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 [Fee Required] for the fiscal year ended May 31, 1998 or
[ ]     Transition report pursuant to section 13 or 15(d) of the Securities
        Exchange Act of 1934
        [No Fee Required] for the transition period from ______ to ______
Commission file number 0-8773

                                  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 September 5, 1998 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 $600,000.

               Class                          Outstanding at September 4, 1998
---------------------------------------      -----------------------------------
     Common Stock, $0.001 par value                  10,302,694 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:

        1998 Annual  Meeting  Proxy  Statement for the fiscal year ended May 31,
        1998, 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. [ ]


<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.  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"  or the  "Registrant")  is in the business of
acquiring,  exploring,  developing and/or selling or leasing mineral properties,
and the mining and  marketing of minerals.  USE is now engaged in two  principal
mineral sectors:  uranium and gold, both of which are in the development  stage.
The most significant  uranium properties are located on Green Mountain and Sheep
Mountain in Wyoming,  and in southeast Utah. USE's gold operations are conducted
through  Sutter  Gold  Mining  Company  ("SGMC"),  a 59% USE  owned  subsidiary.
Interests are held in other mineral properties (principally molybdenum), but are
either  non-operating  interests or undeveloped  claims.  Crested and its parent
U.S. Energy Corp.  ("USE") also carry on small oil and gas operations in Montana
and Wyoming.  Other Crested  business  segments are commercial  operations (real
estate and general aviation). Crested has a May 31 fiscal year.

        Crested was  incorporated  in Wyoming 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". Construction operations are carried on primarily through
USE's  subsidiary  Four Nines Gold,  Inc.  ("FNG").  Oil and gas  operations are
carried out through  Energx,  Ltd.,  a subsidiary  of USE and  Crested.  USE and
Crested originally were independent companies,  with two common affiliates (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.


                                        2

<PAGE>



        In fiscal 1998, USE and USECC signed an agreement with Kennecott Uranium
Company  ("Kennecott"),  for the purchase of  Kennecott's  interest in the Green
Mountain  Mining  Venture  ("GMMV") (the  "Acquisition  Agreement").  Please see
"Minerals-Uranium-The  Green Mountain Mining  Project-June  23, 1997 Acquisition
Agreement with Kennecott Uranium Company" below.

        In fiscal 1998,  USE and Crested  continued the  development of the GMMV
uranium  mines and the  upgrade of the GMMV's  Sweetwater  uranium  mill and the
Shootaring  Canyon  uranium mill in southeast  Utah (owned by Plateau  Resources
Ltd., a wholly-owned USE subsidiary) In addition, USE intends to implement plans
for it and Crested to consolidate  their 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 is no assurance such financing can
be obtained.

        For fiscal 1999, USE and Crested intend to seek the financing  necessary
to  continue  development  work at the  Jackpot  Mine.  In late July 1998,  USE,
Crested and Kennecott made a business  decision to temporarily cease development
work at the jackpot  Mine  because of the  expected  negative  impact on uranium
prices due to the amount of uranium inventory which USEC Inc. announced was held
in its inventory and could be sold into the market.  However,  other factors are
affecting the uranium  market  (reductions  in current and planned  production),
such that the  resumption  of  development  work and  putting  the Utah  uranium
properties  into  production in the  near-term  may be  warranted.  See "Uranium
Market  Information." USE and Crested are in discussions with various sources of
capital for this purpose, however, no funding agreements have been reached as of
the date of this  Report and there is no  assurance  any such  funding  would be
received.  Such  funding  would also  finance  USE's and  Crested's  purchase of
Kennecott's interest in the GMMV. See "June 23, 1997 Acquisition  Agreement with
Kennecott Uranium Company" below.

        USE also will be refining the mine and mill plan for the Lincoln Project
in California (held by Sutter Gold Mining Company,  a majority-owned  subsidiary
of USE and a minority  owned  subsidiary  of  Crested),  with the  objective  of
continuing  mine  development,  building a gold mill and producing  gold in late
fiscal 1999 or early fiscal 2000.  Capital and  operating  costs for the Lincoln
Project may be funded internally by Sutter Gold Mining Company,  as supplemented
by  additional  funding from USE and/or  third  parties.  However,  there are no
outside  funding  agreements  as of the  date of this  Report  and  there  is no
assurance needed funding will be received. See "Gold" below.

(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

        The Registrant operates in two business segments:  (i) minerals and (ii)
commercial operations.  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 and molybdenum.

        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.


                                              3

<PAGE>



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,
                                   1998             1997             1996
                                 --------         --------          ------

Minerals                           11%                 6%             62%
Commercial Operations              19%                29%             16%

        Crested received $429,300 in revenues from the sale of uranium in fiscal
1998. During fiscal 1996,  mineral revenues were generated from sales of uranium
under certain of the utility supply  contracts  held by Sheep Mountain  Partners
("SMP"),  a Colorado  general  partnership.  During  fiscal 1997,  there were no
revenues from mineral sales (except for molybdenum royalty interest) in part due
to the arbitration  proceedings  involving SMP (see Item 3, "Legal Proceedings -
Sheep Mountain Partners Arbitration/Litigation"). Additional mineral revenue was
generated by Crested's molybdenum interest.

(C)  NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT 
     (INCLUDING ITEM 2 - PROPERTIES DISCLOSURE).

                                    MINERALS

URANIUM

GENERAL

        Crested has 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.  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 joint subsidiary of USE and Crested).

        The property interests of Crested in Wyoming are:
        -------------------------------------------------

        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"),  owned 50 percent by USE and
USECC (the "USE Parties"), and 50 percent 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.  Rio Tinto plc
is one of the world's leading natural resource companies and owns 69% of Rossing
Uranium Corp.'s  operations in Namibia in southwest  Africa.  Rossing  currently
produces about 6,000,000 lbs. of U3O8 out of its 10,000,000 lb. annual capacity.
Rio Tinto has delayed  indefinitely  the  construction of its 4,000,000 lb. U3O8
per year Kintyre uranium  project in Western  Australia.  Kennecott  Corporation
owns and operates  several  mines  including the Bingham  Canyon,  Utah open pit
copper mine which opened in 1906.


                                        4

<PAGE>



        All of the GMMV mining claims are  accessible by county,  private and/or
United States Bureau of Land  Management  ("BLM") access roads.  Exploration and
delineation of the principal uranium resources in the proposed Jackpot Mine have
been substantially  completed. The BLM has signed a Record of Decision approving
the  Jackpot  Mine  Plan  of  Operations   following   preparation  of  a  final
Environmental  Impact  Statement  ("EIS") for the proposed mine, and on June 25,
1996,  the Wyoming  Department of  Environmental  Quality  ("WDEQ")  issued Mine
Permit No. 660 that is required for GMMV to develop the underground Jackpot Mine
and mine the uranium deposits.  The proposed mine has had no previous operators,
and will be a new mine when opened.  The Big Eagle Mine and related claim groups
(which are near the  proposed  Jackpot  Mine and are part of the Green  Mountain
Claims held by the GMMV),  are accessible by county and private  roads.  The Big
Eagle Mine was first operated by Pathfinder Mines  Corporation  ("PMC") starting
in the late 1970s.

        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 1988 to June 1, 1998, these assets were held by SMP. 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.  The
disposition of SMP cash and the CIS uranium supply contracts, remain in dispute.
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.
        ------------------------

        Approximately 10,825 acres of properties are held by 437 unpatented lode
mining claims which have been staked by, plus four leases (including three state
leases) held by Yellow Stone Fuels Corp. (an Ontario, Canada corporation,  or by
its wholly-owned  subsidiary  Yellow Stone Fuels,  Inc., a Wyoming  corporation,
hereafter  collectively or individually  referred to as "YSFC").  The properties
are located in Wyoming and New Mexico,  and are  believed to be  prospective  of
uranium and  suitable  for in-situ  leaching.  USE and Crested each own 12.7% of
YSFC.

        The property interests of USE and Crested in Utah through 
        Plateau Resources Ltd. are:
        ----------------------------------------------------------

        The Tony M Mine and the Frank M properties, underground uranium deposits
in San Juan County,  Utah 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  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

                                        5

<PAGE>



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.

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

THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT

        GMMV. In fiscal 1998, USE and USECC signed the Acquisition  Agreement to
acquire  Kennecott  Uranium  Company's  interest in the GMMV. The following is a
description  of the formation of GMMV and certain of its terms,  which have been
modified as a result of the Acquisition Agreement and related  transactions,  as
set forth under the "June 23, 1997 Acquisition  Agreement with Kennecott Uranium
Company" below.

        In fiscal  1991,  USE and USECC  entered  into an  agreement  to sell 50
percent of their  interests in the Green Mountain  uranium  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.

        After the first $50,000,000 of GMMV  expenditures  advanced by Kennecott
is spent  (which  has been  completed  as of the date of this 10-K  Report  (see
"Properties  and Mine Plan"  below)),  the GMMV expenses are to be shared by the
parties generally in accordance with their  participating  interests (50 percent
Kennecott,  50 percent USE Parties).  The agreement also provides that Kennecott
will pay a  disproportionate  share (up to an  additional  $45,000,000)  of GMMV
operating  expenses,  but  only  out of cash  operating  margins  from  sales of
processed  uranium at more than  $24.00/lb  (for  $30,000,000  of such operating
expenses),  and from sales of processed  uranium at more than $27.00/lb (for the
next $15,000,000 of such operating expenses).

        Pursuant to the GMMV joint venture agreement, each party's participation
interest  in the GMMV is subject  to  reduction  for  voluntary  or  involuntary
failure to pay its share of expenses as required in approved budgets  (including
Kennecott's   commitment   to  fund  the   initial   $50,000,000   of  the  GMMV
expenditures), so that in effect, the interest held by each party collateralizes
its performance. However, a defaulting party would remain liable for third party
liabilities  incurred during the GMMV operations,  proportionate to its interest
before reduction.

        Assuming  Kennecott's  interest is not  acquired by the USE Parties (see
below), the GMMV cash flows will be shared between Kennecott and the USE Parties
according to their participation  interests.  However, 105 of the Green Mountain
Claims, which cover the Round Park (Jackpot) uranium deposit, currently believed
to be the most significant mineralized resource on Green Mountain, were formerly
owned solely by USE. Pursuant to an agreement between USE and Crested, cash flow
from  production  of  uranium  out of these 105 Green  Mountain  Claims  will be
distributed only to USE and Kennecott,  and GMMV expenditures on such properties
will be shared 50 percent by USE and 50 percent by Kennecott. This sharing ratio
will change if  Kennecott's  interest is acquired by USE and Crested.  See "June
23, 1997 Acquisition  Agreement with Kennecott  Uranium  Company." Milling costs
will be paid by the GMMV as operating  costs and shared  among the  participants
according to their ownership interests in the ore being milled.

        The USE Parties'  share of GMMV cash flow  resulting from the balance of
the properties (outside the 105 claims),  which were previously owned by USE and
Crested together,  will be shared equally by USE and Crested.  GMMV expenditures
from such properties  will be shared 25 percent each by USE and Crested,  and 50
percent by Kennecott.  Such latter properties are expected to be developed after
the Round Park (Jackpot)

                                        6

<PAGE>



deposit is placed into production and the uranium  deposits on these  properties
may be accessed  through the proposed  tunnels at the Jackpot Mine.  Development
work at the Jackpot  Mine was  temporarily  halted in late July 1998,  see "USEC
Inc." below.

        The GMMV Management  Committee has three Kennecott  representatives  and
two USECC  representatives,  acts by majority  vote, and appoints and supervises
the project manager.  In fiscal 1993,  Kennecott became the GMMV project manager
and has continued as project manager  through May 31, 1998.  USECC has continued
work on a contract basis at Kennecott's request through May 31, 1998.

        Activities on the GMMV properties have included environmental and mining
equipment  studies,  mine  permitting and planning work,  property  maintenance,
setting  up a uranium  marketing  program,  acquisition  and  monitoring  of the
Sweetwater  Mill  and  preparation  of an  application  to  the  U.  S.  Nuclear
Regulatory  Commission  ("NRC") to convert  the  Sweetwater  Mill  license  from
standby to an operating license. USE and Crested have completed the construction
of  additional  mining  support  facilities  at the Jackpot Mine in fiscal 1998,
including;   the   installation   of  natural  gas  lines  and  phone  services;
construction  of a new shop  building  containing  offices,  a dry-change  room,
emergency generators,  air compressors and mechanical repair base; upgrading the
ore haul road; and  installation of a conveyor and stacker and other  incidental
mine activities,  while maintaining all permits and licenses at the Jackpot Mine
and Sweetwater Mill. For underground  mine  development  work, as of the date of
this 10-K Report,  the GMMV has driven twin decline  tunnels 18 feet wide and 12
feet high on a -17  percent  grade  approximately  2,000  feet  each into  Green
Mountain  with 1,000  feet of cross  cuts  between  the  declines.  All of these
development  costs in fiscal  1998 and to date in fiscal  1999 have been  funded
through the $16,000,000  loan in connection with  Kennecott's  $50,000,000  work
commitment (for its 50 percent interest).

JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY

        On June 23, 1997,  USE and USECC signed an  Acquisition  Agreement  with
Kennecott,  for the  right  to  acquire  Kennecott's  interest  in the  GMMV for
$15,000,000 and other consideration.  Kennecott paid USE and USECC $4,000,000 as
a signing  payment,  and  committed  to provide the GMMV up to  $16,000,000  for
payment of  reimbursable  costs  incurred by USECC in  developing  the  proposed
underground  Jackpot  Uranium Mine for  production and in changing the status of
the  Sweetwater  Mill from  standby  to  operational.  The work to  develop  the
proposed Jackpot Mine and ready the Sweetwater Mill for operations was performed
by USECC as  lessee of all the GMMV  mineral  properties  under a Mineral  Lease
Agreement  between  the  GMMV  and  USECC  (the  "Mineral  Lease"),  and  as  an
independent contractor under a Contract Services Agreement (the "Mill Contract")
between Kennecott (as manager of the GMMV) and USECC. Both the Mineral Lease and
the Mill  Contract,  as well as a Fourth  Amendment  to the GMMV Mining  Venture
Agreement  among  Kennecott,  USE and USECC (the  "Fourth  Amendment to the GMMV
Agreement"), were executed simultaneously with the Acquisition Agreement.

        The  $16,000,000  provided  by  Kennecott  to the GMMV was  advanced  to
Kennecott by an  affiliate,  Kennecott  Energy  Company  ("KEC") under a secured
recourse  Promissory  Note  (the  "Note")  bearing  interest  at 10.5% per annum
starting  in  April  1999  until  paid in full.  As of the  date of this  Report
approximately  $14,000,000  of the  $16,000,000  loan  has  been  spent.  If the
Acquisition  Agreement closes, the Note converts to become a debt of the GMMV or
its successors,  and would be payable quarterly out of 20% of cash flow from the
GMMV properties, but not more than 50% of the earnings for such quarter from the
GMMV operations,  before interest,  income tax,  depreciation and  amortization.
However,  the Note is payable by GMMV or its  successors (i) in full on June 23,
2010  regardless  of cash flow and  earnings  of the GMMV,  or (ii)  sooner  (on
December 31, 2005) if an  economically  viable  uranium mine has not been placed
into  production  by such date.  The Note is secured  by a first  mortgage  lien
against  Kennecott's  50% interest in the GMMV pursuant to a Mortgage,  Security
Agreement,  Financing  Statement and  Assignment  of Proceeds,  Rents and Leases
granted by  Kennecott  to KEC (the  "Mortgage").  At closing of the  Acquisition
Agreement, USE,

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<PAGE>



USECC and their  assignee  (if such is assigned)  will assume the Note,  and the
assets of the GMMV will be subject to the Mortgage.

        Pursuant  to the  Mineral  Lease and the Mill  Contract  included in the
Acquisition Agreement,  USECC is to expend funds to develop the proposed Jackpot
Mine and  nearby  Big Eagle  Mine,  and work with  Kennecott  in  preparing  the
Sweetwater  Mill  for  renewed  operations.   Such  work  was  funded  from  the
$16,000,000  loan provided to the GMMV by Kennecott.  Under the Fourth Amendment
to the GMMV  Agreement,  Kennecott is entitled to a credit  against  Kennecott's
original  $50,000,000  commitment to fund the GMMV, in the amount of two dollars
of credit for each one dollar of such funds out of the  $16,000,000  provided by
Kennecott to the GMMV,  plus the $4,000,000  paid to USE and USECC on signing of
the Acquisition  Agreement.  These credits  satisfied the balance of Kennecott's
initial funding commitment to acquire a 50% interest in the GMMV.

        Pursuant to the Fourth  Amendment to the GMMV  Agreement,  USECC submits
detailed invoices for reimbursable costs,  defined in the Mineral Lease and Mill
Contract to include USECC's labor and equipment costs  (maintenance and rental),
environmental compliance costs, direct general and administrative costs of USECC
staff incurred in monitoring and invoicing  project costs and  expenditures  and
associated engineering costs and expenditures, and an additional amount equal to
10% of all the preceding costs and expenditures as an administrative charge (the
same 10% as previously  allowed in the GMMV  Agreement).  USECC also charges the
GMMV rental  expense for equipment  owned or leased by USECC.  The  reimbursable
cost  allocations  for each phase of the  development  of the  Jackpot  Mine and
upgrade of the Sweetwater Mill to operating  status are made by the GMMV against
budgets under the Mineral Lease and Mill Contract. Also included in reimbursable
costs will be the amounts required to cover all reclamation activities that will
result from operations  conducted on the mining properties  pursuant to the Mill
Contract  and the  Mineral  Lease  (USE and USECC will be  required  to put such
reclamation cost amounts aside in a sinking fund to pay for the reclamation work
when production commences).

        Kennecott provided funds to the GMMV each month in an amount adequate to
reimburse USECC for invoiced costs and restore the USECC working account balance
to  $1,000,000.  Payment  by GMMV of the  monthly  invoiced  costs is subject to
Kennecott's  confirmation  that such costs conform to the Mineral Lease and Mill
Contract  budgets.  Subject to and at the closing of the Acquisition  Agreement,
Kennecott will advance to the GMMV cash equal to any difference  between (i) the
$16,000,000  commitment and (ii) amounts advanced to pay reimbursable  costs and
maintain the working capital account up until the closing date.

        Also pursuant to the Mineral Lease,  USECC pays the GMMV a monthly lease
fee of $3,363.  Separately and pursuant to the Mineral Lease,  USE and USECC are
required to pay all rental,  leasehold,  property and other payments relating to
the mining properties, and all utility and other payments, taxes and assessments
that may be  assessed  against  such  properties  during the term of the Mineral
Lease.

        Closing  of the  Acquisition  Agreement  is  subject  to USE  and  USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market  capitalization of at least  $200,000,000  (this
condition  has not yet  been met and may not be met by the  deadline);  (ii) the
parties to the  Acquisition  Agreement  must have  received all  authorizations,
consents,  permits and  approvals of  government  agencies  required to transfer
Kennecott's  interest in the GMMV to the acquiring  entity;  (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately  $25,000,000 of
reclamation  bonds,  in  addition  to  other  guarantees,   indemnification  and
suretyship  agreements  posted by Kennecott on behalf of the GMMV;  and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 in cash to Kennecott at
closing and assume all  obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 Note and the Mortgage) from and
after the closing.  Under very limited  circumstances,  the closing date for the
Acquisition  Agreement  may be  postponed  not later than  October 30, 1998 (see
"USEC

                                        8

<PAGE>



Inc. " below).  The parties to the Acquisition  Agreement also executed a mutual
General  Release  with  respect  to any and all  claims  that they may have with
respect to any prior disputes  concerning the GMMV,  which General Release would
be delivered to all such parties at closing of the Acquisition  Agreement.  Upon
closing of the  Acquisition  Agreement,  the Mineral Lease and the Mill Contract
will be terminated and USE, USECC or the acquiring  entity will own  Kennecott's
50% of the GMMV,  although its  properties  will remain  subject to the Mortgage
until the Note is paid in full. If the Acquisition  Agreement is closed, USE and
Crested  would each own 50% of the GMMV,  and Crested will thereby own the right
to 25% of the  revenues  from the Round Park  (Jackpot  Mine)  deposit,  because
Crested  will have  acquired  one-half of  Kennecott's  50% interest in the GMMV
(which includes the Round Park deposit).

        Crested  estimates that at least $40,000,000 will be needed to close the
Acquisition Agreement  transactions  ($15,000,000 closing cash purchase price to
Kennecott,  plus  $25,000,000 to assume or cause the  replacement of reclamation
bonds, guarantees,  indemnification agreements and suretyship agreements related
to the GMMV properties and the Sweetwater  Mill). USE and Crested  presently are
negotiating with investment banking firms to raise up to $100 million in debt or
a combination of debt and equity  financing to close the  Acquisition  Agreement
and put the uranium  assets into  production.  Such  negotiations  have not been
finalized as of the date of this Report.  There is no assurance  this  financing
can be obtained  by October  30, 1998 in light of current  prices in the uranium
oxide market.

        If the  Acquisition  Agreement is not closed,  USE, USECC and Kennecott,
shall  retain  their  respective  50%  interests  in the GMMV,  and  Kennecott's
obligation  to repay the  $16,000,000  loaned by KEC  shall  remain  Kennecott's
obligation,  without any adverse  effect on the 50% interest in the GMMV held by
USE and USECC.  However,  the Jackpot Mine  development work and Sweetwater Mill
upgrade work funded by the $16,000,000  loan will have benefitted all parties to
the GMMV. Further, if the Acquisition  Agreement is not closed, the GMMV parties
will remain in the GMMV, and the  development,  mining and milling costs will be
paid for by such  parties.  If one of the  parties  does not pay its share,  its
percentage in the GMMV is reduced if the other party pays instead.  In the event
the Acquisition  Agreement is not closed,  Kennecott may not wish to participate
further in the  project.  If USE and USECC have the funding to pay for all costs
to continue  the  development  of the Jackpot  Mine and the upgrade  work at the
Sweetwater Mill (but no the funds to purchase  Kennecott's  interest  directly),
and USE and USECC make the decision to continue the  project,  then  Kennecott's
interest  would be  reduced.  Thus,  it is possible  that USE and Crested  could
indirectly purchase Kennecott's interest through funding the project through the
GMMV.

        USEC INC. In 1992,  Congress  enacted  the  "Energy  Policy Act of 1992"
creating the U.S. Enrichment Corporation ("USEC") to operate the U.S. Department
of Energy's ("DOE") uranium enrichment program. Congress later enacted the "USEC
Privatization  Act of 1996" to  privatize  USEC and  allowed the DOE to transfer
various  forms of  uranium to USEC.  The DOE has  transferred  approximately  75
million  pounds of uranium and uranium  equivalents  to USEC.  On July 22, 1998,
USEC Inc. became a publicly traded company.  Because of the anticipated negative
impact  of USEC  Inc.'s  sales  of new  uranium  inventory  in the  market  (see
"Marketing - U.S.  Enrichment  Corporation,"  below) on uranium oxide prices, on
July 31,  1998,  Kennecott  and USE and  Crested  made a  business  decision  to
temporarily place the Jackpot Mine on standby,  which resulted in the lay off of
approximately  45 employees.  Resumption of  development  work with funding from
GMMV provided by Kennecott  will depend on  resolution of the USEC Inc.  uranium
inventory  sales  issue (see "U.S.  Enrichment  Corporation"  below and Item 13,
"Legal  Proceedings") and improved uranium prices.  However, it is possible that
third party  financing  will be obtained,  in which event the  development  work
would resume and the  Acquisition  Agreement  would be closed.  The  anticipated
negative  impact  of the  USEC  Inc.  inventory  on the  uranium  market  may be
mitigated by other factors.  Crested  believes the GMMV's  decision to place the
development  of the  Jackpot  Mine on  standby,  should be viewed as an  interim
event,  because  anticipated  improved uranium prices based on supply and demand
projections,  or even continued level prices, could lead to a decision to resume
development work on the Jackpot Mine. See "Uranium Market Information" below.

                                        9

<PAGE>



        As a result of the current  uncertainty  surrounding the uranium market,
and the July 31, 1998  suspension of  development  work on the Jackpot Mine, USE
and Crested anticipate that certain provisions of the Acquisition Agreement will
be  modified  after  discussions  with  Kennecott.  Such  changes may include an
extension of the deadline for purchase of Kennecott's  interest in the GMMV; the
$200 million market  capitalization  requirement;  provisions for funding GMMV's
standby  maintenance  costs;  and other items.  However,  as of the date of this
Report, no such modifications had been finalized with Kennecott.

PROPERTIES AND MINE PLAN.

        The GMMV owns a total of 521 claims on Green Mountain, including the 105
claims on which the Round Park  (Jackpot)  uranium  deposit is located.  Surface
rights are owned by the United States Government under management by the BLM. In
addition,  other uranium  mineralization  has been delineated in the Phase 2 and
Whiskey  Peak  deposits  on these  claims,  which  formerly  belonged to USE and
Crested.  These deposits are  undeveloped.  Roads and utilities have been put in
place, which are satisfactory to support mine development.

        The GMMV also owns the Big Eagle  Properties  on Green  Mountain,  which
contain substantial uranium  mineralization,  and are adjacent to the other GMMV
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 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.  Permits
transferred  to the GMMV for the  properties  include:  a permit to mine, an air
quality permit, and water discharge and water quality permits. The GMMV owns the
mineral rights to the underlying unpatented lode mining claims.

        The Round Park (Jackpot) mining claims 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  plans to mine this
mineralize  material from two decline tunnels (-17 percent slope) in the Jackpot
Mine, which are being driven  underground from the south side of Green Mountain.
The first of several  mineralized  horizons is about 2,300 feet  vertically down
from the top of Green Mountain.

        The  declines  will  ultimately  extend up to  12,300  feet in length to
access  the  different  zones  of the  deposit;  one  decline  will be used  for
ventilation and transportation of personnel, and the other will convey ore, rock
and waste out of the mine.  The mine plan  estimates  that the Jackpot Mine will
produce  about 3,000 tons of uranium ore per day and will have an expected  mine
life of 13 to 22 years. The Big Eagle Mine facilities  located about three miles
west of the Jackpot Mine site will be  utilized.  As many as 250 workers will be
required during mining full operations.  To the date of this Report, USE has run
approximately 2,000 feet of tunnel in each decline.

        The USE  Parties  expect the  Jackpot  Mine  development  costs will not
exceed  an  additional  $10,000,000  to  reach  the  "B"  zone to  continue  the
development  in the ore at the Round Park deposit.  However,  cost estimates may
change as the development progresses.  Pursuant to the GMMV agreement, Kennecott
agreed  to  fund  the  initial   $50,000,000  in  development   costs  including
reclamation  costs. To April 30, 1997, such expenditures  totaled  approximately
$20,355,142.  In fiscal 1998, approximately $10,160,896 of additional GMMV costs
had been funded by the $16,000,000  loan.  With the 2 for 1 credit  provision in
the Acquisition  Agreement  which also applied to the $4,000,000  signing bonus,
Kennecott had completed its $50,000,000  commitment.  Since June 1997, Kennecott
has advanced approximately $14,000,000 of the $16,000,000 to the GMMV, leaving a
balance  of  $2,000,000.  Whether  this  $2,000,000  will be made  available  by
Kennecott  for the GMMV to keep the Jackpot Mine on standby  status has not been
determined as of the date of this Report.

                                       10

<PAGE>



        SWEETWATER  MILL. In fiscal 1993,  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.

        Kennecott is manager and operator of the  Sweetwater  Mill and, as such,
will be  compensated  by GMMV  out of  production.  Payments  for  pre-operating
management  will be based on a sliding scale  percentage of mill cash  operating
costs prior to mill operation;  payments for operating  management will be based
on 13 percent of mill cash  operating  costs when  processing  ore. Mill holding
costs  have  been  paid by the  GMMV  and  funded  by  Kennecott  as part of its
$50,000,000 funding commitment.

        The Sweetwater Mill includes  buildings,  milling and related equipment,
real estate  improvements,  mining and mill site claims and other real  property
interests,  personal  property and  intangible  property  (including  government
permits  relating to  operation of those  properties).  The major assets are the
mill buildings and equipment located on approximately 92 acres.

        The 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 has agreed to be responsible  for compliance
with mill decommissioning and land reclamation laws, for which the environmental
and  reclamation  bonding  requirements  are  approximately  $24,330,000,  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  (see "Notes F and K to the  Consolidated  Financial  Statements  for
fiscal year ended May 31, 1998").

        The  reclamation  and  environmental  liabilities  assumed  by the  GMMV
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.  On June 18,
1996,  Kennecott  established  an  irrevocable  Letter of Credit  through Morgan
Guaranty Trust Company of New York City in the amount of $19,767,079 in favor of
the  Wyoming  Department  of  Environmental  Quality  ("WDEQ")  for  reclamation
requirements  of the GMMV.  The  Letter of Credit  was  increased  by $10,000 on
August 26, 1996 to cover  off-permit  wetland  enhancement.  The WDEQ  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.

        Although  the  GMMV is  liable  for all  reclamation  and  environmental
compliance  costs  associated  with mill and site  maintenance,  as well as mill
decontamination  and cleanup and site  reclamation and cleanup after the mill is
decommissioned,  USECC  believes it is unlikely USECC would have to pay for such
costs  directly.  First,  based on current  estimates of cleanup and reclamation
costs (reviewed annually by the oversight  agencies),  such costs covered by the
letters of credit or other surety appear to be within the $24,330,000 of

                                       11

<PAGE>



reclamation  bonds posted by Kennecott for GMMV. These costs are not expected to
increase  materially if the mill is not put into operation.  Second,  UNOCAL has
agreed that if the GMMV incurs expenditures for environmental  liabilities prior
to the earlier of  commercial  production  by GMMV or  February 1, 2001,  (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000  (escalated  according to the Consumer Price Index
to current dollars,  from 1993) of such expenditures.  Any reimbursement for the
loan may only be  recovered by UNOCAL from 20% of future cash flows from sale of
uranium  concentrates  processed through the Sweetwater Mill. Third,  payment of
reclamation and environmental  liabilities  related to the Mill is guaranteed by
Kennecott. Last, the GMMV will set aside a portion of operating revenues to fund
reclamation and environmental liabilities when mining and milling operations are
finally shut down.

        Kennecott  will be  entitled  to  contribution  from the USE  Parties in
proportion  to their  participating  interests  in the  GMMV,  if  Kennecott  is
required to pay mill cleanup  costs  directly  pursuant to its  guarantee.  Such
contributions  would be required only if the liabilities  cannot be satisfied by
Kennecott  within the balance of any  development  commitment as provided by the
Acquisition Agreement, after the credits provided by the Fourth Amendment to the
GMMV (see the "June 23, 1997 Acquisition  Agreement with Kennecott"  above).  In
addition,  if and to the extent such  liabilities  resulted  from  UNOCAL's mill
operations,  and payment of the liabilities was required before February 1, 2001
and before mill production  resumes,  then up to $8,000,000  (escalated) of that
amount would be paid by UNOCAL, before Kennecott would be required to pay on its
guarantee.  However,  notwithstanding the preceding,  the extent of any ultimate
USECC liability for contribution to mill cleanup costs cannot be predicted.

        PERMITTING AND ACTIVITIES. The WDEQ issued a mine permit for the Jackpot
Mine on June 26, 1996. This Permit allows the GMMV to proceed with  construction
of mine surface  facilities,  further  underground mine development and eventual
mining of the Round Park (Jackpot) Deposit.

        The  Jackpot  Mine  Plan  of  Operations   and  a  combination   of  the
alternatives  analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle  Mine pits some  three  miles from the  Jackpot  declines,  the
upgrading of existing roads,  and the  construction of new haul road segments to
transport  ore  to  the  Sweetwater   Mill.  These  roads  will  be  subject  to
modification  in  alignment  necessary to minimize or avoid  adverse  impacts to
riparian and cultural resources.

        Kennecott  has  initiated  discussions  and  made  filings  with the NRC
regarding  amendments to the Source Material License to resume ore processing at
the  Sweetwater  Mill.  The NRC has advised that the Operating  Permit should be
issued in September 1998.

        Crested  believes  all of the  uranium  operations  in  which it owns an
interest are in compliance with these rules.  There ultimately will be an effect
on the earnings of USE and Crested from environmental compliance expenditures by
the GMMV,  since the GMMV  operations will be accounted for by the equity method
if  the  acquisition  of  Kennecott's  interest  in  the  GMMV  pursuant  to the
Acquisition  Agreement  does not close.  GMMV's  expenses  for  compliance  with
environmental  laws (as well as other  matters) are not  expected to  materially
affect the cash flow of USE and Crested during the next two years.


                                       12

<PAGE>



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.  The Shootaring  Mill holds a source  materials  license from the
NRC. USE agreed:

        (a) to perform all studies,  remedial or other response actions or other
activities  necessary from time to time for Plateau to comply with environmental
monitoring  and other  provisions  of (i) federal and state  environmental  laws
relating to hazardous or toxic  substances,  and (ii) the Uranium Mill  Tailings
Radiation Control Act, the Atomic Energy Act of 1954, and administrative  orders
and licenses  relating to nuclear or radioactive  substances or materials on the
property of, or produced or released by, Plateau; and

        (b) to  indemnify  CPC from all  liabilities  and costs  related  to the
presence of hazardous  substances or radioactive  materials on Plateau property,
and to any future  violation  of laws and  administrative  orders  and  licenses
relating to the environment or to nuclear or radioactive substances.

        Plateau  transferred  $2,500,000  cash to fund  the  "NRC  Surety  Trust
Agreement"  with a  commercial  bank as  trustee.  The  trustee is to pay future
decommissioning  costs of  Shootaring  Mill as directed  by the NRC.  The amount
transferred  to the  trust is the  minimum  amount  now  required  by the NRC as
financial assurance reclamation of the Shootaring Mill.

        Plateau transferred  $4,800,000 cash to fund the "Agency Agreement" with
a  commercial  bank.  These funds will be  available  to  indemnify  CPC against
possible claims related to  environmental or nuclear matters as described above,
and against  third-party  claims related to an agreement between Plateau and the
third-party (see Note K to the USE Consolidated  Financial Statements for fiscal
year ended May 31, 1998).

        There are no present  claims  against  funds held under either the Trust
Agreement or Agency Agreement.  Funds (including accrued interest) not disbursed
under  the  Trust  and  Agency  Agreements  will be paid  over to  Plateau  upon
termination of such Agreements with NRC concurrence.

        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.

        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 to $6,700,000, the NRC issued the new license on
May 2, 1997.  Plateau has an  additional  $1,600,000  of  government  securities
available for further bonding needs.

                                       13

<PAGE>



        In fiscal 1998, in anticipation of resuming milling operations,  Plateau
has  significantly  performed a reactivation and  rehabilitation  program at the
Mill.  Plateau is awaiting approval of the water control permit for the tailings
facility from the State of Utah Water Control Division.

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  and  single  family,  mobile  home and
recreational vehicle sites (all with utility access). The townsite is located on
a State of Utah lease near Lake  Powell and is being  operated  as a  commercial
enterprise.  An  amendment  was entered  into on April 1, 1997 on the Utah State
lease  covering the Ticaboo  townsite  whereby the State deeded  portions of the
Townsite  to Canyon on a sliding  scale  basis.  USE and Crested may develop the
townsite  to sell home and mobile  home sites as the  nearby  Shootaring  Canyon
uranium mill commences operations.

YELLOW STONE FUELS CORP.

        Yellow Stone Fuels Corp., 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.
("YFI").  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  and  Sweetwater  Mills,  USECC  decided to take a
minority  position in Yellow Stone Fuels,  Inc. 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 in the
ore body, causing the uranium contained into the ore to dissolve.  The resulting
solution is pumped to the surface where it is further  processed to a dried form
of  uranium  which is  shipped  to  conversion  facilities  for  eventual  sale.
Generally,  the ISL process is more cost  effective and  environmentally  benign
compared to conventional  underground mining techniques.  In addition, less time
may be required to bring an ISL mine into  operation  than to permit and build a
conventional mine.

        In Wyoming,  YSFC has staked and/or holds 356  unpatented  mining claims
and has entered into four State leases  covering a total of 9,040 acres  located
in the Powder River Basin and Red Desert uranium  districts.  Three State leases
have a 10 year term expiring October 1, 2006; one State lease has a 10 year term
expiring  October 1, 2008; each require annual rental of $1.00 per acre for five
years,  then $2.00 for the second five years,  or sooner upon the  discovery  of
commercial  quantities  of  minerals;  plus a 5% gross  royalty  of the value of
uranium bearing ore mined from the leased  properties is payable to the State of
Wyoming.

        Also in Wyoming,  YSFC owns or leases a total of 113  unpatented  mining
claims in the Powder River Uranium  District.  One group of 63 claims is located
approximately  20 miles northwest of the producing Rio Algom's Smith Ranch Mine.
These  claims may be similar in geology  and  hydrology  to the Smith  Ranch and
Cameco's Highland ISL operations.

        In New Mexico, YSFC has staked and holds 39 unpatented mining claims and
has  leased 8 patented  mining  claims  (approximately  945 acres) in the Grants
uranium  region of New Mexico.  The 8 unpatented  mining  claims  (covering  165
acres) are held by a 5 year renewable lease ($500 monthly rental, and a 5% gross

                                       14

<PAGE>



royalty on revenues  from uranium sold from the  property).  Other claims in the
immediate  area were mined for up to 600,000  pounds U3O8 at a grade of 0.24% by
other  companies in the 1970s.  The extent of further  mineral  resources on the
properties is presently unknown.

        In  fiscal  1997,  USE,  USECC and the GMMV have  entered  into  several
agreements with YSFC,  including a Milling Agreement through Plateau  Resources.
The  Shootaring  Canyon mill  facilities  will be available to YSFC to transport
uranium  concentrate  slurry  and loaded  resin to the mill and  process it into
uranium  concentrate  ("yellowcake"),  for which Plateau will be paid its direct
costs plus 10%. Other agreements include a Drill Rig Lease Agreement for YSFC to
access USE drilling rigs at the  prevailing  market rates;  an  Outsourcing  and
Lease Agreement for assistance from USECC accounting and technical  personnel on
a cost plus 10% basis and a sublease  for 1,000  square feet of office space and
use of various  office  equipment for $3,000 per month;  and a  Ratification  of
Understanding  by which  USECC will  offer to YSFC  (with a reserved  royalty in
amounts  to be agreed on later)  any  uranium  properties  amenable  to  in-situ
production  which USECC  acquires or has the right to acquire.  In return,  YSFC
will  offer to USECC ( with a reserve  royalty in amounts to be agreed on later)
uranium properties  amenable to conventional  mining methods which YSFC acquires
or has the right to  acquire.  USECC also will make its  library  of  geological
information  and related  materials  available to YSFC.  YSFC also has a Storage
Agreement  with GMMV by which YSFC stores  used  low-level  contaminated  mining
equipment at the Sweetwater Mill.

        YSFC has  11,764,000  shares of Common  Stock  issued  and  outstanding,
including  3,000,000 shares 25.4%) issued to USE and Crested.  Most of the funds
used by YSFC have been provided by USECC under a $400,000 loan facility. As part
consideration  for the  loan,  USE  and  Crested  entered  into a  Voting  Trust
Agreement having an initial term of 24 months with two principal shareholders of
YSFC,  whereby USE and Crested will have voting  control of more than 50% of the
outstanding shares of YSFC. See Part III of this Report.

SHEEP MOUNTAIN PARTNERS ("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.  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.  USE and Crested  filed  petitions  for
confirmation of the Order and Award with the

                                       15

<PAGE>



U.S.  District  Court of  Colorado  and the Court has  entered a Second  Amended
Judgment  confirming  the monetary  and  equitable  provisions  of the Order and
Award.  Some of the claims have been  resolved and the rest are to be determined
by the 10th  Circuit  Court of Appeals  ("CCA"),  which is  expected to occur in
fiscal   1999   (see   "Legal    Proceedings   -   Sheep    Mountain    Partners
Arbitration/Litigation").

        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.

        Various structures and equipment are located on the properties including
three operating and three non-operating mine headframes with hoists, maintenance
shops,  offices,  and other buildings,  equipment and supplies.  An ion-exchange
plant is located on the properties.

        Of the claims,  which contain a  previously-mined  open-pit uranium mine
and three underground mines,  Pathfinder Mines Corporation ("PMC") has the right
to mine a portion (the Congo area), by open-pit or in-situ techniques to certain
depths,   without   royalty  or  other   obligations  to  USECC.   PMC  has  the
responsibility   for  reclamation  work  needed  thereon  as  a  result  of  its
activities. If PMC mines any portion of the properties outside the Congo area, a
3% royalty is owed to USECC. Conversely, USECC has the right to mine portions of
the claims and leases outside the Congo area (and specified  surrounding  zones)
by  underground  mining  techniques,  subject to a 3%  royalty  to PMC.  PMC had
conducted  an  exploration  program  on a portion of these  properties,  and has
advised the Company  that it does not intend any  further  development.  PMC has
decommissioned and dismantled its two uranium mills in the vicinity.

        The ion  exchange  plant on the  properties  was 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.   Management  is  reviewing  the  economics  of
relicensing  this facility as part of a potential  in-situ leach uranium  mining
operation.

        PROPERTY   MAINTENANCE.   As  operating   manager  for  SMP,  USECC  was
responsible for exploration, mining, and care and maintenance of the SMP mineral
properties. USECC was to have been reimbursed by SMP for certain expenditures on
the properties.  During the SMP  arbitration/litigation,  Nukem/CRIC  refused to
allow SMP to pay USECC for care and  maintenance and other work performed on the
properties  since  the  spring of 1991.  As part of the Order and Award  made on
April 18, 1996, the Arbitration  Panel awarded USECC $2,065,989 for Nukem/CRIC's
50% share of care and maintenance  expenses for the SMP properties plus interest
of $446,834 to March 31, 1996 and per diem cost of $616 thereafter.  See Item 3,
"Legal Proceedings - Sheep Mountain Partners Arbitration/Litigation - Stipulated
Arbitration."  Currently,  USECC has a maintenance staff on site to care for and
maintain the mines and pump mine water to prevent  flooding of the mines,  which
could destroy  equipment and the concrete  lined vertical  shafts  accessing the
various levels of uranium mineralization.

        SMP  MARKETING.  Nukem,  Inc.  was  engaged by SMP to  provide  SMP with
financial  expertise  and  marketing  services.  SMP  entered  into a  marketing
agreement with CRIC,  which was  concurrently  assigned to and assumed by Nukem.
Nukem was to provide  marketing  and trading  services for SMP,  which  included
acquiring uranium for SMP by purchasing or borrowing. Nukem was to be reimbursed
at its direct costs for acquiring such uranium for SMP. USECC, SMP and Nukem had
seven long-term contracts plus an additional  long-term contract with a domestic
utility  that  was  awarded  to SMP by the  Arbitration  Panel  (three  of these
contracts  remained in SMP until the partial  settlement  on June 1, 1998).  The
contracts all were for sales of

                                       16

<PAGE>



uranium originally to eight domestic  utilities.  SMP's uranium supply contracts
were either base-price  escalated or  market-related  (referring to how price is
determined for uranium to be delivered at a future date).  Base- price escalated
contracts set a floor price which is escalated  over the term of the contract to
reflect changes in the GNP price deflator. Two of the base priced contracts have
been  fulfilled and the third  base-price  escalated  contract of SMP required a
delivery  of 130,000  pounds of uranium  concentrates  on May 15, 1997 which was
made,  completing  that  contract.  The fourth  contract  of SMP (which has been
transferred to USECC) is a  market-related  contract,  and calls for delivery of
unspecified  quantities  of U3O8  totaling  approximately  1,000,000  lbs.  U3O8
(depending  on the  number of  reactors  this  utility  is  operating  and their
consumption levels). This contract may be completed in calendar 2000.

        Under the  market-related  contracts,  the  purchaser's  cost depends on
quoted market prices based on estimated  prices at which a willing  seller would
sell its U3O8 during specified periods before delivery.

        Through fiscal 1997 and for prior years,  USECC and its affiliates  have
satisfied most of these contracts with uranium concentrates  previously produced
by SMP,  borrowed from others,  or purchased on the open market. In fiscal 1998,
$429,300 in revenues was received representing Crested's portion of revenues for
a delivery  made in late fiscal 1997 by Nukem.  See "Legal  Proceedings  - Sheep
Mountain Partners Arbitration/Litigation."

        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.

URANIUM MARKET INFORMATION.

        There are  currently  nine  producers  of uranium in the United  States,
which  collectively  produced  5,800,000 pounds of U3O8 during calendar 1997 and
produced approximately 6,300,000 pounds in calendar 1996. Production in the U.S.
for 1998 is estimated at 5,000,000 pounds. In addition,  there are several major
producers  in Canada  (Cameco,  Cogema  Canada,  Ltd.,  Rio Algom and  Uranerz);
Australia  (Energy  Resources of Australia  and  Pancontinental  Mining,  Ltd.);
Africa (Cogema and Rio Tinto's  Rossing unit),  and Europe,  which  collectively
produced  about  78,000,000  pounds of U3O8  during  calendar  year 1997 and are
expected to produce  approximately  the same amount in  calendar  1998.  Several
members of the  Commonwealth  of Independent  States ("CIS") also export uranium
into the  western  markets  although  the  amount of such  exports to the United
States and European markets are currently limited.

        Uranium is primarily used in nuclear  reactors to heat water which drive
turbines to generate  electricity.  According to the Uranium  Institute based in
London,  England,  nuclear  plants  generated  approximately  17% of the world's
electricity  in 1996,  up from less than 2% in 1970.  According  to the  Uranium
Institute,  through the year 2000,  nuclear  generating  capacity is expected to
grow at 1 % per annum primarily as a result of new reactor  construction outside
the United States and increased efficiencies of existing reactors.

        In 1997,  437  nuclear  power  plants were  operating  and 28 were under
construction worldwide,  according to the Uranium Institute. Uranium consumption
by world commercial  reactors has increased from about 60,000,000 pounds in 1981
to approximately 165,000,000 pounds in 1997.


                                       17

<PAGE>



SUPPLY AND DEMAND

        From the early 1970s  through 1980,  the Western World uranium  industry
was characterized by increasing  uranium  production fueled by overly optimistic
projections  of nuclear power  growth.  From 1970 to 1985,  production  exceeded
consumption by approximately 500,000,000 pounds U3O8. By the end of 1985, enough
inventory  had been amassed to fuel Western  World  reactor  needs for over five
years. In response, sales of excess inventory followed and prices plummeted from
highs above $40 per pound in 1979 to below $8 per pound U3O8 in 1992.  As prices
fell, Western World production declined  dramatically from a high of 115,000,000
pounds in 1980 to a low of 57,000,000 pounds by 1994. Since 1985, uranium demand
in the Western World has exceeded  Western World  production by over 400,000,000
pounds.  In 1995,  uranium demand in the Western World was  129,000,000  pounds,
nearly double the production of 66,000,000 pounds by Western World producers. In
1997, total world demand rose to an estimated  165,000,000  pounds,  while world
mine supply  increased  only to an estimated  93,000,000  pounds  (including the
78,000,000 pounds produced in North America,  Australia,  Africa and Europe, see
above).  Accordingly, by the end of 1997, excess inventory levels in the Western
World  (inventory  in excess of preferred  levels) had been reduced to less than
1.5 years of forward  reactor  requirements,  and the excess  inventories in the
U.S. had been reduced to less than one year of projected  forward  requirements.
This trend is expected to continue in calendar 1998.

        Countering the drawdown of Western World  inventories  and  contributing
directly to the downturn of market  prices was the  importation  of uranium from
the CIS  republics,  and to a lesser  extent,  from Eastern  Europe and mainland
China starting in 1989. As the result of an anti-dumping  suit filed in the U.S.
("CIS  Anti-dumping  Suit") in 1991  against  republics  of the CIS,  suspension
agreements  were  signed  by six CIS  republics  (Russia,  Ukraine,  Kazakhstan,
Uzbekistan,  Kyrgyzstan  and  Tajikistan)  in  October  1992.  These  Suspension
Agreements  applied price related  volume quotas to CIS uranium  permitted to be
imported into the U.S, so that to rectify prior damage to domestic United States
uranium  producers  from dumping sales of U3O8, all spot sales of U3O8 delivered
into the U.S.  now reflect  quota  restrictions  on U3O8  imports  from the CIS.
Exceptions are allowed by provisions  which allow CIS uranium to be imported for
certain long-term  uranium sales contracts entered into with domestic  utilities
prior to March 5, 1992 ("grandfathered contracts").

        The Suspension  Agreement with Russia was amended in March 1994 allowing
for up to 43,000,000 pounds of Russian uranium to be imported into the U.S. over
the 10 years  beginning  March  1994,  but only if it is  matched  with an equal
volume  of new U.S.  production.  Based on U.S.  consumption  for the  1994-2003
period (as  reported or  projected  by the  Department  of Energy),  the matched
volumes could account for up to 18% of the supply to the U.S. market during this
period.

        In  1995,  the  Republics  of  Kazakhstan   and   Uzbekistan   concluded
negotiations with the U.S. DOC to amend their respective Suspension  Agreements.
Both  amendments  lowered  initial prices  relating to their  respective  import
quotas  allowing  imports to occur.  Additionally,  the amendments  require that
uranium mined in those Republics and enriched in another country for importation
in the U.S. will count against their respective quotas. The Uzbekistan amendment
replaces the price-tied  quota system with one based upon U.S.  production rates
after October 1997. As U.S.  production rates increase,  additional imports from
Uzbekistan are allowed.

        Although  these  amendments to three of the  Suspension  Agreements  may
increase the supply of uranium to the U.S. market,  they also provide  increased
predictability  concerning CIS imports into the U.S. Due to declining production
levels in the CIS  republics,  uranium  from these  sources  has  recently  been
difficult to obtain.  Consequently,  the market impact of CIS primary production
may be diminishing.

        In January  1994,  the U.S. and Russia  entered  into an agreement  (the
"Russian HEU Agreement") to convert highly  enriched  uranium  ("HEU"),  derived
from dismantling nuclear weapons, to low enriched

                                       18

<PAGE>



uranium ("LEU") suitable for use in nuclear power plants. At a projected maximum
conversion rate for HEU to LEU, approximately 24,000,000 pounds of U3O8 per year
will be available to Western World markets.

        In 1996, the U.S.  Congress  passed  legislation in compliance  with the
Suspension  Agreements,  which allows the  converted  Russian HEU material to be
sold in the U.S.  market at an annual  rate not to  exceed  2,000,000  pounds in
1998,  increasing  gradually to 20,000,000 pounds in 2009. At this maximum rate,
HEU material could supply  approximately 40% of annual U.S. reactor requirements
projected for 2009.  However,  the Russians may require much of the material for
its own internal use and the amounts which may be imported into the U.S.  cannot
be predicted.  In addition, an uncertain amount of HEU material is allowed to be
used in the U.S. for  overfeeding  of enrichment  facilities  and as a source of
Russian uranium for matching sales.

        Industry  analysts  expect  annual  Western World  consumption  to be at
levels  between  135,000,000  and  165,000,000  pounds U3O8  through  2001.  USE
management  estimates that between 30,000,000 and 40,000,000 pounds U3O8 of this
demand could be filled by a  combination  of  government  stockpiles  (including
converted  Russian  and U.S.  HEU) and  imports  from CIS  republics  and former
Eastern  Bloc  countries.   To  achieve  market  equilibrium  by  2001,  primary
production  in the  Western  World will need to supply  between  95,000,000  and
120,000,000  pounds U3O8 on an annual basis subject to some  adjustment  for any
remaining inventory drawdown and limited uranium  reprocessing.  Production from
existing facilities in the Western World,  however, is projected to decline from
current levels  (78,000,000  pounds in 1998) to approximately  57,000,000 pounds
U3O8 by 2001 as reserves are depleted.  New production therefore will have to be
brought  on  line to fill a  potential  annual  gap of  between  38,000,000  and
63,000,000  pounds U3O8.  While current price levels may sustain 1998 production
levels,  USE believes  that higher prices will be needed to support the required
investment by other uranium  producers in new higher cost production  facilities
as lower cost production reserves are depleted.

        Overall,  Crested believes that adequate supply of U3O8 material to meet
firm demand (i.e. to supply future long term contracts with utilities) cannot be
sustained at spot price levels below  $15.00 per pound.  And,  while  production
remains at levels just above 50% of consumption  in the Western World,  existing
and planned new production  combine will not equal  consumption  even if the new
production comes on stream as planned.

        Published  reports  indicate  that   approximately  31  percent  of  the
worldwide  nuclear-powered  electrical  generating  capacity is in the U.S.,  49
percent is in Western  Europe,  and 14 percent is in the Far East.  Although the
reactors in Western Europe have a greater aggregate generating capacity and fuel
usage,  the supply of uranium for those reactors has been secured for relatively
long periods.  The market  requiring the greatest supply of uranium for the next
few years is believed to be the United  States.  The Asia Pacific region is also
developing into a significant uranium consumer, due to announced plans for rapid
expansion  of nuclear  power  programs in Japan,  Korea,  Taiwan and the Russian
Federation.  This  region  accounts  for most of the 98 power  plants  which are
ordered or under construction.

        U.S. ENRICHMENT  CORPORATION.  The United States Enrichment  Corporation
("USEC") was created by the United States  Congress as part of the Energy Policy
Act of  1992.  USEC  began  operations  in July  1993  when  the  United  States
Department of Energy ("DOE") transferred the DOE's uranium enrichment facilities
to USEC.  USEC  enriches  uranium at two gaseous  diffusion  process  plants (at
Paducah, Kentucky and near Portsmouth, Ohio) as part of the process to transform
natural  uranium into fuel for commercial  power plants.  USEC has a substantial
share of the world  market for  enrichment  services,  and  dominates  the North
American market for enrichment  services.  In 1996,  Congress  enacted the "USEC
Privatization  Act of 1996" to  privatize  USEC and  allowed the DOE to transfer
certain amounts of various forms of uranium to USEC.


                                       19

<PAGE>



        In July 1998, USEC became a wholly-owned subsidiary of USEC Inc. (herein
"USEC")  when it  completed  its  privatization  through a $1.4  billion  public
offering.   USEC  represented  in  filings  with  the  Securities  and  Exchange
Commission  that it now holds or  intends to  acquire  95 metric  tons  enriched
uranium  (50 tons  highly  enriched,  45 tons low  enriched)  and 10,800 tons of
natural  uranium  (uranium  oxide as produced  from  uranium  milling,  prior to
concentration).  USEC  has  represented  its  intention  to  supplement  uranium
enrichment services revenues through sales of natural uranium.

        Based upon the  amounts  of uranium  USEC  purportedly  has,  or will be
acquiring  in shipments  from DOE,  USEC may be seeking to sell up to 75 million
pounds of uranium or uranium  equivalents  through  the year 2005.  On an annual
basis,  such sales  would  adversely  impact  the  domestic  uranium  market for
producers such as USE and Crested,  because USEC's sales would amount to more on
an annual basis than all domestic  producers  (including  USE and Crested)  will
produce and plan to sell combined.

        USE and Crested  believe that a  substantial  portion of the uranium (45
metric tons of low  enriched  uranium and 7,000 tons of natural  uranium)  which
USEC has acquired and will  acquire  from the DOE, in fact was  transferred  and
will be transferred by DOE in violation of the USEC  Privatization  Act of 1996.
USE and  Crested  have  joined  with other  uranium  producers  and the  Uranium
Producers of America ("UPA") in the filing of a lawsuit for declaratory judgment
and  injunctive  relief  against the  Department of Energy,  with respect to the
excess transfers, in an attempt to prevent USEC from enjoying a market advantage
over the  domestic  uranium  producers  which is  prohibited  by law. See "Legal
Proceedings" below.

        MARKET  SUMMARY -  IMPLICATIONS  FOR  FUTURE  URANIUM  PRICES.  With the
privatization  of USEC and the prospect of natural  uranium coming to the market
from USEC inventories,  uranium prices may not rise  significantly over the next
12 months,  as previously had been  anticipated in reports by industry  analysts
and by Crested  management.  Nevertheless,  Crested believes that uranium prices
eventually will be determined and moved up  significantly by the fundamentals of
the market, because all excess inventories built up in the 1980s will eventually
be consumed. In addition,  USEC has stated that USEC would sell its uranium in a
rational  and  responsible   manner   indicating  (in  the  opinion  of  Crested
management)  that USEC may keep its market sales at levels which would not drive
down uranium prices.

        As detailed  below,  many projects have been delayed or postponed  since
mid-1997 for various  reasons,  which will have a  significant  impact on future
supply/demand  fundamentals.  If, as it  appears  to be the case,  the  possible
introduction of the new USEC  inventories  currently has a depressing  effect on
the price of uranium  concentrates,  then new planned uranium production will be
curtailed more than indicated below.

                                                                Delay/Loss of
                                                                    Annual
                                                            Production Potential
   Date                    The Events Reported                 lbs. of U3O8
   ----                    -------------------                 ------------

July 1997          Former Soviet Union production                   5 million
                   delcines 27% (1992-1996)

July 28, 1997      Russia announces it may require 30-50% of       6-10 million
                   the HEU feed for internal use

August 11, 1997    Kazakhs annul World Wide Contract at            1-2 million
                   Tselinney Project, Kazakhstan

September 1, 1997  Rio Tinto suspends development at Kintyre       3-4 million


                                           20

<PAGE>



September 1, 1997  McClean Lake, Can., schedule slips               6 million
                   from 1997 to 1998

November 3, 1997   Rio Algom begins product at Smith Ranch,        1-2 million
                   Wyo. behind schedule

November 10, 1997  Midwest and Cigar Lake, Can., timing delayed     18 million
                   from 1999 to 2001

November 24, 1997  Aborigines veto ERA's plan to truck ore           6 million
                   to Ranger Mill, Aust.

July 1998          U.S. Energy/Crested Corp. suspend operations    2-4 million
                   at Green Mountain, Wyoming

August 1998        World Wide Minerals puts the Dornod project in  1-2 million
                   Mongolia on standby citing market conditions

August 1998        Cogema will put Cluff Lake, Can., Mine on       2-3 million
                   standby on Dec. 31, 2000.                       -----------

                                                           Total 51-62 million

        With  these  delays,  postponements,  and  possible  further  delays  or
cancellations of planned uranium production  projects,  Crested believes that it
is possible that the market price for uranium may increase  substantially in mid
- to late  1999,  in spite of  possible  sales  from  the  USEC  inventory.  The
fundamentals for higher uranium prices are ascertainable. Currently, all nuclear
reactors worldwide consume approximately 160 million lbs. of natural uranium per
year and by most estimates,  will continue at that rate for at least the next 20
years.  Total world  production for 1997 was  approximately 90 million lbs. Over
the next four  years,  three mines  located in Canada (Key Lake,  Cluff Lake and
Rabbit Lake) will have exhausted their reserves and will be shut down. Three new
Canadian  mines  (McArthur  River,  McClean  Lake/Midwest  and  Cigar  Lake) are
scheduled to produce  approximately  40 million lbs. of U3O8  annually when they
are in full production.

        Crested  management  believes  that other  delays and  cancellations  of
projects may be imminent and that  eventually all  inventories  (government  and
public)  will be consumed.  New  significant  production  will be needed to fuel
existing and planned  reactors into the 21st century.  USE  management  believes
that prices must rise  significantly  from  current  levels of  $10.50/lb.,  and
possibly  up to the  $18.00/lb.  range  over  the next 2-3  years,  to  motivate
existing and new mines to move forward as planned. In addition, no new mine/mill
construction  would be  justifiable  for selling into only the spot  market.  At
least 80 percent of a uranium producer's  production has to be sold to long term
contracts, because only with long term contracts can the mine/ mill process over
the life of the mine be planned and financed.

        In  contrast  to  finding,  developing  and  mining new  properties  and
building  new mills,  USE's  uranium  properties  are  believed to contain  well
defined  uranium  deposits  delineated  by others  which do not require  further
exploration   work  prior  to   beginning   production.   Development   work  is
significantly advanced at both the principal Wyoming site (the Jackpot Mine) and
the Utah mines.  The uranium mills in Wyoming and Utah were acquired fully built
at no cost to USE and Crested,  and the remaining work required to put the mills
into operating status will not consume significant amounts of capital. For these
reasons,  Crested believes that its uranium  properties will be low cost uranium
producers compared to some of the other uranium mines now in operation, and also
compared to the costs to develop new properties and build new uranium mills.


                                       21

<PAGE>



        Nonetheless,  the  decision  by USE and  Crested  to put any  mine  into
production,  and the commitment of funds necessary to implement that commitment,
must be made well in advance of the time when revenues  from the mined  resource
are received.  Price fluctuations between the time the production  commitment is
made, and the time when production and sales occur, can significantly impact the
economics of the mine. If the sales revenues fall below  production  costs for a
substantial  period of time, it is possible that USE and Crested could determine
that it is not then  economically  feasible to continue  production  operations.
Taking into account all of the relevant factors discussed above, Crested intends
throughout fiscal 1999 to seek the financing to put the uranium  properties into
production,  and in the meantime to seek long term utility contracts to take the
uranium  production,  with the  ultimate  goal of being  in full  production  in
Wyoming in April 2000, and milling the stockpiled uranium in Utah in late fiscal
1999 or  early  fiscal  2000.  There  is no  assurance  such  financing  will be
obtained,  nor is there  assurance  prices will not  decrease,  which would make
obtaining such financing more expensive or impossible.

        NUEXCO  EXCHANGE  VALUE.  The market  related  contracts to sell uranium
oxide to utilities  usually are based on an average of the Nuexco Exchange Value
("NEV") or some other market  quotes for 2, 3 or more months  before the uranium
delivery.  The high and low NEV  reported on U3O8 sales  during USE's past seven
fiscal years are shown below.  NUEXCO Exchange Values are now reported weekly by
TradeTech and  represents  its judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs for fiscal 1993
are higher for U.S.  transactions,  due to the impact of CIS import restrictions
since late 1992.  These prices ("US NEV") were reported by NUEXCO for spot sales
in the restricted U.S. market.

                                                NUEXCO EXCHANGE VALUE
                                                  US $/pound of U3O8
             Years Ended                          ------------------
               May 31,                       High                    Low
            -------------                    ----                    ---
               1992                         $  9.05              $  7.75
               1993                           10.05                 7.75
               1994                            9.60                 9.05
               1995                           12.20                 9.65
               1996                           16.50                13.00
               1997                           14.25                10.20
               1998*                          12.05                10.50

               * Through August 10, 1998 when it was $10.50/lb.

        NUEXCO's restricted market values ("U.S. NEV") apply to all products and
services  delivered in the U.S. as well as non-CIS origin  products and services
delivered outside the U.S.

        The foregoing  prices  represent  the "spot"  market only,  and indicate
transactions  primarily  by  utilities  purchasing  to  cover  short  positions.
Long-term  supply  contracts,  which cover up to 10 to 15 percent of the uranium
sold from year to year,  carry  prices  which are in excess of the spot  market.
This price premium is paid by the utilities to assure long term price stability;
the producer  demands the premium to compensate for future price increases which
could (but may not) exceed the premium.  Utilities keep their long term contract
provisions confidential,  so it is difficult to assess any one utility company's
long term  contract  plans or needs.  The amount of the price  premium will vary
from time to time.


                                       22

<PAGE>



GOLD

LINCOLN PROJECT (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 L.L.C., a Wyoming
limited liability company,  which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").

        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) are being applied to  pre-production  mine
development,  mill design, and property holding and acquisition cost. Additional
financing  of up to  $15,000,000  will be  sought  to fund the  development  and
construction of the mine/mill.  SGMC's properties contain an estimated amount of
proven  reserves (see below).  Because the  properties are not yet in production
and the needed funding is not yet available to do so (gold is at $290 per ounce,
which has  hampered  efforts to raise  capital),  the  recorded  value of SGMC's
mineral  properties  has  been  reduced  as  of  May  31,  1998.  See  "Item  7,
Management's   Discussion  and  Analysis  Financial  Condition  and  Results  of
Operations." If such financing is not available by the end of fiscal 1999, or if
gold prices do not improve,  the value of Crested's  investment in SGMC could be
deemed further  impaired and more of such  investment  written off during fiscal
1999.  SGMC  intends to fund the  development  and  construction  of the project
through private or public debt and/or equity  financing.  At Report date SGMC is
in  discussions  with certain  investment  banks,  however,  no  agreements  for
financing have been reached,  and there is no assurance any  agreements  will be
reached.

        In fiscal 1998,  due to the depressed gold price and gold equity market,
SGMC  suspended the start of  construction  of the 1,000  ton-per-day  gold mill
complex and  development of the  underground  mine.  SGMC initially  anticipated
production  mining  would  commence  in  mid-calendar  1998  and by  that  time,
construction of a 1,000 ton per day gold mill would have been completed.  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.  During  fiscal  1998,  SGMC  pursued  amendments  to its
approved 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 started to
build the entrance road to the mine.

        SGMC  does not have any  class  of its  securities  registered  with the
Securities and Exchange Commission, and none of its securities are traded in the
United States.

        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
each own the following securities of SGMC:

        (a) Together,  a majority (after the April 1998  transaction,  discussed
below) of the outstanding shares of SGMC Common Stock, which would be reduced in
the event  outstanding  warrants  held by the  remaining  Canadian  investors to
purchase 564,900 more shares of Common Stock are exercised at Cdn$6.00 per share
18  months  from  the date of  closing  of the  private  offerings  (which  were
completed  in May  1997) and the  outstanding  warrants  held by C.M.  Oliver to
purchase  145,480  more shares of Common  Stock are  exercised  at Cdn$5.50  per
share,  before May 13, 1999. The preceding does not reflect SGMC shares that may
be  acquired by USE and Crested  pursuant  to the USECC  $10,000,000  Contingent
Stock  Purchase  Warrant  (described  below)  issued  as  consideration  for the
voluntary reductions in the ownership of SGMC shares by

                                       23

<PAGE>



USE and  Crested.  One  reorganization  of the  capital  structure  was  made in
contemplation   of  its  private   placement  of  SGMC  shares,   and  a  second
reorganization was made in contemplation of the Canadian private placement.

        (b)  A  $10,000,000   Contingent  Stock  Purchase  Warrant  (the  "USECC
Warrant") 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.

        APRIL 1998 TRANSACTION FOR CASH AND SGMC SPECIAL  WARRANTS.  As of April
7, 1998,  USE entered into four separate  Stock  Purchase  Agreements  with four
Canadian investment funds, for the issuance of 658,895 shares of Common Stock of
USE, in consideration of the funds' payment to USE of $1,190,000 in cash and the
delivery to USE of 888,900  Special  Warrants of SGMC. The funds had paid SGMC a
total of Cdn$4,888,950 in May 1997, pursuant to a private offering in Canada, to
purchase  the Special  Warrants  from SGMC.  Each Special  Warrant  entitles the
holder to acquire from SGMC,  at no further  cost,  one share of Common Stock of
SGMC, and one Purchase  Warrant;  each Purchase  Warrant  entitles the holder to
purchase  one share of Common  Stock of SGMC,  at a price of Cdn$6.00  per whole
share  (the  "Purchase  Warrants"),  through  November  13,  1998.  For  further
information  on this  transaction,  reference is made to USE's Annual  Report on
Form 10-K for fiscal year ended May 31, 1998.

        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),  55 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.

        On October 1, 1996,  SGMC  entered  into three  letter  agreements  (the
"Lincoln  Letter  Agreements")  with the property owners of 185 acres ("185 Acre
Property") on the west side of California  State Highway 49 ("Hwy 49") and 32.58
acres ("32 Acre  Property")  of minerals  which include 20.5 acres of surface on
the  east  side of Hwy 49  adjacent  to the  Stringbean  Decline.  The 185  Acre
Property is the proposed new location

                                       24

<PAGE>



for the Surface Fill Unit and the 32 Acre Property  provides the land  necessary
for access and utility easements to Hwy 49.

        Surface and mineral rights  holding costs will  aggregate  approximately
$225,000 from June 1, 1998 through May 31, 1999.  Property taxes for fiscal 1998
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.

        Through May 31, 1998, an estimated  $21,000,000 was spent on the Lincoln
Project by Meridian,  USECC Gold and other of their  predecessors to acquire the
Lincoln Project and for mine development,  mining and processing bulk samples of
mineralization,  exploration,  feasibility  studies,  permitting costs,  holding
costs,  and  related  general  and  administrative  costs.  The  amount  of such
expenditures during the 1998 fiscal year was approximately  $1,410,800 ($572,700
in 1997).

        GEOLOGY AND RESERVES. The minerals consulting firm Pincock, Allen & Holt
of Lakewood,  CO ("PAH") prepared a prefeasibility  study of the Lincoln Project
in fiscal 1994 (and updated the study in 1997).  PAH reviewed core drilling data
on the Lincoln Zone on 100-foot  centers  from the surface,  and drilling on the
Comet  Zone from both  surface  and  underground.  PAH also  reviewed  data from
drilling on the Keystone  Zone from surface on 200-foot  centers.  Total data is
from 162 exploration core holes (surface and underground), with total footage of
64,700 feet. PAH based its estimate of proven  reserves on mineralized  material
within 25 feet of sample  information;  probable reserves were based on material
located between 25 and 50 feet of sample information.

        Using a  cutoff  grade of 0.15  ounces  of gold  per ton in  place,  PAH
estimates the Lincoln Project contains  approximately 350,000 tons of proven and
probable reserves grading approximately 0.4 ounces of gold per ton. If operating
economics indicate a lower cutoff grade is feasible, the tonnages for the stated
reserves would be increased.  Historical data  (underground  maps and production
records) from historic (now closed) mines within the Lincoln Project  boundaries
indicate certain areas of those mines were not "mined out," such that additional
mineralized resources may exist on the property.

        The geology within the Lincoln Project is typical of the historic Mother
Lode  region of  California,  with a steeply  dipping to  vertical  sequence  of
metavolcanic  and  metasedimentary   rocks  hosting  the  gold-  bearing  veins.
Depending  on  location  along  the  strike  length  on the  vein  systems,  the
gold-bearing veins are slate, metavolcanic greenstone, or an interbedded unit of
slates and  volcanics.  The  Lincoln  Project  covers over 11,000 feet of strike
length along the Mother Lode vein systems.


                                       25

<PAGE>



        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. On July 14, 1998 the Amador County Planning Commission certified the
Final Subsequent  Environmental  Impact Report ("FSEIR:) and approved all of the
amendments  requested by SGMC. The decision by the Planning  Commission has been
appealed to the Amador County Board of  Supervisors by a local  citizens'  group
and will be heard by the Board of  Supervisors  in August 1998;  further  appeal
would be available to the Amador County Superior Court if the opposition lost at
the Board of Supervisors  level.  The appeal deals only with the adequacy of the
FSEIR;  since SGMC already has a valid CUP, SGMC could  continue to move forward
on certain parts of the  development of the mine/mill.  In any event,  SGMC does
not expect  the appeal  process to  materially  impact the  development  plan or
schedule.  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.

PROPOSED MINE PLAN

        In should be noted that the mine  workings  actually  developed may vary
substantially from the plan adopted,  depending on the different  conditions and
grades of mineralization that are encountered. SGMC proposes to mine the Lincoln
and Comet Zones  initially  by access  through  the  existing  Stringbean  Alley
decline.  Production will be by overhand cut-and-fill and open sub-level stoping
techniques.  Screened tailings from the mill (support fill) will be used to back
fill the stopes,  which will stabilize the hanging and foot wall vein rocks, and
greatly reduce the volume of processed ore going into the Surface Fill Unit.

        Mining at startup is expected to increase up to 500 tons per day ("tpd")
during the first six months of mining  operations.  Ore will be  conveyed to the
surface  through an off shoot portal from the Stringbean  Alley  decline.  a new
underground  level is  planned  to be driven  at 1,000  feet  above  sea  level,
(approximately  120 feet below surface) during the next six months.  Mining will
coincide with development of additional stopes and may allow an increase in mine
production  up to  1,000  tpd in  approximately  the  third  year of  operation.
Concurrently  with  production  mining,  SGMC intends to maintain an  aggressive
underground development program to delineate (on an on-going basis) two to three
years of developed ore in sight.

MILL PLAN

        There are three  stages of milling  and  processing  the ore.  The first
stage  involves  wet  grinding  of  the  ore to  the  size  of  fine  sand  in a
semi-autogenous  grinding  ("SAG")  mill.  The  resulting  finely-milled  ore is
treated in a gravity  separator which employs  centrifugal force to separate the
heavier free gold  particles  from the lighter rock  particles.  Next,  the gold
concentrate  is  run  across  a set of  cleaning  tables  to  upgrade  the  gold
concentrate.  The second stage takes the  middlings and tails from the first and
again involves wet grinding in a ball mill to a finer size particle. This ground
ore is again  treated  in a similar  gravity  separator  which is tuned for this
finer size  particle and the gold  concentrate  is run across a different set of
cleaning  tables.  The third stage  separates  the  remaining  gold by flotation
wherein  minute  quantities  of non-toxic  chemicals are added to the ground ore
which makes the gold bearing  particles attach to air bubbles.  The gold bearing
particles are then separated  from the ground ore into a flotation  concentrate.
At this stage, the flotation concentrate is either reground and processed with a
dilute  solution  of sodium  cyanide or shipped  offsite.  SGMC is  planning  on
shipping  the  flotation   concentrate  offsite,  even  though  its  CUP  allows
processing  with  sodium  cyanide.  The  mill is  designed  to  produce  several
gold-bearing products: a high-grade gravity concentrate; a flotation concentrate
or a gold  precipitate  if the  cyanide  process  is  used.  These  gold-bearing
products  will be smelted  to dore  bullion  for  shipment  to a precious  metal
refinery. During processing, 95 to 97% of the processed ore

                                       26

<PAGE>



will be removed. Of this material,  approximately 65% will be placed underground
as structural fill and 35% will be placed into the Surface Fill Unit.

MOLYBDENUM

        As holders of royalty,  reversionary  and  certain  other  interests  in
properties located at Mt. Emmons near Crested Butte,  Colorado,  USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent  (one-half to each).  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.

        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.  USECC did not receive any advance  royalties  during fiscal
1996 because of an arrangement with Cyprus Amax described below. These royalties
are shown in the  Consolidated  Statements of Operations as a component of gains
from  restructuring  mineral  properties  agreements.  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 USE and  Crested  are to
receive $2,000,000 (one-half to each), 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 was a sale of AMAX's  interest in the properties  which
would  entitle USE and Crested to such  payment.  Cyprus Amax has rejected  such
assertion and USE and Crested are considering their remedies.

        In fiscal 1995,  USE and Crested  reached  agreement with Cyprus Amax to
forego six quarters of advance royalties (starting fourth quarter calendar 1994)
as payment for the option  exercise  price for certain  real estate in Gunnison,
Colorado  owned by Cyprus Amax and the subject of a purchase  option held by USE
and Crested.  The option  exercise price is valued at $266,250.  USE and Crested
exercised  their option in August 1994 and  subsequently  sold that property for
$970,300  in cash and notes  receivable.  The advance  royalties  resumed in the
second  quarter of calendar  1996,  however,  the payment was not received until
June 1996, being the first quarter of fiscal 1997. Crested  recognized  $105,500
and $103,600 of revenues in fiscal 1998 and 1997,  respectively  related to this
royalty interest.

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.

                                       27

<PAGE>



        Worldwide  demand for  molybdic  oxide in calendar  1996 was reported at
approximately  230,000,000  pounds, its highest level ever.  Production for that
period was about 225,000,000 pounds. There is, however, excess capacity from the
primary  molybdenum  mines which are currently not producing.  In addition,  by-
product molybdenum  (primarily from Chilean copper mining companies) has a major
impact on available supplies. It is unlikely that any major new primary deposits
will be developed during fiscal 1999.

        Molybdenum prices on the open spot market increased substantially,  from
$3.35 per pound of technical  grade molybdic  oxide (the  principal  product) in
September 1994, to $15.50 - $17.50 per pound in February 1995.  However,  by May
31,  1996,  prices  declined to $3.00 - $3.35 per pound but were in the $4.00 to
$4.40 per pound range in September 1997 and $3.75 in July 1998.

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  presently are 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
operations  at the  Lustre  Oil  Field on the Ft.  Peck  Indian  Reservation  in
north-eastern  Montana; four wells are producing,  and USE and Crested receive 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.

        ENERGX, LTD. FORT PECK GAS PROJECT.  Energx, Ltd., a Wyoming corporation
owned 45% by USE, 45% by Crested, and 10% by the Fort Peck (Montana) Assiniboine
and Sioux Tribes,  had certain rights to explore Montana  properties for shallow
natural gas. Exploration efforts were unsuccessful prior to 1998, and Energx was
released from the property  agreements in 1998.  Other Energx projects have also
been  unsuccessful.  Accordingly,  in fiscal  1998  Energx  decided to cease all
operations pending evaluation of future options.

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.


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        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.

        USE and Crested also own 18  undeveloped  lots on 26.8 acres of the Wind
River Airpark 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.  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.  The townsite may be utilized
for  worker  housing  as the  Jackpot  Mine  and  Sweetwater  Mill  are put into
operation.  In the interim, USE and Crested are selling lots at Jeffrey City and
made  sales  aggregating  $38,400  and  $21,150  during  fiscal  1998 and  1997,
respectively.

        USE owns five city lots and a 20-acre tract with improvements  including
two smaller office  buildings and three other  buildings with 19,000 square feet
of office  facilities,  5,000  square  feet of  laboratory  space and repair and
maintenance shops containing 8,000 square feet, all in Riverton, Wyoming.

        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 (the option  purchase  price was $200,000),
plus payment of certain  expenses i.e.  real property  taxes from 1987 and other
expenses  amounting to $19,358.  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.

        The first option (exercised in February, 1995) was for the 57 commercial
and noncommercial  zoned acres in the City of Gunnison,  Colorado;  the purchase
price was  $970,300.  Pangolin  paid  $345,000  cash and  $625,300 in three year
nonrecourse  promissory notes, of which $137,900 was paid during fiscal 1995 and
$35,600 was paid during fiscal 1996. The remaining note carried interest at 7.5%
per annum.

        The second option  covered 472.5 acres of ranch land,  owned by Crested,
northwest of the City of Gunnison, Colorado (purchase price $822,460).  Pangolin
paid  $10,000 for the option;  on option  exercise and  closing,  Pangolin  paid
$46,090 in cash and $776,370 by two nonrecourse  promissory  notes.  USE did not
receive  the  $35,000 as  scheduled.  At  closing,  22.19  acres were  deeded to
Pangolin; different parcels of the remaining acreage secured the notes, and were
to be released for principal payments in the course of

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<PAGE>



development. The sale was accounted for as an installment sale and thus the gain
on sale was deferred, to be recorded as the notes were paid. Both notes required
annual interest payments.

        In fiscal 1997, USE and Crested agreed with Pangolin to restructure  the
remaining obligations of Pangolin. Under the restructuring,  Contour Development
Company LLC gave USE and Crested two recourse,  secured  promissory  notes:  the
first note for $454,894 due January 26, 1998, the second note for $872,508.  The
notes are secured by Contour's  73% interest in  Tenderfoot  Properties  LLC ( a
Colorado limited  liability  company  affiliated with Contour).  USE and Crested
conveyed a key lot in the Gunnison parcel to Tenderfoot,  upon which Contour and
Tenderfoot were to construct an apartment  building with HUD  construction  loan
financing to be obtained by Contour and Tenderfoot. USE and Crested had intended
the  restructuring  to result in a faster  recovery  by USE and Crested of their
investments  in the land than  would have been  realized  under the terms of the
original Pangolin obligations.

        Although the initial payments on the two new notes were paid when due in
January 1997, thereafter, on May 30, 1997, Contour 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 1998.

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

                            RESEARCH AND DEVELOPMENT

        Registrant has incurred no research and development expenditures, either
on its own  account or  sponsored  by  customers,  during the past three  fiscal
years.

                                  ENVIRONMENTAL

        GENERAL.  Registrant's  operations 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.

        The Company's  management  believes it is currently in compliance in all
material respects with existing  environmental  regulations.  To the extent that
production by SMP, GMMV or SGMC is delayed,  interrupted or discontinued  due to
need to  satisfy  existing  or new  provisions  which  relate  to  environmental
protection, future USE earnings 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

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<PAGE>



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.  Registrant
does 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
Registrant's competitive position.

                                    EMPLOYEES

        Crested  has no  full-time  employees.  Crested  uses  approximately  50
percent of the time of USE employees,  and reimburses USE  accordingly.  USE had
approximately  120  full-time  employees as of the date of this Report.  Payroll
expense has been shared by USE and Crested since 1981.

                              MINING CLAIM HOLDINGS

        TITLE TO PROPERTIES.  Nearly all the uranium mining  properties  held by
GMMV, USE 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,
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").

        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  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 the Green Mountain  mineral  properties,  the SMP
properties and some of Plateau's 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,  as well as other  mineral  prospects on federal  unpatented  mining
claims.

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<PAGE>



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).  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.

        Approximately  $18  million of SMP cash had been  placed in escrow and a
bank account by agreement of the parties pending resolution of the disputes.

        The April  1996  Order  awarded  USE and  Crested  monetary  damages  of
approximately  $7,800,000  with interest  (after  deduction of monetary  damages
which the  Arbitration  panel awarded in favor of Nukem/CRIC and against USE and
Crested).  An additional  amount of approximately  $4,300,000 was awarded by the
Panel to USE and  Crested,  to be paid out of the  escrowed  $18 million and SMP
cash.  This  $4,300,000 was USE and Crested's  share of SMP profits from selling
uranium to utilities  and  advances to purchase  uranium for SMP. The Panel also
ordered that one utility supply  contract which had been in dispute  belonged to
SMP,  not Nukem,  and that Nukem was to assign that  contract to SMP.  The Panel
further ordered that certain contracts which Nukem had obtained for the purchase
of uranium from countries in the CIS (former Soviet republics) belonged to SMP.

        After motions and further proceedings in the Federal District Court, and
a  reaffirmation  Order by the  Panel in July  1996,  the  U.S.  District  Court
confirmed  the Panel's Order and Award.  In November  1996,  USECC  received the
$4,367,000 of the damage award out of the SMP escrowed  funds and a separate SMP
bank account. In confirming the Panel's Order, the Court ordered Nukem to assign
a utility contract to SMP; to pay USECC a net amount of approximately $8,465,000
in  monetary  damages;  and  impressed a  constructive  trust in favor of SMP on
Nukem's rights to purchase CIS uranium,  the uranium acquired  pursuant to those
rights,  and  profits  therefrom.  Nukem/CRIC  posted  a  supersedeas  bond  for
$8,613,600  and the Court  stayed  execution on the  judgment.  The bond did not
cover the value of the CIS  contracts at issue because the Panel's Order did not
value such contracts.

        Nukem/CRIC  appealed the District  Court's  Judgment to the 10th Circuit
Court of Appeals,  and the matter is set for oral argument on September 24, 1998
in  Oklahoma  City,  Oklahoma.  The issues to be decided  are:  whether the U.S.
District Court, in confirming the Panel's Order,  provided for a double recovery
to USE and Crested  (i.e.,  awarding  both  $8,465,000  in monetary  damages and
one-half  of the  profits  SMP has made on uranium  contracts);  and whether the
constructive  trust  on the CIS  contracts  covers  only an  amount  of  profits
necessary to secure  Nukem/CRIC's  payment of the  $8,645,000  monetary award in
favor of USE and Crested.  USE's  positions on these issues are that there is no
double recovery; and that the constructive trust of SMP on

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<PAGE>



the CIS contracts extends to all such contracts and profits  therefrom,  because
Nukem  obtained  the  contracts  for its own  account  outside  of and  hence in
violation of Nukem's fiduciary obligations to SMP as a general partner.

        During the fourth quarter of fiscal 1998, USE and Crested entered into a
partial  settlement  with Nukem and CRIC on certain of the claims not on appeal.
Under the partial  settlement,  USECC received (i) from SMP an assignment of all
of the mining  claims and  equipment  which had been held by SMP (USECC  remains
responsible  for the reclamation  liabilities  associated with the claims as had
always been the case when the properties were in SMP); (ii) from Nukem and CRIC,
$484,361  which settled USE and  Crested's  claim to their share of the past and
future profits on a utility  contract which Nukem had wrongfully kept outside of
SMP (and Nukem was  allowed to keep this  contract  as part of the  settlement);
(iii) from Nukem and CRIC, $4,540,000 to settle all claims by USE against Nukem,
CRIC and SMP (including  Nukem/CRIC's one-half share of the SMP mine maintenance
costs); (iv) from SMP, a contract to sell 1,076,842 pounds of uranium oxide to a
utility;  and (v) from SMP, a contract  to  purchase  600,000  pounds of uranium
oxide from another  producer in North America  (200,000 pounds annually  through
2000).  In connection  with the partial  settlement,  the parties  agreed to the
dismissal  with  prejudice of the Colorado and Wyoming  State Court  proceedings
(for reimbursement of SMP mine maintenance costs), and all claims in the Federal
District  Court and the  arbitration,  except for the issues  pending before the
10th Circuit Court of Appeals.  The cash settlement portion under (iii) above is
in addition to the $4,367,000  received by USECC in November 1996 out of the SMP
escrowed funds.  USECC is negotiating to sell the purchase contract under (v) to
Nukem.

TICABOO TOWNSITE  LITIGATION.  In fiscal 1998, a prior contract  operator of the
Ticaboo  restaurant  and lounge,  and two  employees  supervising  the motel and
convenience store in Utah (owned by Canyon  Homesteads,  Inc.) sued USE, Crested
and others in Utah State Court. After a five day trial, a jury denied the claims
of two of three  plaintiffs but awarded the third plaintiff  $156,000 in damages
against USE. USE is appealing the award.

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,  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  extralateral 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.

        BGBI  seeks to quiet  title to its  leasehold  interest  in the  subject
claims, a determination  that USE and Crested have no rights in the claims,  and
an order  enjoining USE and Crested from  asserting  any interest in them.  BGBI
further asserts other claims and that, in attempting to lease an interest in the
subject claims to USE and Crested,  Parador breached the provisions of its lease
to BGBI, and that Parador is  responsible  for the legal fees and costs incurred
by BGBI in the quiet title action, which may be offset against royalties.

        A partial or bifurcated  trial to the Court of the  extralateral  rights
issues was held on December 11 and 12, 1995,  to determine  whether the Bullfrog
orebody is a "vein,  lode or ledge" as described in the General  Mining Law and,
if so,  whether the facts warrant  application  of the doctrine of  extralateral
rights as set forth in such statute.  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

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<PAGE>



the trial, the Court found against the parties on their respective  claims,  and
the plaintiff and these  defendants filed a Notice of Cross-Appeal and Notice of
Appeal,  respectively to the Nevada Supreme Court. The record on appeal has been
filed with the Nevada Supreme Court and the appeals process is underway.

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").  See Item 1,  "Business,  Uranium  Marketing - U.S.
Enrichment Corporation" above.

        Specifically,  the  plaintiffs  allege that the USEC  Privatization  Act
authorizes  the DOE to  transfer to USEC  "without  charge" an initial 50 metric
tons of highly enriched  uranium and 7,000 metric tons of natural  uranium.  The
Act authorizes the DOE to sell (not merely  transfer)  additional  quantities of
uranium out of the DOE stockpile, but only upon payment of fair market value for
the  uranium  and then only upon  specific  finding  by the DOE that such a sale
would not have an  adverse  material  impact on the  domestic  uranium,  mining,
conversion or enrichment  industry,  taking into account sales under the Russian
HEU Agreement and the Suspension Agreement.

        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.

CONTOUR DEVELOPMENT LITIGATION

        On July 28,  1998,  USE filed a lawsuit  in the United  States  District
Court, Denver, Colorado against Contour Development Company, L.L.C. and entities
and persons  associated  with Contour  Development  Company,  L.L.C.  (together,
"Contour")  seeking  compensatory  and  consequential  damages of more than $1.3
million from the defendants for dealings in certain real estate.

        Specifically,  USE  (which  is the  assignee  of  Crested's  rights  and
interests in certain of the promissory notes,  contracts and agreements) 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 has further alleged that Contour fraudulently induced
USE and  Crested  to  enter  into  restructuring  agreements  for  the  original
transactions between the parties in such properties;  and further,  that Contour
has breached the duties of good faith, honesty, full disclosure and fair dealing
which were owed to USE and Crested by Contour in the course of the transactions.
USE has made  additional  claims  against  Contour  for  unjust  enrichment  and
conversion  of the real  estate  assets.  See  Item 1,  "Business  -  Commercial
Operations - Real Estate and Other Commercial  Operations - Colorado Properties"
above.

        As of the date of this  Report,  Contour  has not filed an answer to the
complaint.



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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not Applicable.

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 47, has been Controller and 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 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.


                                     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, 1998
        ------------------------------
           Fourth quarter ended 5/31/98               $0.45      $0.22
           Third quarter ended 2/29/98                 0.46875    0.25
           Second quarter ended 11/30/97               0.71875    0.4375
           First quarter ended 8/31/97                 0.8125     0.34375

        Fiscal year ended May 31, 1997
        ------------------------------
           Fourth quarter ended 5/31/97               $0.7187    $0.3437
           Third quarter ended 2/28/97                 0.9375     0.625
           Second quarter ended 11/30/96               1.4375     0.875
           First quarter ended 8/31/96                 1.50       0.191

(b)     Holders.

        (b)(1) At September 3, 1998 there were approximately  1,900 stockholders
of record for Crested common stock.

        (b)(2)  Not applicable.


                                       35

<PAGE>



(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, 1998,  Crested did not issue any shares of its
Common Stock.

ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                     May 31,
                                 ----------------------------------------------------------------------------
                                       1998           1997            1996           1995            1994
                                      ----            ----            ----           ----            ----

<S>                              <C>             <C>             <C>             <C>             <C>         
Current assets                   $  4,809,300    $  1,049,500    $    596,200    $    512,600    $    282,800
Current liabilities                 9,282,300       6,592,400       6,848,300       5,518,500         555,000
Working capital                    (4,473,000)     (5,542,900)     (6,252,100)     (5,005,900)       (272,200)
Total assets                       10,211,400       6,285,700       8,132,500       8,097,800       8,092,900
Long-term obligations(1)              768,000         741,700         725,900         853,700       4,688,700
Shareholders' equity/(deficit)        117,200      (1,092,300)        521,900       1,690,800       2,849,200

<FN>
        (1)  Includes  $725,900,  $725,900,  $725,900,  $847,800 and $847,800 of
        accrued  reclamation costs on uranium  properties for fiscal 1997, 1996,
        1995, 1994 and 1993, respectively.
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                                    For Years Ended May 31,
                             ---------------------------------------------------------------------
                                 1998         1997           1996          1995          1994
                                 ----         ----           ----          ----          ----

<S>                          <C>           <C>           <C>            <C>           <C>         
Revenues                     $4,659,900    $1,703,500    $ 2,509,200    $ 1,160,200   $  2,870,000
Income (loss) before
   equity in loss of
   affiliates and
   income taxes               1,581,700      (862,400)      (811,000)   (1,031,100)    (1,297,600)
Equity in loss of
   affiliates                  (372,200)     (807,900)      (357,900)     (415,900)      (657,600)
                             ----------    ----------    -----------    ----------    -----------

Net income (loss)              1,209,500   (1,670,300)    (1,168,900)   (1,447,000)    (1,955,200)
                             ===========   ==========    ===========    ==========    ===========

Net income (loss)
   per share                 $      .12    $     (.16)   $      (.12)   $     (.14)   $      (.19)
                             ==========    ==========    ===========    ==========    ===========

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 that have  affected  the  Company's  liquidity,  capital  resources  and
results  of  operations   during  the  periods   included  in  the  accompanying
consolidated financial statements.

        Some of the  statements  in this  Management's  Discussion  and Analysis
constitute  "forward-looking  statements"  within  the  meaning  of the  Private
Securities  Litigation  Reform  Act of  1995.  Such  forward-looking  statements
involve known and unknown risks,  uncertainties and other factors that may cause
the actual results, performance or

                                       36

<PAGE>



achievements of the Company to be materially  different from any future results,
performance  or  achievements   expressed  or  implied  by  the  forward-looking
statements.


LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1998

WORKING CAPITAL COMPONENTS

        Net cash used in  operating  activities  was $922,700 for the year ended
May 31, 1998.  Cash provided by investing  activities  and financing  activities
during fiscal 1998 was $675,800 and $574,000,  respectively. For the year, these
activities  resulted in a net increase of $975,600 in cash. At May 31, 1998, the
Company had a working  capital  deficit of  $4,473,000  as compared to a working
capital deficit of $5,542,900 at May 31, 1997.

        The decrease in the working  capital deficit of $1,069,900 is the result
of increases in accounts receivable of $2,882,300.  This decrease in the working
capital  deficit was offset by  reductions  in the current  portion of long-term
receivables  of $76,200 and inventory and other assets of $21,900.  The decrease
in the working  capital  deficit was further  offset by  increases in a deferred
purchase option related to GMMV, accounts payable,  debt to affiliate,  and long
term debt of $2,000,000, $142,200, $523,700 and $24,000, respectively.

        Accounts receivable from affiliates increased by $343,700 primarily as a
result of increased amounts due from USECC as a result of increased  activity on
the GMMV properties. These amounts were paid after May 31, 1998.

        In June 1998, the Company and USE signed an agreement with Nukem/CRIC as
partial  satisfaction of the monetary damages awarded by the Arbitration  Panel.
The Company received $2,513,000 as a result of this settlement which occurred in
the fourth quarter of fiscal 1998. The Company  eliminated its investment in SMP
and  recognized  the  balance  as  income  of which the  Company's  portion  was
$2,295,000.

        Cash  provided by financing  activities  resulted from a net increase in
debt to  affiliates  of $523,700 as the  Company's  parent,  U.S.  Energy  Corp.
("USE")  advanced the  Company's  portion of operating and capital costs for the
various mining and commercial ventures in which the Company participates.

        Cash provided by investing  activities  was due to $707,200 of purchases
of Property,  Plant and  Equipment.  This  increase was  partially  offset by an
increase  in  long-term   receivables  of  $251,800  and  $218,700  invested  in
affiliates.

CAPITAL RESOURCES

        GENERAL:  The primary  source of the  Company's  capital  resources  for
fiscal 1999 will be cash on hand at May 31, 1998, possible equity financing from
affiliated  companies,  proceeds under the line of credit  discussed  below, and
loans from USE.  Additionally,  the Company  and USE will  continue to offer for
sale various non-core  equipment assets such as lots and homes in Ticaboo,  real
estate holdings in Wyoming,  Colorado and Utah and mineral interests.  Interest,
rentals of real estate holdings and equipment,  aircraft chartering and aviation
fuel sales, also will provide cash.

        LINE OF CREDIT:  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.  This  facility is
currently  available to the Company and USE. It is anticipated that this line of
credit may be used to finance  working  capital needs as well as the purchase of
uranium in the open  market to  fulfill  the  delivery  of an SMP  contract  the
Company and USE received in partial settlement of certain of the SMP arbitration
matters.


                                       37

<PAGE>



        FINANCING:  Equity financing for Sutter Gold Mining Company ("SGMC") and
Plateau  Resources  ("Plateau")  are  dependent  on the market price of gold and
uranium  among other things.  At May 31, 1998,  the prices for these metals were
depressed and it is not known when or if they will recover.  No assurance can be
given that prices will improve during fiscal 1999. If the prices do not recover,
the  ability  of the  Company  and  USE to  raise  equity  financing  for  these
subsidiaries will be impaired.

        SUMMARY:  The Company  believes  that cash on hand and proceeds from its
line of credit, if needed, will be adequate to fund working capital requirements
through fiscal 1999. However,  these capital resources will not be sufficient to
provide  the funding  for major  capital  expansions  of the  Company's  mineral
properties.

CAPITAL REQUIREMENTS

        GENERAL:  The primary  requirements  for the Company's  working  capital
during  fiscal 1999 are  expected to be the costs  associated  with  development
activities  of  Plateau,  care and  maintenance  costs of the former SMP mineral
properties, payments of holding fees for mining claims, purchases of uranium for
delivery to the utility  contract  that was received by the Company and USE as a
result of the settlement  agreement reached  regarding the SMP arbitration,  the
Company's portion of the costs associated with the GMMV properties and corporate
general and administrative expenses.

        SGMC: The Company owns 4% of the outstanding  stock of SGMC. As such, it
is not directly  responsible for the administrative  and capital  obligations of
bringing the SGMC gold properties into production.  Through its affiliation with
USE,  however,  the Company  assists in the securing of financing to place these
gold mineralized properties into production.

        SGMC's properties  contain reserves of gold.  Preliminary  estimates are
that a 500 ton per day ("tpd")  mine/mill  operation  using a  cyanide-flotation
process, will require up to $15,000,000 to place the proposed mine and mill into
full  operation.  It is the  intent  of the  Company  and  USE to  complete  the
necessary  financing in fiscal 1999 to develop the reserves of SGMC.  Management
believes that if adequate  funding is obtained,  production will begin in fiscal
2000.  SGMC is currently  attempting to negotiate  financing  with an investment
firm with a proposed plan for the necessary  financing  intended to be completed
in fiscal 1999.  Management of SGMC believes  sufficient  capital  resources are
available to SGMC to continue its  permitting  efforts as well as the raising of
capital.

        SMP: As part of a settlement agreement reached during the fourth quarter
of fiscal 1998, the SMP mines and associated  properties were transferred to the
Company and USE. All past holding  costs of the SMP mines have been resolved and
the future  cost of standby as well as  reclamation  are the  obligation  of the
Company and USE. These costs are estimated at  approximately  $85,000 per month.
There are no current plans to mine the SMP Crooks Gap  properties  during fiscal
1999.  However,  the  Company  and USE will  continue  to  preserve  the mineral
properties and develop concepts to reduce care and maintenance costs.

        All matters in the SMP arbitration  have been settled with the exception
of two issues that are currently before the 10th Circuit Court of Appeals.  Oral
arguments are  scheduled on these issues for  September 24, 1998.  Management of
the Company  cannot  predict the timing or ultimate  outcome of this hearing but
believes  that the issues will be resolved  during  fiscal 1999 unless Nukem and
CRIC elect to appeal the  decision  further to the U.S.  Supreme  Court and that
court determines to hear the appeal.

        GMMV:  On June 23,  1997,  USE and USECC,  a joint  venture  between the
Company and USE, signed an Acquisition Agreement with Kennecott for the right to
acquire   Kennecott's   interest   in  the  GMMV  for   $15,000,000   and  other
consideration.  As discussed in Note F to the  financial  statements,  Kennecott
paid the Company  and USE $4 million  upon  execution  of the  Agreement,  which
became  nonrefundable upon the satisfaction of certain terms. One half of the $4
million was treated by the Company as deferred  income pending the  satisfaction
of the nonrefundability

                                       38

<PAGE>



terms,  all of which were  satisfied  by November  30, 1998 at which time the $2
million was classified as a deferred purchase option,  since it will be recorded
as a reduction of the  Company's  purchase  price if the  Acquisition  Agreement
closes.

        During July 1998, the GMMV Management  Committee  unanimously  agreed to
place the  Jackpot  Mine and  Sweetwater  Mill on active  standby  status.  This
decision was made as a result of uncertainties in the short term uranium market.
These  same  uncertainties  have  made  the  financing  of  the  acquisition  of
Kennecott's  interest in GMMV  difficult.  The Company and USE continue in their
financing  activities  in an effort to raise  sufficient  capital to acquire the
Kennecott  interest in the GMMV. It is believed that such financing  efforts may
not be  concluded  by the terms of the  Acquisition  Agreement  with  Kennecott.
Kennecott  continues  to work with the  Company in its  efforts to  successfully
close the purchase of Kennecott's interest.

        The standby  costs of the GMMV mine,  associated  property and mill will
eventually become the responsibility of the individual  partners on a percentage
ownership  basis.  Currently,  the  partners in the GMMV are  discussing  how to
operate  and  fund  the  operations  of the  properties.  Budgets  have not been
finalized but it is projected the annual holding costs of the mine and mill will
be approximately $2,000,000.  The Company and USE will be obligated to pay their
share of these costs once the obligations of Kennecott are completely satisfied.
Due to the  unpredictability  of the  uranium  market,  the Company is unable to
predict when the GMMV properties will again be put on an active basis or when it
will be able to purchase Kennecott's interest in the GMMV, if at all.

        PLATEAU:  Plateau  owns  and  operates  the  Ticaboo  townsite,   motel,
convenience  store and restaurant.  These operations of Plateau generated a loss
of  $800,000 in fiscal  1998,  which were  absorbed by the Company and USE.  The
Company and USE continue to work on methods of increasing  revenues and reducing
costs.  There has been an annual  growth in sales since the Company and USE have
owned Plateau.

        The  Company  and USE are  currently  working  to obtain  the  necessary
permits  from the NRC and State of Utah to place the  Shootaring  mill  which is
owned by Plateau and located in southern Utah into  production.  The Company and
USE are seeking debt or equity financing of between $6,000,000 and $9,000,000 to
put the mill and Tony M. Mine into production.  Until such time as the financing
is obtained and profitable contracts are obtained,  the Company and USE will not
put the properties into production.

        YELLOW STONE FUELS CORP.  ("YSFC"):  In Management's  opinion,  YSFC has
sufficient  cash to  complete  its  projected  1999  exploration  program on its
in-situ  uranium  properties.  At May 31,  1998  YSFC owed the  Company  and USE
$400,000 on a convertible  promissory  note plus $40,000 in interest for a total
of  $440,000.  The note bears  interest  at 10% per annum and is due in December
1998. YSFC also owed the Company and USE $161,700 for miscellaneous  payroll and
operating expenses.  YSFC has indicated its desire to pay the total indebtedness
in cash but it is not certain  that a cash payment will occur as YSFC may elect,
at its option, to pay the promissory note with shares of its common stock.

        TERM DEBT AND OTHER OBLIGATIONS:  Debt to non-related parties at May 31,
1998 was $78,500 which was  primarily  for property and  equipment  purchased by
USECC. The debt bears different  interest rates and is due under various payment
terms.  It is anticipated  that all debt payments will be able to be made in the
normal course of the Company's business.

        As of May 31,  1998,  the  Company  was in debt to USE in the  amount of
$6,547,100  of which  $6,023,400  was in the form of a  promissory  note bearing
interest  at 6% per annum with a maturity  date of October 1, 1999.  USE has not
indicated that it will call the promissory  note when due. The Company will need
to either retire the note with shares of its common stock or negotiate  with USE
to extend the note by rolling the interest and adding the additional principle.


                                       39

<PAGE>



        RECLAMATION OBLIGATIONS: It is not anticipated that any of the Company's
working  capital will be used in fiscal 1999 for the  reclamation  of any of its
mineral  properties.  The reclamation  costs are long term and are either bonded
through  the use of cash bonds or the pledge of  assets.  It is not  anticipated
that any of the mining  properties will enter the reclamation phase prior to May
31, 1999.

        Prior to fiscal  1996,  the  Company  and USE  assumed  the  reclamation
obligations,  environmental  liabilities and contingent liabilities for employee
injuries, from mining the Crooks Gap and other properties in the Sheep and Green
Mountain  Mining  Districts  as well as the  SGMC  properties.  The  reclamation
obligations,  which are established by government  agencies,  were most recently
set at $1,451,800 for the SMP  properties  and $27,000 for the SGMC  properties.
The  amount  of  accruals  for  environmental  liabilities  for  each  site  are
determined by estimating costs  associated with current or expected  reclamation
and remediation plans. These plans include detailed  descriptions of the work to
be performed, and in many cases involve the work of third party consultants. The
plans are submitted annually to the government  agencies who review them and set
the bond amounts.

        To assure the reclamation  work will be performed,  regulatory  agencies
require posting of a bond or other security.  The Company and USE satisfied this
requirement  with respect to SMP properties by mortgaging their executive office
building in Riverton, Wyoming.

        Reclamation  obligations  on the  GMMV  Big  Eagle  properties  and  the
Sweetwater Mill,  estimated at approximately  $23,620,000,  have been assumed by
the  GMMV  venturers,  and  secured  by a bank  letter  of  credit  provided  by
Kennecott.   The  reclamation  and  environmental   costs  associated  with  the
Sweetwater  Mill will not commence  prior to conclusion of mining  activities on
Green  Mountain  with the  exception  of an open pit mine next to the  mill.  As
uranium is processed  through the mill, a reclamation  reserve will be funded on
the  unit of  production  basis.  Up to  $8,000,000  (in  1990  dollars)  in any
reclamation costs on the Sweetwater mill and associated  properties which may be
incurred prior to commencement of production or 2001 will be loaned by UNOCAL to
the GMMV and must be repaid out of production.

        Reclamation obligations of Plateau are covered by a $7,270,400 cash bond
at May 31, 1998 to the U.S. Nuclear Regulatory  Commission and a $1,561,600 cash
deposit as of May 31, 1998 for the  resolution of any  environmental  or nuclear
claims.

        OTHER:  The  Company  and USE  currently  are not in  production  on any
mineral  properties,  and  development  work continues on several of their major
investments.  The Company and USE are not using  hazardous  substances  or known
pollutants  to any great  degree in these  activities.  Consequently,  recurring
costs for managing hazardous substances, and capital expenditures for monitoring
hazardous  substances or pollutants  have not been  significant.  Likewise,  the
Company and USE do not have properties  which require current  remediation.  The
Company and USE are also not aware of any claims for personal injury or property
damages that need to be accrued or funded.

        The tax years  through May 31,  1992 are closed  after audit by the IRS.
The  Company  currently  has filed a request  for an  appeal  hearing  on an IRS
agent's  findings  for the years  ended  May 31,  1994 and  1993.  Although  all
indicators  are that the  findings  of the IRS  audit for 1994 and 1993 will not
result in  additional  tax,  the  findings of the audit could affect the tax net
operating loss of the Company.  Management of the Company  believes that it will
prevail on the majority of the issues. No assurance of the outcome of the appeal
can be given. The tax years ended May 31, 1996 and 1995 are also currently being
audited by the IRS. No determination on these audits can be made as they are not
yet completed.


                                       40

<PAGE>



RESULTS OF OPERATIONS

FISCAL 1998 COMPARED TO FISCAL 1997

        Revenues for the twelve months ended May 31, 1998 totaled  $4,659,900 as
compared to revenues of $1,703,500 for the fiscal year ended May 31, 1997.  This
increase in revenues of  $2,956,400  is primarily  the result of the  litigation
settlement,  increased mineral revenues, commercial operations,  management fees
and interest revenues.  The litigation  revenues of $2,295,000 are the result of
the    signing   of   an    partial    settlement    agreement    in   the   SMP
litigation/arbitration.  The  increase  in mineral  revenues  of $431,200 is the
result of the receipt by the Company of its portion of the net  proceeds  from a
delivery of U3O8 under a SMP contract,  which was the final  delivery under this
contract.

         Commercial operations revenues increased $392,600 as compared to fiscal
year 1997. These revenues increased as a result of increased equipment rental to
the GMMV. Management fees and other revenues increased $261,800 over fiscal year
1997  primarily  as a result of increased  activity at GMMV and  Plateau.  These
increases  were  partially  offset by a decrease  in  revenues  from the sale of
assets of $28,100.

        During the fiscal year ended May 31, 1998,  operating costs and expenses
increased  $512,300  compared to fiscal year ended May 31,  1997.  Increases  in
mineral operations and general and administrative expenses were partially offset
by decreases in commercial  operations and interest  expenses.  The increases in
mineral  operations of $410,900 and general and  administrative of $821,000 were
primarily  the result of  increased  operating  expenses at the GMMV and Plateau
uranium  properties.  The increases in general and administrative  expenses were
primarily due to increased compensation.

        Expenses in  commercial  operations  and interest  expense  decreased by
$59,400 and $3,500,  respectively  . These  expenses were reduced as a result of
reduced  activity on the  properties  and as a result of the Company and USE not
using their  commercial  bank line of credit  during the twelve months ended May
31, 1998.

        Operations  resulted  in net income of  $1,209,500  or $.12 per share in
fiscal 1998 as compared to a net loss of  $1,670,300 or $.16 per share in fiscal
1997.

FISCAL 1997 COMPARED TO FISCAL 1996

        Revenues for the twelve months ended May 31, 1997 totaled  $1,703,500 as
compared  to  revenues  for the year  ended  May 31,  1996 of  $2,509,200.  This
decrease in revenues of $805,700 is  primarily  the result of no revenues  being
recognized  from  mineral  sales  from  SMP  during  fiscal  1997  (decrease  of
$1,558,400).  Other  decreases  in revenues  were oil sales,  $22,800;  sales of
assets, $147,800, and interest, $58,800. These decreases in revenues were offset
by increased commercial operations, $79,300; advance royalties from Cyprus Amax,
$103,600;  partial distribution of SMP funds, $501,900; and increased management
fees and other revenues, $297,300.

        With the  exception of mineral  operations,  the  provision for doubtful
accounts and abandoned  mineral claims,  costs and expenses remained the same as
they had been in 1996. Mineral operations declined by $1,364,600  primarily as a
result of Crested and USE not delivering  any U3O8 under the SMP contracts.  The
provision  for  doubtful  accounts  increased by $570,800 as a result of a third
party defaulting on a note payable on certain real estate that Crested sold in a
prior year. Crested also wrote off an investment of $71,500 in a mining property
that was abandoned.  The increases in general and  administrative  expenses were
reduced by overhead and direct charges to GMMV, SMP and SGMC.

        Equity losses recognized by Crested increased by $450,000. This increase
was the result of increases in the equity losses in USE, SGMC, YSFC, and SMP.


                                       41

<PAGE>



        Operations  resulted  in a net loss of  $1,670,300  or $.16 per share in
1997 as compared to a net loss of $1,168,900 or $.12 in 1996.

        FUTURE OPERATIONS:

         The Company has generated  losses in two of the last three years,  as a
result of holding costs and permitting  activities in the mineral  segment along
with impairment allowances of mining claims and investments in subsidiaries that
are involved in the minerals  business and from certain  commercial  operations.
The Company is in the process of developing  and/or holding  investments in gold
and uranium properties that are currently not generating any operating revenues.
These  properties  require  expenditures for permitting,  development,  care and
maintenance,  holding  fees,  corporate  overhead and  administrative  expenses.
Success in the  minerals  industry is  dependent on the price that a company can
receive for the  minerals  produced.  The Company can not predict  what the long
term price for gold and uranium will be.

        In  addition,   legal  expenses   associated  with  the  litigation  and
arbitration  surrounding the SMP Partnership and the inability of the Company to
utilize  all the funds that have been  awarded to the Company and Crested by the
Arbitration  Panel and  confirmed  by the  Federal  Court  have  compounded  the
Company's  operating  and cash flow position in the past.  The Company  believes
that the SMP arbitration  will be conclusively  resolved during fiscal 1999. The
Company  believes that it will meet its obligations in fiscal 1999 as well as be
able to secure  financing to further the  development of its mineral  properties
and place them into production.

YEAR 2000 ISSUE

        Computer  programs  written  in the past  utilize a two digit  format to
identify the applicable  year. Any date sensitive  software  beyond December 31,
1999  could  fail,   if  not   modified.   The  result  could  be,  among  other
possibilities,  disruptions to operations and the inability to process financial
transactions. The Company has evaluated the operating systems on all headquarter
and field office systems and has consulted with various  vendors of the computer
software  which is being used by the Company and  affiliates.  The vendors  have
confirmed to the Company that the Company's software and information systems are
Year 2000 compliant.  Therefore, the Company does not anticipate any significant
expenditures will be required for the Year 2000 event.

EFFECTS OF CHANGES IN PRICES

        Mining  operations and the  acquisition,  development and disposition of
mineral  properties are  significantly  affected by changes in mineral commodity
prices. As prices for a particular  mineral  increase,  prices for prospects for
that mineral also increase,  making  acquisitions of such properties more costly
and difficult, and dispositions  advantageous and easier.  Conversely, a mineral
commodity price decline facilitates acquisitions of properties for that mineral,
but  makes  sales  of  such  properties  more  difficult  and  less  attractive.
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, as its principal  holdings are of prospects for those minerals.
When  uranium  prices  were  relatively  high in fiscal  1988,  USE and  Crested
acquired the Crooks Gap  properties,  and  thereafter  put the  properties  into
production.  When uranium  prices fell sharply  during fiscal  1989-1991,  USECC
suspended  mining  operations  for SMP,  because  uranium  could be purchased at
prices  less than the costs of  producing  uranium.  Uranium  production  in the
United States  reportedly  fell by 25% to 33% in 1990,  due to the lowest prices
for uranium since the market developed in the 1960s.

        Changes in uranium prices  directly  affect the  profitability  of SMP's
uranium supply agreements with electric  utilities.  Certain of those agreements
become advantageous to the Company when the spot market price for uranium

                                       42

<PAGE>



falls  significantly  below the price which a utility has agreed to pay. Some of
the supply  agreements  of SMP were  acquired  before  the fall of uranium  spot
market prices during fiscal 1989-1991.  Those fixed-price contracts,  which have
contract prices exceeding current spot market rates, are currently  advantageous
to the Company, as the uranium to fill them can be readily obtained at favorable
prices.  Although  such  contracts  benefit the Company in a falling  market,  a
corresponding   adverse  impact  would  not  be  anticipated  in  the  event  of
substantially  increased  prices.  SMP would produce uranium from its Crooks Gap
properties to fill those contracts,  in the event of a prolonged increase in the
spot market price above the contract prices.

        With the  acquisition of its interest in SGMC and its Lincoln Mine, gold
prices directly affect the Company. Crested believes SGMC's Lincoln Mine will be
profitable with gold prices over $290 per ounce.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        Financial  statements meeting the requirements of Regulation S-X for the
Company  follow  immediately.  Financial  statements  of GMMV  are  included  as
schedules and immediately follow the index at Item 14(a)(2).


                                       43

<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, 1998 and 1997, 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,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

As  discussed in Note G, the note  payable to U.S.  Energy is  currently  due on
October 1, 1999. However,  U.S. Energy may unilaterally  accelerate the due date
of this note given its majority control over the Company, even though management
of U.S. Energy has no current intentions to do so. Crested's current projections
indicate that there may not be sufficient cash flow from operations to fund that
obligation  when due and it  continues to rely on advances  from U.S.  Energy to
fund its  current  operating  requirements.  If  Crested  is unable to  generate
sufficient  funds from  operations or other sources,  it may be required to sell
certain assets in order to satisfy such obligations to U.S. Energy.

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,  1998 and 1997,  and the results of their  operations  and their cash
flows  for  each of the  three  years  in the  period  ended  May 31,  1998,  in
conformity with generally accepted accounting principles.




                               ARTHUR ANDERSEN LLP


Denver, Colorado,
September 11, 1998.

                                       44

<PAGE>



                                     CRESTED CORP. AND AFFILIATE

                                     CONSOLIDATED BALANCE SHEETS

                                               ASSETS
<TABLE>
<CAPTION>
                                                                     May 31,
                                                       -------------------------------
                                                           1998                 1997
<S>                                                    <C>                  <C>
CURRENT ASSETS:
   Cash and cash equivalents                           $ 1,012,700          $   37,100
   Accounts receivable
      Trade, net of allowance for doubtful
         accounts of $1,400 and $3,200,
         respectively                                       89,500              63,900
      Affiliates                                           939,900             596,200
   Current portion of long-term receivables
      Related parties                                      227,800             304,000
   SMP settlement receivable                             2,513,000           --
   Inventory and other                                      26,400              48,300
                                                       -----------          ----------
         Total current assets                            4,809,300           1,049,500

LONG-TERM RECEIVABLES:
   Related parties                                         116,500             292,100
   Real estate sales, net of valuation
      allowance of $882,900                                182,500             182,500

INVESTMENTS IN AFFILIATES                                1,643,300           1,796,800

INVESTMENT IN SGMC CONTINGENT
   STOCK PURCHASE WARRANT                                  651,000             651,000

PROPERTIES AND EQUIPMENT:
   Land and mobile home park                               397,400             397,400
   Buildings and improvements                            2,185,000           2,243,200
   Aircraft and other equipment                          2,393,300           1,640,000
   Developed oil properties, full cost method              886,800             886,800
   Mineral properties                                       14,200              13,900
                                                       -----------          ----------
                                                         5,876,700           5,181,300
   Less accumulated depreciation,
      depletion and amortization                        (3,221,700)         (3,017,700)
                                                       -----------          ----------
                                                         2,655,000           2,163,600

OTHER ASSETS                                               153,800             150,200
                                                       -----------          ----------

                                                       $10,211,400          $6,285,700
                                                       ===========          ==========


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


                                                 45

<PAGE>



                                     CRESTED CORP. AND AFFILIATE

                                     CONSOLIDATED BALANCE SHEETS

                           LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)

<TABLE>
<CAPTION>

                                                                     May 31,
                                                       -------------------------------
                                                           1998                  1997
                                                           ----                  ----
<S>                                                    <C>                  <C>       
CURRENT LIABILITIES:
   Accounts payable and accrued expenses               $   698,800          $  556,600
   Deferred GMMV purchase option                         2,000,000            --
   Current portion of long-term debt
        Affiliate                                        6,547,100           6,023,400
        Other                                               36,400              12,400
                                                       -----------          ----------
           Total current liabilities                     9,282,300           6,592,400


LONG-TERM DEBT                                              42,100             15,800

RECLAMATION LIABILITY                                      725,900             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;
        10,237,694 shares issued and outstanding            10,200              10,200
   Additional paid-in capital                            6,375,400           6,375,400
   Accumulated deficit                                  (6,268,400)          (7,477,900)
                                                       -----------          -----------
        Total shareholders' equity/(deficit)               117,200          (1,092,300)
                                                       -----------          ----------
                                                       $10,211,400          $6,285,700
                                                       ===========          ==========


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


                                                 46

<PAGE>



                                       CRESTED CORP. AND AFFILIATE

                                  CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                               Year Ended May 31,
                                                -----------------------------------------------
                                                    1998              1997              1996
                                                    ----              ----              ----

<S>                                             <C>               <C>               <C>
REVENUES:
  Mineral revenues                              $   534,800       $   103,600       $ 1,558,400
  Commercial operations                             880,900           488,300           409,000
  Interest                                          141,500            38,500            97,300
  SMP litigation settlements, net                 2,295,000           501,900           --
  Oil sales                                          85,100            82,300           105,100
  Management fees and other                         721,800           460,000           162,700
  Gain on sale of assets                                800            28,900           176,700
                                                -----------       -----------       -----------
                                                  4,659,900         1,703,500         2,509,200
                                                -----------       -----------       -----------
COSTS AND EXPENSES:
  Mineral operations                                832,400           421,500         1,786,100
  Abandoned mineral claims                         --                  71,500           --
  Provision for doubtful accounts                  --                 570,800           --
  Commercial operations                             814,100           873,500           806,900
  General and administrative                      1,370,300           549,300           642,200
  Oil production                                     34,000            48,400            36,300
  Interest                                           27,400            30,900            48,700
                                                -----------       -----------       -----------
                                                  3,078,200         2,565,900         3,320,200
                                                -----------       -----------       -----------

INCOME (LOSS ) BEFORE EQUITY IN LOSS
  OF AFFILIATES AND INCOME TAXES                  1,581,700          (862,400)         (811,000)

EQUITY IN LOSS OF AFFILIATES                       (372,200)         (807,900)         (357,900)
                                                -----------       -----------       -----------

INCOME (LOSS) BEFORE INCOME TAXES                 1,209,500        (1,670,300)       (1,168,900)

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

NET INCOME (LOSS)                               $ 1,209,500       $(1,670,300)      $(1,168,900)
                                                ===========       ===========       ===========

NET INCOME (LOSS) PER SHARE,
  BASIC AND DILUTED                             $       .12       $      (.16)      $      (.12)
                                                ===========       ===========       ===========

BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING                               10,237,694        10,165,931        10,156,094
                                                ===========       ===========       ===========

DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING                               10,302,694        10,165,931        10,156,094
                                                ===========       ===========       ===========


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


                                                   47

<PAGE>



                                  CRESTED CORP. AND AFFILIATE

                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)

<TABLE>
<CAPTION>

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

<S>                               <C>              <C>              <C>                   <C>                 <C>         
Balance, May 31, 1995             10,156,094       $  10,100        $   6,319,400         $ (4,638,700)       $  1,690,800

Net loss                            --                --                 --                 (1,168,900)         (1,168,900)
                                 -----------       ---------        -------------         ------------        ------------

Balance, May 31, 1996             10,156,094          10,100            6,319,400           (5,807,600)            521,900

Issuance of stock to
   outside directors                  81,600             100               56,000            --                     56,100

Net loss                            --                --                 --                 (1,670,300)         (1,670,300)
                                 -----------       ---------        -------------         ------------        ------------

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
                                 ===========       =========        =============         ============        ============


Shareholders'  Equity at May 31, 1998 does not include  65,000 shares  currently
issued but  forfeitable  if certain  conditions  are not met by the  recipients.
However,  the shares deemed to be outstanding on the accompanying  Balance Sheet
include the forfeitable shares.



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

                                              48

<PAGE>



                                        CRESTED CORP. AND AFFILIATE

                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                     Year Ended May 31,
                                                       ------------------------------------------
                                                           1998           1997           1996
                                                           ----           ----           ----
<S>                                                    <C>            <C>            <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                   $ 1,209,500    $(1,670,300)   $(1,168,900)
   Adjustments to reconcile net income (loss) to net
      cash used in operating activities:
        Depreciation, depletion, and amortization          214,600        183,600        252,400
        Equity in loss of affiliates                       372,200        807,900        357,900
        Provision for doubtful accounts                       --          574,600           --
        Non-cash compensation                                 --           76,300          1,600
        Gain on sale of assets                                (800)       (28,900)      (176,700)
        SMP settlement receivable                       (2,513,000)      (501,900)          --
        Abandonment of mineral claims                         --           71,500           --
        Net changes in:
           Accounts and notes receivable                  (369,300)      (457,900)       (34,500)
           Inventory and other                              21,900        (14,700)        21,700
           Accounts payable and accrued expenses           142,200        256,600       (629,100)
                                                       -----------    -----------    -----------
NET CASH USED IN
    OPERATING ACTIVITIES                                  (922,700)      (703,200)    (1,375,600)
                                                       -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Deferred GMMV purchase option                         2,000,000           --             --
   Reversal of deferred gain on sale of assets                --             --         (127,800)
   Decrease (increase) in long-term receivables            251,800       (668,400)       (73,900)
   (Investments in) proceeds from affiliates              (218,700)     1,891,400       (575,400)
   Purchases of property and equipment                    (707,200)       (64,500)      (127,100)
   Proceeds from sale of assets                              2,000         30,000        437,100
   Increase in other assets                                 (3,600)        (4,100)       (88,000)
                                                       -----------    -----------    -----------
NET CASH PROVIDED BY (USED IN)
    INVESTING ACTIVITIES                                 1,324,300      1,184,400       (555,100)
                                                       -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on line of credit, net                            --          (88,000)      (392,000)
   Payment on long-term debt                              (103,600)          --             --
   Increase in long-term debt                              153,900         28,200      2,421,500
   Net activity on long-term debt to affiliates            523,700       (436,900)       (70,600)
                                                       -----------    -----------    -----------
NET CASH PROVIDED BY (USED IN)
   FINANCING ACTIVITIES                                    574,000       (496,700)     1,958,900
                                                       -----------    -----------    -----------


(continued)


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


                                                    49

<PAGE>



                                        CRESTED CORP. AND AFFILIATE

                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (CONTINUED)

<TABLE>
<CAPTION>
                                                                Year Ended May 31,
                                                      ------------------------------------
                                                          1998          1997       1996
                                                          ----          ----       ----
<S>                                                   <C>           <C>          <C>      
NET INCREASE (DECREASE) IN CASH
     AND CASH EQUIVALENTS                                 975,600     (15,500)      28,200

CASH AND CASH EQUIVALENTS, Beginning of year               37,100      52,600       24,400
                                                      -----------   ---------    ---------

CASH AND CASH EQUIVALENTS, End of year                $ 1,012,700   $  37,100    $  52,600
                                                      ===========   =========    =========

SUPPLEMENTAL DISCLOSURES:

     Interest paid                                    $    27,400   $  30,900    $ 116,300
                                                      ===========   =========    =========

     Income taxes paid                                $      --     $    --      $    --
                                                      ===========   =========    =========

     Noncash investing and financing activities:

        Issuance of common stock to officers
           and directors for services rendered        $      --     $  63,600    $   1,600
                                                      ===========   =========    =========

        Exchange of affiliate shares for contingent
           stock purchase warrant                     $      --     $ 651,000    $    --
                                                      ===========   =========    =========

        Issuance of stock to outside directors        $      --     $  56,100    $    --
                                                      ===========   =========    =========


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

                                                    50

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998


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 properties, mining and marketing of minerals.
Principal mineral interests are in uranium,  gold and molybdenum.  However, none
are  producing  at the  present  time.  The  Company  also  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 (see Note J), are engaged in two ventures to develop
certain uranium  properties,  one a joint venture with Kennecott Uranium Company
("Kennecott")  known as the Green  Mountain  Mining  Venture  ("GMMV"),  and the
second a  partnership  with  Nukem,  Inc.  ("Nukem")  through  its wholly  owned
subsidiary  Cycle  Resource  Investment  Corporation  ("CRIC")  known  as  Sheep
Mountain Partners  ("SMP").  In fiscal 1998, the Company and USE entered into an
Agreement with Kennecott whereby they may purchase  Kennecott's  interest in the
GMMV if certain conditions are met (see Note F). During fiscal 1991, the Company
and USE formed USECC Gold Limited  Liability  Company ("USECC  Gold"),  and with
Seine River  Resources Inc.  ("SRRI")  operated  Sutter Gold Venture  ("SGV") to
develop certain gold properties.  USECC Gold acquired SRRI's remaining  interest
in SGV during fiscal 1994 and then owned 100% of SGV.  During  fiscal 1995,  SGV
was  terminated  when USE and Crested formed a new Wyoming  corporation,  Sutter
Gold Mining  Company,  and  exchanged  their  interests in USECC Gold for common
stock of Sutter Gold Mining Company ("SGMC").

LIQUIDITY AND OPERATING LOSSES

        The Company has a  significant  working  capital  deficit which has been
impacted by the  litigation/arbitration  with Nukem and CRIC, which is discussed
in Note K. During fiscal 1998, the Company received $429,300 for a delivery made
on an SMP  contract.  During the fourth  quarter of fiscal  1998,  a  settlement
agreement was reached whereby the Company and USE received $2,513,000 as partial
payment of the monetary  resolution  of the American  Arbitration  Association's
order  and  award  for  a  portion  of  the  SMP  arbitration/litigation   ("SMP
litigation")  that was finalized in fiscal 1998.  For accounting  purposes,  the
Company first applied the proceeds  against their recorded  investment  with the
remaining balance of $2,295,000, after cost recovery, being recognized as income
and  included in the  accompanying  Consolidated  Statement  of  Operations.  In
November  1996,  the Company and USE received  $4,367,000 (of which one-half was
attributable  to the Company) as partial  resolution of the monetary  damages in
the SMP  arbitration/litigation.  This amount was first applied to the Company's
investment in SMP.  After cost  recovery,  a total of $501,900 was recognized as
income by the Company. Recovery of the Company's advances and improvement in its
liquidity   position   are   dependent   on  the   ultimate   outcome   of  this
litigation/arbitration.  This matter has also impacted the Company's  ability to
pay its  obligations to its  affiliates,  primarily USE. As of May 31, 1998, the
Company owes USE $6,547,100.


                                       51

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

B.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

        The  consolidated  financial  statements of Crested and affiliate (USECC
Joint Venture ("USECC")) include the accounts of the Company and one-half of the
account  balances of USECC,  a joint  venture  through which the Company and its
controlling  shareholder,  USE, conduct the bulk 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 (see  Notes F and K),  investments  in other
joint  ventures and 20% to 50% owned  companies  are accounted for by the equity
method.  The  Company  accounts  for its 8%  investment  in USE using the equity
method because the Company is controlled by USE.  Investments in other companies
of less than 20% are accounted for by the cost method, except for SGMC, which is
accounted  for under 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.

INVENTORIES

        Inventories  consist  primarily of aviation  fuel,  associated  aircraft
parts,  mining  supplies,  stockpiled  uranium and gold ore  stockpiles.  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 cash  equivalents.  The carrying amount
of cash  equivalents  approximates  fair value because of the short  maturity of
those instruments.

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 45 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 will be
amortized using the units-of-production method over the estimated useful life 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.

                                       52

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (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.  The
market  value of these  assets  and most of the  reclamation  and  environmental
liabilities   associated  with  them  are  not  reflected  in  the  accompanying
consolidated balance sheets (see Note K).

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
or the fair value 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 or the fair value
of the  asset to the  carrying  amount  of the  asset.  Changes  in  significant
assumptions  underlying  future  cash flow  estimates  or fair values may have a
material effect on the Company's financial position and results of operations. A
low commodity  price market,  if sustained for an extended  period of time,  may
result in asset impairment.  As of May 31, 1998,  management believes that there
has not  been  any  impairment  of the  Company's  long-lived  assets  or  other
identifiable intangibles.

FAIR VALUE OF FINANCIAL INSTRUMENTS

        The recorded  amounts for  short-term and long-term  debt,  receivables,
other current assets, and accounts payable and accrued expenses approximate fair
value.

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.

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 carryforwards.

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

                                       53

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

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

NET INCOME (LOSS) PER SHARE

        In February 1997,  Statement of Financial  Accounting  Standards No. 128
"Earnings per Share,"  ("SFAS 128") was issued and  specifies  the  computation,
presentation  and disclosure  requirements  for earnings per share.  SFAS 128 is
effective  for periods  ended after  December 15, 1997 and requires  retroactive
restatement of prior period earnings per share. The statement  replaces "primary
earnings per share" with "basic  earnings per share" and replaces "fully diluted
earnings  per share" with  "diluted  earnings  per share."  Adoption of SFAS 128
required  restatement  of 1996  earnings  per share as  forfeitable  shares were
included in the  calculation of primary  earnings per share.  For the year ended
May 31, 1996, the loss per share was $.11 prior to restatement.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June,  1997,  SFAS No. 130  "Reporting  Comprehensive  Income" ("SFAS
130")  was  issued  and  establishes  standards  for  reporting  and  displaying
comprehensive income and its components in the financial statements. In addition
to net income,  comprehensive  income  includes  all changes in equity  during a
period,  except those resulting from investments by and distributions to owners.
The Company will adopt SFAS 130,  which is effective for fiscal years  beginning
after  December 15, 1997, in the first quarter of fiscal 1999.  Management  does
not expect the adoption of this  pronouncement  to have a material impact on its
consolidated financial statements.

        In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related  Information" ("SFAS 131") was issued and establishes  standards for
reporting  information about operating  segments in annual and interim financial
statements.  SFAS 131 also establishes  standards for related  disclosures about
products  and  services,  geographic  areas  and  major  customers.  SFAS 131 is
effective  for fiscal years  beginning  after  December  15,  1997,  and will be
adopted  in  fiscal  1999.  Reporting  and  disclosures  under  SFAS 131 are not
expected to be materially different than those disclosures in Note I.

        In February 1998,  SFAS No. 132 "Employers'  Disclosures  about Pensions
and Other Post  Retirement  Benefits"  ("SFAS 132") was issued and  standardizes
disclosure  requirements  for pension and other post  retirement  benefit plans.
Adoption of this standard is required for fiscal years  beginning after December
15, 1997, and restatement of prior period  comparative  disclosures is required.
The Company will adopt SFAS 132 in fiscal 1999.  The adoption of SFAS 132 is not
expected to have a material effect on prior period amounts.

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.

                                       54

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

RECLASSIFICATIONS

        Certain  reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.

C.      RELATED-PARTY TRANSACTIONS:

        The Company does not have  employees,  but utilizes USE's  employees and
pays for one-half of the costs under the USECC 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 1998, 1997 and 1996, the
Board of Directors of USE  contributed  49,470,  24,069 and 10,089 shares of USE
stock to the ESOP at prices of $6.57,  $8.87 and $8.65 per share,  respectively.
The Company is responsible for one-half of the value of these  contributions  or
$162,300, $106,800 and $43,700 in fiscal 1998, 1997 and 1996, respectively.

        As of May 31, 1998,  the Company had notes  receivable  due from certain
officers,  employees and related parties of the Company and USE totaling $94,543
which bear interest at 10% per annum and are due in November  1998.  The Company
also has advances to affiliates of $803,858.

        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 $552,775,  $329,900 and $116,500 in fiscal
1998, 1997 and 1996, 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 each
own 12.7% of YSFC.  The  convertible  note bears  interest  at 10% and is due on
December 31, 1998.  YSFC can, at its option,  either repay the debt with cash or
its common stock.  However,  if YSFC defaults in paying the note on December 31,
1998,  the note is  convertible  into a number of shares which will give USE and
Crested a combined 51% ownership interest in YSFC.

D.      USECC JOINT VENTURE:

        USECC  operates the Glen L. Larsen office  complex;  an aircraft  hangar
with a fixed base operation and office space; certain aircraft;  holds interests
in various  minerals  operations  including SMP and the GMMV;  and transacts all
operating and payroll expenses, except for specific expenses which are allocated
directly to each venturer.  In addition,  through April 1996 USECC operated Wind
River Estates ("Wind River"),  a 100 unit mobile home park.  During 1996,  USECC
sold Wind  River  (which  had a net book value of  approximately  $512,700)  and
recognized  a gain of  $252,600  on this sale of which  50%,  or  $126,300,  was
Crested's portion.

        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:


                                       55

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

                        CONDENSED BALANCE SHEETS - USECC
<TABLE>
<CAPTION>

                                                       May 31,
                                        --------------------------------
                                             1998                1997
                                             ----                ----
    <S>                                 <C>                  <C>        
    Current assets                      $  9,098,700         $ 1,468,100
    Properties and equipment               9,248,800           7,858,300
    Mineral properties                        28,500              27,900
    Accumulated depreciation              (4,031,600)         (3,623,600)
    Other long-term assets                 2,095,000           2,583,500
                                        ------------         -----------
                                        $ 16,439,400         $ 8,314,200
                                        =============        ===========

    Current liabilities                 $  1,474,900         $ 1,139,400
    Reclamation liability                  1,451,900           1,451,900
    Other liabilities                         84,300              31,500
    Deferred income                        4,000,000           --
    Venturers' capital                     9,428,300           5,691,400
                                        ------------         -----------
                                        $ 16,439,400         $ 8,314,200
                                        ============         ===========
</TABLE>

                          CONDENSED STATEMENTS OF OPERATIONS - USECC

<TABLE>
<CAPTION>
                                               Year Ended May 31,
                                -----------------------------------------------
                                     1998             1997             1996
                                     ----             ----             ----
    <S>                         <C>              <C>              <C>         
    Revenues                    $  8,778,200     $  3,043,600     $  4,855,500
    Costs and expenses            (6,164,300)      (3,963,500)      (6,789,300)
                                ------------     ------------     ------------
    Net income (loss)           $  2,613,900     $   (919,900)    $ (1,933,800)
                                ============     ============     ============
</TABLE>

E.      INVESTMENTS IN AFFILIATES:

        The Company's investments in affiliates are as follows:

<TABLE>
<CAPTION>
                                               Carrying Value at May 31,
                                       -----------------------------------------
                                       Ownership         1998            1997
                                       ---------         ----            ----
     Equity Method Investments:
        <S>                             <C>          <C>             <C>       
        GMMV                               25%       $  116,300      $  116,300
        SGMC                              3.2%          403,600         417,800
        ENERGX Ltd.                        45%           62,900          62,900
        YSFC                             12.7%         (192,200)       (122,400)
        USE (Note B)                        8%        1,243,600       1,316,700
        Others                         various            9,100           5,500
                                                     ----------      ----------
                                                     $1,643,300      $1,796,800
                                                     ==========      ==========
</TABLE>


                                       56

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

     Equity in income (loss) from investments accounted for by the equity method
is as follows:
<TABLE>
<CAPTION>

                                          Year Ended May 31,
                             -----------------------------------------
                                  1998          1997            1996
                                  ----          ----            ----

    <S>                      <C>            <C>             <C>  
    YSFC                     $ (69,300)     $ (122,400)     $  --
    GMMV                       --              --              --
    SGMC                       (13,000)       (121,800)        (39,700)
    ENERGX, LTD.               --              (27,400)       (180,400)
    USE                        (73,100)       (271,400)         73,500
                             ---------      ----------      ----------
                             $(155,400)     $ (543,000)     $ (146,600)
                             =========      ==========      ==========
</TABLE>
        There are currently  litigation  and  arbitration  proceedings  with the
Company's partner in the SMP partnership, as discussed further in Note K.

                       CONDENSED COMBINED BALANCE SHEETS:
                                EQUITY INVESTEES
<TABLE>
<CAPTION>

                                                  1998               1997
                                                  ----               ----
<S>                                         <C>                 <C>          
Current assets                              $  18,434,400       $  10,155,700
Non-current assets                            118,550,300         104,447,100
                                            -------------       -------------
                                            $ 136,984,700       $ 114,602,800
                                            =============       =============

Current liabilities                         $   9,351,900       $   1,993,800
Reclamation and other liabilities              61,281,400          45,692,700
Excess in assets                               66,351,400          66,916,300
                                            -------------       -------------
                                            $ 136,984,700       $ 114,602,800
                                            =============       =============
</TABLE>

                         CONDENSED COMBINED STATEMENTS OF OPERATIONS:
                                       EQUITY INVESTEES
<TABLE>
<CAPTION>

                                 1998                1997               1996
                                 ----                ----               ----
<S>                          <C>                <C>                <C>         
Revenues                     $ 11,695,900       $  5,766,000       $  9,053,100
Discontinued operations         --                  --                2,604,600
Costs and expenses            (13,273,900)       (12,213,500)       (12,685,600)
                             ------------       ------------       ------------
Net loss                     $ (1,578,000)      $ (6,447,500)      $ (1,027,900)
                             ============       ============       ============
</TABLE>

        SMP entered into various market related and base price escalated uranium
sales  contracts with certain  utilities which require  approximately  1,500,000
pounds of uranium  concentrates to be delivered from 1997 through 2000 depending
on utility  requirements.  These  contracts  also allow for the quantities to be
substantially  increased by the utilities.  As discussed in Note K, SMP has been
the subject of significant  litigation and arbitration  proceedings  between the
SMP  partners  since 1991,  portions of which are  currently  still in progress.
Pending the resolution of the remaining proceedings,  the partners in SMP agreed
to  fulfill  certain  of  the  SMP's  uranium  sales  contracts  outside  of the
partnership  by each  partner  delivering  a  mutually-  agreed  portion  of the
delivery commitments on an individual basis. In 1998 and 1996,  deliveries under
this

                                       57

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

arrangement  resulted in revenues  to the  Company of $429,300  and  $1,383,400,
respectively  (no such  revenues were  recognized in 1997).  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.

        Due to the litigation and  arbitration  proceedings,  audited  financial
statements  for SMP are not  obtainable.  Accordingly,  the Company has recorded
only its direct  investment in, and results of operations from the  partnership.
The Company had no carrying  value of its  investment  in SMP for either 1998 or
1997.  The  Company's  direct  loss  generated  from its  investment  in SMP was
$(216,800), $(264,900) and $(211,300) for the years ended May 31, 1998, 1997 and
1996, respectively. No amounts attributable to SMP are included in the Condensed
Combined  Balance Sheets or Condensed  Combined  Statements of Operations of the
Company's equity investees presented above.

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
$15,000,000  and a commitment to fund the first $50 million of  development  and
operating  costs.  Kennecott  committed to fund 100% of the first $50 million of
capital  contributions  to the GMMV.  Kennecott also committed to pay additional
amounts  if  certain  future  operating  margins  were  achieved.  USE and USECC
participate in cash flows of the GMMV in accordance  with their ownership of the
mining claims prior to the formation of the GMMV.

        On June 23, 1997,  USE and USECC signed an  Acquisition  Agreement  with
Kennecott  for the  right  to  acquire  Kennecott's  interest  in the  GMMV  for
$15,000,000 and other consideration.  Kennecott paid USE and USECC $4,000,000 on
signing,  and  committed  to loan  the GMMV up to  $16,000,000  for  payment  of
reimbursable  costs  incurred by USECC in  developing  the proposed  underground
Jackpot Uranium Mine for production and in changing the status of the Sweetwater
Mill from standby to operational.

        Pursuant to the Acquisition  Agreement,  the Mineral Lease, and the Mill
Contract,  USECC is to develop the  proposed  Jackpot  Mine and nearby Big Eagle
Mine,  and work with  Kennecott in  preparing  the  Sweetwater  Mill for renewed
operations.  Such work will be funded from the  $16,000,000  being loaned to the
GMMV by Kennecott.  Kennecott will be entitled to a credit  against  Kennecott's
original  $50,000,000  commitment to fund the GMMV, in the amount of two dollars
of credit  for each one dollar of such  funds out of the  $16,000,000  loaned by
Kennecott to the GMMV,  plus the $4,000,000  paid to USE and USECC on signing of
the  Acquisition  Agreement.  It is  anticipated  that such  credits  will fully
satisfy the balance of Kennecott's initial funding commitment to the GMMV.

        Closing  of the  Acquisition  Agreement  is  subject  to USE  and  USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market  capitalization of at least  $200,000,000;  (ii)
the parties to the Acquisition  Agreement must have received all authorizations,
consents,  permits and  approvals of  government  agencies  required to transfer
Kennecott's interest in the GMMV to the acquiring

                                       58

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

entity;  (iii) USE and USECC shall have replaced,  or caused the replacement of,
approximately $25,000,000 of reclamation bonds, in addition to other guarantees,
indemnification  and suretyship  agreements posted by Kennecott on behalf of the
GMMV; and (iv) USE and USECC, or the acquiring entity, must pay $15,000,000 cash
to Kennecott at closing and assume all  obligations and liabilities of Kennecott
with respect to the GMMV (including  repayment of the  $16,000,000  Note and the
Mortgage)  from and after the  closing.  Under very limited  circumstances,  the
scheduled closing date may be postponed to not later than October 30, 1998.

        USECC satisfied the terms of the Acquisition Agreement to the point that
the $4,000,000 signing payment paid by Kennecott is nonrefundable and will serve
to reduce USE's and Crested's ultimate $15,000,000  purchase obligation.  If the
acquisition is  unsuccessful,  the signing  payment will be applied  against any
future  reimbursable  costs and contributions due the GMMV. After such costs and
remaining obligations are satisfied,  the remainder,  if any, will be recognized
as income.

        In 1996,  the U.S.  Government  adopted the "USEC  Privatization  Act of
1996" to privatize the U.S.  Enrichment Corp. In July 1998, in a filing with the
U.S.  Securities  and Exchange  Commission,  USEC Inc.  ("USEC")  disclosed  its
planned  sale of  significant  quantities  of uranium  in the U.S.  marketplace.
Accordingly,  forecasted demand for uranium and forecasted  uranium sales prices
have  decreased  in the  short-term.  As a result,  in July  1998,  GMMV  halted
development  activities  at the Jackpot Mine on July 31, 1998 and has placed the
facility on active standby. This action required the layoff of mine workers. Due
to the  uncertainty  of the  uranium  market it is not known  when the mine will
operate  again or if USECC will be able to conclude the  financing  necessary to
buy Kennecott's interest.

        If the  Acquisition  Agreement is not closed,  USE,  USECC and Kennecott
shall  continue  to  own  their  respective  50%  interests  in  the  GMMV,  and
Kennecott's  obligation  to repay the  $16,000,000  loaned  by KEC shall  remain
Kennecott's  obligation,  without any adverse effect on the 50% interest in GMMV
held by USE and USECC. However, the Jackpot Mine development work and Sweetwater
Mill upgrade work funded by the  $16,000,000  advance will have  benefitted  all
parties  to the GMMV and will fully  satisfy  Kennecott's  original  $50,000,000
funding obligation to GMMV.

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  seven  years.  See Notes E and K for a
description    of   the   investment   and   a   discussion   of   the   related
litigation/arbitration.

CYPRUS AMAX

        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 and its successor Cyprus Amax Minerals, Inc. ("Cyprus Amax")
have not placed the properties into production as of May 31, 1998.


                                       59

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

        Cyprus Amax now pays the Company  and USE an annual  advance  royalty of
50,000 pounds of molybdenum (or its cash equivalent). Cyprus Amax 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 $105,500,  $103,600 and $-0- of revenue from
the advance royalty payments in fiscal 1998, 1997, and 1996, respectively.

        Cyprus Amax may elect to return the  properties  to the Company and USE,
which  would  cancel the advance  royalty  obligation.  If Cyprus Amax  formally
decides to place the properties into  production,  it will pay $2,000,000 to the
Company and USE. If Cyprus Amax sells the  properties,  the Company and USE will
receive 15% of the first $25 million received by Cyprus Amax.

        The Company and USE also held an option to purchase  certain real estate
located in Gunnison,  Colorado owned by Cyprus Amax. During fiscal 1995, USE and
Crested  reached an  agreement  with Cyprus Amax  whereby USE and Crested  would
forego six  quarters of advance  royalties  as payment of this  option  exercise
price. Accordingly, USE and Crested received no advance royalties during 1996 as
a result of this agreement.  Thereafter,  USE (together with Crested) signed two
option  agreements  with Pangolin  Corporation  ("Pangolin"),  a Park City, Utah
developer,  for sale of the land owned in Gunnison  County,  Colorado.  Pangolin
made a cash  payment  and  signed  promissory  notes  for  the  purchase  of the
properties.  As of May 31, 1998,  the  promissory  notes were in default and are
adequately reserved for. USECC is endeavoring to resolve the default and filed a
legal action to protect its interest (see Note K).

SGMC

        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 pursuing a partner to assist in the  financing of its
mineral  development  and ultimate  production.  As of May 31, 1998,  due to the
decline in the spot price for gold,  SGMC has put the development of the mine on
hold.  Until the time when development  begins,  SGMC does not expect to require
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 the first and second quarters of fiscal 1997, SGMC sold shares of
its common  stock in a private  placement.  These shares were sold for $3.00 per
share. SGMC received  approximately  $1,100,000 in net proceeds from this equity
placement.  During the fourth quarter of fiscal 1997, an additional  offering of
shares of SGMC's  special  warrant units was completed and raised  approximately
$5,400,000 in net cash proceeds.  Each special warrant unit is convertible  into
one share of SGMC  common  stock for no  additional  compensation  and one stock
purchase warrant.  The warrant allows the holder to purchase an additional share
of SGMC common stock for CDN$6.00.  The warrant expires in November 1998. At the
underwriter's  request, the initial investors (including USE and Crested) agreed
to have the amount of their common shares

                                       60

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

owned  reduced  by 50  percent.  The  investors  in the $3.00 per share  private
placement  discussed  above  were not  affected  as those  shares  were  sold in
contemplation of the 1 for 2 reverse split.

        In connection with the second  offering,  the Company and USE accepted a
Stock  Purchase  Warrant dated March 21, 1997 which provides the Company and USE
the right to acquire, for no additional  consideration,  common shares of SGMC's
$.001 par value common stock having an aggregate value of $10,000,000  (US). The
Stock Purchase  Warrant has a term of ten years extending to March 21, 2007, and
is exercisable partially or in total,  semi-annually beginning on June 30, 1997.
However, the Stock Purchase Warrant is only exercisable to the extent proven and
probable ore reserves,  as defined in the Stock Purchase  Warrant,  in excess of
300,000 ounces are added to SGMC's reserves. In addition,  SGMC has the right to
satisfy the  exercise of all or any portion of the Stock  Purchase  Warrant with
the net cash flows, as defined,  at $25.00 (US) for each new ounce of proven and
probable  ore in excess of 300,000  ounces up to a maximum  of  700,000  ounces.
Accordingly,  the  Company  has  allocated  the  carrying  value of SGMC  shares
exchanged for the Contingent  Stock  Purchase  Warrant to its investment in such
contingent warrants.  The Stock Purchase Warrant benefits the Company and USE on
the basis of 11.1% and 88.9%, respectively.

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,  1998,  Plateau  had a cash  security in the amount of  $7,270,408  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 in a portion of 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 the  current  depressed  uranium  market.  Alternative  uses  of the
properties are also being evaluated.

ENERGX, LTD.

        Energx is engaged  in the  exploration,  development  and  operation  of
natural gas properties. Energx currently has leased properties in Wyoming and on
the Fort Peck Indian Reservation, Montana. Energx is owned by USE (45%), Crested
(45%) and the Assiniboine and Sioux Tribes (10%).

        During fiscal 1997 and 1996,  Energx abandoned certain of its leases and
as  a  result  wrote  off  $164,500  and  $328,700,   respectively,  of  related
capitalized costs.


                                       61

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

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 (10.25% as of May 31,
1998).  The  weighted  average  interest  rate for 1998 and 1997 was 10.25%.  No
amounts were outstanding  under this facility at May 31, 1998 or 1997. 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.

        Debt of the Company consists primarily of a note to USE bearing interest
at 6% per annum due on  October 1, 1999.  The debt is  primarily  due to USE for
funding all of the operations of USECC of which 50% is the responsibility of the
Company.  All debt is  classified  as current  as of May 31,  1998 and 1997 as a
result of USE's  unilateral  ability to modify  the  repayment  terms  under the
promissory note  agreement.  The Company signed a two year promissory note as of
May 31, 1997 to USE for the full amount of its indebtedness  reserving the right
to pay all or part of the note through the issuance of Crested common stock.
<TABLE>
<CAPTION>
                                                             May 31,
                                                 ------------------------------
                                                     1998                1997
                                                     ----                ----
    <S>                                          <C>                <C>
    Notes payable - USE, 6% interest
        balance payable  in full on
        demand (see Note A)                      $   6,547,100      $ 6,023,400
    Note payable to bank, 8.75% interest,
        balance due July 1, 1999                        78,500           28,200
                                                 -------------      -----------
           Total                                 $   6,625,600      $ 6,051,600
    Less - current portion                           6,583,500        6,035,800
                                                 -------------      -----------
                                                 $      42,100      $    15,800
                                                 =============      ===========
</TABLE>

                                       62

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

H.      INCOME TAXES:

        The  components  of  deferred  taxes as of May 31,  1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
                                                       May 31,
                                            --------------------------
                                                1998          1997
                                                ----          ----
<S>                                         <C>            <C>        
Deferred tax assets:
    Deferred compensation                   $    50,000    $    86,300
    Deferred gains                              106,100        476,200
    Litigation settlements                      135,700        179,300
    Net operating loss carryforwards          3,126,100      3,814,200
    Tax credits                                   9,000         83,000
Capital loss carryforwards                    1,013,000           --
                                            -----------    -----------
Total deferred tax assets                     4,439,900      4,639,000

Deferred tax liabilities:
    Book basis in excess of tax                    --         (309,600)
    Development and exploration costs           (48,800)       (42,700)
                                            -----------    -----------
Total deferred tax liabilities                  (48,800)      (352,300)
                                            -----------    -----------

Net deferred tax assets - all non-current     4,391,100      4,286,700

Valuation Allowance                          (4,391,100)    (4,286,700)
                                            -----------    -----------

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

        At May 31,  1998,  the Company  had  available,  for federal  income tax
purposes,  net operating loss  carryforwards of  approximately  $9,200,000 which
expire in 2006 through 2012. The Company has  established a 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 carryforwards.

        For fiscal years 1998,  1997 and 1996, the Company  incurred  losses for
both book and tax  purposes.  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:


                                       63

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)
<TABLE>
<CAPTION>

                                                  Year Ended May 31,
                                        ------------------------------------
                                           1998          1997        1996
                                           ----          ----        ----
<S>                                     <C>          <C>          <C>       
Expected federal income tax
    provision (benefit)                 $ 450,800    $(453,700)   $(397,400)
Tax basis not previously
    recognized and other                 (555,200)     (52,600)    (204,500)
Valuation allowance                       104,400      506,300      601,900
                                        ---------    ---------    ---------
Income taxes                            $    --      $    --      $    --
</TABLE>
                                        =========    =========    =========

        There were no taxes payable as of May 31, 1998, 1997 or 1996.

        The Internal Revenue Service ("IRS") is currently auditing the Company's
and USECC's tax  returns for the fiscal  years ended May 31, 1996 and 1995.  The
audit is not completed as of the date of the accompanying  financial statements.
However, 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.

I.      SEGMENTS AND MAJOR CUSTOMERS:

        The Company's primary business  activities include the sales of minerals
and the  acquisition  exploration,  holding,  development  and  sale of  mineral
bearing properties. No properties are currently producing. The second reportable
industry segment is commercial operations,  primarily real estate activities and
the operations of an airport fixed base operation located in Riverton,  Wyoming.
The following is information related to industry segments:


                                       64

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)
<TABLE>
<CAPTION>

                                                              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 revenues                                                           3,244,200
General corporate and other expenses                                                 (1,431,700)
Equity loss in affiliates                                                              (255,800)
                                                                                   ------------
    Income before income taxes                                                     $  1,325,900
                                                                                   ============

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>
                                                   ==========      ==========



                                               65

<PAGE>


                                  CRESTED CORP. AND AFFILIATE

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                         MAY 31, 1998
                                          (CONTINUED)
<TABLE>
<CAPTION>

                                                              Year Ended May 31, 1997
                                                   --------------------------------------------
                                                                   Commercial
                                                     Minerals      Operations      Consolidated
                                                     --------      ----------      ------------

<S>                                                <C>             <C>              <C>        
Revenues                                           $  103,600      $  488,300       $   591,900
                                                    =========      ==========
Interest and other revenues                                                           1,111,600
                                                                                    -----------
    Total revenues                                                                  $ 1,703,500
                                                                                    ===========

Operating loss                                     $ (317,900)     $ (385,200)      $  (703,100)
                                                   ==========      ==========
Interest and other revenues                                                           1,111,600
General corporate and other expenses                                                 (1,270,900)
Equity loss in affiliates                                                              (807,900)
                                                                                    -----------
    Loss before income taxes                                                        $(1,670,300)

Identifiable net assets at May 31, 1996            $   24,600      $2,139,000         2,163,600
                                                   ==========      ==========
Investments in affiliates                                                             1,796,800
Corporate assets                                                                      2,325,300
                                                                                    -----------
    Total assets at May 31, 1996                                                    $ 6,285,700
                                                                                    ===========

Capital expenditures                               $   --          $   64,500
                                                   ==========      ==========
Depreciation, depletion and
    amortization                                   $   --          $  184,900
                                                   ==========      ==========
</TABLE>



                                               66

<PAGE>


                                  CRESTED CORP. AND AFFILIATE

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                         MAY 31, 1998
                                          (CONTINUED)
<TABLE>
<CAPTION>

                                                              Year Ended May 31, 1996
                                                   --------------------------------------------
                                                                   Commercial
                                                     Minerals      Operations      Consolidated
                                                     --------      ----------      ------------

<S>                                                <C>             <C>             <C>         
Revenues                                           $1,558,400      $  409,000      $  1,967,400
                                                   ==========      ==========
Interest and other revenues                                                             541,800
                                                                                   ------------
    Total revenues                                                                 $  2,509,200
                                                                                   ============

Operating loss                                     $ (227,700)     $ (397,900)     $   (625,600)
                                                   ==========      ==========
Interest and other revenues                                                             541,800
General corporate and other expenses                                                   (727,200)
Equity loss in affiliates                                                              (357,900)
                                                                                   ------------
    Loss before income taxes                                                       $ (1,168,900)
                                                                                   ============

Identifiable net assets at May 31, 1995            $    96,100     $2,294,900      $  2,391,000
                                                   ===========     ==========
Investments in affiliates                                                             4,344,700
Corporate assets                                                                      1,396,800
                                                                                   ------------
    Total assets at May 31, 1995                                                   $  8,132,500
                                                                                   ============

Capital expenditures                               $   --          $  127,100
                                                   ===========     ==========
Depreciation, depletion and
    amortization                                   $    --         $  249,100
                                                   ===========     ==========
</TABLE>

        Sales of uranium  accounted  for 80% and 89% of mineral  revenue for the
years ended May 31, 1998 and 1996. There were no mineral sales in fiscal 1997.

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

J.      SHAREHOLDERS' EQUITY:

        The Boards of Directors of both the Company and USE,  from time to time,
issued stock bonuses to certain  directors,  employees and third parties.  These
shares are  forfeitable  to the  Company  and USE until  earned.  The Company is
responsible for one-half of the compensation  expense related to these issuances
(see Note C).  For the years  ending  May 31,  1998,  1997 and 1996 the  Company
recognized compensation expense of $27,300,  $76,300 and $59,800,  respectively,
resulting  from these  issuances.  A  schedule  of  forfeitable  shares for both
Crested and USE is set forth in the following table:


                                       67

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

<TABLE>
<CAPTION>
         Issue                        Number          Issue            Total
         Date                        of Shares        Price        Compensation
         ----                        ---------        -----        ------------

        <S>                           <C>             <C>             <C>    
        June 1990                     25,000          $1.0625         $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, 1998 and 1997       65,000                          $43,900
                                      ======                          =======
</TABLE>

        No shares  were  earned in fiscal  1998 or 1997.  Also  included  in the
forfeitable common stock are 15,000 shares to directors which are vesting at 20%
per year  beginning in November 1992, of which 9,000 are earned but not released
as of May 31, 1997.

K.      COMMITMENTS, CONTINGENCIES AND OTHER:

LEGAL PROCEEDINGS

        ARBITRATION/LITIGATION PROCEEDINGS CONCERNING SMP. In June 1991, Nukem's
wholly-owned   subsidiary  Cycle  Resource   Investment   Corporation   ("CRIC")
instituted arbitration proceedings against the Company and Crested. CRIC claimed
that  the  Company  and  USE  violated  the  Sheep  Mountain   Partners  ("SMP")
partnership  agreement.  On July 3, 1991,  the Company and USE,  through  USECC,
filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC
and their affiliates,  alleging Nukem/CRIC fraudulently misrepresented facts and
concealed  information  from the Company and USE to induce  their entry into the
agreements forming the SMP partnership and sought rescission,  damages and other
relief. Certain of Nukem's affiliates (excluding CRIC) were thereafter dismissed
from the lawsuit. The U. S. District Court granted the motion of the Company and
USE to stay the above arbitration initiated by CRIC.

        On September  16, 1991,  USECC filed  another civil action in the Denver
District Court against SMP seeking  reimbursement of $85,000 per month since the
spring of 1991 for the care and maintenance of the SMP underground uranium mines
and  properties.  On  May  11,  1993,  the  Denver  District  Court  stayed  all
proceedings  in  state  court  until  the case in the U.S.  District  Court  for
Colorado case was resolved.  Thereafter in February 1994, USECC, Nukem and CRIC,
agreed that the majority of the litigation subsequent to the formation of SMP on
December 21, 1988,  would be handled  through  consensual  arbitration  before a
three member panel of the American  Arbitration  Association (the "Panel").  The
arbitration  hearing  consumed 73 hearing days  commencing  on June 27, 1994 and
concluded  on May 31, 1995.  The Panel  entered its Order and Award on April 18,
1996.  Nukem filed two motions with the district  court  indicating  there was a
material  miscalculation and a double recovery.  The District Court remanded the
matter to the Arbitration  Panel to consider Nukem's  motions.  On July 3, 1996,
the Panel found there was no double  recovery  and approved the Order and Award,
which awarded  Crested and USE  $12,500,000  and Nukem/CRIC  $7,100,000  through
March 31, 1996.  On November 4, 1996 the United States  District  Court issued a
Judgment and Order confirming the Panel's Order and Award.

                                       68

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

        In November  1996,  USE and  Crested  received  $4,300,000  from the SMP
escrow bank accounts as partial payment of the monetary award of the Panel. This
$4,300,000  was  accounted  for under the cost  recovery  method of  accounting,
wherein it was applied to outstanding  amounts due USECC and USE and the balance
of $1,003,800  was  recognized as income.  Nukem/CRIC  filed a motion asking for
limited  remand and on June 27, 1997 the Federal  Court  reviewed the motion and
issued a Second Amended Judgment which confirmed the monetary award of the Panel
and  clarified the equitable  damages due USECC from  Nukem/CRIC.  Nukem filed a
notice of appeal with the Tenth Circuit Court of Appeals and posted a $8,613,600
supersedeas bond on the monetary  portion of the Award.  Nukem's appeal is based
on two issues,  the  District  Court  erred in  confirming  the double  recovery
finding  in the  Panel's  Order and Award  and that the  Order  placing  Nukem's
uranium  purchase  contracts with the CIS republics in  constructive  trust with
SMP.  During the fourth  quarter of fiscal  1998,  a  settlement  agreement  was
reached  whereby  U.S.  Energy  and  Crested  received  $5,024,000  as a partial
settlement and, in addition, USECC received the Sheep Mountain Uranium Mines and
certain other properties from SMP and one uranium delivery contract along with a
50% interest in a uranium supply  contract.  This settlement does not in any way
affect issues  presently on appeal and pending  before the 10th Circuit Court of
Appeal ("CCA").  A hearing is currently  scheduled before a three judge panel on
September 24, 1998 in Oklahoma City, Oklahoma.

        ILLINOIS  POWER.  Illinois Power Company  ("IPC"),  one of the utilities
with whom SMP has a long-term  uranium supply contract,  unilaterally  sought to
terminate  the  contract on October 28, 1993 and filed suit in the U.S.  Federal
District Court, Danville, Illinois, against the Company, Crested, et al. seeking
a  declaratory  judgment that IPC's  contract  with SMP was void.  After various
negotiating  sessions the parties  reached  agreement in June 1995 to settle the
case by entering  into an amendment to the original  supply  contract to provide
for 3 deliveries  totaling 486,443 lbs. U3O8. The final delivery was made in May
1997. On June 13, 1997, USE and Crested  received  $838,500 as a distribution of
profits from the final delivery under this SMP contract.

PARADOR MINING COMPANY, INC. ("PARADOR")

        On July 30, 1991, Bond Gold Bullfrog,  Inc.  ("BGBI") filed Civil Action
No.  11877 in the District  Court of the Fifth  Judicial  District,  Nye County,
Nevada  naming  USE,  Crested,  Parador  and  H.B.  Layne  Contractor,  Inc.  as
defendants.  The complaint  primarily  concerns extra lateral rights  associated
with two patented lode mining claims (the "Claims")  owned by Parador which were
initially  leased to a predecessor  of BGBI and  subsequently,  the residuals of
that lease were assigned and leased by Parador to USE and Crested.  A bifurcated
trial was held on December  11-12,  1995 before the District Court for the Fifth
Judicial  District  for the State of  Nevada,  County of Nye,  at which time the
parties presented evidence relative to the issue of extra lateral rights.  Other
claims between the parties were bifurcated by the Court and were not at issue at
the trial. On December 26, 1995, the district court issued a ruling denying apex
rights and extra lateral royalties to Parador,  the Company and USE. The partial
trial did not address the other issues pending in the litigation but limited the
trial to those issues  required to decide the question of extra lateral  rights.
All other  remaining  claims and  counterclaims  were considered by the Court on
January 26-28,  1998 in a bench trial and the Court entered judgment against the
plaintiff and the defendants on their claims.  BGBI,  USECC and Parador appealed
this  judgment  to the Nevada  Supreme  Court.  On June 23,  1998,  a  mandatory
Settlement  Conference was held in Reno, NV but no settlement was achieved.  The
Settlement  Mediator  referred  the  case to the  Nevada  Supreme  Court  for an
expedited hearing and the appeal is currently pending.


                                       69

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

        TICABOO TOWNSITE LITIGATION. In fiscal 1998, the prior contract operator
of the restaurant and lounge and two of its employees who operated the motel and
convenience  store at  Ticaboo  (owned by  Canyon  Homesteads,  Inc.)  sued USE,
Crested and Plateau Resources Ltd., et al in Utah State Court.  After a five day
trial,  the jury found  against the two  plaintiff  employees  but found for the
third  plaintiff and a judgment was entered for $153,371 in damages against USE,
which was recorded in fiscal 1998. USE intends to vigorously appeal the award.

        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") and the acting
secretary  in a  lawsuit  (file  no.  98 CV 1775) in the  U.S.  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 the United  States  Enrichment  Corp.
("USEC") in May 1998.

        The  plaintiffs  have asked the Court among other claims 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
defendants have not yet responded to the complaint.

CONTOUR DEVELOPMENT LITIGATION

        On July 28,  1998,  USE  filed a  lawsuit  in the U.S.  District  Court,
Denver,  Colorado 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 the Gunnison  properties of USE and Crested,
and is in default on the contracts and promissory notes delivered to pay for the
Gunnison properties.

        As of the filing date of this Report,  Contour and the other  defendants
have not filed an answer to the  complaint  but  negotiations  are  underway  to
settle the issues.

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  attempts  to  conduct  its  mining
operations in accordance with these  regulations,  but the rules are continually
changing and generally  becoming more restrictive.  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

                                       70

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

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,  1998  and  1997,  the  Company  has  recorded  estimated
reclamation obligations,  including standby costs, of $725,900 which is included
in Reclamation and Other Long-term Liabilities in the accompanying  Consolidated
Balance Sheets. In addition,  the GMMV, in which the Company is a 50% owner, has
recorded a $23,620,000  liability for future reclamation and closure costs. 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 has 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:

SMP

        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  Crooks  Gap   properties.   The  reclamation
obligations,  which are established by regulatory authorities,  were reviewed by
the Company and the regulatory authorities during fiscal 1998 and the balance in
the reclamation  liability  account at May 31, 1998 ($725,900 or 50% of which is
recorded in the  accompanying  balance  sheet) 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 holding
certificates  of deposits.  A portion of the funds for the  reclamation of SMP's
properties will be provided by a sinking fund of up to $.50 per pound of uranium
for reclamation work as the uranium is produced from the properties.


                                       71

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

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  holds a commercial bank letter of
credit as security for the  performance of the  reclamation  obligations for the
benefit of GMMV.

        During  fiscal  1993,  GMMV  entered  into an  agreement  to acquire the
Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration
for the  acquisition of the  Sweetwater  Mill Property was the assumption of all
environmental liabilities and reclamation bonding obligations. The environmental
obligations  of GMMV are  guaranteed by Kennecott.  However,  UNOCAL also agreed
that if GMMV incurs  expenditures  for  environmental  liabilities  prior to the
earlier of commercial  production by GMMV or February 1, 2001 (which liabilities
are not due solely to the  operations of GMMV),  UNOCAL will  reimburse GMMV for
the first $8,000,000 of such expenditures. Any reimbursement may be recovered by
UNOCAL  from 20% of future  cash  flows  from the sale of  uranium  concentrates
processed through the Mill.

        On June 18,  1996,  Kennecott  had a letter of  credit in the  amount of
approximately  $19,767,000  issued to the WDEQ for minesite  matters  (executing
EPA-delegated  jurisdiction  to administer the Clean Water Act and the Clean Air
Act, and directly administering Wyoming statutes on mined land reclamation), and
$5,400,000  issued to the NRC for  decontamination  and  cleanup of the Mill and
related tailings cells. An irrevocable letter of credit has been provided by the
Morgan  Guaranty Trust Company of New York in lieu of a surety bond to cover the
reclamation  costs for the minesite and a performance bond by St. Paul Insurance
Company  was  obtained  for the  Mill.  The  letter of credit  was  obtained  by
Kennecott  Uranium Company to cover all reclamation  costs related to mining and
drilling operations in the State of Wyoming. 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 commences.

        Although USE and the other GMMV  parties are liable for all  reclamation
and environmental compliance costs associated with Mill and site maintenance, as
well as Mill  decontamination and cleanup and site reclamation and cleanup after
the Mill is decommissioned,  USE believes it is unlikely it will have to pay for
such  costs  directly.   First,  based  on  current  estimates  of  cleanup  and
reclamation costs (reviewed annually by the oversight agencies), these costs may
be within the $50,000,000 development commitment and related $16,000,000 loan of
Kennecott Uranium Company for the GMMV. These costs are not expected to increase
materially  if the mill is not put into full  operation.  Second,  to the extent
GMMV is required to spend money on  reclamation  and  environmental  liabilities
related to previous mill and site operations during UNOCAL's  ownership,  UNOCAL
has agreed to fund up to $8,000,000 of costs  (provided these costs are incurred
before  February 1, 2001 and before  Mill  production  resumes),  which would be
recoverable  only out of future mill production (see above).  Third,  payment of
the  GMMV  reclamation  and  environmental  liabilities  related  to the mill is
guaranteed by Kennecott Corporation,  parent of Kennecott Uranium Company. Last,
GMMV will set aside a portion of  operating  revenues  to fund  reclamation  and
environmental liabilities should mining and milling commence.

                                       72

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1998
                                   (CONTINUED)

        Kennecott  will be  entitled  to  contribution  from the USE  Parties in
proportion to their participation  interests in GMMV if Kennecott is required to
pay mill cleanup  costs  directly  pursuant to its  guarantee.  Such payments by
Kennecott only would be reimbursed if the liabilities cannot be satisfied within
the  initial  $50,000,000  expenditure  commitment,  and then only to the extent
there are  insufficient  funds from the  reclamation  reserve (to be established
from  GMMV  operating  revenues).  In  addition,  if  and to  the  extent  these
liabilities  resulted  from  UNOCAL's  mill  operations,   and  payment  of  the
liabilities  was  required  before  February 1, 2001 and before mill  production
resumes,  then up to  $8,000,000  of that amount would be paid by UNOCAL  before
Kennecott  Corporation  would be required to pay on its guarantee.  Accordingly,
although the extent of any  ultimate  USE  liability  for  contribution  to mill
cleanup costs cannot be predicted,  USE and Crested will only be required to pay
its proportional share of mill cleanup if a) the liabilities cannot be satisfied
with the initial $50,000,000 expenditure commitment from Kennecott, b) there are
insufficient  funds from the  reclamation  reserve to be established out of GMMV
operating revenues and c) payments are not available from UNOCAL.

Sutter Gold Mining Company

        SGMC is  currently  owned 55% by USE,  4% by Crested  and 41% by private
investors.  SGMC owns gold mineral  properties in California.  Currently,  these
properties are in development and costs consist of drilling, permitting, holding
and administrative  costs. No substantial mining has been completed,  although a
2,800 foot decline through the identified ore zones for an underground  mine was
acquired in the purchase.  The Company's policy is to provide reclamation on the
unit-of-production  basis.  Currently,  reclamation obligations are covered by a
$27,000  reclamation bond which SGMC has recorded as a reclamation  liability as
of May 31, 1998.

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.

EXECUTIVE COMPENSATION

        The Company and USE are committed to pay the estates of certain of their
officers an amount equal to one year's salary for one year after their death and
reduced  amounts,  to be set by the Board of Directors,  for a period up to five
years thereafter.


                                       73

<PAGE>



                                    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, 1998 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 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders.



                                       74

<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...........................44

        Consolidated Balance Sheets - May 31, 1998 and 1997.............45-46

        Consolidated Statements of Operations
        for the Years Ended May 31, 1998, 1997 and 1996 ...................47

        Consolidated Statements of Shareholders'
        Equity for the Years Ended May 31, 1998, 1997 and 1996.............48

        Consolidated Statements of Cash Flows
        for the Years Ended May 31, 1998, 1997 and 1996.................49-50

        Notes to Consolidated Financial
        Statements......................................................51-73

        (ii)Affiliate Financials as Schedules

            (a) Green Mountain Mining Venture

                Report of Independent Public Accountants...................82

                Balance Sheet - December 31, 1997 and 1996.................83

                Statement of Operations for the Period 
                from June 1, 1990 (Date of Inception) 
                through December 31, 1997..................................84

                Statement of Changes in Partners'
                Capital for the Period from
                June 1, 1990 (Date of Inception) 
                through December 31, 1997..................................85

                Statement of Cash Flows for the
                Period from June 1, 1990
                (Date of Inception) through December 31, 1997..............86

                Notes to Financial Statements...........................87-92

            (b) Sheep Mountain Partners


                                              75

<PAGE>



                Due to  the  litigation  and  arbitration  proceedings,  audited
                financial  statements  for  SMP  are not  obtainable.  They  are
                therefore  not included as an Exhibit to the  Registrant's  Form
                10-K.

        All other  schedules  have been omitted  because the  information is not
        applicable  or because the  information  is  included  in the  financial
        statements.

(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.......................93-103

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

   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]

                                       76

<PAGE>



   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]

   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]

   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]

                                       77

<PAGE>



   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]

   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]

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


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.


                                       78

<PAGE>



   [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.

   [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.


(b)         Reports filed on Form 8-K.

            During the fourth  quarter of the fiscal year ended on May 31, 1998,
            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).


                                       79

<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 11, 1998                  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 11, 1998                  By:     /s/ John L. Larsen
                                                 ------------------------------ 
                                                 JOHN L. LARSEN, Director


Date:   September 11, 1998                  By:     /s/ Max T. Evans
                                                 ------------------------------ 
                                                 MAX T. EVANS, Director


Date:   September 11, 1998                  By:     /s/ Daniel P. Svilar
                                                 ------------------------------ 
                                                 DANIEL P. SVILAR, Director
 

Date:   September 11, 1998                  By:    /s/ Michael D. Zwickl
                                                 ------------------------------ 
                                                 MICHAEL D. ZWICKL, Director


Date:   September 11, 1998                  By:     /s/ Kathleen R. Martin
                                                 ------------------------------ 
                                                 KATHLEEN R. MARTIN, Director


Date:   September 11, 1998                  By:     /s/ Robert Scott Lorimer
                                                 ------------------------------ 
                                                 ROBERT SCOTT LORIMER,
                                                 Principal Financial Officer and
                                                 Chief Accounting Officer


                                       80

<PAGE>



                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)


                    Report on Audits of Financial Statements
                  as of December 31, 1997 and 1996 and for the
                  years ended December 31, 1997, 1996 and 1995,
                          and the period from inception
                       (June 1, 1990) to December 31, 1997




                                       81

<PAGE>








                        Report of Independent Accountants


To the Members of the Management Committee of
Green Mountain Mining Venture
Riverton, Wyoming

We have audited the accompanying  balance sheet of Green Mountain Mining Venture
(A Joint Venture in the Development Stage) as of December 31, 1997 and 1996, and
the related statements of operations,  changes in Venture partners' capital, and
cash flows for the years ended December 31, 1997,  1996 and 1995, and the period
from inception (June 1, 1990) to December 31, 1997.  These financial  statements
are the  responsibility of the Venture's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Green Mountain Mining Venture
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997,  1996 and 1995, and the period from
inception  (June 1, 1990) to December 31, 1997,  in  conformity  with  generally
accepted accounting principles.


   /s/  Coopers & Lybrand L.L.P.


Salt Lake City, Utah
April 3, 1998


                                       82

<PAGE>


                                 GREEN MOUNTAIN MINING VENTURE
                          (A Joint Venture in the Development Stage)

                                         BALANCE SHEET
                                            ------
<TABLE>
<CAPTION>

                                                                    As of December 31,
                                                            ---------------------------------
                                                                1997                 1996
                                                                ----                 ----
                 ASSETS
<S>                                                         <C>                  <C> 
Assets:
   Cash and cash equivalents                                $     95,778         $  -
   Property and equipment (Note 3):
      Mineral properties and mine development costs           27,725,252           22,812,077
      Buildings                                               24,815,009           24,815,009
      Mining equipment                                           403,000              403,000
                                                            ------------         ------------
                                                              52,943,261           48,030,086
                                                            ------------         ------------
               Total assets                                 $ 53,039,039         $ 48,030,086
                                                            ============         ============

   LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
   Accounts payable - related parties                       $    924,019         $    469,032
   Reclamation liabilities (Note 3)                           23,620,000           23,620,000
                                                            ------------         ------------

               Total liabilities                              24,544,019           24,089,032
                                                            ------------         ------------

   Commitments and contingencies (Notes 3 and 4)

   Partners' capital:
      Kennecott Uranium Company                               14,247,510           11,970,527
      USECC                                                   14,247,510           11,970,527
                                                            ------------         ------------
                                                              28,495,020           23,941,054
                                                            ------------         ------------
               Total liabilities and partners' capital      $ 53,039,039         $ 48,030,086
                                                            ============         ============
</TABLE>


                            The accompanying notes are an integral
                              part of these financial statements

                                              83

<PAGE>


                                  GREEN MOUNTAIN MINING VENTURE
                            (A Joint Venture in the Development Stage)

                                      STATEMENT OF OPERATIONS
                                              ------

<TABLE>
<CAPTION>

                                                                                     Period from
                                                                                      inception
                                                                                   (June 1, 1990)
                                            Year ended December 31,                to December 31,
                                   --------------------------------------------    ---------------
                                      1997            1996             1995              1997
                                   ----------      -----------      -----------     --------------
<S>                                <C>             <C>              <C>             <C>          
Cost and expenses:
   Maintenance and holding costs   $3,065,432      $ 1,838,820      $ 1,697,234     $  12,523,268
   Marketing costs                 -                -                -                    247,598
                                   ----------      -----------      -----------     -------------
   Total costs and expenses         3,065,432        1,838,820        1,697,234        12,770,866
   Other income                        14,618       -                -                     14,618
                                   ----------      -----------      -----------     -------------
      Net loss                     $3,050,814      $ 1,838,820      $ 1,697,234     $  12,756,248
                                   ==========      ===========      ===========     =============
</TABLE>


                            The accompanying notes are an integral
                              part of these financial statements

                                                84

<PAGE>


                                 GREEN MOUNTAIN MINING VENTURE
                          (A Joint Venture in the Development Stage)

                          STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
                                               ------

<TABLE>
<CAPTION>

                                                                                       Period from
                                                                                         inception
                                                                                      (June 1, 1990)
                                             Year ended December 31,                  to December 31,
                                   ----------------------------------------------    ----------------
                                       1997             1996             1995              1997
                                   ------------     ------------     ------------    ----------------
<S>                                <C>              <C>              <C>              <C>  
Balance at beginning of period
   Kennecott Uranium Company       $11,970,527      $11,819,763      $11,510,240      $   -
   USECC                            11,970,527       11,819,763       11,510,240          -
                                   -----------      -----------      -----------      --------------
                                    23,941,054       23,639,526       23,020,480          -
                                   -----------      -----------      -----------      --------------

Capital Contributions (Note 1):
   Kennecott Uranium Company         3,802,390        1,070,174        1,158,140          20,625,634
   USECC                             3,802,390        1,070,174        1,158,140          20,625,634
                                   -----------      -----------      -----------      --------------
                                     7,604,780        2,140,348         2,316,280         41,251,268
                                   -----------      -----------      ------------     --------------

Net loss:
   Kennecott Uranium Company        (1,525,407)        (919,410)        (848,617)         (6,378,124)
   USECC                            (1,525,407)        (919,410)        (848,617)         (6,378,124)
                                   -----------      -----------      -----------      --------------
                                    (3,050,814)      (1,838,820)      (1,697,234)        (12,756,248)
                                   -----------      -----------      -----------      --------------

Balance at end of period:
   Kennecott Uranium Company       $14,247,510      $11,970,527      $11,819,763      $   14,247,510
   USECC                            14,247,510       11,970,527       11,819,763          14,247,510
                                   -----------      -----------      -----------      --------------
                                   $28,495,020      $23,941,054      $23,639,526      $   28,495,020
                                   ===========      ===========      ===========      ==============

</TABLE>

                            The accompanying notes are an integral
                              part of these financial statements

                                                 85

<PAGE>


                                      GREEN MOUNTAIN MINING VENTURE
                                (A Joint Venture in the Development Stage)

                                           STATEMENT OF CASH FLOWS
                                                   ------
<TABLE>
<CAPTION>
                                                                                                        Period from  
                                                                                                          inception
                                                                        Year ended December 31,         (June 1, 1990)
                                                       ---------------------------------------------    to December 31,
                                                            1997           1996             1995            1997
                                                       ------------    ------------     ------------     ------------

<S>                                                    <C>             <C>              <C>              <C>          
Cash flows from operating activities:
    Net loss                                           $(3,050,814)    $(1,838,820)     $(1,697,234)     $(12,756,248)
    Increase (decrease) in accounts payable -
        related parties                                    318,491         329,171          (47,889)          616,938
                                                       -----------     -----------      -----------      ------------
        Net cash used in operating activities           (2,732,323)     (1,509,649)      (1,745,123)      (12,139,310)
                                                       -----------     -----------      -----------      ------------

Cash flows from investing activities:
    Additions to buildings, mineral properties mine
        development and mining equipment                (4,913,175)       (771,772)        (555,448)      (13,596,261)
    Increase (decrease) in accounts payable -
        related parties                                    136,496         141,073          (15,709)          307,081
                                                       -----------     -----------      -----------       -----------
        Net cash used in investing activities           (4,776,679)       (630,699)        (571,157)      (13,289,180)
                                                       -----------     -----------      -----------      ------------

Cash flows from financing activities:
    Capital contributions                                7,604,780       2,140,348        2,316,280        25,524,268
                                                       -----------     -----------      -----------      ------------
    Net cash provided by financing activities            7,604,780       2,140,348        2,316,280        25,524,268
                                                       -----------     -----------      -----------      ------------

        Net increase in cash and cash equivalents          95,778          -                -                  95,778

Cash and cash equivalents:
    At beginning of period                               -                 -                -                 -
                                                       -----------     -----------      -----------      ------------
    At end of period                                   $    95,778     $   -            $ -              $     95,778
                                                       ===========     ===========      ===========      ============


Supplemental schedule of non-cash investing and financing activities:

During 1990 and 1992 the Venture acquired mineral  properties and an established
   uranium  processing  milling  exchange  for  the  assumption  of  reclamation
   liabilities associated with the
   properties.                                                                                $  23,620,000
In 1990 the Venture partners contributed mineral properties and
   buildings which were recorded at the contributing partners'
   historical cost.                                                                           $   15,727,000

</TABLE>


                            The accompanying notes are an integral
                              part of these financial statements

                                              86

<PAGE>


                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)

                          NOTES TO FINANCIAL STATEMENTS
                                     ------


1.      Organization of the Joint Venture:

        Green  Mountain  Mining  Venture  ("GMMV" or the  "Venture")  is a joint
        venture  with a 30 year  life,  formed  by U.S.  Energy  Corp.  ("USE"),
        Crested Corp.  ("Crested") and Kennecott Uranium Company  ("Kennecott"),
        the Venture partners, to explore for, evaluate, develop, mine and market
        the mineral  resources  from the Green  Mountain  properties  located in
        south-central Wyoming. Kennecott has a 50% interest in GMMV, and USE and
        Crested ("USECC") collectively have a 50% interest. GMMV was formed June
        1,  1990,  with  each  partner  contributing  its  portion  of the Green
        Mountain  properties.  Kennecott  acquired  its  portion  of  the  Green
        Mountain  properties  from  USECC  in  1990  for a cash  payment  of $15
        million. Thereafter, the partners are required to contribute funds based
        upon  their  respective  participating  interests,  subject  to  certain
        provisions as provided for in the joint venture agreement.

        Kennecott  has agreed to  contribute  the first $50 million of operating
        and  development  expenses  pursuant to  Management  Committee  budgets.
        Kennecott  also  agreed  to  pay  a  disproportionate  share  (up  to an
        additional $45 million) of GMMV operating expenses, but only out of cash
        operating margins from sales of processed uranium at more than $24.00/lb
        (for  $30  million  of such  operating  expenses),  and  from  sales  of
        processed  uranium at more than  $27.00/lb  (for the next $15 million of
        such operating expenses).

        Effective October 29, 1992,  Kennecott  replaced USECC as manager of the
        Venture. Kennecott contracts with USECC to perform work on behalf of the
        Venture.

        On June 23, 1997,  Kennecott and USECC signed an  Acquisition  Agreement
        wherein  USECC agreed to purchase  Kennecott's  interest in GMMV for $15
        million plus the assumption of Kennecott's share of various  reclamation
        and other liabilities. Kennecott paid $4 million to USECC on signing the
        Acquisition  Agreement and under the terms of the Acquisition  Agreement
        is required to provide a line of credit to GMMV of up to $16 million for
        payment of costs related to the Jackpot mine  development and Sweetwater
        mill preparation  work.  Amounts advanced under this line of credit bear
        interest at 10.5% with  repayment  based upon the cash flow and earnings
        of GMMV.  Any  unpaid  balance is payable in full no later than June 23,
        2010 as long as USECC or its affiliate purchases Kennecott's interest in
        the GMMV. The line of credit is  collateralized by a first mortgage lien
        against  Kennecott's  50% interest in GMMV.  Closing of the  Acquisition
        Agreement is subject to several  conditions and  governmental  approvals
        and must  occur by  October  1998.  Kennecott  is  entitled  to a credit
        against  their  original $50 million  commitment of two dollars for each
        dollar  provided  under the line of credit  and the $4  million  paid on
        signing.  As of December 31, 1997,  Kennecott  has  approximately  $10.8
        million  remaining  to  contribute  to the  Venture  for  operating  and
        development expenses.


                                    Continued

                                       87

<PAGE>


                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)

                    NOTES TO FINANCIAL STATEMENTS, Continued
                                     ------


1.      Organization of the Joint Venture, Continued:

        Through  December 31, 1997, the activities of the Venture have consisted
        primarily  of the  development  and  maintenance  of the Green  Mountain
        properties.  While  these  activities  are  expected  to continue in the
        future,  additional development at substantially higher annual levels is
        required  prior  to the  commencement  of  commercial  production.  Such
        commencement  is not expected to occur until the venture  partners agree
        that all  economic  and  other  conditions  justify  such  commencement.
        Therefore,  the Venture is considered to be in the development  stage as
        defined in Statement of Financial Accounting Standards No. 7.

2.      Summary of Significant Accounting Policies:

        All highly liquid securities with a maturity of three months or less are
        considered to be cash equivalents.

        Mineral  properties  contributed  to the  Venture  were  recorded at the
        partners' historical cost at the date of contribution. Costs incurred in
        the acquisition of mineral properties are capitalized and will be either
        charged  to  operations  on  the  units-of-production  method  over  the
        estimated  reserves to be recovered or charged to operations at the time
        the  property is sold or  abandoned.  Mine  development  costs  incurred
        either to expand the capacity of operating mines, develop new ore bodies
        or  develop  mine areas  substantially  in  advance  of  production  are
        capitalized and will be charged to operations on the units-of-production
        method over the  estimated  reserves to be  recovered.  Amortization  of
        mineral  properties  and  development  costs will  commence  when mining
        operations start. Mine development costs incurred to maintain production
        are included in operating costs and expenses.
        Maintenance and holding costs are expensed as incurred.

        The cost of mining  equipment,  less estimated  salvage  value,  will be
        depreciated  on the  units-of-  production  method  over  the  estimated
        reserves  to be  recovered  or on  the  straight-line  method  over  the
        estimated  life of the  equipment,  whichever  is  shorter.  The cost of
        buildings will be depreciated on the straight-line method.  Depreciation
        of mining  equipment and buildings will commence when mining  operations
        start.  Costs of repairs  and  maintenance  are  expensed  as  incurred.
        Expenditures  that  substantially  extend the useful lives of assets are
        capitalized.  When  assets are  retired or  otherwise  disposed  of, all
        applicable  costs and  accumulated  depreciation  are  removed  from the
        accounts and any resulting gain or loss is recognized currently.


                                    Continued

                                       88

<PAGE>


                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)

                    NOTES TO FINANCIAL STATEMENTS, Continued
                                     ------


2.      Summary of Significant Accounting Policies, Continued:

        The Venture evaluates the recoverability of capitalized  acquisition and
        development costs based on the expected undiscounted future net revenues
        from the related mining properties.  An impairment loss will be recorded
        if the  unamortized  costs exceed the expected  undiscounted  future net
        revenues.  The recorded loss will be based on the difference between the
        unamortized  costs and the expected  discounted future net revenues from
        the related mining properties.  The Venture believes that uranium prices
        will reach  levels  sufficient  to justify  commencement  of  commercial
        production  in the  future.  The  Venture  also  believes  the  expected
        undiscounted future net revenues from the Green Mountain properties will
        be  sufficient  to  allow  recoverability  of these  capitalized  costs,
        assuming commencement of commercial production.

        The estimated net future costs of dismantling,  restoring and reclaiming
        operating  mines  which  result from future  mining  operations  will be
        accrued  during such  operations.  The provision  will be made using the
        units-of-production  method over the estimated  reserves to be recovered
        and estimated  costs at the balance sheet date. The effect of changes in
        estimated  costs and  production  will be  recognized  on a  prospective
        basis.

        No provision  has been made for federal,  state and local income  taxes,
        credits, or benefits since tax liabilities are the responsibility of the
        individual partners.

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

        Certain amounts in 1996 have been reclassified for comparability to 1997
amounts.



                                    Continued

                                       89

<PAGE>


                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)

                    NOTES TO FINANCIAL STATEMENTS, Continued
                                     ------


3.      Property and Equipment:

        USECC conducts operations at the mine site on behalf of the Venture. All
        accounts  payable  are due to USECC for costs  incurred  by USECC in the
        normal course of business on behalf of GMMV.  Through  December 31, 1997
        Kennecott had reimbursed USECC for  substantially  all development costs
        incurred.

        The cost of building, mineral properties and mine development and mining
        equipment incurred by each of the Venture partners are as follows:
<TABLE>
<CAPTION>
                                                                              Period from
                                                                               inception
                                                                          (  June 1, 1990)
                                    Year ended December 31,                 to December 31,
                          ---------------------------------------------     ---------------
                           1997             1996              1995               1997
                        ------------     ------------      ------------     ---------------

        <S>             <C>              <C>               <C>              <C>           
        USECC           $  4,913,175     $    740,175      $    511,822     $   10,864,080
        Kennecott             -                31,597            43,626          2,732,181
                        -----------      ------------      ------------     --------------

        Total           $  4,913,175     $    771,772      $    555,448     $   13,596,261
                        ============     ============      ============     ==============
</TABLE>

        In  December  1990,  GMMV  acquired  additional  mineral  properties  in
        exchange for the assumption of reclamation  liabilities  associated with
        those properties of $7.3 million.  In 1992, GMMV acquired an established
        uranium  processing  mill  (the  Sweetwater  Mill) in  exchange  for the
        assumption of reclamation  liabilities  associated with this property of
        $16.3  million.  Such  amounts  represent  the  estimated  costs  at the
        acquisition date to reclaim these  properties.  Kennecott,  on behalf of
        GMMV, is self-bonded in the amount of $24.3 million, which is payable to
        the Wyoming  Department of  Environmental  Quality ("WDEQ") and the U.S.
        Nuclear  Regulatory  Commission  in the  event  GMMV  does not  properly
        reclaim  the above  properties  or violates  the  Wyoming  Environmental
        Quality Act.  Before the earlier of January 1, 2001,  or  resumption  of
        production,   if  the  GMMV  is   required  to  incur   reclamation   or
        environmental costs, the seller of the mill will be liable for the first
        $8 million of these costs at the Sweetwater Mill.

        The Venture  properties  include  state  leases which will expire in May
        2001 and October 2006. All fees required to hold these unpatented mining
        claims have been paid to the state of Wyoming as of December 31, 1997.



                                    Continued

                                       90

<PAGE>


                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)

                    NOTES TO FINANCIAL STATEMENTS, Continued
                                     ------


3.      Property and Equipment, Continued:

        At  December  31,  1997 and 1996,  costs  capitalized  as  property  and
        equipment are composed of the following:

<TABLE>
<CAPTION>
                                                  1997                 1996
                                             -------------         --------
               <S>                           <C>                   <C>         
               Acquisition costs             $  39,347,000         $ 39,347,000
               Development costs                13,596,261            8,683,086
                                             -------------         ------------

                                             $  52,943,261         $ 48,030,086
                                             =============         ============
</TABLE>

        Acquisition costs include the partners' initial  contribution of mineral
        properties  and  buildings   recorded  at  the  contributing   partners'
        historical  cost of  $15,727,000  and mineral  properties  and buildings
        acquired in  exchange  for the  assumption  of  reclamation  liabilities
        totaling $23,620,000.

4.      Contingencies:

        In June 1994,  Kennecott was served with a complaint filed by Nukem Inc.
        (Nukem) and Cycle Resource Investment Corporation (Cycle). The complaint
        alleged  that when  Kennecott  entered  into the Green  Mountain  Mining
        Venture with USE on June 1, 1990,  Kennecott  interfered  with a Uranium
        Marketing  Agreement  (UMA) between Nukem and USE and the Sheep Mountain
        Partners  Partnership  Agreement (SMPA) between USE and Cycle. Nukem and
        Cycle were each  seeking  damages in excess of $14 million and  punitive
        damages.

        The case was stayed pending the conclusion of an arbitration  proceeding
        between Cycle, Nukem and USE. The arbitration panel entered its order in
        April 1996, and the stay in this case was lifted.  The arbitration panel
        held against Nukem in material  respects  stating that,  even if the UMA
        had been breached,  Nukem suffered no damages thereby.  The panel denied
        the  relief  that  Cycle   sought  for  alleged   breach  of  the  SMPA.
        Accordingly,  on January 6, 1997,  Kennecott  filed a motion for summary
        judgment  contending,  among other things, that the arbitration findings
        collaterally estop all claims asserted by Nukem and Cycle. On August 22,
        1997 the trial court granted  Kennecott's  motion for summary  judgement
        and dismissed the claims of Nukem and Cycle.  Following the motion,  the
        parties  agreed to settle the case,  and in February  1998 a  settlement
        agreement was signed which resulted in both parties  agreeing to suspend
        all litigation and claims against each other.


                                    Continued

                                       91

<PAGE>


                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)

                    NOTES TO FINANCIAL STATEMENTS, Continued
                                     ------


5.      Subsequent Events:

        In 1996,  the U.S.  government  adopted the "USEC  Privatization  Act of
        1996" to privatize  the U.S.  Enrichment  Corp.  In July 1998,  in a S-1
        Registration   Statement   filed  with  U.S.   Securities  and  Exchange
        Commission,   USEC  Inc.  disclosed  its  planned  sale  of  significant
        quantities of uranium in the U.S. marketplace.  Accordingly,  forecasted
        demand for uranium and forecasted uranium sales prices have decreased in
        the short-term.  As a result, GMMV has halted development  activities at
        the Jackpot Mine, and has placed the facility on active standby.



                                       92

<PAGE>