<PAGE>
                       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, 1997 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, 1997 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 $2,785,272.

               Class                          Outstanding at September 5, 1997
----------------------------------------     -----------------------------------
     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:

        1997 Annual  Meeting  Proxy  Statement for the fiscal year ended 
        May 31, 1997, 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. [ ]


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PART I Item 1 and Item 2. Business and Properties

(a) General.

        Crested  Corp.  ("Crested",  the  "Company" or  "Registrant")  is in the
general minerals business of acquiring,  developing, exploring and/or selling or
leasing  mineral  properties  and,  from time to time,  mining and  marketing of
minerals.  Crested is now engaged in two principal mineral sectors:  uranium and
gold. Interests are held in other mineral properties  (principally  molybdenum),
but are either  non-operating  interests or undeveloped claims. The Company also
carries on small oil and gas operations in Montana and Wyoming.  Crested is also
engaged in commercial operations (real estate and general aviation).

        Most of Crested's  operations are conducted through a joint venture with
U.S. Energy Corp. ("USE", its parent company), and various joint subsidiaries of
USE and Crested. The Joint Venture with USE is hereafter referred to as "USECC".
Oil and gas operations are carried on through Energx,  Ltd., a subsidiary of the
Company and USE.

        Crested and USE originally were independent  companies,  with two common
affiliates (Max T. Evans and John L. Larsen).  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.

        Subsequent  to May 31,  1997,  USE  and  USECC  (see  below)  signed  an
Acquisition  Agreement with Kennecott  Uranium  Company  ("Kennecott"),  for the
purchase of Kennecott's  interest in the Green Mountain Mining Venture ("GMMV").
In general terms, as a consequence of the Acquisition  Agreement and the various
transactions associated therewith,  USE and USECC received $4,000,000 as a bonus
for signing the  Acquisition  Agreement.  In  addition,  pending  closing of the
Acquisition Agreement,  USECC has been provided the opportunity to move the GMMV
project forward,  as follows:  USECC has leased the mineral properties from GMMV
in  order to  develop  the  Jackpot  Mine for  production  mining,  and has been
appointed an independent  contractor to ready the Sweetwater uranium mill (owned
by the GMMV) for changeover to operational  processing  status.  Kennecott is to
provide  a line  of  Credit  to the  GMMV  of up to  $16,000,000  for  the  mine
development and mill work being  conducted by USECC.  Closing of the Acquisition
Agreement  will  require  payment  to  Kennecott  of  $15,000,000  cash  and the
assumption of various reclamation and other liabilities. For the details of this
fiscal 1998 transaction,  please see "Minerals-Uranium-The Green Mountain Mining
Project-June  23, 1997  Acquisition  Agreement with Kennecott  Uranium  Company"
below.

        Crested  was  incorporated  in  Colorado  on  September  18,  1970.  All
operations are in the United States.  Principal executive offices are located at
877 North 8th Street West, Riverton, Wyoming 82501, telephone (307) 856-9271.

(b) Financial information about industry segments.

        (1) The Registrant  operates in two business segments:  (i) minerals and
(ii)  commercial  operations.  See  Footnote  I to  the  Consolidated  Financial
Statements. 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:


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        INDUSTRY SEGMENTS                          PRINCIPAL PRODUCTS

        Minerals                    Sales and leases of mineral properties  and,
                                    from  time  to  time, the production  and/or
                                    marketing of uranium, gold and molybdenum.

        Commercial                  Operations  Operation  and  rental  of  real
                                    estate,  operation of an aircraft fixed base
                                    operation  (including  aircraft  fuel sales,
                                    flight      instruction     and     aircraft
                                    maintenance),   and   provision  of  various
                                    contract  services,   including   managerial
                                    services    for    subsidiary     companies;
                                    operations    (through   Plateau   Resources
                                    Limited,  a wholly-owned  subsidiary of USE)
                                    of a motel and rental real estate in Utah.

        (2)  The  Registrant  is  not  required  to  include  interim  financial
statements.

Net Revenues by Crested Segment

        Percentage  contributions  by the two Crested segments in the last three
fiscal years were:

                              Percentage of Net Revenue During Year Ended
                              -------------------------------------------
                              May 31,         May 31,             May 31,
                               1997            1996                1995
                               ----            ----                ----
Minerals                         6%             62%                  4%
Commercial Operations           29%             16%                 35%

        Crested did not receive  revenues  from the mining of either  uranium or
gold in the three fiscal years ended May 31, 1997. During fiscal 1996,  however,
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), USE and Crested delivering their one-half share of uranium
and  receiving  net sales  proceeds  therefrom,  with  profits  deposited in SMP
accounts. For fiscal 1997 and 1995, there were no revenues from mineral sales in
part due to the  arbitration  proceedings  involving  SMP  (see  Item 3 - "Legal
Proceedings - Sheep Mountain Partners Arbitration/Litigation").  Commencement of
uranium  concentrates  production  from the Shootaring Mill belonging to Plateau
Resources  Limited  ("Plateau"),  a 100% subsidiary of USE, at Ticaboo,  Utah is
expected to result in the procurement of utility supply contracts for Plateau in
fiscal 1998.  When USE acquired  Plateau from  Consumers  Power Company  ("CPC")
Crested  and USE agreed  that,  when the  unencumbered  cash  received  with the
acquisition of Plateau was expended to maintain the Plateau properties,  USE and
Crested each will assume one-half of Plateau's obligations, and share equally in
Plateau's operating cash flows. There can be no assurance, however, such milling
operations will commence, or that new utility supply contracts will be procured.
See Description of "Business - Minerals - Uranium."

(c)     Narrative description of business by industry segment.

        Crested is principally  engaged in the general minerals  business.  This
segment   involves  the  acquisition,   exploration,   sale  or  leasing  and/or
development  of  minerals  and mining  properties,  with  primary  interests  in
uranium,  gold and molybdenum  properties in the western United States.  Crested
also holds oil and gas interests in Montana and Wyoming.


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                                    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  located in areas  which have
produced  significant  amounts of uranium in the 1970s and 1980s. The Company is
planning to develop and operate these property interests  (directly or through a
joint venture in which another  company may be the operator) to produce  uranium
concentrates  ("U3O8") for sale to public utilities that operate nuclear powered
electricity   generating  plants.  In  addition,   in  fiscal  1997,  additional
properties were acquired in New Mexico and Wyoming by Yellow Stone Fuels Corp.

        The property interests in Wyoming are:

        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"),
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.  RTZ (now part of the
RTZ-CRA  Group)  is one of  the  world's  leading  natural  resource  companies.
Kennecott  Corporation  owns and operates  several  mines  including the Bingham
Canyon, Utah open pit copper mine which started in 1906.

        KUC is also referred to in this report as  Kennecott.  All mining claims
are  accessible by county and United States  Bureau of Land  Management  ("BLM")
access roads.  Substantial  exploration and delineation of the principal uranium
resources in the proposed Jackpot Mine have been 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.

        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 Big Eagle  mining
claims held by the GMMV.  These assets are held by the Sheep  Mountain  Partners
partnership ("SMP"),  the partners of which are USE and Crested,  doing business
as USECC, and Nukem, Inc. ("Nukem"),  through its wholly-owned  subsidiary Cycle
Resource Investment  Corporation ("CRIC").  The SMP 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. The
SMP and GMMV properties contain uranium mineralization in sandstones of Tertiary
age, as is typical of most Wyoming uranium deposits.


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        Approximately  10,825  acres of  properties  are held by 437  unpatented
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  "YSFC"  including  the  subsidiary).  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 14.3% of YSFC.

        Electric  power to all the above  Wyoming  properties  is  furnished  by
either Pacific Power & Light or the Hot Springs Rural Electric Association.

        The property interests in Utah are:

        The  Tony M Mine  and  the  Frank M  property  are  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  owner 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 into U3O8, the saleable product. In addition,  low grade uranium
ore was  stockpiled at the Tony M mine and at the  Shootaring  Mill, and related
mill support facilities, which are held by Plateau.

        Plateau  also owns the Velvet Mine and the nearby  Wood Mine  complex in
the Lisbon Valley area in  southeastern  Utah. The Velvet uranium mine was fully
developed  and  permitted  by its prior owner and is located  approximately  178
miles by road from the  Shootaring  Mill.  The Wood Mine 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 at this time, but the Company
does not expect  difficulty  in  obtaining  a new  permit  because  the  surface
facilities  would  occupy  the  site  that  has  been  disturbed  from  previous
operations.

The Green Mountain Mining Venture Project

        GMMV.  Subsequent to May 31, 1997,  USE and USECC signed an  Acquisition
Agreement for the acquisition from Kennecott  Uranium Company of its interest in
the GMMV. The following is a description of the formation of GMMV and certain of
its  terms,  which  terms  have been  modified  as a result  of the  Acquisition
Agreement  and  related  transactions,   as  set  forth  under  "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  cash (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.  In fiscal 1991, 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 to utilities using nuclear
power to generate electricity.


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        Kennecott  agreed to fund the first  $50,000,000  of GMMV  expenditures,
pursuant to  Management  Committee  budgets.  Thereafter,  GMMV expenses will 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
the 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 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.

        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. 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),  previously  owned by USE and Crested
together,  will be shared equally by USE and Crested. The 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) deposit is placed into production;  uranium deposits on
these  properties  may be accessed  through the proposed  tunnels at the Jackpot
Mine.

        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, 1997.  USECC has continued
work on a contract basis at Kennecott's request through May 31, 1997.

        Pre-development   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.  During  fiscal  1996,  GMMV  completed a
sediment dam, sediment basin and drainage  diversion ditch, built a fuel storage
facility  and  other  support  facilities  and  made  improvements  to  existing
facilities.  As of the date this 10-K  Report is filed,  the GMMV has  commenced
mine  pre-development work necessary to put the GMMV properties into production,
see "June 23, 1997  Acquisition  Agreement with Kennecott  Uranium  Company" and
"Permitting Activities" below.

June 23, 1997 Acquisition Agreement with Kennecott Uranium Company

        Subsequent  to May  31,  1997,  USE  and  USECC  signed  an  Acquisition
Agreement with Kennecott Uranium Company, a Delaware corporation  ("Kennecott"),
for the right to acquire Kennecott's interest

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in the  Green  Mountain  Mining  Venture  ("GMMV")  for  $15,000,000  and  other
consideration. Kennecott paid USE and USECC $4,000,000 on signing, 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 will be undertaken, prior to closing of the terms
of the Acquisition Agreement scheduled for July 31, 1998, 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 of the GMMV Mining Venture Agreement among Kennecott, USE and
USECC  (the  "Fourth   Amendment  of  the  GMMV   Agreement"),   were   executed
simultaneously with the Acquisition Agreement.

        The $16,000,000  being 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 April 1999 until paid in full. The Note is 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  (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").  USE and USECC will assume the Note, and the
assets  of  the  GMMV  will  be  subject  to the  Mortgage,  at  closing  of the
Acquisition Agreement.

        Pursuant to the Mineral Lease and the Mill  Contract of 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 will be funded from the  $16,000,000  being
provided  to the GMMV by  Kennecott.  Under  the  Fourth  Amendment  of the GMMV
Agreement,  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  provided 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 satisfy 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,  Kennecott
initially advanced  $1,000,000 to the GMMV, which the GMMV has advanced to USECC
pursuant to the Mineral Lease and the Mill Contract, to allow USECC to establish
a working  capital  account.  On a monthly  basis,  USECC is to submit  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 office 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 is permitted to charge the
GMMV  rental  expense  for  equipment  owned 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 set forth in budgets of 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

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reclamation cost amounts aside in a sinking fund to pay for the reclamation work
when production commences).

        Kennecott  has  agreed to  provide  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.

        Also pursuant to the Mineral  Lease,  USECC is to pay the GMMV a monthly
lease fee of $3,363,  starting  July 1, 1997.  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;  (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 scheduled closing date
may be postponed to another date no later than October 30, 1998.  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.
The current 50%  interest in GMMV held by USE and USECC will not change when the
Acquisition Agreement is closed.

        If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity  formed by them to acquire  the GMMV  interest  owned by
Kennecott)  are to provide to  Kennecott a  commitment  letter from a recognized
national  investment banking firm to complete an underwritten public offering of
the securities of USE (or an entity formed or introduced to acquire  Kennecott's
GMMV  interest  (the  "Acquiring  Entity")),  in amount  sufficient to close the
Acquisition  Agreement  transactions.  Such  amount  is  estimated  by USE to be
approximately  $40,000,000,  (for the $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. Alternatively, USE, USECC or the
Acquiring Entity must provide evidence to Kennecott of a commitment  letter from
a bank,  other  financial  institution or industry  entity to provide private or
joint venture financing in such approximate amount.  Failure to provide evidence
of such  financial  commitment  by December 1, 1997 would  entitle  Kennecott to
terminate the Acquisition Agreement, the Mineral Lease and the Mill Contract.

                                        8

<PAGE>




        Subject to providing evidence of adequate  financial  resources to close
the Acquisition  Agreement with funds from a public financing or otherwise,  the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.

        If  the  Acquisition  Agreement  is  not  closed,  USE  and  USECC,  and
Kennecott,  shall own their respective 50% interest 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 advance, will have benefitted all parties
to the GMMV.

        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  believed  to be  satisfactory  to
support future mine development.

        The GMMV also owns the Big Eagle  Properties  on Green  Mountain,  which
appear to contain substantial remaining uranium mineralization, and are adjacent
to  the  other  GMMV  mining  claims.  The  Big  Eagle  Properties  contain  one
underground  and  two  open-pit  mines,  as well as  related  roads,  utilities,
buildings,  structures,  equipment and a stockpile of ore. The assets  include a
38,000 and an 8,000 square foot  buildings  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 averaging .23% uranium
oxide using a grade-thickness  cut-off of .6 (i.e.,  deposit areas were excluded
unless  deposit bed thickness at  intercept,  times  intercept  grade of uranium
mineralization,  exceeded  .6).  The GMMV  plans to mine this  deposit  from two
tunnels in the Jackpot  Mine,  which will be driven  underground  from the south
side of Green Mountain.  The first of several  mineralization  horizons is about
2,300 feet vertically down from the top of Green Mountain.

        The Jackpot  Mine Plan of  Operations  provides  for two  declines to be
driven from the side of Green  Mountain,  extending  about  10,400 feet into the
deposits;  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.  It
will utilize the existing Big Eagle Mine  facilities  located  about three miles
west of the Jackpot Mine site.  As many as 250 workers  will be required  during
full mining operations.

        USE Parties expect mine development costs will not exceed $25,000,000 to
begin production from the Round Park (Jackpot) deposit.  However, cost estimates
may change as exploration and initial development progress. Pursuant to the GMMV
agreement,  Kennecott had agreed to fund the initial  $50,000,000 in development
costs including  reclamation  costs. To May 31, 1997, such expenditures  totaled
approximately  $20,416,400.  Additional costs would be funded by the $16,000,000
loan, operations and/or by cash advance by the venturers.


                                        9

<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  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  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 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  Registrant's  Consolidated
Financial Statements (see Notes F and K to USE Consolidated Financial Statements
for fiscal year ended May 31, 1997).

        The reclamation and environmental liabilities assumed by 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

                                       10

<PAGE>



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  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  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 of the
GMMV (see "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 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.  In March 1993, the GMMV applied to the WDEQ
for a Permit to Mine the Round Park deposit through the Jackpot Mine.  Following
preparation of a final EIS by the BLM, including a series of public meetings and
a period for receipt of written  comments on both the preliminary and final EIS,
on April 24, 1996 the BLM signed the Record of Decision  ("ROD")  approving  the
Jackpot Mine Plan of Operations.  With the entry of the ROD, the WDEQ issued the
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.

        General  activity  increased at the Jackpot mine site during fiscal 1997
and to the date of this Report,  in  anticipation  of increased  uranium prices.
Some of the principle  activities  were: a major portion of the  access/haulroad
from the  Jackpot  Mine to the Big Eagle Mine was  widened to a 40 foot  running
surface  eliminating  various  curves to  accommodate  the  GMMV's  100 ton haul
trucks;  permits  and  approvals  were  obtained  for  construction  of  Jackpot
Reservoirs  No. 2 and 3 and  construction  was started and completed  except for
installing  liners, and Jackpot Reservoir No. 1 was completed and is operational
(catch basin for sediment and runoff). The GMMV is in compliance with all permit
conditions.  Significant progress is being made in preparing for and running the
double  declines  into  the  Round  Park  (Jackpot)  deposit,  pursuant  to  the
pre-development  operations  plan  agreed to between  USECC and  Kennecott.  Two
shifts are currently working underground with a third shift being assembled.

        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.

                                       11

<PAGE>




        The maximum area of new disturbance required for the project will be 289
acres.  This  disturbance  will  include  approximately  118 acres for mine site
development and approximately 171 acres for transportation corridor construction
and/or improvement.  When uranium reserves have been depleted,  the mine portals
will be plugged;  the ground surface recontoured and reclaimed to blend with the
natural  landscape;  surface  structures  will  be  removed;  roads  closed  per
landowner or BLM request, and disturbed areas reclaimed.

        Kennecott, as operator of the Sweetwater Mill, has initiated discussions
and made  filings  with the NRC  regarding  amendments  to the  Source  Material
License to resume ore processing at the Sweetwater Mill.  Separately,  Kennecott
has applied to the NRC for  permission  to use a mill  tailings cell to hold low
level  tailings waste from an ion exchange plant owned by USE and Crested in the
Crooks Gap area.

        The United States  Environmental  Protection  Agency ("EPA") has advised
Kennecott,  as operator of the GMMV,  that if Kennecott would level the tailings
within  the  existing  tailings  impoundment  and  install a new liner with leak
detection  capability,  the EPA  would  allow  the use of the  existing  60 acre
tailings  cell for  milling  operations.  Although  this could  result in a cost
savings to the GMMV, a new 40 acre tailings cell has been designed by an outside
engineering firm and is scheduled to be constructed.

        The  Environmental  Protection  Agency has  promulgated  final rules for
radon emissions.  These regulations affect the mining and milling of uranium and
may  require  substantial  expenditures  for  compliance.  The  GMMV may need to
install venting at the mine site, and must monitor radon emissions at the mines,
as well as wind speed,  direction and other conditions.  USE 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. Out of Kennecott's  initial  $50,000,000  commitment,
Kennecott  has funded  about  $20,416,400  through May 31,  1997.  Nevertheless,
advances to the GMMV made  pursuant  to the  Acquisition  Agreement  will reduce
Kennecott's  development  commitment  by two dollars  for each  dollar  advanced
pursuant to the Fourth Amendment to the GMMV Agreement.

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").  The Shootaring Mill
holds a source materials license from the NRC.

        USE paid  nominal  cash  consideration  for the  Plateau  stock,  but as
additional consideration, USE has agreed:

        (a) to perform or cause  Plateau 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

                                       12

<PAGE>




        (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.

        At closing,  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
costs of Shootaring Mill decommissioning,  site reclamation,  and long term site
surveillance, as directed by the NRC. The amount transferred to the trust is the
minimum amount now required by the NRC as financial assurance for clean up after
permanent shut down of the Shootaring Mill.

        Also at closing, 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, 1997).

        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.

        The  consideration  paid by USE was determined by negotiation  with CPC,
taking into account further  estimated annual Shootaring Mill holding costs, and
estimated future Mill  decommissioning and site reclamation costs as required by
the NRC and the Utah Department of Natural  Resources,  Division of Oil, Gas and
Mining ("DOGM").

        The Plateau  acquisition was done solely with USE, in light of potential
NRC  objections  to selling  Plateau to the USECC joint  venture.  Subsequent to
closing,  in  September  1993,  USE and  Crested  agreed  that  after  Plateau's
unencumbered  cash has been depleted,  USE and Crested each will 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,  approximately 13 miles north of Lake Powell,  and 50 miles
south of  Hanksville,  Utah via State  Highway 276, then four miles west on good
gravel  roads.  The entire  facility  occupies 18.9 acres of a 264.52 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. On July 31, 1996, the NRC
approved  Plateau's  application to postpone  initiation of the  requirements of
timeliness  in  decommissioning  of the  Shootaring  Mill for five years,  which
postponement  enabled  Plateau  to  upgrade  the  source  materials  license  to
operational  status.  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 1997 and into fiscal 1998, in anticipation of resuming milling
operations, Plateau commenced a complete reactivation and rehabilitation program
at the Mill (updating the control  systems and testing  gauges,  relining wooden
acid leach tanks, etc.)

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 66 room motel,
convenience  store, 98 single family home sites,  151 mobile home sites,  and 26
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  Homesteads,  Inc. on a sliding scale basis.  USE and Crested
plan to further develop the townsite,  and have been seeking financial  partners
for this purpose.  Interim  funding for limited  improvements  on the commercial
operations were provided by a private  corporation  controlled by family members
of the Chairman of the Board,  President and Chief Executive Officer of USE. See
Part III, Item 12 "Certain Relationships and Related Transactions - Transactions
with Arrowstar  Investments,  Inc.". USE now operates all commercial  facilities
including the motel, restaurant, convenience store, mobile home/RV park and boat
storage as the renovation of the nearby  Shootaring Canyon uranium mill is under
way.

Yellow Stone Fuels Corp.

        Yellow Stone Fuels Corp.,  hereafter  ("YSFC") was organized on February
17, 1997 in Ontario,  Canada.  As of February  17, 1997,  YSFC  acquired all the
outstanding  shares of Common  Stock of Yellow  Stone  Fuels,  Inc.  (a  Wyoming
corporation  which was organized on June  3,1996),  in exchange for YSFC issuing
the same  number of shares of YSFC  Stock to the former  shareholders  of Yellow
Stone Fuels,  Inc.  ("YFI").  YSFC and its wholly-owned  subsidiary Yellow Stone
Fuels, Inc. will hereafter be referred to collectively 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 first call on any  uranium ore
bodies YSFC discovers which are amenable to conventional  mining and milling and
YSFC will have a call on ore  bodies  discovered  by USECC  amenable  to the ISL
process.  In the ISL process,  groundwater  fortified with  oxidizing  agents is
pumped  into  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.

        As of May 31, 1997,  YSFC had  10,495,000  shares of Common Stock issued
and outstanding,  including  3,000,000 shares (28.5%) 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 CC will have voting control of more than
50% of the outstanding shares of YSFC. Part II, Item 7, "Management's Discussion
and Analysis of Financial  Condition and Results of Operations." The majority of
the other  outstanding  YSFC shares are owned by  affiliates of USE and Crested.
See Part III, Item 13, "Certain Relationships and Related Transactions."

                                       14

<PAGE>




        In Wyoming,  YSFC has staked and/or holds 304  unpatented  mining claims
and has entered into three State leases  covering a total of 9,280 acres located
in the Powder River Basin uranium district. The State leases have a 10 year term
expiring  October  1,  2006;  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;  and 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,  the Peterson claim group includes 50 unpatented mining
claims  covering  approximately  1,000 acres in the  southern  part of the power
River Basin uranium  district.  In addition to owning the Peterson  claim group,
YSFC has leased the surface rights to the mineral  properties for five years, at
$4.00 per acre annual rent per year plus a production royalty of $0.50 per pound
of uranium  concentrates  (U3O8)  sold at or for less than $22.00 per pound (the
royalty  increases  to $0.75 per pound for uranium  sold at more than $30.00 per
pound). The Low claim group,  covering 63 unpatented lode mining claims covering
approximately  1,260 acres,  is also located in the southern  part of the Powder
River Basin uranium district,  approximately 20 miles northwest of the producing
Rio  Algom's  Smith  Ranch  Mine.  The Low 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.  These  properties in the aggregate  cover
approximately 945 acres located in the Grants uranium region of New Mexico.  The
8  unpatented  mining  claims  (covering  165.44  acres)  are  held  by a 5 year
renewable  lease from Parador  Mining  Company,  requiring  $500 monthly  rental
payments to Parador  Mining  Company,  which has retained a 5% gross  royalty on
revenues from uranium sold from the property.  The Parador area was 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.

        The geological and geophysical  data acquired with the Pioneer  Nuclear,
Inc.  ("PNI") library may assist YSFC in evaluating the viability of the various
uranium claims to in-situ processing.  This library of information was assembled
in the 1970s by PNI in its  uranium  exploration  program,  and the  library was
acquired from a person in exchange for shares of YSFC common stock.

        As of the date of this Annual Report on Form 10-K,  YSFC is  negotiating
to acquire additional  properties in Converse,  Fremont and Sweetwater Counties,
Wyoming which in some instances will include certain tangible  assets.  However,
there are no contracts or agreements in principle for such  acquisitions at this
report date.

        YSFC  will   require   additional   funding  to  maintain  its  property
acquisition   program,   conduct  the  geological  and  engineering  studies  on
properties to evaluate their  suitability to in-situ  recovery  methods,  and to
build and operate in-situ recovery  facilities on suitable  properties.  YSFC is
currently seeking additional funding, but there is no assurance adequate funding
will be obtained.

        In fiscal 1997, USE and USECC 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 have access to 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 for $1,000 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

                                       15

<PAGE>



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 purchased from a third party
at GMMV's  Sweetwater  Mill;  YSFC is  responsible  for any bonding and handling
obligations  for the  stored  equipment,  and  pays  GMMV  nominal  rent for the
storage.

Sheep Mountain Partners ("SMP")

        Partnership.  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"). Nukem is
a uranium  brokerage and trading concern.  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 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.  See "Legal  Proceedings  - Sheep
Mountain Partners Arbitration/Litigation".

        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.
USECC mined and sold uranium ore from two 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.

        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 SMP, in which USECC  received an  undivided  50
percent interest. 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.

        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.

        Properties.  SMP owns 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.  Production  from  the  properties  is  subject  to
sliding-scale royalties payable to Western Nuclear, Inc.; the rates are from one
to four  percent on recovered  uranium  concentrates.  Thirty-eight  claims were
conveyed by PMC to SMP in August 1996, see below.

        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 near the SMP properties, but is held by USECC and not SMP.

                                       16

<PAGE>




        Until  recently,  SMP also had interests in 59 an additional  unpatented
mining  claims,  one State mineral lease and one State surface use lease,  which
had been conveyed to Pathfinder Mines Corporation  ("PMC").  In August 1996, PMC
conveyed 38 of the 59 claims to SMP, retaining 21. SMP chose to retain only 3 of
the 38 claims. These SMP properties contain a previously-mined  open-pit uranium
mine and three  underground  mines. PMC has the right to mine a portion of these
properties  (the Congo  area),  by  open-pit  or in-situ  techniques  to certain
depths,  without royalty or other obligations to SMP. 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
SMP.  Conversely,  SMP 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.

        An ion exchange  plant on the SMP  properties  is owned by USECC and 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. See "Environmental" below.

        Property Maintenance. As operating manager for SMP, USECC is responsible
for  exploration,  mining,  and care and maintenance of 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. See Item 7,  "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources at May 31, 1996". 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 PSE&G that
was awarded to SMP by the Arbitration Panel (four of these contracts remain) for
sales of uranium  originally to eight domestic  utilities.  SMP's uranium supply
contracts are 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  delivery of 130,000 pounds of uranium  concentrates in 1997 which
was made,  completing  that contract.  The fourth contract calls for delivery of
750,000  lbs.  U3O8 through  2001.  Prices of uranium for  deliveries  under the
base-price  escalated  contract  currently exceed prices at which uranium can be
purchased in the spot market.


                                       17

<PAGE>



        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.  Some of these contracts
place a ceiling on the  purchase  price,  substituting  a  base-price  escalated
amount,  if the market  price  exceeds a certain  level.  Under the terms of the
various market-price related contracts,  SMP is required to deliver from 250,000
to 900,000  pounds of U3O8  annually  from 1997 to 2000,  which  amounts  may be
increased or decreased by specified percentages.

        Through  fiscal 1997,  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. The future role of Nukem in making
deliveries   under  these   contracts   on  behalf  of  SMP  cannot  be  assured
notwithstanding the April 18, 1996 Order and Award of the Arbitration Panel. See
"Legal Proceedings -
 Sheep Mountain Partners Arbitration/Litigation."

        Permits.  Permits to operate  existing mines on SMP 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,  an NPDES 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  1995 and  produced  approximately  6,300,000  pounds  in
calendar 1996. Production in the U.S. for 1997 is estimated at 7,000,000 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 RTZ's  Rossing  unit),  and
Europe,  which  collectively  produced  about  66,000,000  pounds of U3O8 during
calendar year 1996 and are expected to produce  approximately  73,000,000 pounds
in calendar 1997.  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  and  generators  generating  electricity.  According  to  the  Uranium
Institute   based  in  London,   England   ("UI"),   nuclear  plants   generated
approximately  17% of the world's  electricity  in 1996, up from less than 2% in
1970. According to the UI, 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 1996,  442  nuclear  power  plants were  operating  and 36 were under
construction worldwide, according to the International Atomic Energy Agency. The
plants combined to generate more than 23 trillion  kilowatt hours of electricity
last year.  Five plants totaling 5,717  megawatts - including  Tennessee  Valley
Authority's  Watts  Bar  1  -  began  commercial   operation  in  1996.  Uranium
consumption  by Western  World  commercial  reactors  has  increased  from about
60,000,000 pounds in 1981 to approximately 142,000,000 pounds in 1996.


                                       18

<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.  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 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,  consumption  of
uranium in the Western  World has  exceeded  Western  World  production  by over
400,000,000  pounds.  In 1995,  consumption  of uranium in the Western World was
129,000,000 pounds, nearly double the production of 66,000,000 pounds by Western
World  producers.  In  1996,  Western  World  consumption  rose to an  estimated
142,000,000 pounds,  while production  increased only to an estimated 74,000,000
pounds.  Accordingly, by the end of 1995, excess inventory levels in the Western
World  (inventory  in excess of preferred  levels) had been reduced to less than
two years of forward reactor  requirements,  and excess  inventories in the U.S.
had been reduced to less than one year of projected forward  requirements.  This
trend continued in 1996 and 1997.

        Countering the drawdown of Western World  inventories  and  contributing
directly to the downturn of market prices was the importation, starting in 1989,
of uranium from the CIS republics,  and to a lesser extent,  from Eastern Europe
and mainland China.  As the result of an anti-dumping  suit in 1991 filed in the
U.S.  ("CIS  Anti-dumping  Suit")  against  republics  of  the  CIS,  suspension
agreements  were  signed  by six CIS  republics  (Russia,  Ukraine,  Kazakhstan,
Uzbekistan,  Kyrgstan and  Tajikistan)  in October  1992,  which  applied  price
related volume quotas to CIS uranium permitted to be imported into the U.S.

        The Russian Suspension  Agreement 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.  Department  of Commerce  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. rates  increase,  additional
imports from Uzbekistan are allowed.

        Although these amendments to the suspension  agreements may increase the
supply of uranium to the U.S.  market,  they  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 uranium ("LEU") suitable for use in
nuclear power plants.  At a projected  maximum  conversion rate for HEU and LEU,
approximately  18,000,000  pounds of U3O8 will be  available  to  Western  World
markets.


                                       19

<PAGE>



        In 1996, the U.S.  Congress  passed  legislation in compliance  with the
suspension  agreements which allows the converted HEU material to be sold in the
U.S.  marketplace  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 150,000,000 pounds U3O8 through 2001. The Company
estimates that between  30,000,000 and 40,000,000 pounds 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 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 1996 production levels, USECC believes that higher prices will be needed
to support the required  investment in new higher cost  production as lower cost
production reserves are depleted.

        1996 was also a  transition  year in the  industry as the spot price for
U3O8  concentrates  rose to a high of $16.60 per pound in July 1996  following a
surge in spot buying activity.  Since then the spot price has declined to $10.30
per pound.  And, while the spot price has eroded to 1995 levels,  USECC believes
that it is only a  reflection  of a near term  equilibrium  of supply and demand
that  was  fueled  by  utilities  exercising  option  flexibilities  of up to an
additional  50% of  contracted  volumes of  material  as the spot price  climbed
during 1996.  On the contrary,  utilities  have also likely  exercised  downward
flexibilities of up to 50% of contracted  volumes as the spot price has declined
to levels below  contracted  prices and are planning to buy materials at a lower
price.

        Overall,  USECC  believes that adequate  supply of U3O8 material to meet
firm demand  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 production will not sufficiently meet supply
either, even if new production comes on stream as planned.

        In the near term,  USECC believes that the spot price for U3O8 will rise
to mid teen levels and remain there for a period before trending  upwards to the
low $20s for a  sustained  period  of time.  If there is any  disruption  in HEU
supply or new planned  capacity,  USE believes  the price will  increase to much
higher levels.

        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 obtained for relatively
long periods,  and 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.


                                       20

<PAGE>



        Pursuant to  Suspension  Agreements  signed in October  1992 between the
United States Department of Commerce ("DOC") and certain of the Republics of the
CIS, to rectify prior damage to domestic  United States  uranium  producers from
dumping sales of U3O8 by certain CIS republics, all spot sales of U3O8 delivered
into the U.S.  now reflect  quota  restrictions  on U3O8  imports  from the CIS.
However, there are 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").

        NUEXCO Exchange Value. The market related  contracts of SMP are based on
an average of the Nuexco  Exchange  Value ("NEV") for 2, 3 or more months before
uranium delivery.  The high and low NEV reported on U3O8 sales during USE's past
five fiscal years are shown below.  NUEXCO Exchange Values are reported  monthly
and  represent  NUEXCO's  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
                                                ---------------------
             Years Ended                         US $/pound of U3O8
               May 31,                        High                   Low
               -------                        ----                   ---
               1992                         $  9.05              $  7.75
               1993                           10.05                 7.75
               1994                           10.20                 9.25
               1995                           11.00                 9.50
               1996                           16.60                13.00
               1997*                          14.80                10.30

               * Through September 1, 1997.

        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.

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  totalling a net of
$7,115,100  ($1,271,600  through a private  placement  conducted  in the  United
States by RAF Financial Corporation,  and $5,843,500 through a private placement
conducted in Toronto, Ontario, Canada by C.M. Oliver & Company Limited). The net
proceeds of $6,411,816 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. SGMC anticipates  production
mining will commence in mid-  calendar 1998 and that by that time,  construction
of a 500 ton per day gold mill will have been  completed.  Additional  financing
will be sought  in 1998 to  complete  mill  construction  and  start  production
mining.


                                       21

<PAGE>



        As of the date of this Annual Report on Form 10-K,  SGMC is preparing to
apply for listing on the Toronto Stock Exchange. 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 (and  additional
issue of 75,000 shares to settle a dispute with Amador United,  see below),  USE
and Crested each own the following securities of SGMC:

        (a) 30.7% and 3.2% of the outstanding shares of Common Stock which would
be reduced to 23.5% and 2.5%,  respectively,  in the event outstanding  warrants
held by the Canadian investors to purchase 1,454,800 more shares of Common Stock
are  exercised  at Cdn$6.00  per share 18 months from the date of closing of the
Offering 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  percentages  of SGMC Common Stock do not reflect  345,200
warrants  that may be sold in the Offering or shares that may be acquired by USE
and Crested pursuant to the $10,000,000  USECC Contingent Stock Purchase Warrant
(described  below) issued as consideration  for the voluntary  reductions in the
ownership of SGMC shares by USE and Crested.  One  reorganization of the capital
structure of SGMC was required by RAF Financial  Corporation in connection  with
its private placement of SGMC shares,  and the other was required by C.M. Oliver
& Company Limited in 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.  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
minimum vein  thickness of 4 feet),  USE and Crested will be entitled to acquire
additional   shares  of  Common  Stock  from  SGMC  (without  paying  additional
consideration).  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 to be  exercised
semi-annually. However, as an alternative to exercise of the USECC Warrant, SGMC
has the  right to 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.

        In fiscal  1997,  SGMC issued  75,000  shares of Common  Stock to Amador
United Gold Mines to settle certain  disputes between such company and SGMC, USE
and Crested (see "Properties"  below). In addition,  SGMC bought about one-third
of the  outstanding  shares of Keystone  Mining  Company  owned by The Salvation
Army. The Keystone Mining Company owns property in the Lincoln Project leased to
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. USE 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 with parties will  negotiate at the end of two years starting when the
mining phase begins).  The Management  Agreement  replaces a prior  agreement by
which USE provided administrative services to SGMC.

        Properties. SGMC (through its subsidiary USECC Gold) holds approximately
14 acres of surface  and mineral  rights  (owned),  436 acres of surface  rights
(leased), 158 acres of mineral rights (leased), and

                                       22

<PAGE>



380 acres of mineral rights  (owned),  all on patented mining claims near Sutter
Creek, Amador County, California. The majority of these properties were acquired
from Meridian  Minerals  Company and the balance were acquired in 1995 and 1994.
The properties are located in the western Sierra Nevada  Mountains at from 1,000
to  1,500  feet  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 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 for the Surface Fill Unit and the 32 Acre
Property provides the land necessary for access and utility easements to Hwy 49.
Formal agreements have been submitted for execution but are awaiting approval of
the  probate  court of an estate of a  deceased  who  owned an  interest  in the
properties.

        The 185 Acre Property, which includes the surface and mineral rights, is
being  purchased for $2,000 per acre (or $370,000) plus a 2% net smelter royalty
on any precious metals produced from this property. SGMC also agreed to purchase
for $185,000 the rights to the certified  Environmental Impact Report ("EIR") on
the 185 Acre Property.  The EIR saves SGMC  approximately  six to nine months of
permitting time. Payments for the 185 Acre Property and the EIR are monthly with
the final payments to be made before the construction of a surface fill unit for
the property (the  "Surface  Fill Unit").  The purchase of the 185 Acre Property
and EIR is  contingent  on SGMC  obtaining an amendment to the  Conditional  USE
Permit to allow the  placement of  processed  ore in to the Surface Fill Unit on
this property.

        The  transaction  contemplated  with  respect  to the 32  Acre  property
contains two separate  components.  The first is the purchase of the road access
and utility  easements  and the second is a lease of the mineral  rights on this
property.  The purchase price of the easements is $15,000 which is to be made in
three equal  payments.  SGMC is  obligated to spend up to $15,000 to quiet title
both the  surface and mineral  rights.  Upon  successful  quiet  title,  SGMC is
obligated  to  complete  a two year  exploration  program  of  mapping  and core
drilling of at least 1,000 feet or in lieu of drilling make a $5,000 payment. If
an ore  reserve  can be  developed  on the 32  Acre  property  (in  SGMC's  sole
judgment)  then SGMC will  enter into a lease with the owners and pay up to a 4%
net  smelter  royalty on minerals  extracted  from the 32 Acre  Property  with a
minimum  annual payment of $2,500 tied to the Gross  Domestic  Product  Implicit
Price  Index  ("GDPIP")  (base year shall be the year the quiet  title on the 32
Acre  property  is  obtained).  Lease  payments  will be  offset  by the  earned
royalties in excess of $15,000 escalated by the GDPIP.

        Surface and mineral  rights total  holding  costs will be  approximately
$225,000 from April 1, 1997 through May 31, 1998, including $45,000 for payments
on two parcels (9.1 acres)  bought in 1994;  an  estimated  $30,000 for one-time
costs to acquire  surface  easements on the 32 Acre  property to access the mill
site from  California  State  Highway 49; and  property  taxes of  approximately
$35,000 for the year ended May 31, 1997 Annual  property  taxes are estimated to
increase to more than  $100,000  when the Lincoln  Project is built and put into
operation.  Estimated acquisition costs for the 185 Acre Property and the EIR on
the 185 Acre Property will be approximately $600,000.

        The  leases are for  varying  terms (the  earliest  expires in  February
1998),  and require rental fees,  advance  production  royalties,  real property
taxes and insurance.  Leases expiring before 2010 will generally be extended, 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

                                       23

<PAGE>



4%). The various leases have different  methods of calculating  royalty payments
(net smelter return and gross proceeds).

        Amador United Gold Mines ("Amador  United") was a prior owner of certain
leases  which it conveyed to the Lincoln  Project  when the project was owned by
Meridian  Minerals  Company  ("Meridian").  In return for its conveyance of such
leases  Amador  United  received  a right of first  refusal  to buy the  Lincoln
Project  and a 20 percent net profits  interest  in  production  from any of the
Lincoln Project properties. In fiscal 1997, Amador United sold all of its rights
in the Lincoln Project to SGMC, in  consideration  of SGMC issuing 75,000 shares
of Common Stock to Amador United.

        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,  1997,  there  has  been an  estimated  $20,000,000  of
spending in the Lincoln Project by Meridian,  USECC Gold and 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 1997  fiscal year was  approximately  $572,700
($637,300 in 1996).  Certain of the expenditures have been expensed and the rest
have been capitalized as assets.

        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.  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 0.25  ounces  of gold  per ton in  place,  PAH
estimates  the Lincoln  Project  contains  194,740  tons of proven and  probable
reserves grading 0.57 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.


                                       24

<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.

Proposed Mine Plan

        General.  SGMC is evaluating  different mine plans for properties within
the  Lincoln  Project.  The mine plan  summarized  below is  allowed by the CUP.
Different  plans will  require an  amendment  to the CUP,  which may add several
months to the time required to obtain final approvals to commence  operations on
the  properties  affected.  It 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's  flotation  circuit  (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 (ore  extraction) is anticipated to start by mid-1998,  at a rate
increasing up to 500 tons per day ("tpd")  during the first six months of mining
operations.  Ore initially  will be taken to surface with ore trucks through the
existing  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  1,00  tpd in
approximately  the  third  year of  operation.  After  the  first 18  months  of
operations,  which  is  a  condition  in  the  Conditional  Use  Permit,  it  is
anticipated that the Lincoln decline connecting the Stringbean Alley decline and
the  surface  of the  approved  mill  site will  have  been  completed,  running
underground  from near  underneath  the  location of the mill site to the mine's
1,000-foot level. The Lincoln decline would run for 1,850 feet at an inclination
of minus 19% (cross section 12 feet by 12 feet),  and will be used for access of
personnel and supplies to the underground workings as well as for ore haulage up
the decline by conveyor  thus  eliminating  ore haulage on the surface  from the
portal of the mine to the mill.

        SGMC has applied to amend the CUP to relocate the mill to eliminate  the
need to drive the Lincoln decline and to minimize  haulage to the mill and other
operating  costs.  It is anticipated  that the land  acquisition  costs for such
relocation  would  be  significantly  less  than the  added  capital  costs  and
operating  costs to  drive  and  operate  the  Lincoln  decline.  However,  such
application has not yet been approved.

        Pre-Production  Development.  Current  access to the mine is through the
Stringbean  Alley  decline,  the  portal of which is 1,183  feet above sea level
leading to the bottom of the decline at 835 feet above sea level.  This  decline
was driven to access the Lincoln and Comet Zones,  both of which were originally
core drilled from the surface,  with the Comet Zone thereafter core drilled from
underground.  Raises have been started in the "M" vein of the Comet Zone section
on 200-foot  centers to establish  stoping  areas to access ore. The raises will
provide access, ventilation, fill access and escape ways for initial stopes.

                                       25

<PAGE>



Further crosscuts will be driven for more stopes as the Stringbean Alley decline
is extended and levels driven out horizontally.

        Underground  mine water  seepage into the  Stringbean  Alley  decline is
approximately 5 to 15 gallons per minute,  depending on the season.  Accumulated
water in the  decline is now being  pumped  through a  treatment  plant  located
underground in the Stringbean Alley decline. The plant removes arsenic and other
naturally  occurring  minerals,  and the treated  water is  discharged  by spray
evaporation at the surface. This plant will continue treating mine seepage water
as the mine goes into  production.  The treated  water not used  underground  in
operations will be pumped to the surface for mill operations as needed.

        Production.  All veins  will be  drifted  on the first  floor  above the
crosscuts,  which will serve as the bottom  floor of the stopes.  Raises will be
driven to the level above for ventilation and access for fill. Initially, in the
Comet  Zone,  these  raises  will be driven on 200-foot  centers  and,  assuming
continuity of ore, will be two steps,  one on either side of the raise. Ore will
be mined out of stopes with the  overhand  cut and fill open  sub-level  stoping
methods,  with each layer of stope filled back in with mill tailings  which have
been  recycled  from the surface mill  facility.  Broken ore will be loaded onto
15-ton underground  trucks and hauled over to the underground  crushing station,
then either transported to the surface via truck up the Stringbean Alley decline
or, if the Lincoln decline is driven, via the ore conveyor belt.

        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

        General.  The proposed mill process  essentially  involves three stages:
first, wet grinding of the ore into fine particles in a semi-autogenous  grinder
("SAG") mill, with the resulting finely-milled ore run through a gravity process
to remove free particles of gold through  gravity;  second,  ore containing gold
which was not captured in the first  gravity  process will be fed to a ball mill
for more grinding. The resulting  finely-ground material is run through a second
gravity  recovery  circuit  into  flotation  cells  for  mixing  with  non-toxic
chemicals  and water to further  remove  gold from the ore  (referred  to as the
flotation stage);  and third,  processing the flotation  concentrate with dilute
sodium  cyanide to  chemically  remove most of the remaining  gold.  The mill is
designed to produce three gold-bearing products: free gold; a high-grade gravity
concentrate,  and a  Merrill-Crowe  precipitate.  All three will be smelted to a
dore'  bullion  for  shipment  to  a  precious  metal  refinery.  SGMC  is  also
considering   selling  the  flotation   concentrate  rather  than  installing  a
Merrill-Crowe  circuit  to  precipitate  gold.  An  economic  analysis  of  this
alternative is being completed by SGMC.

        In fiscal  1992,  SGMC's  predecessors  mined  8,000  tons of  material,
including waste rock and low grade mineralization,  out of drifts and raises off
the Stringbean  Alley decline,  which were processed  through a nearby mell in a
bulk sampling  program to test mining  techniques and mill  recoveries.  Milling
results indicated at least 94% of the gold in the ore should be recoverable with
a  combination  of  gravity,   flotation  and  cyanidation   milling   circuits.
Approximately 1,400 ounces of gold were recovered in this program.  PAH believes
the mill recovery rate should be between 93% and 95% using the proposed gravity,
flotation and cyanidation  milling circuits.  In its  prefeasibility  study, PAH
used a 90% mill  recovery  rate  because in its study,  the mill was designed to
recover  gold  in  only  a  single  stage   gravity   circuit.   Since  the  PAH
prefeasibility  study,  Lookewood Greene  Engineers,  Inc. of Dallas,  Texas has
designed a new mill circuit to recover 95% of the gold.


                                       26

<PAGE>



        The central mill  building  (exclusive of attached lab and other support
facilities)  will cover up to  approximately  20,000  square feet. If warranted,
mill capacity may be increased  beyond 500 tpd in the second year of operations,
since the CUP allows for up to 1,000 tpd mining and milling operations.

        Possible  Alternative Mill and Waste Management Sites. SGMC presently is
evaluating a possible  relocation of the waste  management unit (or Surface Fill
Unit)  site and the mill  site.  Although  this  relocation  would  require  the
purchase of additional  properties,  and an amendment to the CUP,  management of
SGMC  believes  the cost will be more than  offset  and  would be  recovered  in
approximately five years by dropping the land surface leases for which the waste
management sit is currently  approved.  Net capital savings could be significant
if the new approach is adopted.  The proposed new mill site also is  anticipated
to significantly  reduce operating costs through reductions in hauling distance;
elimination of the need for constructing  the Lincoln  decline;  and the need to
build large dams, and the hauling costs of importing clay for pond liners.

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.

        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 the USE and Crested.  USE did not receive any advance royalties during fiscal
1996 because of an arrangement with Cyprus Amax described  below.  During fiscal
1995, USE recognized  $85,500 of advance royalty revenue under this arrangement.
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.

        Subsequent  to May 31,  1994,  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.  In fiscal
1997, $207,300 was received by USECC from advance royalty payments.


                                       27

<PAGE>



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.

        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 1998.

        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 are in the $4.00 to
$4.40 per pound range in September 1997.

Parador Mining (Nevada)

        USE and Crested are  sublessees  and assignees  from Parador Mining Co.,
Inc. ("Parador"),  on 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  informed  BGBI that payments are owed to them
pursuant to  extralateral  rights on the claims.  BGBI in turn  initiated  legal
proceedings  to  establish  the rights of the  various  parties  in the  claims.
Thereafter,  Parador notified BGBI that BGBI had defaulted in its lease and that
Parador had terminated the lease. BGBI denies that it has defaulted.  A trial on
the bifurcated  issue of extralateral  rights only to the court in December 1995
resulted  in a decision  that  Parador had failed to meet its burden of proof to
establish  that its claims are entitled to assert  extralateral  rights and that
Parador,  USE and Crested have no right,  title or interest in the adjacent BGBI
claims.  Parador, USE and Crested filed an appeal of this ruling as erroneous as
a matter of law but the appellate court dismissed the appeal as being

                                       28

<PAGE>



premature.  The remaining  issues have not been considered or set for trial. See
Item 3, "Legal Proceedings - BBGI Litigation".

Oil and Gas.

        Fort  Peck  Lustre  Field  (Montana).   USECC  conducts  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  Assiniboine and Sioux Tribes,
signed in October 1993 an "Agreement Between The Assiniboine and Sioux Tribes of
the Fort Peck  Indian  Reservation  and Energx,  Ltd.  to  Explore,  Develop and
Produce  Shallow Gas." This  Agreement has been approved by the Secretary of the
Interior and the United States Bureau of Indian  Affairs.  In the fourth quarter
of  calendar  1995  Energx  drilled  and  tested  three  exploratory  wells,  in
conjunction with NuGas Resources U.S. Inc.  ("NuGas").  These three were all dry
holes,  having been drilled under a farmout  agreement  with Placid (see below);
these three wells counted against the eight well commitment under this Agreement
(see below).  Energx (and NuGas) drilled five more exploratory  wells during the
fall of 1996.  All five of these wells were dry holes.  All eight dry holes were
funded by NuGas in accordance  with the provisions of the Agreement.  Due to the
fact that all eight holes were dry,  NuGas has no further  obligations  to drill
under the Agreement.  Since the fall of 1996 there has been no other exploration
or  drilling  activities  performed  by Energx or NuGas  under  this  Agreement.
Reclamation of the dry hole bores began in 1997. Energx may terminate or farmout
the Fort Peck Gas  Project  if  further  exploration  work does not appear to be
warranted.

        NuGas Resources (U.S.) Inc.  Agreement.  By the Joint Venture  Agreement
("JVA") with Energx dated July 18, 1994,  NuGas was obligated to Energx to drill
and complete (or abandon) at NuGas' sole expense,  eight exploratory shallow gas
wells on the Fort Peck  Reservation by July 1, 1996,  which was extended to July
1, 1997,  to earn a one-half  interest  in  Energx'  rights  under the Fort Peck
Shallow Gas Agreement.

        NuGas  contributed  $100,000  to pay for costs of  acquiring  leases and
easements on non-Tribal lands  contiguous to Tribal lands, to assemble  adequate
sized  drilling  units for the first  eight  exploratory  wells.  In fiscal 1995
Energx received  $200,000 under the JVA as a prospect  generation fee. Energx is
operator of record, while NuGas is field operator.

        NuGas  is  a  subsidiary  of  a  Toronto  Stock  Exchange  company  with
substantial experience in shallow gas exploration and production, principally in
the northern plains states and Canada.

        Farmout Agreement.  In October 1995, Placid Oil Company, a subsidiary of
Occidental  Petroleum  and other  parties  (hereafter  together  referred  to as
"Placid"),  signed  a  Farmout  Agreement  with  Energx  and  NuGas.  Under  the
agreement,  Energx  and NuGas as  operator  had the right to drill and  complete
shallow gas wells on approximately  170,000 acres of non-Tribal lands within the
Fort Peck Indian Reservation,  at the sole expense of the operator.  The Farmout
Agreement   contemplated   three  phases:   (i)  drilling  and   completion  (or
abandonment) of three test wells on widely dispersed  drilling  locations;  (ii)
subject  to  performance  of  (i),   continuous   drilling  and  completion  (or
abandonment) of option wells, also on widely dispersed drilling  locations;  and
(iii) subject to performance of (i), continuous

                                       29

<PAGE>



drilling and  completion  (or  abandonment)  of  additional  wells on blocks not
covered by (i) and (ii). The first three wells were drilled on specific sections
within the 170,000 acres.

        Drilling of the first test well  commenced in October 1995;  the last of
the three wells was to be drilled and completed (or abandoned) within 45 days of
the  commencement  of drilling  the first well.  All three wells were dry holes.
Contemplating  the  significant  holding cost for the delay rentals,  Energx and
NuGas jointly  decided to terminate the Placid  Farmout  Agreement on January 1,
1996 and  relinquished  their rights to the 170,000  acres  referred to above as
Energx and NuGas determined they would focus their efforts and resources towards
the Tribal acreage.

        Wind River Basin,  Wyoming - Monument  Butte  Prospect.  During the 1996
fiscal year, Energx terminated BLM leases covering approximately 13,000 acres in
Fremont  County,  WY, which were believed to be prospective  of shallow  coalbed
methane and  conventional  stratigraphic  natural gas and oil  deposits.  Energx
wrote off  $328,700,  the cost of acquiring  and holding  these leases in fiscal
1996.

        Funding  Energx:  Energx  operations to date have been funded with USECC
equity  investments and advances,  and  transaction  revenue (the NuGas prospect
generation fee).  Energx expects to fund future  operations by private financing
and  industry  participation.  However,  equity  financing  as well as  industry
participation  of natural and coalbed  methane gas  projects may be difficult to
obtain.  Accordingly,  in fiscal 1998  Energx will  continue to monitor its Fort
Peck positions to evaluate whether to continue to seek to find gas on the tribal
lands.

                              COMMERCIAL OPERATIONS

Real Estate and Other Commercial Operations

        Registrant  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 subsidiaries in these
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. Until it was
sold in April 1996, USECC also owned and managed a mobile home park in Riverton,
Wyoming. See Part III, Item 12, "Certain  Relationships and Related Transactions
Transactions  with  Arrowstar  Investments,  Inc.".  WEA  owns and  operates  an
aircraft fixed base operation with fuel sales,  flight  instruction and aircraft
maintenance in Riverton, Wyoming.

        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 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.


                                       30

<PAGE>



        In November  1995,  USECC  exercised an option to acquire a 7,200 square
foot  hangar at the  Riverton  airport,  for  $75,000,  from a  private  Wyoming
corporation affiliated with John L. Larsen, Chairman and Chief Executive Officer
of the Company and President,  Chairman and Chief Executive  Officer of USE. See
Part  III,  Item  12,  "Certain   Relationships   and  Related   Transactions  -
Transactions with Arrowstar Investments, Inc."

        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 sold 9 and 19 lots for an aggregate of
$21,150 and $46,000 during fiscal 1997 and 1996, respectively.

        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 (each with
principal and unpaid interest due on the third anniversary of closing except for
$35,000 on the first anniversary). The Registrant 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  development.  The  sale  was  accounted  for as an
installment  sale and thus the gain on sale was deferred,  to be recorded as the
notes are paid.

        Both notes  ($145,500 and $630,870)  required annual payments of accrued
interest:  the larger note accrued interest at 7.5 percent; the initial interest
rate on the smaller note was 7.5 percent  through August 28, 1995 and 12 percent
thereafter (with a $35,000 principal payment on the first anniversary).

        In fiscal  1997,  USE and Crested  agreed with  Pangolin,  and  entities
affiliated with Pangolin,  to restructure the remaining  obligations of Pangolin
and entities  affiliated with Pangolin,  with respect to the land parcels in and
near  Gunnison,  Colorado  (which had been  covered by the original two purchase
options).  Under the restructuring,  Contour Development Company LLC (a Colorado
limited liability

                                       31

<PAGE>



company,  hereafter  "Contour")  gave  USE and  Crested  two  recourse,  secured
promissory  notes: the first note is for $454,894 of principal,  due January 26,
1998,  the second note is for  $872,508 of  principal.  The notes are secured by
Contour's  73%  interest  in  Tenderfoot  Properties  LLC ( a  Colorado  limited
liability  company  affiliated with Contour,  hereafter  "Tenderfoot").  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 of $128,138 plus accrued  interest of $36,301
at 8.39% per year from  December 1, 1996).  As of the filing date of this Annual
Report on Form 10-K, USE and Crested are  re-evaluating all of the circumstances
of the  negotiations  which  led to the  restructuring  in late  calendar  1996,
including  representations made to USE and Crested by affiliates of Pangolin and
Contour  regarding the value of the Tenderfoot  interests owned by Contour which
secure  the new  notes,  Contour's  intentions  of paying the new notes when due
according to their terms, and other matters.  As of the date of this Report, USE
and Crested have not determined  what types of legal remedies will be pursued to
enforce their rights and recover the value of their  investments in the land and
the original transaction with Pangolin.

        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.  Further  recreational  improvements  to the
townsite  were  planned  for  fiscal  1996,  to develop a  commercial  operation
directed to Lake Powell  tourists.  However,  as the  anticipated  joint venture
partners did not fund  development  plans,  (and the proposed joint ventures for
such purpose were not formed),  and USE and Crested have not been  successful in
finding  other  sources of  development  funding,  limited  interim  funding was
provided by Arrowstar  Investments,  Inc.  through  First-N-Last  LLC, a limited
liability company with Canyon Homesteads, Inc. In April 1996, USECC acquired the
entire interest of Arrowstar in First-N-Last  LLC as partial  consideration  for
the sale to  Arrowstar  of  USECC's  Wind  River  Estates  mobile  home  park in
Riverton,  WY.  See  Part  III,  Item 12,  "Certain  Relationships  and  Related
Transactions - Transactions with Arrowstar Investments, Inc."

        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

                                       32

<PAGE>



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 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.  Costs for this two year
effort (once approved by the NRC) are not expected to exceed $150,000.  However,
management of USE and Crested are reviewing  the economics of  relicensing  this
facility as part of a potential in-situ leach uranium mining operation.

        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
110 full-time employees as of September 5, 1997.
Payroll expense has been shared by USE and Crested since 1981.


                                       33

<PAGE>



                              MINING CLAIM HOLDINGS

        Title to Properties.  Nearly all the uranium mining  properties  held by
GMMV, SMP, 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.

ITEM 3. Legal Proceedings

Sheep Mountain Partners Arbitration/Litigation

        Arbitration.  On June 26, 1991, CRIC submitted  certain disputed matters
concerning SMP to  arbitration  before the American  Arbitration  Association in
Denver,  Colorado,  to which USE and Crested  filed a  responsive  pleading  and
counterclaims  alleging  violations  of contracts  and duties by CRIC related to
SMP. CRIC asserted that USE and Crested, d/b/a/ USECC, were in default under the
SMP partnership agreement ("SMP Agreement").  Prior to initiation of arbitration
proceedings,  USE and Crested had notified  CRIC it was in default under the SMP
Agreement.  The issues  raised in the  arbitration  proceedings  were  generally
incorporated in the Federal  proceedings (see below),  wherein the U.S. District
Court  of  Colorado  stayed  further   proceedings  in  arbitration.   See  also
"Stipulated Arbitration", below.

                                       34

<PAGE>




        Federal  Proceedings.  On July 3, 1991,  USE and Crested  ("plaintiffs")
filed Civil Action No. 91- B-1153 in the United  States  District  Court for the
District of Colorado  against  CRIC,  Nukem and various  affiliates  of CRIC and
Nukem (together, the "defendants"),  alleging that CRIC and Nukem misrepresented
material  facts to and concealed  material  information  from the  plaintiffs to
induce their entry into SMP Agreement and various related agreements. Plaintiffs
also claimed CRIC and Nukem have wrongfully  pursued a plan to obtain  ownership
of  the  USE-Crested   interests  in  SMP  through   various  means,   including
overcharging  SMP for uranium  "sold" to SMP by defendants.  Plaintiffs  further
alleged that defendants refused to provide a complete accounting with respect to
dealings  in  uranium  with and on behalf of SMP,  and that  certain  defendants
misappropriated  SMP property and engaged in other wrongful acts relating to the
acquisition of uranium by SMP.

        Plaintiffs  requested  that  the  court  order  rescission  of  the  SMP
Agreement  and related  contracts,  and asked the court to determine the amounts
payable to CRIC by USECC as a result of any such  rescission  order to place the
parties in status  quo.  USE and  Crested  also  requested  that the court order
defendants to make a complete  accounting to them concerning the matters alleged
in the  Amended  Complaint.  They  requested  an  award  of  damages  (including
punitive,  exemplary and treble damages, interest, costs and attorneys' fees) in
an amount to be determined at trial.  Plaintiffs further requested imposition of
a constructive  trust on all property of SMP held by defendants,  and on profits
wrongfully realized by defendants on transactions with SMP.

        The defendants filed various  motions,  including an application to stay
judicial  process and compel  arbitration  and to dismiss certain of plaintiff's
claims.   The  defendants  also  filed  an  answer  and  counterclaims   against
plaintiffs, claiming plaintiffs breached the SMP Agreement and misappropriated a
partnership  opportunity by providing certain information about SMP to Kennecott
and entering into the GMMV with Kennecott  involving the Green Mountain  uranium
properties.  The  defendants  also  claim  that  plaintiffs  wrongfully  sold an
interest in SMP to Kennecott through the GMMV without CRIC's consent and without
providing  CRIC a right of first  refusal to purchase such  interests;  that USE
breached the uranium  marketing  agreement  between CRIC and SMP, which had been
assigned by CRIC to Nukem, by agreeing with Kennecott in the GMMV that Kennecott
could market all the uranium from Green  Mountain,  thereby  depriving  Nukem of
commissions to be earned under such  marketing  agreement;  that  Registrant and
Crested  interfered with certain SMP supply  contracts,  costing CRIC legal fees
and costs;  that CRIC and Nukem are entitled to be indemnified  for purchases of
uranium  made on behalf of SMP;  that USE and  Crested  failed to perform  their
obligations under an Operating Agreement with SMP in a proper manner,  resulting
in additional  costs to SMP; that  Registrant  and Crested  overcharged  SMP for
certain services under the SMP Partnership Agreement and refused to allow SMP to
pay certain marketing fees to Nukem under the Uranium Marketing Agreement;  that
USE and Crested breached the SMP Partnership  Agreement by failing to maintain a
toll milling  agreement with Pathfinder  Mines  Corporation,  thereby  rendering
SMP's  uranium  resources  worthless;  and that USE and Crested  have engaged in
vexatious  litigation against CRIC and Nukem.  Defendants also requested damages
(including punitive, exemplary and treble damages under RICO, interest costs and
attorney fees).

        Stipulated  Arbitration.  In fiscal 1994,  the plaintiffs and defendants
agreed to proceed with exclusive,  binding  arbitration  before a panel of three
arbitrators  (the  "Panel") with respect to any and all  post-December  21, 1988
disputes,  claims  and  controversies  (including  those  brought  in  the  1991
arbitration  proceedings,  the U.S.  District Court  proceeding and the Colorado
State Court proceeding  described below),  that any party may assert against the
other.  All  pre-December 21, 1988 claims,  disputes and  controversies  pending
before the U.S.  District  Court have been  stayed by  stipulation  between  the
parties,  until  the  Panel  enters  an  order  and  award  in  the  arbitration
proceeding.


                                       35

<PAGE>



        In connection  with agreeing to proceed to  arbitration as stated above,
USE and Crested affirmed the Sheep Mountain Partners partnership,  and proceeded
on common  law  damages  and  other  claims  in the  arbitration.  Approximately
$18,000,000  cash,  comprising  part of the damages  claimed by plaintiffs,  was
placed in escrow by agreement of the parties pending resolution of the disputes.

        The arbitration  evidentiary proceedings were completed on May 31, 1995,
following which the parties filed with the arbitrators proposed findings of fact
and conclusions of law and proposed order, award, briefs of law and responses to
the other party's submittals. NUKEM and CRIC sought damages against USECC in the
amount of  $47,122,535.  For its claims,  USECC sought damages of  approximately
$258,000,000  from Nukem and CRIC, which amount USECC requested be trebled under
the  Racketeer  Influenced  and Corrupt  Organizations  Act ("RICO") and similar
state law provisions.

        On April 18, 1996, the Arbitration Panel entered an Order and Award (the
"Order").  The Panel  found  generally  in favor of USE and  Crested  on certain
claims  made by USE and  Crested  (including  the  claims for  reimbursement  of
standby  maintenance  expense and other expenses on the SMP mines), and in favor
of Nukem/CRIC and against USE and Crested on certain other claims.

        USE  and  Crested  were  awarded   monetary   damages  of  approximately
$7,800,000 with interest,  which amount is after  deduction of monetary  damages
which the Panel awarded in favor of Nukem/CRIC  and against USE and Crested.  An
additional  amount of  approximately  $4,800,000 was awarded by the Panel to USE
and  Crested,  to be paid out of cash  funds  held in SMP bank  accounts,  which
accounts   have   been   accruing   operating   funds   from   SMP   since   the
arbitration/litigation proceedings were commenced.

        The Panel ordered that one utility supply contract for 980,000 pounds of
uranium  oxide held by  Nukem/CRIC  belonged to SMP, and ordered  such  contract
assigned to SMP. The contract expires in 2000.

        The fraud and RICO claims of USE and Crested against Nukem and CRIC were
dismissed.

        The timing and  assurance of payment by Nukem/CRIC to USE and Crested of
the $7,800,000 monetary damages with interest is presently  uncertain.  On April
30,  1996  Nukem/CRIC  filed with the Panel two motions  (the  "Nukem  Motions")
requesting  correction  of the Order,  claiming  to have  discovered  errors and
inconsistencies  in two of the 36 claims addressed in the Order that they allege
improperly  increased  the damages  awarded to USE and  Crested by an  aggregate
amount exceeding $16,000,000.

        On May 15,  1996,  USE and  Crested  filed  the Order  (under  seal with
respect to certain portions containing  commercially sensitive information) with
the United States  District Court for the District of Colorado (the "Court") and
a petition for confirmation of the Order. At a hearing on May 24, 1996 the Court
remanded the Order to the Panel for limited review of the Nukem Motions, without
taking further evidence.  The petition for confirmation of the Order and motions
filed by USE and  Crested  for  dissolution  of SMP,  for the  appointment  of a
receiver  to  oversee  the  obligations  of  SMP to  make  delivery  of  uranium
concentrates  to utilities and supervise the formal  dissolution of SMP, and for
an order  directing  distribution of the escrowed  proceeds,  were stayed by the
Court pending a ruling by the Panel on the Nukem Motions.

        USE and Crested  filed their  opposition  to the Nukem  Motions with the
  Panel on June  14,  1996.  On July 3,  1996,  the  Panel  entered  an Order in
  response to the Nukem motions and reaffirmed its April
18, 1996 Order and Award.


                                       36

<PAGE>



        After a series of motions by the  parties,  the District  Court  entered
orders and a judgment  on  November 5, 1996  confirming  the  Panel's  Order and
Award. In November 1996, USECC received the additional $4,367,000 awarded by the
Arbitration Panel out of SMP escrowed funds and its bank account per the Court's
November 5, 1996  Judgment.  Thereafter,  Nukem filed a motion to modify  and/or
vacate portions of the Judgment and USECC filed a motion to modify one paragraph
of the Judgment  deducting  $265,213  from the amounts Nukem and CRIC claimed to
have  advanced to purchase  uranium  for SMP. In December  1996,  Nukem and CRIC
filed a notice with the 10th  Circuit  Court of Appeals  ("CCA")  appealing  the
Court's  November 5, 1996  Judgment.  However,  the 10th CCA held that appeal in
abeyance pending the issuance of the U. S. District Court's final judgment.

        Following the hearing on USECC's motion to correct the Court's  November
5, 1996 Order and  Judgment and motions to enter a final  judgment,  on March 7,
1997,  Judge Lewis T. Babcock of the U. S. District Court of Colorado entered an
"Order for Entry of Amended  Judgment as Final,"  and an Amended  Judgment as of
March 7, 1997. The Amended Judgment further confirmed the Order and Award of the
Panel but did not include equitable portion of the Award in favor of SMP.

        In the March 7, 1997 Amended Judgment, which included rulings on some 12
monetary  claims of the parties,  Judge Babcock ordered Nukem to pay USECC a net
of approximately  $8,465,000 as monetary  damages.  The Amended Judgment did not
contain the equitable  relief granted in the Panel's Order and Award, so USE and
Crested filed another motion with the U.S.  District  Court to correct  clerical
omissions. Nukem/CRIC opposed the motion but on June 30, 1997, the Court entered
its Second Amended  Judgment  ordering Nukem to assign the PSE&G contract to SMP
and  impressing  a  constructive  trust  in favor of SMP on  Nukem's  rights  to
purchase  CIS  uranium,  the uranium  acquired  pursuant to those rights and the
profits  therefrom.  The District  court also stayed USECC's right to execute on
the judgment against Nukem/CRIC when Nukem/CRIC posted a supersedeas bond in the
amount of $8,613,600.  Thereafter,  Nukem/CRIC filed a motion for  clarification
and/or limited remand of the Second  Amended  Judgment.  On August 13, 1997, the
U.S. District Court denied the motion so Nukem and CRIC now have until September
12, 1997 to file a notice of appeal with the Tenth  Circuit  Court of Appeals of
the June 30, 1997 Second Amended Judgment.

        Colorado State Court Proceeding.  On September 16, 1991, USE and Crested
filed Civil Action No.  91CV7082 in Denver  District Court against SMP,  seeking
reimbursement  of $85,000 per month from the spring of 1991 for  maintaining the
SMP  underground  uranium mines at Crooks Gap on a standby  basis.  On behalf of
SMP,  CRIC filed an answer,  affirmative  defenses  and a  counterclaim  against
plaintiffs. Plaintiffs filed a motion for summary judgment; the court denied the
motion and stayed all proceedings  pending resolution of the Federal proceeding,
which in turn have been stayed through arbitration (see "Stipulated Arbitration"
above).

        On July 17,  1997,  USECC filed a lien on  Nukem/CRIC's  interest in the
mining  claims  subject of the SMP  partnership  for $523,553  being the standby
costs  from March 31,  1996 to June 1, 1997 and  $35,620  per month  thereafter.
These are the amounts of Nukem/CRIC's share of the monies SMP owes USECC for the
expenses of care and maintenance of SMP's properties in Wyoming.  USECC have six
months within which to foreclose the lien through a civil lawsuit.

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

                                       37

<PAGE>



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.

        Parador,  USE and  Crested  had  previously  advised  BGBI that they are
entitled to royalty payments with respect to extralateral  rights of the subject
claims on minerals produced at the Bullfrog Mine, claiming that the lode or vein
containing the gold  mineralization  apexes on the Parador claims and dips under
the claims leased to BGBI by a third party.

        BGBI  seeks to quiet  title to its  leasehold  interest  in the  subject
claims,  alleging that Parador's  lease thereof to USE and Crested is adverse to
the interest  claimed by BGBI,  and that the assertions by USE and Crested of an
interest in the claims have no foundation.  BGBI seeks 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 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.  Under an  arrangement  to pay  certain  legal  expenses  of
Parador, USE and Crested may be responsible for any such amounts.

        BGBI alleges that by entering  into the  Assignment  and Lease of Mining
Claims with  Parador,  USE and Crested  disrupted the  contractual  relationship
between  BGBI and  Parador.  In  addition,  BGBI claims  that the  USECC-Parador
agreement slanders BGBI's title to the claims.  BGBI seeks compensatory  damages
from Parador, USE, and Crested; punitive damages from USE and Crested; and costs
and other appropriate relief from Parador, USE and Crested, all in amounts to be
determined.

        A partial or bifurcated  trial to the court of the  extralateral  rights
issues was held on December 11 and 12,  1995.  The purpose of the hearing was 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 of the case warrant the
application of the doctrine of extralateral rights as set forth in such statute.
Although  the Court sat as both the finder of fact and law with  respect to such
issues,  the Court  concluded that the questions are ultimately one of law which
must be decided  based on the  testimony  and exhibits  introduced  at the trial
concerning the description of the orebody.  USE,  Crested and Parador  presented
five experts in the field of geology,  including the person who was  responsible
for the discovery of the gold deposit at the mine.  All five experts opined that
the  deposit  was a lode and it apexed  on a portion  of  Parador's  two  mining
claims. The defendant H.B. Layne Contractor,  Inc. ("Layne")  presented a single
witness who  testified  that there was no apex within the  Parador  claims.  The
Court nevertheless 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
Court entered a partial  judgment in favor of Layne and ordered that Parador pay
Court costs to Layne.  Parador,  USE and Crested  filed an appeal of the Court's
ruling as erroneous as a matter of law and the Supreme Court of Nevada dismissed
the appeal as  premature.  The  partial  trial did not address any of the issues
pending in the  litigation  other than those  required to decide the question of
whether the doctrine of  extralateral  rights is  applicable  to this case.  All
other claims and  counterclaims  remain  pending  before the Court.  The parties
intend to seek  permission  of the trial  court to again  appeal  and/or try the
remaining issues in the case.


38      

<PAGE>



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 Crested who are
not also directors.

        Robert Scott Lorimer,  age 46, has been Controller and Chief  Accounting
Officer for 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,
and their Treasurer since December 14, 1990. He serves at the will of the Boards
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, 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

           Fiscal year ended May 31, 1996
           ------------------------------
           Fourth quarter ended 5/31/96               $1.94      $1.07
           Third quarter ended 2/29/96                  .16       1.75
           Second quarter ended 11/30/95                .22        .19
           First quarter ended 8/31/95                  .38        .22

(b)     Holders.

        (b)(1)  At September 3, 1997 there were 1,867 stockholders of record for
 Crested common stock.

        (b)(2)  Not applicable.


                                       39

<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, 1997,  Crested recorded the issuance of 81,600
shares of Common Stock for issue to non-employee  directors, as compensation for
services.  Such shares were issued in fact in fiscal 1998.  In  addition,  8,000
shares of Common Stock were issued to employees,  as compensation  for services.
No  underwriter  was  involved  in the  transactions.  All shares were issued as
restricted  securities,  in reliance on Sec. 4(2)  exemption  from  registration
under the Securities Act of 1933.

ITEM 6.  SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>

                                                            May 31,
                             --------------------------------------------------------------------
                                 1997         1996           1995          1994          1993
                                 ----         ----           ----          ----          ----

<S>                          <C>           <C>           <C>            <C>           <C>        
Current assets               $1,049,500    $  596,200    $   512,600    $  282,800    $   432,500
Current liabilities           6,592,400     6,848,300      5,518,500       555,000      1,573,100
Working capital              (5,542,900)   (6,252,100)    (5,005,900)     (272,200)    (1,140,600)
Total assets                  6,285,700     8,132,500      8,097,800     8,092,900      7,398,200
Long-term obligations(1)        741,700       725,900        853,700     4,688,700      1,169,400
Shareholders' equity         (1,092,300)      521,900      1,690,800     2,849,200      4,527,900

</TABLE>

        (1) Incudes  $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.
<TABLE>
<CAPTION>

                                                    For Years Ended May 31,
                             --------------------------------------------------------------------
                                 1997         1996           1995          1994          1993
                                 ----         ----           ----          ----          ----
<S>                          <C>           <C>           <C>            <C>           <C>        
Revenues                     $1,703,500    $2,509,200    $  1,160,200   $ 2,870,000   $ 3,164,600
Income (loss) before
   equity in loss of
   affiliates, provision
   for income taxes and
   extraordinary item          (862,400)     (811,000)    (1,031,100)   (1,297,600)        41,300
Equity in (loss) of
   affiliates                  (807,900)     (357,900)      (415,900)     (657,600)      (324,500)

Net income (loss)            (1,670,300)   (1,168,900)    (1,447,000)   (1,955,200)      (283,200)

Income per share before
   extraordinary item             $(.16)        $(.12)         $(.14)        $(.19)        $ (.03)
Extraordinary item                 --            --             --            --              --
Net income (loss)
   per share                      $(.16)        $(.12)         $(.14)        $(.19)        $ (.03)

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



                                       40

<PAGE>



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  Crested's  liquidity,  capital  resources  and
results of operations during the periods included in the accompanying  financial
statements.

        The Company has generated losses in the last three years, as a result of
holding  costs  and  permitting  activities  in  the  mineral  segment  and  gas
operations 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,  but for which the Company has
high  expectations.   These  properties  require  expenditures  for  permitting,
development,  care  and  maintenance,   holding  fees,  corporate  overhead  and
administrative  expenses,  etc. In addition,  legal expenses associated with the
litigation and arbitration  surrounding the SMP Partnership and the inability of
the  Company to utilize  funds that have been  awarded to the Company and USE by
the  Arbitration  Panel and confirmed by the Federal Court have  compounded  the
Company's operating and cash flow situation.  Nevertheless, the Company believes
that it will meet its  obligations  in the coming  year,  as  further  discussed
below.


Liquidity and Capital Resources at May 31, 1996

        Working  Capital  Components.  Cash  used  in  operating  and  financing
activities  was $703,200 and $496,700,  respectively  for the year ended May 31,
1997. Cash provided by investing  activities  during fiscal 1997 was $1,184,400.
For the year, these activities resulted in a net decrease of $15,500 in cash. At
May 31,  1997,  the  Company  had a working  capital  deficit of  $5,542,900  as
compared to a working capital deficit of $6,252,100 at May 31, 1996.

        The change in working capital of $709,200 is as a result of increases in
accounts receivable,  inventory and other assets and a reductions of the line of
credit  and debt to  affiliates  of  $460,300,  $14,700,  $88,000  and  $436,900
respectively.  These  increases in working  capital were offset by reductions in
long-term  receivables  of $6,200 and increases in accounts  payable of $256,600
and current portion of long-term debt of $12,400.

        Accounts  receivable  affiliates  increased  by $454,600  primarily as a
result  of  increased  amounts  to due USECC  from  GMMV,  $406,100  and SGMC of
$56,000.  These  amounts  were paid after May 31,  1997.  At May 31,  1996,  the
Company  owed $88,000 on the line of credit of  $1,000,000  that the Company and
USE have.  During  fiscal  1997,  this amount was paid off and at May 31, 1997 a
total of  $1,000,000  remained  available  to the Company and USE on the line of
credit.

        Cash used in financing  resulted in a net decrease in debt to affiliates
of $436,900 and the line of credit of $88,000.  Increased long-term debt payable
to  non-affiliates  of $28,200 is as a result of the Company  financing  various
prepaid working capital items.

        Cash generated from investing  activities were principally from proceeds
of a  distribution  of SMP and a reduction in the Company's  ownership of Sutter
Gold Mining Company.  In November 1996, the Company and USE received  $4,300,000
from the SMP escrow  accounts as partial  satisfaction  of the monetary  damages
awarded by the Arbitration  Panel. These funds were applied first to the amounts
due the Company and USE for standby costs. This reduced the Company's investment
in SMP by  $1,384,000.  The  balance was  recorded as income of which  Crested's
portion was $501,900.  The other major  reduction in investments was as a result
of the Company and USE accepting contingent warrants

                                       41

<PAGE>



from Sutter Gold Mining  Company.  The acceptance of these  contingent  warrants
reduced the  investment in SGMC by $589,900  while at the same time $651,000 was
recorded as an investment in a contingent warrant.

        Capital  Requirements - General:  The primary requirements for Crested's
working capital during fiscal 1997 are expected to be the costs  associated with
development  activities of Plateau (see "Capital Requirements - Plateau"),  care
and  maintenance  costs of SMP,  payments  of holding  fees for  mining  claims,
purchase of uranium for delivery to utility  customers of SMP, overhead expenses
of Energx and corporate  general and  administrative  expenses,  including costs
associated with continuing litigation and arbitration.

        Capital Requirements - SGMC: 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.

        During the first and second  quarters of fiscal  1997 SGMC sold  424,000
shares of its common  stock in a private  placement.  These shares were sold for
$3.00 per share.  SGMC  received  $1,106,600  in net  proceeds  after  deducting
commissions and offering costs.

        During  the  fourth  quarter  of fiscal  1997,  as a result of a planned
equity offering, the initial investors of SGMC agreed to a 1 for 2 reverse stock
split,  exclusive of the 424,000 private  placement  shares  discussed above. In
addition to the  reduction  of the shares owned by founders  and  insiders,  the
Company and USE agreed to have their holdings reduced from 870,469 common shares
and  6,964,531  common  shares to 172,258  common  shares and  1,503,060  common
shares, respectively.

        In  consideration  of this  reduction in their common shares owned,  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.  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 based on $25
per ounce of  proven  reserves  added to SGMC's  reserves  between  300,000  and
700,000 ounces.  The number of shares issuable are based on the greater of $4.07
per share for the fair market  value of SGMC's  common stock (as  defined).  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.
SGMC has the right to satisfy  the  exercise  of all or any portion of the Stock
Purchase  Warrant with net cash flows, as defined,  at $25 for each new ounce of
proven and probable ore in excess of 300,000 ounces.  The Stock Purchase Warrant
benefits the Company and USE on a basis of 11.1% and 88.9%, respectively.

        It is  anticipated  that  SGMC will sell an  additional  $10,000,000  in
equity  during  fiscal  1998.  There  can be no  assurance  that the IPO will be
successfully completed.  If the offering is successful,  no additional financing
will be needed  to place the SGMC  properties  into  production.  If SGMC is not
successful in its offering of equity,  other sources of capital will be required
to complete the mine and mill design and construction.

        Capital  Requirements  - SMP: There are no current plans to mine the SMP
Crooks Gap properties during fiscal 1998, however, Crested and USE will continue
to preserve the ore bodies and develop  concepts to reduce care and  maintenance
costs,  including  driving a decline to reduce  pumping  costs (which also would
reduce future mining costs by reducing hoisting costs). Although funds are

                                       42

<PAGE>



available in SMP's bank account of approximately $15,600,000 as of May 31, 1997,
these  funds are  restricted  and have not been made  available  to pay  standby
costs.

        Notwithstanding disputes between the SMP partners,  Crested and USE have
delivered an agreed-upon  portion of the uranium  concentrates  required to fill
contract delivery requirements on certain long-term U3O8 contracts since July 1,
1991.  During 1997 all of the  deliveries to fill the SMP contracts were made by
Nukem.  It is uncertain  what  protocol with Nukem will be in place for 1998 and
thereafter.  If the SMP partners are unable to agree on how to separately effect
contract  performance for the various SMP customers,  resulting  delivery delays
and/or incomplete deliveries could adversely affect the contracts, and therefore
Crested.  Further,  the Company  and USE are  awaiting  Nukem's  response to the
Federal Courts  confirmation of the Arbitration  panel's Award.  Nukem has until
September  12, 1997 to file a notice of appeal with the Tenth  Circuit  Court of
Appeals. No assurance can be given on the outcome of a potential appeal.

        Capital  Requirements  -  GMMV:  Operations  of GMMV  are not  requiring
Crested's  capital  resources.  On June  23,  1997,  USE  and  USECC  signed  an
Acquisition  Agreement  with  Kennecott  for the  right to  acquire  Kennecott's
interest in the Green Mountain Mining Venture ("GMMV") for $15,000,000 and other
consideration.  Kennecott paid USE and USECC a $4,000,000 bonus on signing,  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  $16,000,000  loan  being  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 April 1999 until paid in full. The Note is 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 (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").  USE and USECC will  assume the
Note, and the assets of the GMMV will be subject to the Mortgage,  at closing of
the acquisition.

        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 loan being provided 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  advanced  under the
$16,000,000  loan to be provided 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  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  entity;  (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately

                                       43

<PAGE>



$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  loan and the
Mortgage)  from and after the  closing.  Under very limited  circumstances,  the
scheduled  closing  date may be postponed to another date not later than October
30, 1998.

        If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity  formed by them to acquire  the GMMV  interest  owned by
Kennecott)  are to provide to  Kennecott a  commitment  letter from a recognized
national  investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest), in
amount sufficient to close the Acquisition Agreement  transactions.  Such amount
is estimated by USE to be approximately $40,000,000 (for the $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.
Alternatively,  USE and USECC (or the acquiring  entity) may provide evidence to
Kennecott of a commitment letter from a bank or other  institutional or industry
entity to provide private or joint venture financing in such approximate amount.
Failure to provide  evidence of such  financial  commitment  by December 1, 1997
will  terminate  the  Acquisition  Agreement,  the  Mineral  Lease  and the Mill
Contract.

        Subject to providing evidence of adequate  financial  resources to close
the Acquisition  Agreement with funds from a public financing or otherwise,  the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.

        If  the  Acquisition  Agreement  is  not  closed,  USE  and  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.

        Capital  Requirements  - Plateau:  On August 11, 1993, USE purchased all
the outstanding shares of Plateau Resources,  Limited ("Plateau").  Plateau owns
various real estate developments in and around Ticaboo,  Utah and the Shootaring
Uranium  Mill.  Although  Crested has no ownership in Plateau,  the Directors of
Crested  and USE have  agreed  to divide  equally  one-half  of the  obligations
incurred in excess of the total $14.2  million  which was held by Plateau at the
time of the USE acquisition.  Management of Crested and USE are currently in the
process of having the Shootaring Mill license  changed to  operational.  At such
time as the mill is licensed to operate,  significant amounts of capital will be
required to place the mill and mines into  operation.  It is expected that these
funds  will  either  be  provided  by  cash  received  as a  result  of the  SMP
arbitration,  equity  financing  on the Plateau  U3O8 assets or a joint  venture
partner.

        Capital  Requirements  - Energx:  Another  requirement  of Crested's and
USE's working  capital is the  continued  funding of Energx  overhead  expenses.
Energx held several gas leases and  participated in one gas venture (on the Fort
Peck Indian reservation in Montana) with NuGas, a Canadian firm; the gas venture
required  NuGas to fund the  drilling  of the first eight  wells.  The eight gas
wells were drilled and no economic  production of gas was found. Energx does not
currently have any plans for future exploration or development drilling.

        Capital Requirements - Yellow Stone Fuels Corp. ("YSFC"):  In June 1996,
the  Company  and  USE  assisted   YSFC  in   organizing   and  funded   certain
administrative costs. The Company and USE each

                                       44

<PAGE>



own 14% of  YSFC.  The  president  and  vice  president  of YSFC are the son and
son-in-law,  respectively,  of Company's Chairman.  On May 15, 1997, the Company
and USE  signed a $400,000  convertible  promissory  note with YSFC which  bears
interest at 10% and is due December 1998. The debt is repayable at YSFC's option
in cash or its common stock.

        Long-Term  Debt  and  Other  Obligations:  Debt  at  May  31,  1997  was
$6,035,800.  Of the debt,  $6,023,400 is due to USE as a result of advances that
USE made on behalf of  Crested in the  various  mining  operations  in which the
companies  participate  jointly.  It is not  anticipated  that USE  will  demand
payment on any of this debt in fiscal 1998 unless  funds are  received  from the
arbitration  proceedings.  At May 31, 1997,  Crested signed a promissory note in
favor of USE in the amount of  $6,023,407.  The note bears interest at 6% and is
due on October 1, 1999.

        Reclamation  Costs.  Prior to fiscal  1996,  Crested 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.  The reclamation  obligations,  which
are  established  by  governmental   regulators,   were  most  recently  set  at
$1,451,800,  one half of which amount,  $725,900,  is shown on Crested's balance
sheet as a long-term obligation.

        To assure the reclamation  work will be performed,  regulatory  agencies
require  posting of a bond or other  security.  Crested and USE  satisfied  this
requirement  with respect to SMP properties by mortgaging their executive office
building in Riverton,  Wyoming.  Crested and USE have also posted a cash bond in
the  amount  of  $176,000  for  this  reclamation  bond.  Crested  and  USE  are
negotiating  with  government  agencies to decrease the  $176,000  cash bond and
either  forego  the  additional   collateral  or  take  other  real  estate  and
improvements  with equal value.  A portion of the funds for the  reclamation  of
SMP's  properties  was to have been  provided by SMP,  which agreed to pay up to
$.50 per pound of uranium  produced  from its  properties to Crested and USE for
reclamation  work.  The  status  of this  commitment  could be  impacted  by the
ultimate resolution of the litigation with SMP.

        Reclamation  obligations on the contiguous 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.  As uranium is processed through the Mill, a reclamation reserve
will be funded on a per unit of  production  basis.  Up to  $8,000,000  (in 1990
dollars) in any reclamation costs which may be incurred prior to commencement of
production or 2001 will be paid for by UNOCAL.

        Reclamation obligations of Plateau are covered by a $6,883,500 cash bond
at May 31, 1997 to the U.S. Nuclear Regulatory  Commission and a $1,622,800 cash
deposit as of May 31, 1997 for the  resolution of any  environmental  or nuclear
claims.

        Reclamation  work  on any of the  above  properties  need  not be  fully
completed  until a decision is made to abandon the  properties,  or as otherwise
required by regulatory agencies.  Reclamation and environmental costs associated
with any of these  properties  are not  expected to require  Crested  funding in
fiscal  1996,  because  such costs are not  anticipated  to be incurred for many
years.

        See Note K to the Crested  consolidated  financial  statements regarding
reclamation and environmental costs, and the funding thereof.

        Capital  Resources:  The primary source of Crested capital resources for
fiscal  1998 will be cash on hand,  advances  from  USE,  equity  financing  for
affiliated companies, the resolution of the

                                       45

<PAGE>



arbitration/litigation with Nukem and commercial debt. Additionally, Crested and
USE will  continue to offer for sale  various  non-core  assets such as lots and
homes in Ticaboo, real estate holdings in Wyoming, Colorado and Utah and mineral
interests. Fees from oil production (Ft. Peck Lustre Field, Montana), rentals of
real estate holdings and equipment, aircraft chartering and aviation fuel sales,
also will provide cash.

        Additional  sources of capital  will be needed to develop  and build the
mine and mill  complex for the Lincoln  Project,  for which  capital  costs SGMC
presently is seeking equity  financing.  There is no certainty as to the outcome
of these efforts. Continued funding of such costs could cause Crested and USE to
incur short term working capital deficiencies and increase the Company's working
capital deficit.

        Funding  of SMP  care  and  maintenance  costs  may  require  additional
capital,  depending on the outcome of the SMP  arbitration/litigation.  Although
management  is of the  opinion  that  the  SMP  arbitration/litigation  will  be
resolved in favor of Crested and USE during  fiscal  1998,  which will result in
funds being  available to fund  projects,  this  outcome is not assured.  In any
event,  further delays in resolution of the  arbitration  are expected,  and may
exacerbate short term liquidity requirements.

        Crested  believes  available  working  capital  excluding  the  debt  to
affiliates,  operating  revenues and  anticipated  financing will continue to be
adequate to fund  working  capital  requirements.  However,  Crested may require
continued  support  from USE and  additional  sources of funding to continue the
development of and investment in its various mineral ventures, as stated above.

        Although  Crested and USE currently are not in production on any mineral
properties,  development  work continues on several of their major  investments.
Crested and USE are not using hazardous  substances and 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, Crested and USE do
not have properties which require current remediation.  Crested 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,  1991 are closed  after audit by the IRS.
Crested  currently  has filed a request for an appeal  hearing on an IRS agent's
findings for the years ended May 31, 1993 and 1994. Although the findings of the
IRS audit for 1993 and 1994 will not cause any  additional  tax to become due to
the Government, the findings of the audit could affect the tax net operating los
of the Company.  Management of Crested feels confident that they will prevail on
the  majority of the issues.  No  assurance  of the outcome of the appeal can be
given.

Results of Operations

Fiscal 1997 Compared to Fiscal 1996

        Revenues for the twelve months ended May 31, 1997 totaled  $1,703,500 as
compared to revenues at May 31, 1996 of $2,509,200. This decrease in revenues of
$805,700 is primarily as a result of no revenues being  recognized  from mineral
sales in fiscal 1997 (decrease of $1,558,400). During the prior year Crested and
USE had made certain  deliveries  of U3O8 for SMP.  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  sales,  $79,300;
advance  royalties from Climax,  $103,600;  partial  distribution  of SMP funds,
$501,900, and increased management fees and other revenues, $297,300.


                                       46

<PAGE>



        With the exception of mineral operations and bad debt expense, 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.  Bad debt expense  increased as a result of a provision
for doubtful  accounts of $570,800  which was taken 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 $450,100. This increase
was as a result of increases of the equity losses in SGMC,  YSFC, and SMP. These
increases  in equity  losses  were  offset by a  reduction  in equity  losses in
Energx.  Additionally,  there was no equity income recognized from USE in fiscal
1997 while there was equity income of $73,500 in fiscal 1996.

        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.

Fiscal 1996 Compared to Fiscal 1995

        Revenues  increased by $1,349,000  to $2,509,200  for the year ended May
31,  1996.  This  increase was  primarily  due to an increase of  $1,558,400  in
mineral  sales and  option  (primarily  as a result of U3O8  deliveries  made in
fiscal 1996 to two of the utilities who have  contracts with SMP). No deliveries
were made by  Crested or USE  during  the year  ended May 31,  1995.  Due to the
litigation/arbitration  between Crested,  USE and Nukem/CRIC,  virtually all SMP
deliveries  have been in  dispute.  Certain  deliveries  are made 100% by either
partner,  while others are delivered on agreed to  percentages.  Crested and USE
have turned over any profits they have made on these  deliveries  to SMP. Due to
the difficulties between Crested, USE and Nukem/CRIC.

        The gain in mineral sales revenue  during fiscal 1996 was offset in part
by a reduction of $318,300 in gain on sale of assets. This decrease was a result
of large gains recognized on the sale of real estate in Colorado in fiscal 1995.
No  comparable  sales  took  place  during  fiscal  1996  except for the sale of
Crested's and USE's mobile home park on which a gain of $126,300 was recognized.

        Expenses from mineral  operations  increased by $958,900 to  $1,786,000.
This  increase is directly a result of the cost of U3O8 sold during fiscal 1996,
as no U3O8 was sold during fiscal 1995 due to disputes  between the SMP partners
relating  to  contract  deliveries.  This  increase  was  partially  offset by a
reduction mineral operations expense associated with mining properties.

        General and  administrative  costs and expenses increased by $204,400 to
$642,200 primarily as a result of costs associated with the SMP litigation.  The
increased costs are related to amounts paid to lawyers, expert witnesses and the
Arbitrators.

        Operations  resulted  in a before tax and equity loss in  affiliates  of
$811,000  for fiscal 1996 as compared to a loss of  $1,031,100  for fiscal 1995.
This reduction in the operating  loss is due to the increased  mineral sales and
option revenues and reduced mine property holding costs and expenses.

        Equity losses in affiliates  have been recorded using the equity method.
Please refer to Notes A and E to the consolidated  financial  statements.  After
accounting  for equity losses of $357,900 and $415,900 for fiscal 1996 and 1995,
respectively,  operations resulted in losses of $1,168,900,  $.12 per share, and
$1,447,000,  $.14 per share,  for the fiscal  years ended May 31, 1996 and 1995,
respectively.


                                       47

<PAGE>



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  Registrant  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  Registrant  when the spot market price for uranium
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  Registrant,  as the  uranium  to fill them can be  readily  obtained  at
favorable  prices.  Although such contracts  benefit SMP and the Registrant 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 Registrant. Crested believes SGMC's Lincoln Mine will
be  profitable  with  gold  prices  over $290 per  ounce.  The price of gold has
remained relatively stable over the past year between $370 and $390 per ounce.

Molybdenum and Oil.

        Changes  in prices of  molybdenum  and  petroleum  are not  expected  to
materially  affect the Registrant with respect to either its molybdenum  advance
royalties  or its  fees  associated  with  oil  production.  A  significant  and
sustained  increase  in the  price  of  molybdenum  would  be  required  for the
development of the Mt. Emmons properties by Cyprus Amax.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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


                                       48

<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,  1997 and  1996,  and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the  three  years in the  period  ended  May 31,  1997.  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,  1997 and 1996,  and the results of their  operations  and their cash
flows  for  each of the  three  years  in the  period  ended  May 31,  1997,  in
conformity with generally accepted accounting principles.




                                                   ARTHUR ANDERSEN LLP


Denver, Colorado,
August 15, 1997.

                                       49

<PAGE>




                           CRESTED CORP. AND AFFILIATE

                           CONSOLIDATED BALANCE SHEETS
<TABLE>

                                     ASSETS
<CAPTION>

                                                                         May 31,
                                                            -----------------------------
                                                                1997              1996
                                                                ----              ----
<S>                                                         <C>               <C>       
CURRENT ASSETS:
     Cash and cash equivalents                              $    37,100       $   52,600
     Accounts receivable
        Trade, net of allowance for doubtful
           accounts of $3,200 and $7,000,
           respectively                                          63,900           58,200
        Affiliates                                              596,200          141,600
     Current portion of long-term receivables (Note C)
        Related parties                                         304,000          210,100
        Other                                                    --              100,100
     Inventory and other                                         48,300           33,600
                                                            -----------       ----------
        TOTAL CURRENT ASSETS                                  1,049,500          596,200

LONG-TERM RECEIVABLES (Note F):
     Related parties                                            292,100          --
     Real estate sales, net of valuation
        allowance of $882,900                                   182,500          689,200

INVESTMENTS IN AFFILIATES,
     (Notes B and E):                                         1,796,800        4,344,700

INVESTMENT IN CONTINGENT
     STOCK PURCHASE WARRANT                                     651,000          --

PROPERTIES AND EQUIPMENT (Notes B, C, D and F):
     Land and mobile home park                                  397,400          397,400
     Buildings and improvements                               2,243,200        2,185,100
     Aircraft and related equipment                           1,640,000        1,634,700
     Developed oil properties, full cost method                 886,800          886,800
     Undeveloped mining properties                               13,900           85,400
                                                            -----------       ----------
                                                              5,181,300        5,189,400
     Less accumulated depreciation,
        depletion and amortization                           (3,017,700)      (2,832,800)
                                                            -----------       ----------
                                                              2,163,600        2,356,600

OTHER ASSETS                                                    150,200          145,800
                                                            -----------       ----------
                                                            $ 6,285,700       $8,132,500
                                                            ===========       ==========

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

                                              50

<PAGE>



                           CRESTED CORP. AND AFFILIATE

                           CONSOLIDATED BALANCE SHEETS
<TABLE>

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>

                                                                         May 31,
                                                           ----------------------------
                                                               1997              1996
                                                               ----              ----

<S>                                                       <C>               <C>
CURRENT LIABILITIES:
     Accounts payable and accrued expenses                 $   556,600      $  300,000
     Line of credit (Note G)                                    --              88,000
     Current portion of long-term debt                          12,400         --
     Debt to affiliates (Note G)                             6,023,400       6,460,300
                                                           -----------       ---------
        TOTAL CURRENT LIABILITIES                            6,592,400       6,848,300


     LONG-TERM NOTE PAYABLE                                     15,800         --

ACCRUED RECLAMATION COSTS (Note K)                             725,900         725,900

COMMITMENTS AND CONTINGENCIES (Note K)

FORFEITABLE COMMON STOCK, $.001 par value;
     issued 65,000 and 57,000 shares, respectively,
     forfeitable until earned (Note J)                          43,900          36,400

SHAREHOLDERS' EQUITY (Notes B and J):
     Preferred stock, $.001 par value;
        authorized, 100,000 shares;
        none issued or outstanding                              --             --
     Common stock, $.001 par value;
        authorized, 20,000,000 shares;
        10,237,694 and 10,156,094 shares
        issued and outstanding, respectively                    10,200          10,100
     Additional paid-in capital                              6,375,400       6,319,400
     Accumulated deficit                                    (7,477,900)     (5,807,600)
                                                           -----------       ---------
        Total shareholders' equity                          (1,092,300)        521,900
                                                           -----------       ---------
                                                           $ 6,285,700     $ 8,132,500
                                                           ===========     ===========

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

                                              51

<PAGE>



                                       CRESTED CORP. AND AFFILIATE

                                  CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                         Year Ended May 31,
                                                          -----------------------------------------------
                                                              1997              1996              1995
                                                              ----              ----              ----
<S>                                                       <C>               <C>               <C>    
REVENUES:
     Mineral sales and option (Note E)                    $  --             $ 1,558,400       $    --
     Commercial operations                                    488,300           409,000           407,900
     Oil sales                                                 82,300           105,100            97,300
     Royalties from mineral properties
        agreements (Note F)                                   103,600            --                42,700
     Gain on sale of assets (Notes D and F)                    28,900           176,700           495,000
     Interest                                                  38,500            97,300            18,100
     Distribution from affiliate in excess 
        of cost basis                                         501,900            --                --
     Management fees and other (Note C)                       460,000           162,700            99,200
                                                          -----------       -----------       -----------
                                                            1,703,500         2,509,200         1,160,200
                                                          -----------       -----------       -----------
COSTS AND EXPENSES:
     Mineral operations                                       421,500         1,786,100           827,200
     Abandoned mineral claims                                  71,500            --                --
     Provision for doubtful accounts                          570,800            --                --
     Commercial operations                                    873,500           806,900           828,200
     Oil production                                            48,400            36,300            39,000
     Interest                                                  30,900            48,700            59,100
     General and administrative                               549,300           642,200           437,800
                                                          -----------       -----------       -----------
                                                            2,565,900         3,320,200         2,191,300
                                                          -----------       -----------       -----------
LOSS  BEFORE EQUITY IN LOSS
     OF AFFILIATES AND INCOME TAXES                          (862,400)         (811,000)       (1,031,100)

EQUITY IN LOSS OF AFFILIATES (Note E)                        (807,900)         (357,900)         (415,900)
                                                          -----------       -----------       -----------
LOSS BEFORE INCOME TAXES                                   (1,670,300)       (1,168,900)       (1,447,000)

INCOME TAXES (Note H)                                         --                 --                --
                                                          -----------       -----------       -----------
NET LOSS                                                  $(1,670,300)      $(1,168,900)      $(1,447,000)
                                                          ===========       ===========       =========== 

PER SHARE AMOUNTS:

NET LOSS PER SHARE                                        $      (.16)      $      (.12)      $      (.14)
                                                          ===========       ===========       =========== 

WEIGHTED AVERAGE SHARES OUTSTANDING                        10,266,109        10,156,094        10,156,094
                                                          ===========        ==========        ==========


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

                                                   52

<PAGE>



                                  CRESTED CORP. AND AFFILIATE
<TABLE>

                        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (As Restated (Notes B and J))

<CAPTION>

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

<S>                               <C>              <C>              <C>                   <C>                 <C>         
Balance, May 31, 1994             10,156,094       $  10,100        $   6,319,400         $ (3,191,700)       $  3,137,800

Net loss                            --                --                 --                 (1,447,000)         (1,447,000)
                                  ----------       ---------        -------------         ------------        ------------
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)
                                  ==========       =========        =============         ============        ============ 


Shareholders'  Equity at May 31, 1997 does not include  65,000 shares  currently
issued but  forfeitable  if certain  conditions  are not met by the  recipients.
However,  both the "Outstanding  Shares at September 11, 1997" on the cover page
and the "Weighted Average Shares  Outstanding" on the consolidated  Statement of
Operations include the forfeitable shares.
</TABLE>

                                       53

<PAGE>



                                        CRESTED CORP. AND AFFILIATE

                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                       Year Ended May 31,
                                                          --------------------------------------------
                                                             1997             1996             1995
                                                             ----             ----             ----
<S>                                                       <C>             <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                             $(1,670,300)    $(1,168,900)     $(1,447,000)
     Adjustments to reconcile net loss to net
        cash used in  operating activities:
           Depreciation, depletion, and amortization          183,600         252,400          259,100
           Equity in loss of affiliates                       807,900         357,900          415,900
           Provision for doubtful accounts                    574,600          --                --
           Non-cash compensation                               76,300           1,600          135,200
           Gain on sale of assets                             (28,900)       (176,700)        (495,000)
           Distribution from affiliate in
             excess of cost basis                            (501,900)         --                --
           Loss on sale of investments                         --              --                8,700
           Abandonment of mineral claims                       71,500          --                --
           Net changes in:
             Accounts and notes receivable                   (457,900)        (34,500)         (31,300)
             Inventory and other assets                       (14,700)         21,700           (8,800)
             Accounts payable and accrued expenses            256,600        (629,100)       1,024,200
                                                          -----------     -----------      -----------
NET CASH USED BY OPERATING ACTIVITIES                        (703,200)     (1,375,600)        (139,000)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Reversal of deferred gain on sale of assets               --            (127,800)           --
     Proceeds from sales of marketable equity securities       --              --               23,400
     Change in investments, other                              --              --               (1,500)
     Decrease (increase) in long-term receivables           (668,400)         (73,900)           3,800
     Development of mining claims                              --              --               (1,700)
     Proceeds from sale of property and equipment             30,000          437,100          190,900
     Purchases of property and equipment                     (64,500)        (127,100)         (16,100)
     Proceeds from (investments in) affiliates             1,891,400         (575,400)        (600,800)
     Increase in other assets                                 (4,100)         (88,000)           --
                                                          -----------     -----------      -----------
NET CASH PROVIDED BY (USED IN)
      INVESTING ACTIVITIES                                 1,184,400         (555,100)        (402,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from third party debt                            --              77,600           68,900
     (Payments) proceeds on/from line of credit, net         (88,000)        (392,000)         480,000
     Increase in long-term debt                               28,200        2,343,900            --
     Proceeds from non-affiliated debt                         --              --               75,100
     Payments on long-term debt to affiliates               (436,900)         (70,600)        (160,900)
                                                          -----------     -----------      -----------
NET CASH PROVIDED BY (USED IN)
     FINANCING ACTIVITIES                                   (496,700)       1,958,900          463,100


(continued)


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

                                                    54

<PAGE>




                                        CRESTED CORP. AND AFFILIATE
<TABLE>
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (continued)
<CAPTION>

                                                                         Year Ended May 31,
                                                           --------------------------------------------
                                                               1997             1996            1995
                                                               ----             ----            ----
<S>                                                        <C>             <C>             <C>     
NET INCREASE (DECREASE) IN CASH
     AND CASH EQUIVALENTS                                    (15,500)         28,200           (77,900)

CASH AND CASH EQUIVALENTS, Beginning of year                  52,600          24,400           102,300
                                                           ---------      ----------       -----------
CASH AND CASH EQUIVALENTS, End of year                     $  37,100      $   52,600       $    24,400
                                                           =========      ==========       ===========

SUPPLEMENTAL DISCLOSURES:

     Interest paid                                         $  30,900      $   116,300      $    49,700
                                                           =========      ===========      ===========

     Income taxes paid                                     $   --         $    --          $   --
                                                           =========      ===========      ===========
     Noncash investing and financing activities:

        Issuance of common stock to officers
           and directors for services rendered             $  63,600      $     1,600      $     1,200
                                                           =========      ===========      ===========
        Note receivable on sale of property                $   --         $    --          $ 1,125,100
                                                           =========      ===========      ===========
        Offset of account receivable from related
           party against payable to parent                 $   --         $    --          $   434,000
                                                           =========      ===========      ===========
        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>

                                                    55

<PAGE>



                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995


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.  Currently,  the Company holds various real
properties  used  in  commercial  operations  and  engages  in the  exploration,
development and production of petroleum.  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").  Subsequent  to May 31,  1997,  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 L). 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 (hereafter,  "SGMC"). During
fiscal 1997, SGMC sold shares in two private  placements and the Company and USE
accepted  contingent  stock  purchase  warrants in exchange  for certain  shares
previously held in SGMC. These  activities  combined reduced the Company's share
ownership interest in SGMC to approximately 3.2% (see Notes E and F).

        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.  Expenditures  made on behalf of SMP are recorded as an investment in
SMP.  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 entire amount was applied to the
Company's  investment  in SMP.  After cost  recovery,  a total of  $501,900  was
recognized  as income by the Company  (see Note E).  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, 1997, the Company owes USE $6,023,400.


                                       56

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (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

        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 (52%
shareholder).  Investments in other companies of less than 20% are accounted for
by the cost method (see Note E). All material intercompany profits, transactions
and balances have been eliminated.

Inventory

        Inventory  consists of aviation fuel and associated  aircraft  supplies.
The inventory is carried 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 the
Company's share of cost.

        Depreciation of buildings,  improvements and other equipment is provided
by the  straight-line  and  declining-balance  methods over the estimated useful
lives of three to forty-five years.

        The  Company  capitalizes  all costs  associated  with the  acquisition,
exploration and development of mineral properties as incurred. Capitalized costs
are charged to  operations at the time the Company  determines  that no economic
ore  bodies  exist on such  properties.  Costs and  expenses  related to general
corporate overhead are expensed as incurred.

        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.  These assets are owned by various
ventures accounted for by the equity method. Accordingly, the market

                                       57

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

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).

        Proceeds from the sale of undeveloped  mineral properties are treated as
a recovery of cost with any excess of proceeds over cost recognized as gain.

        The Company  follows the full-cost  method of accounting for oil and gas
properties  whereby  all costs  incurred  in the  acquisition,  exploration  and
development of the properties,  including  unproductive  wells, are capitalized,
limited to the present value of the estimated proved reserves,  and the lower of
cost or estimated fair value of unproved properties.

        Depreciation,  depletion and  amortization of oil and gas properties are
provided by the units of production  method based on the  estimated  recoverable
reserves. All oil and gas properties were fully amortized at May 31, 1997.

        Long-lived  Assets  - The  Company  evaluates  potential  impairment  of
long-lived  assets and  long-lived  assets to be disposed of in accordance  with
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of"
("SFAS  No.  121").   SFAS  No.  121   establishes   procedures  for  review  of
recoverability, and measurement of impairment if necessary, of long-lived assets
and certain  identifiable  intangibles held and used by the entity. SFAS No. 121
requires that those assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be fully
recoverable.  SFAS  No.121  also  requires  that  long-lived  assets and certain
identifiable  intangibles to be disposed of be reported at the lower of carrying
amount  or  fair  value  less  estimated  selling  costs.  As of May  31,  1997,
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 cash and
cash equivalents,  receivables,  other current assets,  and accounts payable and
accrued expenses  approximate  fair value due to the short-term  nature of these
financial instruments.

Revenue Recognition

        Advance royalties which are payable only from future production or which
are  non-refundable  are  recognized  as revenue  when  received.  Revenue  from
commercial  operations are  recognized as goods and services are delivered.  Oil
and gas sales  revenue is  recognized  as the products are produced (see Notes D
and F).

Net Loss Per Share

        Net loss per share is  computed  using the  weighted  average  of common
shares outstanding during each period.  Stock options  outstanding are deemed to
be  common  stock   equivalents   but  have  been  excluded   because  they  are
antidilutive.  Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
which established  standards for computing and presenting earnings per share, is
effective for years

                                       58

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

ending after December 15, 1997. Management does not believe the adoption of SFAS
128 will materially affect reported earnings per share.

Income Taxes

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

        SFAS No.  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,  if deemed  necessary,  by a valuation  allowance  for any tax benefits
which, based on current circumstances, are not expected to be realized.

Reclassifications

        Certain  reclassifications have been made in the 1996 and 1995 financial
statements to conform to the classifications used in 1997.

Management's 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.

C.      RELATED-PARTY TRANSACTIONS:

        The Company does not have  employees,  but utilizes USE's  employees and
pays for one-half of the costs of these employees 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
1997,  1996 and 1995, the Board of Directors of USE contributed  24,069,  10,089
and 37,204  shares of USE stock to the ESOP at prices of $8.87,  $8.65 and $5.38
per share, respectively. The Company is responsible for one-half of the value of
these  contributions or $106,800,  $43,700 and $100,000 in fiscal 1997, 1996 and
1995, respectively.

        As of May 31, 1997,  the Company had notes  receivable  due from certain
officers  and  employees  of the Company and USE  totaling  $290,000  which bear
interest at 10% per annum and are due in fiscal  1998.  A portion of these notes
receivable are  collateralized by 160,000 shares of USE stock which are owned by
a director of the Company. In addition, the Company has receivables from certain
other  employees  of $76,600.  The Company also has  advances to  affiliates  of
$825,700.

                                       59

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)


        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 $329,900,  $116,500 and $99,200 in fiscal
1997, 1996 and 1995, respectively.

        In November 1992, the Company  entered into a sale  agreement,  and sold
certain  machinery and equipment to an affiliate.  This  machinery and equipment
was being  rented from the  affiliate  on a month- to month basis for $6,800 per
month and was charged to commercial operations in the accompanying  consolidated
statement of  operations.  The Company had deferred the gain of $127,800 on this
sale. In fiscal 1996, the affiliate was sold and USE and Crested repurchased the
same equipment from the buyer. The deferred gain offset Crested's portion of the
purchase price of the assets.

        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 14.3% 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.

        See Note J with  respect to stock grants to employees of USE who provide
services to the Company.

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; conducts oil and gas
operations;  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) to Arrowstar  Investment,  Inc.  ("Arrowstar"),  an
entity  which  is owned by  family  members  of the  Company's  chairman.  USECC
recognized  a gain of  $252,600  on this  sale of Wind  River  of  which  50% or
$126,300 is  Crested's  portion and is  reflected as a gain on sale of assets in
the accompanying statements of operations. The Company received consideration of
$765,300 for Wind River. The $765,300 was comprised of the following:

               Cash                                    $  500,000
               Note receivable                             56,000
               Debt forgiven                               47,900
               50% interest in First-N-Last LLC           161,400
                                                       ----------
                                                       $  765,300
                                                       ==========


                                       60

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

        The  debt   forgiven  was  an  amount  due  to  Arrowstar   from  USECC.
First-N-Last LLC owns and operates a convenience store near Lake Powell in Utah.
Subsequently,  USECC then transferred its acquired 50% ownership in First-N-Last
LLC to Plateau Resources Limited, a 100% owned subsidiary of USE.

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

                        CONDENSED BALANCE SHEETS - USECC

                                                          May 31,
                                            -------------------------------
                                                1997                1996
                                                ----                ----
     Current assets                         $ 1,468,100         $   735,200
     Properties and equipment                 7,858,300           7,731,500
     Undeveloped mineral properties              27,900              27,900
     Accumulated depreciation                (3,623,600)         (3,253,700)
     Other long-term assets                   2,583,500           4,514,700
                                            -----------         -----------
                                            $ 8,314,200         $ 9,755,600
                                            ===========         ===========

     Current liabilities                    $ 1,139,400         $   704,900
     Reclamation liability                    1,451,900           1,451,900
     Other liabilities                           31,500              75,000
     Venturers' capital                       5,691,400           7,523,800
                                            -----------         -----------
                                            $ 8,314,200         $ 9,755,600
                                            ===========         ===========


                   CONDENSED STATEMENTS OF OPERATIONS - USECC

                                             Year Ended May 31,
                              ----------------------------------------------
                                   1997             1996            1995
                                   ----             ----            ----
     Revenues                 $  3,043,600     $  4,855,500     $  2,225,600
     Costs and expenses         (3,963,500)      (6,789,300)      (4,453,600)
                              ------------     ------------     ------------
     Net loss                 $   (919,900)    $ (1,933,800)    $ (2,228,000)
                              ============     ============     ============

                                       61

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

E.      INVESTMENTS IN AFFILIATES:

        The Company's investments in affiliates are as follows:

                                            Carrying Value at May 31,
                                    ----------------------------------------
                                    Ownership         1997            1996
                                    ---------         ----            ----
Equity Method Investments:
     GMMV                               25%       $  116,300      $   116,300
     SGMC*                             3.2%          417,800        1,190,600
     SMP (Notes F and K)                25%            --           1,383,900
     ENERGX Ltd.                        45%           62,900           90,300
     YFI (YSFC)                         14%         (122,400)          --
     USE (Note B)                        8%        1,316,700        1,558,100
     Others                         various            5,500            5,500
                                                  ----------      -----------
                                                  $1,796,800      $ 4,344,700
                                                  ==========      ===========
     *Approximately 9% in 1996.

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

                                               Year Ended May 31,
                                  -----------------------------------------
                                     1997            1996            1995
                                     ----            ----            ----

     YFI (YSFC)                   $(122,400)     $  --           $  --
     GMMV                           --              --              --
     SGMC                          (121,800)        (39,700)        (37,500)
     SMP (Note F)                  (264,900)       (211,300)       (219,600)
     ENERGX, LTD.                   (27,400)       (180,400)         (5,000)
     USE                           (271,400)         73,500        (153,800)
                                  ---------      ----------      ----------
                                  $(807,900)     $ (357,900)     $ (415,900)
                                  =========      ==========      ==========

        There are currently  litigation  and  arbitration  proceedings  with the
Company's  partner  in the SMP  partnership,  as  discussed  further  in Note K.
Because of the  litigation  and  arbitration,  the Company has been  required to
advance  funds to SMP for  standby  mine  care and  maintenance,  the  rental of
certain mining equipment and administrative costs.

        SMP has entered into  various  market  related and base price  escalated
uranium  sales   contracts  with  certain   domestic   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 or decreased by the  utilities.
Until the disputes  between the SMP partners are  resolved,  the Company and USE
are  arranging  for the purchase  and  delivery of their  portion of some of the
contracts or are allowing Nukem and CRIC to make the balance of the  deliveries.
The  deliveries  will be  satisfied  either  by  purchases  in the spot  market,
existing  purchase  contracts,  uranium  inventories  or by  producing  from SMP
properties, if and when a mill becomes available. Most market

                                       62

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

related sales contracts can be settled through spot market  purchases.  The last
delivery  under the remaining base price sales contract was made in May 1996 and
exceeded the spot market price as of May 31,  1996.  Revenues  from such uranium
sales  of  $1,383,400  have  been  included  in  the  accompanying  consolidated
statements of operations  for the year ended May 31, 1996,  which would normally
have been sales of SMP.  All sales  contracts  were  filled by Nukem in 1997 and
1995,  and as a result,  no revenues from uranium sales were  recognized  during
1997 and  1995.  The cash  from  uranium  sales is  accumulating  in SMP's  bank
accounts  and is subject to the Order and Award of the  arbitration  proceedings
with Nukem/CRIC discussed in Note F.

        Condensed  combined   financial   statements  of  the  Company's  equity
investees  include the GMMV,  SMP,  Energx,  Ltd., SGMC and USE for fiscal 1997,
1996 and 1995. GMMV and SGMC are in the development stage and have not commenced
operations.  GMMV expenses certain general and  administrative,  maintenance and
holding costs.  However,  the Company has not  recognized  equity losses in GMMV
because  Kennecott  was  committed  to fund  100% of the first  $50  million  of
development  and operating  costs of this joint  venture.  Subsequent to May 31,
1997, the Company and USE entered into an agreement with Kennecott  whereby they
may be able to  purchase  Kennecott's  interest  in the GMMV (see  Note L).  The
Company's  investment  in  GMMV of  $116,300  in the  accompanying  consolidated
balance  sheets is  substantially  lower than its equity basis in GMMV.  SGMC is
considered an equity  investment  because of the combined control exerted by USE
and the Company.

                       CONDENSED COMBINED BALANCE SHEETS:
                                EQUITY INVESTEES

                                                  1997               1996
                                                  ----               ----
Current assets                              $  25,904,200       $  11,292,700
Non-current assets                            106,624,800          91,884,400
                                            -------------       -------------
                                            $ 132,529,000       $ 103,177,100
                                            =============       =============
Current liabilities                         $  24,363,500       $   9,952,200
Reclamation and other liabilities              45,694,300          48,928,000
Excess in assets                               62,471,200          44,296,900
                                            -------------       -------------
                                            $ 132,529,000       $ 103,177,100
                                            =============       =============

                  CONDENSED COMBINED STATEMENTS OF OPERATIONS:
                                EQUITY INVESTEES

                                  1997                1996             1995
                                  ----                ----             ----
Revenues                      $  6,648,200       $ 10,195,400      $  5,163,800
Discontinued operations           --                2,604,600           296,200
Costs and expenses             (13,188,200)       (13,901,100)       (8,902,400)
                              ------------       ------------      ------------
Net loss                      $ (6,540,000)      $ (1,101,100)     $ (3,442,400)
                              ============       ============      ============

                                       63

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

F.      MINERAL TRANSACTIONS AND MINING PROPERTIES:

GMMV

        During fiscal 1991,  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  $50,000,000 of development  and
operating costs.  Before the mineral  properties were contributed to the GMMV, a
portion of the Green Mountain  Properties was owned by USE and the remainder was
owned by USECC.

        The  Boards of  Directors  of the  Company  and USE  adopted a method of
apportioning the initial consideration of $15,000,000,  on a ratio of 16% to the
Company and 84% to USE.  This  division  was based on analyses of the  projected
cash flows from the properties contributed by USE and USECC and other criteria.

        Kennecott committed to fund 100% of the first $50,000,000 of development
costs and operating expenses of the GMMV joint venture. Kennecott also committed
to pay additional amounts if certain future operating margins are 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 GMMV. Because USE owned
all of the claims on that  portion of the Green  Mountain  Properties  where the
Round Park (Jackpot) uranium deposit was delineated, the Company has no interest
in GMMV's cash flow from the ore produced in mining operations on the Round Park
properties, which have been scheduled for initial development.

        GMMV has  incurred  approximately  $20,416,400  in the  development  and
operations of the above uranium  mineral  properties  through May 31, 1997. This
was funded by Kennecott out of the $50,000,000 funding commitment. As previously
mentioned, the Company's carrying value of its investment in GMMV is $116,300 at
May 31,  1997,  which is  substantially  lower  than its  equity  basis in GMMV.
Reclamation  obligations  of GMMV are  discussed in Note K.  Development  of the
properties and pursuit of mining  permits  continues in  anticipation  of future
uranium price increases.

        On June 23, 1997,  USE and USECC signed an  Acquisition  Agreement  with
Kennecott for the right to acquire  Kennecott's  interest in the Green  Mountain
Mining Venture ("GMMV") for $15,000,000 and other consideration.  Kennecott paid
USE and USECC a $4,000,000  bonus 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.

        The  $16,000,000  loan  being  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 April 1999 until paid in full. The Note is 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;

                                       64

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

however,  the Note is payable  (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").  USE and USECC will assume the Note, and the assets of the
GMMV will be subject to the Mortgage, at closing of the acquisition.

        Pursuant to the Mineral Lease and the Mill  Contract of the  Acquisition
Agreement,  USECC is to expend the funds in developing 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 loan
being provided 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 advanced under
the  $16,000,000  loan  to be  provided  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 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  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 loan and the Mortgage) from and
after the closing. Under very limited circumstances,  the scheduled closing date
may be postponed to another date not later than October 30, 1998.

        If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity  formed by them to acquire  the GMMV  interest  owned by
Kennecott)  are to provide to  Kennecott a  commitment  letter from a recognized
national  investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest), in
amount sufficient to close the Acquisition Agreement  transactions.  Such amount
is estimated by USE to be approximately $40,000,000 (for the $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).
Alternatively,  USE and USECC (or the acquiring  entity) may provide evidence to
Kennecott of a commitment letter from a bank or other  institutional or industry
entity to provide private or joint venture financing in such approximate amount.
Failure to provide  evidence of such  financial  commitment  by December 1, 1997
will  terminate  the  Acquisition  Agreement,  the  Mineral  Lease  and the Mill
Contract.


                                       65

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

        Subject to providing evidence of adequate  financial  resources to close
the Acquisition  Agreement with funds from a public financing or otherwise,  the
$4,000,000  signing bonus paid by Kennecott is  nonrefundable  and will serve to
reduce USE and Crested's ultimate $15,000,000 purchase obligation.

        If  the  Acquisition  Agreement  is  not  closed,  USE  and  USECC,  and
Kennecott,  shall  continue to own their  respective  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 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 the Company,  through USECC, entered into an
agreement to sell a 50% interest in their Sheep  Mountain  properties,  to Nukem
through  its  wholly-owned  subsidiary  Cycle  Resource  Investment  Corporation
("CRIC").  USECC and CRIC each contributed their 50% interests in the properties
to a  newly  formed  Colorado  partnership,  Sheep  Mountain  Partners.  SMP was
established to further develop and mine the uranium claims on Sheep Mountain, to
market uranium and acquire additional uranium sales contracts.  Certain disputes
have arisen between USECC and CRIC and its parent Nukem, Inc. over the formation
and operation of SMP. These disputes have been in litigation/arbitration for the
past six years. In the arbitration,  the American Arbitration  Association Panel
issued its Order and Award  during  fiscal 1996.  On June 27,  1997,  the United
States District Court entered its Second Amended  Judgment  confirming the Order
and Award and including the equitable portion of the Order and Award. Nukem/CRIC
filed a motion for  clarification  and/or limited  remand.  The Court denied the
motion and Nukem has until September 12, 1997 to determine if it will appeal the
Second Amended Judgment to the Tenth Circuit Court of Appeals. See Notes E and K
for  a  description   of  the   investment  and  a  discussion  of  the  related
litigation/arbitration.

AMAX Transactions

        During  prior years,  the Company and USE  conveyed  interests in mining
claims to AMAX Inc.  ("AMAX")  in  exchange  for cash,  advance  and  production
royalties,  and other consideration  including interest-free loans, due in 2010.
In connection with a renegotiation  of various rights and duties of the parties,
AMAX agreed to amortize  the  principal  amount of those  loans.  The loans were
completely  amortized  in fiscal  1994.  AMAX was  acquired  by Cyprus  Minerals
Corporation  in November 1993 and is now doing  business as Cyprus Amax Minerals
Company ("Cyprus Amax").  AMAX and its successor Cyprus Amax have not placed the
properties into production as of May 31, 1997.

        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.  Under the terms of the initial  agreement  with AMAX,  if AMAX
sells  the  properties,  the  Company  and USE  will  receive  15% of the  first
$25,000,000 received by AMAX.


                                       66

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

        In addition,  Cyprus Amax now pays the Company and USE jointly 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  $103,600,  $-0- and
$42,700 of revenues from the advance  royalty  payments in fiscal 1997, 1996 and
1995, respectively.

        USE and Crested held an option to purchase  certain real estate  located
in Gunnison 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.  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, a Park City, Utah developer, for sale of the 57 acres, and
a separate parcel owned in Gunnison County, Colorado.

        The first option (exercised by Gunnison Center Properties LLC in January
1995)  was for 57  commercial  and  noncommercial  zoned  acres  in the  City of
Gunnison, Colorado; the net purchase price was $970,300. This resulted in a gain
for the  Company of  $491,100.  Pangolin  paid  $345,000  cash and  $625,300  in
nonrecourse  promissory  notes.  The first note for  $137,900 was paid in fiscal
1995.  The second note for $487,366 was a three year  promissory  note,  bearing
interest at 7.5% per year and calling for interest only payments in January 1996
and 1997 with the  balance  due in January  1998,  of which $0 and  $35,600  was
received during fiscal 1997 and 1996, respectively. Effective December 1, 1996 a
replacement  promissory note was given to USE and Crested by Contour Development
Company LLC in the principal  amount of $454,900  payable January 1998,  bearing
interest at the rate of 7.5% per annum, and secured by Contour's 73% interest in
a limited  liability  company  owning a 2.93 acre  subdivided lot in the City of
Gunnison currently approved for development of an 87 unit apartment project.  As
of May 31,  1997  the  second  note  had an  outstanding  principal  balance  of
$451,865,  of which  Crested's  50% portion,  or  $225,932,  is reflected in the
accompanying  consolidated  balance  sheet,  before  a  valuation  allowance  of
$43,400.

        The second  option  covered  472.5 acres of ranch land  northwest of the
City of Gunnison,  Colorado and was exercised by Castle Mountain  Ranches LLC in
May 1995 (purchase  price  $822,460).  Pangolin paid $10,000 for the option;  on
option exercise and closing, Pangolin paid $36,090 in cash for 22 acres and gave
Crested two nonrecourse  promissory notes totalling  $776,370,  each due May 30,
1998, and secured by the remaining acreage.  One note for $145,500 bore interest
at the rate of 7.5% per annum until August 28, 1995 and  thereafter  at the rate
of 12% per annum  until paid.  A principal  payment in the amount of $35,000 was
due on May 30, 1996 but was not paid. The second note for $630,873 bore interest
at the rate of 7.5% per annum with  interest  only payments due May 30, 1996 and
May 30, 1997 and principal and interest due at maturity.  Effective  December 1,
1996 a  replacement  note  from  Contour  Development  Company  LLC was given to
Crested in the  principal  amount of  $872,508  bearing  interest at the rate of
8.39% per  annum  until May 30,  1997,  at which  time a  principal  payment  of
$128,138, together with accrued interest, was due, but was not paid. As a result
of Contour's  default in the payment due May 30, 1997,  Crested has declared the
entire  principal  balance of this note to be due and payable and has declared a
default in the pledge of Contour's 73% interest in the limited liability company
building the apartment  project in the City of Gunnison.  Crested recorded a bad
debt expense of $527,300 and a reversal of deferred gain of $312,100 as a result
of Contour's default and has established a

                                       67

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

corresponding  valuation  allowance  against  the  receivable  in the  amount of
$839,500.  Crested and USE are currently  evaluating  their  potential  remedies
against Contour (which may include litigation).

Sutter Gold Mining Company

        Sutter Gold Mining Company ("SGMC") acquired  indirect  ownership of the
Sutter  Gold  Venture  ("SGV") a joint  venture  between  USE and SRRI formed to
acquire,  hold and develop  mineral  leases and mining claims in Amador  County,
California  (the "Lincoln  Project").  On December 14, 1990,  Crested  purchased
one-ninth of USE's beneficial  interest in the SGV Properties  hereinafter fully
described, for $500,000 and the commitment to fund one-ninth of the future costs
and  liabilities.  USE and Crested formed USECC Gold Limited  Liability  Company
("USECC Gold") which became the joint venturer with SRRI on the Lincoln Project.
USECC Gold was owned 88.89% by USE and 11.11% by Crested.  SGMC was  established
to conduct  operations  on mining  leases and to produce  gold from the  Lincoln
Project.

        USE (i) funded  $4,500,000  of the  $5,000,000  purchase  price of SGV's
properties;   (ii)  agreed  to  initially  fund  SRRI's  share  of  holding  and
development  costs totaling  $500,000;  and (iii) agreed to provide its share of
the holding costs and  assessments of SGV.  SRRI,  the second  venture  partner,
through a subsidiary, funded $500,000 of the property purchase price, and agreed
to pay $2,000,000 to USE to equalize the  investments so that USE and SRRI would
each  initially  hold 50%  interests  in SGV. USE was to recover the $500,000 of
predecessor  holding costs and SGV's initial development costs paid by them, out
of SGV's initial cash flows.

        SRRI issued a $2,000,000 note to USE, bearing interest at 10% per annum.
The note provided that $500,000 of principal and accrued  interest was due April
12, 1991, and the balance of $1,500,000  with interest was due October 12, 1991.
In  February  1991,  USE and Crested  formed  USECC Gold and  transferred  their
respective interests in the Lincoln Project to USECC Gold. When the installments
on the  $2,000,000  note to USE were not paid when due,  the  interests of USECC
Gold and SRRI in SGV were  adjusted to equal the  percentage  of the  $5,000,000
purchase price of SGV's properties that each of them provided. On July 16, 1991,
the  50%  interest  of  SRRI in SGV was  reduced  to 40%,  with a  corresponding
increase in the USECC Gold interest to 60%. On October 12, 1991, SRRI's interest
was further  reduced to 10% and USECC Gold's  interest  increased to 90%. On May
23, 1994,  SRRI released its remaining 10% interest and issued 400,000 shares of
SRRI common stock to USE in exchange  for the release of all SRRI's  liabilities
relating  to SGV and USECC  Gold.  Accordingly,  SRRI's  capital  investment  of
$257,900 and all  liabilities of SGV to USE and its affiliates on behalf of SRRI
totaling  $1,550,600  were  transferred to USECC Gold's capital  investment.  In
addition, SGV released SRRI of its obligation to SGV totaling $1,970,500,  which
included accrued but unrecorded interest of approximately $579,800.

        SGMC was  incorporated in Wyoming in January 1994 and on August 5, 1994,
USE,  Crested and SGMC entered  into an  agreement  whereby USE and Crested each
conveyed their eight-ninths and one-ninth interest,  respectively, in USECC Gold
in  exchange  for common  shares of SGMC.  USE and Crested  ultimately  received
approximately  100% of the outstanding  shares of SGMC's common stock, for their
eight-ninths and one-ninth interest, respectively, in USECC Gold.


                                       68

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

        SGMC is in the development stage and additional  development is required
prior to the commencement of commercial production. SGMC has yet to generate any
significant revenue and has no assurance of future revenue.  During fiscal 1992,
SGV shipped a bulk sample of gold ore mined during development  operations to an
independent  mill  to  determine  mill   availability  and  assay   information.
Approximately  1,400 ounces of gold were  recovered and sold. The related mining
costs were recognized.  All acquisition and other mine  development  costs since
inception  have been  capitalized.  Since test  production in 1992, SGV and SGMC
have focused their efforts on obtaining a reserve study, developing a mine plan,
acquiring  permits,  seeking  financing  and pursuing a partner to assist in the
financing of its mineral development and ultimate production. SGMC will continue
to be  considered  in the  development  stage  until  such time as it  generates
significant revenue from its principal operations.

        Since  inception,   the  Company  and  USE  have  funded   approximately
$7,858,900  in  development  and holding  costs.  These costs were funded by the
Company and USE on a one-ninth/eight-ninths  basis, respectively.  As of May 31,
1997, the Company's total investment in SGMC had a carrying value of $1,068,800.

        During  May 1996,  SGMC  issued  shares of its  common  stock to certain
individuals,  including a related  party for total  proceeds  of  $98,600.  Such
shares were  authorized to be sold by SGMC in October 1995 to raise funds to pay
for legal and other costs of a possible future equity  financing.  Subsequent to
the above issuance of shares, USE and Crested owned 74% and 9%, respectively, of
SGMC.

        During  the  first  and  second  quarters  of  fiscal  1997,  SGMC  sold
additional shares of its common stock in a private placement.  These shares were
sold for $3.00 per share.  SGMC  received  $1,106,600  in net proceeds from this
equity placement.

        During the fourth  quarter of fiscal  1997,  management  of SGMC entered
into an Engagement Letter with a different underwriter in Toronto to complete an
offering of additional shares of SGMC's common stock,  which closed in May, 1997
raising  approximately  $5,404,500 in net cash  proceeds.  At the  underwriter's
request,  the initial  investors  (including USE and the Company) agreed to have
the amount of their common shares 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 this offering,  USE and Crested accepted a Contingent
Stock Purchase Warrant ("USECC Warrant") dated March 21, 1997 which provides USE
and Crested 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),  valued at the  greater  of $4.07 per  share or the then  market  value as
defined.. The USECC 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 USECC Warrant is only  exercisable to the extent proven and
probable ore  reserves,  as defined in the USECC  Warrant,  in excess of 300,000
ounces are added to SGMC's reserves.  In addition,  SGMC shall have the right to
satisfy the  exercise of all or any  portion of the USECC  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  (limited to a maximum of 700,000  ounces).  The
USECC  Warrant  benefits  USE  and  Crested  on a  basis  of  88.9%  and  11.1%,
respectively.

                                       69

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

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.

Plateau Resources Limited

        Effective  August 11, 1993, 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.  "(CHI")  in
southeastern Utah. USE paid nominal cash consideration for the Plateau stock and
agreed  to  assume  all  environmental   liabilities  and  reclamation   bonding
obligations. Prior to closing the agreement, Plateau transferred $2,500,000 cash
to  fund  the  NRC  Surety   Trust   Agreement  to  pay  future  costs  of  mill
decommissioning,  site reclamation and long-term site surveillance. Plateau also
transferred  $4,800,000  cash to an Agency  Agreement  to  indemnify  the seller
against possible  environmental  or nuclear claims.  At the date of acquisition,
Plateau held an additional  $6,900,000 of unencumbered  cash to be used for care
and maintenance costs on the mill and other assets acquired. As of May 31, 1997,
most of the  unencumbered  cash has been used for care and maintenance  costs or
was  loaned to USE for  development  of certain  properties  held by USE and the
Company.  Although  the Company has no  ownership  in Plateau,  Directors of the
Company  and USE have  agreed  to divide  equally  one-half  of the  obligations
incurred in excess of the total  $14,200,000  described  above and will share in
one-half of all cash flows derived from operations of these assets.

        On August 25, 1994, Plateau Resources Limited, a wholly-owned subsidiary
of USE,  signed a letter of intent with a third  party to sell part  interest in
Canyon Homesteads,  Inc. ("CHI"), a wholly-owned  subsidiary of Plateau,  and to
develop the Ticaboo Townsite,  in south central Utah and other resort properties
near Lake Powell.  The purchaser later defaulted and the $100,000  earnest money
deposit was recognized as income in fiscal 1995 by Plateau.

        CHI entered  into a joint  venture,  First-N-Last  LLC,  with  Arrowstar
Investments,  Inc. ("Arrowstar") to develop on a 50/50 basis, certain properties
at the  Ticaboo  Townsite.  Arrowstar  is owned by certain  shareholders  of the
Company.  During 1996,  Arrowstar  gave its 50% interest in First- N-Last LLC to
USECC as part of the  consideration  for Wind  River  (see Note D).  USECC  then
transferred  its 50%  ownership in  First-N-Last  LLC to Plateau.  As of May 31,
1997, Plateau/CHI owns 100% of First-N-Last, LLC.

Energx, Ltd.

        During  fiscal  1994,  USE and  Crested  formed  Energx to engage 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 1995, Energx sold a 50% interest in the leases on the Fort
Peck Indian  Reservation  for the sum of $200,000  plus $100,000 to be used only
for the acquisition and consolidation of additional

                                       70

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

leases, and for committing to drill 8 exploratory wells. Eight exploratory wells
were drilled. No further activity is planned for this project.

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

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,
1997). The weighted average interest rate for 1997 and 1996 was 10.25%. The line
of credit had an outstanding balance for the Company and USE jointly of $-0- and
$176,000  as of May 31,  1997 and 1996,  respectively,  of which  Crested's  50%
portion  is $-0- and  $88,000.  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 and due on October 1, 1999.  The debt is  primarily  due to U.S.
Energy  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,
1996 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.

                                                                May 31,
                                                  ------------------------------
                                                      1997               1996
                                                      ----               ----
     Notes payable - U.S. Energy, 6% interest
        balance payable in full on
        demand (see Note A)                       $   6,023,400      $ 6,460,300
     Note payable to bank, 8.75% interest,
        balance due July 1, 1999                         28,200          --
                                                  -------------      -----------
           Total                                  $   6,051,600      $ 6,460,300
     Less - current portion                           6,035,800        6,460,300
                                                  -------------      -----------
                                                  $      15,800      $   --
                                                  =============      ===========


                                       71

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

H.   INCOME TAXES:

     The  components  of  deferred  taxes  as of May 31,  1997  and  1196 are as
follows:
<TABLE>
<CAPTION>
                                                                    May 31,
                                                      -------------------------------
                                                          1997                1996
                                                          ----                ----
<S>                                                   <C>                <C>         
     Deferred tax assets:
        Deferred compensation                         $     86,300       $     20,300
        Deferred gains                                     476,200            106,100
        Litigation settlements                             179,300             --
        Net operating loss carryforwards                 3,814,200          3,756,900
        Tax credits                                         83,000             83,000
     Capital loss carryforwards                             --                297,100
                                                      ------------       ------------
     Total deferred tax assets                           4,639,000          4,263,400

     Deferred tax liabilities:
        Accelerated depreciation for tax                  (309,600)          (447,500)
        Development and exploration costs                  (42,700)           (35,500)
                                                      ------------       ------------
     Total deferred tax liabilities                       (352,300)          (483,000)
                                                      ------------       ------------
     Net deferred tax assets - all non-current           4,286,700          3,780,400

     Valuation Allowance                                (4,286,700)        (3,780,400)
                                                      ------------       ------------
     Net deferred tax asset                           $     --           $     --
                                                      ============       ============
</TABLE>

        At May 31,  1997,  the Company  had  available,  for federal  income tax
purposes,  net operating loss  carryforwards of approximately  $11,200,000 which
expire  in  2006  through  2012  and  investment  tax  credit  carryforwards  of
approximately  $83,000  which,  if not used,  will begin to expire in 1998.  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 1997,  1996 and 1995, 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:


                                       72

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)
<TABLE>
<CAPTION>

                                                        Year Ended May 31,
                                           -----------------------------------------
                                              1997            1996            1995
                                              ----            ----            ----
<S>                                        <C>             <C>             <C>       
Expected federal income tax benefit        $(453,700)      $(397,400)      $(491,900)
Capital loss carryforward                      --             --             269,900)
Other                                        (52,600)       (204,500)        (37,900)
Valuation allowance                          506,300         601,900         799,700
                                           ---------       ---------       ---------
Income taxes                               $   --          $  --           $   --
                                           =========       =========       =========
</TABLE>

        There were no taxes payable as of May 31, 1997, 1996 or 1995.

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

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
operations of an airport  fixed base  operation.  The  following is  information
related to industry segments:


                                       73

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (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, 1997            $   24,600      $2,139,000      $  2,163,600
                                                   ==========      ==========
Investments in affiliates                                                             1,798,800
Corporate assets                                                                      2,323,300
                                                                                   ------------
     Total assets at May 31, 1997                                                  $  6,285,700
                                                                                   ============
Capital expenditures                               $  --           $   64,500
                                                   ==========      ==========
Depreciation, depletion and
     amortization                                  $  --           $  184,900
                                                   ==========      ==========
</TABLE>


                                       74

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (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, 1996            $   96,100      $2,294,900         2,391,000
                                                   ==========      ==========
Investments in affiliates                                                             4,344,700
Corporate assets                                                                      1,396,800
                                                                                    -----------
     Total assets at May 31, 1996                                                   $ 8,132,500
                                                                                    ===========
Capital expenditures                               $   --          $  127,100
                                                   ==========      ==========
Depreciation, depletion and
     amortization                                  $   --          $  249,100
                                                   ==========      ==========
</TABLE>


                                               75

<PAGE>


                                  CRESTED CORP. AND AFFILIATE

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 1997, 1996 and 1995
                                          (continued)
<TABLE>
<CAPTION>

                                                              Year Ended May 31, 1995
                                                                   Commercial
                                                     Minerals      Operations      Consolidated

<S>                                                <C>             <C>             <C>         
Revenues                                           $   42,700      $  407,900      $    450,600
                                                   ==========      ==========
Interest and other revenues                                                             709,600
                                                                                   ------------
     Total revenues                                                                $  1,160,200
                                                                                   ============
Operating loss                                     $ (784,500)     $ (420,300)     $ (1,204,800)
                                                   ==========      ==========
Interest and other revenues                                                             709,600
General corporate and other expenses                                                   (535,900)
Equity loss in affiliates                                                              (415,900)
                                                                                   ------------
     Loss before income taxes                                                      $ (1,447,000)
                                                                                   ============
Identifiable net assets at May 31, 1995            $    96,100     $2,714,300      $  2,810,400
                                                   ==========      ==========
Investments in affiliates                                                             4,127,200
Corporate assets                                                                      1,160,200
                                                                                   ------------
     Total assets at May 31, 1995                                                  $  8,097,800
                                                                                   ============
Capital expenditures                               $     1,700     $   16,100
                                                   ==========      ==========
Depreciation, depletion and
     amortization                                  $    --         $  259,100
                                                   ==========      ==========
</TABLE>

        During fiscal 1996, 89% of mineral  revenue were from sales of minerals.
There were no mineral sales in fiscal 1997 or 1995.

        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.  Such
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,  1997,  1996 and 1995,  the  Company
recognized compensation expense of $76,300,  $59,800 and $35,300,  respectively,
resulting  from these  issuances.  A  schedule  of  forfeitable  shares for both
Crested and USE is set forth in the following table.


                                       76

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                          (continued)

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

    May 1990              40,300        USE         $  9.75          $392,925
    June 1990             66,300        USE           11.00           729,300
    November 1990
      (stock dividend)    10,660        USE            N.A.             N.A.
    June 1990             25,000        Crested        1.06            26,562
    December 1990          7,500        Crested         .50             3,750
    January 1993          18,520        USE            3.00            55,560
    January 1993           6,500        Crested         .22             1,430
    January 1994          18,520        USE            4.00            74,080
    January 1994           6,500        Crested         .28             1,828
    January 1995          18,520        USE            3.75            69,450
    January 1995           6,500        Crested         .19             1,219
    January 1996           7,700        USE           15.125          116,462
    January 1996           5,000        Crested         .3125           1,562
    January 1997          36,832        USE           11.02           405,830
    January 1997           8,000        Crested         .9375           7,500

        No shares were earned out in fiscal 1997 or 1996.  During  fiscal  1993,
the Company's Board of Directors amended the stock bonus plan. As a result,  the
earn out dates of certain  individuals were extended until retirement,  which is
the earn out date of the amended  stock bonus  plan.  The amended  plan grants a
stock-bonus of 20% of the previous plan per year for five years.

        In April 1993,  the Board of  Directors  of the Company  authorized  the
Company  to issue  160,000  shares of its  common  stock at $.27 per share to an
affiliate for cash in an effort to increase the Company's operating capital. The
Company also granted this  affiliate  options for 300,000  common shares at $.40
per share.  These options are exercisable  over a five year period.  During 1996
this affiliate was sold to an unrelated third party,  but the shares and options
were  transferred  to other  affiliated  entities,  SGMC and  Plateau  Resources
Limited.

        In May 1996,  the Board of Directors of U.S.  Energy  approved an annual
incentive  compensation  arrangement for its CEO and four other officers of U.S.
Energy  payable in shares of U.S.  Energy  common  stock.  The  arrangement  was
subject to  approval of the formal  1996 Stock  Award  Program by the  Company's
shareholders  in December 1996. The shares are to be issued  annually,  starting
January 15,  1997,  as long as each  officer is employed  by USE,  provided  the
Company has been  profitable  in the  preceding  fiscal year.  The officers will
receive up to an  aggregate  total of 67,000  shares per year for the years 1997
through 2002. One-half of the compensation under the 1996 Stock Award Program is
the  responsibility  of Crested.  The number of shares  awarded each year out of
such 67,000 shares aggregate annual limit will be based on earnings per share of
Common  Stock to be  determined  in the plan,  and in  addition  is  subject  to
approval by the  shareholders of the Company for each award each year. In fiscal
1997, 14,158 share were authorized for issuance by shareholder  approval to five
officers of USE.  The Stock Award  Program was modified to reflect the intent of
the directors of USE which was to provide

                                       77

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

incentive to the  officers of the Company and USE to remain with the  Companies.
The shares under the plan therefore became  forfeitable until retirement,  death
or  disability  of the  officer.  The shares are held in trust by the  Company's
treasurer and are voted by the non-employee directors of USE. Additionally,  the
modified plan delegates the  responsibility  of determining the number of shares
to be issued to USE's  Compensation  Committee  and  eliminates  the  previously
required vote of shareholders to approve the issuance. All such modifications to
the 1996 Stock Award Program will be voted on by the  shareholders of USE at the
1997 Annual Meeting.

K.      COMMITMENTS, CONTINGENCIES AND OTHER:

Legal Proceedings

Sheep Mountain Partners (SMP)

        Arbitration   Proceedings   Concerning   SMP.  In  June  1991,   Nukem's
wholly-owned   subsidiary  Cycle  Resource   Investment   Corporation   ("CRIC")
instituted  arbitration  proceedings  against the Company and USE.  CRIC claimed
that  the  Company  and  USE  violated  the  Sheep  Mountain   Partners  ("SMP")
partnership  agreement by assigning to the Green Mountain  Mining Venture (GMMV)
the amounts equal to any SMP cash  distributions  to USECC derived from sales of
uranium under SMP supply contracts. CRIC also asserted that by entering into the
GMMV agreement,  the Company and USE  misappropriated a business  opportunity of
SMP. CRIC sought damages and certain equitable remedies from the Company and USE
and sought to expel the Company and USE from the SMP Partnership.

        Federal Court Action  Concerning  SMP. On July 3, 1991,  the Company and
USE d/b/a USECC  filed a civil  action in the U. S.  District  Court of Colorado
against Nukem,  CRIC and their  affiliates,  alleging that Nukem, CRIC and their
affiliates fraudulently  misrepresented facts and concealed information from the
Company and USE to induce their entry into the  agreements  forming SMP and seek
rescission,  damages and other relief.  The Company and USE further alleged that
Nukem and CRIC have refused to provide  information  about  transactions by CRIC
and its  affiliates  with SMP,  and that the  defendants  had engaged in various
wrongful acts relating to financing and  acquisition  of uranium for SMP.  Nukem
and CRIC filed an answer and a variety of counterclaims  against the Company and
USE. 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 and also ordered the Company
and USE to amend their complaint. On April 6, 1992, the Company and USE filed an
amended  complaint  against  Nukem and CRIC  setting out the alleged  fraud with
particularity, and Nukem and CRIC filed answers and counterclaims to the amended
complaint.

        State Court Action  Concerning SMP. On September 16, 1991, USECC filed a
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 in south-central  Wyoming.  On May
11,  1993,  the Denver  District  Court  stayed all  proceedings  until the U.S.
District Court for Colorado case is resolved.


                                       78

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

        Summary. The discovery stage in the case filed by the Company and USE on
July 3, 1991 in the U. S. District Court of Colorado  against Nukem,  CRIC et al
has been  protracted  and  vigorously  contested by all parties.  On November 6,
1993,  the  remaining  parties in that  suit,  Nukem and CRIC,  agreed  with the
Company and USE that the majority of the litigation post the formation of SMP on
December 21, 1988,  would be handled  through  consensual  arbitration  with the
American Arbitration Association ("AAA"). The agreement to arbitrate was finally
reduced to writing and  executed on February 7, 1994.  The  arbitration  hearing
commenced on June 27, 1994 before a three member AAA arbitration panel. After 73
hearing days and some 15,000 pages of testimony,  the parties rested their cases
on May 31,  1995.  Per order of the Panel,  the  parties  filed  their  proposed
Findings of Fact and  Conclusions of Law, Award and a brief of the law on August
7,  1995.  Each  side  submitted   responsive  proposed  findings  of  fact  and
conclusions of law,  responsive proposed award and reply briefs by September 21,
1995.

        The Panel  entered  its  Order  and Award on April 18,  1996 but did not
dissolve  the  Partnership.  Nukem  objected  to the Award by filing two motions
indicating there was a material  miscalculation and a double recovery.  The U.S.
District Court remanded the matter to the Arbitration  Panel to consider Nukem's
motions.  On July 3, 1996,  the Panel  found there was not double  recovery  and
confirmed  the Order and Award,  which  awarded  Crested  and USE  approximately
$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
Arbitration  Panel's  Order and Award during  fiscal  1997.  The Company and USE
received a total of $4,300,000 as a result of this Order and Award. That balance
of the Award due the  Company  and USE is due from  Nukem and CRIC.  On June 27,
1997 the Federal  Court issued a Second  Amended  Judgment  which  confirmed the
monetary award of the Arbitration  Panel and clarified the equitable damages due
USECC  from  Nukem/CRIC.  Nukem/CRIC  filed a motion  for  clarification  and/or
limited  remand and the Court  denied the motion of August 13,  1997.  Nukem has
until September 12, 1997 to file a notice of appeal with the Tenth Circuit Court
of  Appeals.  Nukem has posted a  $8,600,000  supersedeas  bond on the  monetary
portion of the Award.  If Nukem  seeks to appeal  the  equitable  portion of the
Award,  the  Company  and USE will ask that the  supersedeas  bond be  raised to
$111,000,000.

        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  contemporaneously  in
the Federal District Court, Danville,  Illinois, against the Company, USE, CRIC,
SMP,  Nukem  Luxembourg  GmbH  ("NULUX")  and  the  Dresdner  Bank,   seeking  a
declaratory judgment that the contract with USECC, which was assigned to SMP and
thereafter to NULUX,  had been breached by USECC filing a Motion for Appointment
of Receiver in the SMP  litigation.  The Dresdner  Bank was  dismissed  from the
case, and the remaining  defendants filed answers denying IPC's  allegations and
filed  counterclaims  for damages due under the IPC contract.  These  defendants
also filed Motions for Summary Judgment and a hearing was held on the motions on
May 27, 1994.  On September 1, 1994,  the U. S.  District  Court for the Central
District  of  Illinois  granted the  defendants'  motions  for summary  judgment
against IPC dismissing  IPC's complaint,  and further granted those  defendant's
counterclaims  against  IPC  for  breach  of  contract  by  IPC.  After  various
negotiating  sessions the parties  reached  agreement in June 1995 to settle the
case by entering  into an amendment  to the  original  agreement to increase the
price per pound of U3O8 delivered to IPC and provide for 3 deliveries  totalling
486,443 lbs.

                                       79

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

U3O8 in 1995, 1996 and 1997. The first delivery of 226,443 lbs. U3O8 was made on
June 30,  1995 by Nukem on behalf of SMP. A delivery  of 130,000  lbs.  U3O8 was
made during  fiscal 1996 and the last  delivery of 130,000  lbs.  U3O8 under the
contract was made in May 1997. The Company and USE received a distribution  from
SMP of the profits for the last delivery to IPC on June 13, 1997 of $838,500.

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. (Layne) as
defendants. The complaint primarily concerns extralateral 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.  Parador, USE
and Crested answered the complaint,  filed a counterclaim  against the Plaintiff
and a cross claim against Layne. 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  extralateral  rights.  Other  claims  between  the  parties  were
bifurcated  by the Court and were not at issue at the  trial.  Parador,  USE and
Crested  submitted expert testimony by five renowned  geologists  opining that a
gold lode apexed on  Parador's  Sunset No. 1 patented  lode mining  claim,  from
which apex the lode  extended in a  continuous  downward  direction  outside the
surface  boundaries  of that claim and under the surface  boundaries  of a claim
owned by an adjacent property owner. No contrary  testimony was submitted by the
other parties.

        The District Court took the matter under advisement at the conclusion of
the evidentiary  proceedings,  and on December 26, 1995, issued a written ruling
denying apex rights and extralateral  royalties to Parador,  USE and Crested. It
is the belief of  Parador,  USE and  Crested  that the trial  court's  ruling is
erroneous  as a matter of law and,  consequentially,  on  February  2, 1996,  an
appeal was lodged  with the  appellate  court  asking  that Court to reverse the
trial  court's  ruling.  The  Appellate  Court  dismissed  the appeal  pending a
resolution of all claims  before the District  Court.  Parador,  USE and Crested
intend to proceed with the litigation.

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  so as to comply  with these  regulations,  but they 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  and  technology  and  enacted  laws and  regulations.  Certain
regulatory agencies,  such as the Nuclear Regulatory  Commission,  the Bureau of
Land Management and the Wyoming  Department of Environmental  Quality review the
Company's reclamation,  environmental and decommissioning  liabilities,  and the
Company  believes its recorded  amounts are  consistent  with those  reviews and
related  bonding  requirements.  To the extent that  planned  production  on its
properties is

                                       80

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

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 in the  reclamation  liability.  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. For the obligations recorded on
acquired properties,  including site-restoration,  closure and monitoring costs,
actual expenditures for reclamation will occur over a number of 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,  1997  and  1996,  the  Company  has  recorded  estimated
reclamation  obligations,  including standby costs, of $725,900, as reflected in
reclamation  and other  long-term,  liabilities  in the  accompanying  financial
statements.  In  addition,  the  GMMV,  in which  the  Company  is a 25%  equity
investor,  has  recorded a  $23,620,000  liability  for future  reclamation  and
closure costs.  See GMMV  discussion  below for likelihood of liabilities  being
incurred by the Company. 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  and  USE  currently   have  four  mineral   properties  or
investments that account for most of its environmental obligations.  The Company
is a partner in SMP,  a joint  venturer  in the GMMV,  and owns an  interest  in
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:

Sheep Mountain Partners ("SMP")

        The  Company  and USE  agreed to  assume  the  reclamation  obligations,
environmental  liabilities  and  liabilities for injuries to employees in mining
operations with respect to the Crooks Gap properties, which are part of SMP. The
reclamation obligations,  which are established by regulatory authorities,  were
reviewed by the Company and the  regulatory  authorities  during fiscal 1995 and
the balance in the reclamation  liability account at May 31, 1997 of $1,451,800,
($725,900 or 50% of which is recorded in the  accompanying  balance sheet),  was
determined by the Company and the  regulatory  authorities  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 holdings. A portion of the
funds for the reclamation of SMP's  properties is expected to be provided by SMP
which has agreed to pay up to $.50 per pound of uranium to the  Company  and USE
for

                                       81

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

reclamation  work,  as the uranium is produced  from the  properties.  The final
outcome of the  arbitration  proceedings  with  Nukem and CRIC  could  result in
changes to these agreements between the parties.

Green Mountain Mining Venture ("GMMV")

        During  fiscal  1991,  the Company and USE acquired  developed  minerals
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 in them to Kennecott,  and  Kennecott,  the Company and USE
contributed the Big Eagle  properties to GMMV, which assumed the reclamation and
other environmental liabilities.  Kennecott obtained 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 Corporation (parent of Kennecott
Uranium Company, the other joint venture partner).  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 the
first $8,000,000 of such  expenditures.  Any such reimbursement may be recovered
by UNOCAL  from 20% of future  cash  flows  from  sale of  uranium  concentrates
processed  through the mill. In any event,  until such time as environmental and
reclamation  undertakings are liquidated  against  Kennecott  Corporation,  such
costs are not deemed  expenditures  under  Kennecott's  $50,000,000  development
commitment  (although  bond  costs  may  be  charged  against  this  development
commitment).

        The reclamation and  environmental  liabilities  assumed by GMMV concern
two  categories:  (1) cleanup of an  inactive  open pit mine site near the Mill,
including water (heavy metals and other contaminants) and tailings (heavy metals
and other dust contaminant  abatement and erosion  control)  associated with the
pit, and (2)  decontamination  and cleanup and disposal of the Mill building and
equipment and tailings cells after Mill decommissioning. Current liabilities for
such efforts have been established at  approximately  $19,767,000 by the Wyoming
Department  of  Environmental  Quality  for mine pit  site  matters  (exercising
EPA-delegated  jurisdiction  to administer the Clean Water Act and the Clean Air
Act, and directly administering Wyoming statutes on mined land reclamation), and
by the NRC for  decontamination and cleanup of the Mill and Mill 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 open pit mine  site and 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 is started.


                                       82

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

        Although  Crested  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,  Crested  believes it is unlikely
Crested  will  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 may be within the $50,000,000  development  commitment of
Kennecott  Uranium Company for GMMV subject to the provisions of the Acquisition
Agreement.  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  ownership  by Minerals  Exploration  Company (a UNOCAL
subsidiary),  UNOCAL has agreed to fund up to $8,000,000 of such costs (provided
such 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  once  mining  and  milling
commences.  To date, ongoing Mill maintenance  expense is funded by Kennecott as
part of its development commitment.

        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 built up out of
GMMV operating  revenues).  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  of that amount would be paid by UNOCAL,  before  Kennecott  would be
required  to pay on its  guarantee.  Accordingly,  although  the  extent  of any
ultimate  Crested  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 built up out of GMMV operating revenues
and c) payments are not available  from UNOCAL.  As of June 1997, the obligation
to continue to hold the mill in a standby  mode to protect  certain tax benefits
sold by Consumers Power expired and the Company and USE are no longer under this
obligation.

Sutter Gold Mining Company ("SGMC")

        SGMC  which is  currently  owned 3.2% by the  Company,  30.7% by USE and
66.1%  by  other  investors,  owns  interests  in  gold  mineral  properties  in
California.  Currently,  the  property is in  development  and costs  consist of
drilling,  permitting,  holding costs 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. SGMC's policy is
to provide  reclamation  reserves  as ore is  produced  on a  unit-of-production
basis.  Current  reclamation  obligations  are covered by a $27,000  reclamation
bond, which SGMC has recorded as a reclamation liability as of May 31, 1997.


                                       83

<PAGE>


                           CRESTED CORP. AND AFFILIATE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           MAY 31, 1997, 1996 and 1995
                                   (continued)

Plateau Resources Limited ("Plateau")

        The environmental  obligations  acquired with the acquisition of Plateau
include all environmental and reclamation 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 addition,  Plateau has
recorded additional  obligations for the estimated holding and maintenance costs
needed until the mill is placed in service or decommissioning  begins. In fiscal
1997,  Plateau increased the NRC surety to a cash bond of $6,784,000 in order to
have its standby license changed by the NRC to operational. As of June 1997, the
obligation to continue to hold the  Shootaring  Canyon Mill in a standby mode to
protect  certain tax  benefits  associated  with the Mill and sold by  Consumers
Power  expired.  The  Company  and USE used the funds  held for this  purpose to
increase the NRC surety cash bond.

Executive Benefits

        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 of up to
five years thereafter.


                                       84

<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, 1997, 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 1997 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 1997 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 1997 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 1997 Annual Meeting of Shareholders.



                                       85

<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................................49


     Consolidated Balance Sheets - May 31, 1997 and 1996..................50-51

     Consolidated Statements of Operations
     for the Years Ended May 31, 1997, 1996 and 1995 ........................52

     Consolidated Statements of Shareholders'
     Equity for the Years Ended May 31, 1997, 1996 and 1995..................53

     Consolidated Statements of Cash Flows
     for the Years Ended May 31, 1997, 1996 and 1995......................54-55

     Notes to Consolidated Financial
     Statements...........................................................56-84

     (ii) Affiliate Financials as Schedules

         (a) Green Mountain Mining Venture

             Report of Independent Public Accountants........................93

             Balance Sheet - December 31, 1996 and 1995......................94

             Statement of Operations for the Period 
             from June 1, 1990 (Date of Inception) 
             through December 31, 1996.......................................95

             Statement of Changes in Partners' Capital
             for the Period from June 1, 1990 (Date of 
             Inception) through December 31, 1996............................96

             Statement of Cash Flows for the Period 
             from June 1, 1990 (Date of Inception)
             through December 31, 1996.......................................97

             Notes to Financial Statements...............................98-103

         (b) Sheep Mountain Partners


                                       86

<PAGE>



            The Registrant's partner in SMP, Nukem/CRIC, have refused to provide
            certain  information  concerning  SMP to  SMP's  independent  public
            accountants.  The information  requested concerns  partnership costs
            for uranium purchases.  USECC and Nukem/CRIC  disagree as to whether
            uranium  costs  of the  partnership  means:  (i) the  price at which
            Nukem/CRIC  pays for purchases of uranium for SMP; or (ii) the price
            which CRIC charges SMP for the uranium.

            As a result,  the independent  public  accountants have informed the
            Registrant  and USE that  they have been  unable to  complete  their
            audit of SMP,  and are unable to render a report on SMP's  financial
            statements.  The Registrant and SMP's independent public accountants
            are seeking to resolve these  uncertainties  so that SMP's financial
            statements  may be  finalized  and  filed.  When these  matters  are
            resolved,  the SMP financial statements will be filed under cover of
            a Form 10-K/A.

                Balance Sheets - May 31, 1997 and 1996........................*

                Statements of Operations - Years Ended
                May 31, 1976, 1996 and 1995...................................*

                Statements of Changes in Partners' Capital - Years Ended
                May 31, 1997, 1996 and 1995...................................*

                Statements of Cash Flows - Years Ended
                May 31, 1997, 1996 and 1995...................................*

                Notes to the Financial Statements.............................*

        *To be filed under cover of a Form 10-K/A.

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

                                       87

<PAGE>



(3)     Exhibits Required to be Filed.

  Exhibit                                                        Sequential
    No.                           Title of Exhibit                Page No.

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

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

   4.1      USE 1989 Incentive Stock Option Plan
            as Amended through 12/95....................................[9]

   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.......................................104

   4.6      Amendment to USE 1989 Incentive Stock
            Option Plan (12/13/96).....................................105

   4.7      USE 1996 Stock Award Program (Plan)....................106-107

   4.8      USE Restated 1996 Stock Award Plan and Amendment to
            USE 1990 Restricted Stock Bonus Plan...................108-111

   10.1     Promissory Note from Crested to USE (5/31/97)..........112-113

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

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

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

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

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

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

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

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

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


                                       88

<PAGE>



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

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

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

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

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

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

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

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

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

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

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

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

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

   10.49    Acquisition Agreement between
            Kennecott Uranium Company,
            USE and USECC regarding GMMV (6/23/97).....................114-148

   10.50    Exhibit A to Acquisition Agreement (see 10.49)
            Promissory Note from Kennecott Uranium Company to
            Kennecott Energy Company regarding GMMV ...................149-153

   10.51    Exhibit B to Acquisition Agreement (see 10.49)
            Mortgage, Security Agreement, Financing Statement and
            Assignment of Proceeds, Rents and Leases...................154-183

   10.52    Exhibit G to Acquisition Agreement 
            (see 10.49) - Contract Services Agreement
            for the Sweetwater Uranium Mill Facility...................184-217

   10.53    Exhibit H to Acquisition Agreement
            (see 10.49) - Mineral Lease Agreement .....................218-245

   10.54    Exhibit I to Acquisition Agreement (see 10.49) - Fourth
            Amendment of Mining Venture Agreement among
            Kennecott Uranium Company, USE and USECC...................246-257

   10.55    Master Resolution Agreement
            regarding Gunnison Properties..............................258-262

                                       89

<PAGE>




   10.56    Membership Pledge Agreement
            regarding Gunnison Properties..............................263-269

   10.57    Management Agreement between SGMC and USECC................270-286

   10.58    Outsourcing and Lease Agreement between YSFC and USECC.....287-290

   10.59    Convertible Promissory Note from YSFC to USECC.............291-293

   21       Subsidiaries of Registrant.....................................294


By Reference

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

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

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

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

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

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

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

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

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

(b) Reports filed on Form 8-K.

            During the fourth  quarter of the fiscal year ended on May 31, 1997,
the  Registrant  filed  one  report  on Form 8-K  under  Item 5,  Other  Events,
reporting an event of March 6, 1997.

(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).


                                       90

<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 10, 1997             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 10, 1997             By:      /S/ JOHN L. LARSEN
                                              ----------------------------------
                                              JOHN L. LARSEN, Director


Date:   September 10, 1997             By:      /S/ MAX T. EVANS
                                              ----------------------------------
                                              MAX T. EVANS, Director


Date:   September 10, 1997             By:      /S/ DANIEL P. SVILAR
                                              ----------------------------------
                                              DANIEL P. SVILAR, Director


Date:   September 12, 1997             By:      /S/ MICHAEL D. ZWICKL
                                              ----------------------------------
                                              MICHAEL D. ZWICKL, Director


Date:   September ___, 1997            By:
                                              ----------------------------------
                                              KATHLEEN R. MARTIN, Director


Date:   September 12, 1997             By:      /S/ ROBERT SCOTT LORIMER
                                              ----------------------------------
                                              ROBERT SCOTT LORIMER,
                                              Principal Financial Officer and
                                              Chief Accounting Officer


                                       91

<PAGE>












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


                    Report on Audits of Financial Statements
                  as of December 31, 1996 and 1995 and for the
                  years ended December 31, 1996, 1995 and 1994,
                          and the period from inception
                       (June 1, 1990) to December 31, 1996




                                       92

<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, 1996 and 1995, and
the related statements of operations,  changes in Venture partners' capital, and
cash flows for the years ended December 31, 1996,  1995 and 1994, and the period
from inception (June 1, 1990) to December 31, 1996.  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, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996,  1995 and 1994, and the period from
inception  (June 1, 1990) to December 31, 1996,  in  conformity  with  generally
accepted accounting principles.


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


Salt Lake City, Utah 
May 6, 1997, except for Note 5, as 
to which the date is June 17, 1997


                                       93

<PAGE>


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

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

                                                                   AS OF DECEMBER 31,
                                                               1996                  1995
                 ASSETS
<S>                                                       <C>                   <C>           
Assets:
   Due from USECC                                         $    -                $        1,212
   Property and equipment (Note 3):
      Mineral properties and mine development costs           22,812,077            22,443,305
      Buildings                                               24,815,009            24,815,009
      Machinery and equipment                                    403,000             -
                                                          --------------        --------------
                                                              48,030,086            47,258,314
                                                          --------------        --------------
               Total assets                               $   48,030,086        $   47,259,526
                                                          ==============        ==============

   LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
   Due to USECC                                           $      469,032        $    -
   Reclamation liabilities (Note 3)                           23,620,000            23,620,000
                                                          --------------        --------------

               Total liabilities                              24,089,032            23,620,000
                                                          --------------        --------------

   Commitments and contingencies (Notes 3 and 4)

   Partners' capital:
      Kennecott Uranium Company                               11,970,527            11,819,763
      USECC                                                   11,970,527            11,819,763
                                                          --------------        --------------
                                                              23,941,054            23,639,526
                                                          --------------        --------------
               Total liabilities and partners' capital    $   48,030,086        $   47,259,526
                                                          ==============        ==============


<FN>
                            The accompanying notes are an integral
                              part of these financial statements
</FN>
</TABLE>

                                              94

<PAGE>


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

<TABLE>
                                      STATEMENT OF OPERATIONS
                                              -------
<CAPTION>


                                                                                     PERIOD FROM
                                                                                      INCEPTION
                                                                                   (JUNE 1, 1990)
                                            YEAR ENDED DECEMBER 31,                TO DECEMBER 31,
                                    -------------------------------------------    ---------------
                                       1996          1995             1994              1996
                                   ------------   ------------   --------------    ---------------
<S>                                <C>            <C>            <C>                <C>           
Cost and expenses:
   Maintenance and holding costs   $  1,838,820   $  1,697,234   $    1,877,528     $    9,457,836
   Marketing costs                   -              -                    85,676            247,598
                                   ------------   ------------   --------------     --------------

      Net loss                     $  1,838,820   $  1,697,234   $    1,963,204     $    9,705,434
                                   ============   ============   ==============     ==============

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

                                                95

<PAGE>


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

<TABLE>
                          STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
                                                -----

<CAPTION>

                                                                                       Period from
                                                                                         inception
                                                                                      (June 1, 1990)
                                            YEAR ENDED DECEMBER 31,                   TO DECEMBER 31,
                                   ----------------------------------------------     ---------------
                                       1996             1995             1994              1996
                                   ------------     ------------     ------------     ---------------

<S>                                <C>              <C>              <C>              <C>  
Balance at beginning of period     $ 11,819,763     $ 11,510,240     $ 11,348,745     $   -
   Kennecott Uranium Company         11,819,763       11,510,240       11,348,745

Capital Contributions (Note 1):
   Kennecott Uranium Company          1,070,174        1,158,140        1,143,097        16,823,244
   USECC                              1,070,174        1,158,140        1,143,097        16,823,244

Net loss:
   Kennecott Uranium Company           (919,410)        (848,617)        (981,602)       (4,852,717)
   USECC                               (919,410)        (848,617)        (981,602)       (4,852,717)

Balance at end of period:
   Kennecott Uranium Company       $ 11,970,527     $ 11,819,763     $ 11,510,240     $  11,970,527
   USECC                           $ 11,970,527     $ 11,819,763     $ 11,510,240     $  11,970,527

<FN>

                            The accompanying notes are an integral
                              part of these financial statements
</FN>
</TABLE>

                                                 96

<PAGE>


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

<TABLE>
                                     STATEMENT OF CASH FLOWS
                                             -----


                                                                                                    PERIOD FROM
<CAPTION>
                                                                                                     INCEPTION
                                                                                                   (JUNE 1, 1990)
                                                               YEAR ENDED DECEMBER 31,             TO DECEMBER 31,
                                                  ---------------------------------------------    ---------------
                                                       1996             1995            1994            1996
                                                  -------------    ------------    ------------    ---------------
<S>                                               <C>              <C>             <C>             <C>           
Cash flows from operating activities:
   Net loss                                       $ (1,838,820)    $(1,697,234)    $(1,963,204)    $  (9,705,434)
   Increase (decrease) in due to and due from
      USECC                                            329,171         (47,889)        (34,782)          298,447
                                                  ------------     -----------     -----------     -------------
      Net cash used in operating activities         (1,509,649)     (1,745,123)     (1,997,986)       (9,406,987)
                                                  ------------     -----------     -----------     -------------

Cash flows from investing activities:
   Cost of buildings, mineral properties mine
      development, and machinery and equipment        (771,772)       (555,448)       (283,194)       (8,683,086)
   Increase (decrease i due to and due from
      USECC                                            141,073         (15,709)         (5,014)          170,585
                                                  ------------     -----------     -----------     -------------
      Net cash used in investing activities           (630,699)       (571,157)       (288,208)       (8,512,501)
                                                  ------------     -----------     -----------     -------------

Cash flows from financing activities:
   Capital contributions                             2,140,348       2,316,280       2,286,194        17,919,488
                                                  ------------     -----------     -----------     -------------

      Net change in cash and cash equivalents      $    -          $    -          $    -          $      -
                                                   ===========     ===========     ===========     =============

Cash and cash equivalents:
   At beginning of period                          $    -          $    -          $    -          $      -
   At end of period                                     -               -               -                 -

Supplemental schedule of non-cash activities:

During 1990 and 1992 the Venture acquired
  mineral  properties an 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


<FN>
                            The accompanying notes are an integral
                              part of these financial statements
</FN>

                                       97

<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 $15.0
        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. As of
        May 6, 1997, the Management  Committee has not approved a budget for the
        year  ending  December  31,  1997.  Kennecott  has also  agreed to 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).

        Through December 31, 1996, Kennecott has contributed  $17,919,488 to the
        Venture for operating and development expenses.  During this period, 50%
        of the capital  contributions  made by Kennecott  have been allocated to
        USECC.  Income  or loss and the cash  flows  from  the  Venture  will be
        allocated 50% to Kennecott and 50% to USECC. The allocation of the USECC
        portion of cash flows will be determined  by the ownership  interests of
        USE and Crested in the various GMMV properties.

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

                                    Continued

                                       98

<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, 1996, 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  have
        agreed 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:

        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 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 charged to operations on the units-of-production  method
        over  the  estimated  reserves  to be  recovered.  Amortization  of mine
        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

                                       99

<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  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  sold method on the basis  proven and  probable ore
        reserves 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.

3.      BUILDINGS, MINERAL PROPERTIES AND MINE DEVELOPMENT COSTS:

        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, 1996
        Kennecott had reimbursed USECC for  substantially  all development costs
        incurred.

                                    Continued

                                       100

<PAGE>


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

                    NOTES TO FINANCIAL STATEMENTS, Continued



3.      BUILDINGS, MINERAL PROPERTIES AND MINE DEVELOPMENT COSTS, Continued:

        Building,  mineral property and mine development  costs incurred by each
        of the Venture partners are as follows:

</TABLE>
<TABLE>
<CAPTION>
                                                                              Period from
                                                                               inception
                                                                            (June 1, 1990)
                                    YEAR ENDED DECEMBER 31,                 TO DECEMBER 31,
                          ---------------------------------------------     ---------------
                           1996             1995              1994               1996
                        ------------     ------------      ------------     --------------
        <S>             <C>              <C>               <C>              <C>            
        Kennecott             31,597           43,626           137,482          2,732,181
                        ------------     ------------      ------------     --------------

        Total           $    771,772     $    555,448      $    283,194     $    8,683,086
                        ============     ============      ============     ==============
</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,  and  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 the  unpatented  mining
        claims have been paid to the state of Wyoming as of December 31, 1996.


                                    Continued

                                       101

<PAGE>


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

                    NOTES TO FINANCIAL STATEMENTS, Continued



3.      BUILDINGS, MINERAL PROPERTIES AND MINE DEVELOPMENT COSTS, Continued:

        At  December  31,  1996 and 1995,  costs  capitalized  as  property  and
        equipment are composed of the following:

                                                  1996                1995
                                            --------------       -------------
               Acquisition costs            $   39,347,000       $  39,347,000
               Development costs                 8,683,086           7,911,314
                                            --------------       -------------

                                            $   48,030,086       $  47,258,314
                                            ==============       =============

        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
        alleges  that when  Kennecott  entered  into the Green  Mountain  Mining
        Venture  with USE on June 1,  1990,  that  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 are 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. The motion is
        currently pending. If the motion is denied,


                                    Continued

                                       102

<PAGE>


                          GREEN MOUNTAIN MINING VENTURE
                   (A Joint Venture in the Development Stage)
                    NOTES TO FINANCIAL STATEMENTS, Continued



4.      CONTINGENCIES, Continued:

        the case will proceed to trial scheduled in 1997.  Kennecott  intends to
        vigorously  prosecute  the summary  judgment  motion,  and to vigorously
        defend the litigation in the event the motion is denied.

        Although the Venture is not a party to the complaint  filed by Nukem and
        Cycle, the ultimate  resolution of this contingency could have an impact
        on the properties held by the Venture.

5.      SUBSEQUENT EVENT:

        Subsequent  to year  end,  Kennecott  and USECC  continued  negotiations
        whereby the parties are  attempting to extract  Kennecott from the GMMV.
        These  negotiations  contemplate USECC buying out the Kennecott interest
        in GMMV.  No  assurance  can be  given  that  the  negotiations  will be
        successfully concluded.


                                    Continued

                                       103

<PAGE>