**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K/A**

** **

**(Mark One)**

| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                              |
| ** ** | **For  the fiscal year ended December 31, 2006 or**                                                |
| ** ** | ** **                                                                                              |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom             to**

**Commissionfile number 001-33404**

 

**URANIUMRESOURCES, INC.**

(Exact name of Registrant as specified in its charter)

 

| **\DELAWARE**                                                     | **75-2212772**                        |
|-------------------------------------------------------------------|---------------------------------------|
| (State  of Incorporation)                                         | (I.R.S.  Employer Identification No.) |
|                                                              |                                  |
| **405 State Highway Bypass 121,**

**Building A, Suite 110** | ** **                            |
| **Lewisville, Texas**                                             | **75067**                             |
| (Address  of principal executive offices)                         | (Zip  code)                           |

 

**(972) 219-3330**(Registrant’s telephone number, including area code)

 

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

 

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

 

Common Stock, $.001 par value per share(Title of class)

 

Indicate by check mark if theRegistrant is a well-known seasoned issuer as defined in Rule 405 of theSecurities Act. Yes o  No x

 

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

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

 

| Large  accelerated filer  o |   | Accelerated  filer  x |   | Non-accelerated  filer  o |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

 

The aggregate market value ofthe Common Stock held by non-affiliates of the Registrant at June 30,2006, was approximately $200,393,826.

 

Number of shares of CommonStock, $0.001 par value, outstanding as of March 9, 2007: 51,797,339shares.

 

 

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This report onForm 10-K/A is being filed in response to comments from the Securities andExchange Commission. The information contained herein has been updated as if itwere being disclosed as of April 2007.

 

**URANIUMRESOURCES, INC.**

 

**ANNUALREPORT ON FORM 10-K/AFOR THE FISCAL YEAR ENDED DECEMBER 31, 2006**

 

**TABLEOF CONTENTS**

 
| PART I                                                                                                                |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item 1.  Business                                                                                                          |   | 1      |   |
| The Company and Current Plan of Operation                                                                                  |   | 1      |   |
| Uranium Reserves/Mineralized Material                                                                                      |   | 3      |   |
| Long-Term Delivery Contracts                                                                                               |   | 4      |   |
| Joint Venture for Churchrock Property                                                                                      |   | 5      |   |
| Overview of the Uranium Industry                                                                                           |   | 5      |   |
| The In Situ Recovery Mining Process                                                                                        |   | 6      |   |
| Environmental Considerations and Permitting                                                                                |   | 7      |   |
| Reclamation and Restoration Costs and Bonding  Requirements                                                                |   | 7      |   |
| Water  Rights                                                                                                              |   | 8      |   |
| Competition                                                                                                                |   | 8      |   |
| Item 1A. Risk Factors                                                                                                      |   | 8      |   |
| Item 1B. Unresolved Staff Comments                                                                                         |   | 11     |   |
| Item 2. Properties                                                                                                         |   | 11     |   |
| South  Texas                                                                                                               |   | 11     |   |
| New Mexico Properties                                                                                                      |   | 16     |   |
| Insurance                                                                                                                  |   | 23     |   |
| Reclaimed Properties                                                                                                       |   | 23     |   |
| Item 3. Legal Proceedings                                                                                                  |   | 23     |   |
| New Mexico Radioactive Material License                                                                                    |   | 23     |   |
| New Mexico UIC Permit                                                                                                      |   | 23     |   |
| Texas Department of Health Bonding Issues                                                                                  |   | 24     |   |
| Kingsville Dome Production Area Authorization 3                                                                       |   | 24     |   |
| Other                                                                                                                      |   | 24     |   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                               |   | 24     |   |
| GLOSSARY OF CERTAIN URANIUM INDUSTRY TERMS                                                                                 |   | 25     |   |
| PART II                                                                                                               |   | 27     |   |
| Item 5. Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 27     |   |
| Dividends                                                                                                                  |   | 27     |   |
| Securities Authorized for Issuance Under Equity  Compensation Plans                                                        |   | 27     |   |
| Performance  Graph                                                                                                         |   | 27     |   |
| Recent Sales of Unregistered Securities                                                                                    |   | 28     |   |
| Item 6. Selected Financial Data                                                                                            |   | 28     |   |
| Item 7. Management’s Discussion and Analysis of  Financial Condition and Results of Operation                         |   | 30     |   |
| Forward Looking Statements                                                                                                 |   | 30     |   |
| Restatement of Financial Statements                                                                                        |   | 30     |   |
| Financial Condition and Results of Operations                                                                              |   | 30     |   |
| Liquidity—Cash Sources and Uses for 2007                                                                              |   | 33     |   |

 

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| Derivative Financial Instruments                                                                         |   | 33  |   |
|----------------------------------------------------------------------------------------------------------|--------|-----|--------|
| Contingent Liabilities                                                                                   |   | 34  |   |
| Off  Balance Sheet Arrangements                                                                          |   | 34  |   |
| Critical Accounting Policies                                                                             |   | 34  |   |
| Impact of Recent Accounting Pronouncements                                                               |   | 35  |   |
| Item 7A. Quantitative and Qualitative Disclosures  About Market Risk                                     |   | 35  |   |
| Uranium Price Volatility                                                                                 |   | 35  |   |
| Derivative Financial Instruments                                                                         |   | 35  |   |
| Item 8. Financial Statements and Supplementary Data                                                      |   | 36  |   |
| Financial Statements                                                                                     |   | 36  |   |
| Supplemental Financial Data Tables                                                                       |   | 36  |   |
| Item 9. Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure            |   | 37  |   |
| Item 9A. Controls and Procedures                                                                         |   | 37  |   |
| Management’s Report on Internal Control Over Financial  Reporting                                   |   | 37  |   |
| Changes in Internal Control                                                                              |   | 38  |   |
| Report of Independent Registered Public Accounting  Firm                                                 |   | 38  |   |
| Item 9B. Other Information                                                                               |   | 39  |   |
| PART III                                                                                            |   | 40  |   |
| Item 10. Directors, Executive Officers and Corporate  Governance                                         |   | 40  |   |
| Directors                                                                                                |   | 40  |   |
| Other Executive Officers                                                                                 |   | 41  |   |
| Section 16(a) Beneficial Ownership Reporting  Compliance                                       |   | 42  |   |
| Amended Code of Ethics for Senior Financial Officers                                                     |   | 42  |   |
| Audit  Committee                                                                                         |   | 42  |   |
| Item 11. Executive Compensation                                                                          |   | 42  |   |
| Compensation Discussion and Analysis                                                                     |   | 42  |   |
| Summary Compensation Table                                                                               |   | 47  |   |
| Grant of Plan Based Awards                                                                               |   | 48  |   |
| Employment Agreements                                                                                    |   | 48  |   |
| Outstanding Awards at Fiscal Year-End                                                                    |   | 48  |   |
| Option Exercises and Stock Vested                                                                        |   | 49  |   |
| Potential Payments Upon Termination or Change in  Control                                                |   | 50  |   |
| Director Compensation                                                                                    |   | 50  |   |
| Item 12. Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   | 51  |   |
| Securities Authorized for Issuance Under Equity  Compensation Plans                                      |   | 51  |   |
| Security Ownership of Certain Beneficial Owners and  Management                                          |   | 51  |   |
| Item 13. Certain Relationships and Related  Transactions and Director Independence                       |   | 53  |   |
| Item 14. Principal Accountant Fees and Services                                                          |   | 53  |   |
| Audit  Fees                                                                                              |   | 53  |   |
| Audit Related Fees                                                                                       |   | 53  |   |
| Tax  Fees                                                                                                |   | 53  |   |
| All  Other Fees                                                                                          |   | 53  |   |
| Audit Committee Pre-Approval Policies and Procedures                                                     |   | 53  |   |
| PART IV                                                                                             |   | 53  |   |
| Item 15. Exhibits and Financial Statement Schedules                                                      |   | 53  |   |
| SIGNATURES                                                                                               |   | 54  |   |
| Index to Consolidated Financial Statements                                                               |   | F-1 |   |
| Exhibit Index                                                                                       |   | E-1 |   |

 

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**URANIUMRESOURCES, INC.**

 

**ANNUALREPORT ON FORM 10-K/AFOR THE FISCAL YEAR ENDED DECEMBER 31, 2006**

 

**PART I**

 

*The “Company” or “Registrant” isused in this report to refer to Uranium Resources, Inc. and itsconsolidated subsidiaries. This 10-K/A contains “forward-looking statements.” These statements include, without limitation, statements relating to management’sexpectations regarding the Company’s ability to remain solvent, capitalrequirements, mineralized materials, timing of receipt of mining permits,production capacity of mining operations planned for properties in South Texasand New Mexico and planned dates for commencement of production at suchproperties, business strategies and other plans and objectives of the Company’smanagement for future operations and activities and other such matters. Thewords “believes,” “plans,” “intends,” “strategy,” “projects,” “targets,” or “anticipates”and similar expressions identify forward-looking statements. The Company doesnot undertake to update, revise or correct any of the forward-lookinginformation. Readers are cautioned that such forward-looking statements shouldbe read in conjunction with the Company’s disclosures under the heading: “RiskFactors” beginning on page 8.*

 

*Certain terms used in this Form 10-K/Aare defined in the “Glossary of Certain Terms” appearing at the end of Part Ihereto.*

 

**Item 1.****   ****Business.**

 

**The Company and Current Plan ofOperation**

 

***Our History***

 

We were organized in 1977 to mine uranium in theUnited States by using an in situ recovery (ISR) mining method, a process bywhich groundwater is fortified with an oxidizing agent and pumped into the orebody causing the uranium contained to dissolve. The resulting solution is thenpumped to the surface where it is further processed into uranium concentrates thatare shipped to a conversion facility for sale to our customers. This ISRprocess is generally more cost effective and environmentally benign thanconventional mining techniques.

 

From 1988 through 1999 we produced approximately6.1 million pounds of uranium from two South Texas properties;3.5 million pounds from Kingsville Dome and 2.6 million pounds fromRosita. In 1999, we shut-down all production because of depressed uraniumprices. From the first quarter of 2000 until December 2004, we had nosource of revenue, and therefore, had to rely on equity infusions to remain inbusiness and maintain the critical employees and assets of the Company.

 

When prices began to improve in mid-2003, we took thefirst steps to bring our Vasquez property into production. Vasquez was our onlyfully licensed and permitted property at the time. We signed two long-termcontracts, calling for deliveries of 600,000 pounds of uranium each year from2005 through 2008. The planned source of production for those contracts was theVasquez property, which we had expected to produce at an annual volume and at aproduction cost that would meet the contracted delivery requirements. Theproperty was brought online in the fourth quarter of 2004.

 

During 2005, the Vasquez property produced fewerpounds than expected due to chemical and permeability obstacles in the orebody. In addition, our cost of production exceeded the sales price under thecontracts, and we lost money on each pound sold. These contracts wererenegotiated in March 2006 (see **“Business—Long-TermDelivery Contracts”**).

 

In 2006, we brought Kingsville Dome back intoproduction and are in the process of restarting Rosita in 2007.

 

In addition to our South Texas properties, we own183,000 acres of mineral holdings in New Mexico that were acquired during the1980s and 90s. We also acquired a vast database of exploration logs and drillresults for these properties that were developed by Homestake Mining, MobilOil, Kerr-McGee, Phillips Petroleum, United Nuclear, and Westinghouse ElectricCorporation.

 

***2006 Events***

 

In March 2006, we renegotiated our supplycontracts with Itochu and UG. We committed to each of them one-half of whateverour production is in Texas at a price that is based on the market price at thetime of delivery less a discount. Prior to March 2006, these contractswere priced based on fixed prices that contained nominal price increasesindexed to inflationary changes. The average price for the deliveries under ourprevious contract terms was $17.95 in 2005 and was anticipated to have been$14.58 per pound in 2006.  Therenegotiated contracts provided us with the ability to take advantage of theincreases in uranium market prices realized in 2006 and more closely alignedthe prices we received for uranium sales to the pricing occurring in theuranium marketplace.  For 2006, uraniumspot market prices rose from $36.25 per pound in January 

 

1

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to $72.00 per pound in December.  We expect to see a continued strengthening inuranium market prices for 2007, which in turn is projected to provide increasedsales prices for our uranium sales.

 

Based upon our projected uranium production for 2007,current uranium prices and uranium market outlooks, we expect 2007 to showincreased sales volumes and increased uranium sales revenues compared to2006.  We expect our Kingsville Domeproduction to contribute more towards our total production in 2007 than ourproduction from Vasquez and, as a result of projected lower Kingsville Dome productioncosts, expect 2007 operations to reflect higher profitability than 2006.  See “**Business—Long-TermDelivery Contracts** ” for a discussion of the terms of the revisedcontracts, including certain conditions thereto.

 

In April 2006, we raised $50 million inequity by a sale of 10,200,307 shares of Common Stock at $4.90 per share in aprivate placement to selected accredited investors. The Company used theproceeds of the offering to pay UG the $12 million discussed under “ **Business—Long-Term Delivery Contracts** ” andthe remainder for capital costs for upgrades to the Rosita plant, permittingand development drilling for Rosita, delineation drilling for propertiescontiguous to the Rosita plant, land acquisition and exploration costs andworking capital.

 

In July 2006, the Company stated our Texasproduction was being adversely affected by a shortage of drill rigs, loggingtrucks, permitting delays, and weather related problems. This shortage of drillrigs and logging trucks was the result of intense industry-wide competition forexploration and development tools. These problems continued through August andinto September 2006. The loss of key personnel to competitors alsohindered production development plans.

 

In November 2006, we launched a pre-feasibilitystudy to evaluate the ability of the company to develop several of itsproperties in New Mexico by conventional mining and milling methods, includingmine sites at Crownpoint, Nose Rock, and Roca Honda. These mine sites weredesigned by previous owners to produce nearly 4 million pounds of uranium peryear. All three projects were deferred in the early 1980s after uraniumprices fell from $43 per pound U 3 O 8  to below $10 per pound by the endof that decade. On these sites are six completed mine shafts that are estimatedto have a replacement cost of $25 to $50 million. With these shafts already inplace, we believe the cost of development should be lower. In addition, onceall required permits are received, production on the sites with mine shafts alreadyin place should begin considerably sooner than on comparable undeveloped sites.

 

The pre-feasibility studywill include the following:

 

·       An economic evaluation of the Nose Rockproject that was developed by a division of Phillips Petroleum in the late1970s. This project was designed to produce approximately 2.5 million pounds ofuranium per year, but was shutdown in 1981 before mining began. There are twoplugged shafts that were sunk to the ore zone.

 

·       An economic evaluation of the Roca Hondaproject that was developed by Kerr-McGee in the late 1970s. There is apartially completed shaft that was being developed to produce 1 million poundsper year. Production from this project was deferred in 1981 before mining beganand the shaft was plugged at the surface.

 

·       An economic evaluation of the West Largoproject that was drilled out by Kerr-McGee in the 1970s. The property appearsto be amenable to both ISR and conventional mining methods.

 

·       A thorough evaluation of the Company’sextensive data base that includes over 16,000 logs, feasibility studies, minedevelopment plans, and ore reserve analyses. This evaluation will focus on theCompany’s 43,000 acres located in the prolific Ambrosia Lake District wherethere exists the greatest potential to discover new uranium resources.

 

·       A complete examination of the Company’s183,000 acres of mineral holdings in New Mexico to determine which propertiesare more amenable to conventional development as opposed to in-situ recoverymining methods.

 

·       An analysis to determine the feasibilityof building a conventional mill to process company mined ore, as well as thepotential for toll milling.

 

***Update and Operational Plans***

 

Total production from Kingsville Dome and Vasquez in January andFebruary was 33,400 and 29,200 pounds U3O8, respectively. March productionthrough the 15th of the month was 20,700 pounds U3O8. Production for the first quarter of2007 is estimated to be in the range of 98,000 to 108,000 pounds U3O8. For thequarter, Kingsville production is estimated to be in the range of 60,000 to65,000 pounds U3O8, while Vasquez is expected to produce between 38,000 and 43,000pounds.

 

Production from Wellfield 13 at Kingsville Dome, whichwas brought online at the end of January, has been meeting company expectationsand should produce between 44,000 to 49,000 pounds U 3 O 8  forthe quarter. Wellfield 14 is scheduled to come online in April, while Wellfield15 should startup early in the third quarter. Vasquez is currently producing ata rate around 350 pounds per day.

 

2

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OurVasquez operation continued to operate below expectations throughout 2006. Atthe beginning of the project in 2004, our mining plan indicated we couldproduce the Vasquez property at an annual rate of 700,000 pounds. Thegeological and chemical problems we experienced in 2005 caused us to revisethat estimate downward in July 2006 to an annual capacity of 400,000pounds. This estimate assumed steps we implemented would successfully resolveproduction problems that we had never experienced at our other mines. Whilepartially successful, these steps have not lead to higher production levels. Atthe end of the third quarter 2006 and again in December 2006 we reducedour estimation of recoverable reserves at the Vasquez property to include onlythose pounds under developed and producing wellfields, from which we expectfuture production to be in the 90,000 to 100,000 pound range. This reduced ourestimated recoverable reserves at Vasquez by 1.987 million pounds. We intend tocontinue mining existing wellfields at Vasquez as long as they generatepositive results on an operating basis. We are not currently planning to addany new wellfields at Vasquez.

 

In October 2006, we began a $3.5 million programto drill 1,440 holes totaling over 575,000 feet by the end of the secondquarter 2007. This program will allow us to develop the reserves needed forproduction at Kingsville Dome and Rosita over the next few years, and shouldresult in lower production costs for our Texas operations.

 

As of the end of February 2007, we had 16 drillrigs under contract, up from 11 rigs in September 2006. In addition, theCompany acquired two prompt fission neutron (PFN) logging tools in late 2006.

 

In New Mexico, we received a decision from the USEnvironmental Protection Agency (EPA) in February 2007 determining thatsection 8 of our Churchrock Project was deemed by EPA to be Indian country, andtherefore, the underground injection permit should be issued by EPA and not bythe New Mexico Environmental Department. We have appealed this decision to theUnited States Court of Appeals for the Tenth Circuit.

 

Total production for all of 2006 was 259,112 poundsand production costs per pound were $47.46.

 

As of December 31, 2006, we had 121 employees,including eight geologists, ten engineers and two certified public accountants.We have field offices at Kingsville Dome, Vasquez, Rosita and Crownpoint, NewMexico.

 

The Company’s annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act may be accessed free of charge through theCompany’s web site. The Company’s web site address is www.uraniumresources.com.

 

***Future Strategy***

 

Our strategy moving forward is to generate cash fromour Texas operations while developing the future production potential of ourNew Mexico properties. We plan to utilize the most efficient and economicmining methods available including in situ recovery and conventional mining andmilling. We are planning to proceed immediately with the development of all ourprojects, especially those in New Mexico that are not on Indian lands. We alsointend to increase our reserve position through acquisitions or joint venturesin order to exploit the strong market for uranium.

 

The Company has recently adopted a strategic plan withthe goal of URI becoming a 10 million pound producer of uranium by 2014 usingboth ISR and conventional mining and milling methods. As part of its strategy,we intend to build our uranium base to between 200 and 300 million poundsthrough exploration of our own properties and by acquisition.

 

In Texas, we intend to maximize production fromexisting properties at Kingsville Dome and Rosita. We plan to add additionalproperties to feed these operations, with the ultimate goal being to achieve 1to 2 million pounds of production annually within the next several years. Toaccomplish this objective, the Company plans to complete its drill out programby the end of the second quarter of 2007, mine all identified uraniumexpeditiously and acquire or lease new properties as necessary.

 

In New Mexico, the Company is working to obtain thefinal permit for the joint venture Churchrock ISR project while also looking todevelop its conventional assets beginning with Roca Honda. The ongoingevaluation of the Company’s extensive database should be completed by the endof June, while an internal pre-feasibility study on conventional mining andmilling of Company properties should be finished by the end of March.

 

We believe 2006 was a pivotal year. We renegotiatedour supply contracts on far more favorable terms, raised $50 million in equitywhich will allows us to move forward with our strategic plans for Texas and NewMexico, entered into the joint venture with Itochu and commenced apre-feasibility study on conventional mining of our New Mexico uranium assets.The Company intends to execute on its strategic plan to make the Company aleading uranium producer.

 

**UraniumReserves/Mineralized Material**

 

In accordance with the SEC’s Guideline of Non-ReserveMineralized Material, and as shown in the following table, the Companyestimates 91.7 million pounds of in-place mineralized uranium material on itsNew Mexico properties as of 

 

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March 15, 2007. This estimate reflects theCompany’s ongoing reevaluation of its New Mexico properties, including itsdecision to consider development of certain properties by conventional miningand milling methods in addition to ISR methods. The estimate for each NewMexico property is based on studies and geologic reports prepared by priorowners, along with studies and reports prepared by geologists engaged by theCompany. The estimates presented below were reviewed and affirmed by BehreDolbear & Company (USA), an independent private engineering firm.

 

**SUMMARYOF IN-PLACE NON-RESERVE MINERALIZED MATERIAL IN NEW MEXICO**

 

| ** **   | ** ** | **Tonnage**  | ** ** | **Grade**   | ** ** | **Non-Reserve Mineralized Material** | ** ** |
|--------------|------------|--------------|------------|-------------|------------|--------------------------------------|------------|
| **Property** | ** ** | **Millions** | ** ** | **Percent** | ** ** | **Millions of Pounds U3O8**          | ** ** |
| Mancos       |       | 2.3          |       | 0.09        | %          | 4.2                                  |       |
| Church Rock  |       | 8.5          |       | 0.11        | %          | 18.6                                 |       |
| Nose Rock    |       | 7.8          |       | 0.14        | %          | 21.7                                 |       |
| West Largo   |       | 2.9          |       | 0.30        | %          | 17.2                                 |       |
| Roca Honda   |       | 3.9          |       | 0.19        | %          | 14.7                                 |       |
| Crownpoint   |       | 4.8          |       | 0.16        | %          | 15.3                                 |       |
| **Total**    | ** ** | **30.1**     | ** ** | **0.15**    | **%**      | **91.7**                             | ** ** |

 

The foregoing table doesnot include estimates for our Texas properties. The following table summarizes the Company’s estimates of ProvenReserves for the Company’s Kingsville Dome and Vasquez properties in SouthTexas.  The Company has completed widespaced drilling on extensions of the Kingsville Dome properties that it intendsto mine after the identified reserves have been mined.  When the Company finishes the delineationdrilling for the wellfields on those extensions it will then assign reserve numbersthereto.

 

**SUMMARYOF IN-PLACE RESERVES IN SOUTH TEXAS**

 

| **Property**    | ** ** | **Tonnage  Millions** | ** ** | **Grade  Percent** | ** ** | **Proven Uranium Reserves  Millions of Lbs U3O8 at  12/31/06** | ** ** |
|-----------------|------------|-----------------------|------------|--------------------|------------|----------------------------------------------------------------|------------|
| Kingsville Dome |       | 0.304                 |       | 0.102              | %          | 0.445                                                          |       |
| Vasquez         |       | 0.187                 |       | 0.096              | %          | 0.144                                                          |       |

 

**Long-Term Delivery Contracts**

 

Prior to March 2006 we had two contracts withItochu Corporation and two with UG USA, Inc.  Under those contracts the Company wasobligated to deliver an aggregate of 600,000 pounds in each of the years2005 through 2008, and the buyer had the right to increase or decrease thosedeliveries by 15%.  The average price forsuch deliveries was $17.95 in 2005 and was anticipated to have been $14.58 perpound in 2006. These contracts were entered into at a time when the spot pricefor uranium was less than $15 per pound, substantially below the $40 per poundin effect as of March 25, 2006. Two other contracts with these buyerscalled for aggregate deliveries of 645,000 pounds by December 31, 2007priced at the spot price at the time of delivery less an average of $3.80 perpound.

 

In March 2006 weentered into a new contract with Itochu and a new contract with UG thatsupersede the existing contracts. Each of the new contracts calls for deliveryof one-half of our actual production from our Vasquez property and otherproperties in Texas currently owned or hereafter acquired by the Company(excluding certain large potential exploration plays). The terms of suchcontracts are summarized below.

 

*The Itochu Contract.  * Under the Itochu contract all productionfrom the Vasquez property will be sold at a price equal to the average spotprice for the eight weeks prior to the date of delivery less $6.50 per pound,with a floor for the spot price of $37 and a ceiling of $46.50. Other Texasproduction will be sold at a price equal to the average spot price for theeight weeks prior to the date of delivery less $7.50 per pound, with a floorfor the spot price of $37 and a ceiling of $43. On non-Vasquez production theprice paid will be increased by 30% of the difference between the actual spotprice and the $43 ceiling up to and including $50 per pound. If the spot priceis over $50 per pound the price on all Texas production will be increased by50% of such excess. The floor and ceiling and sharing arrangement over theceiling applies to

 

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3.65 million pounds of deliveries, after whichthere is no floor or ceiling. Itochu has the right to cancel any deliveries onsix-month’s notice.

 

On December 5, 2006,HRI-Churchrock, Inc., a wholly-owned subsidiary of the Company, enteredinto an agreement with a wholly-owned subsidiary of Itochu to develop jointlythe Company’s Churchrock property in New Mexico (the “Joint Venture”) ( see “ **Business—Joint Venture for Churchrock Property**”). A feasibility study was completed and delivered by the end of 2006. Underthe terms of the Joint Venture, both parties had until the end of March 2007to make a preliminary investment decision (“Preliminary Investment Decision”)whether to move forward with the Joint Venture. Itochu has requested anextension, and the parties have agreed to extend that date until May 1,2007. If Itochu should terminate the venture at that time, we would no longerreceive the additional price of 30% of the excess over $43 per pound outlinedabove. If we should terminate the venture at that time, the original contractterms will be reinstated from that time forward.

 

*The UG Contract*.**  **Under the UG contract all production fromthe Vasquez property and other Texas production will be sold at a price equalto the month-end long-term contract price for the second month prior to themonth of delivery less $6 per pound until (i) 600,000 pounds have beensold in a particular delivery year and (ii) an aggregate of 3 millionpounds of uranium has been sold. After the 600,000 pounds in any year and3 million pounds total have been sold, UG will have a right of firstrefusal to purchase other Texas production at a price equal to the average spotprice for a period prior to the date of delivery less 4%. In consideration ofUG’s agreement to restructure its previously existing contract, we paid UG$12 million in cash with funds raised in our equity offering completed in April 2006.

 

**Joint Venture for Churchrock Property**

 

On December 5, 2006, HRI-Churchrock, Inc., awholly-owned subsidiary of the Company, entered into a Joint Venture with awholly-owned subsidiary of Itochu to develop jointly our Churchrock property inNew Mexico.

 

A feasibility study was completed and delivered at theend of 2006. Under the terms of the Joint Venture, both parties had until April 2,2007 to make a Preliminary Investment Decision whether to move forward with theJoint Venture. The parties have agreed to extend that date until May 1,2007. If a positive decision is made, Itochu will reimburse us for 50% of ourpermitting costs from November 1, 2005, through the completion of thefeasibility study, up to a maximum contribution of $180,000. The parties willsplit costs incurred after completion of the feasibility study 50-50 until afinal investment decision is made by the parties after receipt of necessarypermits and resolution of the Indian country status of certain of theproperties included in the venture, which is currently pending with the USEnvironmental Protection Agency (“Final Investment Decision”).

 

If a positive Final Investment Decision is made, wewill convey to the Joint Venture certain permits and certain of our Churchrockproperties in New Mexico, and Itochu will contribute $8 million in cash andcause a $24 million debt facility to be made available to us. Cash flow fromthe first $30 per pound of uranium sold by us will be split 50-50 and cash flowfrom uranium sales in excess of $30 per pound will be split 70% to us and 30%to Itochu. We will manage the Joint Venture and receive a management fee.

 

If Itochu makes a positive Preliminary InvestmentDecision or a Positive Final Investment Decision and we make a negativedecision at either time, the Joint Venture will terminate and the terms of theparties’ original delivery contracts applicable to South Texas production willbe reinstated prospectively. The average price of deliveries under the originalcontracts would have been about $15 per pound for 2006. If we make a negativeFinal Investment Decision and Itochu makes a positive Final InvestmentDecision, we will reimburse Itochu 30% of the permitting expenses paid byItochu, and we will be prohibited from developing the Churchrock property for18 months.

 

If both parties make a negative decision at either thePreliminary or Final Investment Decision time, or if we make a positivedecision at either time and Itochu makes a negative decision, the Joint Venture will terminate and there will be noreinstatement of the original delivery contracts with Itochu for South Texasproduction. However, our sales price will be reduced by $2.10 per pound on someof our South Texas production from that date forward.

 

The Company and Itochu have each guaranteed theobligations of its subsidiary that is the member of the Joint Venture. Certainobligations are limited to the amount of distributions received from theventure.

 

**Overview of the Uranium Industry**

 

The only significant commercial use for uranium is asa fuel for nuclear power plants for the generation of electricity. According tothe World Nuclear Association, there were 435 nuclear power plants operating inthe world at the end of 2006 with an annual consumption of more than170 million pounds of uranium. Based on reports by the Ux ConsultingCompany, LLC (“Ux”) worldwide production of uranium in 2005 (the most recentyear for which statistics are available) was approximately 108 millionpounds. Ux reported the gap between production and demand has been filled bysecondary supplies, such as inventories held by governments, utilities and othersin the fuel cycle, including the highly enriched 

 

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uranium (HEU) inventories which are a result of theagreement between the US and Russia to blend down nuclear warheads. Thesesecondary supplies are currently meeting nearly a third of worldwide demand.

 

Spot market prices have risen over the past threeyears in anticipation of sharply higher projected demand as a result of aresurgence in nuclear power, and by the fact that as secondary supplies are depleted,future production will have to rise closer to demand. Spot market prices,according to Ux, rose from $36.25/lb to $75/lb during 2006. The spot price asof the end of February 2007 was $85/lb.

 

The following graph shows average spot prices perpound from 1983 to March 5, 2007, as reported by Trade Tech and Ux.

 

 

All prices beginning in 1993 represent U 3 O 8 deliveries available to U.S. utilities.

 

**The In Situ Recovery Mining Process**

 

The in situ recovery mining process is a form ofsolution mining. It differs dramatically from conventional mining techniques.The in situ recovery technique avoids the movement and milling of significantquantities of rock and ore as well as mill tailing waste associated with moretraditional mining methods. It is generally more cost-effective andenvironmentally benign than conventional mining. Historically, the majority ofUnited States uranium production resulted from either open pit surface mines orunderground shaft operations.

 

The in situ recovery process was first tested for theproduction of uranium in the mid-1960s and was first applied to acommercial-scale project in 1975 in South Texas. It was well established inSouth Texas by the late 1970’s, where it was employed in about twentycommercial projects, including two operated by us.

 

In the in situ recovery process, groundwater fortifiedwith oxygen and other solubilizing agents is pumped into a permeable ore bodycausing the uranium contained in the ore to dissolve. The resulting solution ispumped to the surface. The fluid-bearing uranium is then circulated to an ionexchange column on the surface where uranium is extracted from the fluid ontoresin beads. The fluid is then reinjected into the ore body. When the ionexchange column’s resin beads are loaded with uranium, they are removed andflushed with a salt-water solution, which strips the uranium from the beads.This leaves the uranium in slurry, which is then dried and packaged forshipment as uranium powder.

 

We have historically used a central plant for the ionexchange. In order to increase operating efficiency and reduce future capitalexpenditures, we are now designing and developing wellfields using awellfield-specific remote ion exchange methodology. Instead of piping thesolutions over large distances through large diameter pipelines and mixing thewaters of several wellfields together, each wellfield will be mined using adedicated satellite ion exchange facility. This will allow ion exchange to takeplace at the wellfield instead of at the central plant. A wellfield consists ofa series of injection wells, production (extraction) wells and monitoring wellsdrilled in specified patterns. Wellfield pattern is crucial to minimizing costsand maximizing efficiencies of production. The satellite facilities allowmining of each wellfield using its own native groundwater.

 

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**Environmental Considerations andPermitting**

 

Uranium mining isregulated by the federal government, states and, where conducted in IndianCountry, by Indian tribes. Compliance with such regulation has a materialeffect on the economics of our operations and the timing of projectdevelopment. Our primary regulatory costs have been related to obtaininglicenses and permits from federal and state agencies before the commencement ofmining activities.

 

***RadioactiveMaterial License.***  ******Beforecommencing operations in both Texas and New Mexico, we must obtain aradioactive material license. Under the federal Atomic Energy Act, the UnitedStates Nuclear Regulatory Commission has primary jurisdiction over the issuanceof a radioactive material license. However, the Atomic Energy Act also allowsfor states with regulatory programs deemed satisfactory by the Commission totake primary responsibility for issuing the radioactive material license. TheCommission has ceded jurisdiction for such licenses to Texas, but not to NewMexico. Such ceding of jurisdiction by the Commission is hereinafter referredto as the “granting of primacy.”

 

The Texas Department of Health is the permittingagency for the radioactive material license. For operations in New Mexico,radioactive material licensing is handled directly by the United States NuclearRegulatory Commission.

 

See **“Properties** ” and “ **Legal Proceedings** ” for the status of ourradioactive material license for New Mexico and our Texas properties.

 

***UndergroundInjection Control Permits (“UIC”).  ***The federal Safe Drinking Water Actcreates a nationwide regulatory program protecting groundwater. This act is administeredby the United States Environmental Protection Agency (the “USEPA”). However, toavoid the burden of dual federal and state (or Indian tribal) regulation, theSafe Drinking Water Act allows for the UIC permits issued by states (and Indiantribes determined eligible for treatment as states) to satisfy the UIC permitrequired under the Safe Drinking Water Act under two conditions. First thestate’s program must have been granted primacy. Second, the USEPA must havegranted, upon request by the state, an aquifer exemption. The USEPA may delayor decline to process the state’s application if the USEPA questions the state’sjurisdiction over the mine site.

 

Texas has been granted primacy for its UIC programs,and the Texas Commission on Environmental Quality administers UIC permits. TheTexas Commission on Environmental Quality also regulates air quality andsurface deposition or discharge of treated wastewater associated with the insitu recovery mining process.

 

New Mexico has also been granted primacy for itsprogram. The Navajo Nation has been determined eligible for treatment as astate, but it has not requested the grant of primacy from the USEPA. Until theNavajo Nation has been granted primacy, in situ recovery uranium miningactivities within Navajo Nation jurisdiction will require UIC permit from theUSEPA. Despite some procedural differences, the substantive requirements of theTexas, New Mexico and USEPA underground injection control programs are verysimilar.

 

Properties located in Indian Country remain subject tothe jurisdiction of the USEPA. Some of our properties are located in areas thatare in dispute.

 

See **“Properties**” and “ **Legal Proceedings** ” for adescription of the status of our UIC permits in Texas and New Mexico.

 

***Other.  ***In addition to radioactive materiallicenses and underground injection control permit, we are also required toobtain from governmental authorities a number of other permits or exemptions,such as for wastewater discharge, for land application of treated wastewater,and for air emissions.

 

In order for a licensee to receive final release fromfurther radioactive material license obligations after all of its mining andpost-mining clean up have been completed in Texas, approval must be issued bythe Texas Department of Health along with concurrence from the United StatesNuclear Regulatory Commission and in New Mexico by the United States NuclearRegulatory Commission.

 

In addition to the costs and responsibilitiesassociated with obtaining and maintaining permits and the regulation ofproduction activities, we are subject to environmental laws and regulationsapplicable to the ownership and operation of real property in general,including, but not limited to, the potential responsibility for the activitiesof prior owners and operators.

 

The current environmental regulatory program for thein situ recovery industry is well established. Many in situ recovery mines havegone full cycle without any significant environmental impact. However, thepublic anti-nuclear lobby can make environmental permitting difficult andtiming unpredictable.

 

**Reclamation and Restoration Costs andBonding Requirements**

 

At the conclusion of mining, a mine site isdecommissioned and decontaminated, and each wellfield is restored and reclaimed.Restoration involves returning the aquifer to its pre-mining use and removingevidence of surface disturbance. Restoration can be accomplished by flushingthe ore zone with native ground water or using reverse osmosis to remove ions,minerals and salts to provide clean water for reinjection to flush the orezone. Decommissioning and decontamination entails dismantling and removing thestructures, equipment and materials used at the site during the mining andrestoration activities.

 

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The Company is required by the State of Texasregulatory agencies to obtain financial surety relating to certain of itsfuture restoration and reclamation obligations. The Company has a combinationof bank Letters of Credit (the “L/C’s) and performance bonds issued for thebenefit of the Company to satisfy such regulatory requirements. The L/C’s wereissued by Bank of America and the performance bonds have been issued by UnitedStates Fidelity and Guaranty Company (“USF&G”). The L/C’s relate primarilyto our operations at our Vasquez project and amounted to $2,072,000 and$944,000, at December 31, 2006 and 2005, respectively. The L/C’s arecollateralized in their entirety by certificates of deposit.

 

The performance bonds were $2,835,000 on December 31,2006 and 2005, respectively, and related primarily to our operations atKingsville Dome and Rosita. USF&G has required that the Company depositfunds collateralizing a portion of the bonds, and we have depositedapproximately $360,000 and $344,000 at December 31, 2006 and 2005,respectively, as cash collateral for such bonds. We are obligated by agreementwith the bonding company to increase the cash collateral to an amount equal to50% of the amount of the bonds, plus an additional $0.50 for each pound ofuranium produced until the account accumulates an additional $1.0 million.

 

We estimate that our actual reclamation liabilitiesfor completed operations at Kingsville Dome and Rosita and current operationsat Vasquez at December 31, 2006, are about $5.0 million of which thepresent value of $4.1 million is recorded as a liability as of December 31,2006. Under an agreement reached on March 1, 2004 with the Texasregulatory agencies and our bonding company, we agreed to fund ongoinggroundwater restoration at the Kingsville Dome and Rosita mine sites atspecified treatment rates, utilizing a portion of our cash flow from sales ofuranium from the Vasquez site as a substitute for additional bonding.

 

These financial surety obligations are reviewed andrevised periodically by the Texas regulators.

 

In New Mexico, surety bonding will be required beforecommencement of mining and will be subject to annual review and revision by theUnited States Nuclear Regulatory Commission and the State of New Mexico or theUSEPA.

 

**Water Rights**

 

Water is essential to the in situ recovery process. Itis readily available in South Texas. In Texas, water is subject to capture, andwe do not have to acquire water rights through a state administrative process.In New Mexico, water rights are administered through the New Mexico StateEngineer and can be subject to Indian tribal jurisdictional claims. New waterrights or changes in purpose or place of use or points of diversion of existingwater rights, such as those in the San Juan and Gallup Basins where ourproperties are located, must be obtained by permit from the State Engineer.Applications may be approved subject to conditions that govern exercise of thewater rights.

 

Jurisdiction over water rights becomes an issue in NewMexico when an Indian nation, such as the Navajo Nation, objects to the StateEngineer’s authority and claims tribal jurisdiction over Indian Country. Thisissue may result in litigation between the Indian nation and the state, whichmay delay action on water right applications, and can require applications tothe appropriate Indian nation and continuing jurisdiction by the Indian nationover use of the water. The foregoing issues arise in connection with certain ofour New Mexico properties.

 

In New Mexico, we hold approved water rights toprovide sufficient water to conduct mining at the Churchrock project and Section 24for the Crownpoint project for the projected life of these mines. We also holdtwo unprotested senior water rights applications that, when approved, wouldprovide sufficient water for future extensions of the Crownpoint project.

 

**Competition**

 

We market uranium to utilities in direct competitionwith supplies available from various sources worldwide. The Company competes primarilybased on price.

 

**Item 1A.  Risk Factors.**

 

The factors identified below are important factors(but not necessarily all of the important factors) that could cause actualresults to differ materially from those expressed in any forward-looking statementmade by, or on behalf of, the Company. Where any such forward-looking statementincludes a statement of the assumptions or bases underlying suchforward-looking statement, we caution that, while we believe such assumptionsor bases to be reasonable and make them in good faith, assumed facts or basesalmost always vary from actual results, and the differences between assumedfacts or bases and actual results can be material, depending upon thecircumstances. Where, in any forward-looking statement, the Company, or itsmanagement, expresses an expectation or belief as to the future results, suchexpectation or belief is expressed in good faith and believed to have areasonable basis, but there can be no assurance that the statement ofexpectation or belief will result, or be achieved or accomplished. Taking intoaccount the foregoing, the following are identified as important risk factorsthat could cause actual results to differ materially from those expressed inany forward-looking statement made by, or on behalf of, the Company.

 

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**Ourability to function as an operating mining company is dependent on our abilityto mine our properties at a profit sufficient to finance further miningactivities and for the acquisition and development of additional properties.**

 

Our ability to operate on a positive cash flow basisis dependent on mining sufficient quantities of uranium at a profit sufficientto finance our operations and for the acquisition and development of additionalmining properties.

 

**The Navajo Nation ban on uraniummining in Indian country encompasses some of our properties in New Mexico andwill adversely affect our ability to mine unless the ban is overturned.**

 

In April 2005, the Navajo Nation Council passedthe Diné Natural Resources Protection Act of 2005 prohibiting uranium miningand processing on any sites within Indian Country. Some of our New Mexicoproperties have been determined to be Indian country and the status of othersas Indian country is in dispute. We believe that the ban is  beyond thejurisdiction of the Navajo Nation. However, the ban may prevent us fromdeveloping and operating the properties until the jurisdictional issues isresolved.

 

In February 2007, the USEPA determined that Section 8of our Churchrock property was Indian country and that the USEPA and not thestate of New Mexico has the authority to issue the UIC permits for Section 8that are a precondition to mining. We are appealing that decision to the UnitedStates Court of Appeals for the Tenth Circuit.

 

**As of December 31, 2006, weidentified a material weakness in internal control over financial reporting andconcluded that our disclosure controls were not effective. If we fail tomaintain an effective system of internal and disclosure controls, we may not beable to accurately report our financial results or prevent fraud. As a result,investors may be misled and lose confidence in our financial reporting anddisclosures and the price of our common stock may be negatively affected.**

 

The Sarbanes-Oxley Act of 2002 requires that we reportannually on the effectiveness of our internal control over financial reporting.Among other things, we must perform systems and process evaluation and testing.We must also conduct an assessment of our internal controls to allow managementto report on, and our independent registered public accounting firm to attestto, our assessment of our internal control over financial reporting as requiredby Section 404 of the Sarbanes-Oxley Act.

 

In connection with the assessment of our internalcontrol over financial reporting for this Annual Report on Form 10-K/A, asfurther described in Item 9A, management and our registered public accountingfirm determined that as of December 31, 2006 our disclosure controls andprocedures were ineffective because of the material weakness in our internalcontrol over financial reporting.

 

Although we have made and are continuing to makeimprovements in our internal controls, if we are unsuccessful in remediatingthe material weakness impacting our internal control over financial reporting anddisclosure controls, or if we discover other deficiencies, it may adverselyimpact our ability to report accurately and in a timely manner our financialcondition and results of operations in the future, which may cause investors tolose confidence in our financial reporting and may negatively affect the priceof our Common Stock. Moreover, effective internal and disclosure controls arenecessary to produce accurate, reliable financial reports and to prevent fraud.If we continue to have deficiencies in our internal control over financialreporting and disclosure controls, they may negatively impact our business andoperations.

 

**Our inability to obtain financialsurety would threaten our ability to continue in business.**

 

Future bonding requirements will increasesignificantly when future development and production occurs at our sites inTexas and New Mexico. The amount of the bonding for each producing property issubject to annual review and revision by regulators. We expect that the issuerof the bonds will require us to provide cash collateral equal to the faceamount of the bond to secure the obligation.

 

**Because we have limited capital,inherent mining risks pose a significant threat to us.**

 

Because we are small with limited capital, we areunable to withstand significant losses that can result from inherent risksassociated with mining, including environmental hazards, industrial accidents,flooding, interruptions due to weather conditions and other acts of nature.Such risks could result in damage to or destruction of our wellfieldinfrastructure and production facilities, as well as to adjacent properties,personal injury, environmental damage and processing and production delays,causing monetary losses and possible legal liability.

 

**More stringent federal and stateregulations could adversely affect our business.**

 

If we are unable to obtain or maintain permits orwater rights for development of our properties or otherwise fail to manageadequately future environmental issues, our operations could be materially andadversely affected. We have expended significant resources, both financial andmanagerial, to comply with environmental protection laws, regulations andpermitting requirements and we anticipate that we will be required to continueto do so in the future. Although we believe our 

 

 

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properties comply in all material respects with allrelevant permits, licenses and regulations pertaining to worker health andsafety as well as those pertaining to the environment and radioactivematerials, the historical trend toward stricter environmental regulation maycontinue. The volatility of uranium prices makes our business uncertain.

 

**The volatility of uranium pricesmakes long-range planning uncertain and raising capital difficult.**

 

The price of uranium is affected by numerous factorsbeyond our control, including the demand for nuclear power, political andeconomic conditions, and legislation and production and costs of production ofour competitors.

 

**The only market for uranium isnuclear power plants world wide, and there are only a few customers.**

 

We are dependent on a small number of electricutilities that buy uranium for nuclear power plants. Because of the limitedmarket for uranium, a reduction in purchases of newly-produced uranium byelectric utilities for any reason (such as plant closings) would adverselyaffect the viability of our business.

 

**The price of alternative energysources affects the demand for and price of uranium.**

 

The attractiveness of uranium as an alternative fuelto generate electricity is to some degree dependent on the prices of oil, gas,coal and hydro-electricity and the possibility of developing other low costsources for energy.

 

**Public acceptance of nuclear energyis uncertain.**

 

Maintaining the demand for uranium at current levelsand future growth in demand will depend upon acceptance of nuclear technologyas a means of generating electricity. Lack of public acceptance of nucleartechnology would adversely affect the demand for nuclear power and increase theregulation of the nuclear power industry.

 

**Our inability to obtain insurancewould threaten our ability to continue in business.**

 

We currently have liability and property damageinsurance that we believe is adequate. However, the insurance industry isundergoing change and premiums are being increased. If premiums should increaseto a level we cannot afford, we could not continue in business.

 

**If we cannot add additional reservesto replace production in the future, we would not be able to remain inbusiness.**

 

Our future uranium production, cash flow and incomeare dependent upon our ability to mine our current properties and acquire anddevelop additional reserves. There can be no assurance that our properties willbe placed into production or that we will be able to continue to find anddevelop or acquire additional reserves.

 

**Competition from better-capitalizedcompanies affects prices and our ability to acquire properties and personnel.**

 

There is global competition for uranium properties,capital, customers and the employment and retention or qualified personnel. Inthe production and marketing of uranium there are about 15 major producingentities, some of which are government controlled and all of which are significantlylarger and better capitalized than we are. We also compete with uraniumrecovered from the de-enrichment of highly enriched uranium obtained from thedismantlement of United States and Russian nuclear weapons and imports to theUnited States of uranium from the former Soviet Union.

 

**Industry-wide competition forexploration and development tools could delay production.**

 

Intense industry-wide competition for exploration anddevelopment tools can create the shortage of drill rigs, logging trucks and otherequipment. Such shortages could delay our production.

 

**Competition from numerous smallcompanies affects our ability to acquire properties and personnel and retainexisting personnel.**

 

There are numerous entities in the market that competewith us for properties and are attempting to become licensed to operate ISRfacilities. In addition, we are aware several entities have expressed interestin hiring certain of our employees. To retain key employees, we may faceincreased compensation costs, including potential new option grants.

 

**Over 56% of our shares of CommonStock is controlled by Principal Stockholders and Management.**

 

Over 56% of our Common Stock is controlled by sixstockholders of record. In addition, our directors and officers are the beneficialowners of about 6.8% of our Common Stock. This includes with respect to bothgroups shares that may be purchased upon the exercise of outstanding options.Such ownership by the Company’s principal shareholders, executive officers anddirectors may have the effect of delaying, deferring, preventing orfacilitating a sale of the Company or a business combination with a thirdparty.

 

 

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**The availability for sale of a largeamount of shares may depress the market price for our Common Stock.**

 

The Company has 51,797,339 shares of Common Stockcurrently outstanding, all of which are transferable under a RegistrationStatement on Form S-1, S-8 prospectuses or otherwise. The availability forsale of such a large amount of shares may depress the market price for ourCommon Stock and impair our ability to raise additional capital through thepublic sale of Common Stock. The Company has no arrangement with any of theholders of the foregoing shares to address the possible effect on the price ofthe Company’s Common Stock of the sale by them of their shares.

 

**Item 1B.    UnresolvedStaff Comments.**

 

None.

 

**Item 2.   Properties.**

 

**South Texas**

 

We currently control 3 major properties in the state of Texas.  The Kingsville Dome, Rosita and Vasquezproperties are shown in Figure No. 2.1 and are described below.

 

**Figure No 2.1. Texas Properties Location Map**

 

 

***Kingsville Dome (Figure 2.2)***

 

*The Property.*    The Kingsville Domeproperty consists of mineral leases from private landowners on about 2,354gross and net acres located in central Kleberg County, Texas. The leasesprovide for royalties based upon a percentage of uranium sales of 6.25%. Theleases have expiration dates ranging from 2000 to 2007. We hold most of these leasesby production; and with a few minor exceptions, all the leases contain clausesthat permit us to extend the leases not held by production by payment of a peracre royalty ranging from $10 to $30. We have paid such royalties on allmaterial acreage.  Mineralization isfound in the Goliad formation at depths of 600 to 750 feet.

 

 

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*Production History.  * Initial production commenced in May 1988.From then until July 1999, we produced a total of 3.5 million pounds.Production was stopped in July 1999, because of depressed uranium prices.We spent about $10.4 million in capital expenditures at Kingsville Dome in2006. We resumed production at Kingsville Dome in April 2006 and produced94,100 pounds of uranium in 2006. We believe that there is a significantquantity of uranium remaining at Kingsville Dome.

 

*PermittingStatus.**  * A radioactive materiallicense and underground injection control permit have been issued. As new areasare proposed for production, additional authorizations under the area permitare required. Approval of our Production Area Authorization #3 was received in February 2006which allowed for the start-up of production at Kingsville Dome in April 2006.See “ **Legal Proceedings** .”

 

*Restoration andReclamation.  *During 2006, we conducted restoration activities as required by thepermits and licenses on this project, spending approximately $321,000 on suchactivities. In 2005 and 2004, we spent about $358,000 and $256,000 inrestoration costs.

 

**Figure No. 2.2.  Kingsville Dome Property**

 

 

 

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***Rosita (Figure 2.3)***

 

*TheProperty:*TheRosita and Rosita South property consists of mineral leases from privatelandowners on about 2075 gross and net acres (775 acres in Rosita and 1300acres in Rosita South) located in north-central Duval County, Texas.  The leases provide for sliding scaleroyalties based on a percentage of uranium sales.  Royalty percentages on average increase from6.25% up to 18.25 % when uranium prices reach $80.00 per pound.  The leases have expiration dates ranging from2012 to 2015.  We are holding theseleases by payment of rentals ranging from $10 to $30 per acre.

 

                *Production History:*Initial production commenced in 1990. From then until July 1999, URI produced a total of 2.64 millionpounds.  Production was stopped in July of1990 because of depressed uranium prices. Based on the significant increase inthe market price of uranium, we are re-evaluating the potential for uranium productionat the Rosita project and believe the project could resume operations by eitherproducing uranium from Rosita or in conjunction with processing uranium minedfrom other South Texas projects.  Inorder to restart the plant facility, we have spent about $2.8 million in 2006for plant refurbishment and wellfield development.  We will need to spend additional funds forthe development and plant refurbishment to bring this project back on-line andare evaluating the range of such cash requirements, depending on the projectedscope of the operation.  We areconducting restoration and reclamation, of which $676,000 was spent in2006.  In 2005 and 2004, we spent about$618,000 and 315,000 for restoration and reclamation activities.  Mineralization is found in the GoliadFormation at depths of 125 to 350 feet.

 

*                PermittingStatus:*  A radioactive material license and anunderground injection control permit have been issued for the Rositaproperty.  The underground injectioncontrol permit is being amended to include the Rosita South property.  Production could resume in areas alreadyincluded in existing Production Area Authorizations.  As new areas are proposed for production,additional authorizations under the permit will be required.

 

 

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**Figure No. 2.3.  RositaProperty Mineral Ownership**

 

 

***Vasquez (Figure 2.4)***

 

*The Property.  *We have a mineral lease on 872 gross andnet acres located in southwestern Duval County, in South Texas. The primaryterm expires in February 2008.  Wehold the lease by production.  The leaseprovides for royalties based upon 6.25% of uranium sales below $25.00 per poundand royalty rate increases on a sliding scale up to 10.25% for uranium salesoccurring at or above $40.00 per pound. Mineralization is found in the Oakville formation at depths of 200 to250 feet.

 

*Production History.  *We commenced production from thisproperty in October 2004. We spent about $3.4 million in capitalexpenditures at Vasquez and produced 165,000 pounds of uranium in 2006. Wespent about $3.9 million in capital expenditures at Vasquez in 2005. Weproduced 310,000 pounds of uranium in 2005 and sold 271,000 pounds. We spentabout $2.7 million in capital expenditures at Vasquez in 2004. We produced76,200 pounds of uranium in 2004 and sold 72,350 pounds.

 

*Permitting Status.  * All of the required permits for thisproperty have been received.

 

 

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**Figure No. 2.4.  Vasquez Property**

 

 

 

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** **

**New Mexico Properties**

 

***General.  ***We havevarious interests in properties located in New Mexico (Figure 2.5). We have feelands, patented and unpatented mining claims, mineral leases and some surfaceleases. We have spent $11.2 million to date on permitting for New Mexico.Additional expenditures will be required and could be material. We are unableto estimate the amount. We expect that whatever is spent will occur overmultiple years. See****“**Legal Proceedings******”**for adiscussion of the current status of our license for New Mexico.

 

**Figure No. 2.5.  Location ofNew Mexico Properties**

 

*** ***

***Church Rock/ Mancos (Figure 2.6)***

 

*The Property.  *The Church Rock project encompasses about2,200 gross and net acres. The properties are located in McKinley County, NewMexico and consist of three parcels, known as Section 8, Section 17and Mancos. None of these parcels lies within the area generally recognized asconstituting the Navajo Reservation. Access to the Church Rock property is viaState Highway 566 and access to Mancos is via 4-wheel drive ranch roads west ofState Highway 566.

 

We own the mineral estate in fee for the NE 1⁄4 and theSW 1⁄4 of the NW 1⁄4 of Section 17, T16N, R16W.  In Section 8, T16N, R16W, we own the SE1⁄4 in fee and hold the minerals in the rest of the section with 26 unpatentedfederal mining claims (UNC1A thru UNC 26). For the Mancos Property, we own the minerals in Section 13, T16N,R17W, in fee, the minerals in the NW 1⁄4 of Section 7, T16N, R16W, in feeand hold the minerals in the E 1⁄2 of Section 12, T16N, R17W, with 20unpatented federal mining claims (KP1A thru KP5A, KP19, KP36, 121617-14A thru121617-18A, 121617-20A thru 

 

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121617-23A and 121617-32A thru 121617-35A).  The federal unpatented mining claims are allheld through the payment of a $125.00 assessment fee each year on each claim.

 

Mineralization occurs in the Westwater Member of theMorrison Formation at depths of 800 to 1700 feet.

 

The surface estate on Section 17,Mancos Section 13 and Mancos Section 7 is owned by the United StatesGovernment and held in trust for the Navajo Nation. On those sections we haveroyalty obligations ranging from 5% to 6 1⁄4% and a 2% overriding royaltyobligation to the Navajo Nation for surface use agreements.  The total royalties on Section 8 dependon the sales’ price of uranium.  Theroyalty agreements are unclear, but depending on the interpreation of theroyalty agreements the aggregate royalties could be as much as 39.25% at thecurrent price of uranium, although we believe the aggregate royalties are alower amount.

 

*Development Plan.  *We anticipate that Churchrock will be thefirst of our New Mexico properties we will develop. We spent about $305,000 and$382,000 in 2006 and 2005, respectively, for permitting activities and landholding costs and about $124,000 in 2004 for permitting activities and landholding costs. In December 2006, we entered into a joint venture withItochu to jointly develop this property (see “ **Business—Joint Venture for Churchrock Property** ”).

 

*Water Rights.  *The State Engineer approved our waterrights application in October 1999 and granted us sufficient water rightsfor the life of Churchrock.

 

*Permitting Status.  *We have the radioactive material licensefor Section 8. This license is subject to the continuing proceedingsdescribed under “ **Legal Proceedings**..” With respect to the UIC permits, see “ **LegalProceedings.** ” We do not plan to pursue permits for Mancos at thistime.

 

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**Figure No. 2.6.  Church Rock/ Mancos Property Mineral Ownership**

 

 

***Crownpoint (Figure 2.7)***

 

*The Property.  *The Crownpoint properties are located inthe San Juan Basin, 22 miles northeast of our Churchrock deposits and 35 milesnortheast of Gallup, New Mexico, adjacent to the town of Crownpoint, NewMexico. The Properties consist of 619 gross and 521.8 net acres. We hold theminerals in the NW 1⁄4 of Section 9, T17N, R13W with 9 unpatented federalmining claims (CP-1 thru CP9) and the minerals in the SW 1⁄4 of Section 24,T17N, R13W with 10 unpatented federal mining claims (CP-10 thru CP-19).  In the SE 1⁄4 of Section 24, T17N, R13W wehold a 40% interest in the minerals through a lease (the “Walker” lease) onapproximately 139 acres and hold 100% of the minerals on the remaining 21 acreswith two unpatented federal mining claims (Consol I and Consol II).  In the NE 1⁄4 of Section 25, T17N, R13W wehold the minerals with eight unpatented federal mining claims (Hydro-1 thruHydro-8).  The federal unpatented miningclaims are held through 

 

18

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the payment of a $125.00 assessment fee each year oneach claim.  Access is via paved roadfrom State Highway 371, through the town of Crownpoint to Church Road to themain gate of the property.

 

Mineralization is found in the Westwater Member of theMorrison Formation at a depth of from 2,100 to 2,300 feet.  Three pilot shafts were completed on theproperty in the early 1980’s but were never completed.  Surface facilities dating from thoseactivities including buildings and their associated electrical/waterinfrastructure are still in-place and are currently used as offices and storagefacilities.

 

*Development Plan.  * We spent about $91,000 and $397,000 in2006 and 2005, respectively, for permitting activities and land holding costsand about $61,000 in 2004 for permitting activities and land holding costs.

 

*Water Rights.  * We have three pending applications forappropriations of water, which give us the first three “positions in line” onthe hearings list for the San Juan Basin. Certain of the water rights mayinvolve a claim of jurisdiction by the Navajo Nation.

 

*Permitting Status.  * See “ **LegalProceedings** ” for a discussion of the radioactive material licensefor Crownpoint. The surface estate on Section 19 and 29 is owned by theUnited States Government and held in trust for the Navajo Nation and may besubject to the same jurisdictional dispute with respect to the UIC permit asfor Section 8 and 17 in Churchrock.

 

**Figure No. 2.7.  Crownpoint Property Mineral Ownership**

 

 

19

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***Nose Rock (Figure 2.8)***

 

The Nose Rock property consists of approximately 6,400acres and is located about 12 miles northeast of Crownpoint, New Mexico. The mineralsis held in fee on Sections 10, 11, 15, 17, 18, 19, 20, 29, 30 and 31 all inT19N, R11W.  Access to the property isvia a 4-1/2 mile private paved road north of Tribal Road 9.  The property was developed by Philips UraniumCorporation in the early 1980’s and includes two circular concrete-lined shaftsthat have been completed to a depth of 3,300 feet.  Both shafts have been plugged at surface andjust above the Westwater.  There is nousable surface infrastructure on site. Mineralization occurs in the Westwater Member of the Morrison Formation,

 

**Figure No. 2.8.  Nose Rock Property Mineral Ownership**

 

 

20

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***West Largo(Figure 2.9)***

 

The West Largo property is comprised of six contiguoussections of land located in McKinley County, New Mexico about 21 miles north ofthe town of Milan, New Mexico and about three miles west of State Highway509.  Access is via a nine-mile 4-wheeldrive road from State Highway 509.  Theminerals on sections 17, 19, 21 and 29 T15N, R10W is held in fee and theminerals on sections 20 and 28 T15N, R10W is held by 75 unpatented federalmining claims (ID21 thru ID91 and ID95 thru ID98).  The Federal unpatented mining claims are heldthrough the payment of a $125.00 assessment fee each year on each claim.

 

Mineralization occurs in the Westwater Member of theMorrison Formation at depths ranging from 2,000 to 2,750 feet depending onsurface topography.  Over 1,000 drillholes were used to define the mineralization in the late 1970’s and early 1980’s.  Other than this exploration drilling, therehas been no development on this property.

 

**Figure2.9.  West Largo Property MineralOwnership**

 

 

21

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***Roca Honda (Figure 2.10)***

 

The Roca Honda property  is comprised of four sections of landtotaling approximately 2,560 acres located about 4 miles northwest of the townof San Mateo in McKinley County, New Mexico.  Sections 13, 15 and 17, T13N, R8W are held in fee and Section 8,T13N, R8W is held by 36 unpatented federal mining claims (Roca Honda 55 thruRoca Honda 63, Roca Honda 82 thru Roca Honda 90, Roca Honda 109 thru 117 andRoca Honda 136 thru Roca Honda 144). The federal unpatented mining claims areheld through the payment of a $125.00 assessment for each year on eachclaim.  The property is accessed overvarious 4-wheel drive ranch roads north of State Highway 605.

 

 Mineralizationoccurs in the Westwater Member of the Morrison Formation at depths ranging from1,700 on Section 17 to over 3,300 feet in Section 13.  In the late 1970’s and early 1980’s, variousoperators drilled 620 exploration holes on the property.  In the late 1980’s, Kerr-McGee sank a shaftto a depth of 1,475 feet on Section 17 to develop the property, then knownas the Lee Mine.  The shaft was stoppedshort of the ore zone and the mine closed down when uranium prices fell in1983.  There is no useable infrastructureon surface.

 

**Figure No. 2.10.  Roca Honda Property Mineral Ownership**

 

 

22

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**Insurance**

 

Our property is covered by various types of insuranceincluding property and casualty, liability and umbrella coverage. We have notexperienced any material uninsured or under insured losses related to ourproperties in the past and believe that sufficient insurance coverage is inplace. Future losses if sustained would not be material.

 

**Reclaimed Properties**

 

We have completed production and groundwaterrestoration on our Benavides and Longoria projects in South Texas. We completedthe final stages of surface reclamation on these projects and received full andfinal release for these sites in 1999.

 

We acquired the Section 17 leases in the NewMexico Churchrock district from United Nuclear Corporation. It had conductedunderground mining for uranium on Section 17 and had reclaimed theseproperties. In the acquisition, we assumed any liability of United NuclearCorporation for any remaining remediation work that might be required. The NewMexico Energy Minerals and Natural Resources Department has not determinedwhat, if any, additional remediation would be required under the New MexicoMining Act. If more remediation work is required, we believe it would notinvolve material expenditures.

 

**Item 3.****          ****Legal Proceedings.**

 

**New Mexico Radioactive MaterialLicense**

 

In the State of New Mexico, uranium recovery by insitu recovery (“ISR”) technology requires a radioactive material license issuedby the United States Nuclear Regulatory Commission (the “NRC” or the “Commission”).We applied for one license covering the properties located in both theChurchrock and Crownpoint districts collectively known as the CrownpointUranium Project. The Commission issued an operating license for the CrownpointUranium Project in January 1998 that allowed ISR uranium recoveryoperations to begin in the Churchrock district. In mid-1998, the Commissiondetermined that certain Churchrock and Crownpoint residents who requested ahearing had standing to raise certain objections to the license. AnAdministrative Law Judge conducted a hearing during 1999. The AdministrativeLaw Judge upheld the Churchrock Section 8 license and granted our requestto defer any dispute on all but the Churchrock Section 8 property until wemake a decision whether to mine these other properties.

 

The ruling was appealed to the Commission. On January 31,2000, the Commission issued an order concurring with the technical, substantiveand legal findings of the Administrative Law Judge, but the Commission alsodetermined that we must proceed with the hearing process for the other NewMexico properties beyond Churchrock Section 8. Subsequently, the hearingprocess was held in abeyance until 2004 pursuant to NRC supervised settlementnegotiations between the parties.

 

In February 2004, the Administrative Law Judgeissued an order, which concluded that we must make three specific changes toour submitted restoration action plan for Churchrock Section 8 in order tocommence mining operations at Churchrock. The Commission accepted our petitionfor review on two of three issues and subsequently overruled the AdministrativeLaw Judge on these issues. The parties agreed to truncate the number and scopeof the issues remaining for consideration at the three sites, and theAdministrative Law Judge is proceeding with the hearing on four remainingissues at the remaining three sites.

 

All contested issues regarding the Crownpoint UraniumProject have been decided by the Administrative Law Judge in our favor, with afew minor amendments, and affirmed on appeal by the full Commission.Intervenors have appealed the Commission’s final endorsement to the UnitedStates Court of Appeals for the Tenth Circuit. The Company has intervened todefend the license.

 

**New Mexico UIC Permit**

 

The State of New Mexico, the USEPA and the Navajo Nationare engaged in a jurisdictional dispute as to which entity has the authority toissue Underground Injection Control (“UIC”) program permits and, in the case ofsome of the Churchrock and Crownpoint properties, aquifer exemptions requiredto mine a portion of our Churchrock and Crownpoint properties. The dispute wastaken to the United States Court of Appeals for the Tenth Circuit, which in January 2000remanded to the USEPA the issue whether the Section 8 Churchrock propertywas Indian Country. In February 2007, the USEPA issued a decision thatfound that Section 8 was Indian country and that the USEPA was the properauthority to issue the UIC permit. We have appealed that decision to the UnitedStates Court of Appeals for the Tenth Circuit. The decision can be accessed atthe USEPA Region 9 website athttp://www.epa.gov/region09/water/groundwater/permit-determination.html.

 

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**Texas Department of Health BondingIssues**

 

On March 1, 2004, the Company entered into aRestoration Performance Agreement with the Texas Department of Health (“TDH”),later renamed the Texas Department of State Health Services, (“DSHS”), theTexas Commission on Environmental Quality and United States Fidelity andGuarantyInsuranceCompany under which the Company agreed to fund ongoing groundwater restorationat the Kingsville Dome and Rosita mine sites at specified treatment rates,utilizing a portion of the Company’s cash flow from sales of uranium from theVasquez site as a substitute for additional bonding. Kleberg County and an adhoc citizen group brought suit challenging the Restoration Agreement. However,Kleberg County has settled with the Company and withdrew its support andfunding of the suit.

 

Kleberg County, Texas, has advised the Company that ithas retained counsel to investigate the possibility of seeking an injunctionagainst new uranium mining at the Company’s Kingsville Dome operations. Thedispute relates to differing interpretations of the Restoration PerformanceAgreement regarding the degree of restoration of previously mined wellfields.In trying the resolve these issues amicably, the Company elected to defer thestartup of production at the new wellfield. When the negotiations failed, theCompany notified the County of its intent to begin new production. The Companybelieves it is in full compliance. We are engaged in a mediation of thisdispute. The Company does not anticipate this dispute will interfere with itsmining at Kingsville Dome.

 

**Kingsville Dome Production AreaAuthorization 3**

 

After a hearing held in August 2005, the TexasCommission on Environmental Quality (“TCEQ”) voted unanimously February 22,2006 to renew the Company’s disposal well permits, WDW-247 and WDW-248, and toissue Kingsville Dome Production Area Authorization 3 (“PAA 3”). Two petitionsfor judicial review were filed. The Texas Attorney General has answered indefense of the TCEQ Order. The TCEQ is in the process of preparing theadministrative record for submission to the court. The TCEQ decision standsuntil and unless vacated by the court. The Company believes the TCEQ decisionis well-founded and will intervene with the Attorney General to defend itsinterests.

 

**Other**

 

The Company is subject to periodic inspection bycertain regulatory agencies for the purpose of determining compliance by theCompany with the conditions of its licenses. In the ordinary course ofbusiness, minor violations may occur; however, these are not expected to causematerial expenditures.

 

**Item 4.****          ****Submission of Matters to a Vote ofSecurity Holders.**

 

None.

 

24

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**GLOSSARY OF CERTAIN URANIUM INDUSTRY TERMS**

 

| claim                 |   | A claim is a  tract of land, the right to mine of which is held under the federal General  Mining Law of 1872 and applicable local laws.                                                                                                                                                                                                                                                                                  |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| concentrates          |   | A product from a  uranium mining and milling facility, which is commonly referred to as uranium  concentrate or U 3 O 8 .                                                                                                                                                                                                                                                                                                 |
| conversion            |   | A process  whereby uranium concentrates are converted into forms suitable for use as  fuel in commercial nuclear reactors.                                                                                                                                                                                                                                                                                                |
| cut-off grade         |   | Cut-off grade is  determined by the following formula parameters: estimates over the relevant  period of mining costs, ore treatment costs, general and administrative  costs, refining costs, royalty expenses, process and refining recovery rates  and uranium prices.                                                                                                                                                 |
| gross acres           |   | Total acres  under which we have mineral rights and can mine for uranium.                                                                                                                                                                                                                                                                                                                                                 |
| Indian Country        |   | A term derived  from jurisdictional determinations in criminal law enforcement proceedings  under 18 U.S.C. § 1151 and understood to encompass territory situated  within Indian reservations, land owned by Indian allottees and land within a  dependent Indian community.                                                                                                                                    |
| mineralized  material |   | A mineralized  body which has been delineated by appropriately spaced drilling and/or  underground sampling to support a sufficient tonnage and average grade. Such  a deposit does not qualify as a reserve, until a comprehensive evaluation  based upon unit cost, grade, recoveries, and other material factors conclude  legal and economic feasibility.                                                             |
| net acres             |   | Actual acres  under lease which may differ from gross acres when fractional mineral  interests are not leased.                                                                                                                                                                                                                                                                                                            |
| ore                   |   | Naturally  occurring material from which a mineral or minerals of economic value can be  extracted at a reasonable profit.                                                                                                                                                                                                                                                                                                |
| over feeding          |   | Operating  enrichment plants in a manner that reduces plant operating costs but  increases the amount of uranium required to produce a given quantity of  enriched uranium.                                                                                                                                                                                                                                               |
| probable  reserves    |   | Reserves for  which quantity and grade and/or quality are computed from information similar  to that used for proven (measured) reserves, but the sites for inspection,  sampling and measurement are farther apart or are otherwise less adequately  spaced. The degree of assurance, although lower than that for proven  (measured) reserves, is high enough to assume continuity between points of  observation.      |
| proven reserves       |   | Reserves for  which (a) quantity is computed from dimensions revealed in outcrops,  trenches, workings or drill holes; grade and/or quality are computed from the  results of detailed sampling and (b) the sites for inspection, sampling  and measurement are spaced so closely and the geologic character is so well  defined that size, shape, depth and mineral content of reserves are  well-established. |
| reclamation           |   | Reclamation  involves the returning of the surface area of the mining and wellfield  operating areas to a condition similar to pre-mining.                                                                                                                                                                                                                                                                                |
| recoverable  reserves |   | Reserves that  are either proven or probable, are physically minable and can be profitably  recovered under conditions specified at the time of the appraisal, based on a  positive feasibility study. The calculation of minable reserves is adjusted  for potential mining recovery and dilution.                                                                                                                       |
| reserve               |   | That part of a  mineral deposit which could be economically and legally extracted or produced  at the time of the reserve determination.                                                                                                                                                                                                                                                                                  |
| restoration           |   | Restoration  involves returning an aquifer to a condition consistent with our pre-mining  use and removing evidences of surface disturbance. The restoration of  wellfield can be accomplished by flushing the ore zone with native ground  water and/or using reverse osmosis to remove ions to provide clean water for  reinjection to flush the ore zone.                                                              |
| resources             |   | A resource is a  concentration of naturally occurring minerals in such a form that economic  extraction is potentially feasible.                                                                                                                                                                                                                                                                                          |
| roll front            |   | The  configuration of sedimentary uranium ore bodies as they appear within the  host sand. A term that depicts an elongate uranium ore mass that is “C”  shaped.                                                                                                                                                                                                                                                |
| shut in               |   | A term that  refers to ceasing production or the absence of production.                                                                                                                                                                                                                                                                                                                                                   |
| shut-in royalty       |   | A lease clause  permitting the extension of a lease not held by production by payment of a  per acre royalty.                                                                                                                                                                                                                                                                                                             |
| slurry                |   | Fine particles  of uranium concentrated and suspended in water.                                                                                                                                                                                                                                                                                                                                                           |
| spot price            |   | The price at  which uranium may be purchased for delivery within one year.                                                                                                                                                                                                                                                                                                                                                |
| surety  obligations   |   | A bond, letter  of credit, or financial guarantee posted by a party in favor of a beneficiary  to ensure the performance of its or another party’s obligations, e.g.,  reclamation bonds, workers’ compensation bond, or guarantees of debt  instruments.                                                                                                                                                       |

 

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| tailings                         |   | Waste material  from a mineral processing mill after the metals and minerals of a commercial  nature have been extracted; or that portion of the ore which remains after  the valuable minerals have been extracted. |
|----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| uranium or  uranium concentrates |   | U 3 O 8  or triuranium octoxide.                                                                                                                                                                                |
| U 3 O 8                          |   | Triuranium  octoxide equivalent contained in uranium concentrates, referred to as uranium  concentrate.                                                                                                              |
| waste                            |   | Barren rock in a  mine, or uranium in a rock formation that is too low in grade to be mined and  milled at a profit.                                                                                                 |

 

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**PART II**

 

**Item 5.****          ****Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

Since April 12, 2007, our Common Stock has beenlisted on the NASDAQ Global Market under the symbol “URRE.” Between April 11,2007 and October 15, 2004, our shares were quoted on the Over the CounterBulletin Board and we were dually quoted on both the OTCBB and the Pink Sheetsduring those dates. From January 1, 2003 until June 24, 2003, we werequoted on the OTCBB. From June 25, 2003, until October 15, 2004, wewere quoted only on the Pink Sheets.

 

The following table setsforth the high and low bid prices for the Common Stock as reported on theapplicable markets for the periods indicated:

 

| ** **                          | ** ** | **Common** | ** ** |
|-------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **Stock**  | ** ** |
| **Fiscal Quarter Ending** | ** ** | **High**   | ** ** | **Low** | ** ** |
| December 31, 2006              |       | $          | 6.86       |   | $ | 2.51 |   |
| September 30, 2006             |       | 5.30       |       | 1.83 |   |
| June 30, 2006                  |       | 7.60       |       | 4.60 |   |
| March 31, 2006                 |       | 7.68       |       | 3.12 |   |
| December 31, 2005              |       | 3.28       |       | 2.20 |   |
| September 30, 2005             |       | 3.40       |       | 1.68 |   |
| June 30, 2005                  |       | 2.84       |       | 1.60 |   |
| March 31, 2005                 |       | 3.88       |       | 2.60 |   |
|                                     |            |            |            |  |  |  |  |

 

As of December 31, 2006, we had 51,791,339 sharesof Common Stock outstanding. On that date, there were 175 holders of record.

 

On March 29, 2006 the Board of Directors declareda 1 for 4 reverse stock split for stockholders of record on April 10,2006. All of the common stock share information, share price information andshare ownership information in this Annual Report on Form 10-K/A has beenrevised to give effect to the reverse stock split. The split was approved bythe Company’s Stockholders at the 2005 Annual Meeting of Stockholders.

 

**Dividends**

 

We have never paid any cash or other dividends on ourCommon Stock, and we do not anticipate paying dividends for the foreseeablefuture.

 

**Securities Authorized for IssuanceUnder Equity Compensation Plans**

 

The following table setsforth information as of December 31, 2006 regarding equity compensation tothe Company’s employees, officers and directors under equity compensationplans.

 

| ** **                                                  | ** ** | **Number of shares** | ** ** | ** **                | ** ** | ** **                     | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **issuable under**        | ** ** | ** **                | ** ** | **Number of shares** | ** ** |
| ** **                                                  | ** ** | **outstanding options**   | ** ** | **Weighted average** | ** ** | **available for**         | ** ** |
| **Plan category**                                      | ** ** | **and rights**            | ** ** | **exercise price**   | ** ** | **future issuance**       | ** ** |
| Equity compensation plans  approved by security holders     |       | 4,524,246                      |       | $                         | 2.36       |                           | 500        |   |
| Equity compensation plans  not approved by security holders |       | 1,201,234                      |       | $                         | 1.34       |                           | 700,000    |   |
| Total                                                       |       | 5,725,480                      |       | $                         | 2.14       |                           | 700,500    |   |

 

**Performance Graph**

 

The following chart compares the yearly changes intotal stockholder return on the Company’s common stock against four othermeasures of performance. The comparison is on a cumulative basis for theCompany’s last five fiscal years. The four other performance measures are theRussell 2000 index, the NASDAQ stock market index, the Dow Jones WilshireMicrocap index and a peer group consisting of Cameco Corp. and US Energy Corp.In each case, we assumed an initial investment of $100 on December 31,2001 and reinvestment of all dividends. Dates on the following chart representthe last trading day of the indicated fiscal year.

 

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** **

**Recent Sales of UnregisteredSecurities.**

 

In January and February 2004 we sold 875,000and 812,500 shares of common stock at $0.40 per share (an aggregate of$675,000) in a transaction not involving a public offering under Section 4(2) ofthe Securities Act of 1933, as amended, and Regulation D thereunder, tocertain accredited investors.

 

In May 2005 we sold 833,333 shares of commonstock at $1.80 per share (an aggregate of $1.5 million) in a transactionnot involving a public offering under Section 4(2) of the SecuritiesAct of 1933, as amended, and Regulation D thereunder, to certainaccredited investors of which George R. Ireland, a director of the Company, isan affiliate.

 

In August 2005 we sold 6 million shares ofcommon stock at $2.00 per share (an aggregate of $12 million) in atransaction not involving a public offering under Section 4(2) of theSecurities Act of 1933, as amended, and Regulation D thereunder, tocertain accredited investors. The Company paid a fee of $336,000 in cash and112,000 shares of Common stock to a placement agent in connection with theoffering. Two private investment partnerships managed by George R. Ireland, adirector of the Company, purchased 400,000 shares in the offering.

 

In April 2006 we sold 10,200,307 shares of commonstock at $4.90 per share (an aggregate of $50.0 million) in a transactionnot involving a public offering under Section 4(2) of the SecuritiesAct of 1933, as amended, and Regulation D thereunder, to certainaccredited investors. The Company paid a 6% fee (3% in cash and 3% in commonstock) to a placement agent in connection with the offering. Two privateinvestment partnerships managed by George R. Ireland, a director of theCompany, purchased 300,000 shares in the offering.

 

**Item 6.****          ****Selected Financial Data.**

 

The following tablesprovide selected financial and operating data for each of the fiscal yearsin the five-year period ended December 31, 2006. The selected financialand operating data set forth below should be read in conjunction with, and arequalified in their entirety by reference to, the section entitled “ **Management’s Discussion and Analysis of FinancialCondition and Results of**

 

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**Operation** ” and the Company’s financial statementsand related notes included elsewhere in this annual report. Historical resultsare not necessarily indicative of results to be expected in any future period.

 
| ** **                                                                   | ** ** | **For the Year Ended December 31,**                                      | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                   | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | **(In thousands except per share and per pound amounts)** | ** ** |
| Uranium sales                                                                |       | $                                                                                                 | 8,581      |   | $ | 4,865 |   | $ | 1,009 |   | $ | — |   | $ | — |   |
| Cost of sales—operations                                                |       | 12,687                                                                                            |       | 6,299 |   | 1,768 |   | 797 |   | 1,159 |   |
| (Gain) loss on derivatives                                                   |       | (34,821                                                                                           | )          | 30,975 |   | 13,112 |   | 2,734 |   | — |   |
| Writedown of uranium  properties and other uranium assets                    |       | 3,495                                                                                             |       | 0 |   | 46 |   | 341 |   | 515 |   |
| Total cost of uranium  sales                                                 |       | (18,639                                                                                           | )          | 37,274 |   | 14,926 |   | 3,872 |   | 1,674 |   |
| Gain (loss) from  operations before corporate expenses                       |       | 27,220                                                                                            |       | (32,409 | ) | (13,917 | ) | (3,872 | ) | (1,674 | ) |
| Corporate expenses                                                           |       | 6,791                                                                                             |       | 3,209 |   | 2,006 |   | 883 |   | 1,202 |   |
| Gain (loss) from  operations                                                 |       | 20,429                                                                                            |       | (35,618 | ) | (15,923 | ) | (4,755 | ) | (2,876 | ) |
| Interest and other, net                                                      |       | 1,081                                                                                             |       | 531 |   | 58 |   | 244 |   | 18 |   |
| Gain (loss) before  accounting change                                        |       | 21,510                                                                                            |       | (35,087 | ) | (15,865 | ) | (4,511 | ) | (2,858 | ) |
| Cumulative effect of  accounting change                                      |       | —                                                                                            |       | — |   | — |   | 1,447 |   | — |   |
| Net earnings (loss)                                                          |       | $                                                                                                 | 21,510     |   | $ | (35,087 | ) | $ | (15,865 | ) | $ | (3,064 | ) | $ | (2,858 | ) |
| Gain (loss) per common share before cumulative effect of accounting  change: |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | $                                                                                                 | 0.44       |   | $ | (0.96 | ) | $ | (0.55 | ) | $ | (0.17 | ) | $ | (0.20 | ) |
| Diluted                                                                      |       | $                                                                                                 | 0.42       |   | $ | (0.96 | ) | $ | (0.55 | ) | $ | (0.17 | ) | $ | (0.20 | ) |
| Cumulative effect of  accounting change per common share:                    |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | $                                                                                                 | —     |   | $ | — |   | $ | — |   | $ | 0.08 |   | $ | — |   |
| Diluted                                                                      |       | $                                                                                                 | —     |   | $ | — |   | $ | — |   | $ | 0.08 |   | $ | — |   |
| Net earnings (loss) per  common share:                                       |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | $                                                                                                 | 0.44       |   | $ | (0.96 | ) | $ | (0.55 | ) | $ | (0.09 | ) | $ | (0.20 | ) |
| Diluted                                                                      |       | $                                                                                                 | 0.42       |   | $ | (0.96 | ) | $ | (0.55 | ) | $ | (0.09 | ) | $ | (0.20 | ) |
| Weighted average common  stock and equivalents outstanding:                  |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | 48,338                                                                                            |       | 36,644 |   | 28,725 |   | 18,194 |   | 14,421 |   |
| Diluted                                                                      |       | 51,560                                                                                            |       | 36,644 |   | 28,725 |   | 18,194 |   | 14,421 |   |
| CONSOLIDATED OPERATING AND  OTHER DATA                                       |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Cash used in operations                                                      |       | $                                                                                                 | (2,215     | ) | $ | (1,722 | ) | $ | (2,541 | ) | $ | (1,952 | ) | $ | (1,342 | ) |
| Capital expenditures and  investing activities                               |       | (31,906                                                                                           | )          | (6,364 | ) | (4,777 | ) | 655 |   | (534 | ) |
| Financing activities                                                         |       | 48,445                                                                                            |       | 13,670 |   | 7,277 |   | 581 |   | 2,352 |   |
| Net increase (decrease) in  cash and equivalents                             |       | $                                                                                                 | 14,324     |   | $ | 5,584 |   | $ | (41 | ) | $ | (716 | ) | $ | 476 |   |
|                                                                         |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Pounds of uranium produced                                                   |       | 259                                                                                               |       | 310 |   | 76 |   | — |   | — |   |
| Pounds of uranium  delivered                                                 |       | 263                                                                                               |       | 271 |   | 72 |   | — |   | — |   |
| Average sales price per  pound                                               |       | $                                                                                                 | 32.63      |   | $ | 17.95 |   | $ | 13.95 |   | — |   | — |   |
| Average cost of produced  pounds sold                                        |       | $                                                                                                 | 43.36      |   | $ | 20.32 |   | $ | 11.76 |   | — |   | — |   |
| Royalties/commissions per  pound sold                                        |       | $                                                                                                 | 2.92       |   | $ | 1.31 |   | $ | 0.94 |   | — |   | — |   |
|                                                                              |            |                                                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**CONSOLIDATEDBALANCE SHEET DATA**

 

| ** **                                 | ** ** | **At December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                 | ** ** | ** **                    | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **(In thousands)**       | ** ** |
| Cash and cash equivalents                  |       | $                             | 20,177     |   | $ | 5,853 |   | $ | 269 |   | $ | 310 |   | $ | 1,025 |   |
| Working capital                            |       | 18,371                        |       | (16,370 | ) | (5,650 | ) | 115 |   | (166 | ) |
| Net property, plant and  equipment         |       | 18,196                        |       | 8,689 |   | 4,308 |   | 684 |   | 716 |   |
| Total assets                               |       | 45,936                        |       | 17,913 |   | 6,592 |   | 1,499 |   | 3,222 |   |
| Unrealized loss on  derivatives            |       | —                        |       | 46,821 |   | 15,846 |   | 2,734 |   | — |   |
| Total debt                                 |       | 838                           |       | 626 |   | 585 |   | 585 |   | 585 |   |
| Total liabilities                          |       | 9,167                         |       | 53,903 |   | 21,884 |   | 8,299 |   | 7,539 |   |
| Total shareholders’ equity  (deficit) |       | $                             | 36,769     |   | $ | (35,990 | ) | $ | (15,293 | ) | $ | (6,800 | ) | $ | (4,317 | ) |

 

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**Item 7.****          ****Management’s Discussion and Analysisof Financial Condition and Results of Operation.**

 

**Forward Looking Statements**

 

This Item 7 contains “forward looking statements.”These statements include, without limitation, statements relating to liquidity,financing of operations, continued volatility of uranium prices and othermatters. The words “believes,” “expects,” “projects,” “targets,” “estimates” orsimilar expressions identify forward-looking statements. We do not undertake toupdate, revise or correct any of the forward-looking information. Readers arecautioned that such forward-looking statements should be read in conjunctionwith our disclosures under the heading: “Risk Factors” beginning on page 11.

 

**Restatement of Financial Statements**

 

The financial statements for the year ended December 31,2004 have been restated to give effect for fair value accounting of certainuranium sales contracts under FAS No. 133, Accounting for DerivativeInstruments and Hedging Activities. The Company determined that at December 31,2003, its long-term uranium sales contracts met the definition of derivativefinancial instruments for financial statement reporting purposes, and thefinancial statements have been restated as of such date, to record thesecontracts at fair value.

 

**Financial Condition and Results ofOperations**

 

***Comparison of Twelve Months Ended December 31, 2006,2005 and 2004***

 

*Production and Sales. *Our uranium production increased from 76,200 pounds in2004, to 310,000 pounds in 2005 and trailed off to 259,100 pounds in 2006.  Production began at our Vasquez project inthe fourth quarter of 2004 and increased in 2005 as Vasquez’s wellfieldsreached there peak production output.

 

In 2006 we saw a drop off in Vasquez production andthe start-up of production from our Kingsville project.  We expect this trend to continue in 2007,with Vasquez contributing a lower percentage of overall production andKingsville Dome contributing the majority of our uranium production.  The start-up of production from KingsvilleDome wellfield 13 in January 2007, the first new production from ourProduction Area 3 at Kingsville Dome is expected to allow us to increaseproduction from 2006 levels.

 

We expect our 2007 production rates to increase from2006 levels as a result of increases in production from our Kingsville Domeproject.  Our focus in 2007 will be tomaximize production from our existing wellfields at Kingsville Dome, bring onadditional wellfields at this project, ready our Rosita project for a return toproduction and continue to produce the existing wellfields at Vasquez providingthey remain economically viable.  Theseproduction increases will be dependent upon certain factors includingcontinuing strong uranium market prices, the continued availability ofdevelopment and production resources and ability to continue to delineate anddevelop new production wellfields as existing wellfields are produced.

 

In 2006, we sold a total of 263,000 pounds of uraniumproduced from our Kingsville Dome and Vasquez projects, resulting in revenuesof $8.581 million. In 2005, we sold 271,000 pounds of Vasquez production,resulting in revenues of $4.865 million (including $253,000 from therenegotiation of the contract price of sales that were made in the fourthquarter of 2004). We sold 72,350 pounds in 2004 (having commenced production inOctober of that year) and had revenues of $1.009 million.

 

*Cost of Goods Sold.**  *We expect to see an improvement in our production costs in 2007 compared to2006.  With a higher percentage of ourproduction in 2007 projected from our Kingsville Dome project we expect thishistorically lower cost production to contribute significantly in reducing bothour operating and capital costs of production in 2007.

 

Our average cost of pounds sold was $43.36 for 2006compared to $20.32 for 2005. This cost increase resulted from our incurringboth higher operating and capital costs in 2006 when compared to 2005 and wereprimarily caused by inefficiencies at our Vasquez project.  We encountered chemical and permeabilityobstacles in the Vasquez project’s formation which caused us to attempt avariety of new operating techniques including the use of different oxidizingcomponents and more concentrated drilling patterns for our wellfields.  These and other attempted solutions did nothave the desired effect of increasing the production rates and reducing ouroperating and capital costs at Vasquez. The cost of pounds sold includesoperating expenses and depreciation and depletion. These costs for 2006 includea cumulative $1.5 million related to lower of cost or market inventoryadjustments made quarterly. The adjustments resulted from the book carryingvalue of our uranium inventory exceeding the expected market value of theinventory. These adjustments had the effect of reducing the carrying value ofthe uranium inventory and accelerating the timing of recording operatingexpenses and depreciation and depletion recorded in the statement of operationsfor each quarter. The cost of goods sold for 2006 exclude $761,000 ($17.77 perpound) from a lower of cost or market adjustment made in December 2005 for42,900pounds of Vasquez inventory at that date that were sold in the firstquarter of 2006. In 2004, we sold 72,350 pounds of Vasquez production andincurred cost of sales of $852,000 or $11.77 per pound related such sales.

 

*Operating Expenses.**  *During 2006, operating expenses and related royalties and commissions forVasquez and Kingsville Dome production sold was $6.279 million. In 2006 weincurred $64,000 of stand-by costs at the Rosita project, such costs werecharged to operations. During 2005, operating expenses and related royaltiesand commissions for Vasquez production sold was $3.702 million. Weincurred $73,000 of stand-by costs at the Rosita project that were charged to 

 

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operations. The operating expenses and related royaltiesand commissions for Vasquez production sold in 2004 totaled $683,000; and weincurred $579,000 of pre-production and stand-by costs at the Vasquez,Kingsville Dome and Rosita projects that were charged to operations in 2004.

 

*Depreciation and Depletion.**  *During 2006, we incurred depreciation and depletion expense attributable to ourVasquez and Kingsville Dome production of $5.827 million. During 2005, weincurred depreciation and depletion expense attributable to our Vasquezproduction of $1.399 million. We incurred $16,000 of stand-by depreciationcost for the Kingsville Dome and Rosita projects that was charged to operationsin December 2005. In 2004, we incurred depreciation related to Vasquezproduction and for stand-by activities of $236,000 and $27,000, respectively.

 

*Impairment of Uranium Properties.**  *During 2006, we determined the carrying value of the Vasquez project assetsexceeded their fair value as provided in SFAS 144 “Accounting for theImpairment or Disposal of Long-Lived Assets”. Such determination resultedprimarily our reducing the estimated recoverable reserves projected to beproduced from Vasquez in the future and resulted in an impairment provisionrelated to the Vasquez project assets of approximately $3.260 million in 2006.

 

*Accretion and Amortization of FutureRestoration Costs.**  * During 2006 and2005, the accretion and amortization of future restoration costs was $517,000and $348,000, respectively. In 2004 these expenses were $242,000.

 

*General and Administrative Charges.**  *We incurred general and administrative charges and corporate depreciation of$6.8 million in 2006 compared to $3.2 in 2005 and $2.0 million in 2004.

 

Significant expendituresfor general and administrative expenses for year ended December 31, 2006,2005 and 2004 were:

 
| ** **                                  | ** ** | **(Amounts in 000’s)** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **Year Ended**                   | ** ** |
| ** **                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock compensation expense                  |       | $                                     | 2,422      |   | $ | 582 |   | $ | — |   |
| Salaries and payroll  burden                |       | 1,570                                 |       | 1,110 |   | 943 |   |
| Legal, accounting, public  company expenses |       | 1,279                                 |       | 801 |   | 530 |   |
| Insurance and bank fees                     |       | 406                                   |       | 359 |   | 241 |   |
| Consulting and  professional services       |       | 563                                   |       | 183 |   | 82 |   |
| Office expenses                             |       | 292                                   |       | 136 |   | 90 |   |
| Travel expenses                             |       | 162                                   |       | 80 |   | 55 |   |
| Other, project allocations                  |       | 61                                    |       | (60 | ) | 58 |   |
| Total                                       |       | $                                     | 6,755      |   | $ | 3,191 |   | $ | 1,999 |   |

 

The non-cash compensation expense recorded for theyear ended December 31, 2006 resulted from the adoption of SFAS 123(R) inJanuary 2006, requiring the recognition of expense related to the Company’sstock option grants. The value of each option award is estimated on the date ofgrant using the Black-Scholes option-pricing model. The Black-Scholesoption-pricing model requires the input ofsubjective assumptions, including the expected term ofthe option award and stock price volatility. The expected term of optionsgranted was derived from historical data on our employee exercise andpost-vesting employment termination experience. The expected volatility wasbased on the historical volatility of our stock. The non-cash stockcompensation expense recorded in 2005 resulted from the grant of stock optionsthat were subject to approval of an amendment to the Company’s stock optionplan which was received in June 2005.

 

Salary and payroll costs increases for the yearpresented resulted primarily from the additions to the engineering,professional and executive levels in South Texas and New Mexico made in late2005 and 2006, compensation increases for the Company’s key personnel in 2006and a discretionary match made to the Company’s 401(k) profit sharing planfor the plan year ended July 2006. Salary and payroll costs increased in2005 compared to 2004 from additions to the engineering, professional andexecutive levels in South Texas and New Mexico made in late 2004 and 2005.

 

The Company’s legal, accounting and public companyexpenses increased for the year from the increase in transactions andactivities occurring in 2006. Such transactions and activities included therenegotiation of the Company’s long-term sales contracts, the negotiation of ajoint venture in New Mexico with Itochu Corporation, increased costs to conductthe annual shareholder meeting, an increase in the number of Board of Directorsmeetings and preparation of the Company’s NASDAQ application listing. Legal,accounting and public company expenses increased in 2005 from 2004 because oflegal and accounting costs related to our SEC filings, our resale registrationstatements, negotiation of our New Mexico joint venture and increased Boardmeeting activity during the year.

 

31

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Our insurance costsincreased in the year from higher directors and officer’s insurance premiumsand increased vehicle coverage premiums resulting from additional vehicles in 2006. Bank feesincreased as a result of additions to our financial surety requirements for ourSouth Texas uranium projects. Insurance costs increased in 2005 compared to2004 from higher general liability, property, directors and officers and autoinsurance premiums when compared to 2004.

 

The costs for consulting and professional servicesincreased in year as a result of an increase in project related activities in2006. Such activities include the Company’s compliance work related to it’sSarbanes-Oxley requirements in 2006, the increase in activities in New Mexicorelated to the preparation of these projects towards their final licensing andpermitting phase, increases in environmental, health and safety training andconsulting work, computer networking and web site design work and activitiesperformed in the formulation of a corporate strategic plan. Increasedconsulting and professional services in 2005 from 2004 related to expansion ofour New Mexico and South Texas community awareness activities, uranium industryconsulting fees and costs related to the update of our uranium reserve report.

 

Increased office costs incurred in the year resultedprimarily from the opening of a corporate office location in Corpus Christi,Texas in June 2006 and increases in the South Texas Kingsville operationsoffice resulting from the personnel added in 2006. Office related costincreases in 2005 compared to 2004 were for additional telephone, officeequipment and miscellaneous office expenses from the increase in South Texasstaffing.

 

*Net Income (Loss).**  *For the twelve months ended December 31, 2006 we had net earnings of$21.5 million compared to a net loss of $35.1 million in 2005 and a netloss of $15.9 million in 2004. On a diluted per share basis, earnings were$0.42 in 2006 compared to a loss of $(0.96) and $(0.55) for 2005 and 2004,respectively. Included in 2006 results was a non-cash gain on derivatives of$34.8 million somewhat offset by a non-cash impairment provision for theVasquez project of $3.3 million. The loss in 2005 and 2004 included a non-cashloss on derivatives of $31.0 million and $13.1 million, respectively.

 

*Cash Flow.*    As of December 31,2006 we have a cash balance of approximately $20.2 million compared to $5.9million and $269,000 at December 31, 2005 and 2004, respectively.

 

In 2006, we had a negative cash flow from operationsof $2.2 million, resulting primarily from our low production volumes coupledwith high production costs incurred during the year. We also used$31.9 million in investing activities, the largest component of which wasthe payment of $12.0 million to one of our customers in connection with therestructuring of our uranium sales contract. Other significant investingactivities were for production start-up capital at Kingsville Dome of $10.4million, additional wellfield development at Vasquez of $3.4 million, Rositaproject expenditures of $2.8 million, other Texas property and other assets of$1.7 million and other property additions in New Mexico of $396,000.

 

In 2006, we raised net proceeds of approximately $48.2million through the sale of 10,200,307 shares at $4.90 per share in April 2006and $458,000 from the issuance of 229,000 shares from the exercise of employeestock options.

 

Since the receipt of theproceeds raised in April 2006, the Company has received the followingfunds and has made the following expenditures (amounts in millions):

 

| **Receipts**                                         | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Net proceeds from  April 2006 equity offering   |       | $          | 48.2       |   |
| Proceeds from stock option  exercise                 |       | 0.5        |       |
| Proceeds from uranium  sales                         |       | 7.0        |       |
| Interest/other  income/feasibility study funding     |       | 1.0        |       |
| Total receipts                                       |       | $          | 56.7       |   |
|                                                 |       |       |       |
|                                                 |       |       |       |
| **Expenditures**                                     |       |       |       |
| Buyout of long-term  uranium sales contract          |       | $          | 12.0       |   |
| Working capital                                      |       | 4.3        |       |
| Kingsville Dome capital  expenditures                |       | 7.0        |       |
| Kingsville Dome  operations/restoration expenditures |       | 2.4        |       |
| Vasquez capital  expenditures                        |       | 2.6        |       |
| Vasquez operations  expenditures                     |       | 2.2        |       |
| Rosita project capital  expenditures                 |       | 2.4        |       |
| Rosita project  operations/restoration expenditures  |       | 0.6        |       |
| Other South Texas capital  expenditures              |       | 1.8        |       |
| New Mexico land and  permitting expenditures         |       | 0.3        |       |
| Financial surety funding                             |       | 1.0        |       |
| Total Expenditures                                   |       | $          | 36.6       |   |

 

 

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In 2005 we had a negative cash flow from operations of$1.7 and raised $13.7 million from financing activities. In 2005 we spent $3.9million at Vasquez for property, plant and equipment, $889,000 at KingsvilleDome and $1.5 for other property additions in Texas and New Mexico. Our netcash flow from operations in 2004 was a negative $2.5 and we raised $7.3million from financing activities. In 2004 we spent $2.7 million at Vasquez forproperty, plant and equipment, $905,000 at Kingsville Dome and $316,000 forother property additions in Texas and New Mexico.

 

**Impactof Contract Renegotiation**

 

In March 2006, we renegotiated our supplycontracts with Itochu and UG. We committed to each of them one-half of whateverour production is in Texas at a price that is based on the market price at thetime of delivery less an agreed discount. Prior to March 2006, thesecontracts were priced based on fixed prices subject to agreed nominal priceincreases indexed to inflationary changes. The average price for the deliveriesunder our previous contract terms was $17.95 in 2005 and was anticipated tohave been $14.58 per pound in 2006.  Therenegotiated contracts provided us with the ability to take advantage of theincreases in uranium market prices realized in 2006 and more closely alignedthe prices we received for uranium sales to the pricing occurring in theuranium marketplace.  For 2006, uraniumspot market prices rose from $36.25 per pound in January to $72.00 perpound in December.  We expect to see acontinued strengthening in uranium market prices for 2007, which in turn isprojected to provide increased sales prices for our uranium sales.

 

Based upon our projected uranium production for 2007,current uranium prices and uranium market outlooks, we expect 2007 to showincreased sales volumes and increased uranium sales revenues compared to2006.  We expect our Kingsville Domeproduction to contribute more towards our total production in 2007 than ourproduction from Vasquez and as a result of projected lower Kingsville Domeproduction costs expect 2007 operations to reflect higher profitability than2006.  See “**Business—Long-Term Delivery Contracts** ” for a discussion ofthe terms of the revised contracts, including certain conditions thereto.

 

**Liquidity—Cash Sources and Uses for2007**

 

In April 2006 we raised net proceeds ofapproximately $48.2 million by a sale of 10,200,307 shares of Common Stockat $4.90 per share in a private placement to selected accredited investors. Inaddition to the foregoing proceeds, the Company had $5.9 million in cashon hand at December 31, 2005.

 

From April to December 2006, our net cashoutflows have averaged $1.7 to $1.8 million per month..  Our cash on hand at December 31, 2006 of$20.2 million and the cash generated from operations is expected to be thesource to fund all of our cash requirements during the year.  These requirements include uranium productionoperations, capital expenditures for development of new production wellfields,permitting and licensing of new production areas, acquisition and explorationof new properties with uranium production potential, restoration andreclamation activities at existing and previously mined wellfields, increasesfor financial surety needs and our general and administrative costs.  The cash we expect to generate from oururanium operations in 2007 will be dependent on our ability to achieve theproduction increases projected from our Kingsville Dome project as well as thecontinuation of strong uranium market prices during the year.   These production increases will be dependentupon certain factors including the continued availability of development andproduction resources and ability to continue to delineate and develop newproduction wellfields as existing wellfields are produced.  In the event that we are unable to achieveour targeted production rates or our projected production costs, or if uraniumprices should fall substantially below their expected prices, we may not beable meet our continued cash requirements in the future.

 

**Derivative Financial Instruments**

 

The Company determined that its original long-termuranium sales contracts met the definition of derivative financial instrumentsfor financial statement reporting purposes and are recorded on the balancesheet at fair value at December 31, 2005 and 2004. Changes in the fairvalue of such derivatives recorded on the balance sheet are recorded in theconsolidated statements of operations in current earnings as they occur. Suchchanges in the Company’s derivatives represent non-cash charges to earnings forthe present value of the loss the Company would incur in the event it would berequired to purchase uranium in the spot market to satisfy the deliveries underboth of its long-term uranium sales contracts. See Note 5 to the ConsolidatedFinancial Statements for discussion of renegotiated sales contracts.

 

The Company amended these contracts in March 2006.The amended contracts obligate the Company to deliver 50% of its uraniumproduction to each customer, and do not obligate the Company to deliver anyuranium in excess of its production. The Company has determined that the termsof the amended contracts substantially eliminate their qualification asderivatives.

 

 

33

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We recorded a gain on derivatives in 2006 of $34.8million compared to losses of $30.9 million and $13.1 million in 2005 and 2004,respectively. The gain in 2006 resulted from changes in the contract terms oflong-term uranium sales contracts that were finalized in March 2006. In March 2006we entered into a new contract with Itochu and a new contract with UG thatsupersede the prior contracts. Each of the new contracts calls for delivery ofone-half of our actual production from our Vasquez property and otherproperties in Texas currently owned or hereafter acquired by the Company(excluding certain large potential exploration plays). The terms of suchcontracts are summarized in “ **Business—LongTerm Delivery Contracts** ”.

 

**Contingent Liabilities**

 

In April 2006, the Company completed the sale of10,200,307 shares of its Common Stock at $4.90 per share to accreditedinvestors resulting in gross proceeds of approximately $50 million beforeexpenses of the offering. The Company has filed a registration statement underthe Securities Act of 1933, as amended, to register the resale of the shares.Such shares are subject to certain resale registration rights that includepenalties in the event the registration statement fails to remain effective.

 

**Off Balance Sheet Arrangements**

 

The Company has obtained financial surety relating tocertain of its future restoration and reclamation obligations as required bythe State of Texas regulatory agencies. The Company has bank Letters of Credit(the “L/C’s) and performance bonds issued for the benefit of the Company andthese off balance sheet financing arrangements permit us to meet the financialsurety requirements as directed by the Texas regulatory agencies that permitand license our operations.  L/C’s,issued by Bank of America in the amount of $2.0 million and$1.1 million, were issued on December 31, 2006 and December 31,2005, respectively, and are collateralized in their entirety by certificates ofdeposit.  Since we are collateralizingthese L/C’s for their face amount, we do not receive any significant benefitsfrom a liquidity or capital resource standpoint.  The collateral deposited to facilitate theissuance of the L/C’s does provide a nominal rate of return that approximatesthe annual cost of the L/C.  We do notexpect any significant changes in the terms or availability of additional L/C’swe may require in the future.

 

Performance bonds totaling $2.8 million were issued byUnited States Fidelity and Guaranty Company (“USF&G”) for the benefit ofthe Company on December 31, 2006 and December 31, 2005. USF&G hasrequired that the Company deposit funds collateralizing a portion of the bonds.The amount of bonding issued by USF&G exceeded the amount of collateral by$2.5 million as of December 31, 2006 and December 31, 2005,respectively.  In the event thatUSF&G is required to perform under its bonds or the bonds are called by thestate agencies, the Company would be obligated to pay any expenditure in excessof the collateral.  The amount by whichthe bonding exceeds the collateral provides us a liquidity and capital resourcebenefit.  If we were required to provideadditional financial surety for these bonds on terms similar to those of ourL/C’s, we would be required to fund approximately $2.5 million in additionalcollateral on both December 31, 2006 and 2005.  No new bonds have been issued by USF&G,or any other bonding or insurance entities, for us.

 

**Critical Accounting Policies**

 

Our significant accounting policies are described inNote 2 to the consolidated financial statements on page F-8 of thisprospectus. We believe our most critical accounting policies involve thoserequiring the use of significant estimates and assumptions in determiningvalues or projecting future costs.

 

Specifically regarding our uranium properties,significant estimates were utilized in determining the carrying value of theseassets. These assets have been recorded at their estimated net realizable valuefor impairment purposes on a liquidation basis, which is less than our cost.The actual value realized from these assets may vary significantly from theseestimates based upon market conditions, financing availability and otherfactors.

 

Regarding our reserve for future restoration andreclamation costs, significant estimates were utilized in determining thefuture costs to complete the groundwater restoration and surface reclamation atour mine sites. The actual cost to conduct these activities may vary significantlyfrom these estimates.

 

Such estimates and assumptions affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofexpenses during the reporting period.

 

The accounts of the Company are maintained in UnitedStates dollars. All dollar amounts in the financial statements are stated inUnited States dollars except where indicated.

 

 

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**Impact of Recent AccountingPronouncements**

 

In December 2004, the FASB issued SFAS No. 123(revised 2004) (SFAS No. 123R) “Share-Based Payments.” SFAS No. 123Rrequires that the cost from all share-based payment transactions, includingstock options, be recognized in the financial statements at fair value. SFAS No. 123Ris effective for the Company in the first interim period after December 15,2005. SFAS No. 123R requires measurement and recording to the financialstatements of the costs of employee services received in exchange for a grantof equity instruments based on the grant-date fair value of the award,recognized over the period during which an employee is required to provideservices in exchange for such award. The Company adopted the provisions of SFASNo. 123R on January 1, 2006. Compensation expense will be recognizedfor all newly granted options after January 1, 2006. The implementation ofSFAS No. 123R resulted in a non-cash charge against earnings in 2006 of$2.422 million.

 

In March 2005, the FASB ratified Emerging IssuesTask Force Issue No. 04-6, “Accounting for Stripping Costs Incurred duringProduction in the Mining Industry,” (EITF 04-6) which addresses the accountingfor stripping costs incurred during the production phase of a mine and refersto these costs as variable production costs that should be included as acomponent of inventory to be recognized in operating costs in the same periodas the revenue from the sale of inventory. The EITF 04-6 applies specificallyto conventional mining operations (open pit mining), and as a result thecompany does not believe it is applicable to the Company’s in situ recoverymining operations.

 

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes, an interpretation ofFASB Statements No. 109” (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes by prescribing a two-step method of firstevaluating whether a tax position has met a more likely than not recognitionthreshold and second, measuring that tax position to determine the amount ofbenefit to be recognized in the financial statements. FIN 48 provides guidanceon the presentation of such positions within a classified statement offinancial position as well as on derecognition, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 is effectivefor fiscal years beginning after December 15, 2006. The adoption of thisstatement is not expected to have a material effect on the Company’s futurereported financial position or results of operations.

 

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”), which provides interpretive guidance onthe consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. TheCompany adopted SAB 108 in the fourth quarter of 2006. SAB 108 allows aone-time transitional cumulative effect adjustment to beginning retainedearnings as of January 1, 2006 for errors that were not previously deemedmaterial, but are material under the guidance in SAB 108. The adoption of thisstatement is not expected to have a material effect on the Company’s futurereported financial position or results of operations.

 

**Item 7A.****  ****Quantitative andQualitative Disclosures About Market Risk.**

 

**Uranium Price Volatility**

 

The Company is subject to market risk related to themarket price of uranium. The Company’s cash flow has historically beendependent on the price of uranium, which is determined primarily by globalsupply and demand, relative to the Company’s costs of production. Historically,uranium prices have been subject to fluctuation, and the price of uranium hasbeen and will continue to be affected by numerous factors beyond the Company’scontrol, including the demand for nuclear power, political and economicconditions, and governmental legislation in uranium producing and consumingcountries and production levels and costs of production of other producingcompanies.

 

The spot market price for uranium has demonstrated alarge range since January 2001. Prices have risen from $7.10 per pound at January 2001to a high of $113.00 per pound as of April 23, 2007.

 

**Derivative Financial Instruments**

 

The Company determined that its original long-termuranium sales contracts met the definition of derivative financial instrumentsfor financial statement reporting purposes and are recorded on the balancesheet at fair value at December 31, 2005 and 2004. Changes in the fairvalue of such derivatives recorded on the balance sheet are recorded in theconsolidated statements of operations in current earnings as they occur. Suchchanges in the Company’s derivatives represent non-cash charges to earnings forthe present value of the loss the Company would incur in the event it would berequired to purchase uranium in the spot market to satisfy the deliveries underboth of its long-term uranium sales contracts. See Note 5 to the ConsolidatedFinancial Statements for discussion of renegotiated sales contracts.

 

The Company amended these contracts in March 2006.The amended contracts obligate the Company to deliver 50% of its uraniumproduction to each customer, and do not obligate the Company to deliver anyuranium in excess of its production. 

 

 

35

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The Company has determined that the terms of theamended contracts substantially eliminate their qualification as derivatives.

 

Management applies significant judgment in estimatingthe fair value of instruments that are highly sensitive to assumptionsregarding uranium prices and market volatilities. Future factors, such aschanges in uranium market price, changes in pricing and delivery terms and thephysical delivery of produced uranium under the contracts, among others, mayimpact the amount of the liability. Variations in these factors couldmaterially affect amounts credited or charged to operations to reflect thechanges in fair market value of derivatives.

 

**Item 8.****    ****Financial Statementsand Supplementary Data.**

 

**Financial Statements**

 

The financial statementinformation called for by this item appears on pages F-1 through F-23.

 

**Supplementary Financial Data Table**

 

**SUPPLEMENTARYFINANCIAL DATA (UNAUDITED)**

 

 
| ** **                               | ** ** | **For the Quarter Ended(1)** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **3/31/2005** | ** ** |
| ** **                               | ** ** | **12/31/2006**                              | ** ** | **9/30/2006** | ** ** | **6/30/2006** | ** ** | **3/31/2006** | ** ** | **12/31/2005** | ** ** | **9/30/2005** | ** ** | **6/30/2005** | ** ** | **(Restated)** | ** ** |
| ** **                               | ** ** | **(Amounts in Thousands)**        | ** ** |
| Uranium sales                            |       | $                                           | 2,903      |   | $ | 2,765 |   | $ | 1,844 |   | $ | 1,069 |   | $ | 836 |   | $ | 1,263 |   | $ | 1,060 |   | $ | 1,706 |   |
| Earnings (loss) from operations          |       | (2,999                                      | )          | (6,371 | ) | (2,148 | ) | 31,947 |   | (21,114 | ) | (2,051 | ) | (10,077 | ) | (2,376 | ) |
| Net earnings (loss)                      |       | (2,543                                      | )          | (5,989 | ) | (2,116 | ) | 32,158 |   | (20,629 | ) | (2,018 | ) | (10,082 | ) | (2,358 | ) |
| Net earnings (loss) per common share:(2) |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                    |       | $                                           | (0.05      | ) | $ | (0.12 | ) | $ | (0.04 | ) | $ | 0.79 |   | $ | (0.50 | ) | $ | (0.05 | ) | $ | (0.30 | ) | $ | (0.07 | ) |
| Diluted                                  |       | $                                           | (0.05      | ) | $ | (0.12 | ) | $ | (0.04 | ) | $ | 0.73 |   | $ | (0.50 | ) | $ | (0.05 | ) | $ | (0.30 | ) | $ | (0.07 | ) |

 

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| (1)    | Unaudited quarterly results.                                                                                                                          |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                  |
| (2)    | Net earnings (loss) per common share information  reflects the effect of a reverse 1 for 4 stock split made effective  April 11, 2006. |

 

 

 

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**Item 9.****    ****Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 9A.****  ****Controls andProcedures.**

 

During the fiscal period covered by this report, theCompany’s management, with the participation of the Chief Executive Officer andChief Financial Officer of the Company, carried out an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

 

Based on that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures as of December 31, 2006 were not effective as a result of thematerial weakness in our internal controls over financial reporting discussedbelow.

 

**Management’s Report on InternalControl Over Financial Reporting**

 

The management of theCompany is responsible for establishing and maintaining adequate internal controlover financial reporting. The Securities and Exchange Act of 1934 definesinternal control over financial reporting in Rule 13a-15(f) and15d-15(f) as a process designed by, or under the supervision of, thecompany’s principal executive and principal financial officers and effected bythe company’s board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles and includes those policies andprocedures that:

 
| · | Pertain to the maintenance of records that in  reasonable detail accurately and fairly reflect the transactions and  dispositions of the assets of the company;                                                                                                                                                                                 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                            |
| · | Provide reasonable assurance that transactions are  recorded as necessary to permit preparation of financial statements in  accordance with generally accepted accounting principles, and that receipts  and expenditures of the company are being made only in accordance with  authorizations of management and directors of the company; and |
|   |                                                                                                                                                                                                                                                                                                                                            |
| · | Provide reasonable assurance regarding prevention or  timely detection of unauthorized acquisition, use or disposition of the  company’s assets that could have a material effect on the consolidated  financial statements.                                                                                                               |

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject torisk that controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006. In making this assessment, the Company’s management used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in *Internal Control—IntegratedFramework* .

 

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting in connection with preparation of the annualreport on Form 10-K for the year ended December 31, 2006. As a resultof these assessments, a material weakness was identified in March 2007, inconnection with our year ended December 31, 2006 audit procedures, leadingmanagement to conclude that our internal controls over financial reporting werenot effective as of December 31, 2006. A material weakness is a controldeficiency, or combination of control deficiencies, that results in more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.

 

The following materialweakness forms the basis for our conclusion at December 31, 2006:

 
| · | *Controls over the Review of  Financial Statements.* Our financial and accounting organization consists of the Vice  President—Finance and the Corporate Controller. Due to a lack of financial  and accounting resources, the financial records preparation and review  procedures performed by our personnel with respect to our application of the  fair value recognition provisions of Statement of Financial Accounting  Standard 123(R) “ *Share-Based  Payment”* |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

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|   | (“SFAS 123(R)”) for the fourth quarter of 2006 did  not correctly record certain terms of stock option grants made in the fourth  quarter of 2006. This matter was identified by our auditors in March 2007  during the course of their audit procedures and resulted in an audit  adjustment increasing stock compensation expense by $629,000 in our year end  2006 financial statements. Because of this lack of resources, review  procedures were not consistently performed on a timely basis to ensure that  financial reporting and fraud risk controls were operating in the manner  designed. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Hein & Associates LLP, the independentregistered public accounting firm that audited the consolidated financialstatements of the Company included in this Annual Report on Form 10-K/A,has issued an audit report on management’s assessment of the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006. The report, dated March 27, 2007, which expressed an unqualifiedopinion on management’s assessment of the effectiveness of the Company’sinternal control over financial reporting and an opinion that the Company hadnot maintained effective internal control over financial reporting as of December 31,2006 based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) is included below.

 

**Changes in Internal Controls**

 

There were no changes inour internal control over financial reporting during our last fiscal quarterthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting. Management is continuing toevaluate and implement procedures necessary to fully remediate the materialweakness described above. Management is in the process of making the followingchanges to its system of internal controls:

 
| · | We are planning for a relocation and expansion of  our Corporate office in the second quarter of 2007, which will allow for the  hiring of additional personnel, including both experienced accounting and  support staff to allow for improved segregation of duties and allow for a  more thorough review, by senior financial personnel, of the financial  statements and underlying supporting documentation. In March and April 2007,  we contacted various search firms specializing in the accounting and  financial services areas to identify and recruit qualified personnel. We are  in the process of reviewing potential candidates to expand our internal  accounting resources. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · | The addition of accounting and support staff will  allow for the formal documentation our purchasing and procurement policies  and permit the implementation of review procedures at each uranium project  location and in the financial reporting area for compliance with such  policies.                                                                                                                                                                                                                                                                                                                                                                                                              |

 

**Report of Independent Registered Public Accounting Firm**

 

To the Board of DirectorsUranium Resources, Inc.Lewisville, TX  75067

 

We have audited management’s assessment, included inManagement’s Report on Internal Control over Financial Reporting appearingunder Item 9A, that Uranium Resources, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2006, based on thecriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).Uranium Resources, Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

 

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and 

 

 

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directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment.

 

Due to a lack of an adequate amount of accountingresources, review procedures are not consistently performed on a timely basisto ensure that financial reporting and fraud risk controls are operating in themanner designed.

 

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the 2006financial statements, and this report does not affect our report dated March 27,2007 on those financial statements.

 

In our opinion, management’s assessment that UraniumResources, Inc. did not maintain effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Also, in our opinion, because of the effect of the materialweakness described above on the achievement of the objectives of the controlcriteria, Uranium Resources, Inc. has not maintained effective internal controlover financial reporting as of December 31, 2006, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).

 

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheet of Uranium Resources, Inc. as of December 31,2006 and 2005, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2006 of Uranium Resources, Inc. and our reportdated March 27, 2007 expressed an unqualified opinion thereon.

 

***HEIN****&ASSOCIATES LLP*Dallas, TexasMarch 27, 2007

 

**Item 9B.****    ****Other Information.**

 

None.

 

 

 

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**PART III**

 

**Item 10.****   ****Directors, ExecutiveOfficers and Corporate Governance.**

 

**Directors**

 

The Board of Directorsconsists of five individuals listed below who hold office until the next annualmeeting of stockholders and until their successors are elected and qualified.Directors are elected below by plurality vote.

 

| **Name**          |   | **Age** |   | **Positions and Offices with the Company** |   |
|-------------------|--------|---------|--------|---------------------------------------------------------------------|--------|
| Paul K. Willmott  |   | 67      |   | Chairman, Chief Executive  Officer and Director                     |   |
| David N. Clark    |   | 52      |   | President, Chief Operating  Officer and Director                    |   |
| Leland O. Erdahl  |   | 78      |   | Director                                                            |   |
| George R. Ireland |   | 50      |   | Director                                                            |   |
| Terence J. Cryan  |   | 44      |   | Director                                                            |   |

 

Leland O. Erdahl, George R. Ireland andTerence J. Cryan have been determined by our Board of Directors to beindependent directors under the rules of the NASDAQ Global Market.

 

**Paul K. Willmott** has served as a director since August 1994,as President from February 1995 to October 2006, and as Chairman ofthe Board and Chief Executive Officer since July 31, 1995. Mr. Willmottserved as our Chief Financial Officer from April 12, 1995 to September 25,1995. Mr. Willmott retired from Union Carbide Corporation (“Union Carbide”)where he was involved for 25 years in the finance and operation of UnionCarbide’s world-wide mining and metals business. Most recently, Mr. Willmottwas President of UMETCO Minerals Corporation, a wholly owned subsidiary ofUnion Carbide, from 1987 to 1991, where he was responsible for Union Carbide’suranium and vanadium businesses. From January 1993 until February 1995,Mr. Willmott was engaged by the Concord Mining Unit as a senior vicepresident where he was primarily involved in the acquisition of UMETCO MineralsCorporation’s uranium and vanadium operating assets. Mr. Willmottgraduated from Michigan Technological University with a Bachelor of Sciencedegree in Mining in 1964 and a Bachelor of Science Degree in EngineeringAdministration in 1967. He has been an active member of the American Instituteof Mining Engineers, the Canadian Institute of Mining Engineers and a number ofstate professional organizations.

 

**David N. Clark** has served as a director since June 2006and as President since October 2006. Prior to April 2007, Mr. Clarkwas the principal owner of Ux Consulting Company LLC (“UxC”). UxC publishes theUx Weekly and the UxC Market Outlook Reports, which cover the complete nuclearfuel cycle including uranium, conversion and enrichment. Mr. Clarkco-founded UxC in March 1994 as an affiliate of The Uranium ExchangeCompany (“Ux”), a uranium brokerage and consulting company he founded in 1987. Mr. Clarkhas also held marketing positions with other entities in the nuclear fuelbusiness. He began his career as a Field Geologist and Market Analyst for theuranium division of the Cleveland-Cliffs Iron Company. Mr. Clark holds aBachelor of Science degree in Geology (1978) from the University of Akron.

 

**Leland O. Erdahl** has served as a director since July 11,1994. From 1986 to 1991, Mr. Erdahl served as President and ChiefExecutive Officer for Stolar, Inc., a high-tech company involved in theradio wave imaging of geologic media and underground radio transmission forvoice and data. He was President and CEO of Albuquerque Uranium Corporation, auranium mining company, from 1987 to 1991 and served as Vice President of AMAXGold in 1997 and 1998. From January 2001 to September 14, 2001 Mr. Erdahlserved as President of Nord Pacific Limited, a mining company with gold andcopper interests in Australia and Papau, New Guinea. He is a Certified PublicAccountant and is a graduate from the College of Santa Fe. He is currently adirector of Canyon Resources Corporation (a mining company whose primarybusiness is the discovery and production of precious metals). Mr. Erdahlalso serves on the Compensation Committee of Canyon Resources Corporation andis Chairman of its Audit Committee.

 

**George R. Ireland** has served as a director since 1995. Mr. Irelandis President and Chief Investment Officer of Geologic Resource Partners LLC, aninvestment management company which manages Ring Partners L.P., a Coloradolimited partnership, the Geologic Resource Fund Ltd., a Grand Cayman investmentcompany, and Geologic Resource Fund L.P., a Delaware Limited Partnership, whichpositions he has held since June 2000. Prior to such time, Mr. Irelandwas an analyst at Knott Partners L.P., a Delaware limited partnership, where heworked since May 1993. Mr. Ireland is also a director of Peru CopperInc. since 2004 and director of Geoinformatics Exploration Inc. since November 2005.Both companies are listed on the TSX Venture Exchange. Mr. Ireland servesas Chairman of the Investment Committee of the Society of Economic Geologists.He received a Bachelor of Science degree in Resource Economics and Geology fromthe University of Michigan in 1980 and is a citizen and resident of the UnitedStates.

 

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**Terence J. Cryan** has served as director since October 2006.Mr. Cryan has over twenty years of experience in international business asan investment banker in the US and Europe. In 2001, Mr. Cryan co-foundedand serves as the Managing Director of Concert Energy Partners, an investmentbanking and private equity firm based in New York City. Prior to that, Mr. Cryanwas a Senior Managing Director in the Investment Banking Division at BearStearns. Earlier in his career, Mr. Cryan was a Managing Director, GroupHead and member of the Investment Banking Operating Committee at Paine Webber. Mr. Cryanjoined Paine Webber following its acquisition of Kidder, Peabody in 1994. Mr. Cryanis an adjunct professor at the Metropolitan College of New York Graduate Schoolof Business, has served as director of a number of international companies andis a frequent lecturer at finance and energy industry gatherings. Mr. Cryanholds a Master of Science degree in Economics from the London School ofEconomics and a B.A. from Tufts University.

 

**ArrangementsRegarding Election of Directors**

 

There are no arrangements regarding the election ofdirectors.

 

**Other Executive Officers**

 

The executive officers serve at the discretion of theBoard of Directors and are subject to annual appointment by the Board at itsfirst meeting following the Annual Meeting of the Stockholders. The officershold office until their successors are appointed by the Board of Directors. Allofficers are employed on a full-time basis. There is no family relationshipbetween any director and executive officer.

** **

The following table sets forth certain informationconcerning executive officers that are not also directors:

** **

| **Name**                       |   | **Age** |   | **Positions and Offices**                                                                           |   |
|--------------------------------|--------|---------|--------|---------------------------------------------------------------------------------------------------------------|--------|
| Richard A. Van Horn            |   | 59      |   | Senior Vice  President—Operations                                                                        |   |
| Thomas H. Ehrlich              |   | 47      |   | Vice President, Chief  Financial Officer, Secretary and Treasurer                                             |   |
| Mark S. Pelizza                |   | 53      |   | Vice President—Health,  Safety and Environmental Affairs                                                 |   |
| Craig S. Bartels               |   | 57      |   | Senior Vice  President—Technology and New Project Development and President, Hydro  Resources, Inc. |   |
| William M.  McKnight, Jr. |   | 69      |   | Vice President—Exploration                                                                               |   |

 

The following sets forthcertain information concerning the business experience of the foregoingexecutive officers during the past five years.

 

**Richard A. Van Horn** joined us in March 1997 and assumedthe position of Senior Vice President of Operations on April 1, 1997.Previously, he spent three years with Energy Fuels Nuclear, Inc. asGeneral Manager—Colorado Plateau Operations with responsibility for the dailymanagement of and planning for Energy Fuels Nuclear, Inc. miningactivities on the Colorado Plateau. Before his work at Energy Fuels Nuclear, Inc.,Mr. Van Horn spent eighteen years with Union Carbide Corporationwhere he was involved with the finance and operation of that company’sworldwide mining and metals business. From 1990 to 1994, Mr. Van Horn wasDirector of Operations of UMETCO Minerals Corporation, a wholly owned subsidiaryof Union Carbide Corporation, responsible for all operating aspects of UMETCO’suranium and vanadium business on the Colorado Plateau prior to its sale toEnergy Fuels Nuclear, Inc. Mr. Van Horn graduated from the ColoradoSchool of Mines with a Engineer of Mines degree in mining in 1973.

 

**Thomas H. Ehrlich,** a certified public accountant, rejoinedus in September 1995 as Vice President and Chief Financial Officer and wasappointed Secretary and Treasurer in December 1995. Immediately beforethat, Mr. Ehrlich spent nine months as a Division Controller withAffiliated Computer Services, Inc., an information technology servicesprovider in Dallas, Texas. Mr. Ehrlich originally joined us in November 1987as Controller—Public Reporting and was promoted to Controller and ChiefAccounting Officer in February 1990. In February 1993, Mr. Ehrlichassumed the additional duties of Vice President and Secretary. Before joiningus, he spent four years with Deloitte Haskins & Sells and workedprimarily with clients that were publicly held companies. Prior to his work atDeloitte Haskins & Sells, he spent three years in variousaccounting duties at Enserch Exploration, Inc., an oil and gas company inDallas, Texas. Mr. Ehrlich received his B.S. B.A. degree in Accountingfrom Bryant College in 1981.

 

**Mark S. Pelizza** has served as our Environmental Managersince 1980, and as such, he has been responsible for all environmentalregulatory activities. In February 1996, he was appointed VicePresident—Health, Safety and Environmental Affairs. In November 1999, hewas appointed President and a Director of Hydro Resources, Inc., a whollyowned subsidiary. Before joining us, he was employed for two years byUnion Carbide as an Environmental Planning Engineer at 

 

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Union Carbide’s Palangana solution mining plant inSouth Texas. Mr. Pelizza received a M.S. degree in Engineering Geologyfrom Colorado School of Mines in 1978 and a B.S. degree in Geology from FortLewis College in 1974.

 

**Craig S. Bartels,** a Licensed Professional Engineer and aLicensed Professional Geoscientist, rejoined the Company as Senior VicePresident—Technology and New Project Development, and President of HydroResources, Inc., a wholly owned subsidiary of the Company in December 2004.He was previously an officer of HRI from July 1996 until September 1999,when he started a consulting company specializing in ISR technology, hydrologyand geochemistry. Among his projects as a consultant, he helped with design andstartup of the Beverley ISR project in Australia, evaluated an Arizona copperISR project for a Canadian firm, and began an upgrade of his commercialgroundwater model. From January 1995 to July 1996, he was Manager ofWellfield Operations for Crow Butte Resources, Inc., a uranium ISR miningcompany. Mr. Bartels originally joined the Company in early 1981 and heldvaried positions with the Company as Reservoir Engineer, Plant Manager andManager of Wellfield Operations through October 1994. Earlier, he was withUnion Carbide, eventually becoming Technical and Plant Superintendent for theirsolution mining operation. Mr. Bartels also spent six years with NaturalGas Pipeline Company of America, a major gas transmission company, as drillingand reservoir engineer for their gas storage operations. Mr. Bartelsreceived a B.S. Degree in Petroleum Engineering from Montana School of Mines in1972.

 

**William M. McKnight, Jr.,** rejoined the Company in September 2005as Vice President—Exploration. Mr. McKnight is responsible for explorationand land acquisition activities of the Company. Mr. McKnight was one ofthe founders of the Company and served as Sr. Vice President—Operations andChief Operating Officer from 1978 to 1997. He also served as a director of theCompany until 1994. Before rejoining the Company he served as an independentconsultant for several companies, evaluating uranium mineralization potentialfor projects located both domestically and in foreign countries. Mr. McKnightalso served as President of ACHEMCO, Inc. from 1999 to 2004, a privatelyheld company, specializing in the treatment of municipal waste.

 

**Section 16(a) BeneficialOwnership Reporting Compliance.**

 

Section 16(a) of the Securities Exchange Actof 1934, as amended, requires the Company’s officers and directors, and personswho own more than 10% of a registered class of the Company’s equity securities,to file reports of ownership and changes in ownership with the SEC and theNational Association of Securities Dealers, Inc. Officers, directors, andgreater than 10% stockholders are required by SEC regulation to furnish theCompany with copies of all Section 16(a) filings.

 

Directors and officers of the Company have filed allrequired Form 4s and Form 5s.

 

**Amended Code of Ethics for Senior FinancialOfficers**

 

In December 2006, we adopted an Amended Code ofEthics for Senior Financial Officers including the Company’s chief executiveofficer, chief financial officer, controller, treasurer, and chief internalauditor, if any (“Amended Code of Ethics”). A copy of the Amended Code ofEthics can be found on the Company’s Web site or a copy will be furnishedwithout charge upon request to our Vice President and Chief Financial Officerat the Company’s principal executive offices.

 

**Audit Committee**

 

The Company has a standing Audit Committee that wasestablished in accordance with section 3(a)(58)(A) of the Securitiesand Exchange Act of 1934, as amended, and operates under a written charteradopted and approved by the Board of Directors. The current members of theAudit Committee are Leland O. Erdahl, George R. Ireland andTerence J. Cryan. Mr. Erdahl, Mr. Ireland and Mr. Cryan areindependent directors under the requirements of the NASDAQ Global Market asdetermined by our Board of Directors. The Company’s Board of Directors hasreviewed the qualifications of those serving on our Audit Committee  andhas determined that we have at least one audit committee financial expertserving on our Audit Committee. Mr. Leland O. Erdahl has beendesignated as our Audit Committee financial expert. Mr. Erdahl serves aschairman of the Audit Committee and is independent of the management of theCompany. Mr. Erdahl is a certified public accountant and has served onaudit committees of other public companies as a member and, in several cases,as chairman.

 

**Item 11.****  ****Executive Compensation.**

 

**Compensation Discussion and Analysis**

 

The Compensation Committee of the Board of Directorsoversees the Company’s compensation programs, which are designed specificallyfor the Company’s most senior executives officers, including the ChiefExecutive Officer, Chief Operating Officer, Chief Financial Officer and theother executive officers named in the Summary Compensation Table 

 

42

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(collectively, the “named executive officers”).Additionally, the Compensation Committee is charged with the review andapproval of all annual compensation decisions relating to named executiveofficers.

 

The Compensation Committee is composed entirely ofindependent, non-management members of the Board of Directors. No CompensationCommittee member participates in any of the Company’s employee compensationprograms. Each year the Company reviews any and all relationships that eachdirector has with the Company and the Board of Directors subsequently reviewsthese findings. The Board of Directors has determined that none of theCompensation Committee members have any material business relationships withthe Company.

 

The responsibilities ofthe Compensation Committee, as stated in its charter, include the following:

 

·    review and assessthe adequacy of the Compensation Committee charter annually and submit anyproposed changes to the Board of Directors for approval;

 

·    produce an annual report on executive compensationfor inclusion in the Company’s proxy statement relating to its annual meetingof stockholders;

 

·    review and make such recommendations tothe Board of Directors as the Compensation Committee deems advisable withregard to all incentive-based compensation plans and equity-based plans;

 

·    review and approve the corporate goalsand objectives that may be relevant to the compensation of the Company’s chiefexecutive officer and chief operating officer;

 

·    evaluate the chief executive officer’sand chief operating officer’s performance in light of the goals and objectivesthat were set and determine and approve the chief executive officer’s and chiefoperating officer’s compensation based on such evaluation; and

 

·    review and approve the recommendations ofthe chief executive officer and/or chief operating officer with regard to thecompensation of all officers of the Company other than the chief executiveofficer and chief operating officer.

 

***Objectives of Compensation Program***

 

The primary objectives of our compensation program areto (i) design competitive total compensation and rewards programs toenhance the Company’s ability to attract and retain knowledgeable andexperienced senior executives, (ii) drive and reward performance which supportsthe Company’s core values, (iii) provide a percentage of totalcompensation that is “at-risk”, or variable, based on predetermined performancecriteria, (iv) require significant stock holdings to align the interestsof named executive officers with those of stockholders, and (v) setcompensation and incentive levels that reflect competitive market practices.

 

***What Our Compensation Program isDesigned to Reward***

 

The Company’s compensation program is designed toreward exceptional organizational and individual performance.

 

***Elements of Company’sCompensation Plan and Why We Chose Each (How It Relates to Objectives)***

 

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                Infurtherance of the Company’s compensation objectives and to reward exceptionalorganization and individual performance, the Company’s compensation programincludes a base salary component, performance goals component (both financialand non-financial), stock incentive component, and retirement, health andwelfare benefit component, each of which is reviewed by the CompensationCommittee collectively in establishing the various forms and levels of thecompensation program.  The Company doesnot have an exact formula for allocating between cash and non-cashcompensation.

 

*(i)**           **Base Salary*

 

                Weestablish base salaries for our executives based on the scope of theirresponsibilities, and take into account competitive market compensation paid bycomparable uranium industry companies.  For 2006, such peers included Denison Mines, Laramide Resources,Strathmore Minerals, Uranium One, Uranium Energy, Energy Metals, Cameco, andPalladin.   Base salaries are adjustedannually, and from time to time to realign salaries with market levels aftertaking into account individual responsibilities, performance and experience.

 

*(ii)**       **Performance Goals*

 

                Financial.  The Compensation Committee believes that asignificant portion of each` senior executive’s compensation should be tied tothe Company’s performance measured against profitability and stockholder valuecreation. By doing so, named executive officers have the incentive ofincreasing Company profitability and stockholder return.  The Company measures financial performanceawards against certain (i) production targets, (ii) production costtargets, and (iii) budget targets. During periods when performance meets or exceeds these establishedfinancial objectives, named executive officers should be paid at or more thanexpected levels. When the Company’s performance does not meet key financialobjectives, named executive officers should be paid less than expectedlevels.  Performance goals have changedfrom time to time and will continue to change as the conditions of the Companyand the uranium market evolve.

 

                Non-Financial.  The Compensation Committee also believes thata significant portion of a senior executive’s compensation should be tied tothe Company’s performance as a whole measured against the Company’s performancein relation to its (a) performance goals:

 

                (i) continuedviability of the company as a going concern through the low price cycle foruranium concentrate and as conditions permit develop a strong balance sheet;

 

                (ii) maximizingshareholder value;

 

                (iii) developand implement strategy for market competitiveness in acquiring additional propertiesfor uranium resources for future development and operation;

 

                (iv) continuedretention of existing uranium properties and resources for development andoperation at a time when an economic cycle for uranium selling prices returns;and

 

                (v) continuedretention of a valuable cadre of personnel for future development and operationof uranium properties in the United States, and

 

(b) core values:

 

                (i) safety,

 

                (ii) communityinvolvement,

 

                (iii) environmentalfriendliness,

 

                (iv) developmentof future leaders, and

 

                (vi) adherencewith a strict code of ethics.

 

During periods when performance meets or exceeds theseestablished non-financial objectives, named executive officers should be paidat or more than expected levels. When the Company’s performance does not meetor exceed these established non-financial objectives, named executive officersshould be paid less than expected levels. Performance goals have changed from time to time and will continue tochange as the conditions of the company and the uranium market evolve.

 

                *(iii) **       **StockIncentive Compensation*

 

44

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The Company has two stockIncentive Plans for Employees, both of which were approved by the Company’sstockholders. Under the 1995 Stock Incentive Plan (the “1995 Plan”) 2,600,521 shares maybe purchased upon the exercise of outstanding options with exercise pricesranging from $0.76 to $28.50 per share. No new options may be granted under the1995 Plan. Under the Company’s 2004 Stock Incentive Plan (the “2004 Plan”) atotal of 1,750,000 shares may be purchased upon exercise of options grantedunder the 2004 Plan. At December 31, 2006 there were outstanding under the2004 Plan options for the purchase of 1,722,688 shares of Common Stock atexercise prices ranging from $2.97 to $5.19 per share. At December 31,2006, 500 shares were available for future grants under the 2004 Plan. Employeestock options generally vest ratably over a 3 or 4 year time frame and have acontractual term of 10 years.

 

An important objective of the long-term incentiveprogram is to strengthen the relationship between the long-term value of ourstock price and the potential financial gain for employees. Stock optionsprovide employees with the opportunity to purchase our Common Stock at a pricefixed on the grant date regardless of future market price. A stock optionbecomes valuable only if our Common Stock price increases above the optionexercise price (at which point the option will be deemed “in-the-money”) andthe holder of the option remains employed during the period required for theoption to “vest” thus, providing an incentive for an option holder to remainemployed by the Company. In addition, stock options link a portion of anemployee’s compensation to stockholders’ interests by providing an incentive toincrease the market price of our stock.

 

The exercise prices of all stock options granted tothe named executive officers as of December 31, 2006 are shown in theGrant of Plan-Based Awards Table on page 44. Additional information onthese grants, including the number of shares subject to each grant, also isshown in the Grants of Plan-Based Awards Table.

 

Options are granted periodically. The exercise pricefor each stock option is the market value on the date of grant. TheCompensation Committee may approve stock option awards to a new employee at thetime he or she is hired if the Compensation Committee determines that he or shecan substantially contribute to meeting the performance goals of the company.The only such award during 2006 was to Mr. David Clark for 800,000 shareswhen he was hired as President and Chief Operating Officer in 2006 by theCompany. The only other stock option awards to employees during 2006 were on November 8,2006 at the time of a regularly scheduled board meeting for a total of 230,000shares to eight tier two employees with individual awards ranging from 15,000shares to 50,000 shares. It has been the Company’s practice not to make anystock option awards to employees during a period when there is material nonpublic information.

 

Upon a Change of Control (as defined in the Plans) ofthe Company, all stock options granted under the 2004 Plan will becomeexercisable in full. Also, in the event the number of outstanding shares ofCommon Stock is increased or decreased or changed into or exchanged for adifferent number or kind of shares of stock or other securities of the Companyor of another Company, as a result of a stock split, stock dividend,combination or exchange of shares, merger or otherwise, each share subject toan unexercised option will be substituted for the number and kind of shares intowhich each share of outstanding Common Stock is to be changed or for which eachsuch share is to be exchanged and the option price will be increased ordecreased proportionately.

 

Option holders generally forfeit any unvested optionsif their employment with the Company terminates, except that upon, death ordisability while employed with the Company then outstanding stock options maybe exercised within the one year period ending on the anniversary of such deathor permanent and total disability to the same extent that the option wasexercisable on the date of death or disability.

 

The Compensation Committee has recently retained GKPartners, a compensation consulting firm, to advise it on establishingappropriate criteria for considering stock option grants to named executiveofficers.

 

*(iv)  Retirement, Health and Welfare Benefits*

 

The Company offers avariety of health and welfare and retirement programs to all eligibleemployees. The named executive officers generally are eligible for the samebenefit programs on the same basis as the rest of the broad-based employees.The Company’s health and welfare programs include medical, dental and vision.In addition to the foregoing, the named executive officers are eligible toparticipate in the following programs:

 

SupplementalHealth Care Plan.  The Company has adopted a health careplan (the “Supplemental Plan”) for the Company’s named executive officers andcertain of its other employees, which supplements the standard health care planavailable to all eligible employees (the “Standard Plan”). The SupplementalPlan pays directly to the participant 80% of all out-of-pocket medical anddental expenses not covered under the Standard Plan, including deductibles andco-insurance amounts. Additionally, the Supplemental Plan provides to eachparticipant $100,000 of accidental death and dismemberment insurance protectionand a worldwide medical assistance benefit. Each participant in theSupplemental Plan will receive a maximum annual benefit of $100,000. The Companypays an annual premium under the Supplemental 

 

 

45

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Plan equal to $250 per participant plus 10% of claimspaid. In addition to other officers and employees, the named executive officerscovered by the Supplemental Plan are Paul K. Willmott, Richard A. Van Horn,Mark S. Pelizza, Thomas H. Ehrlich and David N. Clark.

 

401(k) ProfitSharing Plan.* *The Company maintains a definedcontribution profit sharing plan for employees (the “401(k)”) that is administeredby a committee of trustees appointed by the Company. All Company employees areeligible to participate upon the completion of six months of employment,subject to minimum age requirements. Each year the Company makes a contributionto the 401(k) without regard to current or accumulated net profits of theCompany. These contributions are allocated to participants in amounts equal to25% (or a higher percentage, determined at the Company’s discretion) of theparticipants’ contributions, up to 4% of each participant’s gross pay. For theplan year ended July 31, 2006, the Company contributed amounts equal to100% of the participant’s contributions, up to 4% of gross pay. Participantsbecome 20% vested in their Company contribution account for each year of serviceuntil full vesting occurs upon the completion of five years of service.Distributions are made upon retirement, death or disability in a lump sum or ininstallments.

 

DeferredCompensation Plans.* *The Company has four separate deferredcompensation plans covering the years 1999 through 2004. Under these plansexecutive officers and directors of the Company and its subsidiaries werepermitted to defer up to 100% of their 1999, 2000, 2001, 2002, 2003 and 2004salary with payment thereof to be made on January 11, 2011. On or beforethat date, the participant may elect to receive the deferred amount in sharesof the Company’s Common Stock valued at a weighted average of $0.71 per shareunder the 1999 deferred compensation plan and $0.80 per share under the2000-2004 plans. As of December 31, 2006, a total of $789,228 has beendeferred under such plans. In 2006, no elections were made to convert deferredcompensation into shares of Common Stock under the 1999 plan or under the plansfor the years 2000 through 2004.

 

*(v)  Competitive Compensation Program*

 

The Compensation Committee reviews the overallcompensation of executives at peer companies to ensure that the compensationprogram is competitive.  For 2006, suchpeers included Denison Mines, Laramide Resources, Strathmore Minerals, UraniumOne, Uranium Energy, Energy Metals, Cameco, and Palladin.   The Compensation Committee focused on suchpeers salary levels, performance bonuses, long term incentive compensation, andany other relevant executive compensation to provide a base of comparison.  The Company believes that a competitivecompensation program will enhance its ability to attract and retain seniorexecutives. The Compensation Committee has recently retained GK Partners, anexecutive compensation consultant, to advise the Compensation Committee ondeveloping appropriate financial metrics to be used in settling executivecompensation.  The Company does not havea long term contract in place with GK Partners.

 

***How the Company Chose Amounts and/or Formulas for EachElement***

 

The Compensation Committee reviews, on an annualbasis, each compensation package for the named executive officers. The Companydoes not have an exact formula for allocating between cash and non-cashcompensation.  In each case, the CompensationCommittee takes into account each named executive officers (i) current andprior compensation, (ii) scope of responsibilities, (iii) experience,(iv) comparable market salaries, and (v) the Company’s achievement ofperformance goals (both financial and non-financial).  The Compensation Committee also (i) hasthe opportunity to meet with the named executive officers at various timesduring the year, which allows the Compensation Committee to form its ownassessment of each individual’s performance, and (ii) reviews the reportof the Chief Executive Officer presented to the Compensation Committee,evaluating each of the other named executive officers, including a review oftheir contributions and performance over the past year, strengths, weaknesses,development plans and succession potential.

 

Upon review of each of the above named items, andafter giving particular consideration to Mr. Van Horn’s knowledge andexperience in developing and operating uranium deposits, Mr. Pelizza’sknowledge and experience in securing permits for operating uranium propertiesand processing facilities, Mr. Ehrlich’s knowledge of accounting rules andregulations governing the accounting for uranium operations, and Mr. Clark’sknowledge and experience in (i) the uranium industry, (ii) marketingof uranium concentrate, and (iii) developing a strategic plan ofoperations for the company, the Compensation Committee approved the followingincreases to each named executive officer’s base salary:

 
| · | Mr. Van Horn’s  base salary was increased from $156,000 to $210,000; |
|--------|--------------------------------------------------------------------------------|
|   |                                                                           |
| · | Mr. Pelizza’s base  salary was increased from $126,000 to $210,000;  |
|   |                                                                           |
| · | Mr. Ehrlich’s base  salary was increased from $126,000 to $165,000;  |
|   |                                                                           |
| · | Mr. Willmott’s base salary was set at $237,000;  and                 |

 

 

46

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| · | Mr. David Clark  was hired in 2006, and his base salary of $240,000 and initial option award  associated with his hiring as our president and chief operating officer was  set on November 13, 2006. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The above-referencedadjustments to base salary reflect the Compensation Committee’s totalcompensation adjustments.

 

While the Company didmeet a number of non-financial performance goals, no performance based awardswere granted because the Company failed to meet its production target for 2006of 800,000 pounds and its production cost target for 2006 of $20-$25 per pound.

 

No stock option awardswere made during 2006 to any of the above-named employees other than Mr. Clark.  The other named executive officers of theCompany had received long term incentive stock option grants in prior yearswhich were not yet fully vested and the Compensation Committee determined thatthere was not an additional need to issue additional incentive compensationawards.  Mr. Clark received a grantof stock options that were awarded on his appointment as President of theCompany.  Mr. Clark’s award was madein part to strengthen the relationship between the long term value of our stockand his ability to participate in that gain financially, thereby furtheraligning his interests with that of the Company’s shareholders.  The size of the stock option award to Mr. Clarkwas determined after analyzing and deliberating on the appropriate level oftotal compensation for Mr. Clark given his importance to the Company inreaching its stated operating and financial objectives.  The Compensation Committee also consideredthe level of incentive stock awards to Mr. Clark’s peers at industrycompetitors, with the goal of establishing a level that would allow the Companyto both retain Mr. Clark and serve as an appropriate incentive to Mr. Clarkin a highly competitive industry.

 

*Mr. Willmott’sand Mr. Clark’s Compensation*

 

Mr. Willmott’sannual base salary as Chairman and CEO was set at $237,000 on October 13,2005 based on his responsibility for all phases of meeting the company’sperformance and adherence to core values and remained unchanged in 2006. Mr. Clarkwas hired in October, 2006 at a base annual salary of $240,000 ss President andChief Operating Officer and assumed the duties of (i) supervising the dayto day activities of the Company’s operations and (ii) developing andimplementing a strategy for the Company’s participation in the renaissance ofthe nuclear power industry in the United States and worldwide. Mr. Clark’sexperience in developing strategic plans for the uranium industry was deemed tobe extremely important to the Company as the uranium mining and nuclear powerindustry began to undergo dramatic changes throughout the world. It wastherefore the judgment of the Compensation Committee that we should structure Mr. Clark’scompensation package to both align his financial interest with that of theshareholders and incentivize him to remain with the Company for a longer periodof time in a very competitive environment for experienced uranium industryexecutives. The Compensation Committee also reviewed the compensation packagesof its peer group companies in reaching a determination as to the size andterms of Mr. Clark’s compensation package. Based on the above factors anddeterminations, he was granted a stock option to purchase 800,000 shares,subject to vesting over time.

 

**Summary Compensation Table**

 

The following table setsforth certain information with respect to compensation for services in allcapacities for the years ended December 31, 2006, 2005 and 2004 paid toour Chief Executive Officer, Chief Financial Officer and the three other mosthighly compensated executive officers who were serving as such as of December 31,2006.

 
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Change in** | ** ** | ** **         | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|--------------------|------------|--------------------|------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Pension**        | ** ** | ** **         | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Value and** | ** ** | ** **         | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Nonqualified**   | ** ** | ** **         | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**          | ** ** | **Deferred**       | ** ** | **All Other** | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Incentive Plan** | ** ** | **Compensation**   | ** ** | **Compensation**   | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Awards** | ** ** | **Compensation**        | ** ** | **Earnings**       | ** ** | **(1)**            | ** ** | **Total**  |
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**                 | ** ** | **($)**            | ** ** | **($)**            | ** ** | **($)**    |
| Paul K Willmott(2)(7)                          |       | 2006       |       | 238,021    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 14,608             |       | 252,629    |
| Chairman and  Chief                            |       | 2005       |       | 207,676    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 6,140              |       | 213,816    |
| Executive Officer                              |       | 2004       |       | 202,725    |       | 0          |       | —     |       | 630,000    |       | —                  |       | —             |       | 3,126              |       | 835,851    |
| Richard A. Van Horn(3)(7)                      |       | 2006       |       | 191,173    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 248,982            |       | 440,155    |
| Senior Vice  President—                   |       | 2005       |       | 139,792    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 2,452              |       | 142,244    |
| Operations                                     |       | 2004       |       | 137,950    |       | 0          |       | —     |       | 420,000    |       | —                  |       | —             |       | 2,372              |       | 560,322    |
| Mark S. Pelizza(4)(7)                          |       | 2006       |       | 174,787    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 241,115            |       | 415,902    |
| Vice  President—Health,                   |       | 2005       |       | 109,908    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 9,143              |       | 119,051    |
| Safety and  Environmental                      |       |       |       |       |       |       |       |       |       |       |       |                    |       |               |       |               |       |       |
| Affairs/President—Hydro                   |       |       |       |       |       |       |       |       |       |       |       |                    |       |               |       |               |       |       |
| Resources Inc.                            |       | 2004       |       | 109,108    |       | 0          |       | —     |       | 420,000    |       | —                  |       | —             |       | 5,3271             |       | 534,429    |
| Thomas H. Ehrlich(5)(7)                        |       | 2006       |       | 148,672    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 7,077              |       | 155,749    |
| Vice President  and Chief                      |       | 2005       |       | 109,908    |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 2,162              |       | 112,070    |
| Financial Officer                              |       | 2004       |       | 106,780    |       | 0          |       | —     |       | 420,000    |       | —                  |       | —             |       | 1,923              |       | 528,703    |
| David N. Clark(6)(7)                           |       | 2006       |       | 58,154     |       | 0          |       | —     |       | 2,579,500  |       | —                  |       | —             |       | 40,892             |       | 2,678,546  |
| President and  Chief                           |       | 2005       |       | 0          |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 0                  |       | 0          |
| Operating Officer                              |       | 2004       |       | 0          |       | 0          |       | —     |       | —     |       | —                  |       | —             |       | 0                  |       | 0          |

 

----

| (1)    | Includes amounts paid for  out-of-pocket medical and dental expenses under the Company’s Supplemental  Health Care Plan described below, contributions made by the Company under the  Company’s 401(k) Profit Sharing Plan described below,  life  insurance premiums paid by the Company on behalf of the named officer, the  value realized from the exercise of stock options and directors’ fees. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    | Salary for 2004 includes  $90,000 which was deferred under the 2004 Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                |

 

 

47

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| (3)    | Salary for 2004 includes  $20,800 which was deferred under the 2004 Deferred Compensation Plan. All  Other Compensation includes $238,690 for income related to the exercise of  stock options as described below and $856 for gross ups to cover taxes  related to annual lease value of company vehicle.                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (4)    | All Other Compensation  includes $217,150 for income related to the exercise of stock options as  described below.                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (5)    | Salary for 2004 includes  $15,938 which was deferred under the 2004 Deferred Compensation Plan.                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (6)    | All Other Compensation  includes $40,892 for directors’ fees. The value of the Stock Option awards   includes 800,000 options and 50,000 using a fair market value of $2.91  and $5.03 per share, respectively. The fair market value per share is  calculated as described in Footnote 9 Stock Based Compensation Plan of the  Notes to Consolidated Financial Statements. |
|   |                                                                                                                                                                                                                                                                                                                                                                                  |
| (7)    | See Footnote 8 —  Shareholder’s Equity of the Notes to Consolidated Financial Statements for  discussion of stock option grants issued or issuable for deferred  compensation.  See Footnote 9 — Stock  Based Compensation Plan of the Notes to Consolidated Financial Statements for  discussion of valuation assumptions for stock option grants.               |

 

**Grant of Plan Based Awards**

 

This table discloses theactual number of stock options and restricted stock awards granted in 2006 andthe grant date fair value of these awards. It also captures potential futurepayouts under the Company’s non-equity and equity incentive plans.

 

 
| ** **     | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                             | ** ** | **All Other** | ** ** | **All Other** | ** ** | ** **        | ** ** | ** **         |
|----------------|------------|------------|------------|----------------------------------------|------------|----------------------------------------|------------|--------------------|------------|--------------------|------------|-------------------|------------|--------------------|
| ** **     | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                             | ** ** | **Stock**          | ** ** | **Option**         | ** ** | ** **        | ** ** | ** **         |
| ** **     | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                             | ** ** | **Awards:**        | ** ** | **Awards:**        | ** ** | **Exercise**      | ** ** | **Grant**          |
| ** **     | ** ** | ** ** | ** ** | **Estimated Future Payouts** | ** ** | **Estimated Future Payouts** | ** ** | **Number**         | ** ** | **Number of** | ** ** | **or Base**  | ** ** | **Date Fair** |
| ** **     | ** ** | ** ** | ** ** | **Under  Non-Equity**                  | ** ** | **Under  Equity**                      | ** ** | **of Shares** | ** ** | **Securities**     | ** ** | **Price of** | ** ** | **Value of**  |
| ** **     | ** ** | ** ** | ** ** | **Incentive Plan Awards**    | ** ** | **Incentive Plan Awards**    | ** ** | **of Stock**  | ** ** | **Underlying**     | ** ** | **Option**        | ** ** | **Stock and** |
| ** **     | ** ** | **Grant**  | ** ** | **Threshold**                          | ** ** | **Target**                             | ** ** | **Maximum**        | ** ** | **Threshold**      | ** ** | **Target**        | ** ** | **Maximum**        | ** ** | **or Units** | ** ** | **Options** | ** ** | **Awards** | ** ** | **Option** |
| **Name**       | ** ** | **Date**   | ** ** | **($)**                                | ** ** | **($)**                                | ** ** | **($)**            | ** ** | **(#)**            | ** ** | **(#)**           | ** ** | **(#)**            | ** ** | **(#)** | ** ** | **(#)** | ** ** | **($/Sh)** | ** ** | **Awards** |
| David N. Clark |       | 10/3/2006  |       | —                                 |       | —                                 |       | —             |       | —             |       | —            |       | —             |   | — |   | 800,000 |   | 2.97 |   | 2,328,000 |
|           |       | 6/6/2006   |       | —                                 |       | —                                 |       | —             |       | —             |       | —            |       | —             |   | — |   | 50,000 |   | 5.13 |   | 251,500 |

 

**Employment Agreements**

 

We have standardagreements in place for our key employees that become effective in the event ofa change in control. The Committee has made the determination that suchagreements are necessary to retain key employees during the process leading toa possible change in control and insure that such employees can proceed toreview the elements regarding the change in control in the best regard forshareholders without concern for continued salary payments if the change incontrol in fact does occur. The amount of the compensation payable to anyparticular employee is based on the compensation earned by such employeeimmediately prior to the change in control. Except for these agreements, we have not employment contracts withemployees.

 

**Outstanding Awards at Fiscal Year-End**

 

The following table showsoutstanding stock option awards classified as exercisable and unexercisable asof December 29, 2006 for the named executive officers. The table alsoshows unvested and unearned stock awards (both time-based awards andperformance-contingent) assuming a market value of $5.80 a share (the closingmarket price of the Company’s stock on December 29, 2006).

 

 

48

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| ** **           | ** ** | **Option Awards**                                                             | ** ** | **Stock Awards**                                                                |
|----------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|
| **Name**             | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options  (#)** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of Shares  or Units  of Stock  That  Have Not  Vested  (#)** | ** ** | **Market  Value of  Shares  or Units  of Stock  That  Have Not  Vested  ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested  (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested  ($)** |
| Paul K. Willmott     |       | 6,570                                                                              |       | 0                                                                                    |   | — |   | 28.50 |   | 2/10/2007 |   | — |   | — |   | — |   | — |
|                 |       | 10,000                                                                             |       | 0                                                                                    |   | — |   | 11.75 |   | 2/23/2008 |   | — |   | — |   | — |   | — |
|                 |       | 131,684                                                                            |       | 0                                                                                    |   | — |   | 0.80 |   | 9/27/2010 |   | — |   | — |   | — |   | — |
|                 |       | 217,940                                                                            | (1)        | 164,060                                                                              |   | — |   | 1.16 |   | 6/2/2014 |   | — |   | — |   | — |   | — |
|                 |       | 135,375                                                                            | (2)        | 45,125                                                                               |   | — |   | 1.16 |   | 6/2/2014 |   | — |   | — |   | — |   | — |
| Richard A. Van  Horn |       | 13,750                                                                             |       | 0                                                                                    |   | — |   | 22.00 |   | 4/10/2007 |   | — |   | — |   | — |   | — |
|                 |       | 6,250                                                                              |       | 0                                                                                    |   | — |   | 11.75 |   | 2/23/2008 |   | — |   | — |   | — |   | — |
|                 |       | 75,000                                                                             |       | 0                                                                                    |   | — |   | 0.80 |   | 9/27/2010 |   | — |   | — |   | — |   | — |
|                 |       | 16,000                                                                             |       | 0                                                                                    |   | — |   | 0.76 |   | 2/28/2011 |   | — |   | — |   | — |   | — |
|                 |       | 219,828                                                                            | (1)        | 155,172                                                                              |   | — |   | 1.16 |   | 6/2/2014 |   | — |   | — |   | — |   | — |
| Mark S. Pelizza      |       | 1,925                                                                              |       | 0                                                                                    |   | — |   | 28.50 |   | 2/10/2007 |   | — |   | — |   | — |   | — |
|                 |       | 2,250                                                                              |       | 0                                                                                    |   | — |   | 11.75 |   | 2/23/2008 |   | — |   | — |   | — |   | — |
|                 |       | 75,000                                                                             |       | 0                                                                                    |   | — |   | 0.80 |   | 9/27/2010 |   | — |   | — |   | — |   | — |
|                 |       | 8,100                                                                              |       | 0                                                                                    |   | — |   | 0.76 |   | 2/28/2011 |   | — |   | — |   | — |   | — |
|                 |       | 219,828                                                                            | (1)        | 155,172                                                                              |   | — |   | 1.16 |   | 6/2/2014 |   | — |   | — |   | — |   | — |
| Thomas H. Ehrlich    |       | 3,500                                                                              |       | 0                                                                                    |   | — |   | 28.50 |   | 2/10/2007 |   | — |   | — |   | — |   | — |
|                 |       | 3,000                                                                              |       | 0                                                                                    |   | — |   | 11.75 |   | 2/23/2008 |   | — |   | — |   | — |   | — |
|                 |       | 125,000                                                                            |       | 0                                                                                    |   | — |   | 0.80 |   | 9/27/2010 |   | — |   | — |   | — |   | — |
|                 |       | 13,050                                                                             |       | 0                                                                                    |   | — |   | 0.76 |   | 2/28/2011 |   | — |   | — |   | — |   | — |
|                 |       | 219,828                                                                            | (1)        | 155,172                                                                              |   | — |   | 1.16 |   | 6/2/2014 |   | — |   | — |   | — |   | — |
| David N. Clark       |       | 33,500                                                                             | (3)        | 24,000                                                                               |   | — |   | 2.97 |   | 10/3/2016 |   | — |   | — |   | — |   | — |
|                 |       | 233,166                                                                            | (3)        | 509,334                                                                              |   | — |   | 2.97 |   | 10/3/2016 |   | — |   | — |   | — |   | — |
|                 |       | 0                                                                                  | (4)        | 50,000                                                                               |   | — |   | 5.13 |   | 6/6/2016 |   | — |   | — |   | — |   | — |

 

----

| (1)    | Remaining unexercisable  options vest ratably at 06/02/2007 and 06/02/2008.                         |
|--------|-----------------------------------------------------------------------------------------------------|
|   |                                                                                                |
| (2)    | Remaining unexercisable  options vest at 06/02/2007.                                                |
|   |                                                                                                |
| (3)    | Remaining unexercisable  options vest ratably at 10/03/2007 and 10/03/2008.                         |
|   |                                                                                                |
| (4)    | Remaining unexercisable  options vest ratably at 06/06/2007, 06/06/2008, 06/06/2009 and 06/06/2010. |

 

**OptionExercises and Stock Vested**

 

The followingtable sets forth certain information regarding options and stock awardsexercised and vested, respectively, during 2006 for the named executiveofficers.

 
| ** **          | ** ** | **Option Awards**             | ** ** | **Stock Awards**   | ** ** |
|---------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **          | ** ** | **Number of Shares**     | ** ** | **Value Realized** | ** ** | **Number of Shares** | ** ** | **Value Realized** | ** ** |
| ** **          | ** ** | **Acquired on Exercise** | ** ** | **on Exercise**    | ** ** | **Acquired on Vesting** | ** ** | **on Vesting** | ** ** |
| **Name**            | ** ** | **(#)**                            | ** ** | **($)**                 | ** ** | **(#)** | ** ** | **($)** | ** ** |
| Richard A. Van Horn |       | 50,000                             |       | 238,690                 |       | — |   | — |   |
| Mark S. Pelizza     |       | 50,000                             |       | 217,150                 |       | — |   | — |   |

 

 

49

----

 

**PotentialPayments Upon Termination or Change in Control**

 

In June 1997, theCompany entered into Compensation Agreements with each of Messrs. Willmott,Van Horn, Pelizza, Ehrlich and in February 2007, with Messrs. Clarkand Bartels that provide that, in the event of a change in control, suchofficers will have certain rights and benefits for a period of thirty-sixmonths for Mr. Willmott and twenty-four months for the otherofficers, following such change in control.

 

For purposes of theCompensation Agreements, a “change in control” means (a) the consummationof any transaction pursuant to which any “person” (as such term is used inSections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of1934) is or becomes the beneficial owner, directly or indirectly, of securitiesof the Company representing 51% or more of the combined voting power of thethen outstanding securities of the Company; or (b) a change in thecomposition of a majority of the Board of Directors within twelve months afterany person is or becomes the beneficial owner, directly or indirectly, ofsecurities of the Company representing 25% or more of the combined voting powerof the then outstanding securities of the Company.

 

Rights under theCompensation Agreement will be triggered in the event that, following a changein control, the executive’s employment is terminated by (a) the Companywithout cause; or (ii) by the executive if (i) the executive isassigned substantial duties or responsibilities that are materiallyinconsistent with the executive’s position, duties, responsibilities or statusduring the twelve-month period immediately prior to the Change in Control; (ii) theexecutive’s base compensation is reduced or the executive experiences in anyyear a reduction in the ratio of the executive’s incentive compensation paymentto the executive’s base compensation in such year which is greater than theaverage reduction in the ratio of incentive compensation payments to basecompensation in such year experienced by all of the Company’s other salariedofficers; or (iii) the executive is transferred to a location (other thanAlbuquerque, New Mexico) which is an unreasonable distance from the executive’scurrent principal work location.

 

Assuming a change incontrol occurred on December 29, 2006, the total estimated compensationthat would be paid in the aggregate under the Compensation Agreements to thesesix executive officers is $2.781 million. The Compensation Agreements providethat the base salary payments shall be made on a monthly basis for the durationof the term and incentive payments shall be paid annually until the obligationto make such payments expires.

 

**DirectorCompensation**

 

On June 2, 2004 theCompany adopted the 2004 Amended and Restated Directors’ Stock Option Plan (the“2004 Directors’ Plan”). Under the 2004 Directors’ Plan, each non-employeeDirector elected or appointed to the Board of Directors for the first time willbe granted an option to purchase twenty-five thousand (25,000) shares of theCompany’s Common Stock and each Non-Employee Director will be granted an optionto purchase twenty-five thousand (25,000) shares either (a) upon his orher re-election at an annual meeting of the Company’s stockholders, or (b) inany calendar year in which an annual meeting of stockholders is not held, on June 1of such year.

 

Compensation for 2006 forthe non-employee directors was earned at the rate of $4,000 per quarter plus$1,200 per meeting attended. The Chairman of the Audit Committee earnscompensation at the rate of $1,250 per quarter and each non-employee directorearns $600 for each meeting of the Audit Committee attended. The Chairman ofthe Strategic Planning Committee earns compensation at the rate of $1,250 perquarter and each non-employee director earns $600 for each meeting attended.Non-employee members of the Strategic Planning Committee are also compensatedat a rate of $2,000 per day, and a pro rata portion thereof for less that afull eight hour day for non-meeting work performed by a Strategic PlanningCommittee member. Non-employee members of the Compensation and NominatingCommittees earn $600 for each such meeting attended.

 

The followingtable summarizes all compensation earned by the Company’s directors in the yearended December 31, 2006.

 
| **Name**              | ** ** | **Fees Earned or  Paid in Cash  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards (2)  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|-----------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| Leland O. Erdahl (1)  |       | 42,000                                                    |       | —                 |       | 126,250                     |       | —                                                 |       | —                                                                                      |       | —                                |       | 168,250        |       |
| George R. Ireland (1) |       | 40,200                                                    |       | —                 |       | 126,250                     |       | —                                                 |       | —                                                                                      |       | —                                |       | 166,450        |       |
| Terence J. Cryan (1)  |       | 10,050                                                    |       |                   |       | 146,000                     |       | —                                                 |       | —                                                                                      |       | —                                |       | 156,050        |       |

----

(1) SeeFootnote 8 — Shareholder’s Equity of the Notes to Consolidated FinancialStatements for discussion of stock option grants issued or issuable fordeferred compensation. See Footnote 9 — Stock Based Compensation Plan of theNotes to Consolidated Financial Statements for discussion of valuationassumptions for stock option grants.

 

(2) Option Award representsthe grant date fair value of equity awards granted during 2006.

 

50

----

 

**Compensation Committee Report**

 

The CompensationCommittee has reviewed and discussed the Compensation Discussion and Analysiswith management.  Based upon this review and discussion, the CompensationCommittee recommended to the board of directors that the CompensationDiscussion and Analysis be included in this annual report.

 

Compensation Committee:

Mr. Leland O. Erdahl

Mr. George R. Ireland

Mr. Terence J. Cryan

 

**Item12.****   ****Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

Please refer to ourresponse in Item 11 of this Annual Report on Form 10-K/A for equitycompensation plan information.

 

**SecurityOwnership of Certain Beneficial Owners and Management**

 

The following tables setforth, as of December 31, 2006, information regarding persons known by usto be the beneficial owner of more than 5% of the outstanding shares of ourCommon Stock. Shown separately in the second table below is informationregarding the beneficial ownership of our Common Stock by (i) eachdirector, (ii) each of the named executive officers, and (iii) alldirectors and named executive officers as a group.

 

**PrincipalStockholders**

 
| **Name and Address of Beneficial Owner** | ** ** | **Amount and  Nature of  Beneficial  Ownership(1)** | ** ** | **Percent of  Class(2)** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------|------------|
| Zesiger Capital Group, LLC                                        |       | 8,604,807                                                     | (3)        | 16.6                          | %          |
| 320 Park Avenue, 30th Floor                                       |       |                                                          |       |                          |       |
| New York, NY 10022                                                |       |                                                          |       |                          |       |
| Rudolf J. Mueller                                                 |       | 2,736,680                                                     | (4)        | 5.3                           | %          |
| c/o The Winchester Group, Inc.                               |       |                                                          |       |                          |       |
| 153 East 53 rd  Street,  Suite 5101                     |       |                                                          |       |                          |       |
| New York, NY 10022                                                |       |                                                          |       |                          |       |
| Gilder, Gagnon,  Howe & Co. LLC                          |       | 5,915,096                                                     | (5)        | 11.4                          | %          |
| 1775 Broadway, 26 th  Floor                                  |       |                                                          |       |                          |       |
| New York, NY 10019                                                |       |                                                          |       |                          |       |
| Dreman Value Management  LLC                                      |       | 6,481,150                                                     |       | 12.53                         | %          |
| Harbourside Financial Center                                      |       |                                                          |       |                          |       |
| Plaza 10, Suite 800                                          |       |                                                          |       |                          |       |
| Jersey, City, NJ 07311                                            |       |                                                          |       |                          |       |
| Deutsche Asset  Management, Inc.                             |       | 5,282,200                                                     |       | 10.21                         | %          |
| Taunusanlage 12                                                   |       |                                                          |       |                          |       |
| D-60325 Frankfurt am Main                                         |       |                                                          |       |                          |       |
| Federal Republic of Germany                                       |       |                                                          |       |                          |       |

----

(1) Each person has sole voting and investmentpower with respect to the shares listed, unless otherwise indicated. Beneficialownership includes shares over which the indicated beneficial owner exercisesvoting and/or investment power.

 

51

----

 

(2) The shares owned by each person, and theshares included in the total number of shares outstanding, have been adjusted,and the percentages owned have been computed, in accordance with Rule 13d-3(d)(1) underthe Securities Exchange Act of 1934. Shares subject to options or warrantscurrently exercisable or exercisable within 60 days are deemed outstandingfor computing the percentage ownership of the person holding such options orwarrants, but are not deemed outstanding for computing the percentage ownershipof any other person.

 

(3) Includes 8,604,807 shares as to which ZesigerCapital Group, LLC (“ZCG”) holds dispositive power and 5,342,740 shares as towhich they hold voting power for shares that are owned by their investmentadvisory clients. ZCG disclaims beneficial ownership of all of these shares.

 

(4) Includes 2,317,030 shares as to which Mr. Muellerholds sole dispositive and voting power and 431,650 shares as to which Mr. Muellerholds shared dispositive power and 9,000 shares as to which Mr. Muellerholds shared voting power. Includes (i) 14,000 shares owned by members of Mr. Mueller’sfamily in which Mr. Mueller shares voting and dispositive power. Mr. Muellerdisclaims beneficial ownership of such shares.

 

(5) Includes 5,750,951 shares held in customeraccounts over which partners and/or employees of the Gilder Gagnon hasdiscretionary authority to dispose of or direct the disposition of the shares,111,145 shares held in accounts owned by the partners of the Reporting Personand their families, and 53,000 shares held in the account of the profit-sharingplan of Gilder Gagnon.

 

**Directorsand Named Executive Officers**

 
| **Name of Beneficial Owner**                             |   | **Amount and  Nature of  Beneficial  Ownership(1)** |   | **Percent of  Class(2)** |   |
|-------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|-------------------------------|--------|
| Paul K. Willmott                                                        |   | 1,293,145                                                     | (3)    | 2.4%                          |   |
| Leland O. Erdahl                                                        |   | 206,643                                                       | (4)    | 0.4%                          |   |
| George R. Ireland                                                       |   | 1,735,949                                                     | (5)    | 3.3%                          |   |
| David N. Clark                                                          |   | 316,666                                                       |   | 0.6%                          |   |
| Terence J. Cryan                                                        |   | 1,000                                                         |   | —                        |   |
| Richard A. Van Horn                                                     |   | 474,161                                                       | (6)    | 0.90                          |   |
| Mark S. Pelizza                                                         |   | 374,983                                                       | (7)    | 0.7%                          |   |
| Thomas H. Ehrlich                                                       |   | 475,375                                                       | (8)    | 0.9%                          |   |
| All named executive  officers and directors as a group (8 persons) |   | 4,877,922                                                     |   | 9.2%                          |   |

----

(1) Each person hassole voting and investment power with respect to the shares listed, unlessotherwise indicated. Beneficial ownership includes shares over which theindicated beneficial owner exercises voting and/or investment power.

 

(2) The shares owned by each person, and the sharesincluded in the total number of shares outstanding, have been adjusted, and thepercentages owned have been computed, in accordance with Rule 13d-3(d)(1) underthe Securities Exchange Act of 1934. Shares subject to options or warrantscurrently exercisable or exercisable within 60 days are deemed outstandingfor computing the percentage ownership of the person holding such options orwarrants, but are not deemed outstanding for computing the percentage ownershipof any other person.

 

(3) Includes 1,153,688 shares that may be obtained byMr. Willmott through the exercise of stock options and deferredcompensation plans that are currently exercisable or will become exercisablewithin 60 days. Does not include 290,185 shares that may be obtained by Mr. Willmottthrough the exercise of stock options exercisable more than 60 days fromthe date hereof.

 

(4) Includes 69,687shares that may be obtained by Mr. Erdahl through the exercise of stockoptions and deferred compensation plans that are currently exercisable or willbecome exercisable within 60 days. Does not include 11,626 shares that maybe obtained by Mr. Erdahl through the exercise of stock optionsexercisable more than 60 days from the date hereof.

 

(5) Includes 184,937 shares that may be obtained by Mr. Irelandthrough the exercise of stock options and deferred compensation plans that arecurrently exercisable or will become exercisable within 60 days. Does notinclude 11,626 shares that may be obtained by Mr. Ireland through theexercise of stock options exercisable more than 60 days from the datehereof.  Includes 1,218,466 and 314,866 shares owned by Geologic ResourceFund Ltd. and Geologic Resource Fund LP, respectively. Mr. Ireland is themanaging partner and has an economic interest in each of these funds.

 

(6) Includes 460,828shares that may be obtained by Mr. Van Horn through the exercise of stockoptions and deferred compensation plans that are currently exercisable or willbecome exercisable within 60 days. Does not include 155,172 shares thatmay be obtained by Mr. Van Horn through the exercise of stock optionsexercisable more than 60 days from the date hereof.

 

(7) Includes 307,103shares that may be obtained by Mr. Pelizza through the exercise of stockoptions that are currently exercisable or will become exercisable within60 days. Does not include 155,172 shares that may be obtained by Mr. Pelizzathrough the exercise of stock options exercisable more than 60 days fromthe date hereof.

 

52

----

 

(8) Includes 467,275shares that may be obtained by Mr. Ehrlich through the exercise of stockoptions and deferred compensation plans that are currently exercisable or willbecome exercisable within 60 days. Does not include 155,172 shares thatmay be obtained by Mr. Ehrlich through the exercise of stock optionsexercisable more than 60 days from the date hereof.

 

**Item13.****     ****Certain Relationshipsand Related Transactions and Director Independence.**

 

None

 

**Item 14.****     ****Principal AccountantFees and Services.**

 

The Audit Committeeapproved the engagement of Hein & Associates, LLP as the Company’sindependent auditors for the year ended December 31, 2006.

 

**AuditFees.**

 

The Company was billedfor audit fees and services by Hein & Associates, LLP the Company’sprincipal independent accountants, during the years ended December 31,2006 and 2005 of $214,653 and $52,588, respectively. Audit fees include feesfor the audits of the Company’s consolidated financial statements and fees inconnection with internal controls testing and evaluation under Sarbanes-Oxleyrequirements.

 

**AuditRelated Fees.**

 

The Company was billedaudit related fees of $23,465 in 2006 and $29,559 in 2005. Audit related feesinclude fees for the review of registration statements and issuance of consentletters in 2006.

 

**TaxFees.**

 

The Company was billed$1,279 in tax fees in 2006. No such tax fees were billed in 2005.

 

**AllOther Fees.**

 

None.

 

**AuditCommittee Pre-Approval Policies and Procedures.**

 

The Audit Committee isrequired to pre-approve the audit and non-audit services performed by theindependent auditor to assure that the provision of such services do no impairthe auditor’s independence.

 

**PART IV**

 

**Item 15.****     ****Exhibits and FinancialStatement Schedules.**

 

See Index to Exhibits on page E-1for a listing of the exhibits filed as part of this Annual Report.

 

53

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| Date: March 13,  2008 |                         |   |                     |
|-----------------------|------------------------------|--------|--------------------------|
|                  | URANIUM RESOURCES, INC. |
|                  |                         | By:    | /s/ DAVID N. CLARK       |
|                  |                         |   | David N. Clark           |
|                  |                         |   | Chief Executive  Officer |
|                       |                              |        |                          |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signature**                                            | ** ** | **Date**       |
|----------------------------------------------------------|------------|----------------|
| ** **                                               | ** ** | ** **     |
| /s/ PAUL K. WILLMOTT                                     |       | March 13, 2008 |
| Paul K.  Willmott,                                       |       |           |
| Director and  Chairman                                   |       |           |
|                                                     |       |           |
| /s/ DAVID N. CLARK                                       |       | March 13, 2008 |
| David N. Clark                                           |       |           |
| Director,  President and Chief Executive Officer         |       |           |
|                                                     |       |           |
| /s/ THOMAS H. EHRLICH                                    |       | March 13, 2008 |
| Thomas H.  Ehrlich,                                      |       |           |
| Vice  President—Finance and Chief Financial Officer |       |           |
| (Principal  Financial and Accounting Officer)            |       |           |
|                                                     |       |           |
| /s/ LELAND O. ERDAHL                                     |       | March 13, 2008 |
| Leland O.  Erdahl, Director                              |       |           |
|                                                     |       |           |
| /s/ GEORGE R. IRELAND                                    |       | March 13, 2008 |
| George R.  Ireland, Director                             |       |           |
|                                                     |       |           |
| /s/ TERENCE J. CRYAN                                     |       | March 13, 2008 |
| Terence J.  Cryan, Director                              |       |           |
|                                                     |       |           |
| /s/ MARVIN K.  KAISER                                    |       | March 13, 2008 |
| Marvin K.  Kaiser, Director                              |       |           |

 

54

----

** **

**URANIUM RESOURCES, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Consolidated Financial Statements ForThe Years Ended December 31, 2006, 2005 and 2004**

 
| Report  of Independent Registered Public Accounting Firm      |   | F-2 |   |
|---------------------------------------------------------------|--------|-----|--------|
| Consolidated Balance  Sheets                                  |   | F-3 |   |
| Consolidated  Statements of Operations                        |   | F-5 |   |
| Consolidated  Statements of Common Shareholders’ Deficit |   | F-6 |   |
| Consolidated  Statements of Cash Flows                        |   | F-7 |   |
| Notes to Consolidated Financial Statements                    |   | F-8 |   |

 

The followingconsolidated financial statements are presented reflecting the effects of the 1for 4 reverse split effective April 10, 2006.

 

F-1

----

 

**Reportof Independent Registered Public Accounting Firm**

 

To the Board of DirectorsUranium Resources, Inc.Lewisville, TX  75067

 

We have audited theconsolidated balance sheets of Uranium Resources, Inc. as of December 31,2006 and 2005, and the related consolidated statements of operations, commonshareholders’ deficit and cash flows for each of the three years in the periodended December 31, 2006. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard ( United States ). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provided a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Uranium Resources, Inc. as ofDecember 31, 2006, 2005 and 2004, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2006, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 13to the consolidated financial statements, the Company restated the financialstatements for the year ended December 31, 2004.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Uranium Resources, Inc.’s internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) and ourreport dated March 27, 2007 expressed an unqualified opinion on management’sassessment of the effectiveness of Uranium Resources, Inc.’s internalcontrol over financial reporting and an opinion that the Company had notmaintained effective internal control over financial reporting as of December 31, 2006.

 

Hein & Associates, LLPDallas, TXMarch 27 **,** 2007

 

F-2

----

 

**URANIUM RESOURCES, INC.CONSOLIDATED BALANCE SHEETSASSETS**

 
| ** **                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current assets:                                              |       |                  |       |   |   |
| Cash and cash equivalents                                    |       | $                     | 20,176,771 |   | $ | 5,852,716 |   |
| Receivables, net                                             |       | 713,529               |       | 32,940 |   |
| Uranium and materials/supplies inventory                     |       | 1,603,585             |       | 707,949 |   |
| Prepaid and other current assets                             |       | 410,000               |       | 269,835 |   |
| Total current assets                                         |       | 22,903,885            |       | 6,863,440 |   |
| Property, plant and  equipment, at cost:                     |       |                  |       |   |   |
| Uranium properties                                           |       | 67,153,797            |       | 51,662,223 |   |
| Other property, plant and equipment                          |       | 465,613               |       | 302,164 |   |
| Less—accumulated depreciation, depletion and impairment |       | (49,423,848           | )          | (43,275,660 | ) |
| Net property, plant and equipment                            |       | 18,195,562            |       | 8,688,727 |   |
| Other assets                                                 |       | 2,369,434             |       | 1,072,026 |   |
| Long-term investment:                                        |       |                  |       |   |   |
| Certificate of deposit, restricted                           |       | 2,467,491             |       | 1,288,411 |   |
|                                                         |       | $                     | 45,936,372 |   | $ | 17,912,604 |   |

 

The accompanying notes tofinancial statements are an integral part of these consolidatedstatements.

 

F-3

----

 

**URANIUMRESOURCES, INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

 

**LIABILITIESAND SHAREHOLDERS’ DEFICIT**

 
| ** **                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current liabilities:                                                                                                                                                |       |                  |       |   |   |
| Accounts payable                                                                                                                                                    |       | $                     | 1,994,184  |   | $ | 1,139,005 |   |
| Current portion of restoration reserve                                                                                                                              |       | 1,520,192             |       | 1,061,491 |   |
| Accrued interest and other accrued liabilities                                                                                                                      |       | 816,877               |       | 432,683 |   |
| Unrealized loss on derivatives, current portion                                                                                                                     |       | —                |       | 20,424,291 |   |
| Current portion of long-term debt                                                                                                                                   |       | 201,804               |       | 175,833 |   |
| Total current liabilities                                                                                                                                           |       | 4,533,057             |       | 23,233,303 |   |
| Other long-term  liabilities and deferred credits                                                                                                                   |       | 3,998,229             |       | 3,823,015 |   |
| Unrealized loss on  derivatives, net of current portion                                                                                                             |       | —                |       | 26,396,656 |   |
| Long-term debt, less  current portion                                                                                                                               |       | 635,691               |       | 450,000 |   |
| Commitments and  contingencies (Notes 1, 2, 3, 4, 5, and 11)                                                                                                        |       |                  |       |   |   |
| Shareholders’ equity  (deficit):                                                                                                                               |       |                  |       |   |   |
| Common stock, $.001 par value, shares authorized: 200,000,000; shares  issued and outstanding (net of treasury shares): 2006—51,791,339;  2005—40,952,127 |       | 51,829                |       | 40,990 |   |
| Paid-in capital                                                                                                                                                     |       | 126,252,871           |       | 75,013,668 |   |
| Accumulated deficit                                                                                                                                                 |       | (89,525,887           | )          | (111,035,610 | ) |
| Less: Treasury stock (38,125 shares), at cost                                                                                                                       |       | (9,418                | )          | (9,418 | ) |
| Total shareholders’ deficit                                                                                                                                    |       | 36,769,395            |       | (35,990,370 | ) |
|                                                                                                                                                                |       | $                     | 45,936,372 |   | $ | 17,912,604 |   |

 

The accompanying notes tofinancial statements are an integral part of these consolidatedstatements.

 

F-4

----

 

**URANIUMRESOURCES, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Revenues:                                                  |       |                                       |       |   |   |   |   |
| Uranium sales—                                        |       | $                                          | 8,580,799  |   | $ | 4,865,156 |   | $ | 1,009,283 |   |
| Total revenue                                              |       | 8,580,799                                  |       | 4,865,156 |   | 1,009,283 |   |
| Costs and expenses:                                        |       |                                       |       |   |   |   |   |
| Cost of uranium sales—                                |       |                                       |       |   |   |   |   |
| Royalties and commissions                                  |       | 767,788                                    |       | 355,011 |   | 67,956 |   |
| Operating expenses                                         |       | 5,574,926                                  |       | 3,935,225 |   | 1,194,938 |   |
| Accretion/amortization of restoration reserve              |       | 516,956                                    |       | 348,415 |   | 241,810 |   |
| Depreciation and depletion                                 |       | 5,827,464                                  |       | 1,660,219 |   | 263,380 |   |
| (Gain) loss on derivatives                                 |       | (34,820,947                                | )          | 30,974,837 |   | 13,111,772 |   |
| Writedown of uranium properties and other uranium assets   |       | 3,494,847                                  |       | —- |   | 46,188 |   |
| Total (gain on) cost of uranium sales                      |       | (18,638,966                                | )          | 37,273,707 |   | 14,926,044 |   |
| Earnings (loss) from  operations before corporate expenses |       | 27,219,765                                 |       | (32,408,551 | ) | (13,916,761 | ) |
| Corporate expenses—                                   |       |                                       |       |   |   |   |   |
| General and administrative                                 |       | 6,755,532                                  |       | 3,191,312 |   | 1,999,394 |   |
| Depreciation                                               |       | 35,542                                     |       | 18,027 |   | 7,033 |   |
| Total corporate expenses                                   |       | 6,791,074                                  |       | 3,209,339 |   | 2,006,427 |   |
| Earnings (loss) from  operations                           |       | 20,428,691                                 |       | (35,617,890 | ) | (15,923,188 | ) |
| Other income (expense):                                    |       |                                       |       |   |   |   |   |
| Interest expense                                           |       | (16,204                                    | )          | (93,418 | ) | (8,122 | ) |
| Interest and other income, net                             |       | 1,097,236                                  |       | 624,630 |   | 66,554 |   |
| Net earnings (loss)                                        |       | $                                          | 21,509,723 |   | $ | (35,086,678 | ) | $ | (15,864,756 | ) |
| Net earnings (loss) per  common share:                     |       |                                       |       |   |   |   |   |
| Basic                                                      |       | $                                          | 0.44       |   | $ | (0.96 | ) | $ | (0.55 | ) |
| Diluted                                                    |       | $                                          | 0.42       |   | $ | (0.96 | ) | $ | (0.55 | ) |

 

The accompanying notes tofinancial statements are an integral part of these consolidatedstatements.

 

F-5

----

 

**URANIUMRESOURCES, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT**

 
| ** **                                    | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|--------------|------------|
| ** **                                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**  | ** ** | **Stock** | ** ** |
| Balances, December 31, 2003 (Restated)   |       | 20,492,047            |       | $           | 20,494     |            | $          | 53,272,970   |       | $ | (60,084,176 | ) | $ | (9,418 | ) |
| Net loss                                      |       | —                |       | —      |       | —          |       | (15,864,756  | )          | — |   |
| Common stock issuance                         |       | 13,015,643            |       | 13,052      |       | 7,263,838       |       | —       |       | — |   |
|                                          |       | 119,125               |       | 119         |       | 95,181          |       | —       |       | — |   |
| Balances, December 31, 2004 (Restated)   |       | 33,626,815            |       | $           | 33,665     |            | $          | 60,631,989   |       | (75,948,932 | ) | $ | (9,418 | ) |
| Net loss                                      |       | —                |       | —      |       | —          |       | (35,086,678  | )          | — |   |
| Common stock issuance                         |       | 6,833,333             |       | 6,833       |       | 13,063,281      |       | —       |       | — |   |
| Common stock issued for services              |       | 112,000               |       | 112         |       | (112            | )          | —       |       | — |   |
| Common stock issued for debt conversion       |       | 314,166               |       | 314         |       | 628,019         |       | —       |       | — |   |
| Stock compensation expense                    |       | —                |       | —      |       | 581,960         |       | —       |       | — |   |
| Beneficial conversion on debt modification    |       | —                |       | —      |       | 55,947          |       | —       |       | — |   |
| Common stock issued for deferred compensation |       | 65,813                |       | 66          |       | 52,584          |       | —       |       | — |   |
| Balances, December 31, 2005              |       | 40,952,127            |       | $           | 40,990     |            | $          | 75,013,668   |       | $ | (111,035,610 | ) | $ | (9,418 | ) |
| Net income                                    |       | —                |       | —      |       | —          |       | 21,509,723   |       | — |   |
| Common stock issuance                         |       | 10,200,307            |       | 10,200      |       | 49,675,960      |       | —       |       | — |   |
| Common stock issued for services              |       | 306,009               |       | 306         |       | (1,499,751      | )          | —       |       | — |   |
| Common stock issued for debt conversion       |       | 103,896               |       | 104         |       | 182,752         |       | —       |       | — |   |
| Stock compensation expense                    |       | —                |       | —      |       | 2,422,281       |       | —       |       | — |   |
| Common stock issued for stock option exercise |       | 229,000               |       | 229         |       | 457,961         |       | —       |       | — |   |
| Balances, December 31, 2006              |       | 51,791,339            |       | $           | 51,829     |            | $          | 126,252,871  |       | $ | (89,525,887 | ) | $ | (9,418 | ) |

 

The accompanying notes tofinancial statements are an integral part of these consolidatedstatements.

 

F-6

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**URANIUM RESOURCES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from  operations:                                |       |                                       |       |   |   |   |   |
| Net income (loss)                                           |       | $                                          | 21,509,723 |   | $ | (35,086,678 | ) | $ | (15,864,756 | ) |
| Reconciliation of net loss to cash used in operations— |       |                                       |       |   |   |   |   |
| (Gain) loss on derivatives                                  |       | (34,820,947                                | )          | 30,974,837 |   | 13,111,772 |   |
| Accretion/amortization of restoration reserve               |       | 516,956                                    |       | 348,415 |   | 241,810 |   |
| Depreciation and depletion                                  |       | 5,863,006                                  |       | 1,678,246 |   | 270,413 |   |
| Writedown of uranium properties and other assets            |       | 3,260,201                                  |       | — |   | 46,188 |   |
| Decrease in restoration and reclamation accrual             |       | (886,987                                   | )          | (974,161 | ) | (571,705 | ) |
| Stock compensation expense                                  |       | 2,422,281                                  |       | 581,960 |   | — |   |
| Deferred compensation                                       |       | —                                     |       | — |   | 181,888 |   |
| Other non-cash items, net                                   |       | 448,042                                    |       | 433,636 |   | 226,253 |   |
| Effect of changes in  operating working capital items— |       |                                       |       |   |   |   |   |
| (Increase) decrease in receivables                          |       | (680,589                                   | )          | 336,554 |   | (344,244 | ) |
| Increase in inventories                                     |       | (705,132                                   | )          | (446,769 | ) | (19,644 | ) |
| Increase in prepaid and other current assets                |       | (380,904                                   | )          | (507,563 | ) | (272,765 | ) |
| Increase in payables and accrued liabilities                |       | 1,239,373                                  |       | 939,659 |   | 453,666 |   |
| Net cash used in  operations                                |       | (2,214,977                                 | )          | (1,721,864 | ) | (2,541,124 | ) |
| Investing activities:                                       |       |                                       |       |   |   |   |   |
| Increase in certificate of deposit, restricted              |       | (1,179,080                                 | )          | (56,344 | ) | (830,947 | ) |
| Derivative settlement                                       |       | (12,000,000                                | )          | — |   | — |   |
| Additions to property, plant and equipment—            |       |                                       |       |   |   |   |   |
| Kingsville Dome                                             |       | (10,414,835                                | )          | (889,479 | ) | (905,001 | ) |
| Rosita                                                      |       | (2,767,801                                 | )          | (279,975 | ) | (43,448 | ) |
| Vasquez                                                     |       | (3,405,581                                 | )          | (3,915,760 | ) | (2,724,312 | ) |
| Rosita South                                                |       | (502,646                                   | )          | — |   | — |   |
| Churchrock                                                  |       | (304,632                                   | )          | (382,147 | ) | (124,037 | ) |
| Crownpoint                                                  |       | (91,392                                    | )          | (396,523 | ) | (61,157 | ) |
| Other property                                              |       | (819,901                                   | )          | (444,172 | ) | (87,573 | ) |
| Other assets/notes receivable                               |       | (420,034                                   | )          | — |   | — |   |
| Net cash used in investing  activities                      |       | (31,905,902                                | )          | (6,364,400 | ) | (4,776,475 | ) |
| Financing activities:                                       |       |                                       |       |   |   |   |   |
| Proceeds from (payments of) borrowings                      |       | (199,971                                   | )          | 600,000 |   | — |   |
| Issuance of common stock, net                               |       | 48,644,905                                 |       | 13,070,114 |   | 7,276,840 |   |
| Net cash provided by  financing activities                  |       | 48,444,934                                 |       | 13,670,114 |   | 7,276,840 |   |
| Net increase (decrease) in  cash and cash equivalents       |       | 14,324,055                                 |       | 5,583,850 |   | (40,759 | ) |
| Cash and cash equivalents,  beginning of year               |       | 5,852,716                                  |       | 268,866 |   | 309,625 |   |
| Cash and cash equivalents,  end of year                     |       | $                                          | 20,176,771 |   | $ | 5,852,716 |   | $ | 268,866 |   |

 

The accompanying notes tofinancial statements are an integral part of these consolidatedstatements.

 

F-7

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**URANIUMRESOURCES, INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**DECEMBER 31,2006 AND 2005**

 

**1.   DESCRIPTION OF THECOMPANY**

 

Uranium Resources, Inc. (“ URI”) was formed in1977 and domesticated in Delaware in 1987. The Company is primarily engaged inthe business of acquiring, exploring, developing and mining uranium properties,using the *in situ* recovery (“ISR”)or solution mining process. Historically, the primary customers of the Companyhave been major utilities who utilize nuclear power to generate electricity. Atpresent the Company owns producing and undeveloped uranium properties in SouthTexas and undeveloped uranium properties in New Mexico.

 

The Company resumed uranium production in the fourthquarter of 2004 at its Vasquez project in South Texas and began wellfielddevelopment in the fourth quarter of 2005 at its Kingsville Dome project, inSouth Texas, in anticipation of production from this project, which began in April 2006.Prior to resuming Vasquez production, the Company had been in productionstand-by since the first quarter of 1999 at its Kingsville Dome and Rositaprojects. Groundwater restoration activities have been conducted and arecurrently ongoing at both the Kingsville Dome and Rosita projects.

 

**Reverse Stock Split**

 

On March 29, 2006 the Company’s Board ofDirectors declared a 1 for 4 reverse stock split for stockholders of record on April 10,2006, effective April 11, 2006. The split was approved by stockholders atthe 2005 Annual Meeting of Stockholders. All common stock share amounts,earnings per share data and references to the common stock of the Company inthis report are stated on a post-split basis.

 

**2.   SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**Principles of Consolidation andDescription of Company**

 

The consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and include the accounts of URI and its wholly ownedsubsidiaries (collectively “the Company”). All significant intercompanytransactions have been eliminated in consolidation.

 

**Inventories**

 

Uranium and materials and supplies inventory for eachof the Company’s projects are valued at the lower of average cost or market.Uranium inventories at December 31, 2006 and 2005 reflect a lower of costor market adjustment of $397,000 and $761,000, respectively.

 

**Uranium Properties**

 

Capitalization of Development Costs.   Allacquisition and development costs (including financing, salary and relatedoverhead costs) incurred in connection with the various uranium properties arecapitalized. Exploration and evaluation costs associated with uraniumproperties are expensed as incurred until such time that the existence of acommercially minable uranium deposit is confirmed. All properties withsignificant acquisition or incurred costs are evaluated for their realizabilityon a property-by-property basis. Any impairment of such costs is recognizedthrough a reduction in the net carrying value of the asset. (See Note 3—“UraniumProperties—Property Realizability”).

 

Depreciation and Depletion.   Depletion ofuranium mineral interests, permits, licenses and related development costs arecomputed on a property-by-property basis using the units-of-production methodbased on each projects pounds of recoverable uranium. The determination of thedepleteable base for each uranium mineral interest is  calculated by the Company’s professionalgeologists to determine the estimated recoverable uranium to be produced overthe projected life for each uranium mineral interest.  Depreciation and depletion are provided onthe investment costs, net of salvage value, of the various uranium properties’production plants and related equipment using the estimated production life ofthe uranium reserves. During the periods that our facilities are not inproduction, depletion on our mineral interests, permits, licenses anddevelopment properties are ceased. Depreciation and depletion of our plantfacilities, machinery and equipment continues, at significantly reduced amounts,in accordance with the level of stand-by activity being conducted at each site.Other ancillary plant equipment and vehicles are depreciated using a straightline method based upon the estimated useful lives of the assets.

 

F-8

----

 

**Other Property, Plant and Equipment**

 

Other property, plant and equipment consists ofcorporate office equipment, furniture and fixtures and transportationequipment. Depreciation on other property is computed based upon the estimateduseful lives of the assets. Repairs and maintenance costs are expensed asincurred. Gain or loss on disposal of such assets is recorded as other incomeor expense as such assets are disposed.

 

**Capitalization of Interest**

 

The Company capitalizes interest cost with respect toproperties undergoing exploration or development activities that are notsubject to depreciation or depletion. The average interest rate on outstandingborrowings during the period is used in calculating the amount of interest to becapitalized. No interest was capitalized in the twelve months ended December 31,2006, 2005 and 2004. Total interest costs in these periods were $16,000,$93,000 and $8,000, respectively.

 

**Restoration and Remediation Costs(Asset Retirement Obligations)**

 

Various federal and state mining laws and regulationsrequire the Company to reclaim the surface areas and restore underground waterquality for its mine projects to the pre-existing mine area average qualityafter the completion of mining. In August 2001, the FASB issued Statementof Financial Accounting Standards (“SFAS”) No. 143, “Accounting for AssetRetirement Obligations,” which established a uniform methodology foraccounting for estimated reclamation and abandonment costs. The statement wasadopted January 1, 2003, when the Company recorded the estimated presentvalue of reclamation liabilities and increased the carrying amount of therelated asset, which resulted in a net expense for the cumulative effect of achange in accounting principle of $1,447,000. Reclamation costs are allocatedto expense over the life of the related assets and are periodically adjusted toreflect changes in the estimated present value resulting from the passage oftime and revisions to the estimates of either the timing or amount of thereclamation and remediation costs.

 

In March 2005, the FASB issued Interpretation 47(“FIN 47”), “Accounting for Conditional Asset Retirement Obligations”—aninterpretation of FASB No. 143. FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS No. 143 refers to a legalobligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may ormay not be within the control of the entity. The obligation toperform the asset retirement activity is unconditional even thoughuncertainty exists about the timing and/or method of settlement. FIN 47requires a liability to be recognized for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. FIN 47 was effective for fiscal years ending after December 15,2005. The adoption of FIN 47 did not have a material impact on our consolidatedfinancial position, results of operations or cash flows.

 

Future reclamation and remediation costs are accruedbased on management’s best estimate at the end of each period of the costsexpected to be incurred at each project. Such estimates are determined by theCompany’s engineering studies calculating the cost of future of surface andgroundwater activities.

 

During the years ended December 31, 2006,2005 and 2004 the Company increased its cash flow estimate for restoration andreclamation costs by $543,707, $620,774 and $0.00, respectively.

 

**Contingent Liabilities—Off BalanceSheet Arrangements**

 

The Company has obtained financial surety relating tocertain of its future restoration and reclamation obligations as required bythe State of Texas regulatory agencies. The Company has bank Letters of Credit(the “L/C’s) and performance bonds issued for the benefit of the Company tosatisfy such regulatory requirements. The L/C’s were issued by Bank of Americaand the performance bonds have been issued by United States Fidelity andGuaranty Company (“USF&G”). L/C’s for $2,072,000, $944,000 and $897,000 at December 31,2006, 2005 and 2004, respectively such L/C’s are collateralized in theirentirety by certificates of deposit.

 

Performance bonds totaling $2,835,000 were issued forthe benefit of the Company at December 31, 2006, 2005 and 2004. USF&Ghas required that the Company deposit funds collateralizing a portion of thebonds. The amount of bonding issued by USF&G exceeded the amount ofcollateral by $2.5 million at December 31, 2006, 2005 and 2004, respectively.In the event that USF&G is required to perform under its bonds or thebonds are called by the state agencies, the Company would be obligated to payany expenditures in excess of the collateral.

 

**Revenue Recognition for Uranium Sales**

 

The Company delivers uranium to its customers atthird-party conversion facilities. The third-party converters warehouse oururanium and transfer title to our customers via book transfer upon instructionssupplied by the Company. The Company recognizes revenue from the sale ofuranium when title to the uranium transfers and delivery is completed throughsuch book 

 

F-9

----

 

transfer. The Company bears the risk of loss while itsuranium is held at the converter prior to its sale to our customers, except inthe case of negligence by the converter, whereby the converter would bear suchrisk.  Upon completion of the booktransfer, which is a record keeping entry rather than a physical transfer ofgoods to the customer, the risk of loss passes to our customer.

 

**EarningsPer Share**

 

Net earnings (loss) per common share—basic has beencalculated based on the weighted average shares outstanding during the year andnet earnings (loss) per common share—diluted has been calculated assuming theexercise or conversion of all dilutive securities. Due to net losses incurredfor 2005 and 2004 there were no dilutive securities included in each ofthese years.

 

The weighted average number of shares used tocalculate basic and diluted earnings (loss) per share was 48,338,172 and51,559,867 respectively in 2006 and 36,644,468 and 28,725,320 in 2005 and 2004,respectively. The difference in the number of weighted average shares used tocalculate basic and diluted earnings per share in 2006 resulted from potentialcommon stock issuances of shares related to the Company’s stock option anddeferred compensation plans. The potential Common Stock that was excluded fromthe calculation of diluted earnings per share was 4,402,984 and 2,439,690 in2005 and 2004, respectively.

 

**Consolidated Statements of Cash Flows**

 

The Company considers all highly liquid investmentswith a maturity of three months or less when purchased to be cashequivalents.

 

Additional disclosures of cash flow informationfollow:

 
| ** **                                                                                                                                | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash paid during the  period for:                                                                                                         |       |                                   |       |   |   |   |   |
| Interest                                                                                                                                  |       | $                                      | 13,603     |   | $ | 0 |   | $ | 0 |   |
| The following non-cash transactions occurred in 2006, 2005 and 2004  and such transactions are summarized as follows:                     |       |                                   |       |   |   |   |   |
| The Company issued 65,812 and 119,125 shares of Common Stock in 2005  and 2004 in satisfaction of the conversion of deferred compensation |       | $                                      | 0          |   | $ | 52,649 |   | $ | 95,300 |   |

 

In connection with a private placement in April 2006,the Company paid a fee of $1,449,445 in cash and 306,009 shares of Common Stockto a placement agent.

 

In March 2006, the Company issued 103,896 sharesof Common Stock in connection with the conversion of the Convertible Notesdescribed in Footnote 6.

 

During 2006, 2005 and 2004, the Company entered intocapital leases to acquire certain property plant and equipment totaling$225,000, $266,000 and $165,000. The balance of the capital leases at December 31,2006 was $387,000.

 

In the fourth quarter of 2005, the Company issued1,256,664 shares of Common Stock in satisfaction of the conversion of $600,000in principal and $28,333 in accrued interest for borrowings made pursuant to aNote Purchase Agreement dated March 24, 2005.

 

In September 2005, the Company recorded $138,000in stock compensation expense for stock options granted to a non-employee forservices provided to the Company.

 

In connection with a $12 million private placement in August 2005the Company paid a fee of $336,000 in cash and 448,000 shares of Common Stockto a placement agent.

 

In June 2005, the Company recorded $443,960 instock compensation expense related to stock options granted to employees anddirectors of the Company that were contingent upon shareholder approval ofamendments to the stock option plans under which the grants were issued.

 

**CashBalances in Excess of Federally Insured Limits**

 

The Company’s cash balance at December 31, 2006was $20.2 million and it maintains its cash accounts primarily with Bank ofAmerica, N.A. The total cash balances are insured by the Federal DepositInsurance Corporation up to $100,000 per account. The Company has cash balanceswith Bank of America, N.A. that exceeded the balance insured by the FDIC thattotaled approximately $20 million at December 31, 2006.

 

F-10

----

 

**RestrictedCash**

 

At December 31, 2006 and 2005, the Company hadpledged certificates of deposit and money market accounts of $2,467,000 and$1,288,000, respectively, in order to collateralize letters of credit requiredfor future restoration and reclamation obligations related to the Company’sSouth Texas production and development properties. These funds are not readilyavailable to the Company and are not included in cash equivalents.

 

**Stock-BasedCompensation**

 

On January 1, 2006, the Company adopted the fairvalue recognition provisions of FASB Statement No. 123(R), “ *Share-Based Paymen*t” (“FAS 123(R)”). TheCompany adopted FAS 123(R) using the modified prospective transitionmethod. Under this method, compensation cost recognized in 2006 includes: a)compensation cost for all share-based payments granted prior to, but not yetvested as of January 1, 2006, based on the grant-date fair value estimatedin accordance with the original provisions of FAS 123, and b) compensationcost for all share-based payments granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof FAS 123(R).

 

As a result of adopting FAS 123(R), the Company’s *Earnings from operations* and *Net earnings* for 2006 is $2.422 million($0.05 per share) lower, than if we had continued to account for share-based compensation under APB 25 as wedid in the comparable prior year periods.

 

On June 2, 2004, 1,687,500 options were grantedto officers at an exercise price of $1.16 per share. Stock compensation expenseof $444,000 was recorded in June 2005 (the date an amendment to the stock option plan was approved bythe Company’s stockholders) and is reflected in the Consolidated Statements ofOperations under general and administrative expenses for the year ended December 31,2005.

 

On September 28, 2005, 50,000 options were granted to a non-employee of the Company forservices provided to the Company. Stock compensation expense of $138,000 isreflected in the Consolidated Statements of Operations under general andadministrative expenses for the year ended December 31, 2005.

 

**DerivativeFinancial Instruments**

 

The Company determined that its original long-termuranium sales contracts met the definition of derivative financial instrumentsfor financial statement reporting purposes and are recorded on the balancesheet at fair value at December 31, 2005 and 2004. Changes in the fairvalue of such derivatives recorded on the balance sheet are recorded in theconsolidated statements of operations in current earnings as they occur. Suchchanges in the Company’s derivatives represent non-cash charges to earnings forthe present value of the loss the Company would incur in the event it would berequired to purchase uranium in the spot market to satisfy the deliveries underboth of its long-term uranium sales contracts. See Footnote 5 for discussion ofrenegotiated sales contracts.

 

In March 2006 we entered into a new contract withItochu and a new contract with UG that supersede the prior contracts. Each ofthe new contracts calls for delivery of one-half of our actual production from our Vasquez property and other properties inTexas currently owned or hereafter acquired by the Company (excluding certainlarge potential exploration plays). The terms of such contracts are discussedin Footnote 5. “Contract Commitments—Sales Contracts”. The Company hasdetermined that the terms of the amended contracts substantially eliminatetheir qualification as derivatives.

 

We recorded a gain on derivatives in 2006 of $34.8million compared to losses of $30.9 million and $13.1 million in 2005 and 2004,respectively. The gain in 2006 resulted from changes in the contract terms of long-term uranium salescontracts that were finalized in March 2006.

 

**Use ofEstimates**

 

The preparation of financial statements in conformity with generally accepted accounting principlesrequires management to make certain estimates and assumptions. Such estimatesand assumptions may affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.Specifically regarding the Company’s uranium properties, significant estimateswere utilized in determining the carrying value of these assets and in the caseof producing and development properties the pounds of uranium to be recovered.The actual values received from the disposition of these assets and the amountof uranium recovered from these projects may vary significantly from theseestimates based upon market conditions, financing availability and otherfactors.

 

Regarding the Company’s reserve for future restorationand reclamation costs, significant estimates were utilized in determining thefuture costs and timing to complete the groundwater restoration and surfacereclamation at the Company’s mine sites. The actual cost to conduct theseactivities may vary significantly from these estimates.

 

F-11

----

 

**Risksand Uncertainties**

 

Historically, the market for uranium has experiencedsignificant price fluctuations. Prices are significantly impacted by globalsupply and demand, which is affected by the demand for nuclear power,political, and economic conditions, governmental legislation in uraniumproducing and consuming countries, and production levels and costs ofproduction of other producing companies. Increases or decreases in pricesreceived could have a significant impact on the Company’s future results ofoperations.

 

The Company has outstanding surety bonds issued on itsbehalf by USF&G at December 31, 2006, 2005 and 2004. The Company hasdeposited funds collateralizing a portion of these bonds. In the event that USF&G is required toperform under the bonds or the bonds are called by the state agencies, theCompany would be obligated to pay USF&G for its expenditures in excess ofthe collateral. See “Summary of Significant Accounting Policies—Restoration andReclamation Costs” for further discussion.

 

**Impactof Recent Accounting Pronouncements**

 

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs,” which amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (“spoilage”) and requiressuch costs to be recognized as current-period charges. Additionally, SFAS No. 151requires that allocation of fixed production overhead costs be based on normalcapacity. The Statement is effective for years beginning after June 15,2005, with early adoption permitted. Implementation of the Statement did nothave a significant effect on the Company’s financial statements.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004) (SFAS No. 123R) “Share-Based Payments.” SFAS No. 123Rrequires that the cost from all share-based payment transactions, includingstock options, be recognized in the financial statements at fair value. SFAS No. 123Ris effective for the Company in the first interim period after December 15,2005. SFAS No. 123R requires measurement and recording to the financialstatements of the costs of employee services received in exchange for a grant ofequity instruments based on the grant-date fair value of the award, recognizedover the period during which an employee is required to provide services inexchange for such award. The Company will adopt the provisions of SFAS No. 123Ron January 1, 2006. Compensation expense will be recognized for all newlygranted options after January 1, 2006. Compensation expense for the unvested portion of awards that areoutstanding as of January 1, 2006, based on the fair value at date ofgrant as calculated for our pro forma disclosure under SFAS No. 123R, willbe recognized ratably over the remaining vesting period. The implementation ofSFAS No. 123R resulted in a non-cash charge against earnings in 2006 ofapproximately $2.422 million.

 

In March 2005, the FASB ratified Emerging IssuesTask Force Issue No. 04-6, “Accounting for Stripping Costs Incurred duringProduction in the Mining Industry,” (EITF 04-6) which addresses the accounting for stripping costsincurred during the production phase of a mine and refers to these costs asvariable production costs that should be included as a component of inventoryto be recognized in operating costs in the same period as the revenue from thesale of inventory. The EITF 04-6 applies specifically to conventional mining operations(open pit mining) and as a result the Company does not believe it is applicableto the Company’s in situ recovery mining operations.

 

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes, an interpretation ofFASB Statements No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes byprescribing a two-step method of first evaluating whether a tax position hasmet a more likely than not recognition threshold and second, measuring that taxposition to determine the amount of benefit to be recognized in the financialstatements. FIN 48 provides guidance on the presentation of such positionswithin a classified statement of financial position as well as onderecognition, interest and penalties, accounting in interim periods,disclosure, and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The adoption of this statement is not expected tohave a material effect on the Company’s future reported financial position orresults of operations.

 

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”), which provides interpretive guidance onthe consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. TheCompany adopted SAB 108 in the fourth quarter of 2006. SAB 108 allows aone-time transitional cumulative effect adjustment to beginning retained earnings as of January 1, 2006 for errorsthat were not previously deemed material, but are material under the guidancein SAB 108. The adoption of this statement is not expected to have a materialeffect on the Company’s future reported financial position or results ofoperations.

 

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**3.   LIQUIDITY**

 

The Company’s net cash used in operations for theyears ended December 31, 2006, 2005, and 2004 was $2.2 million, $1.7million and $2.5 million, respectively, and from April to December 2006,our net cash outflows have averaged $1.7 to $1.8 million per month.

 

Our cash balance at December 31, 2006 was $20.2million and based upon our current plan of operations we anticipate that ouroperating and capital requirements for 2007 will be met through existing cashand cash generated from operations.

 

**4.    URANIUM PROPERTIES**

 

**Property, Plant and Equipment**

 

| ** **                      | ** ** | **Property, Plant and  Equipment Balances (net)  At December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                                                                         | ** ** | **2005** | ** ** |
| Uranium plant                   |       | $                                                                                                | 7,052,000  |   | $ | 2,315,000 |   |
| Uranium wellfield  development  |       | 5,128,000                                                                                        |       | 3,592,000 |   |
| Permits and licenses            |       | 1,970,000                                                                                        |       | 1,308,000 |   |
| Mineral rights                  |       | 1,081,000                                                                                        |       | 659,000 |   |
| Exploration                     |       | 423,000                                                                                          |       | 56,000 |   |
| Vehicles/depreciable  equipment |       | 1,402,000                                                                                        |       | 247,000 |   |
| Other                           |       | 1,140,000                                                                                        |       | 512,000 |   |
| Total                           |       | $                                                                                                | 18,196,000 |   | $ | 8,689,000 |   |

 

**Property Realizability**

 

***                Uranium Properties***

 

The Company reviews and evaluates its long-livedassets for impairment when events or changes in circumstances indicate that therelated carrying amounts may not be recoverable. An impairment isconsidered to exist if the total estimated future cash flows on an undiscountedbasis are less than the carrying amount of the assets. An impairment loss is measured and recorded based ondiscounted estimated future cash flows. Future cash flows are estimated basedon quantities of recoverable minerals, expected uranium prices, productionlevels and operating costs of production and capital, based upon the projectedremaining future uranium production from each project. The Company’s estimatesof future cash flows are based on numerous assumptions and it is possible thatactual future cash flows will be significantly different than the estimates, asactual future quantities of recoverable minerals, uranium prices, productionlevels and operating costs of production and capital are each subject tosignificant risks and uncertainties.

 

The Company recorded an impairment and reduced the carryingvalue of its uranium properties by $3,260,000 and $46,000 in 2006 and 2004,respectively. No impairment was recorded in 2005.

 

**VasquezProperty**

 

The Company has a mineral lease on 872 gross and netacres located in southwestern Duval County, in South Texas. The term expires inFebruary 2008. The lease provides for royalties based upon 6.25% ofuranium sales below $25.00 per pound and royalty rate increases on a slidingscale up to 10.25% for uranium sales occurring at or above $40.00 per pound.

 

The net carrying value of the property wasapproximately $1,580,000 at December 31, 2006. Such assets consisted ofmineral rights ($51,000), permits/licenses ($15,000), wellfield development($426,000), plant buildings/uranium processing/drying facilities ($784,000) andrestoration and other equipment ($304,000). The net carrying value of theproperty was approximately $4,611,000 at December 31, 2005. Such assetsconsisted of mineral rights ($104,000), permits/licenses ($60,000), wellfielddevelopment ($3,395,000), plant buildings/uranium processing/drying facilities($963,000) and restoration and other equipment ($89,000).

 

**KingsvilleDome Property**

 

The Kingsville Dome property consists of mineralleases from private landowners on about 2,354 gross and net acres located incentral Kleberg County, Texas. The leases provide for royalties based upon apercentage of uranium sales of 6.25%. The leases have expiration dates rangingfrom 2000 to 2007. With a few minor exceptions, all the leases contain clausesthat permit us to extend the leases not held by production by payment of a peracre royalty ranging from $10 to $30.

 

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The net carrying value of the property wasapproximately $10,017,000 at December 31, 2006. Such assets consisted ofmineral rights ($386,000), permits/licenses ($556,000), plant buildings/uraniumprocessing/drying facilities ($4,115,000), wellfield development ($4,169,000)and restoration and other equipment ($792,000). The net carrying value of theproperty was approximately $2,110,000 at December 31, 2005. Such assetsconsisted of mineral rights ($239,000), permits/licenses ($379,000), plantbuildings/uranium processing/drying facilities ($1,179,000), wellfielddevelopment ($197,000) and restoration and other equipment ($116,000).

 

**RositaProperty**

 

The Company holds several lease holdings in a uraniumprospect (“Rosita”) in Duval County, Texas. The Company has produced over 3million pounds of uranium from this property in the early to mid 1990’s but theproperty was placed on stand-by in 1999 because of low uranium prices. With thesignificant increase in uranium prices the company is re-evaluating thisproperty for additional future uranium production.

 

Cost of uranium sales in 2006, 2005 and 2004 in theConsolidated Statements of Operations includes $64,000, $83,000 and $105,000,respectively of costs incurred to maintain the facility while Rosita was onstandby and not in production.

 

The net carrying value of the property at December 31,2006 and 2005 was approximately $3,089,000 and $173,000, respectively. Suchassets consisted of mineral rights ($63,000), permits/licenses ($67,000), plantbuildings/uranium processing/drying facilities ($2,154,000) , wellfielddevelopment ($535,000) and other equipment of ($270,000) in 2006. Rosita assetsconsisted of plant buildings ($173,000) in 2005.

 

**SouthRosita**

 

In the fourth quarter of 2005, the Company enteredinto leases on approximately 1,300 acres in Duval County near its Rositaproperty. Evaluation of the uranium mineralization potential of this propertybegan in 2006 and continues in 2007. The net carrying value of the property at December 31,2006 was approximately $757,000. Such assets consisted of mineral rights($247,000), permits/licenses ($122,000) and evaluation costs ($388,000).

 

**ChurchrockProperties**

 

The Churchrock project encompasses about 2,200 grossand net acres. The properties are located in McKinley County, New Mexico andconsist of three parcels, known as Section 8, Section 17 and Mancos.None of these parcels lies within the area generally recognized as constitutingthe Navajo Reservation. We own the mineral estate in fee for both Section 17and the Mancos properties. We own patented mining claims on Section 8.

 

The surface estate on Section 17 is owned by theUnited States Government and held in trust for the Navajo Nation. We haveroyalty obligations ranging from 5% to 6 1/4 % and a 2% overriding royalty obligationto the Navajo Nation for surface use agreements.

 

Permitting activities are currently ongoing on both ofthese properties. The net carrying value of these properties was $810,000 and$506,000 at December 31, 2006 and 2005, respectively. The assets consistedof mineral rights and permitting/licensing at December 31, 2006 and 2005.

 

**CrownpointProperty**

 

The Crownpoint properties are located in the San JuanBasin, 22 miles northeast of our Churchrock deposits and 35 miles northeast ofGallup, New Mexico, adjacent to the town of Crownpoint. The Properties consistof 619 gross and 521.8 net acres.

 

The net carrying value of these properties was$610,000 and $518,000 at December 31, 2006 and 2005, respectively, andconsisted primarily of mineral rights, permits/licenses and plant buildings andequipment.

 

**WestLargo and Roca Honda**

 

In March 1997, we acquired the fee interest in177,000 acres in northwestern New Mexico. Several significant occurrences ofuranium mineralization are know to be within this acreage, including a uraniummineralized property called the West Largo and a uranium mineralized propertycalled the Roca Honda.

 

The West Largo property is about 21 miles north of thetown of Milan and about 1.5 miles west of State Highway 509 in McKinley County,New Mexico. The property lies about 3 miles to the northwest of the AmbrosiaLake District, a major producer of uranium by means of underground operationsfrom the late 1950s to the early 1980s.

 

The Roca Honda property lies about 4 miles northwestof the town of San Mateo in McKinley County, New Mexico. We also own 36 unpatentedmining claims encompassing approximately 640 acres that are adjacent to the feeland.

 

The net carrying value of the property was $65,000 and$29,000 at December 31, 2006 and 2005, respectively.

 

F-14

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**5.   CONTRACT COMMITMENTS**

 

**SalesContracts**

 

In March 2006 we entered into a new contract withItochu and a new contract with UG that supersede the previously existingcontracts and provide for delivery of one-half of our actual production fromour Vasquez property and other properties in Texas currently owned or hereafteracquired by the Company (excluding certain large potential exploration plays).The terms of such contracts are summarized below.

 

*The Itochu Contract.*    Under the Itochu contractall production from the Vasquez property will be sold at a price equal to theaverage spot price for the eight weeks prior to the date of delivery less $6.50per pound, with a floor for the spot price of $37 and a ceiling of $46.50.Other Texas production will be sold at a price equal to the average spot pricefor the eight weeks prior to the date of delivery less $7.50 per pound, with afloor for the spot price of $37 and a ceiling of $43. On non-Vasquez productionthe price paid will be increased by 30% of the difference between actual spotprice and the $43 ceiling up to and including $50 per pound. If the spot priceis over $50 per pound the price on all Texas production will be increased by50% of such excess. The floor and ceiling and sharing arrangement over theceiling applies to 3.65 million pounds of deliveries, after which there is nofloor or ceiling. Itochu has the right to cancel any deliveries on six-month’snotice.

 

In December 2005 we entered into a joint venturewith Itochu to develop our Churchrock property in New Mexico. See “ **Joint Venture for Churchrock Property** .” Under the terms of the joint venture, both parties must make an investmentdecision after the completion of a feasibility study, which was completed atthe end of 2006. If Itochu should terminate the venture at that time, we wouldno longer receive the additional price of 30% of the excess over $43 per poundoutlined above. If we should terminate the venture at that time, the originalcontract terms will be reinstated from that time forward. The parties expect tomake the preliminary investment decision the first week of May 2007.

 

*The UG Contract.*    Under the UG contract allproduction from the Vasquez property and other Texas production will be sold ata price equal to the month-end long-term contract price for the second monthprior to the month of delivery less $6 per pound until (i) 600,000 poundshave been sold in a particular delivery year and (ii) an aggregate of 3million pounds of Uranium has been sold. After the 600,000 pounds in any yearand 3 million pounds total have been sold, UG will have a right of firstrefusal to purchase other Texas production at a price equal to the average spotprice for a period prior to the date of delivery less 4%. In consideration ofUG’s agreement to restructure its previously existing contract, we paid UG$12 million in cash with funds raised in our equity offering completed in April 2006.

 

**DerivativeFinancial Instruments**

 

The Company has determined that its long-term uraniumsales contracts in effect prior to March 2006 meet the definition ofderivative financial instruments for financial statement reporting purposes,and the financial statements have been restated as of January 1, 2004, torecord these contracts at fair value.

 

Changes in the Company’s derivatives representnon-cash charges to earnings for the present value of the loss the Companywould incur in the event it would be required to purchase uranium in the spotmarket to satisfy the delivery obligations under the uranium sales contracts.The Company does not enter into hedge transactions with respect to its uraniumsales contracts.

 

**Impactof Amended Sales Contracts on Derivatives**

 

Both of the amended contracts obligate the Company todeliver 50% of its uranium production to each customer, and is does notobligate the Company to deliver any uranium in excess of it’s production. TheCompany has determined that at March 31, 2006 the terms of the amendedcontracts eliminated their qualification as derivatives and therefore, as of May 2006,are not required to be valued at fair value. The amendment to these contractsresulted in a gain on derivatives recorded to the consolidated statements ofoperations of $34.3 million and $527,000 in the first and second quarters of2006, respectively.

 

**6.   LONG-TERM DEBT**

 

**ConvertibleNotes**

 

In 2000, the Company issued a $135,000 ConvertibleNote due July 17, 2005 in settlement of certain outstanding claims.Interest of 6% per annum was due at maturity. The Company could prepay theNote at any time and the holder of the Note had the right to convertall principal and accrued interest into shares of the Company’s Common Stock ata conversion price of $3.00 per share. In the third quarter of 2005, thematurity was extended to July 17, 2006, and the accrued and unpaidinterest of $40,833 was added to the principal of the Convertible Note. Theconversion price was reduced to $1.76 per share. In connection with theseamended terms, the Company recorded interest expense of approximately $56,000in 2005 related to the beneficial conversion terms of the modified Note. In March 2006,all of the principal and accrued interest ($182,900) under the note wereconverted into 103,896 shares of the Company’s Common Stock.

 

F-15

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On March 28, 2005 the Company borrowed $600,000from five (5) stockholders of the Company, each of whom may beconsidered an affiliate. The Notes were unsecured, with a maturity date of March 24,2006 and bore interest at the rate of 10% per annum. Each of the Notes carriedconversion rights entitling the holder the right to convert the face value ofthe Note plus accrued interest into shares of common stock of the Company at aprice equal to the share price the Company received under subsequent debt orequity offerings. In the fourth quarter of 2005 each lender elected to converttheir note and accrued interest into common stock of the Company. A total of314,166 shares were issued at a share price of $2.00 per share.

 

**Summaryof Long-Term Debt**

 

| ** **                                  | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Long-term debt of the  Company consists of: |       |                          |       |   |   |
| Crownpoint property (Note 3)           |       | $                             | 450,000    |   | $ | 450,000 |   |
| Capital leases                              |       | 387,495                       |       | — |   |
| Convertible Note                            |       | —                        |       | 175,833 |   |
|                                        |       | 837,495                       |       | 625,833 |   |
| Less—Current portion                   |       | 201,804                       |       | 175,833 |   |
| Total long-term debt                        |       | $                             | 635,691    |   | $ | 450,000 |   |

 

Maturities of long-term debt are as follows:

 

| **For the Twelve Months Ended:** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| December 31, 2007                               |       | $          | 201,804    |   |
| December 31, 2008                               |       | $          | 141,280    |   |
| December 31, 2009                               |       | $          | 39,327     |   |
| December 31, 2010                               |       | $          | 5,084      |   |
| December 31, 2011 and  beyond                   |       | $          | 450,000    |   |

 

**7.   RELATED-PARTYTRANSACTIONS**

 

In the second quarter of 2006, the Company issued atotal of 162,500 shares of Common Stock (50,000 shares each to Richard A. VanHorn and Mark S. Pelizza at $0.80 per share and 62,500 shares to William M.McKnight, Jr. at $2.80 per share), each of them an executive officer ofthe Company, upon their election to exercise stock options under the terms ofthe Company’s stock option plans.  Theexercise price was the closing price of the shares on the date the stock optionwas granted.

 

In April 2006, August 2005 and May 2005the Company issued shares of its common stock in private placementtransactions. Two private investment partnerships managed by George R. Ireland,a director of the Company, purchased 300,000 out of 10,200,307 shares in the April 2006offering, 400,000 shares out of 6,000,000 shares in the August 2005offering and all of the 833,333 shares in the May 2005 offering.  The partnerships managed by Mr. Irelandpaid the same price for their shares as that paid by other investors who werenot affiliated with the Company, and Mr. Ireland did not participate inthe pricing of those offerings.  TheCompany has filed a registration statement under the Securities Act of 1933, asamended, to register the resale of the shares issued in these privateplacements.

 

In September 2005, the Company issued a total of9,562 shares of Common Stock at $0.80 per share to Leland O. Erdahl, a directorof the Company, upon his election to convert deferred compensation into sharesunder the terms of the Company’s deferred compensation plans adopted in 1999through 2004.

 

On March 28, 2005 the Company borrowed $600,000pursuant to a Note Purchase Agreement dated March 24, 2005. Thelenders were five (5) stockholders of the Company, Robert K. Winters,Domenic Mizio, J.P. Morgan Trust Co. (Bahamas) Ltd. as Trustee U/A/D 11/30/93,City of Milford Pension & Retirement Fund, and Mellon Bank NA,Custodian for PERSI-Zesiger Capital each of whom may be considered an affiliate.In the fourth quarter of 2005 each lender elected to convert their note andaccrued interest in common stock of the Company. A total of 314,166 shares wereissued at a share price of $2.00 per share in connection with the conversion ofthe Notes.  The Board of Directorsdetermined that the interest rate on the loans and the conversion price was noless favorable to the Company that the terms available from unrelated parties.

 

In January 2005, the Company issued a total of56,250 shares of Common Stock at $0.80 per share to a former director andholder of in excess of 5% of outstanding common shares of the Company upon hiselection to convert deferred compensation under the terms of the Company’sdeferred compensation plans adopted in 1999 through 2004.

 

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In November 2004, the Companyraised an additional $100,000 of equity by the issuance of 128,641 shares ofCommon Stock at $0.80 and $0.76 per share to Paul K. Willmott an executiveofficer and director of the Company, upon the exercise of outstanding stockoptions.  The exercise price was theclosing price of the shares on the date the stock option was granted.

 

In June and December 2004,the Company issued a total of 119,125 shares of Common Stock at $0.80 per shareto, Leland O. Erdahl, a director of the Company upon his election to convertdeferred compensation under the terms of the Company’s deferred compensationplans adopted in 1999 through 2004.

 

**8.   SHAREHOLDERS’ EQUITY(DEFICIT)**

 

**ReverseStock Split**

 

On March 29, 2006 the Company’s Board of Directorsdeclared a 1 for 4 reverse stock split for stockholders of record on April 10,2006. The split was approved by stockholders at the 2005 Annual Meeting ofStockholders.

 

**EquityInfusions**

 

In 2006 and 2005 the Company sold shares of commonstock in the following private placements:

 

| **Date**           | ** ** | **Price per Share** | ** ** | **Amount** | ** ** | **Shares Issued** | ** ** |
|--------------------|------------|-------------------------------|------------|------------|------------|------------------------|------------|
| April 2006    |       | $                             | 4.90       |       | $          | 49,981,504             |       | 10,200,307 |   |
| August 2005   |       | $                             | 2.00       |       | $          | 12,000,000             |       | 6,000,000 |   |
| May 2005      |       | $                             | 1.80       |       | $          | 1,499,999              |       | 833,333 |   |
| May 2004      |       | $                             | 0.60       |       | $          | 5,897,550              |       | 9,829,251 |   |
| February 2004 |       | $                             | 0.40       |       | $          | 325,000                |       | 812,500 |   |
| January 2004  |       | $                             | 0.40       |       | $          | 350,000                |       | 875,000 |   |

 

In connection with the April 2006 placement theCompany paid a fee of $1,449,445 in cash and 306,009 shares of Common Stock toa placement agent. In connection with the August 2005 placement theCompany paid a fee of $336,000 in cash and 112,000 shares of Common Stock to aplacement agent.

 

Two private investment partnerships managed by GeorgeR. Ireland, a director of the Company, purchased 300,000 out of 10,200,307 sharesin the April 2006 offering, 400,000 shares out of 6,000,000 shares in the August 2005offering and all of the 833,333 shares in the May 2005 offering. TheCompany has filed a registration statement under the Securities Act of 1933, asamended, to register the resale of the shares issued in these privateplacements.

 

**CommonStock Issued Upon Conversion of Warrants/Options**

 

In 2006, the Company raised $458,000 of equity throughthe issuance of 229,000 shares of Common Stock of the Company upon the exerciseof outstanding stock options.

 

In September 2005, the Company issued 9,562shares of Common Stock of the Company at $0.80 per share to a  director ofthe Company upon his election to convert deferred compensation. In January 2005,the Company issued 56,250 shares of Common Stock of the Company at $0.80 pershare to a former director of the Company upon his election to convert deferredcompensation.

 

In November 2004, the Company raised $100,000 ofequity by the issuance of 55,816 and 72,825 shares of Common Stock at $0.80 and$0.76 per share respectively, to an executive officer and director of theCompany upon the exercise of outstanding stock options.

 

In the fourth quarter of 2004, the Company raised$675,000 of equity by the issuance of 1,406,250 shares of Common Stock at $0.48upon the exercise of Warrants that were issued in August 2000.

 

In June and December 2004, the Companyissued a total of 119,125 shares of Common Stock at $0.80 per share to adirector of the Company upon his election to convert deferred compensation.

 

**StockOptions**

 

*                EmployeeStock Options*

 

The Company has two stock Incentive Plans forEmployees, both of which were approved by the Company’s stockholders. Under the1995 Stock Incentive Plan (the “1995 Plan”) 2,600,521 shares may be purchasedupon the exercise of outstanding options with exercise prices ranging from$0.76 to $28.50 per share. No new options may be granted under the 1995 Plan.

 

Under the Company’s 2004 Stock Incentive Plan (the “2004Plan”) a total of 1,750,000 shares may be issued upon exercise of optionsgranted under the 2004 Plan. At December 31, 2006 there were outstandingunder the 2004 Plan options for the 

 

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purchase of 1,722,688 shares of Common Stock atexercise prices ranging from $2.97 to $5.19 per share. At December 31,2006, 500 shares were available for future grants under the 2004 Plan.

 

Employee stock options generally vest ratably over a 3or 4 year time frame and have a contractual term of 10 years.

 

*                DirectorsStock Options*

 

On June 19, 2001, the Company granted to certainoutside directors options to purchase 75,000 shares of the Company’s CommonStock at an exercise price of $0.88 per share. All such options wereimmediately exercisable and will expire June 19, 2011 or 30 daysafter the holder ceases to be a director of the Company or one year after suchholder’s death, whichever occurs first. These options have not been exercisedand 25,000 of these options were cancelled as of December 31, 2006.

 

On June 2, 2004 the Company adopted the 2004Directors’ Stock Option Plan (the “2004 Directors’ Plan”). Under the 2004Directors’ Plan, each non-employee director on the date the Plan was adoptedwas granted an option to purchase 75,000 shares of Common Stock. Eachnon-employee Director elected or appointed to the Board of Directors for thefirst time will begranted an option to purchase 25,000 shares of Common Stock and, eachNon-Employee Director shall be granted an option to purchase 25,000 shareseither, (a) upon his or her reelection at an annual meeting of the Company’sstockholders or (b) in any calendar year in which an annual meeting ofstockholders is not held, on June 1 of such year. In June 2006, theDirectors’ Stock Option Plan was amended to increase the initial grants tonon-employee Directors to 50,000 shares of Common Stock. The 2004 Directors’Plan replaces an earlier plan that expired in 2004. At December 31, 2006,there were outstanding options for the exercise of 2,000 shares under the oldplan.

 

At the June 2006 and 2005 annual meeting of thestockholders, each of the non-employee directors of the Company (Leland O.Erdahl and George R. Ireland) was granted an option under the 2004 DirectorsPlan to purchase 25,000 shares of the Company’s common stock at an exerciseprice of $5.15 and $1.80 per share, respectively. In June and October 2006options to purchase 50,000 shares of the Company’s Common Stock were granted totwo new non-employee directors of the Company (David N. Clark in June andTerence J. Cryan in October) at exercise prices of $5.13 and $2.97,respectively. The non-employee directors hold options covering 350,000 sharesunder the 2004 Directors’ Plan at December 31, 2006. At December 31,2006, 700,000 shares were available for future grants under the 2004 Directors’Plan.

 

**OptionsIssuable for Deferred Compensation**

 

The Company has a 1999 Deferred Compensation Plan (the“1999 Plan”) and Deferred Compensation Plans for 2000-2001, 2002, 2003 and 2004(the “2000-2004 Plans”) whereby executive officers and directors were permittedto defer up to 100% of their compensation for the years 1999-2004.

 

Under the 1999 Deferred Compensation Plan (the “1999Plan”), executive officers and directors of the Company and its subsidiaries werepermitted to defer until January 11, 2006 up to 100% of their 1999 salary.At the time of the deferral election, a participant could elect to receivepayment of up to 100% of the deferred amount of salary in shares of our CommonStock. A total of approximately $242,000 was deferred under the 1999 Plan ofwhich $133,450 was paid by issuing 88,965 shares of Common Stock at $1.50 pershare. As of December 31, 2006, approximately $108,000 remains outstandingas deferred compensation under the 1999 Plan.

 

Under the 2000-2004 Plans, the executive officers anddirectors were permitted to defer up to 100% of their 2000, 2001, 2002, 2003and 2004 salary with payment thereof to be made on January 11, 2006. On orbefore that date, the participant may elect to receive the deferred amountin shares of our Common Stock valued at $0.80 per share. A total of $829,000was deferred under the 2000-2004 Plans of which $95,300 was paid in 2004 byissuing 119,125 shares of Common Stock at $0.80 per share. As of December 31,2006, approximately $681,000 remains outstanding as deferred compensation underthe 2000-2004 Plans.

 

In December 2005, the 1999 Plan and the 2000-2004Plans were amended, extending the election of the participants under the plansto receive their deferred compensation until January 11, 2011. All of theparticipants with accrued deferred compensation at December 2005 electedto defer their election to such date.

 

**9.   STOCK-BASEDCOMPENSATION PLANS**

 

***Adoption of SFAS 123(R)***

 

Effective January 1,2006, the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standard 123(R) “ *Share-BasedPayment”* (“SFAS 123(R)”) using the modified prospective transitionmethod. In addition, the Securities and Exchange Commission issued StaffAccounting Bulletin No. 107 “ Share*-Based Payment* “ (“SAB 107”) in March, 2005, whichprovides supplemental SFAS 123(R) application guidance based on the viewsof the SEC. Under the modified prospective transition method, compensation costrecognized in the quarter ended March 31, 2006 and beyond includes: (a) compensationcost for all share-based payments granted prior to, but not yet vested as of January 1,2006, based on 

 

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the grant date fair value estimated in accordance withthe original provisions of SFAS No. 123, and (b) compensation costfor all share-based payments granted beginning January 1, 2006, based onthe grant date fair value estimated in accordance with the provisions of SFAS123(R). In accordance with the modified prospective transition method, resultsfor prior periods have not been restated.

 

The adoption of SFAS 123(R) resulted in stockcompensation expense for the year ended December 31, 2006 of $2,422,000 togeneral and administrative expenses. The Company did not recognize a taxbenefit from the stock compensation expense because the Company considers it ismore likely than not that the related deferred tax assets, which have beenreduced by a full valuation allowance, will not be realized.

 

The Black-Scholes option-pricing model was used toestimate the option fair values. The option-pricing model requires a number ofassumptions, of which the most significant are, expected stock pricevolatility, the expected pre-vesting forfeiture rate and the expected optionterm (the amount of time from the grant date until the options are exercised orexpire). Expected volatility was calculated based upon actual historical stockprice movements through the measurement date of the stock option grant.Expected pre-vesting forfeitures were estimated based on actual historicalpre-vesting forfeitures over the most recent periods ending December 31,2006 for the expected option term. The expected option term was estimated basedon historical averages over the most recent periods ending December 31,2006.

 

A total of 100,000 new option grants were made to thenon-employee directors of the Company in June 2006 at grant prices of$5.15 and $5.13 per share. In October 2006 a total of 800,000 new options weremade to an executive officer of the Company and 50,000 new option grants weremade to a non-employee director of the Company at a grant price of $2.97 pershare. In November 2006, a total of 295,000 new option grants were made toemployees of the Company at a grant price of $5.19 per share.

 

***Stock Options as of December 31, 2006***

 

The Company has four stock option plans as summarizedunder Footnote 8 “Stock Options.”  The following table summarizes stockoptions outstanding and changes during the year ended December 31, 2006:

 

| ** **                                     | ** ** | **Outstanding Options** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Options outstanding at  Jan. 1, 2006      |       | 3,743,064                    |       | $ | 2.17 |   |   |   |   |   |
| Granted                                        |       | 1,245,000                    |       | $ | 3.67 |   |   |   |   |   |
| Exercised                                      |       | (229,000                     | )          | $ | 2.00 |   |   |   |   |   |
| Canceled or forfeited                          |       | (83,855                      | )          | $ | 9.71 |   |   |   |   |   |
| Options outstanding at  December 31, 2006 |       | 4,675,209                    |       | $ | 2.44 |   | 7.88 |   | $ | 15,686,685 |   |
| Options exercisable at  December 31, 2006 |       | 2,550,743                    |       | $ | 2.29 |   | 7.21 |   | $ | 8,956,122 |   |

 

The total intrinsic value of options exercised duringthe years ended December 31, 2006, 2005 and 2004 was $793,000, $0 and$312,000, respectively.

 

Shares available for grant under the Plans as of December 31,2006 were 700,500.

 

Stock options outstanding and currently exercisable atDecember 31, 2006 are as follows:

 
| ** **                      | ** ** | **Options Outstanding**             | ** ** | **Options Exercisable**                                                 | ** ** |
|---------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Stock Option Plan** | ** ** | **Number of  Options  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Life  (in years)** | ** ** | **Weighted Average  Exercise price** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| 1995 Stock Incentive Plan       |       | 2,600,521                                |       | 6.94                                                                         |       | $ | 1.74 |   | 1,694,569 |   | $ | 1.80 |   |
| 2004 Employee Incentive  Plan   |       | 1,722,688                                |       | 9.17                                                                         |       | 3.46 |   | 804,474 |   | 3.35 |   |
| Directors Stock Option  Plan    |       | 2,000                                    |       | 2.73                                                                         |       | 7.79 |   | 1,700 |   | 9.14 |   |
| 2004 Directors Plan             |       | 350,000                                  |       | 8.55                                                                         |       | 2.65 |   | 50,000 |   | 1.32 |   |
|                            |       | 4,675,209                                |       | 7.88                                                                         |       | $ | 2.44 |   | 2,550,743 |   | $ | 2.29 |   |

 

F-19

----

 

Total estimated unrecognized compensation cost fromunvested stock options as of December 31, 2006 was approximately $4.7million, which is expected to be recognized over a weighted average period ofapproximately 2 years.

 

***Pro-Forma Stock Compensation Expense for the Year Ended December 31,2005***

 

Prior to 2006, the Company applied the intrinsic valuemethod of accounting for stock options as prescribed by APB 25. Since alloptions granted prior to the year ended December 31, 2005 had an exerciseprice equal to the closing market price of the underlying common stock on thegrant date, no compensation expense was recognized. If compensation expense hadbeen recognized based on the estimated fair value of each option granted inaccordance with the provisions of SFAS 123 as amended by Statement of FinancialAccounting Standard 148, our net loss and net loss per share would have beenreduced to the following pro-forma amounts:

 

| ** **                                                                        | ** ** | **Year Ended  December 31, 2005** | ** **  | **Year Ended  December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------|------------|
| Net Loss: As reported                                                        |       | $                                                | (35,086,678 | )                                                | $          | (15,864,756 | ) |
| Pro forma stock based compensation costs under the fair value method,  net of tax |       | (430,255                                         | )           | (27,458                                          | )          |
| Pro forma                                                                    |       | $                                                | (35,516,933 | )                                                | $          | (15,892,214 | ) |
| As reported                                                                  |       | $                                                | (0.96       | )                                                | $          | (0.55 | ) |
| Basic EPS: Pro forma                                                         |       | $                                                | (0.96       | )                                                | $          | (0.55 | ) |
| As reported                                                                  |       | $                                                | (0.96       | )                                                | $          | (0.55 | ) |
| Diluted EPS:  Pro forma                                                      |       | $                                                | (0.96       | )                                                | $          | (0.55 | ) |

 

The fair value of each option is estimated on the dateof grant using the Black-Scholes option-pricing model.

 

Using the Black-Scholes option pricing model, theweighted average assumptions for grants in 2006: fair market value: $5.05,$5.03, $2.91, $2.92 and $5.09 expected volatility of 155.0%, 155.0%, 154.6%,148.1% and 155.0% and risk-free interest rates of 5.18%, 5.08%, 4.13%, 5.13%and 4.66%. An expected life of 8.58, 8.58, 8.58, 9.53 and 8.58 years was usedfor the options granted. The weighted average fair value of the options grantedin 2006 was $3.60.

 

The following are the weighted average ranges forassumptions used for grants in 2005:  Expected volatility of 150% andrisk-free interest rates of 4.0%-4.5%. An expected life of 9.2 years wasused for options granted to the employees and directors. The weighted averagefair value of options granted in 2005 ranged from $1.80 to $3.12 per share.

 

The following are the weighted average ranges forassumptions used for grants in 2004:  Expected volatility of 149%-179% andrisk-free interest rates of 4.2%-5.0%. The range of the expected life of5.7-9.4 years was used for options granted to the employees and directors.The weighted average fair value of options granted in 2004 ranged from $1.16 to$3.36 per share.

 

On June 2, 2004, 1,687,500 options were grantedto officers at an exercise price of $1.16 per share. Stock compensation expenseof $444,000 was recorded in June 2005 (the date an amendment to the stockoption plan was approved by the Company’s stockholders) and is reflected in theConsolidated Statements of Operations under general and administrative expensesfor the year ended December 31, 2005. On September 28, 2005, 50,000were granted to a non-employee of the Company for services provided to theCompany. Stock compensation expense of $138,000 is reflected in theConsolidated Statements of Operations under general and administrative expensesfor the year ended December 31, 2005.

 

Additional details about the options granted under thestock option plans are as follows:

 
| **Date of Grant**    | ** ** | **Exercise  Price** | ** ** | **Options  Granted** | ** ** | **Options  Available for  Exercise** | ** ** | **Options  Exercised** | ** ** | **Options  Canceled** | ** ** | **Options  Outstanding** | ** ** |
|--------------------------------|------------|---------------------|------------|----------------------|------------|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|--------------------------|------------|
| Balances at Dec. 31, 2003 |       |                |       | 1,198,118            |       | 498,159                                   |       | 311,799                |       | 387,860               |       | 498,459                  |       |
|                           |       |                |       |                 |       |                                      |       |                   |       |                  |       |                     |       |
| June 2, 2004              |       | $                   | 1.16       |                 | 150,000    |                                      | 37,500     |                   | —     |                  | —     |                     | 150,000    |   |
| June 2, 2004              |       | $                   | 1.16       |                 | 1,687,500  |                                      | 1,012,799  |                   | —     |                  | —     |                     | 1,687,500  |   |
| November 12, 2004         |       | $                   | 2.96       |                 | 247,000    |                                      | 89,059     |                   | 26,812     |                  | 92,500     |                     | 127,688    |   |
| December 7, 2004          |       | $                   | 3.36       |                 | 500,000    |                                      | 374,999    |                   | —     |                  | —     |                     | 500,000    |   |
| Balances at Dec. 31, 2004 |       |                |       | 3,782,618            |       | 2,012,516                                 |       | 338,611                |       | 480,360               |       | 2,963,647                |       |
|                           |       |                |       |                 |       |                                      |       |                   |       |                  |       |                     |       |
| June 1, 2005              |       | $                   | 1.80       |                 | 50,000     |                                      | 12,500     |                   | —     |                  | —     |                     | 50,000     |   |
| September 28, 2005        |       | $                   | 2.80       |                 | 300,000    |                                      | 112,499    |                   | 62,500     |                  | —     |                     | 237,500    |   |
| October 6, 2005           |       | $                   | 3.12       |                 | 262,500    |                                      | 72,812     |                   | 39,688     |                  | 43,750     |                     | 179,062    |   |
| Balances at Dec. 31, 2005 |       |                |       | 4,395,118            |       | 2,210,327                                 |       | 440,799                |       | 524,110               |       | 3,430,209                |       |
|                           |       |                |       |                 |       |                                      |       |                   |       |                  |       |                     |       |
| June 1, 2006              |       | $                   | 5.15       |                 | 50,000     |                                      | —     |                   | —     |                  | —     |                     | 50,000     |   |
| June 6, 2006              |       | $                   | 5.13       |                 | 50,000     |                                      | —     |                   | —     |                  | —     |                     | 50,000     |   |
| October 3, 2006           |       | $                   | 2.97       |                 | 850,000    |                                      | 266,666    |                   | —     |                  | —     |                     | 850,000    |   |
| November 8, 2006          |       | $                   | 5.19       |                 | 295,000    |                                      | 73,750     |                   | —     |                  | —     |                     | 295,000    |   |
| Balances at Dec. 31, 2006 |       |                |       | 5,640,118            |       | 2,550,743                                 |       | 440,799                |       | 524,110               |       | 4,675,209                |       |

 

F-20

----

 

The exercise price for the options granted under theplans is the fair market value of the Common Stock on the date granted. Theterms of the options are determined by the Board of Directors upon grant;however, no options may be exercised after a period of ten years. The weightedaverage fair value of options granted in 2006, 2005 and 2004 was $3.67, $3.08and $1.76, respectively.

 

**10.   FEDERAL INCOME TAXES**

 

The deferred federal income tax asset (liability)consists of the following:

 

| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Property development  costs—net of amortization      |       | $                     | 8,883,000  |   | $ | 7,552,000 |   | $ | 7,860,000 |   |
| Accelerated depreciation                                  |       | 28,000                |       | 62,000 |   | 75,000 |   |
| Restoration reserves                                      |       | 1,106,000             |       | 1,087,000 |   | 812,000 |   |
| Derivative valuation  allowance                           |       | —                |       | 15,919,000 |   | 5,388,000 |   |
| Net operating loss and percentage depletion carryforwards |       | 59,711,000            |       | 51,343,000 |   | 47,593,000 |   |
| Valuation allowance and  other—net                   |       | (69,728,000           | )          | (75,963,000 | ) | (61,728,000 | ) |
| Total deferred income tax  asset (liability)              |       | $                     | 0          |   | $ | 0 |   | $ | 0 |   |

 

Major items causing the Company’s tax provision to differfrom the federal statutory rate of 34% were:

 
| ** **                                     | ** ** | **For the Twelve Months Ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                                                   | ** ** | **2005** | ** ** | **2004 (Restated)** | ** ** |
| ** **                                     | ** ** | **Amount**                                                                 | ** ** | **% of Pretax  Income** | ** ** | **Amount** | ** ** | **% of Pretax  Income** | ** ** | **Amount** | ** ** | **% of Pretax  Income** | ** ** |
| Pretax income (loss)                           |       | $                                                                          | 21,509,723 |   | — |   | $ | (35,086,678 | ) | — |   | $ | (15,864,756 | ) | — |   |
| Pretax income (loss) times statutory tax rate  |       | 7,313,000                                                                  |       | (34 | )% | (11,929,000 | ) | (34 | )% | (5,394,000 | ) | (34 | )% |
| Increases (decreases) in taxes resulting from: |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Change in valuation allowance                  |       | (7,313,000                                                                 | )          | 34 | % | 11,929,000 |   | 34 | % | 5,394,000 |   | 34 | % |
| Income tax benefit                             |       | $                                                                          | 0          |   | 0 | % | $ | 0 |   | 0 | % | $ | 0 |   | 0 | % |

 

The Company’s net operating loss carryforwardsgenerated in 2006 and in prior years have generally been valued, net ofvaluation allowance, at Alternative Minimum Tax (“AMT”) rates imposed by theTax Reform Act of 1986. It is assumed that these deferred tax assets willbe realized at such rates.

 

At December 31, 2006, approximately $57,225,000of percentage depletion (available for regular tax purposes) had not beenutilized to offset book income and is available to carry forward to futureaccounting periods.

 

The Company also has available for regular federalincome tax purposes at December 31, 2006 estimated net operating loss (“NOL”)carryforwards of approximately $57,234,000 which expire primarily in 2007through 2026, if not previously utilized. Following the issuance of the Company’sCommon Stock in 2001, use of the Company’s NOL will be severely limited on anannual and aggregate basis. For this reason, the NOL is not included as adeferred tax asset in the table above.

 

F-21

----

 

**11.   OTHER LONG-TERMLIABILITIES AND DEFERRED CREDITS**

 

Other long-term liabilities and deferred credits onthe balance sheet consisted of:

 

| ****                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Reserve for future restoration and reclamation costs (Asset  Retirement Obligations), net of current portion of $1,520,491 and $1,061,491  in 2006 and 2005. (Note 1) |       | $                     | 2,709,001  |   | $ | 2,533,787 |   |
| Royalties payable                                                                                                                                                          |       | 500,000               |       | 500,000 |   |
| Deferred compensation                                                                                                                                                      |       | 789,228               |       | 789,228 |   |
|                                                                                                                                                                       |       | $                     | 3,998,229  |   | $ | 3,823,015 |   |

 

The following table shows the change in the balance ofthe restoration and reclamation liability (Asset Retirement Obligation) duringthe years ended December 31, 2006, 2005 and 2004:

 

| ** **                                                               | ** ** | **Year Ended December 31** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Reserve for future restoration and reclamation costs at  January 1, |       | $                                         | 3,595,278  |   | $ | 3,410,293 |   | $ | 3,480,656 |   |
| Additions                                                                |       | 886,978                                   |       | 339,771 |   | 317,675 |   |
| Changes in cash flow estimates                                           |       | 543,707                                   |       | 620,774 |   | — |   |
| Costs incurred                                                           |       | (997,134                                  | )          | (975,924 | ) | (571,705 | ) |
| Accretion expense                                                        |       | 200,364                                   |       | 200,364 |   | 183,667 |   |
| Reserve for future restoration and reclamation costs at Dec. 31,    |       | $                                         | 4,229,193  |   | $ | 3,595,278 |   | $ | 3,410,293 |   |

 

**12.   COMMITMENTS ANDCONTINGENCIES**

 

The Company’s mining operations are subject to federaland state regulations for the protection of the environment, including waterquality. These laws are constantly changing and generally becoming morerestrictive. The ongoing costs of complying with such regulations have not beensignificant to the Company’s annual operating costs. Future mine closure andreclamation costs are provided for as each pound of uranium is produced on aunit-of-production basis. The Company reviews its reclamation obligations eachyear and determines the appropriate unit charge. The Company also evaluates thestatus of current environmental laws and their potential impact on theiraccrual for costs. The Company believes its operations are in compliance withcurrent environmental regulations.

 

The Company is from time to time involved in variouslegal proceedings of a character normally incident to its business. Managementdoes not believe that adverse decisions in any pending or threatenedproceedings will have a material adverse effect on the Company’s financialcondition or results of operations.

 

In April 2006, the Company completed the sale of10,200,307 shares of its Common Stock at $4.90 per share to accreditedinvestors resulting in gross proceeds of approximately $50 million before expenses of the offering. The Companyhas filed a registration statement under the Securities Act of 1933, asamended, to register the resale of the shares. Such shares are subject tocertain resale registration rights that include penalties in the event theregistration statement fails to remain effective.

 

*            CompensationAgreements*

 

The Company has entered into Compensation Agreementswith Executive Officers of the Company that provide that, in the event of achange in control, such officers will have certain rights and benefits for aperiod of thirty-six months for the Chairman and CEO of the Company andtwenty-four months for the other officers, following such change in control.The Compensation Agreements provide that the executive’s base salary paymentsshall be made on a monthly basis for the duration of the term and any incentivepayments shall be paid annually until the obligation to make such paymentsexpires.

 

**13.   RESTATEMENT OFFINANCIAL STATEMENTS**

 

The financial statements for the year ended December 31,2004 have been restated in our Form 10-KSB/A filed in July 2005 togive effect for fair value accounting of certain uranium sales contracts underFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.The Company determined that its long-term uranium sales contracts meet thedefinition of derivative financial instruments for financial statement andreporting purposes, and the financial statements have been restated as December 31,2004, to record these contracts at fair value.

 

F-22

----

 

The impact of such restatement to the financialstatements at December 31, 2004 are:

 

| ** **                                                   | ** ** | **As Originally  Presented** | ** **  | **As Restated** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|-------------|----------------------|------------|
| **Consolidated Balance Sheet**                               |       |                              |        |                 |       |
| Liabilities and Shareholders Equity (Deficit)                |       |                              |        |                 |       |
| Unrealized loss on  derivatives, current portion             |       | $                                 | —      |                 | $          | 4,406,134 |   |
| Total current liabilities                                    |       | $                                 | 2,036,522   |                 | $          | 6,442,656 |   |
| Unrealized loss on  derivatives, net of current portion      |       | $                                 | —      |                 | $          | 11,439,976 |   |
| Accumulated deficit                                          |       | $                                 | (60,102,822 | )                    | $          | (75,948,932 | ) |
| Total shareholders equity  (deficit)                         |       | $                                 | 553,414     |                 | $          | (15,292,696 | ) |
| **Consolidated Statement of Operations**                     |       |                              |        |                 |       |
| Unrealized loss on  derivatives                              |       | $                                 | —      |                 | $          | 13,111,772 |   |
| Total cost of uranium  sales                                 |       | $                                 | 1,814,272   |                 | $          | 14,926,044 |   |
| Loss from operations  before corporate expenses              |       | $                                 | (804,989    | )                    | $          | (13,916,761 | ) |
| Loss from operations                                         |       | $                                 | (2,811,416  | )                    | $          | (15,923,188 | ) |
| Loss before accounting  change                               |       | $                                 | (2,752,984  | )                    | $          | (15,864,756 | ) |
| Net loss                                                     |       | $                                 | (2,752,984  | )                    | $          | (15,864,756 | ) |
| Loss before accounting  change per common share:             |       |                              |        |                 |       |
| Basic and Fully Diluted                                      |       | $                                 | (0.08       | )                    | $          | (0.55 | ) |
| Net loss per common share:                                   |       |                              |        |                 |       |
| Basic and Fully Diluted                                      |       | $                                 | (0.08       | )                    | $          | (0.55 | ) |
| **Consolidated Statement of  Shareholders Equity (Deficit)** |       |                              |        |                 |       |
| Net loss                                                     |       | $                                 | (2,752,984  | )                    | $          | (15,864,756 | ) |
| Accumulated deficit                                          |       | $                                 | (60,102,822 | )                    | $          | (75,948,932 | ) |
| **Consolidated Statement of Cash  Flows**                    |       |                              |        |                 |       |
| Net loss                                                     |       | $                                 | (2,752,984  | )                    | $          | (15,864,756 | ) |
| Unrealized loss on  derivatives                              |       | $                                 | —      |                 | $          | 13,111,772 |   |

 

**14.   JOINT VENTURE FORCHURCHROCK PROPERTY**

 

In December 2006, HRI-Churchrock, Inc., awholly owned subsidiary of the Company, entered into a Joint Venture with awholly owned subsidiary of Itochu to develop jointly our Churchrock property inNew Mexico, under which Itochu will fund all development costs, primarilythrough a debt facility that it will provide. Itochu and the Company will splitthe profits 50-50 and the Company will be the Managing Partner and receive amanagement fee. For revenues in excess of $30 per pound, the Company willreceive additional payments under the joint venture. The Company estimates thatthe Churchrock property will yield about 12 million pounds of uranium. Afeasibility study was completed and delivered at the end of 2006. Under theterms of the Joint Venture, both parties has until April 2, 2007 to make aPreliminary Investment Decision whether to move forward with the Joint Venture.The partieshave agreed to extend that date until May 1, 2007. If a positive decisionis made, Itochu will reimburse us for 50% of our permitting costs from November 1,2005, through the completion of the feasibility study, up to a maximumcontribution of $180,000. The parties will split costs incurred aftercompletion of the feasibility study 50-50 until a final investment decision ismade by the parties after receipt of necessary permits.

 

F-23

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** **                                                                                                                                                                                                                                                  | **Description** |
|---------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 3.1*                | Restated Certificate of Incorporation of the  Company, dated February 15, 2004 (filed with the Company’s Registration  Statement on Form SB-2 dated July 26, 2004, SEC File  Number 333-117653).                                   |
| 3.1.1*              | Certificate of Amendment of Restated Certificate of  Incorporation of the Company (filed with the Company’s Form 8-K dated  April 11, 2006, SEC File Number 000-17171).                                                                      |
| 3.2*                | Restated Bylaws of the Company (filed with the  Company’s Form 8-K on April 14, 2005).                                                                                                                                                       |
| 4.1*                | Common Stock Purchase Agreement dated  February 28, 2001 between the Company and Purchasers of the Common Stock  of the Company (filed with the Company’s Annual Report on Form 10-KA  dated July 26, 2001, SEC File Number 000-17171). |
| 10.1*               | Amended and Restated Directors Stock Option Plan  (filed with the Company’s Form S-8 Registration No. 333- 00349 on  January 22, 1996).                                                                                                 |
| 10.2*               | Amended and Restated Employee’s Stock Option Plan  (filed with the Company’s Form S-8 Registration No. 333-00403 on  January 24, 1996).                                                                                            |
| 10.3*               | Amended and restated 1995 Stock Incentive Plan  (filed with the Company’s Form SB-2 Registration No. 333-117653 on  July 26, 2005).                                                                                                     |
| 10.4*               | Non-Qualified Stock Option Agreement dated  June 19, 2001 between the Company and Leland O. Erdahl (filed with the  Company’s 10-QSB dated August 13, 2001, SEC File Number 000-17171).                                                      |
| 10.5*               | Non-Qualified Stock Option Agreement dated  June 19, 2001 between the Company and George R. Ireland (filed with the  Company’s 10-QSB dated August 13, 2001, SEC File Number 000-17171).                                                     |
| 10.7*               | Summary of Supplemental Health Care Plan (filed with  Amendment No. 1 to the Company’s Form S-1 Registration Statement  (File No. 33-32754) as filed with the Securities and Exchange Commission  on February 20, 1990).           |
| 10.9*               | License to Explore and Option to Purchase dated  March 25, 1997 between Santa Fe Pacific Gold Corporation and  Uranco, Inc. (filed with the Company’s Annual Report on Form 10-K  dated June 30, 1997, SEC File Number 000-17171). |
| 10.1 2*             | Compensation Agreement dated June 2, 1997  between the Company and Paul K. Willmott (filed with the Company’s Annual  Report on Form 10-K dated June 30, 1998, SEC File Number  000-17171).                                             |
| 10.1 3*             | Compensation Agreement dated June 2, 1997  between the Company and Richard A. Van Horn (filed with the  Company’s Annual Report on Form 10-K dated June 30, 1998, SEC File  Number 000-17171).                           |
| 10.1 4*             | Compensation Agreement dated June 2, 1997  between the Company and Thomas H. Ehrlich (filed with the Company’s Annual Report  on Form 10-K dated June 30, 1998, SEC File Number 000-17171).                                             |
| 10.1 5*             | Compensation Agreement dated June 2, 1997  between the Company and Mark S. Pelizza (filed with the Company’s Annual  Report on Form 10-K dated June 30, 1998, SEC File Number 000-17171).                                               |
| 10.1 6*             | Uranium Resources, Inc. 1999 Deferred  Compensation Plan (filed with the Company’s Annual Report on Form 10-K  dated June 30, 1999, SEC File Number 000-17171).                                                                         |

 
| 10.1 6.1* | Amendment No. 1 to the Uranium  Resources, Inc. 1999 Deferred Compensation Plan (filed with the  Company’s Annual Report on Form 10KSB dated March 31, 2006, SEC  File Number 000-17171).          |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 7*   | 2000-2001 Deferred Compensation Plan (filed with the  Company’s Annual Report on Form 10-K dated December 31, 2004, SEC  File Number 000-17171).                                                             |
| 10.1 7.1* | Amendment No. 2 to the Uranium  Resources, Inc. Deferred Compensation Plan for 2000-2001 (filed with the  Company’s Annual Report on Form 10KSB dated March 31, 2006, SEC  File Number 000-17171). |
| 10.2 2*   | Uranium Resources, Inc. Deferred Compensation  Plan for 2002 (filed with the Company’s Quarterly Report on Form 10-QSB  dated November 13, 2002, SEC File Number 000-17171).                       |

 

E-1

----

 
| 10.2 3*   | Uranium Resources, Inc. Deferred Compensation Plan for 2003  (filed with the Company’s Quarterly Report on Form 10-QSB dated  November 13, 2002, SEC File Number 000-17171)                                                                                                 |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 4*   | Uranium Resources, Inc. Deferred Compensation Plan for 2004  (filed with the Company’s Quarterly Report on Form 10-QSB dated  May 14, 2004, SEC File Number 000-17171)                                                                                                           |
| 10.2 4.1* | Amendment No. 2 to the Uranium Resources, Inc. Deferred  Compensation Plan for 2002, Deferred Compensation Plan for 2003, and Deferred  Compensation Plan for 2004 (filed with the Company’s Annual Report on  Form 10-KSB dated March 31, 2006, SEC File Number 000-17171) |
| 10.2 6*   | 2004 Directors Stock Option Plan dated June 2, 2004 (filed with  the Company’s Registration Statement on Form SB-2 dated July 26,  2004, SEC File Number 333-117653)                                                                                                             |
| 10.2 7*   | Contract with UG U.S.A., Inc for the Purchase of Natural Uranium  Concentrates (U 3 O 8) dated  August 12, 2003 (filed with the Company’s Pre-Effective Amendment No                                                                                                                       |
| 10.2 7.1* | Amendment No. 1 with UG U.S.A., Inc. dated August 30,  2004 to Exhibit 10.27 (filed with the Company’s Pre-Effective Amendment  No                                                                                                                                          |
| 10.2 7.2* | Amendment No. 2 with UG U.S.A., Inc. dated April 29,  2005 to Exhibit 10.27 (filed with the Company’s Pre-Effective Amendment  No                                                                                                                                           |
| 10.2 8*   | Amended and Restated Uranium Supply Contract with Itochu Corporation  dated June 7, 2005 (filed with the Company’s Pre-Effective Amendment No                                                                                                                                              |
| 10.3 1*   | Note Purchase Agreement dated March 24, 2005 and promissory  notes issued thereunder (filed with the Company’s Annual Report on  Form 10-K for the year ended December 31, 2004, SEC File Number 000-17171)                                                                      |
| 10.3 2*   | Uranium Supply Contract with UG U.S.A., Inc. dated  April 29, 2005 (filed with the Company’s Pre-Effective Amendment No                                                                                                                                                               |
| 10.3 3*   | Uranium Supply Contract with Itochu Corporation dated June 15,  2005 (filed with the Company’s Pre-Effective Amendment No                                                                                                                                                                  |
| 10.3 4*   | Stock Purchase Agreement by and between Uranium Resources, Inc.  and accredited investors (filed with the Company’s Form 8-K dated  August 12, 2005, SEC File No                                                                                                                 |
| 10.3 5*   | Uranium Resources, Inc. 2004 Stock Incentive Plan (filed with  the Company’s Quarterly Report on Form 10QSB/A dated November 18,  2005, SEC File No. 000-17171).                                                                                                            |
| 10.3 6*   | Feasibility Study Funding Agreement between Itochu Corporation,  Uranium Resources, Inc. and Hydro Resources, Inc. effective  March 29, 2006 (filed with the Company’s Form 10KSB dated  March 31, 2006, SEC file Number 000-17171).                                   |
| 10.3 7*   | Amended and Restated Uranium Supply Contract between Itochu  Corporation and Uranium Resources, Inc. effective March 1, 2006  (filed with the Company’s Form 10KSB dated March 31, 2006, SEC file  Number 000-17171).                                                       |
| 10.3 8*   | Agreement for the Sale of Uranium Concentrates between UG  U.S.A., Inc. and Uranium Resources, Inc. dated March 31, 2006  (filed with the Company’s Form 10KSB dated March 31, 2006, SEC file  Number 000-17171).                                                      |
| 10.3 9*   | Stock Purchase Agreement dated as of April 19, 2006, by and  between Uranium Resources, Inc. and accredited investors (filed with the  Company’s Current Report on Form 8-K dated April 19, 2006, SEC File  No                                                              |
| 10.4 0*   | Limited Liability Company Agreement of Churchrock Venture LLC (filed  with the Company’s Current Report on Form 8-K dated December 5,  2006, SEC File No                                                                                                                              |
| 10.4 1*   | Compensation Agreement dated March 12, 2007 between the Company  and Craig S. Bartels (filed with the Company’s Form 8-K dated  March 13, 2007, SEC File No                                                                                                                      |
| 10.4 2*   | Compensation Agreement dated March 12, 2007 between the Company  and David N. Clark (filed with the Company’s Form 8-K dated  March 13, 2007, SEC File No                                                                                                                        |

 

E-2

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| 14*  | Uranium Resources, Inc. Amended Code of Ethics  for Senior Executives. (filed with the Company’s Form 10-K dated  March 30, 2007, SEC File No. 000-17171). |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           |
| 31.2 | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           |
| 32.1 | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                           |
| 32.2 | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                           |

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*          Not filed herewith. Incorporated byreference pursuant to Rule 12b-32 under the Securities Exchange Act of1934.

 

E-3

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