and contributed to weak oil prices.  However, crude oil prices did
finish 2009 approximately 52.10% higher than at the beginning of the year, as
investors looked forward to improvements in the global economy. Management
believes, however, that should the global economic situation remain weak, there
is a meaningful possibility that crude oil prices could retreat from their
current levels.
 
 Crude Oil Price Movements in
Comparison to Other Energy Commodities and Investment Categories. The
General Partner believes that investors frequently measure the degree to which
prices or total returns of one investment or asset class move up or down in
value in concert with another investment or asset class. Statistically, such a
measure is usually done by measuring the correlation of the price movements of
the two different investments or asset classes over some period of time. The
correlation is scaled between 1 and -1, where 1 indicates that the two
investment options move up or down in price or value together, known as
“positive correlation,” and -1 indicating that they move in completely opposite
directions, known as “negative correlation.” A correlation of 0 would mean that
the movements of the two are neither positively or negatively correlated, known
as “non-correlation.” That is, the investment options sometimes move up and down
together and other times move in opposite directions.
 
  75
  For the
ten year time period between 1999 and 2009, the chart below compares the monthly
movements of crude oil prices versus the monthly movements of the prices of
several other energy commodities, such as natural gas, heating oil, and unleaded
gasoline, as well as several major non-commodity investment asset classes, such
as large cap U.S. equities, U.S. government bonds and global equities. It can be
seen that over this particular time period, the movement of crude oil on a
monthly basis was not strongly correlated, positively or negatively, with the
movements of large cap U.S. equities, U.S. government bonds or global equities.
However, movements in crude oil had a strong positive correlation to movements
in natural gas and unleaded gasoline. Finally, crude oil had a positive, but
weaker, correlation with heating oil.
 
 10 Year Correlation
                    Matrix 1999-2009
                  
                  Large
                    Cap
                    U.S.
                    Equities
                    (S&P
                    500)
                  
                  
                  U.S. Govt.
                    Bonds
                    (EFFAS
                    U.S.
                    Government
                    Bond Index)
                  
                  
                  Global
                    Equities
                    (FTSE
                    World
                    Index)
                  
                  
                  Unleaded
                    Gasoline
                  
                  
                  Natural
                    Gas
                  
                  
                  Heating
                    Oil
                  
                  
                  Crude
                    OilLarge
      Cap U.S. Equities (S&P 500)
                  
                  
                  1.000
                  
                  
                  
                  -0.443
                  
                  
                  
                  0.863
                  
                  
                  
                  0.360
                  
                  
                  
                  0.353
                  
                  
                  
                  0.127
                  
                  
                  
                  0.325U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
                  
                  
                  
                  
                  
                  
                  1.000
                  
                  
                  
                  -0.394
                  
                  
                  
                  0.044
                  
                  
                  
                  -0.228
                  
                  
                  
                  -0.060
                  
                  
                  
                  -0.287Global
      Equities (FTSE World Index)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.000
                  
                  
                  
                  0.344
                  
                  
                  
                  0.470
                  
                  
                  
                  0.184
                  
                  
                  
                  0.439Unleaded
      Gasoline
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.000
                  
                  
                  
                  0.106
                  
                  
                  
                  0.182
                  
                  
                  
                  0.175Natural
      Gas
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.000
                  
                  
                  
                  0.333
                  
                  
                  
                  0.794Heating
      Oil
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.000
                  
                  
                  
                  0.276Crude
      Oil
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.000
  source:
Bloomberg, NYMEX
 
 PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 
 The chart
below covers a more recent, but much shorter, range of dates than the above
chart. Over the one year period ended December 31, 2009, crude oil continued to
have a strong positive correlation with heating oil and unleaded gasoline.
During this period, it also had aslightly
weakercorrelation
with the movements of natural gas than it had displayed over the ten year period
ended December 31, 2009. Notably, the correlation between crude oil and both
large cap U.S. equities and global equities, which had been essentially
non-correlated over the ten year period ended December 31, 2009, displayed
results that indicated that they had a mildly positive correlation over this
shorter time period, particularly due to the recent downturn in the U.S.
economy. Finally, the results showed that crude oil and U.S. government bonds,
which had essentially been non-correlated for the ten year period ended December
31, 2009, were weakly negatively correlated over this more recent time
period.
 
 Correlation Matrix
                                  2009
                                
                                Large
                                  Cap
                                  U.S.
                                  Equities
                                  (S&P
                                  500)
                                
                                
                                U.S. Govt.
                                  Bonds
                                  (EFFAS
                                  U.S.
                                  Government
                                  Bond Index)
                                
                                
                                Global
                                  Equities
                                  (FTSE
                                  World
                                  Index)
                                
                                
                                Unleaded
                                  Gasoline
                                
                                
                                Natural
                                  Gas
                                
                                
                                Heating
                                  Oil
                                
                                
                                Crude
                                  OilLarge
      Cap U.S. Equities (S&P 500)
                                
                                
                                1.000
                                
                                
                                
                                -0.306
                                
                                
                                
                                0.886
                                
                                
                                
                                0.461
                                
                                
                                
                                0.501
                                
                                
                                
                                0.380
                                
                                
                                
                                0.190U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
                                
                                
                                
                                
                                
                                
                                1.000
                                
                                
                                
                                -0.354
                                
                                
                                
                                -0.365
                                
                                
                                
                                -0.299
                                
                                
                                
                                0.020
                                
                                
                                
                                -0.065Global
      Equities (FTSE World Index)
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1.000
                                
                                
                                
                                0.500
                                
                                
                                
                                0.541
                                
                                
                                
                                0.359
                                
                                
                                
                                0.202Unleaded
      Gasoline
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1.000
                                
                                
                                
                                0.774
                                
                                
                                
                                0.212
                                
                                
                                
                                0.209Natural
      Gas
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1.000
                                
                                
                                
                                0.126
                                
                                
                                
                                0.261Heating
      Oil
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1.000
                                
                                
                                
                                0.177Crude
      Oil
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1.000
  source:
Bloomberg, NYMEX
  PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
  76
 Investors
are cautioned that the historical price relationships between crude oil and
various other energy commodities, as well as other investment asset classes, as
measured by correlation may not be reliable predictors of future price movements
and correlation results. The results pictured above would have been different if
a different range of dates had been selected. The General Partner believes that
crude oil has historically not demonstrated a strong correlation with equities
or bonds over long periods of time. However, the General Partner also believes
that in the future it is possible that crude oil could have long term
correlation results that indicate prices of crude oil more closely track the
movements of equities or bonds. In addition, the General Partner believes that,
when measured over time periods shorter than ten years, there will always be
some periods where the correlation of crude oil to equities and bonds will be
either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.
 
 The correlations between
crude oil, natural gas, heating oil and gasoline are relevant because the
General Partner endeavors to invest USSO’s assets in Futures Contracts and Other
Crude Oil-Related Investments so that daily changes in USSO’s NAV correlate as
closely as possible with the inverse of the daily changes in the price of the
Benchmark Futures Contract. If certain other fuel-based commodity futures
contracts do not closely correlate with the Futures Contracts then their
use could lead to greater tracking error. As noted, the General Partner also
believes that the changes in the price of the Benchmark Futures Contract will
closely correlate with changes in the spot price of light, sweet crude
oil.
 
 Critical
Accounting Policies
 
 Preparation
of the financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. USSO’s application of these policies involves judgments
and actual results may differ from the estimates used.
 
 The
General Partner has evaluated the nature and types of estimates that
it makes in preparing USSO’s financial statements and related
disclosures and has determined that the valuation of its investments which
are not traded on a United States or internationally recognized futures exchange
(such as forward contracts and over-the-counter contracts) involves a critical
accounting policy.  The values which are used by USSO for its forward
contracts are provided by its commodity broker who uses market prices when
available, while over-the-counter contracts are valued based on the present
value of estimated future cash flows that would be received from or paid to a
third party in settlement of these derivative contracts prior to their delivery
date and valued on a daily basis. In addition, USSO estimates interest income on
a daily basis using prevailing interest rates earned on its cash and cash
equivalents. These estimates are adjusted to the actual amount received on
a monthly basis and the difference, if any, is not considered
material.
  77
 
 Liquidity
and Capital Resources
 
 USSO has
not made, and does not anticipate making, use of borrowings or other lines of
credit to meet its obligations. USSO has met, and it is anticipated that USSO
will continue to meet, its liquidity needs in the normal course of business from
the proceeds of the sale of its investments or from the Treasuries, cash
and/or cash equivalents that it intends to hold at all times. USSO’s
liquidity needs include: redeeming units, providing margin deposits for its
existing Futures Contracts or the purchase of additional Futures Contracts and
posting collateral for its over-the-counter contracts and payment of its
expenses, summarized below under “Contractual Obligations.”
 
 USSO
currently generates cash primarily from (i) the sale of Creation Baskets and
(ii) interest earned on Treasuries, cash and/or cash equivalents. USSO has
allocated substantially all of its net assets to trading in Crude Oil Interests.
USSO invests in Crude Oil Interests to the fullest extent possible without being
leveraged or unable to satisfy its current or potential margin or collateral
obligations with respect to its investments in Futures Contracts and Other Crude
Oil-Related Investments. A significant portion of the NAV is held in cash and
cash equivalents that are used as margin and as collateral for USSO’s
trading in Crude Oil Interests. The balance of the net assets is held in USSO’s
account at its custodian bank. Interest earned on USSO’s interest-bearing funds
is paid to USSO. During the period ended December 31, 2009, USSO’s expenses
exceeded the interest income USSO earned and the cash earned from the sale of
Creation Baskets. During the period ended December 31, 2009, USSO was forced to
use other assets to pay cash expenses, which could cause a drop in USSO’s NAV
over time.
 
 USSO’s
investment in Crude Oil Interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons. For
example, most commodity exchanges limit the fluctuations in Futures Contracts
prices during a single day by regulations referred to as “daily limits.” During
a single day, no trades may be executed at prices beyond the daily limit. Once
the price of an Futures Contract has increased or decreased by an amount equal
to the daily limit, positions in the contracts can neither be taken nor
liquidated unless the traders are willing to effect trades at or within the
specified daily limit. Such market conditions could prevent USSO from promptly
liquidating its positions in Futures Contracts. During the period ended December
31, 2009, USSO was not forced to purchase or liquidate any of its positions
while daily limits were in effect; however, USSO cannot predict whether such an
event may occur in the future.
 
 Prior to
the initial offering of USSO, all payments with respect to USSO’s expenses were
paid by the General Partner.  USSO does not have an obligation or
intention to refund such payments by the General Partner.  The General
Partner is under no obligation to pay USSO’s current or future expenses. Since
the initial offering of units, USSO has been responsible for expenses relating
to (i) management fees, (ii) brokerage fees and commissions, (iii)
licensing fees for the use of intellectual property, (iv) ongoing registration
expenses in connection with offers and sales of its units subsequent to the
initial offering, (v) taxes and other expenses, including certain tax reporting
costs, (vi) fees and expenses of the independent directors of the General
Partner and (vii) other extraordinary expenses not in the ordinary course of
business, while the General Partner has been responsible for expenses relating
to the fees of the Marketing Agent, the Administrator and the Custodian.
If the General Partner and USSO are unsuccessful in raising sufficient
funds to cover these respective expenses or in locating any other source of
funding, USSO will terminate and investors may lose all or part of their
investment.
 
 Market
Risk
 
 Trading
in Futures Contracts and Other Crude Oil-Related Investments, such as
forwards, involves USSO entering into contractual commitments to purchase
or sell crude oil at a specified date in the future. The aggregate market value
of the contracts will significantly exceed USSO’s future cash requirements
since USSO intends to close out its open positions prior to settlement. As a
result, USSO is generally only subject to the risk of loss arising
from the change in value of the contracts. USSO considers the “fair value” of
its derivative instruments to be the unrealized gain or loss on the contracts.
The market risk associated with USSO’s commitments to purchase oil is limited to
the aggregate market value of the contracts held. However, should USSO enter
into a contractual commitment to sell oil, it would be required to make delivery
of the oil at the contract price, repurchase the contract at prevailing prices
or settle in cash. Since there are no limits on the future price of oil, the
market risk to USSO could be unlimited.
 
 USSO’s
exposure to market risk depends on a number of factors, including the
markets for oil, the volatility of interest rates and foreign exchange rates,
the liquidity of the Futures Contracts and Other Crude Oil-Related Investments
markets and the relationships among the contracts held by USSO. Drastic market
occurrences could ultimately lead to the loss of all or substantially all of an
investor’s capital.
  78
 
 Credit
Risk
 
 When USSO
enters into Futures Contracts and Other Crude Oil-Related Investments, it is
exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Futures Contracts traded on the NYMEX and
on most other foreign futures exchanges is the clearinghouse associated
with the particular exchange. In general, clearinghouses are backed by their
members who may be required to share in the financial burden resulting from the
nonperformance of one of their members and, therefore, this additional member
support should significantly reduce credit risk. Some foreign exchanges are not
backed by their clearinghouse members but may be backed by a consortium of banks
or other financial institutions. There can be no assurance that any
counterparty, clearinghouse, or their members or their financial backers will
satisfy their obligations to USSO in such circumstances.
 
 The
General Partner attempts to manage the credit risk of USSO by following
various trading limitations and policies. In particular, USSO generally posts
margin and/or holds liquid assets that are approximately equal to the market
value of its obligations to counterparties under the Futures Contracts and Other
Crude Oil-Related Investments it holds. The General Partner has implemented
procedures that include, but are not limited to, executing and clearing trades
only with creditworthy parties and/or requiring the posting of collateral or
margin by such parties for the benefit of USSO to limit its credit exposure. UBS
Securities, USSO’s commodity broker, or any other broker that may be retained by
USSO in the future, when acting as USSO’s futures commission merchant in
accepting orders to purchase or sell Futures Contracts on United States
exchanges, is required by CFTC regulations to separately account for and
segregate as belonging to USSO, all assets of USSO relating to domestic Futures
Contracts trading. These futures commission merchants are not allowed to
commingle USSO’s assets with its other assets. In addition, the CFTC requires
commodity brokers to hold in a secure account USSO’s assets related to foreign
Futures Contracts trading.
 
 If, in
the future, USSO purchases over-the-counter contracts, see “Item 7A.
Quantitative and Qualitative Disclosures About Market Risk” for a discussion of
over-the-counter contracts.
 
 As of
December 31, 2009, USSO had deposits in domestic and foreign financial
institutions, including cash investments in money market funds, in the amount of
$14,233,832. This amount is subject to loss should these institutions cease
operations.
 
 Off
Balance Sheet Financing
 
 As of
December 31, 2009, USSO has no loan guarantee, credit support or other
off-balance sheet arrangements of any kind other than agreements entered into in
the normal course of business, which may include indemnification provisions
relating to certain risks that service providers undertake in performing
services which are in the best interests of USSO. While USSO’s exposure under
these indemnification provisions cannot be estimated, they are not expected to
have a material impact on USSO’s financial position.
 
 Redemption
Basket Obligation
 
 In order
to meet its investment objective and pay its contractual obligations described
below, USSO requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called Redemption Baskets. USSO has to date satisfied
this obligation by paying from the cash or cash equivalents it holds or through
the sale of its Treasuries in an amount proportionate to the number of units
being redeemed.
 
 Contractual
Obligations
 
 USSO’s
primary contractual obligations are with the General Partner. In return for its
services, the General Partner is entitled to a management fee calculated monthly
as a fixed percentage of USSO’s NAV, currently 0.60% of NAV on its average daily
net assets.
 
 The
General Partner agreed to pay the start-up costs associated with the
formation of USSO, primarily its legal, accounting and other costs in connection
with the General Partner’s registration with the CFTC as a CPO and the
registration and listing of USSO and its units with the SEC, FINRA and the
NYSE Arca, respectively. However, since USSO’s initial offering of units,
offering costs incurred in connection with registering and listing additional
units of USSO are directly borne on an ongoing basis by USSO, and not by the
General Partner.
  79
 
 The
General Partner pays the fees of the Marketing Agent and the fees of the
Custodian and transfer agent, BBH&Co., as well as BBH&Co.’s fees for
performing administrative services, including in connection with the preparation
of USSO’s financial statements and its SEC and CFTC reports. The General Partner
and USSO have also entered into a licensing agreement with the NYMEX
pursuant to which USSO and the affiliated funds managed by the General Partner
pay a licensing fee to the NYMEX. USSO also pays the fees and expenses
associated with its tax accounting and reporting requirements with the exception
of certain initial implementation service fees and base service fees which are
paid by the General Partner.
 
 In
addition to the General Partner’s management fee, USSO pays its brokerage fees
(including fees to a futures commission merchant), over-the-counter dealer
spreads, any licensing fees for the use of intellectual property, and,
subsequent to the initial offering, registration and other fees paid to the SEC,
FINRA, or other regulatory agencies in connection with the offer and sale of
units, as well as legal, printing, accounting and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not incurred
in the ordinary course of USSO’s business, including expenses relating to
the indemnification of any person against liabilities and obligations to the
extent permitted by law and under the LP Agreement, the bringing or defending of
actions in law or in equity or otherwise conducting litigation and incurring
legal expenses and the settlement of claims and litigation. Commission
payments to a futures commission merchant are on a contract-by-contract, or
round turn, basis. USSO also pays a portion of the fees and expenses of the
independent directors of the General Partner. See Note 3 to the Notes to
Financial Statements.
 
 The
parties cannot anticipate the amount of payments that will be required under
these arrangements for future periods, as USSO’s NAVs and trading levels to meet
its investment objectives will not be known until a future date. These
agreements are effective for a specific term agreed upon by the parties with an
option to renew, or, in some cases, are in effect for the duration of USSO’s
existence. Either party may terminate these agreements earlier for certain
reasons described in the agreements.
 
 Item
7A. Quantitative and Qualitative Disclosures About Market Risk
 
 Over-the-Counter
Derivatives
 
 In the
future, USSO may purchase over-the-counter contracts. Unlike most of the
exchange-traded Futures Contracts or exchange-traded options on such futures,
each party to an over-the-counter contract bears the credit risk that the
other party may not be able to perform its obligations under its
contract.
 
 Some
crude oil-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other crude
oil-based derivatives have highly customized terms and conditions and are not as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of crude oil- or petroleum-based fuels that
have terms similar to the Futures Contracts. Others take the form of “swaps” in
which the two parties exchange cash flows based on pre-determined formulas tied
to the spot price of crude oil, forward crude oil prices or crude oil
futures prices. For example, USSO may enter into over-the-counter derivative
contracts whose value will be tied to changes in the difference between
the spot price of light, sweet crude oil, the price of Futures Contracts
traded on the NYMEX and the prices of other Futures Contracts in which USSO may
invest.
 
 To
protect itself from the credit risk that arises in connection with such
contracts, USSO may enter into agreements with each counterparty that provide
for the netting of its overall exposure to such counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. USSO also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address USSO’s exposure to the
counterparty. In addition, it is also possible for USSO and its counterparty to
agree to clear their agreement through an established futures clearinghouse such
as those connected to the NYMEX or the ICE Futures. In that event, USSO would no
longer have credit risk of its original counterparty, as the clearinghouse would
now be USSO’s counterparty. USSO would still retain any price risk associated
with its transaction.
  80
  The
creditworthiness of each potential counterparty is assessed by the General
Partner. The General Partner assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the Board.
Furthermore, the General Partner on behalf of USSO only enters into
over-the-counter contracts with counterparties who are, or are affiliates of,
(a) banks regulated by a United States federal bank regulator, (b)
broker-dealers regulated by the SEC, (c) insurance companies domiciled in the
United States, or (d) producers, users or traders of energy, whether or not
regulated by the CFTC. Any entity acting as a counterparty shall be regulated in
either the United States or the United Kingdom unless otherwise approved by the
Board after consultation with its legal counsel. Existing counterparties are
also reviewed periodically by the General Partner.
 
 USSO
anticipates that the use of Other Crude Oil-Related Investments together with
its investments in Futures Contracts will produce price and total return results
that closely track the investment goals of USSO. However, there can be no
assurance of this. Over-the-counter contracts may result in higher
transaction-related expenses than the brokerage commissions paid in connection
with the purchase of Futures Contracts, which may impact USSO’s ability to
successfully track the Benchmark Futures Contract.
 
 USSO may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the Benchmark Futures
Contract. USSO would use a spread when it chooses to take simultaneous long and
short positions in futures written on the same underlying asset, but with
different delivery months. The effect of holding such combined positions is to
adjust the sensitivity of USSO to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later.
USSO would use such a spread if the General Partner felt that taking such long
and short positions, when combined with the rest of its holdings, would more
closely track the investment goals of USSO, or if the General Partner felt it
would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in oil prices. USSO would enter into a straddle
when it chooses to take an option position consisting of a long (or short)
position in both a call option and put option. The economic effect of holding
certain combinations of put options and call options can be very similar to that
of owning the underlying futures contracts. USSO would make use of such a
straddle approach if, in the opinion of the General Partner, the resulting
combination would more closely track the investment goals of USSO or if it would
lead to an overall lower cost of trading to achieve a given level of economic
exposure to movements in oil prices.
 
 During
the period ended December 31, 2009, USSO did not employ any hedging methods such
as those described above since all of its investments were made over an
exchange. Therefore, during the period ended December 31, 2009, USSO was not
exposed to counterparty risk.
  81
  Item
8. Financial Statements and Supplementary Data.
 
 United
States Short Oil Fund, LP
 
 Index
to Financial Statements
 
 Documents
                                    
                                    PageReport
      of Independent Registered Public Accounting Firm.
                                    
                                    83Statements
      of Financial Condition at December 31, 2009 and 2008.
                                    
                                    84Schedule
      of Investments at December 31, 2009.
                                    
                                    85Statements
      of Operations for the year ended December 31, 2009 and the period from
      June 30, 2008 (inception) to December 31, 2008.
                                    
                                    86Statements
      of Changes in Partners’ Capital for the year ended December 31, 2009 and
      the period from June 30, 2008 (inception) to December 31,
      2008.
                                    
                                    87Statements
      of Cash Flows for the year ended December 31, 2009 and the period from
      June 30, 2008 (inception) to December 31, 2008.
                                    
                                    88Notes
      to Financial Statements for the year ended December 31, 2009
      and the period from June 30, 2008 (inception) to December 31,
      2008.
                                    
                                    89
  82
  Report
of Independent Registered Public Accounting Firm
 
 To the
Partners of
 United
States Short Oil Fund, LP
 
 We have
audited the accompanying statements of financial condition of United States
Short Oil Fund, LP (the “Fund”) as of December 31, 2009 and 2008, including the
schedule of investments as of December 31, 2009 and the related statements of
operations, changes in partners’ capital and cash flows for the year ended
December 31, 2009 and the period from June 30, 2008 (inception) to December 31,
2008. These financial statements are the responsibility of the Fund’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Fund is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit also
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, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of United States Short Oil Fund, LP as
of December 31, 2009 and 2008, and the results of its operations and its cash
flows for the year ended December 31, 2009 and the period from June 30, 2008
(inception) to December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
 
 /s/
SPICER JEFFRIES LLP
 
 Greenwood
Village, Colorado
 March 30,
2010
  83
 
 United
States Short Oil Fund, LP
 Statements
of Financial Condition
 At
December 31, 2009 and 2008
 
 2009
                  
                  
                  2008AssetsCash
      and cash equivalents
                  
                  $
                  11,690,132
                  
                  
                  $
                  1,000Equity
      in UBS Securities LLC trading accounts:Cash
                  
                  
                  2,543,700
                  
                  
                  
                  -Unrealized
      loss on open commodity futures contracts
                  
                  
                  (1,024,370
                  )
                  
                  
                  -Receivable
      from General Partner
                  
                  
                  206,444
                  
                  
                  
                  -Interest
      receivable
                  
                  
                  453
                  
                  
                  
                  -Total
      assets
                  
                  $
                  13,416,359
                  
                  
                  $
                  1,000Liabilities
      and Partners' CapitalGeneral
      Partner management fees payable (Note 3)
                  
                  $
                  7,063
                  
                  
                  $
                  -Professional
      fees payable
                  
                  
                  211,500
                  
                  
                  
                  -Brokerage
      commission fees payable
                  
                  
                  600
                  
                  
                  
                  -Other
      liabilities
                  
                  
                  891
                  
                  
                  
                  -Total
      liabilities
                  
                  
                  220,054
                  
                  
                  
                  -Commitments and Contingencies(Notes 3, 4 and 5)Partners'
      CapitalGeneral
      Partner
                  
                  
                  -
                  
                  
                  
                  20Limited
      Partners
                  
                  
                  13,196,305
                  
                  
                  
                  980Total
      Partners' Capital
                  
                  
                  13,196,305
                  
                  
                  
                  1,000Total
      liabilities and partners' capital
                  
                  $
                  13,416,359
                  
                  
                  $
                  1,000Limited
      Partners' units outstanding
                  
                  
                  300,000
                  
                  
                  
                  -Net
      asset value per unit
                  
                  $
                  43.99
                  
                  
                  $
                  -Market
      value per unit
                  
                  $
                  43.90
                  
                  
                  $
                  -
 
 See
accompanying notes to financial statements.
  84
  United
States Short Oil Fund, LP
 Schedule
of Investments
 At
December 31, 2009
 
 Number of
                        Contracts
                      
                      
                      Loss
                        on Open
                        Commodity
                        Contracts
                      
                      
                      % of
                        Partners'
                        CapitalOpen
      Futures Contracts - ShortUnited
      States ContractsNYMEX
      Crude Oil Futures CL contracts, expire February 2010
                      
                      
                      166
                      
                      
                      $
                      (1,024,370
                      )
                      
                      
                      (7.76
                      )Principal
                        Amount
                      
                      
                      Market
                        ValueCash
      EquivalentsUnited
      States - Money Market FundsFidelity
      Institutional Government Portfolio - Class I
                      
                      $
                      5,000,596
                      
                      
                      $
                      5,000,596
                      
                      
                      
                      37.89Goldman
      Sachs Financial Square Funds - Government Fund - Class SL
                      
                      
                      3,000,373
                      
                      
                      
                      3,000,373
                      
                      
                      
                      22.74Total
      Cash Equivalents
                      
                      
                      
                      
                      
                      $
                      8,000,969
                      
                      
                      
                      60.63
 
 See
accompanying notes to financial statements.
  85
 
 United
States Short Oil Fund, LP
 Statements
of Operations
 For
the year ended December 31, 2009 and the period from June 30, 2008 (inception)
to December 31, 2008
 
 Year ended
                        December 31, 2009
                      
                      
                      Period from
                        June 30, 2008 to
                        December 31, 2008IncomeLoss
      on trading of commodity futures contracts:Realized
      loss on closed positions
                      
                      $
                      (41,730
                      )
                      
                      $
                      -Change
      in unrealized loss on open positions
                      
                      
                      (1,024,370
                      )
                      
                      
                      -Interest
      income
                      
                      
                      1,715
                      
                      
                      
                      -Other
      income
                      
                      
                      1,000
                      
                      
                      
                      -Total
      loss
                      
                      
                      (1,063,385
                      )
                      
                      
                      -ExpensesGeneral
      Partner management fees (Note 3)
                      
                      
                      20,150
                      
                      
                      
                      -Professional
      fees
                      
                      
                      211,500
                      
                      
                      
                      -Brokerage
      commission fees
                      
                      
                      4,695
                      
                      
                      
                      -Other
      expenses
                      
                      
                      943
                      
                      
                      
                      -Total
      expenses
                      
                      
                      237,288
                      
                      
                      
                      -Expense
      waiver (Note 3)
                      
                      
                      (206,444
                      )
                      
                      
                      -Net
      expenses
                      
                      
                      30,844
                      
                      
                      
                      -Net
      loss
                      
                      $
                      (1,094,229
                      )
                      
                      $
                      -Net
      loss per limited partnership unit
                      
                      $
                      (6.01
                      )
                      
                      $
                      -Net
      loss per weighted average limited partnership unit
                      
                      $
                      (4.01
                      )
                      
                      $
                      -Weighted
      average limited partnership units outstanding
                      
                      
                      272,727
                      
                      
                      
                      -
 
 See
accompanying notes to financial statements.
  86
 
 United
States Short Oil Fund, LP
 Statements
of Changes in Partners' Capital
 For
the year ended December 31, 2009 and the period from June 30, 2008 (inception)
to December 31, 2008
 
 General Partner
                  
                  
                  Limited Partners
                  
                  
                  TotalBalances,
      at Inception
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Initial
      contribution of capital
                  
                  
                  20
                  
                  
                  
                  980
                  
                  
                  
                  1,000Balances,
      at December 31, 2008
                  
                  
                  20
                  
                  
                  
                  980
                  
                  
                  
                  1,000Addition
      of 300,000 partnership units
                  
                  
                  -
                  
                  
                  
                  14,290,534
                  
                  
                  
                  14,290,534Redemption
      of 0 partnership units
                  
                  
                  (20
                  )
                  
                  
                  (980
                  )
                  
                  
                  (1,000
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  (1,094,229
                  )
                  
                  
                  (1,094,229
                  )Balances,
      at December 31, 2009
                  
                  $
                  -
                  
                  
                  $
                  13,196,305
                  
                  
                  $
                  13,196,305Net
      Asset Value Per UnitAt
      June 30, 2008 (inception)
                  
                  $
                  -At
      December 31, 2008
                  
                  $
                  -At
      September 24, 2009 (commencement of operations)
                  
                  $
                  50.00At
      December 31, 2009
                  
                  $
                  43.99
 
 See
accompanying notes to financial statements.
  87
  United
States Short Oil Fund, LP
 Statements
of Cash Flows
 For
the year ended December 31, 2009 and the period from
June 30, 2008 (inception) to December 31, 2008
 
 Year ended
                      December 31,2009
                    
                    
                    Period from
                      June 30, 2008 to
                      December 31, 2008Cash
      Flows from Operating Activities:Net
      loss
                    
                    $
                    (1,094,229
                    )
                    
                    $
                    -Adjustments
      to reconcile net loss to net cash used in operating
      activities:Increase
      in commodity futures trading account - cash
                    
                    
                    (2,543,700
                    )
                    
                    
                    -Unrealized
      loss on futures contracts
                    
                    
                    1,024,370
                    
                    
                    
                    -Increase
      in receivable from General Partner
                    
                    
                    (206,444
                    )
                    
                    
                    -Increase
      in interest receivable
                    
                    
                    (453
                    )
                    
                    
                    -Increase
      in management fees payable
                    
                    
                    7,063
                    
                    
                    
                    -Increase
      in professional fees payable
                    
                    
                    211,500
                    
                    
                    
                    -Increase
      in brokerage commission fees payable
                    
                    
                    600
                    
                    
                    
                    -Increase
      in other liabilities
                    
                    
                    891
                    
                    
                    
                    -Net
      cash used in operating activities
                    
                    
                    (2,600,402
                    )
                    
                    
                    -Cash
      Flows from Financing Activities:Subscription
      of partnership units
                    
                    
                    14,290,534
                    
                    
                    
                    1,000Redemption
      of partnership units
                    
                    
                    (1,000
                    )
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    14,289,534
                    
                    
                    
                    1,000Net
      Increase in Cash and Cash Equivalents
                    
                    
                    11,689,132
                    
                    
                    
                    1,000Cash and Cash
      Equivalents, beginning of period
                    
                    
                    1,000
                    
                    
                    
                    -Cash and Cash
      Equivalents, end of period
                    
                    $
                    11,690,132
                    
                    
                    $
                    1,000
 
 See
accompanying notes to financial statements.
  88
  United
States Short Oil Fund, LP
 Notes
to Financial Statements
 For
the year ended December 31, 2009 and the period from June 30, 2008 (inception)
to December 31, 2008
 
 NOTE
1 - ORGANIZATION AND BUSINESS
 
 The
United States Short Oil Fund, LP (“USSO”) was organized as a limited partnership
under the laws of the state of Delaware on June 30, 2008. USSO is a commodity
pool that issues limited partnership units (“units”) that may be purchased and
sold on the NYSE Arca, Inc. (the “NYSE Arca”). USSO will continue in perpetuity,
unless terminated sooner upon the occurrence of one or more events as described
in its Amended and Restated Agreement of Limited Partnership dated as of May 18,
2009 (the “LP Agreement”). The investment objective of USSO is for the changes
in percentage terms of its units’ net asset value to inversely reflect the
changes in percentage terms of the spot price of light, sweet crude oil
delivered to Cushing, Oklahoma, as measured by the changes in the price of the
futures contract on light, sweet crude oil as traded on the New York Mercantile
Exchange (the “NYMEX”) that is the near month contract to expire, except
when the near month contract is within two weeks of expiration, in which
case the futures contract will be the next month contract to expire, less USSO’s
expenses. USSO accomplishes its objective through investments in short
positions in futures contracts for light, sweet crude oil, and other types of
crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels
that are traded on the NYMEX, ICE Futures or other U.S. and foreign
exchanges (collectively, “Futures Contracts”) and other oil related
investments such as cash-settled options on Futures Contracts, forward contracts
for oil and over-the-counter transactions that are based on the price of crude
oil, heating oil, gasoline, natural gas and other petroleum-based fuels, Futures
Contracts and indices based on the foregoing (collectively, “Other Crude
Oil-Related Investments”). As of December 31, 2009, USSO held short 166 Futures
Contracts traded on the NYMEX.
 
 USSO
commenced investment operations on September 24, 2009 and has a fiscal year
ending on December 31. United States Commodity Funds LLC (formerly known as
Victoria Bay Asset Management, LLC) (the “General Partner”) is responsible
for the management of USSO. The General Partner is a member of the National
Futures Association (the “NFA”) and became a commodity pool operator
registered with the Commodity Futures Trading Commission effective December 1,
2005. The General Partner is also the general partner of the United States Oil
Fund, LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the
United States 12 Month Oil Fund, LP (“US12OF”), the United States Gasoline Fund,
LP (“UGA”) and the United States Heating Oil Fund, LP (“USHO”), which listed
their limited partnership units on the American Stock Exchange (the “AMEX”)
under the ticker symbols “USO” on April 10, 2006,  “UNG” on April
18, 2007, “USL” on December 6, 2007, “UGA” on February 26, 2008 and “UHN”
on April 9, 2008, respectively. As a result of the acquisition of the AMEX by
NYSE Euronext, each of USOF’s, USNG’s, US12OF’s, UGA’s and USHO’s units
commenced trading on the NYSE Arca on November 25, 2008.  The General
Partner is also the general partner of the United States 12 Month Natural Gas
Fund, LP, which listed its limited partnership units on the NYSE Arca on
November 18, 2009. The General Partner has also filed registration statements to
register units of the United States Brent Oil Fund, LP (“USBO”) and the United
States Commodity Index Funds Trust (“USCI”).
 
 USSO
issues units to certain authorized purchasers (“Authorized Purchasers”) by
offering baskets consisting of 100,000 units (“Creation Baskets”) through
ALPS Distributors, Inc. (the “Marketing Agent”). The purchase price for a
Creation Basket is based upon the net asset value of a unit calculated
shortly after the close of the core trading session on the NYSE Arca on the day
the order to create the basket is properly received.
 
 In
addition, Authorized Purchasers pay USSO a $1,000 fee for each order placed
to create one or more Creation Baskets or redeem one or more baskets
consisting of 100,000 units (“Redemption Baskets”). Units may be purchased
or sold on a nationally recognized securities exchange in smaller increments
than a Creation Basket or Redemption Basket. Units purchased or sold on a
nationally recognized securities exchange are not purchased or sold at the net
asset value of USSO but rather at market prices quoted on such
exchange.
 
 In
September 2009, USSO initially registered 25,000,000 units on Form S-1 with the
SEC. On September 24, 2009, USSO listed its units on the NYSE Arca under the
ticker symbol “DNO”. On that day, USSO established its initial net asset
value by setting the price at $50.00 per unit and issued 200,000 units in
exchange for $10,000,000. USSO also commenced investment operations on September
24, 2009 by taking short positions in Futures Contracts traded on the
NYMEX based on light, sweet crude oil.  As of December 31, 2009,
USSO had registered a total of 25,000,000 units and had a total of 300,000 units
outstanding.
  89
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Revenue
Recognition
 
 Commodity
futures contracts, forward contracts, physical commodities, and related options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or losses on
open contracts are reflected in the statement of financial condition and in
the difference between the original contract amount and the market value (as
determined by exchange settlement prices for futures contracts and related
options and cash dealer prices at a predetermined time for forward contracts,
physical commodities, and their related options) as of the last business day of
the year or as of the last date of the financial statements. Changes in the
unrealized gains or losses between periods are reflected in the statement
of operations USSO earns interest on its assets denominated in U.S. dollars on
deposit with the futures commission merchant at the 90-day Treasury bill
rate. In addition, USSO earns interest on funds held at the custodian at
prevailing market rates earned on such investments.
 
 Brokerage
Commissions
 
 Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
 
 Income
Taxes
 
 USSO is
not subject to federal income taxes; each partner reports his/her allocable
share of income, gain, loss deductions or credits on his/her own income tax
return.
 
 Additions
and Redemptions
 
 Authorized
Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in
blocks of 100,000 units equal to the net asset value of the units calculated
shortly after the close of the core trading session on the NYSE Arca on the day
the order is placed.
 
 USSO
receives or pays the proceeds from units sold or redeemed within three business
days after the trade date of the purchase or redemption. The amounts due from
Authorized Purchasers are reflected in USSO’s statement of financial condition
as receivable for units sold, and amounts payable to Authorized Purchasers upon
redemption are reflected as payable for units redeemed.
 
 Partnership
Capital and Allocation of Partnership Income and Losses
 
 Profit or
loss shall be allocated among the partners of USSO in proportion to the number
of units each partner holds as of the close of each month. The General Partner
may revise, alter or otherwise modify this method of allocation as described in
the LP Agreement.
 
 Calculation
of Net Asset Value
 
 USSO’s
net asset value is calculated on each NYSE Arca trading day by taking the
current market value of its total assets, subtracting any liabilities and
dividing the amount by the total number of units issued and outstanding. USSO
uses the closing price for the contracts on the relevant exchange on that
day to determine the value of contracts held on such exchange.
 
 Net
Income (Loss) per Unit
 
 Net
income (loss) per unit is the difference between the net asset value per
unit at the beginning of each period and at the end of each period. The
weighted average number of units outstanding was computed for purposes of
disclosing net income (loss) per weighted average unit. The weighted average
units are equal to the number of units outstanding at the end of the period,
adjusted proportionately for units redeemed based on the amount of time the
units were outstanding during such period. There were no units held by the
General Partner at December 31, 2009.
  90
 
 Offering
Costs
 
 Offering
costs incurred in connection with the registration of additional units after the
initial registration of units are borne by USSO. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated with such offerings. These costs will be
accounted for as a deferred charge and thereafter amortized to expense over
twelve months on a straight-line basis or a shorter period if
warranted.
 
 Cash
Equivalents
 
 Cash
equivalents include money market funds and overnight deposits or time deposits
with original maturity dates of three months or less.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires USSO’s management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of the revenue and expenses
during the reporting period. Actual results could differ from those estimates
and assumptions.
 
 NOTE 3
- FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS
 
 General
Partner Management Fee
 
 Under the
LP Agreement, the General Partner is responsible for investing the assets of
USSO in accordance with the objectives and policies of USSO. In addition, the
General Partner has arranged for one or more third parties to provide
administrative, custody, accounting, transfer agency and other necessary
services to USSO. For these services, USSO is contractually obligated to pay the
General Partner a fee, which is paid monthly, that is equal to 0.60% per annum
of average daily net assets.
 
 Ongoing
Registration Fees and Other Offering Expenses
 
 USSO pays
all costs and expenses associated with the ongoing registration of its units
subsequent to the initial offering.  These costs include registration
or other fees paid to regulatory agencies in connection with the offer and sale
of units, and all legal, accounting, printing and other expenses associated
with such offer and sale. For the period from September 24, 2009 through
December 31, 2009, USSO did not incur any registration fees and other offering
expenses.
 
 Directors’
Fees and Expenses
 
 USSO is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. USSO shares these fees and expenses with USOF, USNG,
US12OF, UGA, USHO and US12NG based on the relative assets of each fund, computed
on a daily basis. These fees and expenses for the calendar year 2009 amounted to
a total of $433,046 for all funds and USSO’s portion of such fees and expenses
was $167.
 
 Licensing
Fees
 
 As
discussed in Note 4, USSO entered into a licensing agreement with the NYMEX
on May 22, 2009.  Pursuant to the agreement, USSO and the affiliated
funds managed by the General Partner pay a licensing fee that is equal to 0.04%
for the first $1,000,000,000 of combined assets of the funds and 0.02% for
combined assets above $1,000,000,000. During the period ended December 31, 2009,
USSO incurred $776 under this arrangement.
 
  91
 
 Investor
Tax Reporting Cost
 
 The fees
and expenses associated with USSO’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees which are borne by the General Partner, are
paid by USSO.  These costs are approximately $211,500 for the period
ended December 31, 2009.
 
 Other
Expenses and Fees and Expense Waivers
 
 In
addition to the fees described above, USSO pays all brokerage fees, taxes
and other expenses in connection with the operation of USSO, excluding costs and
expenses paid by the General Partner as outlined in Note 4. The General Partner,
though under no obligation to do so, agreed to pay certain expenses, to the
extent that such expenses exceed 0.15% (15 basis points) of USSO’s NAV, on an
annualized basis, through at least December 31, 2009. The General Partner has no
obligation to continue such payment into subsequent periods.
 
 NOTE
4 - CONTRACTS AND AGREEMENTS
 
 USSO is
party to a marketing agent agreement, dated as of June 8, 2009,
with the Marketing Agent and the General Partner, whereby the Marketing
Agent provides certain marketing services for USSO as outlined in the agreement.
The fee of the Marketing Agent, which is borne by the General Partner, is equal
to 0.06% on USSO’s assets up to $3 billion; and 0.04% on USSO’s assets in excess
of $3 billion.
 
 The above
fees do not include the following expenses, which are also borne by the General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.
 
 USSO is
also party to a custodian agreement, dated October 7, 2008, with Brown Brothers
Harriman & Co. (“BBH&Co.”) and the General Partner, whereby BBH&Co.
holds investments on behalf of USSO. The General Partner pays the fees of
the custodian, which are determined by the parties from time to time. In
addition, USSO is party to an administrative agency agreement, dated October 7,
2008, with the General Partner and BBH&Co., whereby BBH&Co. acts as the
administrative agent, transfer agent and registrar for USSO. The General Partner
also pays the fees of BBH&Co. for its services under this agreement and such
fees are determined by the parties from time to time.
 
 Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, a minimum amount of $75,000 annually for its custody, fund
accounting and fund administration services rendered to USSO and each of the
affiliated funds managed by the General Partner, as well as a $20,000 annual fee
for its transfer agency services. In addition, the General Partner pays
BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of
USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and USSO’s combined net assets, (b)
0.0465% for USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and USSO’s combined net
assets greater than $500 million but less than $1 billion, and (c) 0.035% once
USOF’s, USNG’s, US12OF’s, UGA’s, USHO’s and USSO’s combined net assets exceed $1
billion. The annual minimum amount will not apply if the asset-based charge for
all accounts in the aggregate exceeds $75,000. The General Partner also pays
transaction fees ranging from $7.00 to $15.00 per transaction.
 
 USSO has
entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”).
The agreement requires UBS Securities to provide services to USSO in connection
with the purchase and sale of Futures Contracts and Other Crude Oil-Related
Investments that may be purchased and sold by or through UBS Securities for
USSO’s account. The agreement provides that UBS Securities charge USSO
commissions of approximately $7 to $8 per round-turn trade, plus applicable
exchange and NFA fees for Futures Contracts and options on Futures
Contracts.
 
 USSO
invests primarily in Futures Contracts traded on the NYMEX. On May 22, 2009,
USSO and the NYMEX entered into a licensing agreement whereby USSO was granted a
non-exclusive license to use certain of the NYMEX’s settlement prices and
service marks. Under the licensing agreement, USSO and the affiliated funds
managed by the General Partner pay the NYMEX an asset-based fee for the license,
the terms of which are described in Note 3.
  92
 
 USSO
expressly disclaims any association with the NYMEX or endorsement of USSO by the
NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
 
 NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
 
 USSO engages
in the trading of futures contracts, options on futures contracts and cleared
swaps (collectively, “derivatives”). USSO is exposed to both market risk, which
is the risk arising from changes in the market value of the contracts, and
credit risk, which is the risk of failure by another party to perform according
to the terms of a contract.
 
 USSO may
enter into futures contracts, options on futures contracts and cleared swaps to
gain exposure to changes in the value of an underlying commodity. A futures
contract obligates the seller to deliver (and the purchaser to accept) the
future delivery of a specified quantity and type of a commodity at a specified
time and place. Some futures contracts may call for physical delivery of the
asset, while others are settled in cash.  The contractual obligations
of a buyer or seller may generally be satisfied by taking or making physical
delivery of the underlying commodity or by making an offsetting sale or purchase
of an identical futures contract on the same or linked exchange before the
designated date of delivery.
 
 The
purchase and sale of futures contracts, options on futures contracts and cleared
swaps require margin deposits with a futures commission merchant. Additional
deposits may be necessary for any loss on contract value. The Commodity Exchange
Act requires a futures commission merchant to segregate all customer
transactions and assets from the futures commission merchant’s proprietary
activities.
 
 Futures
contracts and cleared swaps involve, to varying degrees, elements of market risk
(specifically commodity price risk) and exposure to loss in excess of the amount
of variation margin. The face or contract amounts reflect the extent of the
total exposure USSO has in the particular classes of instruments. Additional
risks associated with the use of futures contracts are an imperfect correlation
between movements in the price of the futures contracts and the market value of
the underlying securities and the possibility of an illiquid market for a
futures contract.
 
 All of
the futures contracts currently traded by USSO are exchange-traded. The risks
associated with exchange-traded contracts are generally perceived to be less
than those associated with over-the-counter transactions since, in
over-the-counter transactions, USSO must rely solely on the credit of its
respective individual counterparties. However, in the future, if USSO were
to enter into non-exchange traded contracts, it would be subject to the credit
risk associated with counterparty non-performance. The credit risk from
counterparty non-performance associated with such instruments is the net
unrealized gain, if any. USSO also has credit risk since the sole
counterparty to all domestic and foreign futures contracts is the
clearinghouse for the exchange on which the relevant contracts are traded. In
addition, USSO bears the risk of financial failure by the clearing
broker.
 
 USSO’s
cash and other property, such as U.S. Treasuries, deposited with a futures
commission merchant are considered commingled with all other customer funds
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’s insolvency, recovery may be limited to
a pro rata share of segregated funds available. It is possible that the
recovered amount could be less than the total of cash and other property
deposited. The insolvency of a futures commission merchant could result in the
complete loss of USSO’s assets posted with that futures commission merchant;
however, the vast majority of USSO’s assets are held in Treasuries, cash and/or
cash equivalents with USSO’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency of
USSO’s custodian could result in a substantial loss of USSO’s
assets.
 
 USSO
invests a portion of its cash in money market funds that seek to maintain a
stable net asset value. USSO is exposed to any risk of loss associated with an
investment in these money market funds. As of December 31, 2009, USSO had
deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amount of $14,233,832. This amount is
subject to loss should these institutions cease operations.
 
 For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, USSO is exposed to a market risk equal to the value of futures
contracts purchased and unlimited liability on such contracts sold short. As
both a buyer and a seller of options, USSO pays or receives a premium at the
outset and then bears the risk of unfavorable changes in the price of the
contract underlying the option.
  93
  USSO’s
policy is to continuously monitor its exposure to market and counterparty risk
through the use of a variety of financial, position and credit exposure
reporting controls and procedures. In addition, USSO has a policy of requiring
review of the credit standing of each broker or counterparty with which it
conducts business.
 
 The
financial instruments held by USSO are reported in its statement of
financial condition at market or fair value, or at carrying amounts that
approximate fair value, because of their highly liquid nature and short-term
maturity.
 
 NOTE 6
- FINANCIAL HIGHLIGHTS
 
 The
following table presents per unit performance data and other supplemental
financial data for the year ended December 31, 2009 and the period from June 30,
2008 (inception) to December 31, 2008. This information has been derived from
information presented in the financial statements.
  For the
                                        Year Ended
                                        December 31, 2009
                                      
                                      
                                      For the period from
                                        June 30, 2008to
                                        December 31, 2008Per
      Unit Operating Performance:Net
      asset value, beginning of period
                                      
                                      $
                                      50.00
                                      
                                      
                                      $
                                      -Total
      loss
                                      
                                      
                                      (5.90
                                      )
                                      
                                      
                                      -Net
      expenses
                                      
                                      
                                      (0.11
                                      )
                                      
                                      
                                      -Net
      decrease in net asset value
                                      
                                      
                                      (6.01
                                      )
                                      
                                      
                                      -Net
      asset value, end of period
                                      
                                      $
                                      43.99
                                      
                                      
                                      $
                                      -Total
      Return
                                      
                                      
                                      (12.02
                                      )%
                                      
                                      
                                      -
                                      %Ratios
      to Average Net AssetsTotal loss
                                      
                                      
                                      (8.59
                                      )%
                                      
                                      
                                      -
                                      %Management
      fees
                                      
                                      
                                      0.60
                                      %*
                                      
                                      
                                      -
                                      %Total
      expenses excluding management fees
                                      
                                      
                                      6.47
                                      %*
                                      
                                      
                                      -
                                      %Expenses
      waived
                                      
                                      
                                      (6.15
                                      )%*
                                      
                                      
                                      -
                                      %Net
      expenses excluding management fees
                                      
                                      
                                      0.32
                                      %*
                                      
                                      
                                      -
                                      %Net loss
                                      
                                      
                                      (8.84
                                      )%
                                      
                                      
                                      -
                                      %*Annualized
  Total
returns are calculated based on the change in value during the period. An
individual limited partner’s total return and ratio may vary from the above
total returns and ratios based on the timing of contributions to and withdrawals
from USSO.
  94
  NOTE 7
– QUARTERLY FINANCIAL DATA (Unaudited)
  The
following summarized (unaudited) quarterly financial information presents the
results of operations and other data for period from September 24, 2009 to
September 30, 2009 and the three-month period ended December 31,
2009.
 
 First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    Quarter2009
                  
                  
                  2009
                  
                  
                  2009
                  
                  
                  2009Total
      Loss
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (288,191
                  )
                  
                  $
                  (775,194
                  )Total
      Expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,417
                  
                  
                  
                  232,871Expense
      Waivers
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,628
                  )
                  
                  
                  (204,816
                  )Net
      Expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,789
                  
                  
                  
                  28,055Net
      Loss
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (290,980
                  )
                  
                  $
                  (803,249
                  )Net
      Loss per Unit
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (1.45
                  )
                  
                  $
                  (4.56
                  )
 
 NOTE
8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Effective
January 1, 2008, USSO adopted Accounting Standards Codification 820 – Fair Value
Measurements and Disclosures (“ASC 820”).  ASC 820 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurement.  The changes to past practice resulting from the
application of ASC 820 relate to the definition of fair value, the methods used
to measure fair value, and the expanded disclosures about fair value
measurement. ASC 820 establishes a fair value hierarchy that distinguishes
between (1) market participant assumptions developed based on market data
obtained from sources independent of USSO (observable inputs) and (2) USSO’s own
assumptions about market participant assumptions developed based on the best
information available under the circumstances (unobservable
inputs).  The three levels defined by the ASC 820 hierarchy are as
follows:
  Level I –
Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
 
 Level II
– Inputs other than quoted prices included within Level I that are observable
for the asset or liability, either directly or indirectly. Level II assets
include the following: quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the
asset or liability, and inputs that are derived principally from or corroborated
by observable market data by correlation or other means (market-corroborated
inputs).
 
 Level III
– Unobservable pricing input at the measurement date for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that
observable inputs are not available.
 
 In some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy within which
the fair value measurement in its entirety falls shall be determined based on
the lowest input level that is significant to the fair value measurement in its
entirety.
 
 The
following table summarizes the valuation of USSO’s securities at December 31,
2009 using the fair value hierarchy:
 
 At December 31, 2009
                  Total
                  
                  Level I
                  
                  Level II
                  
                  Level IIIShort-Term
      Investments
                  
                  $
                  8,000,969
                  
                  
                  $
                  8,000,969
                  
                  
                  $
                  -
                  
                  
                  $
                  -Exchange-Traded
      Futures ContractsUnited
      States Contracts
                  
                  
                  (1,024,370
                  )
                  
                  
                  (1,024,370
                  )
                  
                  
                  -
                  
                  
                  
                  -
 
 Effective
January 1, 2009, USSO adopted the provisions of Accounting Standards
Codification 815 – Derivatives and Hedging (“ASC 815”), which require
presentation of qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts and gains
and losses on derivatives.
 
  95
 
 Fair
Value of Derivative Instruments
 
 At December 31, 2009
                        
                        
                        At December 31, 2008Derivatives not
                          Accounted for as
                          Hedging Instruments
                        
                        Statement of Financial
                          Condition Location
                        
                        Fair Value
                        
                        
                        Fair ValueFutures
      -Commodity
      Contracts
                        
                        Assets
                        
                        $
                        (1,024,370
                        )
                        
                        $
                        -
 
 The
Effect of Derivative Instruments on the Statements of Operations
 
 For the year ended December 31, 2009
                                    
                                    
                                    For the year ended December 31, 2008Derivatives not
                                      Accounted for as
                                      Hedging Instruments
                                    
                                    Location of Gain
                                      or (Loss) on
                                      Derivatives
                                      Recognized in
                                      Income
                                    
                                    Realized Gain or
                                      (Loss) on
                                      Derivatives
                                      Recognized in
                                      Income
                                    
                                    
                                    Change in
                                      Unrealized Gain
                                      or (Loss)
                                      Recognized in
                                      Income
                                    
                                    
                                    Realized Gain or
                                      (Loss) on
                                      Derivatives
                                      Recognized in
                                      Income
                                    
                                    
                                    Change in
                                      Unrealized Gain
                                      or (Loss)
                                      Recognized in
                                      IncomeFutures
      -
                                    
                                    Realized
      gain
                                    
                                    $
                                    (41,730
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Commodity
      Contracts
                                    
                                    (loss)
      on closedfutures
      contractsChange
      in
                                      unrealized
      gain
                                      (loss)
      on open
                                      futures
      contracts
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (1,024,370
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
  NOTE
9 – RECENTLY ADOPTED ACCOUNTING STANDARDS
 
 In March
2008, the Financial Accounting Standards Board released Accounting Standards
Codification 815 – Derivatives and Hedging (“ASC 815”). ASC 815 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of, and gains and losses on,
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. USSO adopted ASC 815 on January 1,
2009.
 
 In January 2010, the Financial
Accounting Standards Board issued Accounting Standards Update
(“ASU”)No. 2010-06 “Improving Disclosures
about Fair Value Measurements.” ASU No. 2010-06 clarifies existing disclosure
and requires
additional disclosures regarding fair value measurements. Effective for interim
and annual reporting periods beginning after December 15, 2009,
entities will be required to disclose significant transfers into and out of
Level 1 and 2
measurements in the fair value hierarchy and the reasons for those transfers.
Effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years, entities will need to disclose
information about
purchases, sales, issuances and settlements of Level 3 securities on a gross
basis, rather than as a net number as currently required. The General Partneris currently evaluating
the impact ASU No. 2010-06 will have on the financial
statement disclosures.
  NOTE
10 – SUBSEQUENT EVENTS
 
 USSO has
performed an evaluation of subsequent events through March 30, 2010, which is
the date the financial statements were available to be issued. This evaluation
did not result in any subsequent events that necessitated disclosures and/or
adjustments.
  96





UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)




CONTENTS





PageReport
      of Independent Registered Public Accounting Firm
                    98Consolidated
      Statements of Financial Condition
                    99Consolidated
      Statements of Operations and Other Comprehensive Income
    (Loss)
                    100Consolidated
      Statements of Changes in Equity (Deficit)
                    101Consolidated
      Statements of Cash Flows
                    102Notes
      to Consolidated Financial Statements
                    103




97





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Member of


United
States Commodity Funds LLC and Subsidiaries





We have
audited the accompanying consolidated statements of financial condition of
United States Commodity Funds LLC (formerly Victoria Bay Asset Management, LLC)
and Subsidiaries (the “Company”), as of December 31, 2009 and 2008, and the
related consolidated statements of operations and other comprehensive income
(loss), changes in equity (deficit) and cash flows for the years then ended.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also 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, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of United States
Commodity Funds LLC (formerly Victoria Bay Asset Management, LLC) and
Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America.




/s/
SPICER JEFFRIES LLP




Greenwood
Village, Colorado




March 30,
2010


98


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION


December 31,2009
                    
                    
                    2008ASSETSCash
      and cash equivalents
                    
                    $
                    1,789,182
                    
                    
                    $
                    125,815Management
      fees receivable
                    
                    
                    2,973,237
                    
                    
                    
                    893,111Investments
      (Notes 2 and 4)
                    
                    
                    43,304
                    
                    
                    
                    34,579Deferred
      offering costs (Notes 2 and 3)
                    
                    
                    453,351
                    
                    
                    
                    352,794Other
      assets
                    
                    
                    4,171
                    
                    
                    
                    1,960Total
      assets
                    
                    $
                    5,263,245
                    
                    
                    $
                    1,408,259LIABILITIES AND EQUITYLIABILITIES:Accounts
      payable
                    
                    $
                    505,858
                    
                    
                    $
                    624,688Income
      tax payable
                    
                    
                    181,031
                    
                    
                    
                    285,400Expense
      waiver payable (Note 3)
                    
                    
                    811,004
                    
                    
                    
                    311,038Total
      liabilities
                    
                    
                    1,497,893
                    
                    
                    
                    1,221,126COMMITMENTS AND
      CONTINGENCIES (Notes 6 and 8)EQUITY:Member's
      equity (Notes 3 and 7)
                    
                    
                    3,763,392
                    
                    
                    
                    185,173Noncontrolling
      interests (Note 3)
                    
                    
                    1,960
                    
                    
                    
                    1,960Total
      equity
                    
                    
                    3,765,352
                    
                    
                    
                    187,133Total
      liabilities and equity
                    
                    $
                    5,263,245
                    
                    
                    $
                    1,408,259




The
accompanying notes are an integral part of these statements.


99


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





CONSOLIDATED
STATEMENTS OF OPERATIONS


AND
OTHER COMPREHENSIVE LOSS







Year Ended December 31,2009
                
                
                2008REVENUE:Management
      fees
                
                $
                27,224,589
                
                
                $
                8,631,883EXPENSES:Salaries,
      wages, payroll taxes and benefits
                
                
                3,705,288
                
                
                
                1,389,888Distribution
      fees
                
                
                2,896,155
                
                
                
                1,026,625Administration
      fees
                
                
                1,866,968
                
                
                
                665,696General
      and administrative
                
                
                968,114
                
                
                
                460,794Professional
      fees
                
                
                767,669
                
                
                
                1,159,643Custodial
      fees
                
                
                306,575
                
                
                
                118,453Fees
      and licenses expense
                
                
                138,074
                
                
                
                27,683Expense
      waiver expense (Note 3)
                
                
                822,231
                
                
                
                311,038Transfer
      agent fees
                
                
                110,126
                
                
                
                208,274Advertising
      and promotion
                
                
                78,224
                
                
                
                79,202Total
      expenses
                
                
                11,659,424
                
                
                
                5,447,296OTHER
      INCOME:Other
      income
                
                
                53,444
                
                
                
                -Dividend
      income
                
                
                3,934
                
                
                
                14Total
      other income
                
                
                57,378
                
                
                
                14NET
      INCOME BEFORE INCOME TAXES
                
                
                15,622,543
                
                
                
                3,184,601PROVISION
      FOR INCOME TAXES:Income
      tax expense (Note 5)
                
                
                6,229,595
                
                
                
                1,260,622NET
      INCOME
                
                
                9,392,948
                
                
                
                1,923,979OTHER
      COMPREHENSIVE INCOME (LOSS):Unrealized
      gain (loss) on investments (Note 7)
                
                
                8,725
                
                
                
                (88,820
                )COMPREHENSIVE
      INCOME
                
                $
                9,401,673
                
                
                $
                1,835,159






100


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY (DEFICIT)


Member'sEquity
                  
                  
                  Noncontrolling(Deficit)
                  
                  
                  Interests(Note
      3)BALANCES,December 31,
      2007
                  
                  $
                  (311,393
                  )
                  
                  $
                  2,940Purchase
      of interest in United States Short Oil Fund, LP
                  
                  
                  -
                  
                  
                  
                  980Redemption
      of interest in United States Heating Oil Fund, LP
                  
                  
                  -
                  
                  
                  
                  (980
                  )Redemption
      of interest in United States Gasoline Fund, LP
                  
                  
                  -
                  
                  
                  
                  (980
                  )Other
      comprehensive loss (Note 7)
                  
                  
                  (88,820
                  )
                  
                  
                  -Offering
      costs (Note 2)
                  
                  
                  (553,756
                  )
                  
                  
                  -Distributions
                  
                  
                  (784,837
                  )
                  
                  
                  -Net
      income
                  
                  
                  1,923,979
                  
                  
                  
                  -BALANCES,December 31,
      2008
                  
                  
                  185,173
                  
                  
                  
                  1,960Other
      comprehensive income (Note 7)
                  
                  
                  8,725
                  
                  
                  
                  -Redemption
      of interest in United States Short Oil Fund, LP
                  
                  
                  -
                  
                  
                  
                  (980
                  )Redemption
      of interest in United States 12 Month Natural Gas Fund, LP
                  
                  
                  -
                  
                  
                  
                  (980
                  )Purchase
      of interest in United States Short Natural Gas Fund, LP
                  
                  
                  -
                  
                  
                  
                  980Purchase
      of interest in United States Brent Oil Fund, LP
                  
                  
                  -
                  
                  
                  
                  980Offering
      costs (Note 2)
                  
                  
                  (932,418
                  )
                  
                  
                  -Distributions
                  
                  
                  (4,891,036
                  )
                  
                  
                  -Net
      income
                  
                  
                  9,392,948
                  
                  
                  
                  -BALANCES,December 31,
      2009
                  
                  
                  $3,763,392
                  
                  
                  
                  $1,960





101


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





CONSOLIDATED
STATEMENTS OF CASH FLOWS


Year Ended December 31,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                9,392,948
                
                
                $
                1,923,979Adjustments
      to reconcile net income to net cash provided by operating
      activities:Increase
      in management fees receivable
                
                
                (2,080,126
                )
                
                
                (392,983
                )Increase
      in deferred offering costs
                
                
                (1,032,975
                )
                
                
                (719,495
                )(Increase)
      decrease in other assets
                
                
                (2,211
                )
                
                
                980Decrease
      in due to parent
                
                
                -
                
                
                
                (109,539
                )(Decrease)
      increase in income taxes payable
                
                
                (104,369
                )
                
                
                254,498Increase
      in expense waiver payable
                
                
                499,966
                
                
                
                311,038Decrease
      in accounts payable
                
                
                (118,830
                )
                
                
                (410,756
                )Net
      cash provided by operating activities
                
                
                6,554,403
                
                
                
                857,722CASH
      FLOWS FROM FINANCING ACTIVITIES:Distributions
                
                
                (4,891,036
                )
                
                
                (784,837
                )Increase
      (decrease):Noncontrolling
      interest in United States Heating Oil Fund, LP
                
                
                -
                
                
                
                (980
                )Noncontrolling
      interest in United States Gasoline Fund, LP
                
                
                -
                
                
                
                (980
                )Noncontrolling
      interest in United States Brent Oil Fund, LP
                
                
                980
                
                
                
                -Noncontrolling
      interest in United States 12 Month Natural Gas Fund, LP
                
                
                (980
                )
                
                
                -Noncontrolling
      interest in United States Short Natural Gas Fund, LP
                
                
                980
                
                
                
                -Noncontrolling
      interest in United States Short Oil Fund, LP
                
                
                (980
                )
                
                
                980Net
      cash used in financing activities
                
                
                (4,891,036
                )
                
                
                (785,817
                )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                1,663,367
                
                
                
                71,905CASH AND CASH EQUIVALENTS,beginning of year
                
                
                125,815
                
                
                
                53,910CASH AND CASH EQUIVALENTS,end of year
                
                $
                1,789,182
                
                
                $
                125,815SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for taxes
                
                $
                4,485,400
                
                
                $
                1,119,761







102


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 -    
       ORGANIZATION AND
OPERATION





Victoria
Bay Asset Management, LLC was formed as a single-member limited liability
company in the State of Delaware on May 10, 2005. On June 13, 2008,
Victoria Bay Asset Management, LLC changed its name to United States Commodity
Funds LLC (the “Company”).  The Company is the General Partner (the
“General Partner”) of United States Oil Fund, LP (“USOF”), United States Natural
Gas Fund, LP (“USNG”), United States Heating Oil Fund, LP (“USHO”), United
States Gasoline Fund, LP (“USG”), United States 12 Month Oil Fund, LP
(“US12OF”), United States 12 Month Natural Gas Fund, LP (“US12NG”), United
States Short Oil Fund, LP (“USSO”), United States Brent Oil Fund, LP (“USBO”),
United States Short Natural Gas Fund, LP (“USSNG”), and is the Sponsor
(“Sponsor”) of United States Commodity Index Funds Trust
(“Trust”).  The Company is registered as a commodity pool operator
with the Commodity Futures Trading Commission (“CFTC”) and is a member of the
National Futures Association (“NFA”). USOF, USNG, USHO, USG, US12OF, US12NG and
USSO (collectively, the “Funds”) are commodity pools registered with the CFTC
and members of the NFA that issue units that may be purchased and sold on the
NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbols “USO,” “UNG,” “UHN,”
“UGA,” “USL,” “UNL” and “DNO.”  USBO is a commodity pool that is
in the process of registering its units that may be purchased and sold on
the NYSE Arca and the United States Commodity Index Fund (“USCI”), a series of
the Trust, will also be a commodity pool and the Trust is in the process of
registering USCI’s units to be purchased on the NYSE Arca.  USSNG is a
commodity pool that has been formed but has not yet begun the process of
registering its units.





USOF
began trading on April 10, 2006 by purchasing futures contracts for light, sweet
crude oil that are traded on the New York Mercantile Exchange (the
“Exchange”).  The investment objective of USOF is for the changes in
percentage terms of its units’ net asset value to reflect the changes in
percentage terms of the spot price of light, sweet crude oil delivered to
Cushing, Oklahoma, as measured by the changes in the price of the futures
contract on light sweet crude oiltraded on the
Exchange, that is the near month contract to expire, except when the near month
contract is within two weeks of expiration, in which case it will be measured by
the futures contract that is the next month contract to expire, less
USOF’s expenses.  USOF seeks to accomplish its objective through
investments in futures contracts for light, sweet crude oil, other types of
crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels
that are traded on the Exchange and other U.S. and foreign exchanges and other
oil interests such as cash-settled options on futures contracts, forward
contracts for crude oil, cleared swap contracts and over-the-counter
transactions that are based on the price of crude oil, heating oil, gasoline,
natural gas and other petroleum-based fuels, futures contracts and indices based
on the foregoing.





USNG
began trading on April 18, 2007 by purchasing futures contracts for natural gas
that are traded on the Exchange.  The investment objective of USNG is
for the changes in percentage terms of its units’ net asset value to reflect the
changes in percentage terms of the spot price of natural gas delivered to the
Henry Hub, Louisiana, as measured by the changes in the price of the futures
contract on natural gas traded on the Exchange that is the near month contract
to expire, except when the near month contract is within two weeks of
expiration, in which case it will be measured by the futures contract that is
the next month contract to expire, less USNG’s expenses.   USNG seeks to accomplish its objective through
investments in futures contracts for natural gas, crude oil, heating oil,
gasoline, and other petroleum-based fuels that are traded on the Exchange and
other U.S. and foreign exchanges and other natural gas-related investments such
as cash-settled options on futures contracts, forward contracts for natural gas,
cleared swap contracts and over-the-counter transactions that are based on the
price of natural gas, crude oil and other petroleum-based fuels, futures
contracts and indices based on the foregoing.


103


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 -             ORGANIZATION AND OPERATION
(continued)





US12OF
began trading on December 6, 2007 by purchasing futures contracts for light,
sweet crude oil that are traded on the Exchange.  The investment
objective of US12OF is for the changes in percentage terms of its units’ net
asset value to reflect the changes in percentage terms of the spot price of
light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the
changes in the average of the prices of 12 futures contracts on crude oil traded
on the Exchange, consisting of the near month contract to expire and the
contracts for the following eleven months, for a total of 12 consecutive months’
contracts, except when the near month contract is within two weeks of
expiration, in which case it will be measured by the futures contracts that are
the next month contract to expire and the contracts for the following eleven
consecutive months, less US12OF’s expenses. When calculating the daily movement
of the average price of the 12 contracts each contract month will be equally
weighted. US12OF seeks to accomplish its objective through
investments in futures contracts for light, sweet crude oil, other types of
crude oil, heating oil, gasoline, natural gas, and other petroleum-based fuels
that are traded on the Exchange and other U.S. and foreign exchanges and other
oil interests such as cash-settled options on futures contracts, forward
contracts for oil, cleared swap contracts and over-the-counter transactions that
are based on the price of crude oil, other petroleum-based fuels, futures
contracts and indices based on the foregoing.





US12NG began trading on November 18, 2009 by purchasing
futures contracts fornatural gas that are traded on the
Exchange.  The investment objective of US12NG is for the changes in
percentage terms of its units’ net asset value to reflect the changes in
percentage terms of the spot price of natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the average of the prices of 12 futures
contracts on natural gas traded on the Exchange, consisting of the near month
contract to expire and the contracts for the following 11 months for a total of
12 consecutive months’ contracts, except when the near month contract is within
two weeks of expiration, in which case it will be measured by the futures
contracts that are the next month contract to expire and the contracts for the
following 11 consecutive months, less US12NG’s expenses.  When
calculating the daily movement of the average price of the 12 contracts each
contract month will be equally weighted.  US12NG seeks to accomplish
its objective through investments in futures contracts for natural gas, crude
oil, heating oil, gasoline and other petroleum-based fuels that are traded on
the Exchange and other U.S. and foreign exchanges and other natural
gas-related investments such as cash-settled options on futures contracts,
forward contracts for natural gas, cleared swap contracts and over-the-counter
transactions that are based on the price of natural gas, crude oil and other
petroleum-based fuels, futures contracts and indices based on the
foregoing.





USG began
trading on February 26, 2008 by purchasing futures contracts on gasoline that
are traded on the Exchange.  The investment objective of USG is for
the changes in percentage terms of its units’ net asset value to reflect the
changes in percentage terms of the spot price of unleaded gasoline, as measured
by the changes in the price of the futures contract on gasoline traded on the
Exchange that is the near month contract to expire, except when the near month
contract is within two weeks of expiration, in which case it will be measured by
the futures contract that is the next month contact to expire, less USG’s
expenses. USG seeks to accomplish its objective through investments in futures
contracts for gasoline, crude oil, natural gas, heating oil and other
petroleum-based fuels that are traded on the Exchange and other U.S. and foreign
exchanges and other gasoline-related investments such as cash-settled options on
futures contracts, forward contracts for gasoline, cleared swap contracts and
over-the-counter transactions that are based on the price of gasoline, crude oil
and other petroleum-based fuels, futures contracts and indices based on the
foregoing.


104


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 -             ORGANIZATION AND OPERATION
(concluded)





USHO
began trading on April 9, 2008 by purchasing futures contracts on heating oil
that are traded on the Exchange.  The investment objective of USHO is
for the changes in percentage terms of its units’ net asset value to reflect the
changes in percentage terms of the spot price of heating oil, as measured by the
changes in the price of the futures contract on heating oil traded on the
Exchange that is the near month contract to expire, except when the near month
contract is within two weeks of expiration, in which case it will be measured by
the futures contract that is the next month contact to expire, less USHO’s
expenses. USHO seeks to accomplish its objective through investments in futures
contracts for heating oil, crude oil, gasoline, natural gas and other
petroleum-based fuels that are traded on the Exchange and  other U.S.
and foreign exchanges  and other heating oil-related investments such
as cash-settled options on futures contracts, forward contracts for heating oil,
cleared swap contracts and over-the-counter transactions that are based on the
price of heating oil, crude oil and other petroleum-based fuels, futures
contracts and indices based on the foregoing.





USSO
began trading on September 24, 2009 by selling futures contracts on light, sweet
crude oil that are traded on the Exchange.  The investment objective
of USSO is for the changes in percentage terms of its units’ net asset value to
inversely reflect the changes in percentage terms of the spot price of light,
sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in
the price of the futures contract on light, sweet crude oil as traded on the
Exchange that is the near month contract to expire, except when the near month
contract is within two weeks of expiration, in which case the futures contract
will be the next month contract to expire, less USSO’s expenses. USSO
accomplishes its objective through taking short positions in futures contracts
for light, sweet crude oil and other types of crude oil, heating oil, gasoline,
natural gas and other petroleum-based fuels that are traded on the Exchange and
other crude oil-related investments such as cash-settled options on Futures
Contracts, forward contracts for crude oil, cleared swap contracts and
over-the-counter transactions that are based on the price of crude oil, heating
oil, gasoline, natural gas and other petroleum-based fuels, futures contracts
and indices based on the foregoing.





As of
December 31, 2009, USBO, USCI and USSNG had not formally begun
operations.  USBO and the Trust on behalf of USCI filed a registration
statement on Form S-1 with the Securities and Exchange Commission (the “SEC”)
and the Company is in the process of filing amendments to Form S-1 for USBO and
USCI.





The
Company is a wholly owned subsidiary of Wainwright Holdings, Inc.
(“Wainwright”), a Delaware corporation.  Wainwright is a holding
company that is controlled by the president of the Company and served as the
initial limited partner of the Funds.  It also serves as the initial
limited partner for USBO and USSNG.





As the
General Partner of the Funds, the Company is required to evaluate the credit
risk of the Funds to their futures commission merchant, oversee the purchases
and sales of the Funds’ units by certain “authorized purchasers,” review the
daily positions and margin requirements of the Funds, and manage the Funds’
investments. The Company also pays continuing service fees to the marketing
agent for communicating with the authorized
purchasers.


105


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2 -             SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
consolidation





The
Company, as General Partner of the Funds, USBO and USSNG and as Sponsor to the
Trust and USCI, has included the accounts of USBO, USSNG and USCI since
their inception in the consolidated financial statements. The Company has
recorded a noncontrolling interest for the amount directly owned by the limited
partner (representing the limited partner interest owned by Wainwright, except
with respect to the Trust, which does not have a limited
partner).  Subsequent to the Funds commencing operations, the Company
and Wainwright redeemed their partnership interests. Therefore, as of December
31, 2009, the accounts of each of the Funds were no longer included in the
accompanying consolidated statement of financial condition.  All
intercompany accounts and balances have been eliminated in
consolidation.





Revenue
recognition





The
Company recognizes revenue in the period earned under the terms of the Funds’
respective Limited Partnership Agreements, as amended from time to time (the
“Limited Partnership Agreements”). These agreements provide for fees based upon
a percentage of the daily average net asset value of the Funds.  In
connection with the Funds’ trading activities, commodity futures contracts,
cleared swap contracts, forward contracts, physical commodities, and related
options are recorded on the trade-date basis. All such transactions are recorded
on the identified cost basis and marked to market daily. Unrealized gains and
losses on open contracts are reflected in the statement of financial condition
and represent the difference between original contract amount and market value
(as determined by exchange settlement prices for futures contracts and related
options and cash dealer prices at a predetermined time for forward contracts,
physical commodities, and their related options) as of the last business day of
the year or as of the last date of the financial statements. Changes in the
unrealized gains or losses between periods are reflected in the statement of
operations.





The
Company earns interest on its assets on deposit at the broker at the 90-day
Treasury bill rate for deposits denominated in U.S. dollars.  In
addition, the Funds earn interest on funds held with their custodian at
prevailing market rates earned on such investments.





General Partner management
fee





Under the
Funds’ respective Limited Partnership Agreements, the Company is responsible for
investing the assets of the Funds in accordance with the objectives and policies
of the Funds.  In addition, the Company has arranged for one or more
third parties to provide administrative, custody, accounting, transfer agency
and other necessary services to the Funds.  For these services, the
Funds are contractually obligated to pay the Company a management fee, which is
paid monthly, based on the average daily net assets of the
Funds.  Through December 31, 2008 USOF paid a fee equal to 0.50% per
annum on average daily net assets of $1,000,000,000 or less and 0.20% of average
daily net assets that were greater than $1,000,000,000.  Effective
January 1, 2009, USOF pays a management fee of 0.45% per annum on its average
daily net assets.  USNG pays a fee equal to 0.60% per annum on average
daily net assets of $1,000,000,000 or less and 0.50% of average daily net assets
that are greater than $1,000,000,000.  US12OF, USHO, USG and USSO each
pay a fee of 0.60% per annum on their average daily net
assets.  US12NG pays a fee of 0.75% per annum on its average daily net
assets.


106





UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2 -             SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued)





General
Partner management fee (concluded)





The Funds
pay for all brokerage fees, taxes and other expenses, including licensing fees
for the use of intellectual property, registration or other fees paid to the
SEC, the Financial Industry Regulatory Authority (“FINRA”) formerly the National
Association of Securities Dealers, or any other regulatory agency in connection
with the offer and sale of subsequent units after their initial registration and
all legal, accounting, printing and other expenses associated therewith. The
Funds also pay the fees and expenses of the independent
directors.





Investments





The
Company’s investments in common stock are classified as
available-for-sale-securities and are considered to be held for an indefinite
period.  Securities investments not classified as either
held-to-maturity or trading securities are classified as available-for-sale
securities.  Available-for-sale-securities are recorded at fair value
on the statement of financial condition, with the change in fair value excluded
from earnings and recorded as a component of other comprehensive income (loss)
included in member’s equity.  Unrealized holding gain (loss) on such
securities, which were added to (subtracted from) member’s equity were $8,725
and $(88,820) for the years ended December 31, 2009 and 2008 (Note
7).





Realized
gains or losses are recorded upon disposition of investments calculated based
upon the difference between the proceeds and the cost basis determined using the
specific identification method.





Brokerage
commissions





Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.





Additions and
redemptions





Authorized
purchasers may purchase creation baskets of the Funds only in blocks of 100,000
units at a price equal to the net asset value of the units calculated shortly
after the close of the core trading session on the NYSE Arca on the day the
order is placed.  Authorized purchasers may redeem units from the
Funds only in blocks of 100,000 units called “Redemption
Baskets.”  The amount of the redemption proceeds for a Redemption
Basket will be equal to the net asset value of the Funds’ units in the
Redemption Basket as of the end of each business day.





The Funds
receive or pay the proceeds from units sold or redeemed within three business
days after the trade-date of the purchase or redemption.  The amounts
due from authorized purchasers are reflected in the Funds’ statement of
financial condition as receivables for units sold, and amounts payable to
authorized purchasers upon redemption are reflected as payable for units
redeemed.





Partnership capital and
allocation of partnership income and losses





Profit or
loss shall be allocated among the partners of the Funds in proportion to the
number of units each partner holds as of the close of each month.  The
Company, as General Partner, may revise, alter or otherwise modify this method
of allocation as described in the Limited Partnership
Agreements.


107


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2 -             SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued)





Calculation of net asset
value





The Funds
calculate their net asset value on each NYSE Arca trading day by taking the
current market value of their total assets, subtracting any liabilities and
dividing the amount by the total number of units issued and
outstanding.  The Funds use the closing price for the contracts on the
relevant exchange on that day to determine the value of contracts held on such
exchange.





Cash
equivalents





Cash
equivalents are highly liquid investments with original maturity dates of three
months or less.





Accounting
estimates





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





Income
taxes





The
Company has filed an election with the Internal Revenue Service to be treated as
an association taxable as a corporation.  The Company files a
consolidated federal income tax return with Wainwright and provides for income
taxes as if the Company filed separately.  The Company, however, does
not file on a consolidated basis for state income tax purposes.  The
Company accounts for income taxes in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Classification (“ASC”) Topic
740-10, Accounting for Income
Taxes (“FASB ASC Topic 740-10”).  Under the asset and liability
method of FASB ASC Topic 740-10, deferred tax assets and liabilities are
recognized for the estimated future tax consequences or benefits attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis.  Deferred tax assets
and liabilities are measured using the enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled.





Deferred offering
costs





The
Company capitalizes all initial offering costs associated with the registration
of the Funds, USBO, USSNG and USCI until such time as the registration process
with the SEC is complete.  At this time, the Company charges the
capitalized costs to member’s equity.  Deferred offering costs
include, but are not limited to, legal fees pertaining to the Funds’, USBO’s,
USSNG’s and USCI’s units offered for sale, SEC and state registration fees,
initial fees paid to be listed on an exchange and underwriting and other similar
costs.





108


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2 -             SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued)





Recent accounting
pronouncements





Effective
January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and
Disclosures (“FASB ASC Topic 820”).  FASB ASC Topic 820 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurement.  The changes to past practice resulting from the
application of FASB ASC Topic 820 relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurement. FASB ASC Topic 820 establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from sources independent of the Company (observable inputs)
and (2) the Company’s own assumptions about market participant assumptions
developed based on the best information available under the circumstances
(unobservable inputs).  The three levels defined by the FASB ASC Topic
820 hierarchy are as follows:





Level I -
Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.





Level II
- Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly. Level II assets
include the following: quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs).





Level III
- Unobservable pricing input at the measurement date for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that
observable inputs are not available.





In some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy within which
the fair value measurement in its entirety falls shall be determined based on
the lowest input level that is significant to the fair value measurement in its
entirety.  The Company’s adoption of FASB ASC Topic 820 did not have a
material effect on its consolidated financial position, results of operations or
liquidity.





In
December 2007, the FASB issued FASB ASC Topic 810-10-65, Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No.
51.  FASB ASC Topic 810-10-65 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. Additionally, FASB ASC Topic 810-10-65
requires that transactions between an entity and noncontrolling interests be
treated as equity transactions. FASB ASC Topic 810-10-65 is effective for fiscal
years beginning after December 15, 2008. Adoption on January 1, 2009, as
required, did not have a material effect on the Company’s financial condition,
results of operations or liquidity.  The minority interests previously
reflected in the Company’s financial statements have been reclassified to
conform to the current presentation.


109


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2 -             SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(concluded)





Recent
accounting pronouncements(concluded)





In March
2008, the FASB released FASB ASC Topic 815-10, Disclosures about Derivative
Instruments and Hedging Activities.  FASB ASC Topic 815-10
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. The Company adopted FASB ASC Topic
815-10 on January 1, 2009.





In May
2009, the FASB issued FASB ASC Topic 855-10-05, Subsequent
Events.  This standard is intended to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.  Specifically, this standard sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet
date.  FASB ASC Topic 855-10-05 is effective for fiscal years and
interim periods ending after June 15, 2009.





The
Company’s adoption of FASB ASC Topic 815-10 did not have a material effect on
the Company’s financial condition, results of operations or
liquidity.





NOTE 3 -             CAPITALIZATION AND RELATED PARTY
TRANSACTIONS





During
the years ended December 31, 2009 and 2008, the Company paid $4,891,036 and
$784,837 in distributions to its member. The Company and USOF have incurred
offering and organizational costs in the amount of $2,023,991 which are not
included in the accompanying consolidated financial statements at December 31,
2008.  Wainwright has provided funding for these costs, but is under
no obligation to do so or continue funding these costs.  The Company
and USOF are not required to reimburse Wainwright or its affiliates for any such
costs incurred.  Included in deferred offering costs at December 31,
2009 and 2008 (for USCI, USSNG and USBO, as of December 31, 2009 and US12NG as
of December 31, 2008) is $453,351 and $352,794, of initial offering and
organizational costs incurred by the Funds.  These initial offering
and organization costs incurred by the Trust on behalf of USCI, USSNG, USBO and
US12NG will be borne by the Company and not be charged to such
funds.





The
Funds, USBO and USSNG were each capitalized with $1,000, of which the Company
contributed $20 and Wainwright contributed $980.  The Trust was
capitalized with $1,000, which was contributed solely by the Company, which is
included in cash and cash equivalents in the accompanying statement of financial
condition.





In
addition, the Company, as General Partner, through no obligation to do so, has
agreed to pay certain expenses, including those relating to audit expenses and
tax accounting and reporting requirements normally borne by
USHO,  USG, US12OF, USSO and US12NG to the extent that such expenses
exceed 0.15% (15 basis points) of  their NAV, on an annualized basis.
The Company, as General Partner has no obligation to continue such payments in
subsequent years.




110


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -             CAPITALIZATION AND RELATED PARTY TRANSACTIONS(concluded)







December 31,2009
                        
                        
                        2008Limited
      partner interest in United States 12 MonthNatural
      Gas Fund, LP
                        
                        $
                        -
                        
                        
                        $
                        980Limited
      partner interest in United States Short NaturalGas
      Fund, LP
                        
                        
                        980
                        
                        
                        
                        -Limited
      partner interest in United States Short Oil Fund, LP
                        
                        
                        -
                        
                        
                        
                        980Limited
      partner interest in United States Brent Oil Fund, LP
                        
                        
                        980
                        
                        
                        
                        -$
                        1,960
                        
                        
                        $
                        1,960





NOTE
4
-             FAIR
VALUE MEASUREMENTS





The
following table summarizes the valuation of the Company’s investments at
December 31, 2009 and 2008 using the fair value hierarchy:




At December
      31, 2009:
                  
                  Total
                  
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level IIIInvestments
                  
                  $
                  43,304
                  
                  
                  $
                  43,304
                  
                  
                  $
                  -
                  
                  
                  $
                  -At December
      31, 2008:
                  
                  Total
                  
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level IIIInvestments
                  
                  $
                  34,579
                  
                  
                  $
                  34,579
                  
                  
                  $
                  -
                  
                  
                  $
                  -





NOTE
5
-             INCOME
TAXES





The
Company has filed an election with the Internal Revenue Service to be treated as
an association taxable as a corporation.  The Company files a
consolidated federal income tax return with Wainwright and provides for income
taxes as if the Company filed separately.  The Company, however, does
not file on a consolidated basis for state income tax purposes.  In
connection with filing a consolidated federal income tax return, the Company has
recorded federal income tax expense and has recorded a corresponding due from
parent and due to parent for its federal tax liability.





Deferred
tax assets and liabilities reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  Significant
components of the Company’s deferred tax liabilities and assets as of December
31, 2009 and 2008 are as follows:


111


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 5
-             INCOME TAXES
(concluded)





December
      31,2009
                          
                          
                          2008Deferred
      tax liabilities
                          
                          $
                          -
                          
                          
                          $
                          -Deferred
      tax assets:Unrealized
      losses on investments
                          
                          
                          220,000
                          
                          
                          
                          224,000Valuation
      allowance for deferred tax asset
                          
                          
                          (220,000
                          )
                          
                          
                          (224,000
                          )$
                          -
                          
                          
                          $
                          -





Due to
the uncertainty of the realization of the unrealized losses in future years, the
Company has recorded a valuation allowance for the deferred tax
asset.  The valuation allowance decreased by $4,000 for the year ended
December 31, 2009 and increased by $38,000 for the year ended December 31,
2008.





The
deferred tax asset shown above relates to the unrealized losses on investments
and is accounted for as other comprehensive loss (see Note 7).





NOTE
6
-             CONTRACTS
AND AGREEMENTS





The
Company, together with each of the Funds, is a party to marketing agent
agreements with ALPS Distributors, Inc. (“ALPS”), a Colorado corporation,
whereby ALPS provides certain marketing services for the Funds as outlined in
their respective marketing agent agreements. Under the agreement dated as of
March 13, 2006, as amended, whereby ALPS provides certain marketing services for
USOF, the Company pays ALPS a marketing fee of $425,000 per annum plus the
following incentive fee: 0.00% on USOF’s assets from $0 — $500 million; 0.04% on
USOF’s assets from $500 million — $4 billion; and 0.03% on USOF’s assets in
excess of $4 billion. Under the agreement dated as of April 17, 2007, whereby
ALPS provides certain marketing services for USNG, and the agreement dated as of
November 13, 2007, whereby ALPS provides certain marketing services for US12OF,
the Company pays ALPS fees equal to 0.06% on each of USNG’s, US12OF’s and
US12NG’s assets up to $3 billion and 0.04% on each of USNG’s and US12OF’s assets
in excess of $3 billion.  Under the agreement dated as of February 15,
2008, whereby ALPS provides certain marketing services for USG, and the
agreement dated March 10, 2008 whereby ALPS provides certain marketing services
for USHO, the Company pays ALPS fees equal to 0.06% on each of USG’s and USHO’s
assets up to $3 billion and 0.04% on each of USG’s and USHO’s assets in excess
of $3 billion.  Under the agreement dated as of June 8, 2009, whereby
ALPS provides certain marketing services for USSO, the Company pays ALPS fees
equal to 0.06% on USSO’s assets up to $3 billion; and 0.04% on USSO’s assets in
excess of $3 billion.





The above
fees do not include the following expenses, which are also borne by the Company:
the cost of placing advertisements in various periodicals, web construction and
development, and the printing and production of various marketing
materials.


112





UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
6
-             CONTRACTS
AND AGREEMENTS (concluded)





The
Company and each of the Funds are parties to custodian agreements with Brown
Brothers Harriman & Co. (“Brown Brothers”), whereby Brown Brothers holds
investments on behalf of the Funds. The Company pays the fees of the custodian,
which shall be determined by the parties from time to time. In addition, the
Company, with each of the Funds, are parties to administrative agency agreements
with Brown Brothers, whereby Brown Brothers acts as the administrative agent,
transfer agent and registrar for each of the Funds. The Company also pays the
fees of Brown Brothers for its services under these agreements and such fees
will be determined by the parties from time to time.





Currently,
the Company pays Brown Brothers for its services, in the foregoing capacities,
the greater of a minimum amount of $75,000 annually or an asset-based charge of
(a) 0.06% for the first $500 million of combined net assets, (b) 0.0465% for
combined net assets greater than $500 million but less than $1 billion, and (c)
0.035% of combined net assets in excess of $1 billion. The Company also pays a
$20,000 annual fee for transfer agency services and transaction fees ranging
from $7.00 to $15.00 per transaction.





Each of
the Funds has entered into brokerage agreements pursuant to which UBS Securities
LLC acts as the futures commission merchant (the “FCM”). The agreements provide
that the FCM will charge commissions of approximately $7 to $8 per round-turn
trade plus applicable exchange and NFA fees for futures contracts and options on
futures contracts.





Each of
the Funds has invested primarily in futures contracts traded on the Exchange
since the commencement of its operations. On May 30, 2007, USOF and USNG entered
into a license agreement with the Exchange whereby the Funds were granted a
non-exclusive license to use certain of the Exchange’s settlement prices and
service marks. The agreement has an effective date of April 10, 2006. Under the
license agreement, the Funds pay the Exchange an asset-based fee for the
license. Pursuant to the agreement, the Funds pay a licensing fee that is equal
to 0.04% for the first $1,000,000,000 of combined assets of the Funds and 0.02%
for combined assets above $1,000,000,000. US12OF, USG, USHO and USSO entered
into the above license agreement on the same terms with an effective date of
December 4, 2007. Other funds managed by the Company that invest primarily in
futures contracts traded on the Exchange will also be granted a similar
non-exclusive license on the same terms.





The Funds
expressly disclaim any association with the Exchange or endorsement of the Funds
by the Exchange and acknowledge that “NYMEX” and “New York Mercantile Exchange”
are registered trademarks of such Exchange.





The
Company has contracted an accounting firm to prepare each of the Funds, USBO,
USSNG and the Trust's yearly income tax filings with the Internal Revenue
Service and various states. The cost associated with any registered new fund is
expected to be comparable.


113


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
7
-             ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)





Changes
in accumulated other comprehensive loss for the years ended December 31, 2009
and 2008 are as follows:





Balance, December 31,
      2007
                    
                    $
                    (433,189
                    )Unrealized
      holding losses on investments
                    
                    
                    (88,820
                    )Balance,December 31,
      2008
                    
                    
                    (522,009
                    )Unrealized
      holding gains on investments
                    
                    
                    8,725Balance,December 31,
      2009
                    
                    $
                    (513,284
                    )





The
Company records its other comprehensive loss net of income tax expense
(benefit).  As of December 31, 2009 and 2008, the Company has not
recorded an income tax expense or benefit associated with its accumulated other
comprehensive loss (see Note 5).





NOTE
8
-             OFF-BALANCE
SHEET RISKS AND CONTINGENCIES





The Funds
engage in the trading of U.S. futures contracts, options on U.S. contracts,
cleared swap contracts and over-the-counter derivative
transactions  (collectively “derivatives”).  The Funds are
exposed to both market risk, the risk arising from changes in the market value
of the contracts; and credit risk, the risk of failure by another party to
perform according to the terms of a contract.





All of
the contracts currently traded by the Funds, with the exception of USNG, are
exchange-traded.  The risks associated with exchange-traded contracts
are generally perceived to be less than those associated with over-the-counter
transactions since, in over-the-counter transactions, the Funds must rely solely
on the credit of their respective individual counterparties.  To the
extent the Funds enter into non-exchange traded contracts, they are subject to
the credit risk associated with counterparty non-performance.  The
credit risk from counterparty non-performance associated with such instruments
is the net unrealized gain, if any.  The Funds also have credit risk
since the sole counterparty to all domestic futures contracts is the exchange
clearing corporation.  In addition, the Funds bear the risk of
financial failure by the clearing broker.





The
purchase and sale of futures and options on futures contracts require margin
deposits with an FCM. Additional deposits may be necessary for any loss on
contract value. The Commodity Exchange Act requires an FCM to segregate all
customer transactions and assets from the FCM’s proprietary
activities.





A
customer’s cash and other property, such as U.S. Treasury Bills, deposited with
an FCM are considered commingled with all other customer funds subject to the
FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery
may be limited to a pro rata share of segregated funds available. It is possible
that the recovered amount could be less than the total of cash and other
property deposited.


114


UNITED
STATES COMMODITY FUNDS LLC AND SUBSIDIARIES


(formerly
Victoria Bay Asset Management, LLC)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 8
-             OFF-BALANCE SHEET RISKS AND
CONTINGENCIES (concluded)





For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, the Funds are exposed to market risk equal to the value of
futures and forward contracts purchased and unlimited liability on such
contracts sold short. As both buyers and sellers of options, the Funds pay or
receive a premium at the outset and then bear the risk of unfavorable changes in
the price of the contract underlying the option.





The
Company’s policy is to continuously monitor its exposure to market and
counterparty risk through the use of a variety of financial, position and credit
exposure reporting and control procedures.  In addition, the Company
has a policy of reviewing the credit standing of each clearing broker or
counter-party with which it conducts business.





The
financial instruments held by the Company are reported in the statement of
financial condition at market or fair value, or at carrying amounts that
approximate fair value, because of their highly liquid nature and short-term
maturities.





The
Company has securities for its own account and may incur losses if the market
value of the securities decreases subsequent to December 31,
2009.





The
Company has a substantial portion of its assets on deposit with banks. Assets
deposited with banks are subject to credit risk. In the event of a bank's
insolvency, recovery of the Company's assets on deposit may be limited to
account insurance or other protection afforded such deposits. As of December 31,
2009, the Company had cash of $1,531,655 in excess of the federally insured
amount of $250,000.





NOTE
9
-             SUBSEQUENT
EVENTS





In
accordance with FASB ASC Topic 855-10-05, the Company has performed an
evaluation of subsequent events through March 30, 2010 which is the date the
financial statements were available to be issued.


115





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





Not
applicable.





Item
9A.      Controls and Procedures.





Disclosure
Controls and Procedures





USSO
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in USSO’s periodic reports filed
or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the SEC’s rules and
forms.





The duly
appointed officers of the General Partner, including its chief executive officer
and chief financial officer, who perform functions equivalent to those
of a principal executive officer and principal financial officer of USSO if
USSO had any officers, have evaluated the effectiveness of USSO’s
disclosure controls and procedures and have concluded that the
disclosure controls and procedures of USSO have been effective as of the end of
the period covered by this annual report on Form 10-K.





Management’s
Annual Report on Internal Control Over Financial Reporting





This
annual report on Form 10-K does not include a report of management’s assessment
regarding internal control over financial reporting or an attestation report of
USSO’s registered public accounting firm due to a transition period established
by the rules of the SEC for newly public companies.





Change
in Internal Control Over Financial Reporting





There
were no changes in USSO’s internal control over financial reporting during
USSO’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, USSO’s internal control over financial
reporting.





Item
9B.      Other Information.





Monthly
Account Statements





Pursuant
to the requirement under Rule 4.22 under the CEA, each month USSO publishes an
account statement for its unitholders, which includes a Statement of Income
(Loss) and a Statement of Changes in NAV. The account statement is
furnished to the SEC on a current report on Form 8-K pursuant to Section 13
or 15(d) of the Exchange Act and posted each month on USSO’s website at
www.unitedstatesshortoilfund.com.





Part
III





Item
10.       Directors, Executive Officers and
Corporate Governance.





Mr.
Nicholas Gerber and Mr. Howard Mah serve as executive officers of the General
Partner. USSO has no executive officers. Its affairs are generally managed by
the General Partner. The following individuals serve as Management Directors of
the General Partner.


116


Nicholas
Gerber has been the President and CEO of the General Partner since June
9, 2005 and a Management Director of the General Partner since May 10, 2005. He
maintains his main business office at 1320 Harbor Bay Parkway, Suite 145,
Alameda, California 94502. Mr. Gerber has also acted as a portfolio manager for
USSO and the Related Public Funds.  He has been listed with the CFTC
as a Principal of the General Partner since November 29, 2005, as Branch Manager
of the General Partner since May 15, 2009 and registered with the CFTC as an
Associated Person of the General Partner on December 1, 2005. Currently, Mr.
Gerber manages USSO and the Related Public Funds. He will also manage USBO and
USCI. Mr. Gerber also served as Vice President/Chief Investment Officer of
Lyon’s Gate Reinsurance Company, Ltd., a company formed to reinsure workmen’s
compensation insurance, from June 2003 to December 2009. Mr. Gerber has an
extensive background in securities portfolio management and in developing
investment funds that make use of indexing and futures contracts. He is also the
founder of Ameristock Corporation, a California-based investment adviser
registered under the Investment Advisers Act of 1940, that has been sponsoring
and providing portfolio management services to mutual funds since March 1995.
Since August 1995, Mr. Gerber has been the portfolio manager of the Ameristock
Mutual Fund, Inc. a mutual fund registered under the Investment Company Act of
1940, focused on large cap U.S. equities that, as of December 31, 2009, had
$219,616,809 in assets. He has also been a Trustee for the Ameristock ETF Trust
since June 2006, and served as a portfolio manager for the Ameristock/Ryan 1
Year, 2 Year, 5 Year, 10 Year and 20 Year Treasury ETF from June 2007 to June
2008 when such funds were liquidated. In these roles, Mr. Gerber has gained
extensive experience in evaluating and retaining third-party service providers,
including custodians, accountants, transfer agents, and distributors. Mr. Gerber
has passed the Series 3 examination for associated persons. He holds an MBA in
finance from the University of San Francisco and a BA from Skidmore College. Mr.
Gerber is 47 years old.





In
concluding that Mr. Gerber should serve as Management Director of the General
Partner, the General Partner considered his broad business experiences in the
industry including: forming and managing investment companies and commodity
pools, raising capital for such entities and founding and managing non-finance
related companies.





Howard Mah
has been a Management Director of the General Partner since May 10, 2005,
Secretary of the General Partner since June 9, 2005, and Chief Financial Officer
of the General Partner since May 23, 2006. He has been listed with the CFTC as a
Principal of the General Partner since November 29, 2005. In these roles, Mr.
Mah is currently involved in the management of USSO and the Related Public Funds
and will be involved in the management of USBO and USCI. Mr. Mah also serves as
the General Partner’s Chief Compliance Officer. He received a Bachelor of
Education from the University of Alberta, in 1986 and an MBA from the University
of San Francisco in 1988. He served as Secretary and Chief Compliance Officer of
the Ameristock ETF Trust from February 2007 until June 2008 when the trust was
liquidated, Chief Compliance Officer of Ameristock Corporation since January
2001; a tax and finance consultant in private practice since January 1995,
Secretary of Ameristock Mutual Fund since June 1995 and Ameristock Focused Value
Fund from December 2000 to January 2005; Chief Compliance Officer of Ameristock
Mutual Fund since August 2004 and the Co-Portfolio Manager of the Ameristock
Focused Value Fund from December 2000 to January 2005. Mr. Mah is 45 years
old.





In
concluding that Mr. Mah should serve as Management Director of the General
Partner, the General Partner considered his background in accounting and
finance, as well as his experience as Chief Compliance Officer for the General
Partner and Ameristock Corporation.





Andrew F.
Ngim has been a Management Director of the General Partner since May 10,
2005 and Treasurer of the General Partner since June 9, 2005. He has been listed
with the CFTC as a Principal of the General Partner since November 29, 2005. As
Treasurer of the General Partner, Mr. Ngim is currently involved in the
management of USSO and the Related Public Funds and will be involved in the
management of USBO and USCI. He received a Bachelor of Arts from the University
of California at Berkeley in 1983. Mr. Ngim has been Ameristock Corporation’s
Managing Director since January 1999 and co-portfolio manager of Ameristock
Corporation since January 2000, Trustee of the Ameristock ETF Trust since
February 2007, and served as a portfolio manager for the Ameristock/Ryan 1 Year,
2 Year, 5 Year, 10 Year and 20 Year Treasury ETF from June 2007 to June 2008
when such funds were liquidated. Mr. Ngim is 49 years old.





In
concluding that Mr. Ngim should serve as Management Director of the General
Partner, the General Partner considered his broad career in the financial
services industry as well as experience as co-Portfolio Manager of the
Ameristock Mutual Fund.





Robert L.
Nguyen has been a Management Director of the General Partner since May
10, 2005. He has been listed with the CFTC as a Principal of the General Partner
since November 29, 2005 and registered with the CFTC as an Associated Person on
November 9, 2007. As a Management Director of the General Partner, Mr. Nguyen is
currently involved in the management of USSO and the Related Public Funds and
will be involved in the management of USBO and USCI. He received a Bachelor of
Science from California State University Sacramento in 1981. Mr. Nguyen has been
the Managing Principal of Ameristock Corporation since January 2000. Mr. Nguyen
is 50 years old.


117





In
concluding that Mr. Nguyen should serve as Management Director of the General
Partner, the General Partner considered his background in the financial services
industry as well as his experience in leading the marketing efforts for
Ameristock Corporation.





The
following individuals provide significant services to USSO and are employed by
the General Partner.





John P.
Love has acted as the Portfolio Operations Manager for USSO since it
commenced operations in September 2009 and the Related Public Funds since
January 2006 and, effective March 1, 2010, is the Senior Portfolio Manager for
USSO and the Related Public Funds.  He is expected to be the Senior
Portfolio Manager for USBO and USCI. Mr. Love is also employed by the General
Partner. He has been listed with the CFTC as a Principal of the General Partner
since January 17, 2006. Mr. Love also served as the operations manager of
Ameristock Corporation from October 2002 to January 2007, where he was
responsible for back office and marketing activities for the Ameristock Mutual
Fund and Ameristock Focused Value Fund and for the firm in general. Mr. Love
holds a Series 3 license and was registered with the CFTC as an Associated
Person of the General Partner from December 1, 2005 through April 16, 2009. Mr.
Love has passed the Level 1 Chartered Financial Analyst examination and is
currently a Level II candidate in the CFA Program. He holds a BFA in
cinema-television from the University of Southern California. Mr. Love is 38
years old.





John T. Hyland,
CFA acts as a Portfolio Manager and as the Chief Investment Officer for
the General Partner. Mr. Hyland is employed by the General Partner. He
registered with the CFTC as an Associated Person of the General Partner on
December 1, 2005, and has been listed as a Principal of the General Partner
since January 17, 2006. Mr. Hyland became the Portfolio Manager for USSO, USOF,
USNG, US12OF, UGA, USHO, USSO and US12NG in September 2009, April 2006, April
2007, December 2007, February 2008, April 2008 and November, 2009 respectively,
and as Chief Investment Officer of the General Partner since January 2008, acts
in such capacity on behalf of USSO and the Related Public Funds. He is also
expected to become the Portfolio Manager for USBO and USCI. As part of his
responsibilities for USSO and the Related Public Funds, Mr. Hyland handles
day-to-day trading, helps set investment policies, and oversees USSO’s and the
Related Public Funds’ activities with their futures commission brokers,
custodian-administrator, and marketing agent. Mr. Hyland has an extensive
background in portfolio management and research with both equity and fixed
income securities, as well as in the development of new types of complex
investment funds. In July 2001, Mr. Hyland founded Towerhouse Capital
Management, LLC, a firm that provides portfolio management and new fund
development expertise to non-U.S. institutional investors. Mr. Hyland has been,
and remains, a Principal and Portfolio Manager for Towerhouse. Mr. Hyland
received his Chartered Financial Analyst (“CFA”) designation in 1994. Mr. Hyland
is a member of the CFA Institute (formerly AIMR). He is also a member of the
National Association of Petroleum Investment Analysts, a not-for-profit
organization of investment professionals focused on the oil industry. He serves
as an arbitrator for FINRA, as part of their dispute resolution program. He is a
graduate of the University of California, Berkeley. Mr. Hyland is 50 years
old.





The
following individuals serve as independent directors of the General
Partner.





Peter M.
Robinson has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of USSO, and the Related Public Funds and will
serve on behalf of USBO and USCI, if such funds commence operations. He has been
listed with the CFTC is a Principal of the General Partner since December
2005.  Mr. Robinson has been employed as a Research Fellow with the
Hoover Institution since 1993. The Hoover Institution is a public policy think
tank located on the campus of Stanford University. Mr. Robinson graduated from
Dartmouth College in 1979 and Oxford University in 1982. In 1990, Mr. Robinson
received an MBA from the Stanford University Graduate School of Business. Mr.
Robinson has also written three books and has been published in the New York Times, Red Herring, and Forbes ASAP and he is the
editor of Can Congress Be
Fixed?: Five Essays on Congressional Reform (Hoover Institution Press,
1995). Mr. Robinson is 52 years old.


118





In
concluding that Mr. Robinson should serve as Independent Director of the General
Partner, the General Partner considered his broad experience in the United
States government, including his employment at the Securities and Exchange
Commission, and his knowledge of and insight into public policy.





Gordon L.
Ellis has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of USSO, and the Related Public Funds and will
serve on behalf of USBO and USCI, if such funds commence operations. He has been
listed with the CFTC as a Principal of the General Partner since November 2005.
Mr. Ellis has been Chairman of International Absorbents, Inc., a holding company
of Absorption Corp., since July 1988, President and Chief Executive Officer
since November 1996 and a Class I Director of the company since July 1985. Mr.
Ellis is also a director of Absorption Corp., International Absorbents, Inc.’s
wholly-owned subsidiary which is engaged in developing, manufacturing and
marketing a wide range of animal care and industrial absorbent products. Mr.
Ellis is a director/trustee of Polymer Solutions, Inc., a former publicly-held
company that sold all of its assets effective as of February 3, 2004 and is
currently winding down its operations and liquidating following such sale.
Polymer Solutions previously manufactured paints, coatings, stains and primers
for wood furniture manufacturers. Mr. Ellis is a professional engineer with an
MBA in international finance. Mr. Ellis is 63 years old.





In
concluding that Mr. Ellis should serve as Independent Director of the General
Partner, the General Partner considered his experience serving as the Chairman
and Chief Executive Officer of a former publicly-traded corporation as well as
his experience as an entrepreneur.





Malcolm R. Fobes
III has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of USSO and the Related Public Funds and will
serve on behalf of USBO and USCI, if such funds commence operations. He has been
listed with the CFTC as a Principal of the General Partner since November 2005.
Mr. Fobes is the founder, Chairman and Chief Executive Officer of Berkshire
Capital Holdings, Inc., a California-based investment adviser registered under
the Investment Advisers Act of 1940, that has been sponsoring and providing
portfolio management services to mutual funds since June 1997. Since June 1997,
Mr. Fobes has been the Chairman and President of The Berkshire Funds, a mutual
fund investment company registered under the Investment Company Act of 1940. Mr.
Fobes also serves as portfolio manager of the Berkshire Focus Fund, a mutual
fund registered under the Investment Company Act of 1940, which concentrates its
investments in the electronic technology industry. From April 2000 to July 2006,
Mr. Fobes also served as co-portfolio manager of The Wireless Fund, a mutual
fund registered under the Investment Company Act of 1940, which concentrates its
investments in companies engaged in the development, production, or distribution
of wireless-related products or services. In these roles, Mr. Fobes has gained
extensive experience in evaluating and retaining third-party service providers,
including custodians, accountants, transfer agents, and distributors. Mr. Fobes
was also contributing editor of Start a Successful Mutual Fund: The
Step-by-Step Reference Guide to Make It Happen (JV Books, 1995). Mr.
Fobes holds a B.S. degree in Finance and Economics from San Jose State
University in California. Mr. Fobes is 45 years old.





In
concluding that Mr. Fobes should serve as Independent Director of the General
Partner, the General Partner considered his background as founder, Chairman and
Chief Executive Officer of a registered investment adviser as well as Chairman,
President, Chief Financial Officer and Portfolio Manager of a mutual fund
investment company.





The
following are individual Principals, as that term is defined in CFTC Rule 3.1,
for the General Partner: Melinda Gerber, the Gerber Family Trust, the Nicholas
and Melinda Gerber Living Trust, Howard Mah, Andrew Ngim, Robert Nguyen, Peter
Robinson, Gordon Ellis, Malcolm Fobes, John Love, John Hyland, Ray Allen and
Wainwright Holdings Inc. These individuals are principals due to their
positions, however, Nicholas Gerber and Melinda Gerber are also principals due
to their controlling stake in Wainwright. None of the principals owns or has any
other beneficial interest in USSO. Nicholas Gerber and John Hyland make trading
and investment decisions for USSO. John Love and John Hyland execute trades on
behalf of USSO. In addition, Nicholas Gerber, John Hyland, Robert Nguyen and Ray
Allen are registered with the CFTC as Associated Persons of the General Partner
and are NFA Associate Members.


119





Audit
Committee





The Board
of the General Partner has an audit committee which is made up of the three
independent directors (Peter M. Robinson, Gordon L. Ellis, and Malcolm R. Fobes
III). The audit committee is governed by an audit committee charter that is
posted on USSO’s website at www.unitedstatesshortoilfund.com. Any unitholder of
USSO may also obtain a printed copy of the audit committee charter, free of
charge, by calling 1-800-920-0259. The Board has determined that each member of
the audit committee meets the financial literacy requirements of the NYSE Arca
and the audit committee charter. The Board has further determined that each of
Messrs. Ellis and Fobes have accounting or related financial management
expertise, as required by the NYSE Arca, such that each of them is considered an
“Audit Committee Financial Expert” as such term is defined in Item 407(d)(5) of
Regulation S-K.





Other
Committees





Since the
individuals who perform work on behalf of USSO are not compensated by USSO, but
instead by the General Partner, USSO does not have a compensation committee.
Similarly, since the Directors noted above serve on the board of directors of
the General Partner, there is no nominating committee of the board of directors
that acts on behalf of USSO.  The General Partner believes that it is
necessary for each member of the Board of Directors to possess many qualities
and skills. The General Partner further believes that all directors should
possess a considerable amount of business management and educational
experience.  There have not been any vacancies on the General
Partner’s Board of Directors since the commencement of operations of USOF in
April 2006; however, if such a vacancy were to occur, the members of the Board
of Directors would consider a candidate’s management experience as well as
his/her background, stature, conflicts of interest, integrity and
ethics.  In connection with this, the Board of Directors would also
consider issues of diversity, such as diversity of gender, race and national
origin, education, professional experience and differences in viewpoints and
skills. The Board of Directors does not have a formal policy with respect to
diversity; however, the Board of Directors believes that it is essential that
the Board members represent diverse viewpoints.





Corporate
Governance Policy





The Board
of the General Partner has adopted a Corporate Governance Policy that applies to
USSO, USOF, US12OF, USNG, UGA, USHO, US12NG, USBO and USCI. USSO has posted the
text of the Corporate Governance Policy on its website at
www.unitedstatesshortoilfund.com. Any unitholder of USSO may also obtain a
printed copy of the Corporate Governance Policy, free of charge, by calling
1-800-920-0259.





Code
of Ethics





The
General Partner of USSO has adopted a Code of Business Conduct and Ethics (the
“Code of Ethics”) that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions, and also to USSO. USSO has posted the text of
the Code of Ethics on its website at www.unitedstatesshortoilfund.com. Any
unitholder of USSO may also obtain a printed copy of the Code of Ethics, free of
charge, by calling 1-800-920-0259. USSO intends to disclose any amendments or
waivers to the Code of Ethics applicable to the General Partner’s principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, on its
website.





Executive
Sessions of the Non-Management Directors





In
accordance with the Corporate Governance Policy of the General Partner, the
non-management directors of the Board (who are the same as the independent
directors of the Board) meet separately from the other directors in regularly
scheduled executive sessions, without the presence of Management Directors or
executive officers of the General Partner. The non-management directors have
designated Malcolm R. Fobes III to preside over each such executive session.
Interested parties who wish to make their concerns known to the non-management
directors may communicate directly with Mr. Fobes by writing to 475 Milan Drive,
No. 103, San Jose, CA  95134-2453 or by e-mail at
uscf.director@gmail.com.


120





Board
Leadership Structure and Role in Risk Oversight





The Board
of the General Partner is led by a Chairman, Nicholas Gerber, who is also the
President and CEO of the General Partner.  The Board’s
responsibilities include (i) the selection, evaluation, retention and succession
of the Chief Executive Officer and the oversight of the selection and
performance of other executive officers, (ii) understanding, reviewing and
monitoring the implementation of strategic plans, annual operating plans and
budgets, (iii) the selection and oversight of USSO’s independent auditors and
the oversight of USSO’s financial statements, (iv) advising management on
significant issues, (v) the review and approval of significant company actions
and certain other matters, (vi) nominating directors and committee members and
overseeing effective corporate governance and (vii) the consideration of other
constituencies, such as the General Partner’s and USSO’s customers, employees,
suppliers and the communities impacted by USSO. The non-management directors
have designated Malcolm R. Fobes III as the presiding independent
director.  Mr. Fobes’s role as the presiding independent director
includes presiding over each executive session of the non-management directors,
facilitating communications by shareholders and employees with the
non-management directors and may also include representing the non-management
directors with respect to certain matters as to which the views of the
non-management directors are sought pursuant to USSO’s Corporate Governance
Policy.





The Board
believes that Mr. Gerber is best situated to serve as Chairman of the General
Partner because he is the director most familiar with the business of the
General Partner, including investing in the futures contracts and other
commodity interests in order to track the benchmark futures contracts of USSO
and the Related Public Funds.  Because of his background, he is most
capable of effectively leading the discussion and execution of new strategic
objectives.  The independent directors of the General Partner are
actively involved in the oversight of the General Partner and, because of their
varied backgrounds, provide different perspectives in connection with the
oversight of the General Partner, USSO and the Related Public Funds. The General
Partner’s independent directors bring expertise from outside the General Partner
and the commodities industry, while Mr. Gerber brings company-specific and
industry-specific experience and expertise. The Board of Directors believes that
the combined role of Chairman and Chief Executive Officer facilitates
information flow between management and the Board of Directors, including the
independent directors, which is essential to effective governance.





Risk
Management





The full
Board of Directors is actively involved in overseeing the management and
operation of the General Partner, including oversight of the risks that face
USSO and the Related Public Funds.  For example, the Board of
Directors has adopted an Investment Policy and a Policy for Use of
Derivatives.  The policies are intended to ensure that the General
Partner take prudent and careful action while entering into and managing
investments taken by USSO including Futures Contracts or Other Gasoline-Related
Investments such as over-the-counter swap contracts.  Additionally,
the policies are intended to provide assurance that there is sufficient
flexibility in controlling risks and returns associated with the use of
investments by USSO.  The policies, among other things, limit USSO’s
ability to have too high of a concentration of its assets in non-exchange traded
futures contracts or cleared swap contracts or concentrating its investments in
too few counterparties, absent prior approval from the Board of
Directors.  Existing counterparties are reviewed periodically by the
Board of Directors to ensure that they continue to meet the criteria outlined in
the policies.  The Board of Directors tasks management with assessing
risks, including market risk, credit risk, liquidity risk, cash flow risk, basis
risk, legal and tax risk, settlement risk, and operational risk.





The Board
of Directors also determines compensation payable to employees of the General
Partner, including the portfolio managers of each of USSO and the Related Public
Funds.  The compensation of certain employees of the General Partner
is, in part, based on the amount of assets under management by USSO and the
Related Public Funds.  The Board of Directors feels that compensating
certain employees, in part, based on the amount of assets under management is
appropriate since having more assets in a fund generally reflects that investors
perceive the fund’s investment objective is being met.  There are
certain risks that may arise as a result of a growth in assets under
management.  For example, if position limits are imposed on USSO and
the assets under management continue to increase, then USSO may not be able to
invest solely in the Benchmark Futures Contract and may have to invest in
over-the-counter swap contracts or Other Gasoline-Related Investments as it
seeks to track its benchmark.  Other Futures Contracts in which USSO
may invest may not track changes in the price of the Benchmark Futures
Contract.  Other Gasoline-Related Investments, including
over-the-counter swap contracts, may also expose USSO to increased counterparty
credit risk and may be less liquid and more difficult to value than Futures
Contracts.  USSO and the Related Public Funds ameliorate the potential
credit, liquidity and valuation risks by fully collateralizing any
over-the-counter swap contracts or other investments.  The Board of
Directors, in making compensation decisions, considers whether a compensation
arrangement would expose USSO or the Related Public Funds to additional risks
and whether the risks posed by such arrangement are consistent with the best
interests of USSO’s investors.


121





Other
Information





In
addition to the certifications of the Chief Executive Officer and Chief
Financial Officer of the General Partner filed or furnished with this annual
report on Form 10-K regarding the quality of USSO’s public disclosure, USSO will
submit, within 30 days after filing this annual report on Form 10-K, to the NYSE
Arca a certification of the Chief Executive Officer of the General Partner
certifying that he is not aware of any violation by USSO of NYSE Arca corporate
governance listing standards.





Item
11.       Executive
Compensation.





Compensation
to the General Partner and Other Compensation.





USSO does
not directly compensate any of the executive officers noted above. The
executive officers noted above are compensated by the General Partner for
the work they perform on behalf of USSO and other entities controlled by the
General Partner. USSO does not reimburse the General Partner for, nor does it
set the amount or form of any portion of, the compensation paid to the executive
officers by the General Partner. USSO pays fees to the General Partner pursuant
to the LP Agreement under which it is obligated to pay the General Partner
an annualized fee of 0.60% of NAV on all of its average daily net assets. For
2009, USSO paid the General Partner aggregate management fees of
$20,150.





Director
Compensation





The
following table sets forth compensation earned during the year ended
December 31, 2009, by the Directors of the General Partner. USSO’s
portion of the aggregate fees paid to the Directors for the calendar year 2009
was $167.




Fees
      Earned or Paid in Cash
              
              
              Stock
      Awards
              
              
              Option
                Awards
              
              
              Non-Equity
                Incentive Plan
                Compensation
              
              
              Change
      inPension
                Value
      and NonqualifiedDeferred
                CompensationPlan
              
              
              All
      OtherCompensation
              
              
              TotalManagement
      DirectorsNicholas
      Gerber
              
              $
              0
              
              
              NA
              
              
              NA
              
              
              NA
              
              $
              0
              
              $
              0
              
              $
              0Andrew
      F. Ngim
              
              $
              0
              
              
              NA
              
              
              NA
              
              
              NA
              
              $
              0
              
              $
              0
              
              $
              0Howard
      Mah
              
              $
              0
              
              
              NA
              
              
              NA
              
              
              NA
              
              $
              0
              
              $
              0
              
              $
              0Robert
      L. Nguyen
              
              $
              0
              
              
              NA
              
              
              NA
              
              
              NA
              
              $
              0
              
              $
              0
              
              $
              0Independent
      DirectorsPeter
      M. Robinson
              
              $
              100,000
              
              
              NA
              
              
              NA
              
              
              NA
              
              $
              0
              
              $
              0
              
              $
              100,000Gordon
      L. Ellis
              
              $
              101,000
              
              
              NA
              
              
              NA
              
              
              NA
              
              $
              0
              
              $
              0
              
              $
              101,000Malcolm
      R. Fobes III(1)
              
              $
              121,000
              
              
              NA
              
              
              NA
              
              
              NA
              
              $
              0
              
              $
              0
              
              $
              121,000








(1)
            Mr.
      Fobes serves as chairman of the audit committee of the General Partner and
      receives additional compensation in recognition of the additional
      responsibilities he has undertaken in this
role.





Item
12.       Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.





None of
the directors or executive officers of the General Partner, nor the employees of
USSO own any units of USSO. In addition, USSO is not aware of any 5% holder
of its units.


122





Item
13.       Certain Relationships and Related
Transactions, and Director Independence.





Certain
Relationships and Related Transactions





USSO has
and will continue to have certain relationships with the General Partner and its
affiliates. However, there have been no direct financial transactions
between USSO and the directors or officers of the General Partner that have not
been disclosed herein. See “Item 11. Executive Compensation” and “Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.” Any transaction with a related person that must be
disclosed in accordance with SEC Regulation S-K item 404(a), including financial
transactions by USSO with directors or executive officers of the General Partner
or holders of beneficial interests in the General Partner or USSO of more than
5%, will be subject to the provisions regarding “Resolutions of Conflicts of
Interest; Standard of Care” as set forth in Section 7.7 of the LP Agreement and
will be reviewed and approved by the audit committee of the Board of the General
Partner.





Director
Independence





In
February 2010, the Board undertook a review of the independence of the directors
of the General Partner and considered whether any director has a material
relationship or other arrangement with the General Partner, USSO or the Related
Public Funds that could compromise his ability to exercise independent judgment
in carrying out his responsibilities. As a result of this review, the Board
determined that each of Messrs. Fobes, Ellis and Robinson is an “independent
director,” as defined under the rules of NYSE Arca.





Item
14.       Principal Accountant Fees and
Services.





The fees
for services billed to USSO by its independent auditors for the last two fiscal
years are as follows:




2009Audit
      fees
                        
                        $
                        25,000
                        *Audit-related
      fees
                        
                        
                        -Tax
      fees
                        
                        
                        -All
      other fees
                        
                        
                        -$
                        25,000
                        *





* Amount
expected to be billed for 2009 services.





Audit
fees consist of fees paid to Spicer Jeffries LLP for (i) the audit of
USSO’s annual financial statements included in the annual report on Form 10-K,
and review of financial statements included in the quarterly reports on
Form 10-Q and certain of USSO’s current reports on Form 8-K; and
(ii) services that are normally provided by the Independent Registered
Public Accountants in connection with statutory and regulatory filings of
registration statements.





Tax fees
consist of fees paid to Spicer Jeffries LLP for professional services rendered
in connection with tax compliance and partnership income tax return
filings.





The audit
committee has established policies and procedures which are intended to control
the services provided by USSO’s independent auditors and to monitor their
continuing independence.  Under these policies and procedures, no
audit or permitted non-audit services (including fees and terms thereof), except
for the de minimis
exceptions for non-audit services described in Section 10A(i)(1)(B) of the
Exchange Act, may be undertaken by USSO’s independent auditors unless the
engagement is specifically pre-approved by the audit committee.  The
audit committee may form and delegate authority to subcommittees consisting of
one or more members when appropriate, including the authority to grant
pre-approvals of audit and permitted non-audit services, provided that decisions
of such subcommittee to grant pre-approvals must be presented to the full audit
committee at its next scheduled meeting.


123





Part
IV





Item
15.       Exhibits and Financial Statement
Schedules.





1.
            See
      Index to Financial Statements on page 82.2.
            No
      financial statement schedules are filed herewith because (i) such
      schedules are not required or (ii) the information required has been
      presented in the aforementioned financial statements.3.
            Exhibits
      required to be filed by Item 601 of Regulation
  S-K.





Exhibit
Index





Listed
below are the exhibits which are filed or furnished as part of this annual
report on Form 10-K (according to the number assigned to them in Item 601 of
Regulation S-K):




Exhibit Number
              
              Description of Document3.1*
              
              Certificate
      of Limited Partnership of the Registrant.3.2*
              
              Agreement
      of Limited Partnership of the Registrant.3.3**
              
              Amended
      and Restated Agreement of Limited Partnership3.4*
              
              Fourth
      Amended and Restated Limited Liability Company Agreement of the General
      Partner.10.1***
              
              Form
      of Authorized Purchaser Agreement.10.2**
              
              Marketing
      Agent Agreement.10.3**
              
              Custodian
      Agreement.10.4**
              
              Administrative
      Agency Agreement.10.5**
              
              Indemnification
      Agreement.14.1****
              
              Code
      of Ethics.





31.1*****
              
              Certification
      of Principal Executive Officer Pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of 1934.31.2*****
              
              Certification
      of Principal Financial Officer Pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of 1934.32.1*****
              
              Certification
      of Principal Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).32.2*****
              
              Certification
      of Principal Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).99.1**
              
              Customer
      Agreement for Futures
Contracts.





*
                Incorporated
      by reference to Registrant’s Registration Statement on Form S-1
      (333-152386), filed on July 17, 2008.**
                Incorporated
      by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter
      ended September 30, 2009, filed on November 16, 2009.***
                Incorporated
      by reference to Amendment No. 3 to Registrant’s Registration Statement on
      Form S-1 (333-152386), filed on January 23, 2009****
                Incorporated
      by reference to the United States Oil Fund’s Annual Report on Form 10-K
      for the year ended December 31, 2008, filed on March 2,
    2009.*****
                Filed
      herewith.




124





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.





United
      States Short Oil Fund, LP (Registrant)By:  United
      States Commodity Funds LLC, its general partner(formerly
      known as Victoria Bay Asset Management, LLC)By:
                    /s/
      Nicholas D. GerberNicholas
      D. GerberPresident
      and Chief Executive Officer(Principal
      executive officer)Date:
      March 30, 2010By:
                    /s/
      Howard MahHoward
      MahChief
      Financial Officer(Principal
      financial and accounting officer)Date:
      March 30, 2010




125


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 in the
capacities and on the dates indicated.




Signature
                
                Title
      (Capacity)
                
                Date/s/
      Nicholas D. Gerber
                
                Management
      Director
                
                March
      30, 2010Nicholas
      D. Gerber/s/
      Howard Mah
                
                Management
      Director
                
                March
      30, 2010Howard
      Mah/s/
      Andrew Ngim
                
                Management
      Director
                
                March
      30, 2010Andrew
      Ngim/s/
      Robert Nguyen
                
                Management
      Director
                
                March
      30, 2010Robert
      Nguyen/s/
      Peter M. Robinson
                
                Independent
      Director
                
                March
      30, 2010Peter
      M. Robinson/s/
      Gordon L. Ellis
                
                Independent
      Director
                
                March
      30, 2010Gordon
      L. Ellis/s/
      Malcolm R. Fobes III
                
                Independent
      Director
                
                March
      30, 2010Malcolm
      R. Fobes III




126