SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

(Mark One)
[X]  Annual report pursuant to section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the fiscal year ended May 31, 2000 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 0-8773

                                  CRESTED CORP.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

         Colorado                                            84-0608126
----------------------------------------                     -------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

         877 North 8th West
         Riverton, WY                                        82501
----------------------------------------                     -------------------
(Address of principal executive offices)                     (Zip Code)

Registrant's Telephone Number, including area code:          (307) 856-9271
                                                             -------------------

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

           Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.001 par value
                         ------------------------------
                                (Title of Class)

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the Registrant as of August 15, 2000 computed by reference to the average of the
bid and asked prices for the  Registrant's  common stock as reported by National
Quotation  Bureau on Pink  Sheets  for the week then  ended,  was  approximately
$647,060.

            Class                                 Outstanding at August 26, 2000
-------------------------------                   ------------------------------
Common Stock, $0.001 par value                           10,381,664 shares

Documents incorporated by reference: Portions of the documents listed below have
been  incorporated  by  reference  into the  indicated  parts of this  report as
specified in the responses to the item numbers involved:

         2000 Annual  Meeting Proxy  Statement for the fiscal year ended May 31,
         2000, into Items 10-13 of Part III of the filing.
Indicate by check mark if disclosure of delinquent filers,  pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the 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 ]

                                        1

<PAGE>

                 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

     This  Annual  Report on Form  10-K  includes  "forward-looking  statements"
within the meaning of Section 21E of the  Securities  Exchange  Act of 1934,  as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report,  including without limitation the statements under
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations,  the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming  properties,  the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium Mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations  for Yellow Stone Fuels Corp.,  Rocky  Mountain  Gas, Inc. and Sutter
Gold Mining Company (subsidiaries of Crested),  are forward-looking  statements.
In addition,  when words like  "expect,"  "anticipate"  or  "believe"  are used,
Crested is making forward-looking statements.

     Although  Crested   believes  that  the  expectations   reflected  in  such
forward-looking  statements are  reasonable,  it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
Annual Report. The forward-looking  statements should be carefully considered in
the context of all the information set forth in this Annual Report.

                                     PART I

ITEM 1 AND ITEM 2. Business and Properties

(a)  General.

     Crested Corp.  ("Crested",  "Registrant"  or the  "Company") and its parent
U.S.  Energy  Corp.("USE")  d/b/a  USECC  are  in  the  business  of  acquiring,
exploring,  developing and selling or leasing mineral properties, and the mining
and  marketing of minerals.  Crested is now engaged in three  principal  mineral
sectors:  uranium  and  gold,  both of  which  are  currently  in the  care  and
maintenance  mode,  and  coalbed  methane  gas.  For  information  on  "industry
segments" for accounting  purposes,  see (b) below. The most significant uranium
properties are located on Green  Mountain and Sheep Mountain in Wyoming,  and in
southeast Utah. USECC's gold operations are conducted through Sutter Gold Mining
Company ("SGMC"),  a 63% USECC owned subsidiary.  The coalbed methane gas sector
is conducted  through Rocky  Mountain  Gas,  Inc., a newly  created,  82% owned,
subsidiary of Crested and USE.

     Crested was  incorporated in Colorado in 1970. All of its operations are in
the United States. Principal executive offices are located in the Glen L. Larsen
building at 877 North 8th Street West, Riverton,  Wyoming 82501, telephone (307)
856-9271.

     Most of Crested's  operations  are  conducted  through a joint venture with
USE, which owns a majority of Crested's  Common Stock, and various jointly owned
subsidiaries  of USE and Crested.  The joint  venture with USE is referred to in
this Report as "USECC."  USE and Crested  are  independent  companies,  with two
common board members (John L. Larsen and Max T. Evans). In 1980, USE and Crested
formed a joint venture to do business  together (unless one or the other elected
not to pursue an  individual  project).  As a result of USE  funding  certain of
Crested's obligations from time to time (due to Crested's lack of cash on hand),
and later payment of the debts by Crested  issuing common stock to USE,  Crested
became a majority  owned  subsidiary of USE in fiscal 1993. See Part III of this
Report.

     Until  September 11, 2000,  USE and USECC,  and Kennecott  Uranium  Company
("Kennecott"),  owned the Green Mountain Mining Venture ("GMMV"),  which holds a
large  uranium  deposit  and  uranium  mill in  Wyoming.  The GMMV  ceased  mine
development operations in fiscal 1999 and its properties are in

                                        2

<PAGE>

care and  maintenance  status due to the depressed  market for uranium oxide. On
September 11, 2000, USE and Crested settled litigation with Kennecott  including
the GMMV by selling all their  interests in the GMMV and its properties  back to
Kennecott for $3.25  million.  Please see  "Minerals-Uranium-The  Green Mountain
Mining Project" below. Other principal uranium properties and an uranium mill in
southeast  Utah  are  held  by  Plateau   Resources  Ltd.,  a  wholly-owned  USE
subsidiary.  The Utah  uranium  properties  are  also in a care and  maintenance
status.  At some future date, if the uranium oxide market improves,  the Company
and USE may consolidate  their remaining uranium assets into a single subsidiary
and finance the startup of its mines and mill  operations,  subject to obtaining
the necessary  debt or equity  funding.  There are no current plans to implement
this strategy at the present time.

     The  gold  assets  held  by  Sutter  Gold  Mining   Company   ("SGMC"),   a
majority-owned  subsidiary of USE and a minority owned subsidiary of Crested are
also in a care and maintenance status, with a minor amount of improvements being
made to the surface  infrastructure in fiscal 2000, because the current price of
gold (less than  $280/oz.  in early  August 2000)  prevents  raising the capital
necessary to put the properties into production. See "Gold" below.

     In fiscal 2000, USECC provided contract drilling and related services
to companies that own and are developing  coalbed  methane  ("CBM") wells in the
Powder  River Basin of Wyoming and  Montana and other  basins in Wyoming.  USECC
bought more drilling equipment for this purpose to meet the expanding market for
contract  services.  Numerous  major oil and gas  companies,  utilities  and gas
transmission  companies  have drilled and are producing a significant  number of
CBM wells in Wyoming.

     In addition,  in fiscal 2000,  USE and Crested  formed Rocky  Mountain Gas,
Inc. ("RMG"),  a Wyoming  corporation,  to acquire properties with potential for
coalbed  methane in the Powder  River  Basin of Wyoming and  Montana,  and other
basins in Wyoming,  for  development of coalbed  methane gas wells for RMG's own
account.

     At August 1, 2000, RMG held approximately 248,000 net mineral acres of coal
deposits under BLM,  state and fee leases in Wyoming and Montana.  Approximately
185,000 of these acres are held with Quantum Energy LLC in Montana.  RMG intends
to drill and produce CBM gas wells on this acreage; the pace of development will
depend on permits being  available from state and federal  regulatory  agencies,
and on sufficient  capital being  available to fund  exploration  and production
costs.

     Construction  operations  have been  carried  on  primarily  through  USE's
subsidiary  Four Nines  Gold,  Inc.  ("FNG").  Oil and gas  operations  (but not
methane  gas) are carried out through  Energx,  Ltd.,  a  subsidiary  of USE and
Crested.

                                        3

<PAGE>

(b)  Financial information about industry segments.

     The Registrant  operates in three  business  segments:  (i) minerals,  (ii)
commercial  operations,  and  (iii)  contract  drilling  and  construction.  The
Registrant  engages  in  other  miscellaneous  activities  such  as oil  and gas
exploration, development and production. The principal products of the operating
units within each of the reportable industry segments are:

         INDUSTRY SEGMENTS                       PRINCIPAL PRODUCTS
         -----------------                       -------------------------------

         Minerals                                Sales     and     leases     of
                                                 mineral-bearing properties and,
                                                 from   time   to   time,    the
                                                 production  and/or marketing of
                                                 uranium,  gold,  molybdenum and
                                                 advance royalties on molybdenum
                                                 property.

         Commercial                              Operations Operation of a motel
                                                 and  rental  of  real   estate,
                                                 operation of an aircraft  fixed
                                                 base  operation  (aircraft fuel
                                                 sales,  flight  instruction and
                                                 aircraft   maintenance),    and
                                                 provision  of various  contract
                                                 services,  including managerial
                                                 services     for     subsidiary
                                                 companies.

         Contract                                drilling/construction  Contract
                                                 drilling of coalbed methane gas
                                                 wells,  construction  of  drill
                                                 sites,    gas    pipe    lines,
                                                 reservoirs  and  reclamation on
                                                 locations.

Percentage  of Net Revenue  contributions  by the two segments in the last three
fiscal years were:

                                Percentage of Net Revenues During the Year Ended
                                ------------------------------------------------
                                May 31,            May 31,              May 31,
                                 2000               1999                 1998
                                -------            -------              -------

Minerals                           3%                 3%                  11%
Commercial Operations             13%                14%                  19%
Contract drilling/construction*   66%                --                   --
Other                             18%                83%                  70%

* From CBM contract services, see below.

     Commercial  operations  during fiscal 2000 resulted in revenues of $340,900
as compared to revenues of $607,400  during fiscal 1999.  The decrease in fiscal
2000 was as a result of no  equipment  being  rented to the GMMV  during  fiscal
2000.  Contract  drilling and  construction  operations  in the coalbed  methane
business resulted in revenues of $1,735,800 during fiscal 2000. No revenues were
recognized in this segment during fiscal 1999.

(c) Narrative description of business by industry segment
     (including Item 2 - Properties disclosure).

Minerals

Coalbed Methane

     General.  Rocky Mountain Gas, Inc.  ("RMG") was  incorporated in Wyoming on
November 1, 1999 as a subsidiary of USE (owning 41%) and the  Registrant  (41%).
Separately, through USECC, the Registrant

                                        4

<PAGE>

offers independent  drilling and completion services to owners of CBM properties
in the Rocky Mountain area (principally Wyoming and Montana).

     Methane is the primary  commercial  component of natural gas produced  from
conventional gas wells.  Methane also exists in its natural state in coal seams.
Natural gas produced from conventional wells also contains,  in varying amounts,
other  hydrocarbons,  which  generally  require the natural gas to be processed.
However,  the methane gas produced from coalbeds generally contains only methane
and is pipeline-quality gas after simple water dehydration.

     CBM production is similar to  conventional  natural gas production in terms
of the physical producing  facilities.  However, the subsurface  mechanisms that
allow the gas to move to the wellbore are very different.  Conventional  natural
gas wells require a porous and permeable reservoir,  hydrocarbon migration and a
natural  structural  or  stratigraphic  trap.  Coalbed  methane  gas is  trapped
(adsorbed)  in the coal  itself and in the water  contained  in the pore  space,
until  released by pressure  changes when the water  contained in the coalbed is
removed.  In contrast to  conventional  gas wells,  new  coalbed  methane  wells
initially  produce  water for  several  months;  then,  as the water  production
decreases,  the  containing  water  pressure on the gas in the coal  drops,  and
methane gas production increases.

     Methane is a common  component of coal since  methane is created as part of
the  coalification  process.  Coals vary in their methane content as measured by
standard  cubic  feet  per  ton.  Whether  a  coalbed  will  produce  commercial
quantities  of methane gas depends on the coal  quality,  its content of natural
gas per ton of coal, the thickness of the coalbeds,  the reservoir pressure, the
existence of natural fractures and the permeability of the coal.

     Due to the shallow  coal seams in the Powder  River  Basin,  the  drilling,
discovery, development and production of CBM has significant economic advantages
compared with  conventional  gas targets.  Over the past several years,  CBM has
become an important source of pipeline quality gas in the United States. Methane
gas production from coalbed reservoirs has grown from virtually nothing a decade
ago to more than five percent of the total United States gas  production  today.
Development of coalbed methane in the Powder River Basin of northeastern Wyoming
and southeastern Montana is the fastest growing CBM play in the United States.

     The principal  coals in the Powder River Basin include the thick coal seams
of the Tongue  River member of the  Paleocene  Fort Union  Formation,  which are
among the thickest in the world.  Individual  coalbeds range in thickness from a
few feet up to 250 feet. A typical well might penetrate multiple coal zones over
a 200 to 1,200 foot range.  Based on reports filed by other  companies  with the
State of  Wyoming,  reserves  per CBM well can vary  considerably  but a typical
estimate  can exceed 300 million  cubic feet  (MMcf) of gas per well.  Given the
expected low drilling and completion  costs,  these levels of reserves have made
CBM wells  attractive to gas  companies and resulted in a significant  amount of
exploration and production activity in the Powder River Basin.

     To date,  RMG has drilled,  deepened  and/or  tested 3 wells on the Quantum
property  to depths of 1,044  ft.,  1,103 ft. and 1,503 ft. In two of the wells,
testing of four zones  indicated  potential  for gas.  Further  drilling  on the
Quantum  property  for  coalbed  methane  has been  curtailed  by the  temporary
moratorium imposed by the Montana Oil and Gas Commission.

     CBM Contract Services.  USECC owns 10 truck mounted drilling rigs (drilling
capacity  generally down to 1,500 feet,  with one rig to 2,500 feet) and related
equipment  with which it provides  services to third parties who own and develop
CBM properties in the Powder River Basin in Wyoming and Montana.  These services
include  site  preparation,  drilling,  casing,  completion,  dam  construction,
compressor and gathering pipeline construction and site reclamation.

                                        5

<PAGE>

     For fiscal 2000,  USECC had  completed or was  performing  at May 31, 2000,
contract  services  for  approximately  12  companies  active in the CBM sector.
During this period, USECC worked on over 300 CBM wells (including infrastructure
projects involving CBM wells). USECC spent approximately $1,557,800, one half of
which  is  the  obligation  of the  Company,  to buy  additional  equipment  and
materials  for the  contract  services  business  in  fiscal  2000.  See Item 7,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.  The  contracts  are  negotiated  on a turnkey or time and materials
basis,  depending on the project and the customer's needs.  USECC contracts with
the  operator  of the wells;  USECC does not act as the  operator  on any of the
services wells or projects.  The largest customer in fiscal 2000 was J.M. Huber,
Inc.,  representing  $2,603,100 (33%) of the Company's gross revenues and 49% of
the  Registrant's  net  revenues  from all contract  drilling  and  construction
segment operations.

     Due to the  expected  continued  growth  in the  CBM  play in  Wyoming  and
Montana,  it is expected  that the amount of business  done by USECC's  contract
services  business in fiscal 2000 could continue at the same or improved  levels
in fiscal 2001, if RMG and Quantum start developing  substantial  numbers of CBM
wells on their acreage position. See below.

     Rocky  Mountain  Gas,  Inc.  RMG  was  formed  by  USE  and  Crested  as an
independent   energy  company  to  engage  in  the   acquisition,   exploration,
development,  production  and  exploitation  of CBM, for its own account.  It is
expected that USECC will provide support services in CBM property development by
RMG for RMG's own account,  and may also provide competitive services to develop
wells on acreage held by RMG and Quantum (see below). Compression of the coalbed
methane gas in order for it to be fed into a pipeline and pipeline construction,
is  presently  planned  to be  contracted  out to  others  seeking  to  buy  gas
production.

     CBM wells in the Powder  River Basin are  generally  300 to 1200 feet deep,
typically take three to ten days to drill and complete and cost between  $30,000
- $120,000 per well.  In comparison to  conventional  oil and gas wells,  Powder
River Basin coalbed  methane wells can generally be  characterized  by their low
cost and short  drilling  time  frame.  RMG intends to  continue  acquiring  CBM
acreage.  While the costs to acquire  leasehold  interests  in the Powder  River
Basin  have   increased,   RMG  believes  that  attractive   lease   acquisition
opportunities are still available.

     In fiscal 2000,  RMG  acquired  from  Quantum  Energy LLC an undivided  50%
working  interest  (WI) and 40% net  revenue  interest  (NRI)  in  approximately
185,000 net mineral acres of coalbed  methane leases located in the Powder River
Basin of southeastern  Montana.  See "The Quantum  Agreement"  below.  With this
acquisition,  RMG became  one of the larger  holders of gas leases in this area.
The gas collection systems and related equipment associated with these wells may
be  furnished  by RMG or provided by a third party  (transmission  company) at a
negotiated  price  per  thousand  cubic  feet  (Mcf) of gas  transported  in the
pipeline.  The produced and gathered gas would then be sold into a  transmission
company's pipeline.

     In  addition  to  the  acreage   held  with   Quantum,   RMG  has  acquired
approximately  64,000 net acres of other coalbed  methane  prospects in Wyoming.
See below.

     RMG  presently  does not have  any  proved  developed  or  undeveloped  gas
reserves. RMG plans to drill a total of 125 coalbed methane wells in fiscal 2001
and 2002.  Quantum also plans to drill an additional 100 wells in which RMG will
have a 50% working interest.  Attaining these objectives will depend on when and
where on RMG's acreage in Wyoming and Montana the necessary drilling permits can
be obtained,  see "CBM Permits" below.  RMG and Quantum have identified over 200
drilling  locations on state and fee portions of the acreage.  The actual number
of wells to be drilled in fiscal 2001 and 2002 will  depend on future  operating
results,  availability  of capital,  the  prevailing  price of methane  gas, and
issuance of permits.

                                        6

<PAGE>

     To fund startup operations and acquire acreage interests from Quantum
Energy LLC, RMG sold  1,203,333  shares of restricted  common stock at $3.00 per
share to accredited  investors  (including USE and Yellow Stone Fuels Corp.) for
net  proceeds  of  $3,509,000  ($100,000  was  paid  in  offering  expenses  and
commissions  to a registered  broker-dealer  for placement  services on sales to
investors  other than USE and Yellow  Stone Fuels  Corp.).  These  shares are in
addition to the initial  shares  acquired by USE and Crested and  employees  and
directors of the  companies.  The  investment  by USECC at $3.00 per share is in
addition to the original  shares acquired by USE and Crested on the formation of
RMG.  Additional  capital from institutions  and/or joint ventures with industry
partners  is needed in fiscal 2001 and 2002 to begin  fully  exploiting  the CBM
acreage. See Item 7.

     The Quantum  Agreement.  RMG's largest  prospects are the Castle Rock/Kirby
prospects in southeast Montana  consisting of approximately  185,000 net mineral
acres jointly owned with Quantum.  RMG acquired a 50% working  interest (WI) and
40% net revenue  interest  (NRI),  on these  properties  under an Agreement with
Quantum,  which  closed on January 3, 2000.  RMG and Quantum are also  currently
negotiating to acquire additional acres in their area of mutual interest ("AMI")
of the Powder River Basin in Montana.

     The acreage  held with Quantum is all in Montana,  and includes  82,807 net
acres of BLM land,  14,910  net acres of state  land  (Montana),  and 90,430 net
acres of fee land.

     Under the Quantum Agreement, the ultimate purchase price is $5,500,000,  of
which  $3,200,000  was paid on January 3, 2000 and $1,000,000 was paid on May 1,
2000. A payment of  $1,300,000  is due on or before  December  31, 2000.  If RMG
fails to pay the last purchase  installment of $1,300,000 on or before  December
31, 2000, RMG must assign 12% of its undivided 50% WI in the properties  back to
Quantum. At Quantum's sole option, it may elect to have USECC drill and complete
additional wells for the equivalent cost of $1,300,000 (all paid for by RMG). If
Quantum  exercises  this  option,  RMG would own a 50% WI (40% NRI) in the wells
drilled with those funds, but only after Quantum has received  $1,300,000 in net
revenues (payback) from those wells.

     A  separate  provision  in the  Quantum  Agreement  requires  RMG to  spend
$2,500,000 to drill and complete 25 CBM wells,  as  identified  and agreed to by
the operating  company,  Powder River Gas, LLC (see below).  Quantum will have a
carried  working  interest in these wells,  which means that RMG must pay all of
the drilling and completion costs for these wells;  after production begins, the
80% net  revenue  interest  will be  split  40% to RMG and 40% to  Quantum,  and
operating  costs  will be split 50% to RMG and 50% to  Quantum.  RMG will not be
entitled to recover any of the drilling and completion costs for these wells.

     If RMG does not  spend  $2,500,000  to drill and  complete  the 25 wells by
November  30,  2000,  and Quantum  spends part or all of that amount of funds to
drill and  complete  wells on the  acreage,  then RMG will have the right (until
November  30,  2001) in  effect  to buy back its 50% WI for an  amount  equal to
Quantum's expenditures, plus Quantum's cost of funds (if borrowed). Quantum will
hold  100% of the WI and the full 80% NRI  until  such time as RMG buys back its
50% WI in the subject  wells.  If RMG buys back its 50% WI, Quantum would hold a
48% NRI, and a 50% working  interest in the subject  wells until two years after
RMG buys back its 50% working interest. In this period of time, RMG would hold a
50% WI but only a 32% NRI from the subject  wells.  After two years from the buy
back date,  RMG would hold a 40% net  revenue  interest in  production  from the
subject wells; RMG would maintain its 50% WI starting with its buy back date.

     In addition,  the Quantum  Agreement calls for RMG and Quantum to drill and
complete a total of an additional 100 wells between January 1, 2000 and December
31,  2000,  subject to force  majeure.  Each  party  shall pay 50% of the wells'
drilling  and  completion  costs  during  the year 2000,  for a 40% net  revenue
interest to each party.  Neither RMG nor Quantum will have a carried interest in
any of these wells. Instead,

                                        7

<PAGE>

in the event that either Quantum or RMG elects not to drill the wells during the
year 2000,  then the party who elects to drill the wells shall recover the funds
advanced by it to pay for the other party's share of costs to drill and complete
the wells,  plus a 300% penalty.  Until the paying party recovers its costs plus
the  penalty,  the paying  party will hold 100% of the working  interest and the
full  (i.e.,  80%) net revenue  interest.  After such  recovery of advances  and
penalty,  the nonconsenting  party will own its 50% working interest and 40% net
revenue  interest.  This penalty  provision shall also apply to all future years
between  the  parties as to wells not  equally  participated  in on the  Quantum
acreage.

     The RMG-Quantum  properties will be operated through Powder River Gas, LLC,
a Wyoming  limited  liability  company owned 50% by RMG and 50% by Quantum.  CBM
well  sites  will be  selected  from the  acreage as  approved  by a  management
committee  in  which  Quantum  and  RMG  have  equal  representation;  drilling,
completion  and  gathering  system costs will be authorized by the committee and
funded  by RMG and  Quantum  according  to their  interests  in the  acreage  as
determined  by the  Agreement  with  Quantum.  USECC  has the  right to  provide
drilling  services on the first 25 wells  drilled by Powder River Gas, LLC based
on competitive  drilling rates in the areas surrounding the wells to be drilled.
Thereafter,  USECC will have the right to submit bids on a competitive  basis to
Powder River Gas LLC for drilling contracts on additional acreage.

     RMG plans to  operate a  majority,  if not all of the  Powder  River  Basin
properties it owns outside the Quantum acreage.

Permitting

     Drilling CBM wells  requires  obtaining  permits from various  governmental
agencies.  The ease of obtaining  the necessary  permits  depends on the type of
mineral  ownership and the state in which the property is located.  Intermittent
delays in the  permitting  process can  reasonably  be expected  throughout  the
development of any play. For example,  there is currently a temporary moratorium
for  drilling  CBM wells on fee and state  lands in  Montana.  RMG may shift its
strategy  as  needed  to  drill  in  different  parts  of the CBM  play or drill
conventional  shallow  natural  gas wells in order to evaluate  all  formations,
including coal, for gas potential and expedite production capabilities.  As with
all governmental  permit  processes,  there is no assurance that permits will be
issued  in a timely  fashion  or in a form  consistent  with  RMG's  anticipated
operations.

     On March 16, 2000, the Northern Plains Resource Council,  Inc. (NPRC) filed
suit against the Montana Board of Oil and Gas  Conservation  requesting an order
of the court  compelling the defendant to prepare a  Supplemental  Environmental
Impact  Statement  (EIS) for coalbed  methane  development,  which could further
delay  development.  RMG  and  others  have  filed  a  motion  to  intervene  to
participate  in this  litigation  and to ensure that  drilling  can be performed
during any environmental analysis. The matter is pending.

     The Wyodak  Environmental Impact Statement (EIS) for the Powder River Basin
in Wyoming was issued in the fall of 1999, which allowed the permitting of 5,000
CBM wells to be drilled on Federal lands in Wyoming.  More CBM well applications
have been  submitted  causing the BLM to begin a second EIS for the Powder River
Basin Area in Wyoming that will include CBM and  conventional oil and gas wells.
This new EIS is  scheduled  to commence in early summer 2000 and continue for 20
to 24 months.  Development on Federal lands in Wyoming has been stopped with the
balance of the Wyodak EIS  permitted  wells  (4,000)  occurring on fee and state
lands.  BLM has started an EA  reviewing  drainage  issues  which could allow an
additional 1,500 new CBM well permits in the same region. This was scheduled for
scoping in early April 2000 with  completion  expected  the  following  October.
Again,  there is no  assurance  that the EA and EIS will not  negatively  impact
RMG's business or operations.

                                        8

<PAGE>

     In addition,  the Wyoming and Montana Departments of Environmental  Quality
have  regulations  applying to the surface  disposal of water  produced from CBM
drilling  operations.  CBM  operators are  currently  seeking  changes in permit
requirements  and department  policy that would allow operators more flexibility
to discharge  water on the  surface.  If these  changes are not made,  it may be
necessary to install and operate treatment facilities or drill disposal wells to
reinject the produced water back into the underground  rock formations  adjacent
to the coal seams or lower  sandstone  horizons.  If RMG is unable to obtain the
appropriate  permits or if applicable  laws or  regulations  require water to be
disposed of in an alternative  manner,  the costs to dispose produced water will
likely increase.  These costs could have a material effect on operations in this
area, including  potentially  rendering future production and development in the
affected areas uneconomic.

     In Montana,  RMG has pending  applications to the BLM for  approximately 60
permits to drill into  shallow  gas sand  formations  on Federal  land held with
Quantum,  which permits are expected to be issued in September  2000,  and which
may be converted to production  status upon receiving  approval from the Montana
Board of Oil and Gas.  These wells would  evaluate  potential CBM  production as
well as conventional gas. Regarding other land held with Quantum in Montana, the
State of Montana  may lift its  moratorium  for CBM wells on  private  and state
ground in Montana,  and start issuing new permits on these lands in October 2000
(a  voluntary  moratorium  is  currently in place for wells on private and state
ground in Montana). RMG has not determined to what extent it will participate in
this  procedure,  and is  evaluating  how best to protect  its  position to have
reasonable exploration for CBM wells proceed on state and fee ground.

     As  approximately  40% of RMG's  acreage in the  Castle  Rock  prospect  in
Montana  (held with  Quantum)  is on  Federal  land,  RMG  expects to have ample
acreage  permitted  by the  BLM by late  calendar  2000 to  begin  drilling  and
evaluating  gas  potential  in both  shallow  sands and coal  formations.  These
favorable outcomes are predicted but not assured.

Gathering and Transmission of CBM Gas

     Companies  involved  in  CBM  production   generally  outsource  their  gas
gathering,   compression  and   transmission.   RMG  intends  to  outsource  its
compression  and gathering needs as well,  possibly on a competitive  basis with
transmission  companies  in  the  immediate  area.   Negotiations  with  various
transmission  companies  have been  initiated  by RMG in order to better  manage
future capital investment, but no contracts have been signed to date.

     Coalbed   methane   production   growth  in  the  Powder  River  Basin  has
historically  been  impeded by a  shortage  of  gathering  system  capacity  and
transport  capacity  out of the Basin.  However,  two large  diameter  gathering
pipelines  were completed in September 1999 and a third was ready for service in
early 2000.  The two completed  pipelines will provide an additional 900 million
cubic feet, or MMcf, of daily gas capacity as set forth below:

     Fort Union Gas Gathering, LLC's 106-mile, 24" gathering pipeline, commenced
operations September 1, 1999, with an initial capacity of 450 MMcf per day;

     Thunder  Creek  Gas  Services,  LLC's  126-mile,  24"  gathering  pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day; and

     Additionally,  CMS Energy's 110-mile, Big Horn Gas Gathering pipeline, that
connects to the northern  terminus of the Fort Union pipeline,  is continuing to
be expanded in length and has an initial  capacity of 256 MMcf per day which can
readily  be  upgraded  to  500  MMcf  per  day  with  the  addition  of  booster
compression.  Further,  on June 19, 2000,  Big Horn Gas Gathering  announced the
extension of its

                                        9

<PAGE>

pipeline to serve  producers in the Sheridan area.  This 50+ mile extension will
place a 20" high  pressure  pipeline  within 5 miles of the  Montana  border and
within close  proximity to the  development  planned by RMG and Quantum in their
Kirby Prospect area.

     Wyoming  Interstate  Gas  Company's  143-mile,  24"  Medicine  Bow  Lateral
pipeline  commenced  operations in November 1999 with an initial capacity of 260
MMcf per day. This pipeline  will  transport  natural gas from the Thunder Creek
and  Fort  Union  pipelines  at the  south  end of the  Powder  River  Basin  to
interconnect with multiple  interstate  pipelines  accessing markets to the east
and along the front range of Colorado.  This system is already being expanded as
demand for  transportation  space grows.  Further  transmission  lines are being
planned by other companies in the area.

     Powder River Basin  Properties.  As of June 1, 2000, RMG owns a 50% working
interest in oil and gas leases covering  approximately  185,000 net acres in the
Powder  River  Basin of Montana.  These  leases  generally  have two to ten year
primary  terms.  The federal leases are generally ten year term leases and newly
acquired fee and state leases are generally two to five year term leases.  There
are five separate project areas as follows:

     1. Castle Rock. This property consists of approximately 125,000 net
acres of leases held jointly with Quantum  located in Powder River County,  west
of Broadus,  Montana.  Additional properties in this area are under negotiation.
The  Castle  Rock  prospect  covers a large  area and  there  are four  separate
prospective areas: Otter Creek, Kirby, Bartholemew and Castle Rock areas.

     Coals present in the Castle Rock prospect are in the Tongue River Member of
the Fort Union Formation.  Coalbed methane  production in the Wyoming portion of
the Powder  River Basin is also from the Tongue  River  Member  coals.  Coals of
primary interest are the Sawyer, Knobloch and Flowers-Goodale coals. Other coals
present in the prospect  area include the Pawnee,  Brewster  Arnold,  Terret and
Stag coals. Gas shows from the Sawyer,  Knobloch, and Flowers-Goodale coals have
been noted in several  shallow  water wells  drilled in the area.  The  apparent
character, quality and gassiness of RMG project coals in the Castle Rock project
appear  comparable to the coals in CBM projects by other operators  located near
the Montana/Wyoming border area in Johnson and Campbell Counties, Wyoming.

     An initial  permitting and drilling program in this area began in late 1999
and, to date,  three holes have been completed.  Coals  encountered in the first
drill test are outlined in the following table:

        COAL                                      DEPTH               THICKNESS
        ----                                      -----               ---------
        Pawnee                                  245 feet               26 feet
        Brewster                                348 feet               20 feet
        Sawyer                                  565 feet               22 feet
        Knobloch                                640 feet               20 feet
        Flowers-Goodale                         850 feet               26 feet
        Misc other coals                         various               16 feet
                                                                      --------
        TOTAL COAL                                                    130 feet

     2. Kirby:  This lease block  contains  approximately  60,000 net acres held
jointly with Quantum located in Big Horn and Rosebud Counties, Montana, north of
Sheridan,  Wyoming.  Additional  property  in the area is being  considered  for
acquisition.

     The  prospect is located in the  northwestern  portion of the Powder  River
Basin.  Coalbed methane production has been established south of the prospect at
another  field which is currently  being  developed  by Redstone  Gas  Partners.
Redstone recently  received  Discharge Permits from the Montana DEQ to discharge
up to 1,650  gallons per minute into the Tongue River.  Redstone has  production
with 150 active locations

                                       10

<PAGE>

in the field at this time.  Pennaco Energy is planning to drill several wells on
a  prospect  east of the  field.  PETCO is  reportedly  planning  a 20 well test
project offsetting project acreage.

     Several  coal  seams are  present  in the  prospect  area with  total  coal
thickness of approximately 100 feet. The thickest coal is the Wall coal which is
50-85 feet thick. Drilling depth to the Wall coal is about 500 feet and drilling
to 1000-1400 feet will test all coal sections.

     Coals  present  at Kirby  prospect  are in the Tongue  River  member of the
Tertiary Fort Union  Formation.  Productive  coals in the Wyoming portion of the
Powder  River  Basin  in the CX field  are  also  Fort  Union  Formation  coals.
Potentially  productive  coals at  Kirby  prospect  include  the  Canyon,  Wall,
Carlson,  Poker Jim-Pawnee,  Brewster-Arnold,  King-Sawyer,  and Flowers-Goodale
coals.  The Wall coal is the thickest  coal in the prospect area with 50-60 feet
of  development  throughout  the area.  The Wall coal splits and thins south and
east of the  prospect  area.  Drilling  depth to the Wall coal is about 500 feet
over most of the prospect.  The Wall coal  outcrops  along the Kirby on the east
margin of the prospect and along Rosebud  Creek on the northwest  portion of the
prospect.

     At present  there has been no gas content  analysis of the Wall coal in the
immediate vicinity.  However, at a recent spacing hearing before the Montana Oil
and Gas  Commission for wells located in T9S R42E,  Pennaco Energy  presented an
exhibit with estimated gas content for various coals. Pennaco's estimate for the
Wall coal is 118 ft3/ton.

     The coal  intervals  below the Wall coal range in thickness  from 5 feet or
less to around 20 feet. The King-Sawyer coal and  Flowers-Goodale are each 10-15
feet thick  throughout the prospect area. Both of these coal zones have produced
some gas from  shallow  water wells  located east of the  prospect  area.  Total
combined coal thickness over the area is around 100 feet.

     The Kirby  prospect is located in a developing  portion of the Powder River
Basin.  Production and sales of coalbed methane have been  established  south of
the  prospect.  Gas market and pipeline  access are closely  established  in the
area. Thick and multiple coals are present in the prospect area. Production from
the area may be enhanced by the structural  features  present over the prospect.
Successful  completion  of multiple  coal zones in wells will greatly add to the
potential  reserves of the area. CMS's Big Horn Gas Gathering is extending a new
20" gathering system to the Montana border near Decker, Montana.

     3. Gillette North.  RMG holds a 100% working interest in 80 acres of leases
in this project area located in Campbell County,  Wyoming. This State lease lies
at the north end of the City of Gillette. Potential exists for one billion cubic
feet of gas on this 80 acres alone.  Existing  coalbed  methane wells lay in the
section  immediately  north.  Permitting of 2 wells has begun on RMG's property.
RMG intends to conduct test drilling and production techniques in this area that
lies in the heart of the current coalbed methane play in the Gillette area.

     4.  Finley.  RMG holds 160 acres of leases in this  project area located in
Converse  County,  Wyoming.  This  prospect  is a State  lease 12 miles  east of
Edgerton, Wyoming. Review for a two well test is underway.

     5.  Sussex.  RMG holds 640 acres of leases in this  project area located in
Johnson County, Wyoming. This State lease lies 3 miles south of Sussex, Wyoming.
RMG has a 100% working interest.

Other Properties

     RMG has also acquired two properties in Wyoming.

                                       11

<PAGE>

     6. Baggs  North.  This  prospect  contains  120 acres of leases  located in
Carbon  County,  Wyoming.  This State  lease is located 7 miles  north of Baggs,
Wyoming. RMG has a 100% working interest in this prospect.

     7. Oyster  Ridge.  Oyster Ridge is located in  southwestern  Wyoming in the
Ham's Fork Coal Field. It is midway between  Evanston and Kemmerer,  Wyoming and
lies in the  counties  of  Uinta  and  Lincoln.  Wyoming  Highway  189  provides
excellent  access into the area.  Total  property held by RMG at Oyster Ridge is
approximately  63,000 net mineral acres. RMG holds a 100% working interest and a
net  revenue  interest  of 81.5% to 83.5%.  Surface  and  mineral  ownership  is
approximately  60% Union Pacific  Resources (UPR), 35% BLM, 5% state of Wyoming.
Union Pacific  Resources  retains the right to back into each years  exploration
program  for a 25% working  interest.  The coal  formations  of interest on this
project are the Cretaceous Frontier and Adaville.  Both formations trend roughly
north-south  through  the  project  area.  The  Frontier  Formation  (early Late
Cretaceous)  outcrops  on the east  side  and dips  westerly  at  15(degree)  to
30(degree).  The  Frontier  coals  are  higher  rank but much  thinner  than the
Adaville.  The Adaville Formation (Late Cretaceous)  outcrops on portions of the
west  side of the  property.  Dips  here  are  also  15(degree)  to  30(degree).
Cumulative  coal  thickness  in the  Adaville  is up to 100 feet in most  areas.
Frontier cumulative coal thickness varies from 10 to 20 feet.

Uranium

General

     Crested and USE have  interests in several  uranium-bearing  properties  in
Wyoming and Utah and in uranium processing mills in Sweetwater  County,  Wyoming
(the  "Sweetwater  Mill")  and  in  southeastern   Garfield  County,  Utah  (the
"Shootaring  Mill").  All the  uranium-bearing  properties  are in  areas  which
produced  significant  amounts of  uranium  in the 1970s and  1980s.  Subject to
uranium oxide market prices  improving and raising needed  capital,  Crested and
USE plan to  develop  and  operate  these  properties  (directly  or  through  a
subsidiary company or a joint venture) to produce uranium concentrates  ("U3O8")
for sale to public utilities that operate nuclear powered electricity generating
plants. In addition, other uranium-bearing  properties in New Mexico and Wyoming
are held by Yellow Stone Fuels Corp. (a minority subsidiary of USE and Crested).

     However,  until  uranium  oxide prices  improve  significantly,  all of the
uranium  properties  are in care and  maintenance  mode,  meaning  that  work is
performed  to keep the assets in stand down mode and ready for later  activation
and permitting work is done as needed (mostly  monitoring and reporting) to keep
existing  permits in effect.  As of September 12, 2000, the Company and USE sold
their interest in the GMMV properties to Kennecott.

Green Mountain

     521 unpatented  lode mining claims (the "Green  Mountain  Claims") on Green
Mountain in Fremont  County,  Wyoming,  including  105 claims on which the Round
Park  (Jackpot)   uranium   deposit  is  located,   and  the  Sweetwater   Mill,
(approximately  23 miles south of the proposed  Jackpot Mine).  These assets are
held by the Green Mountain Mining Venture ("GMMV"),  now owned 100% by Kennecott
Uranium  Company ("KUC" or  "Kennecott"),  a subsidiary of Kennecott  Energy and
Coal Company of Gillette,  WY.  Kennecott  Energy and Coal Company and Kennecott
Corporation of Salt Lake City, UT are  subsidiaries  of Rio Tinto plc,  formerly
RTZ plc of London.  Until  September  11, 2000,  the Company and USE owned a 50%
interest in the GMMV, but sold their interest to Kennecott.

                                       12

<PAGE>

Sheep Mountain

     Unpatented  lode mining claims,  underground and open pit uranium mines and
mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont
County,  Wyoming and are  adjacent to and west of the GMMV mining  claims.  From
December  21, 1988 to June 1, 1998,  these  assets  were held by Sheep  Mountain
Partners  ("SMP"),  a  Colorado  general  partnership.  On June 1,  1998,  USECC
received  back  from  SMP  all of the  Sheep  Mountain  mineral  properties  and
equipment,  in partial  settlement of disputes with Nukem and CRIC.  See Item 3,
"Legal  Proceedings."  The Sheep Mountain Mines 1 and 2 are accessible by county
and private roads and were first operated by Western Nuclear, Inc., a subsidiary
of Phelps Dodge Corporation, in the late 1970s.

Yellow Stone Fuels Corp.

     Yellow Stone Fuels Corp.  ("YSFC"),  was  organized on February 17, 1997 in
Ontario,  Canada.  As of February 17, 1997,  YSFC  acquired all the  outstanding
shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming  corporation which
was organized on June  3,1996),  in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc. YSFC
and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are herein collectively
referred to as YSFC.

     In order to concentrate the efforts of USECC on conventional uranium mining
using the  Shootaring  Canyon  and  Sweetwater  Mills,  USECC  decided to take a
minority  position in YSFC and not be directly  involved in properties  believed
suitable for the production of uranium  through the in-situ leach ("ISL") mining
process.  USECC will have the right of first refusal with respect to any uranium
ore bodies YSFC discovers which are amenable to conventional  mining and milling
and YSFC  will  have the  right of first  refusal  with  respect  to ore  bodies
discovered by USECC amenable to the ISL process. In the ISL process, groundwater
fortified with oxidizing  agents is pumped to the ore body,  causing the uranium
contained  in the ore to  dissolve.  The  resulting  solution  is  pumped to the
surface  where it is  further  processed  to uranium  oxide  which is shipped to
conversion facilities for eventual sale. Generally, the ISL process is more cost
effective and environmentally benign compared to conventional mining techniques.
In addition,  less time may be required to bring an ISL mine into operation than
to permit and build a conventional mine and mill.

     The property interests of USE and Crested in Utah through Plateau Resources
Ltd. ("Plateau"):

     Plateau  Resources  Ltd.  is a  wholly-owned  subsidiary  of USE,  however,
Crested owns an interest in Plateau. See "Plateau Shootaring Canyon Mill" below.

     The Tony M Mine and the Frank M properties, underground uranium deposits in
San Juan County,  Utah are located partially on Utah State mining leases.  These
properties are accessible by county roads.

     Plateau  is the  lessee  of the Tony M Mine  and  portions  of the  Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties.  The Tony M mine was  originally  developed  by  Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground  workings.  When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium  concentrates  per ton.  Some of this ore was processed at the
Shootaring Mill. In addition, low grade uranium ore was stockpiled at the Tony M
Mine and at the Shootaring Mill.

     Plateau also  acquired the Velvet Mine and the nearby Woods  Complex in the
Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed and
permitted by its prior owner and is located

                                       13

<PAGE>

approximately  178 miles by road from the Shootaring Mill. The Woods Complex was
formerly an operating uranium mine with a remaining undeveloped resource. Access
to this resource would be by extending a drift approximately 2,500 feet from the
former Wood Mine. The Wood Mine property is not  permitted,  but USE and Crested
do  not  expect  difficulty  in  obtaining  a new  permit  because  the  surface
facilities  would  occupy  the  site  that  has  been  disturbed  from  previous
operations.

               The Green Mountain Mining Venture ("GMMV") Project

     GMMV. In fiscal 1991, USE and USECC entered into an agreement to sell
50 percent of their interests in the Green Mountain.  Claims,  and certain other
rights,  to  Kennecott  for  $15,000,000   (USE's  share  of  the  proceeds  was
$12,600,000,  and the balance was  Crested's)  and a commitment  by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets.  At the same time, USE and USECC ("USE  Parties") and Kennecott  formed
the GMMV to develop,  mine and mill uranium ore from the Green Mountain  Claims,
and market U3O8.  For detailed  explanation  of the GMMV  agreement,  please see
Crested  Corp.'s 1999 Annual Report on Form 10-K at pages 6 and 7 and footnote F
to the financial statements.

     In  fiscal  2000,  Kennecott  filed a lawsuit  to  dissolve  the GMMV.  The
Registrant,  USECC, and USE counterclaimed for damages. This lawsuit was settled
on September 11, 2000. Kennecott and USE have agreed to ask the court to dismiss
all parties' claims in this lawsuit.  Under the settlement agreement,  Kennecott
has paid the Company and USE $250,000 and will pay the Company  $1,375,000  five
days after closing and another $1,625,000 in January 2001, to acquire all of the
Company  and USE's  interest  in the GMMV,  its  properties  and the  Sweetwater
Uranium  Mill  (with  certain  exemptions).   Kennecott  also  has  assumed  all
reclamation and other liabilities associated with the GMMV, its properties,  the
Sweetwater  Mill  and  all  liabilities  associated  with  the  GMMV  since  its
inception,  including the historical  liabilities associated with the Sweetwater
Mill prior to its acquisition by the GMMV. The Company and USE together retained
a 4% net profits royalty  interest in any future uranium oxide produced from the
GMMV mining claims through the Sweetwater Mill (currently in a stand by mode and
not operational).

     The ion exchange facility on the Sheep Mountain properties will not be
transferred to Kennecott,  nor will the cleanup liabilities associated therewith
be assumed by Kennecott.  However, the Company, USE and Kennecott have agreed to
cooperate in the disposal of the facility into the  Sweetwater  Mill's  disposal
and impoundment areas.

     Also, certain items of mining equipment held by the GMMV have been conveyed
to USE, and will be removed from the GMMV properties in 2001.

     At such time as Kennecott has completed  necessary  reclamation work on the
Green Mountain  unpatented lode mining claims  (including the Round Park uranium
deposit  proposed to be mined  through the Jackpot  Mine),  Kennecott  will quit
claim  all of such  mining  claims  to the  Company  and USE as well as  certain
equipment  currently  being used at the mine (including a compressor and standby
generator). Kennecott will keep the Sweetwater Mill.

     For information on the Green Mountain claims, see below.

Properties and Mine Plan.

     The  Green  Mountain  claims  include  the Big  Eagle  Properties  on Green
Mountain, which contain substantial uranium mineralization,  and are adjacent to
other mining claims.  The Big Eagle  Properties  contain two open-pit  mines, as
well  as  related  roads,  utilities,  buildings,  structures,  equipment  and a
stockpile of 500,000 tons of uranium material with a grade of approximately .05%
U3O8. The assets include two

                                       14

<PAGE>

buildings (38,000 square feet and 8,000 square feet) formerly used by Pathfinder
Mines  Corporation  ("PMC")  in  mining  operations.  Also  included  are  three
ore-hauling vehicles, each having a 100-ton capacity.

     The Round  Park  (Jackpot)  mining  claims  formerly  owned  solely by USE,
contain  deposits of uranium  which have been  estimated  to contain  52,000,000
pounds of U3O8;  the grade  averages  4.6 pounds of U3O8 per ton of  mineralized
material.  The GMMV had  planned  to mine  this  mineralized  material  from two
decline tunnels (-17 percent slope) in the Jackpot Mine driven  underground from
the south side of Green Mountain.  The first of several mineralized  horizons in
the Round Park deposits, is about 2,300 feet vertically down from the surface of
Green Mountain. This work was halted in July, 1998.

     Sweetwater  Mill. In fiscal 1993, the GMMV acquired the Sweetwater  uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately  23 miles south of the proposed Jackpot Mine, from a subsidiary of
Union Oil  Company of  California  ("UNOCAL"),  primarily  in  consideration  of
Kennecott and the GMMV assuming environmental  liabilities,  and decommissioning
and reclamation obligations.

     The Sweetwater  Mill was designed as a 3,000 ton per day ("tpd")  facility.
UNOCAL's  subsidiary,  Minerals  Exploration  Company,  reportedly  processed in
excess of 4,200 tpd for sustained periods. The Mill is one of the newest uranium
milling  facilities  in the  United  States,  and has  been  maintained  in good
condition.  UNOCAL has  reported  that the mill  buildings  and  equipment  have
historical costs of $10,500,000 and $26,900,000, respectively.

     As  consideration  for the Sweetwater Mill, GMMV agreed to indemnify UNOCAL
against certain reclamation and environmental liabilities, which indemnification
obligations are guaranteed by Kennecott Corporation (parent of Kennecott Uranium
Company).  GMMV is responsible for compliance with mill decommissioning and land
reclamation  laws,  for  which  the   environmental   and  reclamation   bonding
requirements  are  approximately  $26,084,100,  which includes a $4,560,000 bond
required by the NRC. None of the GMMV future  reclamation  and closure costs are
reflected in the consolidated financial statements.

     The reclamation and environmental  liabilities assumed by the GMMV (and now
Kennecott's sole responsibility)  consist of two categories:  (1) cleanup of the
inactive  open pit mine site near the Mill (the source of ore  feedstock for the
mill when  operating  under  UNOCAL),  including  water (heavy  metals and other
contaminants) and tailings (heavy metals dust and other  contaminants  requiring
abatement and erosion control)  associated with the pit; and (2) decontamination
and cleanup and disposal of the Mill  building,  equipment  and  tailings  cells
after Mill  decommissioning.  The Wyoming DEQ exercises  delegated  jurisdiction
from the United States Environmental Protection Agency ("EPA") to administer the
Clean Water Act and the Clean Air Act, and directly administers Wyoming statutes
on mined land reclamation.  The Sweetwater Mill is also regulated by the NRC for
tailings  cells and mill  decontamination  and cleanup.  The EPA has  continuing
jurisdiction under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is started.

Plateau's Shootaring Canyon Mill

     Acquisition of Plateau Resources Limited  ("Plateau").  In August 1993, USE
purchased from Consumers Power Company ("CPC"),  all of the outstanding stock of
Plateau which owns the  Shootaring  Canyon uranium  processing  mill and support
facilities  in  southeastern  Utah (the  "Shootaring  Mill") for a nominal  cash
consideration.  Subsequent  to  closing,  USE  and  Crested  agreed  that  after
Plateau's unencumbered cash had been depleted, USE and Crested each would assume
one-half of Plateau's obligations, and share equally in Plateau's operating cash
flows,  pursuant to the USECC Joint  Venture.  For detailed  explanation  of the
transaction,  please see Crested Corp.'s 1998 Annual Report on Form 10-K at page
13.

                                       15

<PAGE>

     Shootaring  Mill  and  Facilities.   The  Shootaring  Mill  is  located  in
south-eastern  Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd,  but only  operated on a trial basis for two months
in  mid-summer  1982.  In 1984,  Plateau put the mill on standby  because of the
depressed U3O8 market.

     Plateau also owns approximately 90,000 tons of uranium mineralized material
stockpiled  at the  mill  site and  approximately  172,000  tons of  mineralized
material  stockpiled at the Tony M Mine.  Included with Mill assets are tailings
cells,  laboratory  facilities,  equipment shop and inventory.  The NRC issued a
license to Plateau  authorizing  production  of uranium  concentrates,  however,
since  the Mill  was  shut  down,  only  maintenance  and  required  safety  and
environmental  inspection  activities  were  performed and the source  materials
license with the NRC was for standby operations only. Plateau applied to the NRC
to convert the source  materials  license from standby to  operational  and upon
increasing the reclamation  bond, the NRC issued the new license on May 2, 1997.
Plateau has a cash bond in favor of the NRC in the amount of $7,952,600  plus an
additional  $1,315,100 in government  securities  for future bonding and license
fee requirements.

     Plateau also obtained  approval of a water control  permit for the tailings
facility from the State of Utah Water Control Division and is awaiting the NRC's
review of the  operating  license  conditions  so Plateau can continue  with the
construction of tailings facilities.

Ticaboo Townsite

     Plateau  owns all of the  outstanding  stock  of  Canyon  Homesteads,  Inc.
("Canyon"),  a Utah corporation,  which developed the Ticaboo, Utah Townsite 3.5
miles  south  of the  Shootaring  Mill.  The  Ticaboo  site  includes  a  motel,
restaurant,  lounge,  convenience  store,  boat storage,  rental lots, sites for
mobile homes and recreational  vehicle sites and home lots and constructed homes
for sale.  The Townsite is located on a State of Utah lease near Lake Powell and
is being operated as a commercial enterprise. A 1997 amendment to the Utah State
lease covering the Ticaboo  townsite  resulted in the State deeding  portions of
the  Townsite to Canyon on a sliding  scale  basis as parcels are sold.  USE and
Crested are developing the Townsite and selling homes and mobile home sites.

Yellow Stone Fuels Corp.

     YSFC has abandoned all of its unpatented mining claims and State leases
due to historically low uranium market prices.

Sheep Mountain Partners ("SMP")

     SMP Partnership.  In February 1988, USE and Crested acquired uranium mines,
mining equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap
in  south-central  Fremont County,  Wyoming,  from Western  Nuclear,  Inc. These
Crooks  Gap  mining  properties  are  adjacent  to the  Green  Mountain  uranium
properties.  SMP mined and sold  uranium ore from one of the  underground  Sheep
Mines during  fiscal 1988 and 1989.  Production  ceased in fiscal 1989,  because
uranium  could be purchased  from the spot market at prices below the mining and
milling costs of SMP. In December 1988, USE and Crested sold 50 percent of their
interests in the Crooks Gap properties to Nukem's  subsidiary CRIC for cash. The
parties  thereafter  contributed  the  properties  to and formed Sheep  Mountain
Partners ("SMP"), in which USECC received an undivided 50 percent interest.  SMP
is a Colorado general partnership formed on December 21, 1988, between USECC and
Nukem, Inc. of Stamford, CT ("Nukem") through its wholly-owned  subsidiary Cycle
Resource  Investment  Corporation  ("CRIC").  Each group  provided  one-half  of
$315,000 to purchase equipment from Western Nuclear,  Inc.; USE and Crested also
contributed  their interests in three uranium supply contracts to SMP and agreed
to be responsible for property reclamation obligations.

                                       16

<PAGE>

The SMP  Partnership  agreement  provided  that each partner  generally had a 50
percent interest in SMP net profits,  and an obligation to contribute 50 percent
of funds needed for partnership  programs or discharge of  liabilities.  Capital
needs were to have been met by loans, credit lines and contributions. Nukem is a
uranium brokerage and trading concern.

     SMP was directed by a management committee, with three members appointed by
USECC,  and three  members  appointed by  Nukem/CRIC.  The committee has not met
since 1991 as a result of the SMP  arbitration/litigation.  During  fiscal 1991,
certain  disputes arose between the partners of SMP. These disputes  resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. Such proceedings are still under appeal.

     Properties.  Until June 1, 1998, SMP owned 80 unpatented lode mining claims
on the  Crooks Gap  properties,  including  two  open-pit  and five  underground
uranium  mines and an  inventory of uranium  ore. In  connection  with a partial
settlement of  litigation/arbitration  between  USE/Crested and Nukem/CRIC,  SMP
conveyed these mineral properties and equipment to USECC. See Item 3. Production
from the  properties is subject to  sliding-scale  royalties  payable to Western
Nuclear,  with  rates  ranging  from one to four  percent on  recovered  uranium
concentrates.  As of the date of this report,  USE and USECC owned 98 unpatented
lode mining  claims and a 644 acre  adjoining  State Mineral Lease in the Crooks
Gap area.

     There is an ion  exchange  plant  on the  properties  which  can be used to
remove natural  soluble  uranium from mine water.  USE, on behalf of USECC,  has
submitted a plan to the NRC to  decommission  this facility and obtained a three
year extension for timeliness of decommissioning.  This facility may be disposed
of at the Sweetwater Impoundment Facility (see above).

     Property Maintenance.  Currently,  USECC has a maintenance staff on site to
care for and maintain the properties.

     Permits.  Permits to operate  existing  mines on the Crooks Gap  properties
have been  issued by the State of  Wyoming.  Amendments  are  needed to open new
mines within the permit area. As a condition to issuance of the permits, a NPDES
water discharge  permit under the Clean Water Act has been obtained.  Monitoring
and  treatment of water  removed from the mines and  discharged in nearby Crooks
Creek is generally  required.  During the past two years,  SMP did not discharge
wastewater into Crooks Creek,  and the mine water is presently being  discharged
into the McIntosh Pit, another piece of the SMP properties conveyed.

Uranium Market Information.

     Uranium Spot Market. Uranium spot prices averaged $8.05/lb.  U3O8 on August
7, 2000,  a decrease of 5.9% from $8.45 at the end of May 31,  2000.  During the
first half of 2000, total spot market volume was approximately 7 millions pounds
U308 compared with 14 million pounds for the first half of 1999.

     Uranium Long-Term  Market.  The long-term market continued to be relatively
quiet in the second calendar quarter with the long-term  uranium price indicator
at $9.50/lb.  U3O8.  Demand in the long-term market is expected to increase over
the remainder of the year as utilities move to cover future needs and volume for
the year is expected to exceed the 1999, please see the Company's 1999 Form 10-K
for more information on the uranium market.

                                       17

<PAGE>

Gold

Sutter Gold Mine (California)

     Sutter Gold Mining Company. In fiscal 1991, USE acquired an interest in the
Lincoln  Project  (including  the  underground  Lincoln  Mine and the 2,800 foot
Stringbean  Alley decline) in the Mother Lode Mining  District of Amador County,
California,  held by a mining  joint  venture  known as the Sutter Gold  Venture
("SGV").  The entire  interest  of SGV is now owned by USECC Gold LLC, a Wyoming
limited liability company,  which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").  The Lincoln Project has been renamed the Sutter
Gold Mine ("SGM").

     Like  uranium,  current  gold prices are too low to allow SGMC to raise the
capital  necessary to put the gold property into production.  Except for limited
infrastructure  improvements  in 2000,  the assets  are in care and  maintenance
mode, and the existing permits are being kept current as necessary.

     In  fiscal  1997,  SGMC  completed  private  financings  totaling  a net of
US$7,115,400  ($1,272,000  through a private  placement  conducted in the United
States by RAF Financial  Corporation  ("RAF"),  and $5,843,400 through a private
placement  conducted  in  Toronto,  Ontario,  Canada  by C.M.  Oliver &  Company
Limited).  The net proceeds of $6,511,200 from these financings (after deduction
of  commissions  and  offering  costs)  were  applied  to  pre-production   mine
development,  mill design, and property holding and acquisition cost. Additional
financing  of up to  $15,000,000  will be  needed  to fund the  development  and
construction of the mine/mill.

     Due to the  depressed  gold price and lack of available  funding,  SGMC has
deferred the start of  construction of the 1,000  ton-per-day  gold mill complex
and development of the underground mine and plans are being evaluated to develop
the mine into a  visitor's  center to  generate  cash flow while the gold prices
remain depressed.

     During fiscal 1998, SGMC amended its 1993 Conditional USE Permit (see
"Permits and Future  Plans"),  finalized  the process flow of the mill,  entered
into the final design engineering contract with the engineering firm of Lockwood
Greene of Dallas, Texas and built the entrance road to the mine. Once a decision
to commence  production  is made,  from that date,  it is estimated it will take
approximately  18 months to complete the mill complex  construction and pour the
first bar of gold.

     After completion of the two private  financings,  and taking into account a
restructuring of the ownership of USE and Crested in SGMC, USE and Crested own a
$10,000,000  Contingent  Stock Purchase  Warrant (the "USECC Warrant") which was
issued to USE and Crested in connection with the  restructuring  of SGMC for the
Canadian private placement. The USECC Warrant is owned 88.9% by USE and 11.1% by
Crested.  The USECC  Warrant  provides  that for each ounce of gold over 300,000
ounces  added to the proven and  probable  category of SGMC's  reserves (up to a
maximum of 400,000 additional  ounces),  using a cut-off grade of 0.10 ounces of
gold per ton (at a minimum vein  thickness  of 4 feet),  USE and Crested will be
entitled to cash or additional  shares of Common Stock from SGMC (without paying
additional  consideration)  at SGMC's election.  The number of additional shares
issuable  for each new ounce of gold  reserves  will be  determined  by dividing
US$25 by the  greater  of $5.00 or the  weighted  average  closing  price of the
Common Stock for the 20 trading days before  exercise of the USECC Warrant.  The
USECC Warrant is exercisable semi-annually. If SGMC decides against the exercise
of the  USECC  Warrant,  it can pay USE and  Crested  US$25 in cash for each new
ounce of gold  (payable  out of a maximum of 60% of net  cash-flow  from  SGMC's
mining  operations).  Additions to reserves will be determined by an independent
geologist agreed upon by the parties.

                                       18

<PAGE>

     USECC Management  Agreement with SGMC. Effective June 1, 1996, SGMC entered
into a  Management  Agreement  (dated as of May 22,  1996) with USE under  which
USECC provides  administrative  staff and services to SGMC.  USECC is reimbursed
for  actual  costs  incurred,  plus an extra  10%  during  the  exploration  and
development phases; 2% during the construction phase; and 2.5% during the mining
phase (such 2.5% charge to be replaced  with a fixed sum which the parties  will
negotiate at the end of two years  starting when the mining phase  begins).  The
Management  Agreement  replaces  a  prior  agreement  by  which  USECC  provided
administrative services to SGMC.

     Properties. SGMC (through its subsidiary USECC Gold) holds approximately 14
acres of  surface  and  mineral  rights  (owned),  240 acres of  surface  rights
(owned),  436 acres of surface  rights  (leased),  158 acres of  mineral  rights
(leased), and 380 acres of mineral rights (owned), all on patented mining claims
near Sutter Creek, Amador County,  California. The properties are located in the
western Sierra Nevada  Mountains at from 1,000 to 1,500 feet in elevation;  year
round  climate  is  temperate.  Access is by  California  State  Highway 16 from
Sacramento  to   California   State  Highway  49,  then  by  paved  county  road
approximately .4 miles outside of Sutter Creek.

     Surface and  mineral  rights  holding  costs will  aggregate  approximately
$225,000 from June 1, 2000 through May 31, 2001.  Property taxes for fiscal 2001
are estimated to be $30,000.

     The  leases  are for  varying  terms,  and  require  rental  fees,  advance
production royalties,  real property taxes and insurance.  The lease that was to
expire in February 1998 has been extended  through its force majeure  clause due
to the low price of gold. Leases expiring before 2010 will generally be extended
automatically,  so long as minerals are continuously  produced from the property
that is subject to the lease or minimum  payments are made . Other leases may be
extended for various periods on terms similar to those contained in the original
leases.  Production  royalties  are from 2.5% to 6% (most are 4%).  The  various
leases have  different  methods of  calculating  royalty  payments  (net smelter
return and gross proceeds).

     A separate holder of four of the properties that were assembled by Meridian
into the Lincoln  Project  holds a 5 percent net profits  interest on production
from such  properties,  which was  granted  by  Meridian  when it  acquired  the
properties.  The "net profits" generally will be equal to gross mineral revenues
less an  amount  equal to 105  percent  of  numerous  categories  of  costs  and
expenses.  An  additional  0.5 percent net smelter  return  royalty is held by a
consultant to a lessee prior to Meridian's acquisition of the properties,  which
0.5 percent interest covers the same four properties in the Lincoln Project.

     Permits  and Future  Plans.  In August  1993,  the Amador  County  Board of
Supervisors  issued a  Conditional  Use Permit  ("CUP")  allowing  mining of the
Lincoln Mine and milling of production,  subject to conditions  relating to land
use,  environmental and public safety issues, road construction and improvement,
and site  reclamation.  The permit will allow  construction of the mine and mill
facilities  in stages as the project gets  underway,  thereby  reducing  initial
capital   outlays.   Additional   permits  (for  road  work,  dust  control  and
construction of mill and other surface  improvements)  need to be applied for in
due course. In August and September 1998, the Amador County Board of Supervisors
certified  the  Final  Subsequent  Environmental  Impact  Report  ("FSEIR")  and
approved all of the  amendments  requested by SGMC.  Amendments  to the CUP will
remove  two  tailings  dams,  eliminate  the need to use  cyanide  on-site,  and
eliminate  mine  related  traffic on two county  roads.  The  certification  and
decision has been challenged in a lawsuit filed by a local citizens'  group, see
"Legal Proceedings." Since SGMC already has a valid CUP, SGMC believes it may be
able  to  move   forward   on   certain   parts  of  the   development   of  the
mine/mill/visitor  center. In any event, SGMC does not expect the appeal process
to materially impact the current development plan or schedule.

     Visitor's  Center.  In fiscal 2000, SGMC spent  approximately  $298,000 for
surface  infrastructure  related to improving  access to the mine site, and to a
lesser extent tourist related improvements. These

                                       19

<PAGE>

improvements  will help SGMC develop the tourist  potential of Sutter Gold Mine,
pending improvements in the price of gold.  Demographics  indicate that within a
150 mile radius,  there is a total market population of 19.4 million people with
9.0 million  tourists  visiting the area each year. The Sutter Gold  Mine/Museum
attraction is located  along scenic  Highway 49 (known as the Gold Road) between
the historic gold mining towns of Sutter Creek and Amador City,  Amador  County,
California.  The Amador County  Chamber of Commerce  estimates  that 2.5 million
people drive by SGM's entrance each year.  Facilities include a visitor's center
with a gift shop and  museum,  a  self-guided  tour of modern  mine  activities,
visitor  gallery/museum,  hiking trails, picnic areas and a special gold panning
area.  SGMC is evaluating how the tourism  business  performs during fiscal 2000
and the first  quarter  of fiscal  2001.  These  evaluations  may  result in the
business being curtailed, shut down or sold.

Molybdenum

     As  holders  of  royalty,  reversionary  and  certain  other  interests  in
properties  located at Mt.  Emmons  near  Crested  Butte,  Colorado,  Crested is
entitled to receive annual advance royalties of 25,000 pounds of molybdenum,  or
cash  equivalent.  AMAX Inc. (which was acquired by Cyprus Minerals  Company and
was renamed Cyprus Amax Minerals  Company in November 1993) delineated a deposit
of  molybdenum  containing  approximately  146,000,000  tons  of  mineralization
averaging  0.43%  molybdenum  disulfide  on the  properties  of USE and Crested.
Cyprus Amax was acquired by Phelps Dodge Corporation in 1999.

     Advance  royalties are paid in equal  quarterly  installments,  until:  (i)
commencement of production;  (ii) failure to obtain certain  licenses,  permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE and Crested. See "Note F to the USE consolidated  financial  statements."
The advance  royalty  payments  reduce the operating  royalties  (six percent of
gross  production  proceeds)  which would otherwise be due from Cyprus Amax from
production.  There  is no  obligation  to repay  the  advance  royalties  if the
property is not placed in production.

     The Agreement with AMAX also provides that Crested is to receive $1,000,000
at such time as the Mt. Emmons  properties are put into  production  and, in the
event AMAX sells its interest in the  properties,  USE and Crested would receive
15 percent of the first  $25,000,000  received  by AMAX.  USE and  Crested  have
asserted that the  acquisition of AMAX by Cyprus  Minerals  Company and later by
Phelps Dodge was a sale of AMAX's interest in the properties which would entitle
USE and Crested to such  payment.  Cyprus Amax rejected  such  assertion.  Since
Phelps Dodge  Corporation  acquired  Cyprus Amax, USE and Crested have initiated
discussions concerning the properties and the positions of the parties regarding
the royalties and other issues.

Molybdenum Market Information

     Molybdenum is a metallic  element with  applications in both metallurgy and
chemistry. Principal consumers include the steel industry, which uses molybdenum
alloying agents to enhance strength and other  characteristics  of its products,
and  the  chemical,  super-alloy  and  electronics  industries,  which  purchase
molybdenum in upgraded product forms.

     The  molybdenum  market is cyclical  with prices  influenced  by production
costs and the rate of production of foreign and domestic  primary and by-product
producers,  world-wide economic  conditions  particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use  products.  When molybdenum prices rose dramatically in
the late 1970s,  for example,  steel alloys were modified to reduce  reliance on
molybdenum.  AMAX  and  Cyprus  Minerals  Company  were  the two  major  primary
producers of molybdenum in the United States until November 1993,  when AMAX was
acquired by Cyprus forming Cyprus AMAX. Thereafter, Phelps Dodge

                                       20

<PAGE>

acquired of Cyprus  Amax.  This further  concentrated  these  companies'  copper
production  capabilities and added molybdenum  reserves to the surviving company
Phelps Dodge.

Parador Mining (Nevada)

     USE and Crested are  sublessees and assignees from Parador Mining Co., Inc.
("Parador"),  of certain rights under two patented  mining claims located in the
Bullfrog  Mining  District of Nye  County,  Nevada.  The claims are  immediately
adjacent  to and  part of a gold  mine  operated  by Bond  Gold  Bullfrog,  Inc.
("BGBI"),  a non-affiliated  third party (now known as Barrick Bullfrog,  Inc.).
USE and Crested have also been assigned certain  extralateral  rights associated
with the claims and certain  royalty  rights  relating to a prior lease on those
properties.  The lease to USE and  Crested is for a ten year  primary  term,  is
subject to a prior lease to BGBI on the  properties,  and allows USE and Crested
to explore for,  develop and mine minerals  from the claims.  If USE and Crested
conduct  activities  on the claims,  they are  entitled to recover  costs out of
revenues from  extracted  minerals.  After  recovering  any such costs,  USE and
Crested will pay Parador a production  royalty of 50 percent of the net value of
production sold from the claims.

     USE,  Crested and Parador  are  presently  in  litigation  concerning  this
property. See Item 3, "Legal Proceedings - BGBI Litigation."

Oil and Gas.

     Fort Peck Lustre Field  (Montana).  USECC  conducts a small oil  production
operation  at the  Lustre  Oil  Field  on the Ft.  Peck  Indian  Reservation  in
north-eastern Montana. Until December 1998, four wells were producing,  but were
shut in pending an increase in oil prices.  Recently,  3 of the wells were again
placed in  production.  USECC  receives a fee based on oil produced.  USE is the
operator of record.  No further drilling is expected in this field. This fee and
certain  real  property of USE and  Crested,  have been  pledged or mortgaged as
security for a $1,000,000 line of credit from a bank.

Real Estate and Other Commercial Operations

     Crested owns varying interests, alone and with USE, in affiliated companies
engaged  in  real  estate,   transportation,   and  commercial  businesses.  The
affiliated  organizations include Western Executive Air, Inc. ("WEA") and Canyon
Homesteads,  Inc. (through Plateau).  Activities of these and other subsidiaries
in the business sectors include  ownership and management of a commercial office
building,  the  townsite  of Jeffrey  City,  Wyoming  and the  townsite,  motel,
convenience store and other commercial facilities in Ticaboo, Utah.

     Wyoming Properties. USECC owns a 14-acre tract in Riverton, Wyoming, with a
two-story 30,400 square foot office building  (including  underground  parking).
The first floor is rented to affiliates,  nonaffiliates and government agencies;
the second  floor is  occupied  by USE and  Crested  and is  adequate  for their
executive offices.  The property is mortgaged to the WDEQ as security for future
reclamation work on the SMP Crooks Gap uranium properties.

     USECC  (through  WEA)  also owns a fixed  base  aircraft  operation  at the
Riverton Municipal  Airport,  including a 10,000 square foot aircraft hangar and
7,000  square feet of  associated  offices and  facilities.  This  operation  is
located on land leased from the City of Riverton for a term ending  December 16,
2005, with an option to renew on mutually  agreeable  terms for five years.  The
annual rent is presently  $1,180  (adjusted  annually to reflect  changes in the
Consumer  Price Index),  plus a $0.02 fee per gallon of fuel sold.  WEA owns and
operates an aircraft fixed base operation  with fuel sales,  flight  instruction
services and aircraft maintenance in Riverton, Wyoming.

                                       21

<PAGE>

     USE and Crested also own 18 semi-developed  lots on 26.8 acres and 63 acres
of  undeveloped  land near the Riverton  Municipal  Airport,  and three mountain
sites covering 16 acres in Fremont County, Wyoming.

     USECC  owns  various  buildings,  290 city  lots  and/or  tracts  and other
properties at the Jeffrey City townsite in  south-central  Wyoming,  where about
130 people  presently  live.  Nearly 4,000 people resided in Jeffrey City in the
early 1980s,  when the nearby Crooks Gap and Big Eagle uranium  mining  projects
were active. USE and Crested are selling lots at Jeffrey City.

     Colorado  Properties.  In connection with the AMAX  transaction for the Mt.
Emmons  molybdenum  properties near Crested Butte,  Colorado,  USECC acquired an
option  from AMAX  (now  Cyprus  Amax) to  purchase  approximately  57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison,  Colorado. See "Minerals -
Molybdenum"  above.  The property is zoned  commercial  and  industrial,  and is
adjacent to Western State College.  In fiscal 1995, USECC and Cyprus Amax agreed
to  exercise  the option by USE and Crested  agreeing to forego six  quarters of
advance  royalties  from Cyprus Amax.  Thereafter,  USE (together  with Crested)
signed option agreements with Pangolin Corporation, a Park City, Utah developer,
for sale of the 57  acres,  and a  separate  parcel  owned in  Gunnison  County,
Colorado.

     Although  the initial  payments  on the option  agreements  were  received,
thereafter  the  developer  defaulted in making a payment to Crested of $164,439
(principal  plus  interest).  Also,  the first note  ($454,894)  was not paid in
January 1998. In July 1998, USE and Crested filed a lawsuit  against Contour and
associated parties to seek recovery of the balance owing on the promissory notes
and contracts. See "Item 3, Legal Proceedings."

     Utah  Properties.  Canyon  Homesteads,  Inc. (a Plateau  subsidiary) owns a
majority  interest  in a joint  venture  which  holds the  Ticaboo  Townsite  in
Ticaboo,  Utah  (see  "Minerals  -  Uranium-Shootaring  Canyon  Mill  -  Ticaboo
Townsite"  above).  In fiscal 1995,  USE  acquired the minority  interest in the
joint venture from a nonaffiliate. Revenues from sale of homesites and operation
of the motel were nominal in 2000.

     Commercial  operations are not dependent upon a single  customer,  or a few
customers,  the loss of which would have a materially  adverse effect on USE and
Crested.

                            RESEARCH AND DEVELOPMENT

     USE and Crested  have  incurred no research and  development  expenditures,
either on their own account or  sponsored  by  customers,  during the past three
fiscal years.

                                  ENVIRONMENTAL

     General.  The operations of USE and Crested are subject to various federal,
state and local laws and  regulations  regarding the discharge of materials into
the  environment  or otherwise  relating to the  protection of the  environment,
including the Clean Air Act, the Clean Water Act, the Resource  Conservation and
Recovery Act ("RCRA"), and the Comprehensive Environmental Response Compensation
Liability  Act  ("CERCLA").  With  respect  to mining  operations  conducted  in
Wyoming, Wyoming's mine permitting statutes,  Abandoned Mine Reclamation Act and
industrial  development and siting laws and regulations also impact the Company.
Similar laws and  regulations in California  affect SGMC operations and in Utah,
will effect Plateau's operations.

     USE and Crested  believe they are  currently in  compliance in all material
respects with existing environmental regulations.  To the extent that production
by SMP, GMMV, SGMC or RMG is delayed,

                                       22

<PAGE>

interrupted or  discontinued  due to need to satisfy  existing or new provisions
which relate to  environmental  protection,  future  earnings of USE and Crested
could be adversely affected.

     Crooks Gap. An  inoperative  ion exchange  facility at Crooks Gap currently
holds a NRC license for  possession of uranium  operations  byproducts.  USE has
applied to the NRC for permission to decommission and  decontaminate  the plant,
dispose low level waste into the Sweetwater  Mill tailings cell, and keep intact
such of the facility as does not require dismantling.

     Other  Environmental  Costs. Actual costs for compliance with environmental
laws may vary  considerably  from  estimates,  depending  upon such  factors  as
changes in environmental  laws and regulation (e.g., the new Clean Air Act), and
conditions  encountered in minerals  exploration and mining.  USE and Crested do
not anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment,  or which are otherwise  designed to protect the
environment,  will  have  any  substantial  adverse  impact  on the  competitive
position of USE and Crested.

                                                     EMPLOYEES

     Crested has no full-time employees.  Payroll expense has been shared by USE
and Crested since 1981. Crested uses approximately 50 percent of the time of USE
employees,  and reimburses USE accordingly.  USE has  approximately 86 full-time
employees as of August 26, 2000.

                              MINING CLAIM HOLDINGS

     Title to Properties. Nearly all the uranium mining properties held by GMMV,
USE, Crested and Plateau are on federal unpatented claims. Unpatented claims are
located  upon  federal  public land  pursuant to  procedure  established  by the
General  Mining Law.  Requirements  for the  location of a valid mining claim on
public land  depend on the type of claim being  staked,  but  generally  include
discovery  of  valuable  minerals,  erecting a  discovery  monument  and posting
thereon a location  notice,  marking the boundaries of the claim with monuments,
and  filing a  certificate  of  location  with the  county in which the claim is
located and with the BLM. If the statutes and  regulations for the location of a
mining claim are complied with, the locator obtains a valid  possessory right to
the contained  minerals.  To preserve an otherwise  valid claim, a claimant must
also annually pay certain rental fees to the federal government  (currently $100
per  claim) and make  certain  additional  filings  with the county and the BLM.
Failure  to pay such fees or make the  required  filings  may  render the mining
claim void or  voidable.  Because  mining  claims are  self-initiated  and self-
maintained,  they possess some unique  vulnerabilities not associated with other
types of property  interests.  It is  impossible  to  ascertain  the validity of
unpatented  mining claims  solely from public real estate  records and it can be
difficult or  impossible  to confirm that all of the  requisite  steps have been
followed  for  location  and  maintenance  of a  claim.  If the  validity  of an
unpatented  mining claim is challenged by the  government,  the claimant has the
burden of proving the present  economic  feasibility of mining minerals  located
thereon.  Thus,  it is  conceivable  that during times of falling  metal prices,
mining claims which were valid when located could become  invalid if challenged.
Disputes can also arise with adjoining property owners for encroachment or under
the  doctrine of  extralateral  rights (see Item 3,  "Legal  Proceedings  - BGBI
Litigation").

     RMG's  properties  are mineral  leases of BLM,  state and fee lands,  which
require annual cash payments totaling  approximately $515,800 to keep the leases
in effect during fiscal 2001. RMG is responsible for 50% of this amount.

     Proposed  Federal  Legislation.  The  U.S.  Congress  has,  in  legislative
sessions  in recent  years,  actively  considered  several  proposals  for major
revision of the General  Mining Law,  which  governs  mining  claims and related
activities on federal public lands. If any of the recent  proposals  become law,
it could result in the imposition of a royalty upon  production of minerals from
federal lands and new requirements

                                       23

<PAGE>

for mined land reclamation and other environmental  control measures. It remains
unclear whether the current  Congress will pass such legislation and, if passed,
the  extent  such  new  legislation  will  affect  existing  mining  claims  and
operations.  The  effect  of any  revision  of  the  General  Mining  Law on the
Company's  operations cannot be determined  conclusively  until such revision is
enacted;  however, such legislation could materially increase the carrying costs
of mineral properties which are located on federal unpatented mining claims, and
could increase both the capital and operating costs for such projects and impair
the Company's ability to hold or develop such properties.

ITEM 3. Legal Proceedings

Sheep Mountain Partners Arbitration/Litigation

     In 1991,  disputes  arose  between  USE/Crested,  and Nukem,  Inc.  and its
subsidiary Cycle Resource  Investment Corp.  ("CRIC"),  concerning the formation
and operation of the Sheep Mountain Partners  partnership for uranium mining and
marketing,  and activities of the parties outside SMP.  Arbitration  proceedings
were  initiated  by CRIC in June 1991 and in July  1991,  USECC  filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of Colorado)
Civil No. 91 B 1153.  Later,  USECC filed  another suit for the standby costs at
the SMP mines against SMP in the Colorado State Court.  The Federal Court stayed
the arbitration  proceedings and the State Court case was also stayed. In fiscal
1994,  all of the parties  agreed to exclusive  and binding  arbitration  of the
disputes before the American Arbitration Association, for which the legal claims
made by both sides  included  fraud and  misrepresentation,  breach of contract,
breach of duties owed to the SMP partnership, and other claims.

     Following  73 hearing  days and various  submissions  by the  parties,  the
arbitration  panel (the  "Panel")  entered an Order and Award (the  "Order")  in
April 1996  finding  generally  in favor of USE and  Crested on certain of their
claims (including the claims for reimbursement for standby maintenance  expenses
and  profits  denied  SMP in  Nukem's  trading  of  uranium),  and in  favor  of
Nukem/CRIC  and  against USE and Crested on certain  other  claims.  USE/Crested
filed a petition for  confirmation of the Order and the District Court confirmed
the Order in its Second  Amended  Judgment  (the  "Judgment")  on June 30, 1997.
Thereafter,  Nukem/CRIC  appealed  the  Judgment  to the 10th  Circuit  Court of
Appeals ("10th CCA").

     A three judge panel of the 10th CCA in Nos.  96-1532 ss.  97-1332 issued an
Order and Judgment in the  Nukem/CRIC  arbitration/litigation  matter on October
22, 1998, which  unanimously  affirmed the Federal District Court Second Amended
Judgment  without  modification.  The  ruling of the 10th CCA  affirmed  (i) the
imposition of a constructive trust in favor of SMP on Nukem's rights to purchase
CIS uranium,  the uranium  acquired  pursuant to those  rights,  and the profits
therefrom;  and (ii) the damage  award  against  Nukem/CRIC.  As a result of the
ruling  of the 10th CCA,  USE and  Crested  received  an  additional  $6,077,264
(including interest and court costs) from Nukem in February 1999 for a total net
monetary  award of  $15,468,625  in the  arbitration/litigation,  and  equitable
relief in the form of USE's  and  Crested's  interest  in SMP,  which  holds the
constructive trust over the CIS contracts. Nukem/CRIC filed motions for entry of
final satisfaction of Judgment. The U.S. District Court denied both motions, the
last one on July 16, 1999 and on August 16, 1999, Nukem filed a Notice of Appeal
to the 10th CCA.  USECC  opposes the appeal and filed its brief in opposition to
Nukem/CRIC's appeal. The appeal is pending. For more information,  see Note K to
the financial statements.

BGBI Litigation

     USE and Crested are defendants and counter- or  cross-claimants  in certain
litigation in the District Court of the Fifth  Judicial  District of Nye County,
Nevada, Civil No. 11877, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30,
1991.  BGBI (now known as Barrick  Bullfrog,  Inc.) is an  affiliate  of Barrick
Corp., a large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns

                                       24

<PAGE>

extra-lateral rights associated with two patented mining claims owned by Parador
Mining Company Inc.  ("Parador") and initially  leased to a predecessor of BGBI,
which claims are in and  adjacent to BGBI's  Bullfrog  open pit and  underground
mine. USE and Crested assert certain interests in the claims under an April 1991
assignment  and lease  with  Parador,  which is  subject  to the lease to BGBI's
predecessor.

     A partial  or  bifurcated  trial to the Court of the  extra-lateral  rights
issues was held on December 11 and 12, 1995,  to determine  whether the Bullfrog
orebody is a vein apexing on Parador's Claims.  The Court found that Parador had
failed to meet its burden of proof and therefore  Parador,  USE and Crested have
no right,  title and interest in the minerals  lying beneath the claims of Layne
pursuant to extralateral rights. The partial trial did not address the issues of
breach of contract by the defendants and BGBI for specific  performance and they
were tried before the Court commencing on January 26, 1998. After the trial, the
Court found against the parties on their respective claims. BGBI and Parador and
USE/Crested all appealed the decision to the Nevada Supreme Court. The appeal is
pending.

Department of Energy Litigation

     On July 20, 1998,  eight uranium mining  companies  with  operations in the
United  States  (including  USE,  Crested,  YSFC) and the Uranium  Producers  of
America (a trade  organization)  filed a  complaint  against  the United  States
Department  of Energy  (the  "DOE")  in a  lawsuit  (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive  relief. The plaintiffs allege that the DOE violated the
USEC  Privatization  Act of 1996, when the DOE transferred 45 metric tons of low
enriched  uranium  and 3,800  metric  tons of natural  uranium to United  States
Enrichment Corp. ("USEC").

     The  plaintiffs  have asked the Court to declare  that (i) the DOE violated
its statutory  authority by transferring  uranium to USEC in excess of statutory
limits on volume; (ii) the excess amounts were not "sold" by the DOE to USEC for
fair value, as required by the Act, and mandated  findings by the DOE concerning
possible  adverse  impacts  were not  supported  in fact;  and  (iii) the DOE be
enjoined  from future  transfers in violation of the Act. The DOE filed a motion
to dismiss the complaint claiming that the U.S. Congress withdrew its consent to
be sued in connection with the USEC Inc.  privatization  and that USEC Inc. must
be joined as an  indispensable  party. The State of Wyoming moved to join in the
litigation  on behalf of the  plaintiffs.  A hearing  was held on the motions on
January 8, 1999 before the U.S. District Court in Cheyenne,  Wyoming.  The Court
took the motions under advisement and has not entered a decision.

Contour Development Litigation

     On July 28, 1998, USE filed a lawsuit in the United States  District Court,
Denver,  Colorado,  Case No. 98WM1630,  against Contour Development Company, LLC
and  entities  and persons  associated  with Contour  Development  Company,  LLC
(together,  "Contour") and the original developer Pangolin Corporation,  seeking
compensatory  and  consequential  damages  of more  than $1.3  million  from the
defendants  for  dealings in real estate  owned by USE and Crested in  Gunnison,
Colorado. See "Business Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above and Note K to the financial statements.

Kennecott Uranium Litigation

     On November  10,  1999,  Kennecott  Uranium  Company and  Kennecott  Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp. and USECC in the Sixth Judicial  District Court,  Campbell County,
Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with
USECC and judicial  approval of a plan to sell the GMMV or liquidate  its assets
plus attorney fees and costs.  Defendants  filed a motion to change venue to the
District Court in Fremont

                                       25

<PAGE>

County,  Wyoming and the Sixth Judicial  District court granted the motion.  The
case was then  transferred  to the  Ninth  Judicial  District  Court of  Fremont
County,  Wyoming in Civil Action No. 31322. The parties have initiated discovery
proceedings  each seeking  production  of  documents  from the other and certain
documents of the parties have been received and reviewed.

     On March 13, 2000, defendants U.S. Energy, Crested Corp. and USECC filed an
answer denying the various  allegations of Kennecott and  counterclaims  against
plaintiff  Kennecott  and its  parent  Rio Tinto  plc.  Defendants  also filed a
separate third party complaint  against Rio Tinto plc.  Kennecott filed a motion
to  dismiss  the  complaint  and Rio Tinto  filed a motion for  judgment  on the
pleadings.  A hearing date on the  respective  motions was set for May 30, 2000,
but was  continued  for a time in  September  or  October  2000 to be set by the
Court,  as the parties are  attempting  to negotiate a  settlement.  On July 14,
2000,  Kennecott and USECC entered into a partial  settlement  wherein Kennecott
paid USECC $250,000 to settle claims peripheral to the case concerning  accounts
receivables  and  other  minor  claims  for  work  done and  equipment  used and
mobilized by USECC for the GMMV.

     On September  11, 2000,  the parties  executed a settlement  agreement  and
related  documentation  and releases (the  "Settlement").  Under the Settlement,
USECC  will  sell all of its  interests  in the  GMMV  and the GMMV  properties,
including  those  within  a  described  Area  of  Interest  to an  affiliate  of
Kennecott. The purchase consideration is $3,250,000 in cash and a 4% net profits
royalty  interest  in certain of the mining  claims at the Big Eagle and Jackpot
Mines. USECC is allowed to retain certain mining equipment and supplies, and has
the right to receive  certain  mining claims that may be abandoned by Kennecott.
Until  final  bond  release,  USECC  may not  compete  in the Area of  Interest.
Kennecott  assumes  the  reclamation  obligations  (to the  extent  required  by
applicable  regulatory  authority)  at the GMMV  properties  and  USECC  retains
liabilities  relating  to  its  activities  as a  contractor  to the  GMMV.  The
Settlement  provides that Kennecott is under no obligation to develop any of the
properties  or the  underlying  claims  and  may  instead  choose  to  sell  the
properties  and claims or to abandon the claims as they are no longer  required.
USECC and  Kennecott  agree to dismiss  the case and to release  each other from
further liability. The Settlement is effective upon approval by the trial judge.

SGMC Litigation

     In 1993,  Amador County issued a  conditional  use permit  ("CUP") to allow
SGMC  to  develop  the SGM  near  the  town  of  Sutter  Creek,  Amador  County,
California.  A number of  conditions  were  attached to the  original  CUP which
accommodated  local citizen and government  agency  concerns about noise,  waste
disposal, traffic and other aspects of the proposed mining operation.

     In 1997 and 1998,  SGMC proposed  amendments to the CUP for a new design of
the SGM  which  would  lower  its  environmental  impact  by  reducing  traffic,
potentially  eliminating  the use of cyanide  on-site,  and  removing  two large
tailings  dams which would have been built to hold mine and mill waste.  The new
design  also would  significantly  reduce  capital and  operating  costs for the
mine/mill  complex,  but cover more land for waste disposal and other  purposes.
The certification  and approval by the Amador County Planning  Commission of the
Final  Subsequent  Environmental  Impact Report  ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by another local citizens project  opposition group)
to the Amador County Board of  Supervisors.  In August and September  1998,  the
Board of Supervisors certified the FSEIR and approved the amendments to the CUP.

     On September 28, 1998 a lawsuit was filed in Amador County  Superior Court,
California  (Case  No. 98 CV 3298) by  Concerned  Citizens  of Amador  County as
plaintiffs,  against  the  County  of  Amador  and the  Amador  County  Board of
Supervisors,  and  against  SGMC  as a  real  party  in  interest.  The  lawsuit
challenges  the  actions  of  Amador  County  and its  Board of  Supervisors  in
certifying the FSEIR and approving the

                                       26

<PAGE>

amended  CUP. A hearing was held on June 7, 1999 and the Court denied all claims
by the Concerned Citizens  plaintiff.  The mater is on appeal, see Note K to the
financial statements.

     Dennis Selley et al vs. U.S. Energy Corp.,  Crested Corp. et al. On May 14,
1999, Dennis Selley  personally and as personal  representative of the Estate of
Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in the
Ninth Judicial  District Court of Fremont  County,  Wyoming  against U.S. Energy
Corp. and Crested Corp.,  Plateau Resources Limited and USECC the joint venture,
alleging  that  the  defendants  were  negligent  as a  landlord  in  renting  a
doublewide trailer (converted to a bunkhouse) near Ticaboo,  Utah to plaintiffs'
daughter Hannah Selley and seek various unspecified damages.  Hannah Selley died
in a June 1998 fire in the  bunkhouse  provided by USE,  located  about 1/2 mile
from the Ticaboo Lodge.  Defendants deny negligence and assert various  defenses
including plaintiffs' complaint is barred by the Workers Compensation  statutory
immunity as well as the defense of an intervening clause. A pre-trial conference
was held on September 8, 2000, and the trial may commence on September 25, 2000.
See Note K to the financial statements.

     Declaratory  Judgment  Action.  The Workers  Compensation  Fund of Utah has
filed a complaint for declaratory  relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp.,  Plateau Resources Limited,  Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third  Judicial  Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S.  Energy Corp. and its affiliates in the above Hannah Selley case.
Defendants  filed a motion for summary judgment in July, 2000. See Note K to the
financial statements.

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

     A meeting of shareholders  was held at the Company's  offices at 877 N. 8th
W., Riverton, WY on Friday, December 10, 1999 commencing at 10:00 a.m. There was
not a quorum present at that time and the meeting was postponed  until Thursday,
December 23, 1999 at 11:00 a.m.

     The only  matter for  shareholder  consideration  was the  election of five
directors including,  John L. Larsen, Max T. Evans, Daniel P. Svilar, Michael D.
Zwickl and  Kathleen  R. Martin and they were so elected to serve until the next
annual meeting and until their successors are qualified.

Information Concerning Executive Officers Who Are Not Directors.

     The following  information is provided  pursuant to Instruction 3, Item 401
of Reg. S-K, regarding certain of the executive officers of USE who are not also
directors.

     Robert Scott  Lorimer,  age 49, has been the Chief  Accounting  Officer for
both USE and  Crested for more than the past five years.  Mr.  Lorimer  also has
been Chief  Financial  Officer for both of these  companies  since May 25, 1991,
their Treasurer since December 14, 1990, and Vice President  Finance since April
1998.  He  serves  at  the  will  of  each  board  of  directors.  There  are no
understandings  between Mr.  Lorimer and any other person,  pursuant to which he
was named as an officer, and he has no family relationship with any of the other
executive  officers or directors of USE or Crested.  During the past five years,
he has not been involved in any Reg. S-K Item 401(f) listed proceeding.

                                       27

<PAGE>

                                     PART II

ITEM 5.   Market For Registrant's Common Equity And Related Stockholder Matters.

(a) Market information.

     The principal trading market for the Registrant's  Common Stock,  $.001 par
value,  is the  over-the-counter  market.  Prices are  reported by the  National
Quotation  Bureau on Pink Sheets.  The range of high and low bid  quotations for
the Common  Stock is set forth below for each  quarter in the two most  recently
completed  fiscal years.  Retail  markup or markdown,  or  commissions,  are not
reflected.

                                                             High          Low
                                                             ----          ---

     Fiscal year ended May 31, 2000
          Fourth quarter ended 5/31/00                      $ .32        $ .15
          Third quarter ended 2/29/00                         .45          .20
          Second quarter ended 11/30/99                       .45          .21
          First quarter ended 8/31/99                         .50          .34

     Fiscal year ended May 31, 1999
          Fourth quarter ended 5/31/99                      $0.52         $0.31
          Third quarter ended 2/28/99                        0.39           .218
          Second quarter ended 11/30/98                      0.420          .15
          First quarter ended 8/31/98                        0.350          .16

(b)      Holders.

     (b)(1) At September 1, 2000 there were approximately  1,797 stockholders of
record for Crested common stock.

     (b)(2) Not applicable.

(c) Crested has not paid any cash  dividends  with respect to its common  stock.
There are no contractual  restrictions on Crested's present or future ability to
pay cash dividends,  however, Crested intends to retain any earnings in the near
future for operations.

(d) During the year ended May 31,  2000,  Crested  issued  32,000  shares of its
Common Stock to its Outside Directors for services rendered.

                                       28

<PAGE>

ITEM 6.  Selected Financial Data.
<TABLE>
                                                                   May 31,
                                   -------------------------------------------------------------------------
                                      2000           1999           1998           1997           1996
                                      ----           ----           ----           ----           ----
<S>                                <C>            <C>            <C>            <C>            <C>
Current assets                     $ 1,478,700    $ 4,833,300    $ 4,809,300    $ 1,049,500    $  596,200
Current liabilities                 11,323,800      9,451,000      9,282,300      6,592,400       6,848,300
Working capital                     (9,845,100)    (4,617,700)    (4,473,000)    (5,542,900)     (6,252,100)
Total assets                         7,681,300      8,630,600     10,211,400      6,285,700       8,132,500
Long-term obligations(1)             1,055,900        958,200        768,000        741,700         725,900
Shareholders' equity/(deficit)      (4,742,300)    (1,822,500)       117,200     (1,092,300)        521,900
</TABLE>

         (1)  Includes   $748,400  of  accrued   reclamation  costs  on  uranium
         properties for fiscal 2000 and $725,900 for each of fiscal 1999,  1998,
         1997 and 1996, respectively.

<TABLE>
                                                                 For Years Ended May 31,
                                   --------------------------------------------------------------------------------
                                      2000           1999           1998           1997           1996
                                      ----           ----           ----           ----           ----
<S>                                <C>            <C>            <C>            <C>            <C>
Revenues                           $ 2,637,300    $ 4,416,600    $ 4,659,900    $ 1,703,500    $ 2,509,200
(Loss) income before
    equity in loss of
    affiliates and
    income taxes                    (3,861,200)      (291,900)     1,581,700       (862,400)      (811,000)
Equity in loss of
    affiliates                      (1,418,600)    (1,659,800)      (372,200)      (807,900)      (357,900)
                                   -----------    -----------    -----------    -----------    -----------

Net (loss) income                  $(5,279,800)   $(1,951,700)   $ 1,209,500    $(1,670,300)   $(1,168,900)
                                   ===========    ===========    ===========    ===========    ===========

Net (loss) income
    per share                      $       (.51)  $       (.19)  $        .12   $      (.16)   $       (.12)
                                   ============   ============   =============  ===========    ============

Cash dividends per share                    -0-            -0-             -0-          -0-             -0-
</TABLE>

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

     The  following  is  Management's  Discussion  and  Analysis of  significant
factors  which have  affected the  Company's  liquidity,  capital  resources and
results of operations during the periods included in the accompanying  financial
statements.  The discussion  contains  forward-looking  statements  that involve
risks and  uncertainties.  Due to  uncertainties in the minerals  business,  the
Company's actual results may differ materially from the results discussed in any
such forward-looking statements.

Overview of Business

     The Company is in the business of acquiring,  exploring,  developing and or
selling mineral properties,  including coalbed methane gas, uranium and gold. As
part of its mineral  business,  Company has been in the  contract  drilling  and
construction  business for third party coalbed  methane  companies.  The Company
also owns interests in commercial properties which are in the tourism and rental
business.

                                       29

<PAGE>

     The  Company  and its parent  U.S.  Energy  Corp.  ("USE")  entered  into a
contract  with Quantum  Energy,  L.L.C.  ("Quantum")  through their newly formed
subsidiary Rocky Mountain Gas, Inc. (RMG), to acquire a 50% working interest and
40% net revenue interest in approximately  185,000 acres of leases on properties
having  potential for coalbed  methane  development in the Powder River Basin of
southeastern  Montana.  The Company and USE also hold  additional  properties in
northeastern  Wyoming that are part of the Powder River Basin . These leases are
outside the  boundaries  of the  agreement  that  controls the 185,000  acres in
Montana  and  consist  of 880 acres in which  the  Company  and USE own  varying
interests.  In  addition to the coalbed  methane  properties  held in the Powder
River Basin,  the Company and USE hold a 100% working interest and a net revenue
interest  of 81.5% to 83.5% in  approximately  63,120 net  mineral  acres in the
Ham's Fork Coal  Fields in  Southwestern  Wyoming.  It is  anticipated  that the
business  operations  of  the  Company  will  be  largely  directed  toward  the
development of its coalbed methane  properties  during fiscal 2001 and well into
the future.

     As in all mineral development  operations,  there are risks involved in the
development  of  coalbed  methane  gas  fields.  Some of the known  risks in the
coalbed methane development and production business are; government regulations,
delays in permitting,  environmental restrictions, market price for methane gas,
availability and capacity of pipe lines. The Company cannot  accurately  predict
what if any of these risks will have on its business in the future.  The Company
and USE will continue to seek financing through either the sale of equity in RMG
or the USE or a joint venture with industry  partners to fund its obligations on
the maintenance and development of these properties.

     The  Company and USE own,  and during  fiscal  2000  purchased  additional,
drilling  and  construction  equipment  that was used  during  Fiscal  2000 on a
contract basis for non- related companies in coalbed methane  development.  This
work  consisted  of  site  preparation,   drilling,   casing,   completion,  dam
construction,   compressor  and  gathering   pipeline   construction   and  site
reclamation.  During  August of 2000,  the  Company and USE  determined  they no
longer would perform such services on a contract basis for third  parties.  Part
of the drilling and  construction  equipment  will be sold and a portion will be
retained  for work  that the  Company  and USE  will do on the  coalbed  methane
properties in which they own an interest.

     The Company has interests in uranium  properties  in Central  Wyoming and a
cash revenue and expense sharing  arrangement  with USE on a uranium property in
Southern  Utah.  Both  properties  in Central  Wyoming  have been or are part of
partnership  arrangements.  In fiscal 1989 the  Company and USE entered  into an
agreement to sell a 50%  interest in their Sheep  Mountain  properties  to Cycle
Resources,  Inc.,  a wholly  owned  subsidiary  of  Nukem,  Inc.("Nukem").  This
partnership,  Sheep Mountain  Partners  ("SMP"),  and the assets contained in it
have been in litigation  for the past nine years.  During fiscal 1999, a partial
settlement  agreement  was reached  wherein the Company and USE received all the
mineral properties and one uranium supply contract.  Nukem has for a second time
appealed  the  decision  to the 10th  Circuit  Court of  Appeals.  The appeal is
pending.

     In fiscal 1990 the Company and USE entered  into an agreement to sell a 50%
interest in their uranium  properties to Kennecott.  These  properties were then
contributed  to the  Green  Mountain  Mining  Venture  ("GMMV").  The GMMV  also
acquired  additional  mining  properties and a uranium mill. During fiscal 2000,
Kennecott  filed a civil action in against the Company and USE in Wyoming  State
Court.  The  Company  and USE  responded  by  filing  an  answerer  denying  the
allegations of Kennecott and counterclaimed certain damages against Kennecott.

     Settlement discussions to resolve the issues surrounding the GMMV have been
successful in resolving the disputes. The Company and Kennecott have agreed that
the Company will sell all of its remaining interest in the GMMV to Kennecott for
cash  compensation  of $3.25  million,  payable at the  signing of the letter of
intent,  $.25  million,  $1.325  million five days after the court  approves the
terms of the  agreement  and  dismisses  the case and  $1.675 in  January  2001.
Kennecott  will  assume  all  reclamation  liabilities  of  the  mine  and  mill
properties.  The Company will have the responsibility of removing certain assets
from the mine  properties  including a GMIX plant which will likely be buried in
the Sweetwater  Mill tailings cell. The clean up of the GMIX plant is covered by
a cash

                                       30

<PAGE>

reclamation  bond  that  management   believes   sufficient  to  cover  cost  of
reclamation.  The Company and USE also received  certain  equipment and a 4% net
profits royalty on any uranium produced from the GMMV mine properties.

     The Company  shares cash flows on a uranium  property in Southern Utah with
USE.  For  licencing  purposes  with the  NRC,  USE  owns  the  properties.  The
properties  consists  of uranium  mining  claims and a state of the art  uranium
mill. Due to current depressed  uranium prices,  the Company and USE have placed
all of its uranium  properties on care and maintenance  status.  The Company and
USE are  currently  evaluating  the  prospects  of the  uranium  market  and may
determine to dispose of part or all of their  interests  in uranium  through the
sale of such interests or the  reclamation of the  properties.  The  reclamation
liabilities  of clean up of all the Company  and USE's  uranium  properties  are
covered  by cash  bonds,  bonds  secured by certain  real  estate  assets of the
Company and USE. The Company and USE are evaluating the long term uranium market
and may conclude to reclaim these assets.

     The Company holds a minority interest in a gold property in the Mother Lode
Mining District of California  which is on a care and maintenance  basis. Due to
the lack of available funding, which is as a result of the depressed gold price,
plans to construct a 1,000 ton-per-day gold mill complex and further development
of the underground mine have been deferred.

     The  Company and USE have  commercial  operations  in Wyoming and  Southern
Utah. The Wyoming  commercial  operations  consist of various real estate rental
properties  and the  operation of an airport fixed base  operation.  The Company
shares cash flows on a 50-50 basis with USE on the Utah  commercial  operations.
These operations include a motel,  restaurant,  lounge,  convenience store, boat
storage, rental space for mobile homes and recreational vehicles and the sale of
home lots and finished homes.

Liquidity and Capital Resources

     As of May 31, 2000, the Company had a working capital deficit of $9,845,100
as compared to a working capital deficit of $4,617,700. Included in thee working
capital deficit is a $2,000,000 deferred purchase option from GMMV. This is as a
result  of a  payment  made to the  Company  from  Kennecott.  This  payment  is
non-refundable  and was carried as a liability at May 31, 2000.  Pursuant to the
settlement of the GMMV  litigation this amount plus the cash purchase price will
be offset  against the Company's  investment  in certain GMMV  equipment and the
balance will be recorded as revenues.

     The primary reason for the decrease in working capital of $5,227,300 was as
a result of decreases in cash,  $3,402,900 and accounts  receivable  affiliates,
$382,400  increased  accounts payable of $185,000,  current portion of long term
debt to USE,  $1,323,700,  and increased current portion of long term debt and a
draw down of the line of credit of $364,200.  These decreases in working capital
were partially offset by an increase in accounts receivable of $439,900.

     Cash was consumed by operations in the amount of  $2,886,200.  The non-cash
items that went into  operations that resulted in a net loss from operations for
the year of $5,279,800  were  depreciation  of $245,800,  provision for doubtful
accounts of $1,061,200, issuance of stock to the Company to outside directors of
$12,800,  equity loss in  affiliates  of  $1,418,600  and $335,100 in changes in
current assets and liabilities. The provision for doubtful accounts is a reserve
that was established on receivables from employee notes and accounts  receivable
and a reserve on Plateau Resources on amounts owed to the Company and USE.

     Cash was also consumed in investing activities in the amount of $2,279,800.
Major  components  of  investing  activities  were  the  increase  in long  term
receivables from affiliates $1,269,300, the purchase of equipment,  $841,700 and
the increase in investments  of $165,700.  Equipment was purchased to expand the
Company and USE's fleet of construction,  drilling and support  equipment.  This
equipment was used throughout fiscal 2000 in contract

                                       31

<PAGE>

construction and drilling  activities and a portion of it will be used in future
coalbed methane development work for the Company's properties.

     Financing  activities  provided $1,763,100 in cash during Fiscal 2000. This
cash came from an increase from debt from affiliates  $1,323,700,  proceeds from
long term debt through the  financing of equipment  purchases,  $253,900 and the
draw down of the  Company's  line of credit with its bank of $325,000.  Cash was
used to reduce long term debt by $139,500.

     The Company has  generated  significant  net losses  during fiscal 1999 and
2000 resulting in an accumulated deficit of approximately $13,499,900 at May 31,
2000.  At year  end,  the  Company  does not have  sufficient  cash  flows  from
operations or cash on hand to meet its obligations. The Company has historically
relied on,  and  continues  to rely on,  advances  from USE to fund its  current
operating requirements.  It is uncertain whether this funding will continue. The
Company has recently  reduced its staff in an effort to reduce  overhead costs .
The  Company  has certain  assets  that are  unencumbered  that could be sold to
generate cash. However, there can be no assurances that any funds generated will
be sufficient to meet the Company's obligations as they come due or that Company
assets could be liquidated in excess of their carrying values.

Capital Resources

     The primary source of the Company's capital resources are the cash on hand;
collection of receivables from contract  construction and drilling operations at
May 31, 2000,  $442,200,  projected  equity  financing  from RMG;  sale of mine,
construction  and  drilling  equipment;  sale of partial  ownership  interest in
mineral properties,  proceeds under the line of credit; receipt of cash from the
GMMV settlement;  potential settlement discussions with Phelps Dodge regarding a
dispute  on  a  molybdenum   property  and  final   determination   of  the  SMP
arbitration/litigation.  The Company also will continue to receive revenues from
its commercial  operations in southern Utah along with the rental and fixed base
airport operations in Wyoming.  Additionally, the Company will continue to offer
for sale various assets such as lots and homes at the Company and USE's southern
Utah commercial operations along with real estate holdings in Wyoming,  Colorado
and Utah.

     The Company  and USE have a  $1,000,000  line of credit  with a  commercial
bank.  The line of credit  is  secured  by  various  real  estate  holdings  and
equipment  belonging  to the Company and USE. At may 31, 2000 the line of credit
had been drawn down by  $650,000  and by the date of this report  $850,000.  The
line of credit is being used for short term  working  capital  needs  associated
with operations.

     The Company  believes  that cash  resources  on hand at May 31,  2000,  the
collection of outstanding receivables and the Kennecott settlement proceeds will
be sufficient to sustain operations during Fiscal 2001. The capital resources at
May 31,  2000  will not be  sufficient,  however,  to  provide  funding  for the
Company's  maintenance  and development of its coalbed methane gas business will
require  significant  cash  infusions.  RMG is seeking  additional  equity or an
industry partner financing arrangement to develop its coalbed methane leases.

Capital Requirements

     The primary  requirements  for the Company's  working capital during Fiscal
2000  are  expected  to  be  general  and  administrative  costs,  the  cost  of
maintaining  the SMP and  southern  Utah  uranium  properties  and the SGMC gold
properties and the costs  associated  with the expansion and  development of the
coalbed methane gas properties.  Additionally the Company owes USE $8,377,700 as
a result of USE  funding  the  Company's  portion  of  operational  and  capital
expansion costs and expenses.

                                       32

<PAGE>

                               Coalbed Methane Gas

     To acquire a 50% working interest in 185,000 acres of leaseholds,  RMG paid
$3,200,000  to Quantum  Energy,  ("Quantum")  in January 2000 and an  additional
$1,000,000 in May 2000. RMG is committed to pay Quantum an additional $1,300,000
on or before  December 31, 2000. If RMG does not make this final payment it must
assign 12% of its undivided 50% WI in the properties  back to Quantum.  Quantum,
at its sole option,  may elect to have RMG drill and complete  additional  wells
for the equivalent  cost of $1,300,000.  If Quantum  exercises this option,  RMG
would own a 50% WI (40% NRI) in the wells  drilled  with those  funds,  but only
after  Quantum has  received  $1,300,000  in net revenues  (payback)  form those
wells.  If these  payments  are not  made,  the 50%  working  interest  could be
reduced.

     Under the terms of the Quantum agreement, the Company and USE, through RMG,
have a  $2,500,000  work  commitment  to drill and  complete 25 coalbed  methane
wells.  If RMG does not complete the work  commitment and Quantum spends part or
all of that amount of funds to drill and complete wells on the Quantum  acreage,
then RMG will have the right to buy back its 50% working  interest by satisfying
certain penalties.  RMG also has the obligation to fund 50% of the delay rentals
on the Quantum  properties which amounts to $515,000  ($257,500) for RMG's share
during Fiscal 2001.

     To fund all of the RMG commitments, financing will need to be obtained from
equity  funding or an industry  partner  through the sale of a portion or all of
RMG's ownership in the Quantum properties.

                              Mineral Holding Costs

SMP Uranium Properties

     The care and maintenance  costs  associated with the Sheep Mountain uranium
mineral  properties are the  responsibility  of the Company and USE. The holding
costs during Fiscal 2000 were  approximately  $48,300 per month. The Company and
USE have initiated  alternative  methods of managing the properties in an effort
to reduce these holding  costs during Fiscal 2001.  The Company and USE have the
obligation  to  deliver  uranium  to a  utility  under  one  of the  SMP  supply
contracts.  The Company and USE believe that they can either continue to deliver
these  pounds at a small  profit  margin or sell the entire  contract to a third
party supplier.

GMMV Uranium Properties

     The Company,  USE and Kennecott  filed  various court actions  against each
other during fiscal 2000. On September 11, 2000, the Company,  USE and Kennecott
entered into a settlement  agreement which resolved these disputes.  The Company
and USE sold their remaining  interest in the GMMV properties to Kennecott for a
total of $3.25  million.  The Company and USE received $.25 million upon signing
the letter of agreement to settle all  disputes,  they will receive  $1.375 five
days after the court approves the settlement  agreement and dismisses all claims
and $1.625 in January  2001.  The Company and USE also received  certain  mining
equipment  and a 4% net royalty on any future  production  from the GMMV mineral
properties.  Kennecott assumed all reclamation  liabilities of the GMMV mine and
mill  properties.  The Company and USE are  responsible to remove certain assets
including the GMIX plant from the properties.

Plateau Resources Uranium Properties

     Plateau owns and operates the Ticaboo townsite,  motel,  convenience store,
boat storage,  restaurant and lounge.  Additionally,  Plateau owns and maintains
the Tony M uranium mine and Shootaring  Canyon Uranium Mill. The Company and USE
are pursuing alternative uses for these properties including alternative feed or
waste disposal of low level nuclear waste. The Company and USE are seeking joint
venture partners and equity financing to enter

                                       33

<PAGE>

into the alternative feed and waste disposal business as the expansion into this
business will require  additional  capital.  It is not known what the outcome of
these discussions will be. In the management of the commercial operations of the
Plateau properties, the Company and USE have determined that they will shut many
of the operations  down during the winter months which should improve the annual
profits of the commercial operations.

                                  Debt Payments

     Debt to  non-related  parties at May 31,  2000 was  $481,400 as compared to
$42,000 at May 31, 1999.  The increase in debt to non-related  parties  consists
primarily  of debt  due on the  financing  of  equipment  and  annual  insurance
premiums. The balance of the debt is for the line of credit. All payments on the
debt are current. If construction or drilling operations are permanently reduced
or discontinued, the equipment will be sold and the debt retired.

     At May 31, 2000, the Company and USE had borrowed $650,000 of their line of
credit and as of the date of this report  $850,000.  This debt is secured by the
pledge of equipment  and real estate  assets of the  Company.  This debt will be
retired  through profits from  operations,  the settlement with Kennecott on the
GMMV issues and the possible  settlement  of the Nukem dispute or the sale of an
interest in assets.

     The Company owes USE  $8,377,700 as a result of USE funding  operations and
capital  expansion  expenses.  The Company does not have the  resources to repay
this debt and must negotiate  continued  terms with USE or find some other means
of retiring the debt. To date USE has not called the debt.

                            Federal Income Tax Issues

     The tax years  through May 31, 1994 are closed  after audit by the IRS. The
Company has attended appeals hearings with the IRS in Denver Colorado to discuss
resolving  issues raised for fiscal 1995 and 1996. The issues have been resolved
with the IRS. A final  settlement  agreement has not yet been approved but it is
not believed that the settlement will have a material affect on the Company.

                                Reclamation Costs

     It is not  anticipated  that any of the Company's  working  capital will be
used  in  fiscal  2000  for  the  reclamation  of any of  its  mineral  property
interests. The reclamation costs are long term and are either bonded through the
use of cash bonds or the pledge of assets.

     As a result of the settlement agreement entered into on September 11, 2000,
Kennecott  assumed  all  reclamation  liabilities  of the  GMMV  mine  and  mill
properties  with the  exception  of the GMIX  plant and the  removal  of certain
equipment from the GMMV properties.  The reclamation of the GMIX plant is bonded
with a cash bond which management  anticipates will fully satisfy the obligation
of reclamation.

     The future  reclamation costs on the Sheep Mountain  properties are covered
by a  reclamation  bond which is  secured by a pledge of certain of the  Company
USE's real estate assets.  The reclamation  bond amount is reviewed  annually by
the state regulatory  agencies.  The Company and USE's reclamation  liability on
the Sheep Mountain properties is $1,496,800.

                                       34

<PAGE>

Results of Operations

Fiscal 2000 compared to Fiscal 1999

Revenues:

     During  fiscal 2000,  the Company  recognized  revenues in three  segments;
minerals in the form of advance royalties on its molybdenum  property,  $66,000,
contract  drilling  and  construction  work  in the  coalbed  methane  industry,
$1,735,800,  commercial operations,  $340,900. The Company also recognized other
revenues  from oil sales of $79,600 from its interest in the Lustre Field on the
Fort  Peck  Reservation,  interest  revenues  of  $104,500  on cash  equivalents
invested  in interest  bearing  accounts  and  management  fees of $300,800  for
services provided to various subsidiaries.

     Total revenues during fiscal 2000 were $2,637,300, a decrease of $1,779,300
from  revenues of  $4,416,600  in Fiscal 1999.  This decrease was as a result of
decreased  revenues  in  Mineral  sales of  $53,100,  commercial  operations  of
$266,500, revenues from the partial settlement of the SMP arbitration/litigation
of $3,038,600, management fees and other revenues of $152,900, interest revenues
of $56,200.  These decreases in revenues were offset by increased  revenues from
contract  drilling/construction  operations  of  $1,735,800  and  oil  sales  of
$37,900.

     The  decrease in mineral  sales is as a result of the  Company  recognizing
revenues of $44,100 from the sale of uranium under a SMP contract  during Fiscal
1999. No revenues were recognized from sales of uranium during Fiscal 2000. This
decrease  in  uranium  sales  plus  the a  decrease  in  the  market  price  for
molybdenum,  which  reduced the advance  royalty from Cyprus Amax during  Fiscal
2000 by $9,000, accounted for the reduction in mineral sales revenues.

     Commercial  operations  decreased  by  $266,500  as  a  result  of  reduced
equipment rental revenues received by the Company for the rental of equipment to
the GMMV during Fiscal 2000 as compared to Fiscal 1999. The reduced  activity at
GMMV during Fiscal 2000 also was the main contributor to the reduced  management
fee revenue when compared with fiscal 1999.

     Revenues in contract  drilling/construction  operations were generated as a
result of the Company entering into the drilling and earth construction contract
work in the coalbed  methane gas business  during  Fiscal 2000. No revenues from
contract  drilling/construction  work was  recorded in Fiscal  1999.  The profit
margin in the contract  drilling and construction  business is a function of the
number of available contractors and is often very narrow. It is not known if the
Company  will resume  this type of work on a contract  basis.  The Company  will
maintain a certain  amount of equipment in order to perform this type of work in
for future for its own account.

     Increased  oil revenues  were as a result of higher  market  prices for oil
which  allowed the Company to produce from more of its wells in the Lustre Field
during fiscal 2000.

Costs and Expenses

     Costs and expenses  increased in fiscal 2000 by  $1,790,000  to  $6,498,500
from  $4,708,500  during fiscal 1999. This increase was primarily as a result of
drilling and construction  operations of $2,043,900 and an increase in provision
of doubtful  accounts of $878,700.  These  increases in costs and expenses  were
offset by  decreases in  write-offs  of  investment  in  contingent  warrants of
$651,000,   reduced  costs  and  expenses  in  commercial  operations,   mineral
operations  and general and  administrative  of $156,600,  $111,100 and $207,200
respectively.  No write of investment  on  contingent  warrants was taken during
Fiscal 2000. During Fiscal 1999 the Company determined that an impairment should
be taken on the SGMC contingent  warrants in the amount of $651,000.  This write
off related

                                       35

<PAGE>

to the recoverability of the Company's  investment in the mineral properties and
equipment based on the then market prices for gold.

     Costs and expenses in mineral  operations during fiscal 2000 decreased as a
result of reduced  activities at the SMP and GMMV properties.  Contract drilling
and construction costs recorded during fiscal 2000 have no comparative costs and
expenses during fiscal 1999. These costs include all labor,  equipment operating
and repair  expenses  and other costs  associated  with  contract  drilling  and
construction.  Prior  to  fiscal  2000  there  were  no  contract  drilling  and
construction operations.

     General and Administrative  costs and expenses decreased by $207,200 during
fiscal 2000. The decrease in General and  Administrative  costs and expenses was
as a result of reduced costs associated with the Nukem litigation  during fiscal
2000.

     The increase in provision for doubtful  accounts of $878,700  during fiscal
2000 was as a result of a reserve  taken on notes  receivables  from  employees,
others and Plateau.

     Operations  resulted  in a loss of  $5,279,800  or $0.51  per  share  fully
diluted as compared  to a loss of  $1,951,700  or $0.19 per share fully  diluted
during fiscal 1999.

     Fiscal 1998 compared to Fiscal 1999

     Although the Company  experienced  positive  cash flows during fiscal 1999,
operations  resulted in a net loss after taxes of  $1,951,700 or $0.19 per share
as compared to a income of $1,209,500 or $0.12 per share in fiscal 1998.

     Revenues:  Mineral sales  decreased by $415,700  during  fiscal 1999.  This
decrease  resulted from no revenues being  recognized  during fiscal 1999 from a
SMP base  escalated  uranium  delivery  contract  which  generated  revenues  of
$429,300  during fiscal 1998 from the final delivery  under the contract.  There
were reduced revenues from the advance royalty from Cyprus Amax of $30,200,  due
to reduced  market  prices for  molybdenum.  These  decreases  in mineral  sales
revenue  were  slightly  offset  by net  profits  received  from  one of the SMP
purchase  contracts of $43,800  during  fiscal 1999 while no such  revenues were
recorded in fiscal 1998.

     Commercial  operations  revenues  decreased  by  $273,500.   This  decrease
occurred  primarily as a result of reduced  equipment  rentals to the GMMV.  The
GMMV  properties  were on a standby  basis  during  most of  fiscal  1999 due to
reduced uranium prices. This decrease of equipment rental of $375,600 was offset
by increased fuel sales.

     Oil sales decreased by $43,400 as a result of temporarily  closing down oil
production  due to  continued  depressed  market  prices  for  crude  oil  and a
continuing  decline in the  production  of the oil wells.  Subsequent to May 31,
1999 the Company began producing two of the oil wells. The Company will continue
to evaluate  production  of the wells as estimated  production  rates change and
market prices for crude oil change.

     Management fees and other revenues  decreased by $268,100 primarily because
of  reduced  contract  work  performed  at the GMMV  properties  and  management
services at the SMP properties. The fee is based on a percentage of all costs at
the GMMV properties for services provided.  During fiscal 1999,  operations were
significantly   reduced  at  the  GMMV  properties  which  reduced  the  related
management  fees.  Upon  receiving  the  SMP  mining  properties  in  a  partial
settlement of the SMP arbitration  issues, the Company was no longer entitled to
a management fee on the SMP properties.

     Costs and Expenses:  Mineral  operations  increased  from  $832,400  during
fiscal  1998 to  $1,121,500  during  fiscal  1999.  This  increase  of  $289,100
primarily  relates to the care and  maintenance  costs  associated  with the SMP
properties.  The  Company  became  responsible  for 100% of  these  costs at the
beginning of fiscal 1999 due to a partial

                                       36

<PAGE>

settlement of the SMP arbitration/litigation  issues which conveyed ownership of
the SMP mining properties to the Company.

     General and Administrative expenses increased from $1,370,300 during fiscal
1998 by $403,400 to $1,773,700 during fiscal 1999. This increase was as a result
of labor expenses no longer being billed  directly to GMMV and SMP.  Significant
portions of labor costs were billable either  directly or on a allocation  basis
to GMMV and SMP during fiscal 1998. As a result of the Company and USE receiving
the SMP properties in partial  settlement of the  arbitration/litigation  issues
and the curtailment of activities at GMMV, these same labor costs are charged to
General and Administrative expense.

     The  largest  increases  in costs  and  expenses  were the  write  off of a
contingent  stock  warrant and provision  for doubtful  accounts.  During fiscal
1999,  the Company wrote off a contingent  stock warrant from SGMC in the amount
of $651,000.  The write off of the contingent  stock warrant does not affect the
ownership of the SGMC properties.

     The Company also  recognized  non-cash  expenses in the form of a provision
for doubtful  accounts of $182,500.  The  provision  for doubtful  accounts is a
result  of the  continual  inability  of a third  party to pay  amounts  due the
Company on real estate sold in prior years.  The Company will pursue  collection
of this amount.

Future Operations

     The  Company has  generated  losses in each of the last three  years,  as a
result of holding costs and permitting  activities in the mineral  segment along
with impairments of mineral assets. The Company is in the process of holding its
investments in gold and uranium properties that are currently not generating any
operating  revenues.  These  properties  require  expenditures for items such as
permitting,   care  and  maintenance,   holding  fees,  corporate  overhead  and
administrative  expenses.  Success in the minerals  industry is dependant on the
price that a company can receive for the minerals  produced.  The Company cannot
predict  what the long term  price for gold and  uranium  will be and  therefore
cannot  predict  when,  or  if,  the  Company  will  generate  net  income  from
operations. The Company has sufficient capital resources to maintain its mineral
properties on a stand by basis through  fiscal 2001.  Development  activities of
the mineral  properties and expansion of commercial  operations are dependant on
the Company obtaining equity financing or commercial loans.

     At May 31,  2000 the  Company was  committed  to be in the coalbed  methane
business well into the future.  Uranium prices and market  projections are being
evaluated.  Decisions to liquidate part or all of the Company's uranium holdings
are being considered.  The Company is also evaluating its commitment to the gold
business and at what time the price for gold may recover.

Effects of Changes in Prices

     Mining  operations  and the  acquisition,  development  and sale of mineral
properties are significantly  affected by changes in commodity prices. As prices
for a particular  mineral  increase,  prices for prospects for that mineral also
increase, making acquisitions of such properties costly, and sales advantageous.
Conversely,  a price decline facilitates  acquisitions of properties  containing
that mineral,  but makes sales of such properties  more  difficult.  Operational
impacts  of  changes  in  mineral  commodity  prices  are  common in the  mining
industry.

     Uranium  and Gold.  Changes in the prices of  uranium  and gold  affect the
Company  to the  greatest  extent.  Currently,  both  gold  and  uranium  are at
historical low prices.  The Company is continually  evaluating market trends and
data. The Company does not plan to go forward with any additional development of
its mineral  properties  until the market price for gold and uranium  obtain and
remain at higher levels which will make the operations profitable.

                                       37

<PAGE>

     Molybdenum  and Oil.  Changes in prices of molybdenum and petroleum are not
expected to materially  affect the Company with respect to either its molybdenum
advance royalties or its fees associated with oil production.  A significant and
sustained   increase  in  demand  for  molybdenum  would  be  required  for  the
development  of the Mt.  Emmons  properties  by  Phelps  Dodge  as it has  other
producing mines.

                                       38

<PAGE>



                    Report of Independent Public Accountants
                    ----------------------------------------

To Crested Corp.:

We have audited the accompanying consolidated balance sheets of CRESTED CORP. (a
Colorado corporation) AND AFFILIATE as of May 31, 2000 and 1999, and the related
consolidated  statements of operations,  shareholders' equity (deficit) and cash
flows for each of the  three  years in the  period  ended  May 31,  2000.  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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Crested Corp. and affiliate as
of May 31,  2000 and 1999,  and the results of their  operations  and their cash
flows  for  each of the  three  years  in the  period  ended  May 31,  2000,  in
conformity with accounting principles generally accepted in the United States.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As  discussed  in Note A to the  financial
statements,   the  Company  continued  to  experience  significant  losses  from
operations  during fiscal 2000. In addition,  the Company has a working  capital
deficit of approximately  $9,845,100 as of May 31, 2000 the substantial  portion
of which is owed to affiliated  entities.  These factors raise substantial doubt
about the ability of the Company to  continue as a going  concern.  Management's
plans in regards to these  matters are also  described in Note A. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.




                                  ARTHUR ANDERSEN LLP


Denver, Colorado,
September 11, 2000

                                       39

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                              May 31,
                                                  ------------------------------
                                                    2000                 1999
                                                    ----                 ----
<TABLE>
<S>                                               <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents                       $  106,100        $ 3,509,000
  Accounts receivable
    Trade, net of allowance for doubtful
      accounts of $0 and $1,600, respectively        512,100             72,200
    Affiliates                                       835,500          1,217,900
  Inventory and other                                 25,000             34,200
                                                  ----------        -----------
          Total current assets                     1,478,700          4,833,300

LONG-TERM NOTES RECEIVABLE
  Related parties                                    176,900            125,200

INVESTMENTS IN AFFILIATES                           1,535,300           225,300

PROPERTIES AND EQUIPMENT:
  Land                                                393,800           397,400
  Buildings and improvements                        2,294,400         2,224,800
  Machinery and equipment                           3,317,200         2,544,900
  Developed oil properties, full cost method          886,800           886,800
  Mineral properties                                   25,000            14,200
                                                  -----------       -----------
                                                    6,917,200         6,068,100
  Less accumulated depreciation,
    depletion and amortization                     (3,683,200)       (3,437,400)
                                                  -----------       -----------
                                                    3,234,000         2,630,700

OTHER ASSETS:
  Advances to affiliates                            1,092,400           657,400
  Other assets                                        164,000           158,700
                                                  -----------       -----------
                                                    1,256,400           816,100
                                                  -----------       -----------
                                                  $ 7,681,300       $ 8,630,600
                                                  ===========       ===========
</TABLE>

       The accompanying notes to consolidated financial statements are an
                     integral part of these balance sheets.

                                       40

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                           CONSOLIDATED BALANCE SHEETS

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)


                                                             May 31,
                                                  -----------------------------
                                                      2000             1999
<TABLE>
<S>                                               <C>                 <C>
CURRENT LIABILITIES:
  Accounts payable and accrued expenses           $   556,600       $   371,700
  Deferred GMMV purchase option                     2,000,000         2,000,000
  Current portion of long-term debt
    Affiliate                                       8,377,700         7,054,000
    Others                                            389,500            25,300
                                                  ------------      -----------
      Total current liabilities                    11,323,800         9,451,000


LONG-TERM DEBT                                         91,900            16,700

COMMITMENT TO FUND EQUITY INVESTEES                   215,600           215,600

RECLAMATION LIABILITY                                 748,400           725,900

COMMITMENTS AND CONTINGENCIES (Note K)

FORFEITABLE COMMON STOCK, $.001 par value;
  65,000 shares issued, forfeitable until earned       43,900            43,900

SHAREHOLDERS' EQUITY (DEFICIT)
  Preferred stock, $.001 par value;
     100,000 shares authorized;
     none issued or outstanding                           --                --
  Common stock, $.001 par value;
     20,000,000 shares authorized;
     10,316,664 and  10,284,664 shares
     issued and outstanding                             10,400           10,300
  Additional paid-in capital                         8,747,200        6,387,300
  Accumulated deficit                              (13,499,900)      (8,220,100)
                                                  ------------      -----------
          Total shareholders' deficit               (4,742,300)      (1,822,500)
                                                  ------------      ------------
                                                  $  7,681,300      $ 8,630,600
                                                  ============      ===========
</TABLE>

       The accompanying notes to consolidated financial statements are an
                     integral part of these balance sheets.

                                       41

<PAGE>



                                    CRESTED CORP. AND AFFILIATE

                              CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>

                                                                   Year Ended May 31,
                                                  ---------------------------------------------------
                                                      2000                1999                1998
                                                      ----                ----                ----
<S>                                               <C>                 <C>                 <C>
REVENUES:
  Contract drilling/construction operations       $ 1,735,800         $       --          $       --
  Mineral revenues                                     66,000             119,100             534,800
  Commercial operations                               340,900             607,400             880,900
  Oil sales                                            79,600              41,700              85,100
  Interest                                            104,500             160,700             141,500
  SMP litigation settlements, net                         --            3,038,600           2,295,000
  Management fees and other                           300,800             453,700             721,800
  Gain (loss) on sale of assets                         9,700              (4,600)                800
                                                  -----------         -----------         -----------
                                                    2,637,300           4,416,600           4,659,900

COSTS AND EXPENSES:
  Contract drilling/construction operations         2,043,900                 --                  --
  Mineral operations                                1,010,400           1,121,500             832,400
  Commercial operations                               772,600             929,200             814,100
  Oil Production                                       27,700              32,300              34,000
  Provision for doubtful accounts                   1,061,200             182,500                 --
  General and administrative                        1,566,500           1,773,700           1,370,300
  Write-off of investment in contingent
    stock warrant                                         --              651,000                 --
  Interest                                             16,200              18,300              27,400
                                                  -----------         -----------         -----------
                                                    6,498,500           4,708,500           3,078,200
                                                  -----------         -----------         -----------

(LOSS) INCOME BEFORE
  EQUITY IN LOSS OF AFFILIATES
  AND INCOME TAXES                                 (3,861,200)           (291,900)          1,581,700

EQUITY IN LOSS OF AFFILIATES                       (1,418,600)         (1,659,800)           (372,200)
                                                  -----------         -----------         -----------

(LOSS) INCOME BEFORE
  INCOME TAXES                                     (5,279,800)         (1,951,700)          1,209,500

INCOME TAXES                                              --                  --                  --
                                                  -----------         -----------         -----------

NET (LOSS) INCOME                                 $(5,279,800)        $(1,951,700)        $ 1,209,500
                                                  ===========         ===========         ===========

NET (LOSS) INCOME
  PER SHARE, BASIC AND DILUTED                    $      (.51)        $     (0.19)        $      0.12
                                                  ===========         ===========         ===========

BASIC WEIGHTED AVERAGE
  SHARES OUTSTANDING                               10,361,149          10,315,091          10,237,694
                                                  ===========         ===========         ===========

DILUTED WEIGHTED AVERAGE
  SHARES OUTSTANDING                               10,361,149          10,315,091          10,302,694
                                                  ===========         ===========         ===========
</TABLE>

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

                                       42

<PAGE>
<TABLE>

                                                   CRESTED CORP. AND AFFILIATE

                                     CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

                                                                      Additional                               Total
                                              Common Stock              Paid-In      Accumulated            Shareholders'
                                          Shares       Amount           Capital        Deficit             Equity (Deficit)
                                        ----------------------        ----------     -----------         -------------------

<S>                                     <C>            <C>            <C>            <C>                 <C>
Balance, May 31, 1997                   10,237,694     $10,200        $6,375,400     $ (7,477,900)       $(1,092,300)

Net income                                     --          --                --         1,209,500          1,209,500
                                        ----------     -------        ----------     ------------        -----------

Balance, May 31, 1998                   10,237,694      10,200         6,375,400       (6,268,400)           117,200

Issuance of stock to directors              46,970         100            11,900              --              12,000

Net loss                                       --          --                --        (1,951,700)        (1,951,700)
                                        ----------     -------        ----------     ------------        -----------

Balance, May 31, 1999                   10,284,664      10,300         6,387,300       (8,220,100)        (1,822,500)

Issuance of stock to directors              32,000         100            12,700              --              12,800

Unrealized gain from sale
  of investee stock                            --          --          1,121,300              --           1,121,300

Non-cash compensation
 paid by equity investee                       --          --          1,225,900              --           1,225,900

Net loss                                       --          --                --        (5,279,800)        (5,279,800)
                                        ----------     -------        ----------     ------------        -----------

Balance, May 31, 2000                   10,316,664     $10,400        $8,747,200     $(13,499,900)       $(4,742,300)
                                        ==========     =======        ==========     =============       ===========


                       Shareholders' Equity at May 31, 2000 does not include 65,000 shares currently issued
                               but forfeitable if certain conditions are not met by the recipients.


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

                                                                43
</TABLE>
<PAGE>



<TABLE>
                                                   CRESTED CORP. AND AFFILIATE

                                              CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                   Year Ended May 31,
                                                                 ---------------------------------------------------
                                                                     2000                1999                1998
                                                                     ----                ----                ----
<S>                                                              <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                              $(5,279,800)        $(1,951,700)        $1,209,500
  Adjustments to reconcile net (loss) income to net
    cash (used in) provided by operating activities:
      Depreciation, depletion, and amortization                      245,800             221,600            214,600
      Equity in loss of affiliates                                 1,418,600           1,659,800            372,200
      Write-off of investment in
        contingent stock warrant                                         --              651,000                --
      Provision for doubtful accounts                              1,061,200             182,500                --
      Non-cash compensation                                           12,800              12,000                --
      Gain on sale of assets                                          (9,700)              4,600               (800)
      SMP settlement receivable, net                                     --            2,513,000         (2,513,000)
      Net changes in:
        Accounts and notes receivable                               (336,100)           (702,500)          (369,300)
        Inventory and other                                            9,200              (7,700)            21,900
        Accounts payable and accrued expenses                         (8,200)           (542,700)           142,200
                                                                 -----------         -----------         ----------
NET CASH (USED IN) PROVIDED BY
  OPERATING ACTIVITIES                                            (2,886,200)          2,039,900           (922,700)
                                                                 -----------         -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of methane gas properties                                 (10,800)                --                 --
  Deferred GMMV purchase option                                          --                  --           2,000,000
  Decrease (increase) in long-term affiliate receivables          (1,269,300)             81,600            251,800
  Investments in affiliates                                         (165,700)             (5,000)          (218,700)
  Purchases of property and equipment                               (841,700)           (135,600)          (707,200)
  Proceeds from sale of property and equipment                        13,200              50,000              2,000
  Increase in other assets                                            (5,500)             (5,000)            (3,600)
                                                                 -----------         -----------         ----------
NET CASH (USED IN) PROVIDED BY
  INVESTING ACTIVITIES                                            (2,279,800)            (14,000)         1,324,300
                                                                 -----------         -----------         ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from third party debt                                     253,900             100,500            153,900
  Net activity from line of credit                                   325,000                 --                 --
  Payment on long-term debt                                         (139,500)           (137,000)          (103,600)
  Net activity on long-term debt to affiliates                     1,323,700             506,900            523,700
                                                                 -----------         -----------         ----------
NET CASH PROVIDED BY
  FINANCING ACTIVITIES                                             1,763,100             470,400            574,000
                                                                 -----------         -----------         ----------

(continued)

               The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
                                                                44

<PAGE>


<TABLE>

                                                   CRESTED CORP. AND AFFILIATE

                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (continued)

                                                                                             Year Ended May 31,
                                                                 ----------------------------------------------------------
                                                                      2000                1999              1998
                                                                      ----                ----              ----
<S>                                                              <C>                 <C>                 <C>
NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                            (3,402,900)         2,496,300             975,600

CASH AND CASH EQUIVALENTS, Beginning of year                       3,509,000          1,012,700              37,100
                                                                 -----------         ----------          ----------

CASH AND CASH EQUIVALENTS, End of year                           $   106,100         $3,509,000          $1,012,700
                                                                 ===========         ==========          ==========

SUPPLEMENTAL DISCLOSURES:

  Interest paid                                                  $    16,200         $   18,300          $   27,400
                                                                 ===========         ==========          ==========

  Income taxes paid                                              $       --          $    7,900          $      --
                                                                 ===========         ==========          ==========

NONCASH INVESTING AND FINANCING ACTIVITIES:

  Issuance of common stock to directors
    for services rendered                                        $    12,800         $   12,000          $      --
                                                                 ===========         ==========          ==========

  Payment of noncash compensation
    by equity investee                                           $ 1,225,900         $      --           $      --
                                                                 ===========         ==========          ==========

  Payment of note receivable - affiliates
    with stock from affiliate                                    $       --          $  137,500          $      --
                                                                 ===========         ==========          ==========

  Unrealized gain on sale of equity investee
    common stock                                                 $ 1,121,300         $      --           $      --
                                                                 ===========         ==========          ==========

               The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>

                                                                45

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000


A.   BUSINESS ORGANIZATION AND OPERATIONS:

     Crested Corp. (the "Company" or "Crested") was incorporated in the State of
Colorado on September 18, 1970. It engages in the acquisition, exploration, sale
and/or development of mineral and coalbed methane gas properties, the production
of petroleum  properties  and  marketing of minerals and methane gas.  Principal
mineral interests are in uranium, coalbed methane, gold and molybdenum. However,
none are producing at the present time.  During fiscal 2000, the Company entered
into the  methane  gas  business.  Currently,  the Company  holds  various  real
properties used in commercial operations. Most of these activities are conducted
through the joint venture discussed below and in Note B.

     The Company and U.S. Energy Corp.  ("USE"),  an approximate 52% shareholder
of the Company,  have been engaged in the standby and maintenance of two uranium
properties,  one a joint venture with Kennecott  Uranium  Company  ("Kennecott")
known as the Green  Mountain  Mining Venture  ("GMMV"),  and the second known as
Sheep Mountain  Partners  ("SMP").  Both of these ventures have been involved in
significant  litigation  (see  Note  K).  All  issues  and  disputes  in the SMP
litigation have been resolved with the exception of certain marketing rights and
the profits  therefrom  on certain  CIS related  uranium  sales  contracts.  The
resolution  of the other  issues  resulted in the payment of cash to the Company
and USE and the Company and USE  receiving  the SMP mineral  properties  and one
uranium delivery contract. The remaining outstanding issue in the SMP litigation
is on appeal before the U.S. 10th Circuit Court of Appeals.  The litigation with
Kennecott  was settled  subsequent  to yearend (see Note L).  Sutter Gold Mining
Company, a Wyoming corporation, manages the Company's and USE's interest in gold
properties.  Rocky  Mountain  Gas,  Inc.  ("RMG"),  was formed in fiscal 2000 to
consolidate  all methane gas operations of the Company and USE. The Company owns
and controls 41% of RMG as of May 31, 2000.

     The Company has  generated  significant  net losses  during fiscal 1999 and
2000 resulting in an accumulated deficit of approximately $13,499,900 at May 31,
2000. The Company also has a working capital deficit of approximately $9,845,100
at May 31, 2000 that includes  $2,000,000 of deferred revenue and $8,377,700 due
to USE and affiliates.  The Company's cash balance  decreased from $3,509,000 at
the prior  year-end to $106,100 at May 31, 2000.  At year-end,  the Company does
not have  sufficient  cash  flows  from  operations  or cash on hand to meet its
obligations.  All of these factors raise  substantial  doubt about the Company's
ability to continue as a going concern during the upcoming year. The Company has
historically  relied on, and continues to rely on, advances from USE to fund its
current  operating  requirements.  It is  uncertain  whether  this  funding will
continue.  The Company  has  recently  reduced its staff to reduce its  overhead
costs. The Company also has certain assets that are  unencumbered  that could be
sold to  generate  cash.  However,  there  can be no  assurances  that any funds
generated will be sufficient to meet the Company's  obligations as they come due
or that Company assets could be liquidated in excess of their  carrying  values.
The Company continues to believe that it will ultimately  receive more cash from
the final  settlement  of the SMP  litigation.  In  addition,  the  Company  has
recently settled a dispute with its GMMV partner that will result in the receipt
of cash to be used to reduce a portion  of its  obligation  to USE (see Note L).
Nevertheless,  there is no  assurance  that the Company  will be  successful  in
meeting its obligations during the upcoming year.

                                       46

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

                 B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

     The consolidated  financial statements of Crested,  include the accounts of
the  Company  and  one-half  of the  account  balances  of USECC  Joint  Venture
("USECC"),  a joint  venture  through  which  the  Company  and its  controlling
shareholder,  USE, conduct the majority of their operations. USECC has interests
in uranium  mining  ventures (see Notes E and F), and owns real estate and other
equipment (see Note D). USECC is owned equally by the Company and USE.

Investments

     With the exception of SMP for fiscal 1998 (see Notes F and K),  investments
in other joint  ventures and 20% to 50% owned  companies are accounted for using
the equity method.  The Company accounts for its 8% investment in USE also using
the equity  method  because  the Company is  controlled  by USE.  The  Company's
investment in SGMC is accounted for using the equity method due to its status as
a  subsidiary  of  USE  (see  Note  E).  All  material   intercompany   profits,
transactions and balances have been eliminated.

Inventory

     Inventories  consist primarily of aviation fuel,  associated aircraft parts
and silver bullion. Retail inventories are stated using the average cost method.
Other inventory is stated at the lower of cost or market.

Cash Equivalents

     The  Company   considers  all  highly  liquid   investments  with  original
maturities of three months or less to be restricted cash equivalents.

Properties and Equipment

     Land,  buildings,  improvements  and other  equipment  are carried at cost.
Depreciation  of  buildings,  improvements,  aircraft  and  other  equipment  is
provided  principally by the  straight-line  method over estimated  useful lives
ranging from three to forty-five years.

     The  Company  capitalizes  all  costs  incidental  to the  acquisition  and
development of mineral  properties as incurred.  Mineral  exploration  costs are
expensed  as  incurred.  The  costs  of  mine  development  are  deferred  until
production  begins  as these  costs  will be  recovered  through  future  mining
operations.  Once commercial  production begins, mine development costs incurred
to maintain production will be amortized using a units-of-production method over
the estimated  reserves of the ore-body.  Costs are charged to operations if the
Company  determines that an ore body is no longer  economic.  Costs and expenses
related to general corporate overhead are expensed as incurred.

                                       47

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

     The Company and USE have acquired  substantial  mining  property assets and
associated  facilities at minimal cash cost, primarily through the assumption of
reclamation and environmental liabilities.  Certain of these assets are owned by
various ventures in which the Company is either a partner or venturer.

Long-Lived Assets

     The Company  evaluates its long-lived  assets for impairment when events or
changes in  circumstances  indicate that the related  carrying amount may not be
recoverable.  If the sum of estimated future cash flows on an undiscounted basis
is less than the carrying  amount of the related asset,  an asset  impairment is
considered  to exist.  The related  impairment  loss is  measured  by  comparing
estimated  future cash flows on a discounted basis to the carrying amount of the
asset. Changes in significant  assumptions underlying future cash flow estimates
may have a material  effect on the Company's  financial  position and results of
operations.  An uneconomic  commodity market price, if sustained for an extended
period of time,  or an  inability to obtain  financing  necessary to develop the
mineral interests may result in asset impairment. As of May 31, 2000, management
believes, no further impairment of the Company's long-lived assets exists.

Fair Value of Financial Instruments

     The carrying amount of cash equivalents receivables,  other current assets,
accounts  payable and accrued  expenses  approximates  fair value because of the
short term nature of those instruments.  The recorded amounts for short-term and
long-term  debt,  approximate  fair  value  due to the  variable  nature  of the
interest rates.

Revenue Recognition

     Advance  royalties  which are payable only from future  production or which
are  non-refundable  are  recognized  as  revenue  when  received  (see Note F).
Non-refundable  option  deposits  are  recognized  as  revenue  when the  option
expires.

     Revenues  from uranium sales are  recognized  upon  delivery.  Revenues are
recognized  from the rental of certain  assets  ratably  over the related  lease
terms.  Revenues from commercial  operations,  which  represents  primarily real
estate  activity,  and an airport fixed base operation,  are recognized as goods
and services are delivered. Oil and gas revenue is recognized at the time of the
sale of production.

Income Taxes

     The Company  accounts for income taxes under the provisions of Statement of
Financial  Accounting  Standards  No. 109 ("SFAS 109"),  "Accounting  for Income
Taxes".  This statement  requires  recognition of deferred income tax assets and
liabilities  for the expected future income tax  consequences,  based on enacted
tax laws, of temporary differences between the financial reporting and tax bases
of assets, liabilities and carry forwards.

     SFAS 109  requires  recognition  of  deferred  tax assets for the  expected
future effects of all deductible temporary differences,  loss carry-forwards and
tax credit carry-forwards. Deferred tax assets are then reduced, if

                                       48

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

deemed necessary,  by a valuation allowance for any tax benefits which, based on
current circumstances, are not expected to be realized.

Net (Loss) Income Per Share

     The Company  reports net (loss)  income per share  pursuant to Statement of
Financial  Accounting  Standards  No. 128 ("SFAS  128").  SFAS 128 specifies the
computation,  presentation  and disclosure  requirements for earnings per share.
Basic  earnings per share is computed  based on the weighted  average  number of
common shares  outstanding.  Diluted earnings per share is computed based on the
weighted  average  number  of  common  shares   outstanding   adjusted  for  the
incremental  shares attributed to outstanding  options to purchase common stock,
if dilutive.

Comprehensive Income

     There are no components of comprehensive  income,  which have been excluded
from net income and,  therefore,  no separate statement of comprehensive  income
has been presented.

Recent Accounting Pronouncements

     SFAS  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities," (as amended by SFAS No. 137 Accounting for Derivative Instruments -
Deferral of the effective  date of SFAS No. 133, an amendment of SFAS  Statement
No.  133")  establishes  fair  value  accounting  and  reporting  standards  for
derivative  instruments and hedging activities.  The Company will adopt SFAS No.
133  effective  June 1, 2001.  The Company is currently  assessing the effect of
adoption,  if any, on its financial  position,  results of operations,  and cash
flows.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions.  These  estimates and  assumptions  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.

Reclassifications

     Certain  reclassifications  have  been  made in the  prior  year  financial
statements to conform with the 2000 presentation.

C.   RELATED-PARTY TRANSACTIONS:

     The Company does not have employees,  but utilizes USE's employees and pays
for one-half of these costs under the USECC Joint Venture  Agreement.  The Board
of Directors of USE adopted the U.S.  Energy Corp. 1989 Employee Stock Ownership
Plan ("ESOP") in 1989, for the benefit of USE's employees.  In fiscal 2000, 1999
and

                                       49

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

1998,  the Board of  Directors  of USE  contributed  123,802,  89,600 and 49,470
shares of USE stock to the ESOP at prices of $3.00,  $4.00 and $6.57 per  share,
respectively.  The  Company is  responsible  for  one-half of the value of these
contributions or $185,700,  $179,200 and $162,300 in fiscal 2000, 1999 and 1998,
respectively.

     As of May 31, 2000, USECC had notes receivable due from directors, officers
and  employees of the Company and USE totaling  $462,000  which bear interest at
10% per annum and are due  December 31, 2001.  This  indebtedness  is secured by
166,500 shares of USE common stock.

     The Company and USE provide  management  and  administrative  services  for
affiliates under the terms of various management agreements. Revenues from these
services provided by the Company were $194,800,  $399,000 and $552,800 in fiscal
2000, 1999 and 1998 respectively.

     On May 15, 1997, the Company and USE entered into a convertible  promissory
note with Yellow Stone Fuels Corp.  ("YSFC").  The Company and USE own 13.2% and
22.7% of YSFC  respectively.  The convertible  note bore interest at 10% and was
due on December  31,  1998.  The Company and USE  extended the note to March 31,
1999. In 1999,  YSFC  exercised its option to either fully satisfy the debt with
cash or the issuance of its common stock by paying  $200,000 and issuing 137,500
shares of its common stock.

D.   USECC JOINT VENTURE:

     USECC operates the Glen L. Larsen office complex; an aircraft hangar with a
fixed base operation,  office space,  and certain  aircraft;  holds interests in
various mineral operations;  conducts oil and gas operations;  and transacts all
operating and payroll expenses, except for specific expenses which are allocated
directly to each venturer.

     The joint venture  agreement  also  provides for the  allocation of certain
operating  expenses to other  affiliates.  Condensed  financial  information  of
USECC, which is 50% proportionately consolidated by the Company, follows:

                        CONDENSED BALANCE SHEETS - USECC

                                                            May 31,
                                             --------------------------------
                                                 2000                1999
                                                 ----                ----
<TABLE>
<S>                                           <C>                 <C>
     Current assets                           $ 6,713,200         $10,887,900
     Properties and equipment                  11,075,700           9,399,000
     Mineral properties                            49,900              28,500
     Accumulated depreciation                  (4,954,600)         (4,463,000)
     Other long-term assets                     2,188,100           1,311,000
                                              -----------        ------------
                                              $15,072,300        $17,163,400
                                              ===========        ===========

     Current liabilities                      $ 1,699,600        $   798,100
     Reclamation liability                      1,496,800          1,451,800
     Other liabilities                            380,600             33,300
     Deferred income                            4,000,000          4,000,000
     Venturers' capital                         7,495,300         10,880,200
                                              -----------         ----------
                                              $15,072,300        $17,163,400
                                              ===========        ===========
</TABLE>

                                       50

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

                   CONDENSED STATEMENTS OF OPERATIONS - USECC
<TABLE>

                                                        Year Ended May 31,
                                        ---------------------------------------------------
                                            2000                 1999              1998
                                            ----                 ----              ----

<S>                                     <C>                 <C>                 <C>
     Revenues                           $  5,128,400        $ 8,659,700         $ 8,778,200
     Costs and expenses                  (10,589,100)        (7,597,600)         (6,164,300)
                                                            -----------         -----------
     Net (loss) income                  $ (5,460,700)       $ 1,062,100         $ 2,613,900
                                        ============        ===========         ===========
</TABLE>

E.   INVESTMENTS IN AFFILIATES:

     The Company's investments in affiliates are as follows:

                                                     at May 31,
                                        ----------------------------------------
                                        Ownership         2000           1999
                                        ---------         ----           ----
<TABLE>
<S>                                     <C>           <C>            <C>
     Rocky Mountain Gas, Inc. ("RMG")     41%         $1,457,700     $     --
     GMMV                                 50%                --            --
     SGMC                                3.2%            (85,500)      (85,500)
     ENERGX Ltd.                          45%             63,000        63,000
     YSFC                                 13.2%         (130,100)     (130,100)
     USE (Note B)                          8%                --        147,700
     Others                             various           14,600        14,600
</TABLE>

     $1,535,300 and $225,300 of these  investments  are presented as investments
in affiliates in the  accompanying  balance  sheets as of May 31, 2000 and 1999,
respectively. A liability of $215,600 has been presented as a commitment to fund
equity investees as of May 31, 2000 and 1999, respectively for these investments
in affiliates that the Company must fund.

     Equity  loss from  investments  accounted  for by the  equity  method is as
follows:

                                             Year Ended May 31,
                         -------------------------------------------------
                               2000                1999             1998
                               ----                ----             ----
<TABLE>
<S>                      <C>                 <C>                 <C>
     GMMV                $        --         $       --          $     --
     SGMC                         --            (489,100)          (13,000)
     ENERGX, LTD.                 --                 --                --
     YSFC                         --             (75,400)          (69,800)
     RMG                  (1,270,900)                --                --
     SMP                         --                  --           (216,300)
     USE                    (147,700)         (1,095,300)          (73,100)
                         -----------         -----------         ---------
                         $(1,418,600)        $(1,659,800)        $(372,200)
                         ===========         ===========         =========
</TABLE>

                                       51

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

                       CONDENSED COMBINED BALANCE SHEETS:
                                EQUITY INVESTEES

                                            2000                 1999
                                            ----                 ----
<TABLE>
<S>                                     <C>                 <C>
Current assets                          $ 3,631,500         $ 15,187,900
Non-current assets                       35,016,100           23,455,200
                                        -----------         ------------
                                        $38,647,600         $ 38,643,100
                                        ===========         ============

Current liabilities                     $ 8,831,600         $  3,523,300
Reclamation and other liabilities        24,020,000           52,017,700
Excess in assets                          5,796,000          (16,897,900)
                                        -----------         ------------
                                        $38,647,600         $ 38,643,100
                                        ===========         ============
</TABLE>
                  CONDENSED COMBINED STATEMENTS OF OPERATIONS:
                                EQUITY INVESTEES

                              2000                1999                1998
                              ----                ----                ----
<TABLE>
<S>                      <C>                 <C>                 <C>
Revenues                 $  7,915,400        $ 11,058,800        $ 11,695,900
Costs and expenses        (22,628,300)        (97,836,400)        (13,273,900)
                         ------------        ------------        ------------
Net loss                 $(14,712,900)       $(86,777,600)       $( 1,578,000)
                          ===========        ============        ============
</TABLE>

     Condensed  combined  balance  sheets and  statements  of  operations of the
Company's equity investees for fiscal 1999 include GMMV, SGMC, Energx,  YSFC and
USE. For fiscal 2000,  the condensed  combine  balance  sheets and statements of
operations of the Company's equity investees include RMG, SGMC, Energx, YSFC and
USE. No balance  sheet for GMMV has been  presented due to the  litigation  with
Kennecott as discussed in Notes F, K and L. Because of this dispute, the Company
did not receive any financial or operating  results of GMMV from Kennecott,  the
operator of the GMMV.  Nevertheless,  the Company's total investment in the GMMV
is zero,  except for the salvage value of certain  equipment  totaling  $116,300
held by GMMV which is included in property  and  equipment  in the  accompanying
balance sheets.  As discussed in Note L, subsequent to year end, the Company has
settled its dispute with  Kennecott  and has been released from any and all GMMV
obligations.

                                       52

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

F.   MINERAL TRANSACTIONS AND MINING PROPERTIES:

GMMV

     During  fiscal 1990,  the Company and USE entered  into an  agreement  with
Kennecott,  a wholly-owned,  indirect subsidiary of The RTZ Corporation PLC, for
Kennecott to acquire a 50% interest in certain  uranium  mineral  properties  in
Wyoming  known as the Green  Mountain  Properties.  The  purchase  price was $15
million  and a  commitment  to fund the first $50  million  of  development  and
operating costs and additional  amounts if certain future operating margins were
achieved.

     On June 23,  1997,  USE and USECC  signed  an  Acquisition  Agreement  with
Kennecott for the right to acquire Kennecott's  interest in the GMMV.  Kennecott
paid USE and USECC  $4,000,000 on signing,  and committed to loan the GMMV up to
$16 million to be used in developing the proposed  underground  Jackpot  Uranium
Mine and change the status of the Sweetwater  Mill from standby to  operational.
Under the Acquisition Agreement,  Kennecott received a credit of two dollars for
each dollar advanced against its work commitment of $50 million.

     During fiscal 1998 and 1999,  the Company,  USE and Kennecott  continued to
own  their  respective  50%  interest  in  the  GMMV,  and  Kennecott   advanced
approximately $14.5 million of the $16 million loan obligation called for in the
Acquisition  Agreement.  Due to the continued depressed market price for uranium
concentrates,  the Company and USE were unable to purchase  Kennecott's interest
in the GMMV, and the GMMV stopped development activities at the Jackpot Mine and
placed the facility on active standby on July 31, 1998.

     As of May  31,  2000,  USE,  USECC  and  Kennecott  continue  to own  their
respective  50% interest in the GMMV.  The GMMV no longer has the  obligation to
repay the $14.5 million advance under the $16 million loan from Kennecott.  As a
result of the funds  advanced  under the loan and the  signing  bonus  discussed
above, the original $50 million work commitment under the 1990 GMMV Agreement is
fully  satisfied.  The Company and Crested have  elected to have their  interest
diluted by become non-participating on the work plans and budgets.  Kennecott is
obligated  to fund the annual plans and budgets.  If the  Company's  and USECC's
participating  interest drop below 10%, their  interests  will be  automatically
converted to a 1% to 3% gross proceeds interest. It is not anticipated that such
dilution will occur in the near term.

     As a result of sustained  depressed  uranium  prices,  GMMV  evaluated  the
carrying  value of its  mineral  assets  for  impairment.  GMMV  determined  the
carrying  value of its assets  exceeded the future cash flows.  Accordingly,  in
fiscal 1999,  GMMV recorded an impairment in the amount of $59.5 million related
to its mineral assets.  This impairment had no effect on the Company's  carrying
value  of  its  investment  in  GMMV.  The  Company's  carrying  value  reflects
management's  estimates  of its portion of the salvage of GMMV's  machinery  and
equipment.

     Subsequent  to yearend,  as  discussed  in Note L, the Company  settled its
dispute  with  Kennecott  and  dissolved  the GMMV for cash and release from all
reclamation and environmental liabilities.

                                       53

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

SMP

     During  fiscal  1989,  USE and  Crested,  through  USECC,  entered  into an
agreement to sell a 50% interest in their Sheep  Mountain  properties to Nukem's
subsidiary CRIC. USECC and CRIC immediately  contributed  their 50% interests in
the  properties  to a  newly-formed  partnership,  SMP. SMP was  established  to
further develop and mine the uranium claims on Sheep  Mountain,  acquire uranium
supply contracts and market uranium.  Certain  disputes arose among USECC,  CRIC
and its parent Nukem,  Inc. over the operation of SMP.  These disputes have been
in  litigation/arbitration  for the past  nine  years.  See  Notes E and K for a
description    of   the   investment   and   a   discussion   of   the   related
litigation/arbitration.

     The Company and USE are  responsible  for one SMP market  related  delivery
contract which requires  approximately 942,644 pounds of uranium concentrates to
be  delivered.  These  deliveries  are priced at an  average of the three  month
market price  preceding each delivery.  The utility has the option of increasing
or decreasing  the quantity by plus or minus thirty  percent.  In 1999 and 1998,
deliveries by the Company to SMP  contracts  resulted in revenues of $43,800 and
$429,300, respectively (no such revenues were recognized in 2000). Revenues from
these   transactions  have  been  included  in  the  accompanying   Consolidated
Statements  of Operations as Mineral  revenues,  which would  normally have been
sales of SMP.  Delivery  requirements  for  fiscal  2001 are  206,047  pounds of
uranium.  Arrangements have made to complete this delivery in the second quarter
of 2001.

     Due to the litigation  and  arbitration  proceedings  involving SMP for the
past 9 years,  the Company has expensed all of its costs  related to SMP and has
had no carrying  value of its investment in SMP for 2000 and 1999. The Company's
direct loss generated from its investment in SMP was $216,800 for the year ended
May 31,  1998.  No  amounts  attributable  to SMP for  fiscal  1999 and 2000 are
included  in  the  Condensed  Combined  Balance  Sheets  or  Condensed  Combined
Statements of Operations of the Company's equity investees presented above.

PHELPS DODGE

     During prior years, the Company and USE conveyed interests in mining claims
to AMAX Inc. ("AMAX") in exchange for cash, royalties,  and other consideration.
AMAX merged with Cyprus  Minerals  ("Cyprus Amax") which was purchased by Phelps
Dodge Mining Company  ("Phelps  Dodge") in December of 1999. The properties have
not been placed into production as of May 31, 2000.

     Cyprus Amax paid the Company  and USE an annual  advance  royalty of 50,000
(25,000 lbs. each) pounds of molybdenum (or its cash equivalent).  During fiscal
2000,  Phelps  Dodge has  assumed  this  obligation  and made its first  advance
royalty payment to the Company and USE during the first quarter of 2001.  Phelps
Dodge is entitled to a partial credit  against future  royalties for any advance
royalty  payments  made, but such royalties are not refundable if the properties
are not placed into  production.  The Company  recognized  $66,000,  $75,300 and
$105,500 of revenue from the advance  royalty  payments in fiscal 2000, 1999 and
1998 respectively.

     Phelps  Dodge may elect to return the  properties  to the  Company and USE,
which would cancel future obligations under the advance royalty  obligation.  If
Phelps Dodge formally  decides to place the properties  into  production,  it is
obligated to pay $2,000,000 to the Company and USE.

                                       54

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

     The Company and USE have  recently  entered  into  discussions  with Phelps
Dodge  concerning  the  purchase of the  properties  from Cyprus  Amax.  Per the
contract  with  Amax,  the  Company  and USE  are to  receive  15% of the  first
$25,000,000,  or $3,750,000,  if the properties are sold,  which the Company and
USE  believe has  occurred.  It is not known how these  discussions  with Phelps
Dodge will be resolved.

SUTTER GOLD MINING COMPANY

     Sutter Gold Mining  Company  ("SGMC")  was  established  in 1990 to conduct
operations  on mining  leases and to produce  gold from the  Lincoln  Project in
California.

     SGMC is in the  development  stage and  additional  development is required
prior to the commencement of commercial  production.  SGMC has not generated any
significant revenue and has no assurance of future revenue.  All acquisition and
mine  development  costs  since  inception  have been  capitalized.  Since  test
production in 1992,  SGMC has focused its efforts on obtaining a reserve  study,
developing a mine plan and obtaining a partner to assist in the financing of its
mineral  development  and  ultimate  production.  Due to the decline in the spot
price for gold and the lack of adequate financing,  SGMC has put the development
of the mine on hold.  Until  the time when  development  begins,  SGMC  requires
capital  contributions  from USE,  Crested  or other  sources  of  financing  to
maintain its current  activities.  SGMC will  continue to be  considered  in the
development  stage  until the time it  generates  significant  revenue  from its
principal operations.

     During fiscal 2000 a visitor's center was developed and became operational.
Management is evaluating if the visitor's  center will cover  stand-by  costs of
the mine until such time as the market  price for gold  increases to levels that
will allow economic operation of the mineral property. The Visitor's Center is a
new venture and the outcome of its operation is uncertain.

Plateau Resources Limited

     During  fiscal 1994,  USE entered into an agreement  with  Consumers  Power
Company  to  acquire  all the issued  and  outstanding  common  stock of Plateau
Resources  Limited  ("Plateau"),  a Utah  corporation.  Plateau  owns a  uranium
processing  mill and support  facilities  and certain  other real estate  assets
through its wholly-owned  subsidiary,  Canyon Homesteads,  Inc., in southeastern
Utah.  USE paid nominal cash  consideration  for the Plateau stock and agreed to
assume all environmental liabilities and reclamation bonding obligations. At May
31,  2000,  Plateau  had a cash  security in the amount of  $9,267,700  to cover
reclamation  of the  properties  (see  Note  K).  Although  the  Company  has no
ownership  in  Plateau,  Directors  of the Company and USE have agreed to divide
equally a portion of certain reclamation obligations above a defined amount, and
will share equally in the cash flows derived from operations.

     USECC is currently  evaluating the best  utilization  of Plateau's  assets.
Evaluations  are ongoing to determine  when, or if, the mine and mill properties
should  be placed  into  production.  The  primary  factor in these  evaluations
relates to uranium market prices.  Commercial  revenues are being generated from
the townsite  assets which  include a motel,  C-store,  lounge/restaurant,  boat
storage facility and housing.

                                       55

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

Rocky Mountain Gas, Inc.

     During fiscal 2000, the Company and USE organized  Rocky Mountain Gas, Inc.
("RMG") to enter into the coalbed  methane gas  business.  RMG is engaged in the
acquisition  of coalbed  methane  gas  properties  and the  future  exploration,
development  and production of methane gas from those  properties.  RMG is owned
41% by the Company and 41% by USE. RMG sold 1,206,333 shares of its common stock
in a private  placement  during fiscal 2000.  Net proceeds from the sale of this
common stock totaled $3,510,000.

     RMG entered into an agreement with Quantum  Energy,  L.L.C.  ("Quantum") on
January 3, 2000 to purchase a 50% working  interest and 40% net revenue interest
in  approximately  185,000 acres of unproven  leasehold  interests in the Powder
River Basin of Southeastern Montana. The terms of the Quantum agreement included
payments of  $3,200,000  upon  closing,  $1,000,000 on or before May 1, 2000 and
$1,300,000  on or before  December 31, 2000.  All payments  through May 31, 2000
were made to Quantum. If RMG does not pay the $1,300,000 payment by December 31,
2000, RMG will assign 12%, of its undivided 50% working interest to Quantum.

     RMG  also has a  $2,500,000  commitment  to  drill 25 wells on the  Quantum
properties  by November 30, 2000.  As of May 31, 2000, no wells had been drilled
on the Quantum  properties  due to delays in the permitting  process.  The funds
necessary  to  complete  this  work  commitment  will be raised  through  equity
financing.

     RMG also acquired a 100% working interest (82% revenue  interest) in 63,000
acres in southwest Wyoming.  These coalbed methane gas leases are in the greater
Green River Basin. RMG purchased these leases for cash and a commitment to drill
two wells before December 31, 2000.

     On February 2, 2000,  RMG and Quantum  organized  Powder River Gas,  L.L.C.
("Powder  River") to operate the  exploration,  development  and  production  of
jointly owned leases in the Powder River Basin.  RMG and Quantum each own 50% of
Powder River.

G.   DEBT:

     The Company  and USE have a  $1,000,000  line of credit  with a  commercial
bank.  The line of credit bears interest at a variable rate (10.5% as of May 31,
2000).  The weighted average interest rate for 2000 and 1999 was 9.8%. As of May
31, 2000,  $650,000 was outstanding on this line of credit, one half of which is
the Company's  obligation.  This line of credit is secured by a share of the net
proceeds of fees from production of oil wells and certain assets of USECC.

     Additional obligations of the Company consist primarily of advances payable
to USE,  which are due upon demand.  The  obligation  is due to U.S.  Energy for
funding  a  majority  of  the   operations  of  USECC,   of  which  50%  is  the
responsibility  of the Company.  All advances  payable to USE are  classified as
current as of May 31, 2000 and 1999 as a result of USE's  unilateral  ability to
modify the repayment terms.

                                       56

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

                                                               May 31,
                                                       -------------------------
                                                          2000           1999
                                                          ----           ----
<TABLE>
<S>                                                    <C>            <C>
     Advances payable - U.S. Energy and affiliates
         balance payable  in full on
         demand (see Note A)                           $8,377,700     $7,054,000
     Line of credit                                       325,000
     Notes payable to bank, financial companies
         and third parties interest at 7.9% to 11.4%;
         maturity from 2001 to 2005                       156,400         42,000
                                                        ---------     ----------
              Total                                     8,859,100      7,096,000
     Less - current portion                             8,767,200      7,079,300
                                                       ----------     ----------
                                                       $   91,900     $   16,700
                                                       ==========     ==========
</TABLE>

     Principal requirements on long-term debt are $8,767,200;  $20,900; $22,500;
     $21,600; $26,900 for the years 2001 through 2006, respectively.

H.   INCOME TAXES:

     The  components  of  deferred  taxes  as of May 31,  2000  and  1999 are as
follows:

                                                                 May 31,
                                                       -------------------------
                                                            2000         1999
                                                            ----         ----
<TABLE>
<S>                                                    <C>           <C>
     Deferred tax assets:
       Deferred compensation                           $    131,200  $   87,800
       Deferred gains                                       106,100     106,100
       Non-deductible reserves                              779,900     135,700
       Net operating loss carry-forwards                  3,831,900   2,835,000
       Tax credits                                           15,000      15,000
     Tax basis in excess of book                            842,700   1,138,300
                                                       ------------  ----------
     Total deferred tax assets                            5,706,800   4,317,900

     Deferred tax liabilities:
       Development and exploration costs                   (51,800)     (51,800)
                                                       -----------   ----------
     Total deferred tax liabilities                        (51,800)     (51,800)
                                                       -----------   ----------

     Net deferred tax assets - all non-current           5,655,000    4,266,100

     Valuation Allowance                                (5,655,000)  (4,266,100)
                                                       -----------   ----------

     Net deferred tax asset                            $      --     $     --
                                                       ===========   ==========
</TABLE>

     At May 31,  2000,  the  Company  had  available,  for  federal  income  tax
purposes,  net operating loss carry-forwards of approximately  $11,270,000 which
expire in 2006 through 2020. The Company has established a

                                       57

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

valuation  allowance  for the full amount of the net  deferred tax assets due to
the recurring losses of the Company and the uncertainty of the Company's ability
to generate future taxable income to utilize the NOL carry-forwards.

     The income tax provision is different from the amounts computed by applying
the statutory  federal  income tax rate to income before taxes.  The reasons for
these differences are as follows:

<TABLE>

                                                       Year Ended May 31,
                                             -----------------------------------
                                                2000         1999         1998
                                                ----         ----         ----
<S>                                        <C>            <C>         <C>

Expected federal income tax benefit        $(1,795,100)  $(663,600)   $ 450,800
Losses from subsidiaries not consolidated
  for tax purposes, and other                  406,200     788,600     (555,200)
Valuation allowance                          1,388,900    (125,000)     104,400
                                           -----------   ---------    ---------
Income taxes                               $       --    $     --     $     --
                                           ===========   =========    =========
</TABLE>

     There were no taxes payable as of May 31, 2000, 1999 or 1998.

     The Internal  Revenue Service ("IRS") has audited the Company's and USECC's
tax returns  through the year ended May 31,  1996.  The audit is completed as of
the date of the accompanying  financial  statements and the Company has attended
appeals hearings.  A tentative settlement has been reached. The Company does not
expect  that the  resolution  of the audits  will have a material  effect on the
Company's financial position or results of operations.

                                       58

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

I.   SEGMENTS AND MAJOR CUSTOMERS:

     The  Company's  primary  business  activity is  construction  and  contract
drilling  work for third  parties in the  coalbed  methane gas  business.  Other
reportable  industry  segments include the sale of minerals and the acquisition,
exploration,  holding,  development  and  sale of  mineral  bearing  properties,
although the Company has no producing mines,  commercial  operations,  primarily
real  estate  activities,  an airport  fixed base  operation,  and  construction
activities. The following is information related to these industry segments:
<TABLE>

                                              Year Ended May 31, 2000
                             ---------------------------------------------------------------
                             Construction/                  Commercial
                              Drilling        Minerals      Operations          Consolidated
                              --------        --------      ----------          ------------
<S>                           <C>            <C>            <C>                 <C>
Revenues                      $1,735,800     $  66,000      $  340,900          $ 2,142,700
                              ==========     =========      ==========
Interest and other revenues                                                         494,600
                                                                                -----------
     Total revenues                                                             $ 2,637,300
                                                                                ===========

Operating loss                $ (308,100)    $(944,400)     $ (431,700)         $(1,684,200)
                              ==========     =========      ==========
Interest and other revenue                                                          494,600
General corporate and other expenses                                             (2,671,600)
Equity loss in affiliates                                                        (1,418,600)
                                                                                -----------
     Loss before income taxes                                                   $(5,279,800)
                                                                                ===========

Identifiable net assets
     at May 31, 2000          $1,261,600     $  25,000      $1,403,600            2,690,200
                              ==========     =========      ==========
Investments in affiliates                                                         1,535,300
Corporate assets                                                                  3,455,800
                                                                                -----------
     Total assets at May 31, 2000                                               $ 7,681,300
                                                                                ===========

Capital expenditures          $  775,900     $  10,800      $   65,800
                              ==========     =========      ==========
Depreciation, depletion and
     amortization             $   47,600     $     --       $   96,900
                              ==========     =========      ==========
</TABLE>

                                                            59

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)
<TABLE>

                                                        Year Ended May 31, 1999
                                             --------------------------------------------
                                                            Commercial
                                                Minerals    Operations      Consolidated
                                                --------    ----------      ------------
<S>                                          <C>            <C>            <C>
Revenues                                     $   119,100    $  607,400     $   726,500
                                                            ==========     ===========
Interest and other revenues                                                  3,690,100
                                                                           -----------
      Total revenues                                                       $ 4,416,600
                                                                           ===========

Operating loss                               $(1,002,400)   $ (321,800)    $(1,324,200)
                                             ===========    ==========
Interest and other revenue                                                   3,690,100
General corporate and other expenses                                        (2,657,800)
Equity loss in affiliates                                                   (1,659,800)
                                                                           -----------
      Loss before income taxes                                             $(1,951,700)
                                                                           ===========

Identifiable net assets at May 31, 1999      $    14,200    $2,511,800     $ 2,526,000
                                             ===========    ==========
Investments in affiliates                                                      225,300
Corporate assets                                                             5,663,700
                                                                           -----------
      Total assets at May 31, 1999                                         $ 8,415,000
                                                                           ===========

Capital expenditures                         $    51,300    $  219,900
                                             ===========    ==========
Depreciation, depletion and
      amortization                           $   230,600    $  212,500
                                             ===========    ==========
</TABLE>

                                       60

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)
<TABLE>

                                                       Year Ended May 31, 1998
                                             ------------------------------------------
                                                                           Commercial
                                             Minerals       Operations     Consolidated
                                             --------       ----------     ------------
<S>                                          <C>            <C>            <C>
Revenues                                     $ 534,800      $  880,900     $ 1,415,700
                                                            ==========     ===========
Interest and other revenues                                                  3,244,200
                                                                           -----------
      Total revenues                                                       $ 4,659,900
                                                                           ===========

Operating (loss) income                      $(297,600)     $   66,800     $  (230,800)
                                             =========      ==========
Interest and other revenue                                                   3,244,200
General corporate and other expenses                                        (1,431,700)
Equity loss in affiliates                                                     (372,200)
                                                                           -----------
      Loss before income taxes                                             $(1,209,500)
                                                                           ===========

Identifiable net assets at May 31, 1998      $  14,200      $2,648,600     $ 2,662,800
                                             =========      ==========
Investments in affiliates                                                    1,799,300
Corporate assets                                                             5,905,300
                                                                           -----------
      Total assets at May 31, 1998                                         $10,367,400
                                                                           ===========

Capital expenditures                         $ 587,500      $  119,700
                                             =========      ==========
Depreciation, depletion and
      amortization                           $ 118,700      $   95,900
                                             =========      ==========
</TABLE>

     Commercial  revenues  in the  statements  of  operations  consist of mining
equipment,  office and other real  property  rentals,  charter  flights and fuel
sales.

                                       61

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

J.   SHAREHOLDERS' EQUITY:

     The Boards of  Directors  of the Company  from time to time,  issued  stock
bonuses to certain  directors,  employees  and third  parties.  These shares are
forfeitable  to the Company until  earned.  The Company is  responsible  for the
compensation  expense  related  to these  issuances  (see Note C). For the years
ended May 31, 2000 and 1999, the Company did not recognize  compensation expense
resulting  from these  issuances.  For the year ended May 31,  1998 the  Company
recognized compensation expense of $27,300. A schedule of forfeitable shares for
Crested is set forth in the following table:

   Issue                       Number                Issue             Total
   Date                      of Shares               Price          Compensation
   ----                      ---------               -----          ------------

June 1990                             25,000         $1.06            $26,562
December 1990                          7,500           .50              3,750
January 1993                           6,500           .22              1,430
January 1994                           6,500           .28              1,828
January 1995                           6,500           .19              1,230
January 1996                           5,000           .3125            1,600
January 1997                           8,000           .9375            7,500
                                      ======                          =======
Balance at
  May 31, 2000 and 1999               65,000                          $43,900
                                      ======                          =======

     No shares were earned in fiscal 2000 or 1999.

K.   COMMITMENTS, CONTINGENCIES AND OTHER:

Legal Proceedings

     Sheep Mountain Partners Arbitration/Litigation

     In 1991,  disputes  arose  between U. S. Energy  Corp.  and  Crested  Corp.
("USECC"),  and Nukem,  Inc. and its subsidiary Cycle Resource  Investment Corp.
("CRIC"),  concerning the formation and operation of the Sheep Mountain Partners
("SMP")  partnership  for uranium  mining and  marketing,  and activities of the
parties outside SMP.  Arbitration  proceedings  were initiated  against USECC by
CRIC in June 1991 before the American  Arbitration  Association ("AAA"). A three
member panel of the AAA held hearings on the SMP issues and entered an Order and
Award in April 1996 and  clarifying  it in July  1996.  The Order and Award were
confirmed by the U.S.  District Court of Colorado in its Second Amended Judgment
(the  "Judgment") in June 1997. The Judgment  ordered  Nukem/CRIC to pay USECC a
monetary  award and ordered the uranium  purchase  contracts  Nukem entered into
with three CIS republics  including the purchase  rights,  the uranium  acquired
pursuant  to  those  rights  and the  profits  therefrom,  be  impressed  with a
constructive trust in favor of SMP of which USECC owned one half. Nukem appealed
the judgment to the 10th Circuit Court of Appeals  ("10th CCA").  On October 22,
1998, the 10th CCA issued its Order and Judgment  affirming the District Court's
Judgment (without modification).

                                       62

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

     On  November  13,  1998,  Nukem/CRIC  filed  a  motion  for  entry  of full
satisfaction of the Judgment if Nukem/CRIC  paid only the balance  remaining due
on the monetary portion of the Judgment. USECC responded opposing the motion and
requested payment of the balance of the monetary award. On February 8, 1999, the
District Court denied the motion of Nukem/CRIC  for entry of final  satisfaction
of the Judgment  and ordered  Nukem/CRIC  to forthwith  pay USECC the balance of
$5,971,600  plus interest of $105,700.  Nukem/CRIC made that payment to USECC on
February 9, 1999.

     On April 28,  1999,  USECC filed a petition in the U.S.  District  Court to
dissolve SMP and for an accounting. Nukem/CRIC responded that the District Court
did not  have  jurisdiction  and  again  filed a motion  seeking  entry of final
satisfaction of the Judgment.  On July 16, 1999, the District Court again denied
the motion of Nukem/CRIC for entry of final  satisfaction of Judgment and denied
USECC's petition for dissolution because neither USECC nor Nukem/CRIC petitioned
the Court for  dissolution  of SMP before the Court  entered its Second  Amended
Judgment. On August 2, 1999, Nukem/CRIC filed a Notice of Appeal to the 10th CCA
of the District Court's July 16, 1999 Order.  Thereafter,  USECC filed a request
with the District Court for post judgment  assistance to compel Nukem to account
for its profits on the CIS  contracts.  This  request was denied.  USECC filed a
motion to  dismiss  the  appeal  of  Nukem/CRIC  to the 10th CCA,  which is also
pending.  On or about March 7, 2000,  Nukem and CRIC filed their  opening  brief
with the 10th CCA.  U.S.  Energy and Crested  Corp.  filed their answer brief on
April 10,  2000 and Nukem and CRIC  filed  their  reply  brief and the appeal is
pending.

     Townsite Litigation

     In fiscal 1998, a prior  contract  operator of the restaurant and lounge at
Ticaboo,  Utah, and two employees  supervising the motel and  convenience  store
(owned by Canyon Homesteads, Inc.) and their corporation Dejavue, Inc. sued USE,
Crested and others in the Utah 3rd District  State Court.  One of the plaintiffs
received a judgment  against USE. USE appealed the judgment to the Utah Court of
Appeals and the appeal was denied.  USE  petitioned for a writ of certiorari and
the Utah Supreme Court denied the petition. On April 26, 2000, USE paid $294,787
being  the  full  amount  of  the  judgment  with   interest.   USE  is  seeking
reimbursement of the payment from USE's insurance company.

     Bond Gold Bullfrog Inc. Litigation

     USE and Crested are defendants and counter- or  cross-claimants  in certain
litigation in the district Court of the Fifth  Judicial  District of Nye County,
Nevada,  brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now
known as Barrick  Bullfrog,  Inc.) is an  affiliate  of Barrick  Corp.,  a large
international  gold producer  headquartered in Toronto,  Canada.  The litigation
primarily  concerns  extra-lateral  rights  associated  with two patented mining
claims owned by Parador Mining Company Inc.  ("Parador") and initially leased to
a predecessor of BGBI,  which claims are in and adjacent to BGBI's Bullfrog open
pit  and  underground  gold  mine.  USE and  Crested  (USECC)  asserted  certain
interests in the claims under an April 1991  assignment  and lease from Parador,
which is subject to the lease to BGBI's  predecessor.  After a trial,  the Court
found against certain of the parties including Parador and USECC on their claims
for extra  lateral  rights and BGBI on its claims.  Parador,  USECC and BGBI all
appealed the decision to the Nevada Supreme Court. The appeal is pending.

                                       63

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

     Department of Energy Litigation

     On July 20, 1998,  eight uranium mining  companies  with  operations in the
United States (including USE, Crested, Yellow Stone Fuels Corp.) and the Uranium
Producers of America (a trade organization) filed a complaint against the United
States Department of Energy (the "DOE) in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive  relief. The DOE filed a motion to dismiss the complaint
claiming  that the U.S.  Congress  withdrew its consent to be sued in connection
with the USEC  Inc.  privatization  and that  USEC  Inc.  must be  joined  as an
indispensable  party.  The State of Wyoming  moved to join in the  litigation on
behalf of the  plaintiffs.  A hearing was held on the motions on January 8, 1999
before the U.S. District Court in Cheyenne,  Wyoming. The Court took the motions
under advisement and had not entered a decision to date.

     Contour Development Litigation

     On July 28, 1998, USE filed a lawsuit in the United States  District Court,
Denver,  Colorado  (Case No. 98 WM 1630) against  Contour  Development  Company,
L.L.C.  and entities and persons  associated with Contour  Development  Company,
L.L.C.  (collectively  "Contour") seeking compensatory and consequential damages
from the defendants for dealings in certain real estate.

     Specifically,  USE alleges that Contour has breached contracts for the sale
of USE's and Crested's Gunnison properties,  and is in default on the promissory
notes delivered to pay for the Gunnison  properties.  USE also alleges a pattern
of fraud,  interference  with  contractual  relation,  breach of fiduciary duty,
conversion  of  USE's  security  for  payment  of the  promissory  notes  unjust
enrichment  in  Contour's  dealings  with USE and  Crested  regarding  such real
estate.  Contour  answered  denying all  allegations  of  wrongdoing,  asserting
certain  counterclaims,  which  USE has  denied,  and  claiming  that  USE's and
Crested's  refusal to consent to a requested  transfer of one of the  properties
excused Contour from paying the balances due on the promissory  notes.  Three of
the defendants also filed motions to dismiss seeking relief from USE's notice of
lis pendens.  That motion was not granted pending further discovery.  Settlement
discussions  have not been fruitful and USE is expected to resume the litigation
against all defendants  other than Val Olsen who petitioned for protection under
Chapter 7 of the Bankruptcy Code and Gunnison Center  Properties,  L.L.C.  which
petitioned for protection under Chapter 11 of the Bankruptcy Code and several of
Gunnison Center  properties  have been sold. The remaining  defendants own other
property  which USE believes has  sufficient  value to satisfy any judgment that
USE may obtain.

     SGMC Litigation

     On September 28, 1998 a lawsuit was filed in Amador County  Superior Court,
California  (Case  No. 98 CV 3298) by  Concerned  Citizens  of Amador  County as
plaintiffs,  against  the  County  of  Amador  and the  Amador  County  Board of
Supervisors,  and  against  SGMC  as a  real  party  in  interest.  The  lawsuit
challenges  the  actions  of  Amador  County  and its  Board of  Supervisors  in
certifying  the  Final  Subsequent   Environmental  Impact  Report  (FSEIR)  and
approving the amended Conditional Use Permit (CUP).

     A hearing was held on June 7, 1999,  and on August 30, 1999,  the Honorable
Susan C. Harlan, Judge of the Superior Court in Amador County, issued a detailed
written Memorandum of Opinion, denying every cause of action

                                       64

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

of  Appellants'/Petitioners'  Petition for Writ of Mandate,  and  upholding  the
County's  certification  of the  FSEIR  and  approval  of the  amended  CUP.  In
September 1999, the Concerned  Citizens  appealed Amador County Superior Court's
decision  to the Court of Appeals  of the State of  California  Third  Appellate
District.  On appeal,  Appellants  presented a more targeted approach,  alleging
only two  violations  of the  Planning  and  Zoning  Law and two  violations  of
California  Environmental  Quality Act (CEQA).  Sutter Gold and the County filed
their respective Respondent Briefs in March 2000. The appeal before the Court of
Appeals is pending.

     Dennis Selley et al vs U.S.  Energy Corp.,  Crested Corp. et al. On May 14,
1999, Dennis Selley  personally and as personal  representative of the Estate of
Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in the
Ninth Judicial  District Court of Fremont  County,  Wyoming  against U.S. Energy
Corp. and Crested Corp.,  Plateau Resources Limited and USECC the joint venture,
alleging that the  defendants  were  negligent as a landlord in renting a double
wide  trailer  (converted  to a bunkhouse)  near  Ticaboo,  Utah to  plaintiffs'
daughter  Hannah  Selley and seek  various  unspecified  damages.  Discovery  is
underway and the defendants  have filed motions to stay the trial  scheduled for
September  25, 2000  because of the  declaratory  judgment  action filed in Utah
which may be dispositive of all issues. The motions are pending.

     Declaratory  Judgment Action.  The Workers  Compensation  Fund of Utah (The
"Fund") filed a complaint for  declaratory  relief on July 26, 1999 against U.S.
Energy Corp.,  Crested Corp.,  Plateau Resources  Limited,  Lexington  Insurance
Company,  Dennis  Selley,  as personal  representative  for the estate of Hannah
Selley and others in Civil Action No. 99090 7500 before the Utah Third  Judicial
Court of Salt Lake County,  Utah. The suit is to determine if Hannah Selley died
in the course of her employment and the Fund's and Lexington Insurance Company's
obligation to defend and indemnify  U.S.  Energy Corp. and its affiliates in the
above Hannah Selley case. Lexington Insurance Company, USE, Crested, Plateau and
USECC  filed a joint  motion for  summary  judgment in the case on July 21, 2000
alleging among other  allegations that Hannah Selley was in the course and scope
of her employment at the time of her death.  The Selleys filed their  opposition
to the motion on or about July 31, 2000. The motion is pending.

     Kennecott Uranium Litigation

     On November  10,  1999,  Kennecott  Uranium  Company and  Kennecott  Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp. and USECC in the Sixth Judicial  District Court,  Campbell County,
Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with
USECC and judicial  approval of a plan to sell the GMMV or liquidate  its assets
plus attorney fees and costs.  Defendants  filed a motion to change venue to the
District Court in Fremont County,  Wyoming and the Sixth Judicial District court
granted the motion. The case was then transferred to the Ninth Judicial District
Court of Fremont County, Wyoming in Civil Action No. 31322.

     On March 13, 2000, defendants U.S. Energy, Crested Corp. and USECC filed an
answer denying the various  allegations of Kennecott and  counterclaims  against
plaintiff  Kennecott  and its  parent  Rio Tinto  plc.  Defendants  also filed a
separate third party complaint  against Rio Tinto plc.  Kennecott filed a motion
to  dismiss  the  complaint  and Rio Tinto  filed a motion for  judgment  on the
pleadings. A hearing date on the respective motions was set for May 30, 2000 but
was continued  for a time in September or October,  2000 to be set by the Court,
as the parties are  attempting  to  negotiate a  settlement.  On July 14,  2000,
Kennecott and USECC entered into a partial settlement

                                       65

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

wherein  Kennecott paid USECC  $250,000 to settle claims  peripheral to the case
concerning  accounts  receivables  and  other  minor  claims  for work  done and
equipment used and mobilized by USECC for the GMMV. The parties have settled all
issues subsequent to yearend as discussed in Note L.

Reclamation and Environmental Liabilities

     Most  of  the  Company's  mine   development,   exploration  and  operating
activities are subject to federal and state regulations that require the Company
to protect  the  environment.  The Company  conducts  its mining  operations  in
accordance with these regulations. Consequently, the Company's current estimates
of its reclamation  obligations and its current level of expenditures to perform
ongoing reclamation may change in the future. At the present time, however,  the
Company cannot predict the outcome of future  regulation or its impact on costs.
Nonetheless,  the Company has recorded its best  estimate of future  reclamation
and closure costs based on currently  available  facts,  technology  and enacted
laws  and  regulations.   Certain  regulatory  agencies,  such  as  the  Nuclear
Regulatory  Commission  ("NRC"),  the Bureau of Land Management  ("BLM") and the
Wyoming  Department  of  Environmental  Quality  ("WDEQ")  review the  Company's
reclamation,  environmental  and  decommissioning  liabilities,  and the Company
believes  its recorded  amounts are  consistent  with those  reviews and related
bonding requirements. To the extent that planned production on its properties is
delayed,  interrupted or discontinued  because of regulation or the economics of
the properties,  the future earnings of the Company would be adversely affected.
The Company  believes it has accrued all necessary  reclamation  costs and there
are no  additional  contingent  losses or  unasserted  claims to be disclosed or
recorded.  The Company has not  disposed  of any  properties  for which it has a
commitment or is liable for any known environmental liabilities.

     The majority of the Company's  environmental  obligations  relate to former
mining properties acquired by the Company.  Since the Company currently does not
have  properties in  production,  the  Company's  policy of providing for future
reclamation  and  mine  closure  costs  on a  unit-of-production  basis  has not
resulted in any significant  annual  expenditures or costs.  For the obligations
recorded  on  acquired  properties,  including  site-restoration,   closure  and
monitoring  costs,  actual  expenditures for reclamation will occur over several
years,  and  since  these  properties  are  all  considered   future  production
properties,  those  expenditures,  particularly  the closure  costs,  may not be
incurred for many years.  The Company also does not believe that any significant
capital  expenditures  to  monitor  or  reduce  hazardous  substances  or  other
environmental  impacts  are  currently  required.  As a  result,  the near  term
reclamation  obligations  are not expected to have a  significant  impact on the
Company's liquidity.

     As of May 31, 2000 and 1999, the Company has recorded estimated reclamation
obligations,  of $725,900 which is included in Reclamation  and Other  Long-term
Liabilities  in the  accompanying  Consolidated  Balance  Sheets.  None of these
liabilities have been discounted, and the Company has not recorded any potential
offsetting  recoveries  from other  responsible  parties  or from any  insurance
companies.

     The  Company  currently  owns an  interest in four  mineral  properties  or
investments that account for most of its environmental  obligations,  SMP, GMMV,
Plateau and SGMC.  The  environmental  obligations  and the nature and extent of
cost sharing arrangements with other potentially responsible parties, as well as
any  uncertainties  with  respect  to joint and  several  liability  of each are
discussed in the following paragraphs:

                                       66

<PAGE>

                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000
                                   (continued)

SHEEP MOUNTAIN URANIUM PROPERTIES

     The  Company  and USE are  responsible  for  the  reclamation  obligations,
environmental  liabilities  and  liabilities for injuries to employees in mining
operations  with  respect  to the Sheep  Mountain  properties.  The  reclamation
obligations,  which are established by regulatory authorities,  were reviewed by
the  Company,  USE and the  regulatory  authorities  during  fiscal 2000 and the
balance in the  reclamation  liability  account at May 31,  2000,  $725,900,  is
believed by management to be adequate. The obligation will be satisfied over the
life of the  mining  project  which is  estimated  to be at least 20 years.  The
Company and USE self bonded this obligation by mortgaging  certain of their real
estate assets and by posting cash bonds.

GMMV

     During  fiscal  1991,  the  Company  and  USE  acquired  developed  mineral
properties on Green Mountain known as the Big Eagle Property. In connection with
that  acquisition,  the Company and USE agreed to assume  reclamation  and other
environmental liabilities associated with the property.  Reclamation obligations
imposed by regulatory  authorities were established at $7,300,000 at the time of
acquisition.  Immediately after the acquisition, the Company and USE transferred
a  one-half  interest  to  Kennecott,   with  Kennecott,  the  Company  and  USE
contributing the Big Eagle properties to GMMV, which assumed the reclamation and
other environmental liabilities.  Kennecott provides bonding for the reclamation
obligations for the benefit of GMMV.

     As a result of the settlement agreement with Kennecott discussed in Note L,
the  Company  has  no  continuing   reclamation  or  environmental   obligations
associated with the GMMV properties.

Sutter Gold Mining Company

     SGMC is currently  owned 4% by the  Company,  62% by USE and 34% by private
investors.  SGMC owns gold mineral  properties in California.  Currently,  these
properties  are on  standby  and  have  never  been  in  production.  Currently,
reclamation obligations are covered by a $27,000 reclamation bond which SGMC has
recorded as a reclamation liability as of May 31, 2000.

Plateau Resources, Limited

     The environmental and reclamation obligations acquired with the acquisition
of Plateau include  obligations  relating to the Shootaring  mill.  Based on the
bonding  requirements,  Plateau  transferred  $2,500,000  to a trust  account as
financial surety to pay future costs of mill  decommissioning,  site reclamation
and  long-term  site  surveillance.  In fiscal 1997,  Plateau  increased the NRC
surety to a cash bond of $6,784,000 in order to have its standby license changed
by the NRC to operational.  As of May 31, 2000,  Plateau held a cash deposit for
reclamation in the amount of $7,952,600 which  management  believes will satisfy
the obligation of reclamation.

Executive Compensation

     The  Company and USE are  committed  to pay the estates of certain of their
officers  one  years'  salary  and an amount to be  determined  by the Boards of
Directors, for a period of up to five years thereafter. This commitment

                                       67

<PAGE>

applies only in the event of the death or total disability of those officers who
are full-time  employees of the Company and USE at the time of total  disability
or death.

L.   SUBSEQUENT EVENT

     On  September  11,  2000,  the Company and USE  entered  into a  settlement
agreement with Kennecott  related to the pending legal dispute discussed in Note
K. In  connection  with this  settlement  agreement,  the  Company  and USE have
transferred  their  ownership  interests  in GMMV to  Kennecott,  including  the
ownership  interest in the Sweetwater Mill, the Jackpot Mine, the Big Eagle Mine
and shop,  and all patented and unpatented  mining  claims.  The Company and USE
will receive  various  machinery and equipment  held by GMMV at the Jackpot Mine
and $3.25 million of cash payments from  Kennecott.  In addition,  Kennecott has
assumed all the  liabilities of the GMMV,  including all reclamation and bonding
requirements,  except  the  reclamation  liability  associated  with  the  Green
Mountain Ion Exchange.

                                       68

<PAGE>

ITEM  9.  Changes In And Disagreements With Accountants On Accounting
          And Financial Disclosure

     Not applicable.

                                    PART III

     In the event a definitive proxy statement  containing the information being
incorporated by reference into this Part III is not filed within 120 days of May
31, 2000 the Registrant will file such information under cover of a Form 10-K/A.

ITEM 10.  Directors And Executive Officers of The Registrant.

     The  information  required by Item 10 with respect to directors and certain
executive  officers is incorporated  herein by reference to  Registrant's  Proxy
Statement for the 2000 Annual Meeting of Shareholders. The information regarding
the remaining executive officer is contained in Part I of this report.

ITEM 11.  Executive Compensation.

     The information  required by Item 11 is incorporated herein by reference to
the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.

ITEM 12.  Security Ownership of Certain Beneficial Owners And Management.

     The information  required by Item 12 is incorporated herein by reference to
the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.

ITEM 13.  Certain Relationships And Related Transactions.

     The information  required by Item 13 is incorporated herein by reference to
the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.

                                       69

<PAGE>

                                     PART IV

ITEM 14.  Exhibits, Financial Statements, Financial Statement Schedules,
          Reports and Form 8-K.

(a)  The  following  financial  statements  are filed as a part of this Report
     as Item 8:

                                                                      Page No.
(1)  Financial Statements

     Registrant and Affiliate

     Report of Independent Public Accountants.................................39

     Consolidated Balance Sheets - May 31, 2000 and 1999...................40-41

     Consolidated Statements of Operations
     for the Years Ended May 31, 2000, 1999 and 1998 .........................42

     Consolidated Statements of Shareholders'
     Equity for the Years Ended May 31, 2000, 1999 and 1998...................43

     Consolidated Statements of Cash Flows
     for the Years Ended May 31, 2000, 1999 and 1998.......................44-45

     Notes to Consolidated Financial
     Statements............................................................46-68

(2)  N/A

(3)  Exhibits Required to be Filed.

Exhibit                                                          Sequential
  No.                        Title of Exhibit                      Page No.
-------                      ----------------                    ---------

 3.1      Restated Articles of Incorporation.................................[1]

 3.2      [intentionally left blank]

 3.3      [intentionally left blank]

 3.4      By-Laws............................................................[2]

 4.1      USE 1998 Incentive Stock Option Plan
            and Form of Stock Option Agreement............................. [11]

 4.2      Form of Stock Option Agreement and
            Schedule, Options issued 1992 ...................................[9]

                                       70

<PAGE>

    4.3        Form of Stock Option Agreement and
               Schedule, Options issued 1/96.................................[9]

    4.4        USE Restricted Stock Bonus Plan
               as Amended through 2/94.......................................[9]

    4.5        Amendment to Warrant to Purchase 200,000 Common Shares of USE[10]

    4.6        Amendment to USE 1989 Incentive Stock Option Plan (12/13/96).[10]

    4.7        USE 1996 Stock Award Program (Plan)..........................[10]

    4.8        USE Restated 1996 Stock Award Plan and Amendment to
               USE 1990 Restricted Stock Bonus Plan.........................[10]

    10.1       Promissory Note from Crested to USE (5/31/97)................[10]

    10.2       Management Agreement - USE - CC...............................[3]

    10.3       Joint Venture Agreement - Registrant and USE..................[2]

    10.4       U.S. Energy Corp. Employee Stock Ownership Plan...............[2]

    10.5       Assignment and Lease - Parador................................[3]

    10.6       Employment Agreement - Daniel P. Svilar.......................[2]

    10.7       Executive Officer Death Benefit Plan..........................[2]

    10.8       [intentionally left blank]

    10.9       Big Eagle Acquisition Agreement with PMC..................... [4]

    10.10      Ft. Peck Agreement - Drilling and Production Services.........[3]

    10.11-10.16   [intentionally left blank]

    10.17      Sweetwater Mill Acquisition Agreement.........................[3]

    10.18      Self Bond Agreement - Crooks Gap Properties...................[1]

    10.19      [intentionally left blank]

    10.20      [intentionally left blank]

    10.21      Master Agreement - Mt. Emmons/AMAX Inc........................[5]

    10.22      [intentionally left blank]

                                       71

<PAGE>

    10.23      Crooks Gap Property Acquisition Agreement.....................[6]

    10.24      [intentionally left blank]

    10.25      [intentionally left blank]

    10.26      Memorandum of Partnership Agreement - GMMV....................[2]

    10.27      Mineral Properties Agreement - Congo Area - PMC...............[2]

    10.28      [intentionally left blank]

    10.29      Memorandum of Partnership Agreement - SMP.....................[1]

    10.30      Plateau Acquisition -
                 Stock Purchase Agreement and Related Exhibits[7]............[7]

    10.31-10.40   [intentionally left blank]

    10.41      Option and Sales Agreements - Gunnison Property Parcel A......[8]

    10.42      Option and Sales Agreements - Gunnison Property Parcel B......[8]

    10.43      Contract for Sale of Wind River Estates
               to Arrowstar..................................................[9]

    10.44      Contract for sale of Jeffrey City Six-Plex
               to Tag Development, Inc.......................................[9]

    10.45      Development Agreement with First-N-Last.......................[9]

    10.46      Operating Agreement with First-N-Last.........................[9]

    10.47      [intentionally left blank]

    10.48      [intentionally left blank]

    10.49      Acquisition Agreement between Kennecott Uranium Company,
               USE and USECC regarding GMMV (6/23/97).......................[10]

    10.50      Exhibit A to Acquisition Agreement (see 10.49)
               Promissory Note from Kennecott Uranium Company to
               Kennecott Energy Company regarding GMMV .....................[10]

    10.51      Exhibit B to Acquisition Agreement (see 10.49)
               Mortgage, Security Agreement, Financing Statement and
               Assignment of Proceeds, Rents and Leases.....................[10]

    10.52      Exhibit G to Acquisition Agreement (see 10.49) - Contract
               Services Agreement for the Sweetwater Uranium Mill Facility..[10]

                                       72

<PAGE>

    10.53      Exhibit H to Acquisition Agreement (see 10.49) - Mineral Lease
               Agreement ...................................................[10]

    10.54      Exhibit I to Acquisition Agreement (see 10.49) - Fourth
               Amendment of Mining Venture Agreement among
               Kennecott Uranium Company, USE and USECC.....................[10]

    10.55      Master Resolution Agreement regarding Gunnison Properties....[10]

    10.56      Membership Pledge Agreement regarding Gunnison Properties....[10]

    10.57      Management Agreement between SGMC and USECC..................[10]

    10.58      Outsourcing  and Lease Agreement between YSFC and USECC......[10]

    10.59      Convertible Promissory Note from YSFC to USECC...............[10]

    10.60      Agreement for Purchase and Sale of Assets
               (Rocky Mountain Gas, Inc. and Quantum Energy LLC ..............*

    21         Subsidiaries of Registrant...................................[10]

               * Filed with this Report.
By Reference

    [1]        Incorporated by reference from the like-numbered  exhibits to the
               Registrant's Form 10-K for the year ended May 31, 1989.

    [2]        Incorporated by reference from the like-numbered  exhibits to the
               Registrant's Form 10-K for the year ended May 31, 1990.

    [3]        Incorporated by reference from the like-numbered  exhibits to the
               Registrant's Form 10-K for the year ended May 31, 1991.

    [4]        Incorporated by reference from the  like-numbered  exhibit to the
               Registrant's Form 10-Q for the period ended February 28, 1991.

    [5]        Incorporated  by  reference  from the  like-numbered  exhibits of
               AMAX's Schedule 13D filed on or about August 3, 1987.

    [6]        Incorporated  by  reference  from the  like-numbered  exhibits of
               Registrant's Form 10-K for the year ended May 31, 1988.

    [7]        Incorporated by reference from exhibit A to the U.S. Energy Corp.
               Form 8-K reporting an event of August 11, 1993.

    [8]        Incorporated by reference from the like- numbered exhibits of the
               Registrant's Form 10-K for the year ended May 31, 1995.

                                       73

<PAGE>

    [9]        Incorporated by reference from the like- numbered exhibits of the
               Registrant's Form 10-K for the year ended May 31, 1996.

    [10]       Incorporated by reference from the like- numbered exhibits of the
               Registrant's Form 10-K for the year ended May 31, 1997.

    [11]       Incorporated by reference from the like- numbered exhibits of the
               Registrant's Form 10-K for the year ended May 31, 1998.

(b)            Reports filed on Form 8-K.

               During  the fourth  quarter  of the fiscal  year ended on May 31,
               2000, the Registrant filed no reports on Form 8-K.

(c)            Required exhibits follow the signature page and are listed above
               under Item 14 (a)(3).

(d)            Required  financial  statement  schedules are listed and attached
               hereto in Item 14(a)(2).

                                       74

<PAGE>

                                   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.

                                                 CRESTED CORP.
                                                 (Registrant)


Date:    September 12, 2000                 By:  /s/ John L. Larsen
                                                 -------------------------------
                                                 JOHN L. LARSEN,
                                                 Chief Executive Officer

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


Date:    September 12, 2000                 By:  /s/ John L. Larsen
                                                 -------------------------------
                                                 JOHN L. LARSEN, Director


Date:    September 12, 2000                 By:  /s/ Max T. Evans
                                                 -------------------------------
                                                 MAX T. EVANS, Director


Date:    September 12, 2000                 By:  /s/ Daniel P. Svilar
                                                 -------------------------------
                                                 DANIEL P. SVILAR, Director


Date:    September 12, 2000                 By:  /s/ Michael D. Zwickl
                                                 -------------------------------
                                                 MICHAEL D. ZWICKL, Director


Date:    September 12, 2000                 By:  /s/ Kathleen R. Martin
                                                 -------------------------------
                                                 KATHLEEN R. MARTIN, Director


Date:    September 12, 2000                 By:  /s/ Robert Scott Lorimer
                                                 -------------------------------
                                                 ROBERT SCOTT LORIMER,
                                                 Principal Financial Officer and
                                                 Chief Accounting Officer

                                       75