U.S. Energy Corp. (USEG, NASDAQ)
Industry: Oil & Gas E&P
Annual report, fiscal year 2010



2010 ANNUAL REPORT

## U.S. ENERGY CORP.



## CORPORATE PROFILE

U.S. Energy Corp. is an independent exploration and production company focused on exploring, developing and producing oil and natural gas in the U.S. Through numerous drilling ventures with proven operators, the Company has a diverse portfolio of prospects including the Williston Basin of North Dakota and Montana, the Eagle Ford Shale in Texas, the San Joaquin Basin of California, Southeast Colorado and onshore Gulf Coast. At year-end 2010, our net proved reserves were 1.95 million barrels of oil equivalent (BOE). *U.S. Energy Corp. also owns the Mt. Emmons molybdenum project, in Colorado.)

PRODUCTION (BOE)*



OPERATING REVENUES (000'S)



PROVED RESERVES (BOE)*



NET ACRES



*Barrels of oil equivalent (BOE) calculated using a ratio of one Bbl of crude oil or NGL equals six Mcf of natural gas.






## STRENGTH THROUGH ASSET DIVERSITY



## 2010 ACCOMPLISHMENTS

Increased average daily production 173% to 1,230 BOE/D.*

Increased total oil and gas reserves 80% to 1,954,941 BOE \( ^{*} \)  at year-end 2010.

Increased oil and gas segment net operating income to $7.9 million, a rise of 450% as compared to the previous year.

Increased cash flow from operations 385% to $12.5 million.

Secured a $75 million senior credit facility with BNP Paribas to increase liquidity.

Acquired an additional 6,200 net acres in the core Bakken/Three Forks producing region of North Dakota.

Drilled 7 gross (2.41) net Bakken wells.

Drilled 6 gross (.92) net Gulf Coast/West Texas wells.



# LETTER TO SHAREHOLDERS

## Corporate Strategy

Over the past several years we have taken measured steps to achieve our two main objectives: diversifying our asset base and leveraging the operational expertise of our partner companies for the benefit of our shareholders. Our primary focus is oil and gas exploration and production, which involves financial, geologic, engineering and other risks inherent to the business. To manage risk, we are building a team of experts in land, geology and engineering while at the same time adding projects of a scale that we can accommodate financially, thereby minimizing capital risk. We believe we are prudently managing our exploration risk through our strategy of asset diversification.

First, we have selectively partnered with established, experienced operators in two significant oil resource plays to mitigate the financial and operational risk associated with exploration and production. Second, we continue to add to our acreage positions in several world-class resource plays such as the Bakken/Three Forks and Eagle Ford shale plays in addition to prospective acreage in Montana, Colorado and California; together, we believe that these assets provide a sizable drilling inventory for development.

## 2010 – In Review

Last year was a pivotal year for U.S. Energy Corp. as we successfully launched a number of initiatives we believe will be the catalysts for consistent growth over the next few years. We continue to monitor market conditions for the best opportunities to add accretive value to the Company in terms of assets, production and reserves. We have been primarily focused on oil projects (85%) because in our view they offer the best potential for future visible growth and are a good fit for our expertise. However, natural gas has to be part of any natural resource company’s portfolio to provide product diversity and balance in volatile markets; the remaining 15% of our total reserves are comprised of natural gas.

2010 was a tumultuous year for commodity prices. However, we remained focused on pursuing additional oil-weighted transactions as the traditional energy equivalent pricing between natural gas prices and oil prices in North America remained unusually high at over 20:1, well above the historical 6:1 ratio, favoring oil producers. As I write this letter, the median analyst estimate for 2011 West Texas Intermediate (WTI) crude oil prices is $92.71 per barrel, ranging from a high of $110.00 to a low of $72.50 per barrel. When considered within the context of improving supply and demand fundamentals driven by growing U.S. and world economies, we believe U.S. Energy Corp. is poised for another strong year of performance in 2011.

## Transformation Begins – Operatorship in Southern Colorado

One of the most significant steps in our corporate development occurred in early 2011 when U.S. Energy Corp. acquired 3,000 net acres, with a working interest of 80%, targeting the Mississippi formation in Southern Colorado. What makes this acquisition so meaningful to our Company is the fact that we identified this project as a manageable prospect for us to transition into operations. Looking forward, we believe that increasing the amount of properties under our control will enhance our already strong non-operated drilling programs with leading E&P companies while providing us greater opportunities to control our own destiny. The experience we gain from the Apache Project will help us evaluate other, larger opportunities while minimizing our near-term financial risk.

## Bakken/Three Forks – Significant Growth Potential

As a non-operator, a central tenet of our corporate strategy in 2010 continued to be our focus on establishing quality partnerships in our oil and gas ventures as a way of managing exploration risk. I have been vocal in emphasizing the strength of U.S. Energy Corp.'s partnership with Brigham Exploration in our Bakken/Three Forks program, and 2010 was yet another year which demonstrated the success of this strategy. Last year, we drilled 7 gross (2.41 net) wells with a 100% success rate, contributing to a 173% increase in 2010 production as compared to 2009. In addition to our drilling program with Brigham, we entered into another Bakken drilling program with Zavanna LLC in late 2010. In January 2011, we initiated an aggressive drilling program and anticipate participating in the drilling of 12 gross wells this year with Zavanna. Between the two Bakken drilling programs, we expect to drill 18 gross wells in the Bakken in 2011 which we expect will result in very meaningful additions to our daily production rates and reserves by year end. Our total acreage in the play now comprises 25,099 net acres, with 5,955 acres developed, with an average working interest of 38.5% across our total acreage position. All together, we believe that we have the potential to drill up to 276 gross Bakken/Three Forks wells with our two operating partners, which equates to several years of inventory for our Company. We plan to spend 73% of our 2011 capital budget drilling additional Bakken/Three Forks wells.




## Onshore Gulf Coast Projects

The Company has continued to add meaningfully to its production through its onshore Gulf Coast drilling programs with three experienced operators. To date, we have completed five gross (1.15 net) producing wells located in Louisiana and Texas which currently produce approximately 700 barrels of oil equivalent per day. For 2011, we have budgeted approximately $3.7 million to drill an additional 9 gross (0.79 net) wells. After meeting our 2011 drilling commitments, the Company plans to direct its attention to our oil resource plays and to evaluate any further Gulf Coast drilling on a case-by-case basis. We are pleased with the results we have experienced to date with our partners in these drilling programs and intend to keep our relationships ongoing as further opportunities arise.

## Future Projects – Continuously Building Growth Potential

U.S. Energy Corp. is constantly searching for and evaluating prospective oil and gas projects in the U.S., focusing on those which are candidates for development using horizontal drilling techniques or located in existing conventional basins and on a scale meaningful to our Company. We have a demonstrated track record of identifying such projects and then establishing the partnerships or joint ventures to commence drilling programs leading to first production. As with any exploration and production company, this process is never-ending in that we are constantly evaluating potential projects and partnerships to continue our path of geographic and geologic diversification, while prioritizing oil potential as our commodity of choice. Shareholders can be confident that when we evaluate projects we are evaluating prospects on the basis of potential returns. We believe our rigorous assessment process ensures that we remain true to our strategy and provide good stewardship of our shareholder's assets. 2010 was an active year for us in terms of adding new projects to our portfolio, each of which is briefly summarized in the following text.

## California San Joaquin Basin

U.S. Energy Corp. acquired a 40% working interest in 6,120 gross (2,448 net) acres in the San Joaquin Basin for $2.5 million in August 2010 from Cirque Resources. This project targets a Miocene oil horizon in a stratigraphic trap on the flank of the Elk Hills anticline. We plan to drill an initial test well in this formation during 2011. Acquiring a working interest in this project is consistent with our overall strategy of participating in exploration projects with the potential to measurably add to our oil reserves. The San Joaquin Basin has been one of the most productive oil basins in California for many decades, and we believe our acreage is prospective for similar development with a significant resource potential. If successful, this project could result in a multi-well, multi-year drilling inventory.

## Eagle Ford – Zavala County, Texas

Early in 2011, we established a new earn-in partnership in the Eagle Ford shale play, another oil horizon being developed using horizontal drilling and completion techniques. The terms of the agreement allow us to earn up to a 30% working interest in 4,675 gross contiguous acres through a combination of a cash payment and a well carry commitment. Our current Eagle Ford leasehold position holds up to 7.8 net drilling locations under current spacing, and based on initial success, we plan to begin an aggressive drilling program with Crimson Exploration in this area next year. The Eagle Ford has emerged in recent years as one of the newest economic oil and natural gas liquids plays in the U.S. The Edwards Shelf Margin essentially divides the play between the dry gas and NGL areas in the southern portion of the trend and the oil areas in the northern part of the trend. We are excited about our acreage in Zavala County because it is located in the lucrative “oil window” of the play, rather than dry gas. For these reasons, our addition of Eagle Ford acreage complements our oil projects in other areas. We spud our first well with Crimson in April 2011.

## Montana

U.S. Energy Corp. acquired a 100% working interest in 11,627 net acres of undeveloped fee mineral leasehold interests in northeast Montana during 2010. Our intention is to seek other working interest partners during 2011 and 2012 to evaluate this position for future exploration drilling. We believe the industry activity associated with the Bakken play, presently concentrated in North Dakota and Roosevelt and Richland counties in Montana, may expand with further delineation and development drilling during the coming years. By establishing an early position in Montana, we have positioned U.S. Energy Corp. to capture the upside of expanded Bakken activity should the play extend into our acreage. The key point to consider is that we acquired this acreage at relatively low per-acre cost and retain the rights for 3-5 years to provide us with the flexibility to begin operations in this area as the Bakken play expands.



# A COMPANY ON THE MOVE

## Mount Emmons Molybdenum Mine

U.S. Energy Corp. firmly believes that Mount Emmons will become a significant and valuable asset for our shareholders. Although in the early stages of permitting and development, this mining project represents one of the world’s highest quality deposits of molybdenum, and we are committed to advancing this project to development stage throughout the coming months and years.

## Capital Strategy and Financial Position

In 2011 we plan to spend a total of $45.7 million on our oil and gas drilling programs, with $33.2 million allocated to our Bakken/Three Forks programs and the balance split between our oil exploration programs in the Eagle Ford, California, Colorado and Gulf Coast projects. We secured a reserve-based revolving credit facility of $75 million in 2010 that has a borrowing base of $22.5 million. This credit facility improves our liquidity and strengthens our balance sheet. We intend to use it judiciously along with cash flow to fund our multiple drilling programs throughout 2011.

By prudently managing our balance sheet in years prior, we remain well-positioned financially to expand our drilling programs in our core acreage. At yearend, the Company had cash and cash equivalents totaling $23.8 million which, coupled with our credit facility, provide us ample resources to continue growth through the drill bit in 2011 as well as sufficient resources to pursue additional acreage or additional working interest acquisitions.

The success of our 2010 drilling programs is clearly demonstrated in our strong financial results for 2010. Oil and gas revenues increased from $7.6 million in 2009 to $26.5 million in 2010, contributing to a 450% increase in operating income from our oil and gas business last year. Our production increased 173% to 449,000 BOE for the year, and our reserves increased to nearly 2 million BOE at year end. What these numbers illustrate is the dramatic rise in production, reserves, and operating income associated with our aggressive pursuit of new oil and gas opportunities in established oil producing basins.

Lastly, we monetized some of our geothermal assets in 2010 and plan to divest the real estate asset U.S. Energy Corp. holds during 2011. We plan to sell both of these assets to align the Company’s core assets solely in natural resources, with oil and gas as our primary focus. We also believe Mount Emmons is a viable long-term project for the Company, but over the course of the next few years our main focus will be managing our growth by increasing oil production and reserves.

## 2011 Outlook

Last year, we worked hard to build a strong foundation for future growth. In 2011 we are working to build on that foundation by maintaining strong relationships with our operating partners and expanding our capabilities by exploring our Apache Project during 2011. Our diverse portfolio of non-operated assets provides strong growth potential in some of the best oil plays in North America, including the Bakken/Three Forks and now the Eagle Ford shale. In addition, our portfolio contains meaningful upside from a number of high-impact optional value projects ranging from a world-class molybdenum deposit to a large prospective oil play in California. Importantly, we have a strong balance sheet with the liquidity to fund our drilling programs in 2011. However, we will continue to seek additional opportunities throughout the year to provide further growth for our shareholders.

I want to express my thanks to our partners, employees, the board of directors, and our shareholders for their contributions toward our goals during 2010. Our success is the result of our combined teamwork, discipline and ingenuity.

U.S. Energy Corp. is a company on the move; we are nimble enough to be able to grow organically and through acquisitions. I believe 2011 will be another year of increasing cash flow from operations, as well as growth in production and reserves. These are metrics by which any energy company is measured, and, given our strategic focus on oil and gas, we expect 2011 will be another year of significant growth for U.S. Energy Corp.



Keith G. Larsen
Chairman and CEO
April 25, 2011



# OFFICERS AND DIRECTORS

















## Keith G. Larsen - Chairman and CEO

Mr. Larsen is the Chairman and CEO of U.S. Energy Corp. He is a former director of the Brunton Company and former CEO and director of Rocky Mountain Gas, Inc. Mr. Larsen is also a former director and founding member of Pinnacle Gas Resources, a public coalbed methane company founded by Credit Suisse First Boston. He has over 25 years of experience in the natural resource sector including oil and gas and mineral project development and financing.

## Mark. J. Larsen - President and COO

Mr. Larsen is the President and COO of U.S. Energy Corp. He is the former President/Director of Rocky Mountain Gas, Inc., a coalbed methane company that was sold to Enterra Energy Trust in 2005. He is also a former director of Pinnacle Gas Resources, a public coalbed methane company founded by Credit Suisse First Boston. He has over 20 years of experience in the natural resource sector including oil and gas and mineral project development and financing. Mr. Larsen received a B.S. in Business Administration from the University of Wyoming.

## Robert (Scott) Lorimer - CFO, Vice-President of Finance, and Treasurer

Mr. Lorimer is the CFO, VP of Finance and Treasurer of U.S. Energy Corp. He received a B.S. in Finance, Accounting, Economics and German from Brigham Young University and worked towards a Masters in Accountancy at the University of Nebraska. Prior to joining U.S. Energy Corp., Mr. Lorimer served as Controller for Federal American Partners, a joint venture between Tennessee Valley Authority, Federal Resources and American Nuclear.

## Steven R. Youngbauer - Secretary and General Counsel

Mr. Youngbauer has more than 25 years experience in the legal profession and 31 years in the mining and oil and gas industries working in various capacities including President, Vice President and General Counsel. He received a Juris Doctorate Degree from the University of Wyoming Law School in 1982 and has also served as a Wyoming State Senator, Chairman of the Wyoming Environmental Quality Council and on the Board of Directors of the Wyoming Mining Association.

## Allen Winters - Independent Director

Mr. Winters has been a director of the company since 2007. He has over 50 years experience in the North American minerals industry. He served in a variety of senior executive management positions with Homestake Mining Co. over a 20-year period and from 1988 - 1992 was in charge of all U.S. operations for Homestake. Mr. Winters is currently a consultant to the industry.

## Michael H. Feinstein - Independent Director

Mr. Feinstein has been director of the Company since September 2004. He is a 1957 graduate of Wharton School, University of Pennsylvania. He became a CPA in the state of Colorado in 1960. Mr. Feinstein is currently a financial and business consultant and the Director of Taxation for a CPA firm in Scottsdale, AZ, which provides accounting and tax services to small businesses. He has over 40 years of accounting, auditing, and business experience including 25 years of experience as an employee and subsequently a partner for Deloitte & Touche and its predecessors. He has served as a director, CFO and CEO of numerous public and private companies.

## H. Russell Fraser - Independent Director

Mr. Fraser has been a director of the Company since 1996 and was a director of Rocky Mountain Gas, Inc. from 1999 until it was sold in June 2005. He is past President and director of American Capital Access, Inc., New, NY, the first "A" rated financial guarantee company. Mr. Fraser was Chairman of the Board and Chief Executive Officer of Fitch Investors Services, L.P. He also served as President and Chief Executive Officer of AMBAC. Mr. Fraser holds a B.S. in finance and economics from the University of Arizona. He is a member and a founder of the Fixed Income Analysts Society.

## Stephen Conrad - CPA, Oil and Gas Professional, Independent Director

Mr. Conrad was elected to the Board of Directors on June 25, 2010. Mr. Conrad is a former Partner of Deloitte & Touche LLP and Arthur Andersen LLP. He has over 35 years of experience in serving public company clients including numerous oil and gas and mining companies. For the past five years Mr. Conrad has been a managing member of several oil and gas exploration and development funds. He is a CPA with a B. S. Degree in accounting from Montana State University.



## STOCK PERFORMANCE GRAPH

The following graph compares the cumulative return on a $100 investment in our common stock for the five years ended December 31, 2010, to that of the cumulative return on a $100 investment in the S&P 500, the NASDAQ Market Index, and the S&P Small Cap 600 Energy Index. In calculating the cumulative return, we assumed reinvestment of the $0.10 per share cash dividend paid in July 2007. The indices are included for comparative purpose only. This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act of 1933 or the Exchange Act, whether made before or after the date the Annual Report was filed and irrespective of any general incorporation language in any such filing.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG U.S. ENERGY CORP, THE S&P 500, THE NASDAQ MARKET INDEX AND THE S&P SMALL CAP 600 ENERGY INDEX






## INFORMATION ABOUT OUR STOCK

Shares of USE common stock are traded on the over-the-counter market, and prices are reported on a "last sale" basis on the Nasdaq Capital Market of the National Association of Securities Dealers Automated Quotation System ("Nasdaq"). Quarterly high and low sale prices follow:

<table><tr><td></td><td>High</td><td>Low</td></tr><tr><td>Calendar year ended December 31, 2010</td><td></td><td></td></tr><tr><td>First quarter ended 03/31/10</td><td>$ 6.76</td><td>$ 5.14</td></tr><tr><td>Second quarter ended 06/30/10</td><td>7.06</td><td>4.67</td></tr><tr><td>Third quarter ended 09/30/10</td><td>5.43</td><td>4.01</td></tr><tr><td>Fourth quarter ended 12/31/10</td><td>6.17</td><td>4.37</td></tr><tr><td>Calendar year ended December 31, 2009</td><td></td><td></td></tr><tr><td>First quarter ended 03/31/09</td><td>$ 2.09</td><td>$ 1.54</td></tr><tr><td>Second quarter ended 06/30/09</td><td>2.57</td><td>1.79</td></tr><tr><td>Third quarter ended 09/30/09</td><td>4.21</td><td>1.87</td></tr><tr><td>Fourth Quarter through 12-31-09</td><td>6.79</td><td>3.65</td></tr></table>



## SELECTED FINANCIAL DATA

The selected financial data is derived from and should be read with the financial statements included in this Report.

<table><tr><td rowspan="2"></td><td colspan="5">(In thousands)</td></tr><tr><td colspan="5">December 31,</td></tr><tr><td></td><td>2010</td><td>2009</td><td>2008</td><td>2007</td><td>2006</td></tr><tr><td>Current assets</td><td>$ 29,824</td><td>$ 62,100</td><td>$ 72,767</td><td>$ 82,729</td><td>$ 43,325</td></tr><tr><td>Current liabilities</td><td>18,763</td><td>8,672</td><td>19,983</td><td>8,093</td><td>11,595</td></tr><tr><td>Working capital</td><td>11,061</td><td>53,428</td><td>52,784</td><td>74,636</td><td>31,730</td></tr><tr><td>Total assets</td><td>156,016</td><td>146,723</td><td>142,631</td><td>131,404</td><td>51,901</td></tr><tr><td>Long-term obligations \( ^{(1)} \)</td><td>1,150</td><td>973</td><td>1,870</td><td>1,283</td><td>882</td></tr><tr><td>Shareholders&#x27; equity</td><td>130,688</td><td>129,133</td><td>111,833</td><td>115,100</td><td>37,468</td></tr></table>

 \( ^{(1)} \) Includes $303,000 of accrued reclamation costs on properties at December 31, 2010, $211,000, at December 31, 2009, $144,000, at December 31, 2008, $133,000, at December 31, 2007, and $124,000 at December 31, 2006.

(In thousands except per share amounts)

<table><tr><td rowspan="2"></td><td colspan="5">For the year ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td><td>2007</td><td>2006</td></tr><tr><td>Operating revenues</td><td>$ 27,176</td><td>$ 10,349</td><td>$ 2,222</td><td>$ 1,174</td><td>$ 880</td></tr><tr><td>Loss from continuing operations</td><td>(4,232)</td><td>(9,271)</td><td>(9,604)</td><td>(14,539)</td><td>(14,668)</td></tr><tr><td>Other income &amp; (expense)</td><td>1,722</td><td>(1,186)</td><td>(17)</td><td>108,824</td><td>2,118</td></tr><tr><td>(Loss) income before minority interest,</td><td>(2,510)</td><td>(10,457)</td><td>(9,621)</td><td>94,285</td><td>(12,550)</td></tr><tr><td>Minority interest in loss (income) of</td><td>--</td><td>--</td><td>--</td><td>(3,551)</td><td>88</td></tr><tr><td>Benefits from (provision for) income taxes</td><td>1,738</td><td>2,279</td><td>3,326</td><td>(32,367)</td><td>15,332</td></tr><tr><td>Discontinued operations, net of tax</td><td>--</td><td>--</td><td>4,907</td><td>(2,004)</td><td>(1,819)</td></tr><tr><td>Net (loss) income</td><td>$ (772)</td><td>$ (8,178)</td><td>$ (1,388)</td><td>$ 56,363</td><td>$ 1,051</td></tr><tr><td>Per share financial data</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Operating revenues</td><td>$ 1.02</td><td>$ 0.48</td><td>$ 0.10</td><td>$ 0.06</td><td>$ 0.05</td></tr><tr><td>Loss from continuing operations</td><td>(0.16)</td><td>(0.43)</td><td>(0.41)</td><td>(0.71)</td><td>(0.79)</td></tr><tr><td>Other income &amp; expenses</td><td>0.06</td><td>(0.05)</td><td>--</td><td>5.32</td><td>0.11</td></tr><tr><td>(Loss) income before minority interest,</td><td>(0.09)</td><td>(0.48)</td><td>(0.41)</td><td>4.61</td><td>(0.68)</td></tr><tr><td>Minority interest in loss (income) of</td><td>--</td><td>--</td><td>--</td><td>(0.17)</td><td>--</td></tr><tr><td>Benefits from (provision for) income taxes</td><td>0.06</td><td>0.11</td><td>0.14</td><td>(1.58)</td><td>0.83</td></tr><tr><td>Discontinued operations, net of tax</td><td>--</td><td>--</td><td>0.21</td><td>(0.10)</td><td>(0.10)</td></tr><tr><td>Net (loss) income per share basic</td><td>$ (0.03)</td><td>$ (0.38)</td><td>$ (0.06)</td><td>$ 2.75</td><td>$ 0.06</td></tr><tr><td>Net (loss) income per share diluted</td><td>$ (0.03)</td><td>$ (0.38)</td><td>$ (0.06)</td><td>$ 2.54</td><td>$ 0.05</td></tr><tr><td>Basic shares outstanding</td><td>26,763,995</td><td>21,604,959</td><td>23,274,978</td><td>20,469,846</td><td>18,461,885</td></tr><tr><td>Diluted shares outstanding</td><td>26,763,995</td><td>21,604,959</td><td>23,274,978</td><td>22,189,828</td><td>21,131,786</td></tr></table>



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

## Forward Looking Statements

Statements in this discussion about expectations, plans and future events or conditions are forward looking statements. Actual future results, including oil and natural gas production growth, financing sources, and environmental and capital expenditures, could be materially different depending on a number of factors, such as: commodity prices, political or regulatory events, and other matters. Please see “Cautionary Statement Regarding Forward-Looking Statements” and Item 1A in this Report, which should be carefully considered in reading this section.

## General Overview

U.S. Energy Corp. (“U.S. Energy” or “Company”) historically invested in mineral properties and sold them prior to placing them into production. Beginning in 2008, the Company began investing primarily in oil and gas properties and expending the amount of capital necessary to place them into production with the intent of generating recurring cash flows, revenues and net income.

The Company is now, predominantly, an oil and gas exploration and production company. Our primary objective is to acquire and develop oil and gas producing properties in the continental United States. Our business is currently focused in the Rocky Mountain region (specifically the Williston Basin of North Dakota and Montana and Anadarko Basin of Colorado), Texas, Louisiana and California, however, we do not intend to limit our focus to these geographic areas. We continue to focus on increasing production, reserves, revenue and cash flow from operations while managing our level of debt. Our liquidity and access to financing under our Senior Secured Revolving Credit Facility (see Liquidity and Capital Resources below) allows us to seek additional oil and gas opportunities in the U.S.

We currently explore for and produce oil and gas primarily through a non-operator business model; however, we expect to operate our Colorado property for our own account in 2011. As a non-operator, we rely on our operating partners to propose, permit and manage wells. Before a well is spud, the operator is required to provide all oil and gas interest owners in the designated well unit the opportunity to participate in the drilling costs and revenues of the well on a pro-rata basis. After the well is completed, our operating partners also transport, market and account for all production.

Additionally, we are involved in the exploration for and development of minerals (molybdenum) through our ownership of the Mt. Emmons project in Colorado, geothermal energy through our investment in Standard Steam Trust and commercial real estate operations. Capitalized dollar amounts invested in each of these areas at December 31, 2010 and December 31, 2009 were as follows:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td></tr><tr><td>Unproved oil and gas properties</td><td>$ 21,620</td><td>$ 5,361</td></tr><tr><td>Proved oil and gas properties</td><td>$ 63,317</td><td>$ 24,595</td></tr><tr><td>Undeveloped mining properties</td><td>$ 21,077</td><td>$ 21,969</td></tr><tr><td>Investment in geothermal properties</td><td>$ 2,834</td><td>$ 2,958</td></tr><tr><td>Commercial real estate</td><td>$ 23,084</td><td>$ 24,600</td></tr><tr><td></td><td>$ 131,932</td><td>$ 79,483</td></tr></table>



In 2010, we recognized record revenues from oil and natural gas production of $26.5 million, production of 448,855 BOE and oil and gas proved reserves, at December 31, 2010, of 1,954,941 BOE. The key drivers to our success for 2010 included the following:

Drilling programs. Our success is largely dependent on the results of our drilling programs. During the year ended December 31, 2010, we drilled 13 gross wells (3.33 net wells) with a success rate of 62% that was comprised of: (a) seven of seven gross wells (2.41 net wells) in the Williston Basin, and (b) one gross (0.53 net wells) of six gross wells (0.92 net wells) in the Gulf Coast and Texas drilling programs. At December 31, 2010, 6 additional gross wells (1.51 net wells) were awaiting completion (5 gross wells (1.46 net wells) in the Williston Basin and 1 gross well (0.05 net wells) in the onshore Gulf Coast area.

Reserve growth. As a result of our drilling programs discussed above, our reserves increased 80% to 1,954,941 BOE at December 31, 2010, replacing 193% of 2010 production.

Production. Our 2010 annual production of 448,855 BOE, or 1,230 BOE/d, was a record high for the Company. The 2010 production increased 173% from 2009 production of 164,396 BOE or 450 BOE/d, primarily due to production from the Williston Basin.

Financial flexibility. In July 2010, we improved our financial flexibility through establishment of a senior credit facility to borrow up to $75 million from a syndicate of banks, financial institutions and other entities, including BNP Paribas (“BNP”). In October 2010, the Borrowing Base increased from the initial $12.0 million to $18.5 million as a result of a redetermination using our June 30, 2010 financial statements, production reports and a reserve report for our Williston Basin wells. See Capital Resources - BNP Paribas Reserve Lending Facility below.

Commodity prices. Our average realized oil price in 2010 was $72.11 per Bbl (excluding the impact of our economic hedges), or $5.89 higher than in 2009. Our average natural gas price realized during 2010 was $4.96 per Mcf, $0.66 per Mcf higher than the 2009 price of $4.30. Commodity prices are affected by changes in market demand, overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. Our financial results are significantly dependent on commodity prices, particularly oil prices, which are beyond our control and have been and are expected to remain volatile.

In 2010, through our wholly-owned affiliate Energy One LLC (“Energy One”), we entered into three commodity derivative contracts (“hedges”) with BNP Paribas, a costless collar and two fixed price swaps. U.S. Energy is a guarantor of Energy One under the hedges. The objective of utilizing the hedges is to reduce the effect of price changes on a portion of our future oil production, achieve more predictable cash flows in an environment of volatile oil and gas prices and to manage our exposure to commodity price risk. The use of these derivative instruments limits the downside risk of adverse price movements. However, there is a risk that such use may limit our ability to benefit from favorable price movements. Energy One may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of the its existing positions.



## Other

Minerals (molybdenum). Our investment in the Mt. Emmons project in Colorado is a long term investment. In 2008, we entered into an Option Agreement with Thompson Creek Metals Company USA (“TCM”) under which TCM may acquire up to 75% ownership of the Mt. Emmons project after expending $400 million.

Real estate. We continue to receive cash flows, revenues and net profits from our energy related multifamily housing development in northeastern Wyoming. We do not plan to build or acquire any additional multifamily housing projects.

Geothermal. We own a 22.8% interest in a geothermal limited partnership, Standard Steam Trust, LLC (“SST”). Due to the sale of two of SST’s geothermal properties in 2010, we recorded an equity gain from SST in 2010 of $1.0 million, however, equity losses from the investment in SST are expected until such time as additional SST properties are sold, equity losses reduce the investment to zero or we sell the investment. Our net investment in this partnership at December 31, 2010 is $2.8 million.

The principal factors affecting the Company are the success of its oil and gas exploration activities, commodity prices, drilling and completion costs, lease operating expenses, decline rates of our wells, mechanical and geological issues with our wells, the grade of mineral deposits, permitting and costs associated with exploration and development of the prospects.

## Liquidity and Capital Resources

We maintained a strong liquidity position throughout the year ended December 31, 2010, notwithstanding significant investment into our oil and gas properties. The Company experienced $12.4 million in cash flow from operations and reduced its debt while maintaining strong liquidity ratios and cash balances. The following table sets forth key liquidity measures for the year ended December 31, 2010 as compared to the year ended December 31, 2009:

<table><tr><td rowspan="2"></td><td colspan="3">(in thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td><td></td></tr><tr><td>Current ratio \( ^{(1)} \)</td><td>1.59 to 1</td><td>7.16 to 1</td><td></td></tr><tr><td>Working capital \( ^{(2)} \)</td><td>$ 11,061</td><td>$ 53,428</td><td></td></tr><tr><td>Total debt</td><td>$ 600</td><td>$ 800</td><td></td></tr><tr><td>Total cash and marketable securities less debt</td><td>$ 24,617</td><td>$ 55,840</td><td></td></tr><tr><td>Total stockholders&#x27; equity</td><td>$ 130,688</td><td>$ 129,133</td><td></td></tr><tr><td>Total liabilities to equity</td><td>0.19 to 1</td><td>0.14 to 1</td><td></td></tr></table>

 \( ^{(1)} \) Current assets divided by current liabilities

 \( ^{(2)} \) Current assets less current liabilities

Our strong working capital position and current ratio are the result of conservative investment strategies which are expected to yield revenues, cash flow and net income in the future. As of December 31, 2010, our only debt is related to the acquisition of a property near the Mt. Emmons project. Additional sources of capital that may be used to expand operations include borrowings pursuant to our credit facility with BNP, long-term financing and sale of the multifamily housing complex and a $10 million line of credit with a commercial bank.



Components of the $42.4 million decrease in working capital for the years ended December 31, 2010 from working capital at December 31, 2009 are as follows:

<table><tr><td rowspan="2"></td><td colspan="4">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td><td>Increase (Decrease)</td><td></td></tr><tr><td>CURRENT ASSETS:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 6,010</td><td>$ 33,403</td><td>$ (27,393)</td><td></td></tr><tr><td>Marketable securities</td><td></td><td></td><td></td><td></td></tr><tr><td>Held to maturity - treasuries</td><td>17,843</td><td>22,059</td><td>(4,216)</td><td></td></tr><tr><td>Available for sale securities</td><td>1,364</td><td>1,178</td><td>186</td><td></td></tr><tr><td>Accounts receivable</td><td></td><td></td><td></td><td></td></tr><tr><td>Trade</td><td>3,932</td><td>3,882</td><td>50</td><td></td></tr><tr><td>Reimbursable project costs</td><td>114</td><td>2</td><td>112</td><td></td></tr><tr><td>Income taxes</td><td>104</td><td>353</td><td>(249)</td><td></td></tr><tr><td>Other current assets</td><td>457</td><td>1,223</td><td>(766)</td><td></td></tr><tr><td>Current assets</td><td>29,824</td><td>62,100</td><td>(32,276)</td><td></td></tr><tr><td>CURRENT LIABILITIES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 14,915</td><td>$ 6,500</td><td>$ 8,415</td><td></td></tr><tr><td>Accrued compensation</td><td>1,669</td><td>1,748</td><td>(79)</td><td></td></tr><tr><td>Commodity risk management liability</td><td>1,725</td><td>--</td><td>1,725</td><td></td></tr><tr><td>Current portion of long-term debt</td><td>200</td><td>200</td><td>--</td><td></td></tr><tr><td>Other current liabilities</td><td>254</td><td>224</td><td>30</td><td></td></tr><tr><td>Total current liabilities</td><td>18,763</td><td>8,672</td><td>10,091</td><td></td></tr><tr><td>Working Capital</td><td>$ 11,061</td><td>$ 53,428</td><td>$ (42,367)</td><td></td></tr></table>

Major changes in working capital during the year ended December 31, 2010 were:

Current Assets. Current assets as of December 31, 2010 decreased by $32.3 million from current assets at December 31, 2009, primarily as a result of the use of cash and monetization of U.S. Treasuries to fund oil and gas exploration and well completion costs, operations and mineral property holding expenses. Please see the discussion below regarding cash flows for the twelve months ended December 31, 2010.

Current Liabilities. Current liabilities increased $10.1 million from at December 31, 2009, primarily as a result of:

- Accounts payable increased significantly as a result of drilling and completion costs associated with wells in progress at December 31, 2010.

- At December 31, 2010, we recorded a $1.7 million unrealized loss resulting from derivatives. This represents the fair value of our derivative contracts at December 31, 2010.



## Analysis of Cash Flows:

The following tables summarize the provision and use of cash in Operations, Investing Activities and Financing Activities for the years ended December 31, 2010, 2009 and 2008:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">For the years ended December 31,</td></tr><tr><td></td><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Cash provided by (used in) operations</td><td>$ 12,372</td><td>$ 2,552</td><td>$ (6,536)</td></tr><tr><td>Cash provided by (used in) investing activities</td><td>$ (39,859)</td><td>$ 17,150</td><td>$ (70,557)</td></tr><tr><td>Cash provided by (used in) financing activities</td><td>$ 94</td><td>$ 5,267</td><td>$ 8,909</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="3">For the years ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Net increase (decrease) in cash and cash equivalents</td><td>$ (27,393)</td><td>$ 24,969</td><td>$ (63,858)</td></tr><tr><td>Net (redemption) investment in U.S. Treasury investments</td><td>(78)</td><td>(183)</td><td>(1,255)</td></tr><tr><td>Net change in cash and U.S. Treasuries</td><td>$ (27,471)</td><td>$ 24,786</td><td>$ (65,113)</td></tr></table>

Investments of surplus cash in U.S. Treasuries have maturity dates in excess of 90 days and are therefore classified as Held to Maturity Marketable Securities for financial presentation purposes under Generally Accepted Accounting Practices (“GAAP”) in the United States of America. Although they are classified in this manner, they are used as needed to fund operations and capital projects, and accordingly are presented in the above table with cash and cash equivalents for clarity of the net change in ready liquid assets. A description of the provision of and use of cash in Operations, Investing Activities and Financing Activities for the year ended December 31, 2010 follows:

## Operations:

Operations for the year ended December 31, 2010 resulted in a net after tax loss of $772,000. This loss included $17.2 million in non-cash expenses related to depreciation, depletion, loss related to derivative instruments, impairment of the multifamily housing project, and non-cash compensation.

For a complete discussion of the cash flows from Operations please refer to Results of Operations below.

## Investing Activities:

Cash provided by Investing Activities includes:

• Redemption of U.S. Treasuries in the amount of $4.3 million.

- $1.1 million that was received as a capital distribution from SST related to the sale of one of SST’s geothermal properties.



- In December 2010, TCM prepaid the third annual option payment of $1.0 million that was due in January 2011.

• Proceeds from the sale of marketable securities of $602,000

Cash consumed in Investing Activities includes:

• Investment in oil and gas properties of $45.9 million.

- Investment of $624,000 in property and equipment: $431,000 for equipment at the Mt. Emmons water treatment plant, $22,000 in improvements at the Company’s multifamily housing project and $171,000 in the acquisition of office equipment and software.

## Financing Activities:

Cash provided by Financing Activities includes:

• $294,000 for the exercise of employee options and warrants to third party consultants.

Cash consumed in Financing Activities:

- We retired $200,000 in long term debt due under a note for the purchase of a 160 acre parcel of property purchased in the vicinity of the Mt. Emmons project.

## Capital Resources

Potential primary sources of future liquidity include the following:

## Oil and Gas Production

The Company’s current sources of cash are expected to be provided by successful oil and gas wells. The ultimate amount of cash resources derived from the production of oil and gas will be determined by production volumes, the price of oil and gas, exploration and production costs. We plan to continue to explore for and develop oil and gas properties and may also acquire existing production.

To achieve more predictable cash flows and to reduce our exposure to downward price fluctuations, we utilize derivative instruments to economically hedge future sales prices on a portion of our oil production. Our current strategy is to economically hedge up to 50% of our proved developed producing (PDP) volumes. The use of certain types of derivative instruments may prevent us from realizing the benefit of upward price movements. See “Item 1A. Risk Factors - The use of hedging arrangements in oil and gas production could result in financial losses or reduce income.”



The following table is a summary of our estimated reserves as of December 31, 2010:

<table><tr><td rowspan="2">Estimated net proved reserves:</td><td>Bakken / Three Forks</td><td>Gulf Coast / Texas</td><td>Total</td></tr><tr><td></td><td></td><td></td></tr><tr><td>Producing:</td><td></td><td></td><td></td></tr><tr><td>Oil (bbls)</td><td>1,120,018</td><td>22,616</td><td>1,142,634</td></tr><tr><td>Gas (Mcf)</td><td>505,565</td><td>717,000</td><td>1,222,565</td></tr><tr><td>NGL (bbls)</td><td>--</td><td>26,000</td><td>26,000</td></tr><tr><td>Developed Non-producing:</td><td></td><td></td><td></td></tr><tr><td>Oil (bbls)</td><td>182,328</td><td>37,771</td><td>220,099</td></tr><tr><td>Gas (Mcf)</td><td>153,924</td><td>620,000</td><td>773,924</td></tr><tr><td>NGL (bbls)</td><td>--</td><td>26,532</td><td>26,532</td></tr><tr><td>Undeveloped</td><td></td><td></td><td></td></tr><tr><td>Oil (bbls)</td><td>183,713</td><td>--</td><td>183,713</td></tr><tr><td>Gas (Mcf)</td><td>139,286</td><td>--</td><td>139,286</td></tr><tr><td>NGL (bbls)</td><td>--</td><td>--</td><td>--</td></tr><tr><td>Total (BOE)</td><td>1,619,188</td><td>335,753</td><td>1,954,941</td></tr><tr><td>Future net income before income taxes</td><td>$ 71,362,000</td><td>$ 10,193,000</td><td>$ 81,555,000</td></tr><tr><td>PV-10</td><td>$ 43,265,000</td><td>$ 8,808,000</td><td>$ 52,073,000</td></tr></table>

Estimated proved reserves (on a BOE basis) at December 31, 2010 increased by 868,738 BOE or approximately 80% over estimated proved reserves at December 31, 2009. Most of the increase is related to our successful Williston Basin drilling program.

The reserve estimates are calculated by independent engineering firms in accordance with SEC rules. Estimated future net cash flows before income taxes are discounted at 10%. This value is not intended to represent the current market value of the reserves. Reserve estimates are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, oil and gas prices, and other factors.

Estimates of reserve volumes and future net cash flows are based on the average of first day of month prices during the year ended December 31, 2010 ($79.43 per barrel of oil and $4.38 per MMbtu of gas). Future estimated production taxes and ad valorem taxes, capital costs and operating costs are deducted from estimated future cash flows, and the result is discounted at an annual rate of 10% to determine “present value” (“PV10”).

PV10 is widely used in the oil and gas industry, and is followed by institutional investors and professional analysts, to compare companies. However, the PV10 data is not an alternative to the standardized measure of discounted future net cash flows calculated under GAAP and in accordance with ASC 932-235-55, which includes the effects of income taxes. The following table provides a reconciliation of Estimated Future Net Revenues Discounted at 10% to the Standardized Measure of Discounted Future Net Cash Flows as shown in Note G to the Company’s Consolidated Financial Statements.



<table><tr><td rowspan="2"></td><td>(in thousands)</td></tr><tr><td>Year Ended</td></tr><tr><td></td><td>December 31, 2010</td></tr><tr><td>Estimated future net revenues discounted at 10%</td><td>$ 52,073</td></tr><tr><td>Future income tax expense (discounted)</td><td>(7,420)</td></tr><tr><td>Standardized measure of discounted future net cash flows</td><td>$ 44,653</td></tr></table>

## Cash on Hand

At December 31, 2010, we had $6.0 million in cash and cash equivalents and $17.8 million in U.S. Treasuries. Cash is invested in interest bearing accounts, with the majority invested in U.S. Government Treasuries. During the past three years, this investment policy has insured the preservation of principal and yielded a return.

## BNP Paribas Reserve Credit Facility

On July 30, 2010, we established a senior credit facility to borrow up to $75 million from a syndicate of banks, financial institutions and other entities, including BNP. The Facility may be used to further our short and mid-terms goals of increasing our investment in oil and gas. As a result of establishing this credit facility we formed a wholly owned subsidiary, Energy One LLC (“Energy One”), to own the majority of our oil and gas properties as well as the BNP senior credit facility.

From time to time until the expiration of the credit facility (July 30, 2014) if Energy One is in compliance with the Facility Documents, Energy One may borrow, pay, and re-borrow funds from the Lenders, up to an amount equal to the Borrowing Base, which was originally established at $12 million. On October 13, 2010, the Borrowing Base increased to $18.5 million as a result of a redetermination using our June 30, 2010 financial statements, production reports and a reserve report for our Bakken wells.

The Borrowing Base will be redetermined semi-annually, taking into account updated reserve reports. Any proposed increase in the Borrowing Base will require approval by all Lenders in the syndicate, and any proposed Borrowing Base decrease will require approval by Lenders holding not less than two-thirds of outstanding loans and loan commitments. As of December 31, 2010 we had not borrowed from the Facility. On February 18, 2011 we borrowed $3.0 million under the Credit Facility to fund a portion of our initial participation in the Eagle Ford Shale oil prospect in Zavala County, Texas.

## Commercial Bank

Line of Credit - We have a $10.0 million line of credit with a commercial bank. No borrowings have been made under this line of credit as of the date of this report. The line of credit has a variable interest rate which is tied to a national market rate with a minimum interest rate of 5.5%. The expiration date of the line of credit, January 31, 2011, was extended to April 15, 2011. The line of credit may be renewed depending on the financial strength and needs of the Company. The credit line is secured by the Remington Village multifamily housing project and a corporate aircraft.



## Equity Market

We filed a registration statement with the Securities and Exchange Commission on October 20, 2009 which became effective on November 6, 2009. The registration statement provides for the sale of $100 million of the Company’s common stock. During the fourth quarter of 2009, we sold 5 million shares of our common stock for $5.25 per share or $26.3 million, $24.3 million net of offering costs. Additional capital may be raised under the registration statement to fund future oil and gas acquisitions and development drilling.

## Real Estate

We own a 216 unit multifamily housing property in Gillette, Wyoming, known as Remington Village. The property averaged an occupancy rate of 90% during 2010 and was 89% occupied as of December 31, 2010. Occupancy is dependent on the regional economy including coal mining operations, oil and gas exploration and construction of a power generating plant in the area. The property generated positive cash flow from operations of $1.2 million during 2010 and is projected to remain in that range of cash flow during 2011. To reach these levels, occupancy rates will have to average 90% and costs and expenses remain similar to those experienced in 2010.

Although the property is pledged as collateral for the $10 million line of credit, there is no debt against the property. In 2011 we made the decision to finance and ultimately sell the property and use the proceeds to further our oil and gas exploration and development projects. The appraised value of the property at December 31, 2010 of $21.0 million resulted in a $1.5 million impairment.

## Mt. Emmons Molybdenum Project and Thompson Creek Metals Company, USA

In 2008, we entered into an agreement with TCM for the permitting and development of the Mt. Emmons project, near Crested Butte, Colorado. Under the terms of the agreement, TCM pays all costs related to activities on the project with the exception of the water treatment plant costs which are currently paid 100% by the Company. TCM may earn up to a 75% interest in the property after it spends $400 million. At such time as TCM has acquired its desired level of ownership, the Company and TCM will fund all costs in proportion to their ownership.

TCM is obligated to pay the Company six annual option payments in the amount of $1.0 million each due in January each year through 2014. TCM has paid three of these payments as of December 31, 2010, one of which was prepaid in December 2010 for the January 2011 option payment.

Once permitted and placed into production, the Mt. Emmons project is expected to provide the Company with long term capital resources. Historical records filed by predecessor owners of the Mt. Emmons project with the Bureau of Land Management (BLM) in the 1990's for the application of patented mineral claims, referenced identification of mineral resources of approximately 220 million tons of 0.366% molybdic disulfide ( \( MoS_{2} \) ) mineralization. A high grade section of the mineralization containing roughly 23 million tons at a grade of 0.689%  \( MoS_{2} \)  was also reported. No assurance can be given that these quantities of  \( MoS_{2} \)  exist or that the Company and TCM will be successful in permitting the property.



We retained a 4% Net Profits Royalty on a portion of the Green Mountain uranium property in Wyoming which is owned by Rio Tinto, Inc. No assurance can be given as to when or if the property will be placed into production. Any royalty due will be based on the market price of uranium concentrates and the cost of producing those concentrates.

Pursuant to the terms of the 2007 sale of our uranium properties to SXR Uranium One Inc., we are entitled to receive $20 million when commercial production begins at the Utah uranium mill which the Company sold; $7.5 million when the first delivery of ore to any commercial mill, after commercial production commences, from any of the uranium properties we sold; and a production royalty of up to $12.5 million. No assurance can be given as to if or when these events and payments will occur.

## Capital Requirements

Our direct capital requirements during 2011 are the funding of our drilling programs, additional oil and gas exploration and development projects, acquisition of prospective oil and gas properties and or existing production, operating and capital improvement costs of the water treatment plant at the Mt. Emmons project, operations at Remington Village and general and administrative costs. We intend to finance our 2011 capital expenditure plan primarily from the sources described above under “Capital Resources”. We may be required to reduce or defer part of our 2011 capital expenditures plan if we are unable to obtain sufficient financing from these sources.

## Oil and Gas Exploration and Development

We expect to spud approximately 40 gross and 13 net wells with capital expenditures of approximately $45.7 million in our 2011 oil and gas drilling program. We have allocated an estimated $33.2 million to be spent in the Williston Basin of North Dakota in the Rough Rider and Yellowstone/SEHR programs with Brigham Exploration and Zavanna LLC, respectively. The remaining $12.5 million in capital expenditure is budgeted to be spent on exploration initiatives in the San Joaquin Basin of California, in Texas and Louisiana (primarily onshore Gulf Coast), and our Colorado drilling program which we will operate. Amounts budgeted for each regional drilling program is contingent upon timing, well costs and success. If our non-Bakken drilling initiatives in California and Colorado are not initially successful, funds allocated for those drilling programs will be allocated to other drilling initiatives in due course. The actual number of gross and net wells could vary in each of these cases. We have also budgeted $1,000,000 for the acquisition of oil and gas leases during 2011.

## Mt. Emmons Molybdenum Project

Under the terms of our agreement with TCM, we are responsible for all costs associated with operating the water treatment plant at the Mt. Emmons project. Annual operating costs during 2011 are projected to be approximately $1.8 million. Additionally, we have budgeted $750,000 for capital improvements in the plant which are expected to improve its efficiency.

In 2009, U.S. Energy and TCM purchased a 160 acre parcel of property near the Mt. Emmons project. Under the terms of the purchase agreement the Company is obligated to make annual payments to the prior owner in the amount of $200,000 beginning in January 2010 through January 2014 with 6% interest per annum on the unpaid balance. In addition to the retirement of the debt, we will be responsible for one half of the holding and operating costs of the acreage which are expected to be minimal.



Through December 31, 2010, TCM has expended $12.2 million on the property which includes $3.5 million in option payments to U.S. Energy. TCM is contractually obligated to spend $2.5 million during 2011, including the $1.0 million option payment to the Company which was pre-paid by TCM in December 2010. As per the terms of the agreement with TCM, we will not be required to fund any of the proposed work to be performed on the property during 2011 unless TCM terminates the agreement. TCM, as project manager, is preparing and evaluating engineering and environmental trade off studies. A Plan of Operations was submitted in 2010 for baseline data collection to the U.S. Forest Service (“USFS”). All the costs related to these studies and activities under the Plan of Operations will be paid for by TCM as per the agreement.

## Real Estate

Cash operating expenses at Remington Village are projected to be $1.0 million for 2011. We do not anticipate any major capital expenditures on the property. Remington Village is pledged as collateral for a $10.0 million line of credit with a commercial bank. At the date of this report there was no debt against Remington Village. We plan to obtain long term financing of the property during 2011 and ultimately sell the property to provide capital for the exploration and development or acquisition of oil and gas properties and or production.

## Geothermal and Alternative Energy Projects

At December 31, 2010, our net investment was $2.8 million which reflected a 22.8% minority ownership position in a geothermal partnership. We are not obligated to fund cash calls and will suffer further dilution if we do not fund.

## Insurance

We have liability insurance coverage in amounts deemed sufficient and in line with industry standards for the location, stage, and type of operations in oil and gas, mineral property development (the Mt. Emmons molybdenum project), and the Remington Village housing complex. Payment of substantial liabilities in excess of coverage could require diversion of internal capital away from regular business, which could result in diminished operations. We have property loss insurance on all major assets equal to the approximate replacement value of the assets. We have also purchased additional liability insurance for our oil and gas drilling programs.

## Reclamation Costs

We have reclamation obligations of $159,000 related to our oil and gas wells and $144,000 related to the Mt. Emmons molybdenum property. No reclamation is expected to be performed on the existing wells at December 31, 2010 during the year ended December 31, 2011. Reclamation will only begin after the wells no longer produce oil or gas in economic quantities. The earliest projected reclamation will begin in 2013 in the Gulf Coast unless wells in other areas are abandoned due to operational challenges. As the Mt. Emmons project is developed, the reclamation liability is expected to increase. It is not anticipated that this reclamation work will occur in the near term. Our objective, upon closure of the proposed mine at the Mt. Emmons project, is to eliminate long-term liabilities associated with the property.



## Results of Operations

Year Ended December 31, 2010 Compared with the Year ended December 31, 2009

We recorded a net loss after taxes of $772,000 or $0.03 per share basic and diluted, for the year ended December 31, 2010 as compared to a net loss after taxes of $8.2 million, or $0.38 per share, during the year ended December 31, 2009.

We recognized $27.2 million in revenues during the year ended December 31, 2010 as compared to revenues of $10.3 million during same period in the prior year. Tabular representation of the increases in revenues as well as the income (loss) from operations for the years ended December 31, 2010 and 2009 is as follows:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td colspan="2">For the years ending</td></tr><tr><td></td><td>December 31, 2010</td><td>December 31, 2009</td></tr><tr><td>Revenues</td><td>$ 29,057</td><td>$ 10,349</td></tr><tr><td>Realized loss from risk management activities</td><td>(156)</td><td>--</td></tr><tr><td>Unrealized (loss) from risk management activities</td><td>(1,725)</td><td>--</td></tr><tr><td></td><td>27,176</td><td>10,349</td></tr><tr><td>Operating expenses</td><td>17,738</td><td>13,086</td></tr><tr><td>Depreciation, depletion and amortization</td><td>12,130</td><td>5,066</td></tr><tr><td>Impairment</td><td>1,540</td><td>1,468</td></tr><tr><td></td><td>31,408</td><td>19,620</td></tr><tr><td>Operating (loss)</td><td>$ (4,232)</td><td>$ (9,271)</td></tr></table>

The significant increase in revenues of $16.8 million for the year ended December 31, 2010 as compared to those revenues recorded during the prior year is primarily a result of production of oil and gas in the Williston Basin. The increased expenses are a result of the increases in lease operating, work over, and depletion costs recognized during the year ended December 31, 2010. During the year ended December 31, 2009, we recorded an impairment of $1.5 million on the oil and gas operations due to depressed gas prices and dry hole costs which had been capitalized. As a result of increased oil and gas prices during 2010 and additional reserves to amortize the full cost pool, no impairment of our oil and gas assets was required during the year ended December 31, 2010.

Oil and gas production from the Williston Basin has increased revenue trends and as additional wells are drilled and completed in 2011 it is believed that this trend will continue. We have experienced a 100% completion rate on wells drilled in the Williston Basin with good initial production results. Future wells may not perform as well. The multi stage frac completion techniques used by the Company and Brigham are relatively new which makes long term production projections uncertain. We rely on professional third party reserve engineers to calculate our reserves.



Oil and gas operations produced net operating income of $8.0 million during the year ended December 31, 2010 as compared to net operating income of $1.5 million from oil and gas operations during the year ended December 31, 2009. The following table details the results of operations from the oil and gas sector for the years ended December 31, 2010 and 2009:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td colspan="2">For the years ending</td></tr><tr><td>Oil and gas revenues</td><td>December 31, 2010</td><td>December 31, 2009</td></tr><tr><td>Realized loss from risk management activities</td><td>$ 26,548</td><td>$ 7,581</td></tr><tr><td>Unrealized (loss) from risk management activities</td><td>(156)</td><td>--</td></tr><tr><td></td><td>(1,725)</td><td>--</td></tr><tr><td></td><td>24,667</td><td>7,581</td></tr><tr><td>Operating expenses</td><td>6,073</td><td>1,085</td></tr><tr><td>Depreciation, depletion and amortization</td><td>10,610</td><td>3,571</td></tr><tr><td>Impairment</td><td>--</td><td>1,468</td></tr><tr><td></td><td>16,683</td><td>6,124</td></tr><tr><td>Operating income</td><td>$ 7,984</td><td>$ 1,457</td></tr></table>



The following table summarizes production volumes, average sales prices and operating revenues for the years ended December 31, 2010 and 2009:

<table><tr><td rowspan="3"></td><td colspan="3">Year Ended</td></tr><tr><td colspan="2">December 31,</td><td rowspan="2">Increase (Decrease)</td></tr><tr><td>2010</td><td>2009</td></tr><tr><td>Production volumes</td><td></td><td></td><td></td></tr><tr><td>Oil (Bbls)</td><td>303,433</td><td>80,461</td><td>222,972</td></tr><tr><td>Natural gas (Mcf)</td><td>757,905</td><td>467,691</td><td>290,214</td></tr><tr><td>Natural gas liquids (Bbls)</td><td>19,104</td><td>5,987</td><td>13,117</td></tr><tr><td>Average sales prices</td><td></td><td></td><td></td></tr><tr><td>Oil (per Bbl)</td><td>$ 72.11</td><td>$ 66.22</td><td>$ 5.89</td></tr><tr><td>Natural gas (per Mcf)</td><td>4.96</td><td>4.30</td><td>0.66</td></tr><tr><td>Natural gas liquids (per Bbl)</td><td>47.53</td><td>40.25</td><td>7.28</td></tr><tr><td>Operating revenues (in thousands)</td><td></td><td></td><td></td></tr><tr><td>Oil</td><td>$ 21,881</td><td>$ 5,328</td><td>$ 16,553</td></tr><tr><td>Natural gas</td><td>3,759</td><td>2,012</td><td>1,747</td></tr><tr><td>Natural gas liquids</td><td>908</td><td>241</td><td>667</td></tr><tr><td>Total operating revenue</td><td>26,548</td><td>7,581</td><td>18,967</td></tr><tr><td>Lease operating expense</td><td>(3,056)</td><td>(394)</td><td>(2,662)</td></tr><tr><td>Production taxes</td><td>(3,017)</td><td>(691)</td><td>(2,326)</td></tr><tr><td>Risk management activities</td><td>(1,881)</td><td>-</td><td>(1,881)</td></tr><tr><td>Impairment</td><td>-</td><td>(1,468)</td><td>1,468</td></tr><tr><td>Income before depreciation, depletion and amortization</td><td>18,594</td><td>5,028</td><td>13,566</td></tr><tr><td>Depreciation, depletion and amortization</td><td>(10,610)</td><td>(3,571)</td><td>(7,039)</td></tr><tr><td>Income</td><td>$ 7,984</td><td>$ 1,457</td><td>$ 6,527</td></tr></table>

Portions of our natural gas production are sent to gas processing plants to profitably extract from the gas various natural gas liquids (“NGL”) that are sold separately from the remaining natural gas. We sell some of our processed gas before processing and some after processing but in both cases receive revenues based on a share of post-processing proceeds from plant sales of the extracted NGL and the remaining natural gas. In the table above, our share of processing costs are classified in lease operating expenses.



Our other revenue producing sector is commercial real estate. A breakdown of the income from operations from commercial real estate is contained in the following table:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">For the years ending</td></tr><tr><td></td><td>December 31, 2010</td><td>December 31, 2009</td><td></td></tr><tr><td>Real estate revenues</td><td>$ 2,509</td><td>$ 2,768</td><td></td></tr><tr><td>Operating expenses</td><td>1,271</td><td>1,059</td><td></td></tr><tr><td>Interest expense</td><td>--</td><td>19</td><td></td></tr><tr><td>Depreciation, depletion and amortization</td><td>1,063</td><td>1,045</td><td></td></tr><tr><td>Impairment</td><td>1,540</td><td>--</td><td></td></tr><tr><td></td><td>3,874</td><td>2,123</td><td></td></tr><tr><td>Operating (loss) income</td><td>$ (1,365)</td><td>$ 645</td><td></td></tr></table>

The decline in revenues for the year ended December 31, 2010 as compared to the same period of the prior year is as a result of lower average rental rates, discounts provided and occupancy rates during the year ended December 31, 2010. Occupancy rates were approximately 80% at December 31, 2009 and 89% at December 31, 2010. Operating expenses increased as a result of the multifamily housing project reaching maturity which added additional expenses to the grounds maintenance and ongoing maintenance of apartment units when property damage occurs or tenants move out. The property was appraised at December 31, 2010 and reflected a value of $21.0 million resulting in a $1.5 million impairment.

Mt. Emmons Molybdenum Project - Pursuant to the 2008 Exploration, Development and Mine Operating Agreement TCM, we are required to pay all costs associated with the water treatment plant at the Mt. Emmons project and thereby recorded $1.8 million in costs and expenses for that facility and $85,000 in holding costs of the Mt. Emmons project during the year ended December 31, 2010. During the year ended December 31, 2009, we expended $1.6 million in operating costs related to the water treatment plant and $323,000 in holding costs for the Mt. Emmons project.

General Administrative - General and administrative expenses decreased by $460,000 during the year ended December 31, 2010 as compared to general and administrative expenses for the year ended December 31, 2009.

Other income and expenses - As a result of the sale of two of Standard Steam Trust’s geothermal properties, we recorded an equity gain of $1.0 million from our investment in SST during the year ended December 31, 2010. We recorded an equity loss of $1.4 million for the year ended December 31, 2009. Equity losses from the investment in SST are expected to continue until such time as additional SST properties are sold, equity losses reduce the investment to zero or we sell the investment.

We recorded a gain on sale of marketable securities of $438,000 during the year ended December 31, 2010. The gain was related to the sale of shares of Sutter Gold Mining, Inc. and Kobex Resources, Inc. No similar gains were recorded in the prior year.

We recorded a gain on sale of assets of $115,000 during the year ended December 31, 2010. The gain was primarily related to the sale of an office building that we previously held as rental property. We recorded a loss on sale of assets of $43,000 during the year ended December 31, 2009.



Interest income decreased from $314,000 during the year ended December 31, 2009 to $112,000 during the year ended December 31, 2010. The decrease is a result of lower amounts of cash invested in interest bearing instruments and lower interest received on those investments.

Interest expense of $70,000 during the year ended December 31, 2010 was related primarily to the financing of a property purchased with TCM near the Mt. Emmons project. During the year ended December 31, 2009 we recorded interest expense of $98,000. The increase over what we recorded in the year ended December 31, 2010 was primarily due to the construction loan for Remington Village which was fully repaid in January 2009.

We therefore recorded a net loss after taxes of $772,000, or $0.03 per share basic and diluted, during the year ended December 31, 2010 as compared to a net loss after taxes of $8.2 million, or $0.38 per share basic and diluted, during the year ended December 31, 2009.

Year Ended December 31, 2009 Compared with the Year ended December 31, 2008

The Company recorded a net loss after taxes of $8.2 million, or $0.38 per share, for the year ended December 31, 2009 as compared to a net loss after taxes of $1.4 million, or $0.06 per share, during the year ended December 31, 2008. The net loss for the year ended December 31, 2008 included a gain of $4.9 million, or $0.21 per share, from discontinued operations related to the sale of a portion of the Company’s investment in Sutter Mining Company, Inc.

Depreciation, amortization and depletion expense increased $3.6 million during the year ended December 31, 2009 over the prior year due primarily to the increased depletion on wells drilled in the Williston Basin and the a full years depreciation of the Company’s multifamily housing complex. Non-cash compensation decreased $601,000 during the year ended December 31, 2009 from those recorded during the same period of 2008 as a result of lower expenses related to the amortization of stock options and lower market prices for the Company’s common stock related to equity compensation.

The Company recognized $9.6 million in revenues during the year ended December 31, 2009 as compared to revenues of $2.3 million during the prior year. Fourth quarter revenues were on average four times greater than the first three quarters of 2009. The increase was as a result of the Company’s drilling activity in the Williston Basin wells with Brigham. The fourth quarter revenues were reflective of only six wells drilled and completed during the fourth quarter of 2009 with production occurring primarily during the months of November and December. Revenues during the fourth quarter increased by a factor of four times while expenses roughly doubled of the previous quarters. The increased expenses were a result of the increased depletion recognized on the increased oil production during the quarter. Also included in the increased operating expenses was a $1.4 million bonus accrual pursuant to the Company’s adopted performance compensation plan. The bonus was not paid until the first quarter of 2010. During the year ended December 31, 2009, the Company recorded an impairment of $1.5 million on its oil and gas operations due to depressed oil and gas prices during the first and third quarters of 2009 and only one producing well to spread the entire exploration cost over. As a result of increased oil and gas prices during the fourth quarter of 2009 and additional production to amortize the full cost pool over, no additional impairment was required during 2009.

The oil production from the Williston Basin not only increased revenue trends but also cut the operating loss by half on a quarterly basis. The Company has experienced a very high rate of completion in the Williston Basin with good initial production flows. Future wells may not perform as well. The multi stage frac completion techniques used by the Company and Brigham are relatively new which makes long term production projections uncertain. The Company relies on professional third party reserve engineers to calculate decline curves.



Oil and gas operations produced a net operating gain during the year ended December 31, 2009 as compared to a loss from oil and gas operations during the year ended December 31, 2008. Production from the Williston Basin during the fourth quarter of 2009 increased revenues from oil and gas operations by 7.7 times over the prior three quarters of 2009 and 12 times over the revenues from oil and gas production during the twelve months ended December 31, 2008. The operating gain from oil and gas operations during the fourth quarter of 2009 was $2.9 million in comparison to an annual gain from oil and gas operations of $1.5 million. During the first three quarters of 2009, the Company recorded an impairment of $1.5 million.

The Company’s other revenue producing sector is commercial real estate. Although revenues increased $1.1 million during the year ended December 31, 2009 over the prior year, the Company experienced a decline in quarterly revenues throughout the year. The decline was as a result of lower occupancy rates at Remington Village. Expenses increased during the fourth quarter as a result of a bad debt write off of $64,000. As a result of a full year of operations, revenues increased as well as the operating gain from $51,000 in 2008 to $645,000 during the year ended December 31, 2009. Commercial real estate generated positive cash flow of $1.7 million during the year ended December 31, 2009 and $1.1 million during the year ended December 31, 2008. Interest expense was reduced from $417,000 during 2008 to $19,000 during 2009 as a result of the repayment of the construction loan utilized to build the property. The loan was retired in January of 2009 and no debt existed against the property as of December 31, 2009.

## Mt. Emmons Molybdenum Property

When the Company entered into its agreement with TCM, it agreed to pay all costs associated with the water treatment plant at the Mt. Emmons project and thereby recorded $1.6 million in costs and expenses for that facility and $323,000 in holding costs of the Mt. Emmons project during the year ended December 31, 2009. During the year ended December 31, 2008, the Company expended $1.5 million in operating costs related to the water treatment plant and $834,000 in holding costs related to the Mt. Emmons project.

## General Administrative

General and administrative expenses increased by $1.5 million during the year ended December 31, 2009 over those experienced at during the year ended December 31, 2008. The increase was as a result of the accrual of a yearend bonus to all employees of the Company as a result of meeting corporate and personal goals, meeting annual budget goals, increased share price and cash flow from operations. Under a Performance Compensation Plan (“PCP”) adopted by the board of directors, employees can earn from 33% to 100% of their base compensation as bonuses if the terms of the PCP are met. No employees earned 100% of their base compensation or the allowable amount under the PCP during 2009 as certain financial measurements were not met. The PCP was proposed by the Company’s Compensation Committee and adopted by the full Board in April 2009. Details of the PCP are disclosed in their entirety in the Company’s annual proxy statement for the annual meeting held in June of 2009. The bonus for 2009 performance was paid during the first quarter of 2010.

Other income and expenses – The Company recorded an equity loss of $1.4 million from its investment in SST during the year ended December 31, 2009 with no similar losses reported during the prior year. Equity losses from the Company’s investment in SST are expected to continue until such time as SST properties are sold, equity losses reduce the Company’s investment to zero or the Company sells its investment. Interest income decreased from $1.4 million during the year ended December 31, 2008 to $314,000 during the year ended December 31, 2009. The decrease was a result of lower amounts of cash



invested in interest bearing instruments and lower interest paid on those investments. Interest expense during the year ended December 31, 2009 was related primarily to the construction loan for Remington Village, $19,000, and the financing of a property purchased with TCM near the Mt. Emmons project, $60,000. Interest expense during 2008 related primarily to the construction loan for Remington Village which was fully repaid in January 2009.

During the year ended December 31, 2008, the Company recorded a net gain on the sale of its controlling interest in Sutter Gold Mining, Inc of $4.9 million. No similar activities occurred during the year ended December 31, 2009.

The Company therefore recorded a net loss after taxes of $8.2 million, or $0.38 per share, during the year ended December 31, 2009 as compared to a net loss after taxes of $1.4 million, or $0.06 per share, during year ended December 31, 2008.

## Critical Accounting Policies

Oil and Gas Properties - We follow the full cost method in accounting for our oil and gas properties. Under the full cost method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities, but does not include any costs related to production, general corporate overhead or similar activities. Proceeds received from property disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and gas reserves. Excluded from amounts subject to depletion are costs associated with unproved properties.

Under the full cost method, net capitalized costs are limited to the lower of unamortized cost reduced by the related net deferred tax liability and asset retirement obligations or the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on unsecalated average prices per barrel of oil and per MMbtu of natural gas at the first of each month in the 12-month period prior to the end of the reporting period and costs, adjusted for contract provisions, financial derivatives that hedge the Company’s oil and gas revenue and asset retirement obligations, (ii) the cost of properties not being amortized, (iii) the lower of cost or market value of unproved properties included in the cost being amortized less (iv) income tax effects related to tax assets directly attributable to natural gas and crude oil properties. If the net book value reduced by the related net deferred income tax liability and asset retirement obligations exceeds the cost center ceiling limitation, a non-cash impairment charge is required in the period in which the impairment occurs.

Full cost pool capitalized costs are amortized over the life of production of proven properties. Capitalized costs at December 31, 2010 and December 31, 2009 which were not included in the amortized cost pool were $21.6 million and $5.4 million, respectively. These costs consist of wells in progress, seismic costs that are being analyzed for potential drilling locations as well as land costs and are related to unproved properties. No capitalized costs related to unproved properties are included in the amortization base at December 31, 2010 and December 31, 2009. It is anticipated that these costs will be added to the full cost amortization pool in the next two years as properties are proved, drilled or abandoned.



Given the volatility of oil and gas prices, it is probable that our estimate of discounted future net cash flows from proved oil and gas reserves will change. If oil or natural gas prices decline substantially, even for only a short period of time, or if we have downward revisions to our estimated proved reserves, it is possible that write-downs of oil and gas properties could occur in the future.

Ceiling Test - We perform a quarterly ceiling test for each of our oil and gas cost centers, which in 2010 and 2009, there was only one. The ceiling test incorporates assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In arriving at the ceiling test for the year ended December 31, 2010, the Company used $79.43 per barrel for oil and $4.38 per MMbtu for natural gas to compute the future cash flows of the Company’s producing property. The discount factor used was 10%.

At December 31, 2010, the ceiling was in excess of the net capitalized costs as adjusted for related deferred income taxes and no impairment was required. Furthermore, as of year-end there were no unproved properties that were considered to be impaired and reclassified to properties being amortized. Management will continue to review its unproved properties based on market conditions and other changes and if appropriate unproved property amounts may be reclassified to the amortized base of properties within the full cost pool.

Derivative Instruments - We use derivative instruments, typically fixed-rate swaps and costless collars to manage price risk underlying its oil and gas production. We may also use puts, calls and basis swaps in the future. All derivative instruments are recorded in the consolidated balance sheets at fair value. We offset fair value amounts recognized for derivative instruments executed with the same counterparty. Although we do not designate any of its derivative instruments as a cash flow hedge, such derivative instruments provide an economic hedge of our exposure to commodity price risk associated with forecasted future oil and gas production. These contracts are accounted for using the mark-to-market accounting method and accordingly, we recognize all unrealized and realized gains and losses related to these contracts currently in earnings and are classified as gain (loss) on derivative instruments, net in our consolidated statements of operations.

Our Board of Directors sets all risk management policies and reviews the status and results of derivative activities, including volumes, types of instruments and counterparties on a quarterly basis. These policies require that derivative instruments be executed only by the President or Chief Financial Officer after consultation and concurrence by the President, Chief Financial Officer and Chairman of the Board. The master contracts with approved counterparties identify the President and Chief Financial Officer as the only Company representatives authorized to execute trades. See Note E, Commodity Price Risk Management, for further discussion.

Proved Reserves - Our estimates of proved reserves are based on quantities of oil and gas reserves which current engineering data indicates are recoverable from known reservoirs under existing economic and operating conditions. Estimates of proved reserves are key elements in determining our depletion expense and our full cost ceiling limitation. Estimates of proved reserves are inherently imprecise because of uncertainties in projecting rates of production and timing of developmental expenditures, interpretations of geological, geophysical, engineering and production data and the quality and quantity of available data. Changing economic conditions also may affect our estimates of proved reserves due to changes in developmental costs and changes in commodity prices that may impact reservoir economics. We utilize independent reserve engineers to estimate our proved reserves annually.

On December 29, 2008, the SEC issued a revision to Staff Accounting Bulletin 113 (“SAB 113”) which established guidelines related to modernizing accounting and disclosure requirements for oil and natural gas companies. The revised disclosure requirements include provisions that permit the use of new



technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes. The revised rules also allow companies the option to disclose probable and possible reserves in addition to the existing requirement to disclose proved reserves. The revised disclosure requirements also require companies to report the independence and qualifications of third party preparers of reserves and file reports when a third party is relied upon to prepare reserves estimates. A significant change to the rules involves the pricing at which reserves are measured. The revised rules utilize a 12-month average price using first of the month pricing during the 12-month period prior to the ending date of the balance sheet to report oil and natural gas reserves rather than year-end prices. In addition, the 12-month average is used to measure ceiling test impairments and to compute depreciation, depletion and amortization. The revised rules became effective for reserve estimation at December 31, 2009 with first reporting for calendar year companies in their 2009 annual reports.

Mineral Properties - We capitalize all costs incidental to the acquisition of mineral properties. Mineral exploration costs are expensed as incurred. When exploration work indicates that a mineral property can be economically developed as a result of establishing proved and probable reserves, costs for the development of the mineral property as well as capital purchases and capital construction are capitalized and amortized using units of production over the estimated recoverable proved and probable reserves. Costs and expenses related to general corporate overhead are expensed as incurred. All capitalized costs are charged to operations if we subsequently determine that the property is not economical due to permanent decreases in market prices of commodities, excessive production costs or depletion of the mineral resource.

Mineral properties at December 31, 2010 and December 31, 2009 reflect capitalized costs associated with the Mt. Emmons project near Crested Butte, Colorado. We entered into an agreement with TCM to develop this property. TCM may earn up to a 75% interest in the project for the investment of $400 million. We have received three of six anticipated $1.0 million annual payments. These payments were applied as a reduction of our investment in the Mt. Emmons project.

We review our investment in the Mt. Emmons project annually to determine if an impairment has occurred to the carrying value of the property. As a result of the market price for Molybdenum Oxide increasing from $11.50 per pound at December 31, 2009 to $16.60 per pound at December 31, 2010 and the reduction of the book value of Mt. Emmons by $3.0 million as a result of TCM’s option payments, we have determined that no impairment is needed to the book value of the property.

Long Lived Assets - Real Estate - We evaluate our long-lived assets, which consist of commercial real estate, for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. Impairment calculations are based on market appraisals. If rental rates decrease or costs increase to levels that result in estimated future cash flows, on an undiscounted basis, that are less than the carrying amount of the related asset, an asset impairment is considered to exist. Changes in significant assumptions underlying future cash flow estimates may have a material effect on our financial position and results of operations. The property was appraised at December 31, 2010. The appraisal reflected a value of $21.0 million which resulted in a $1.5 million impairment at December 31, 2010. At December 31, 2010, management determined that an impairment in the amount of $1.5 million existed on the long-lived asset as the December 31, 2010 appraised value was less than the net book value of the asset.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the USA requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of



revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include oil and gas reserves used for depletion and impairment considerations and the cost of future asset retirement obligations. Due to inherent uncertainties, including the future prices of oil and gas, these estimates could change in the near term and such changes could be material.

Asset Retirement Obligations - We account for asset retirement obligations under ASC 410-20. We record the fair value of the reclamation liability on inactive mining properties as of the date that the liability is incurred. We review the liability each quarter and determine if a change in estimate is required as well as accrete the liability on a quarterly basis for the future liability. Final determinations are made during the fourth quarter of each year. We deduct any actual funds expended for reclamation during the quarter in which it occurs.

Revenue Recognition - We record oil and natural gas revenue under the sales method of accounting. Under the sales method, we recognize revenues based on the amount of oil or natural gas sold to purchasers, which may differ from the amounts to which we are entitled based on its interest in the properties. Gas balancing obligations as of December 31, 2010 were not significant. Revenues from real estate operations are reported on a gross revenue basis and are recorded at the time the service is provided.

Stock Based Compensation - We measure the cost of employee services received in exchange for all equity awards granted including stock options based on the fair market value of the award as of the grant date.

We recognize the cost of the equity awards over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. As share-based compensation expense is recognized based on awards ultimately expected to vest, the expense has been reduced for estimated forfeitures based on historical forfeiture rates.

Income Taxes - We recognize deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carry forwards.

We recognize deferred tax assets for the expected future effects of all deductible temporary differences, loss carry forwards and tax credit carry forwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized. Management believes it is more likely than not that such tax benefits will be realized and a valuation allowance has not been provided.

## Future Operations

We intend to acquire new oil and gas properties and pursue new business opportunities. Long term, we intend to be prepared to pay our share of the holding and development costs associated with the Mt. Emmons project.

## Effects of Changes in Prices

Natural resource operations are significantly affected by changes in commodity prices. As prices for a particular mineral increase, values for that mineral typically also increase, making acquisitions of such properties more costly and sales potentially more valuable. Conversely, a price decline could enhance acquisitions of properties containing those natural resources, but could make sales of such properties more difficult. Operational impacts of changes in mineral commodity prices are common in the natural



resource business. Historical and current prices for the Company’s two main natural resource participation interests follow:

Oil and Gas - The ten year Cushing, OK WTI spot price for oil reached a high of $133.88 per barrel during June 2008 and a ten year low of $19.39 per barrel during December of 2001. As of December 31, 2010 the Cushing, OK WTI spot price for oil had increased to $89.15 per barrel.

The ten year U.S. Natural Gas City Gate Price reached a high of $12.48 per mcf in July of 2008 and the ten year low was $3.37 per mcf in October 2001. The price per mcf at December 31, 2010 was $5.74.

Higher oil and gas prices should positively impact our revenues going forward while lower oil and gas prices will have a negative impact not only on revenues, cash flows and profitability but also may impact ultimate reserve calculations for our wells. There is no assurance that our projected 2011 investments in oil and gas properties will be profitable.

Molybdenum - The ten year high for dealer molybdenum oxide was $38 per pound in June of 2005 declined to a ten year low of $8.03 per pound in April of 2009. The mean price of molybdenum oxide at December 31, 2010 and December 31, 2009 was $16.60 per pound and $11.50 per pound, respectively. The price of molybdenum will have a direct impact on the development of Mt. Emmons project.

## Contractual Obligations

We had three divisions of contractual obligations at December 31, 2010: Debt to third parties of $600,000 with interest at 6% per annum, executive retirement of $1.0 million and asset retirement obligations of $303,000. The debt will be paid over a period of four years in equal installments of $200,000 with interest with the next payment due on January 2, 2012. The executive retirement liability will be paid out over varying periods starting after the actual projected retirement dates of the covered executives. The asset retirement obligations will be retired during the next 34 years. The following table shows the scheduled debt payment, projected executive retirement benefits and asset retirement obligations:

(In thousands)

<table><tr><td rowspan="2"></td><td rowspan="2">Total</td><td colspan="5">Payments due by period</td></tr><tr><td>Less than one Year</td><td>One to Three Years</td><td>Three to Five Years</td><td>More than Five Years</td><td></td></tr><tr><td>Long-term debt obligations</td><td>$ 600</td><td>$ 200</td><td>$ 400</td><td>$ --</td><td>$ --</td><td></td></tr><tr><td>Executive retirement</td><td>1,039</td><td>191</td><td>327</td><td>163</td><td>358</td><td></td></tr><tr><td>Asset retirement obligation</td><td>303</td><td>--</td><td>69</td><td>14</td><td>220</td><td></td></tr><tr><td>Totals</td><td>$ 1,942</td><td>$ 391</td><td>$ 796</td><td>$ 177</td><td>$ 578</td><td></td></tr></table>



## Item 7A – Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for oil and spot prices applicable to natural gas. The effects of such pricing volatility have been discussed above, and such volatility is expected to continue. A 10% fluctuation in the price received for oil and natural gas production would have an approximate $2.7 million impact on our 2010 annual revenues.

To mitigate some of our commodity risk, we use derivative instruments, typically fixed-rate swaps and costless collars to manage price risk underlying its oil and gas production. USE may also use puts, calls and basis swaps in the future. We do not hold or issue derivative instruments for trading purposes. The objective of utilizing the economic hedges is to reduce the effect of price changes on a portion of USE’s future oil production, achieve more predictable cash flows in an environment of volatile oil and gas prices and to manage our exposure to commodity price risk. The use of these derivative instruments limits the downside risk of adverse price movements. However, there is a risk that such use may limit our ability to benefit from favorable price movements. Energy One may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of the its existing positions.

Through our wholly-owned affiliate Energy One, we have entered into three commodity derivative contracts (“economic hedges”) with BNP Paribas, a costless collar and two fixed price swaps, as described below. The three derivative contracts are priced using West Texas Intermediate (“WTI”) quoted prices. U.S. Energy Corp. is a guarantor of Energy One under the economic hedges.

Energy One's commodity derivative contracts as of December 31, 2010 are summarized below:

<table><tr><td>Settlement Period</td><td>Counterparty</td><td>Basis</td><td>Quantity (Bbl/d)</td><td>Strike Price</td></tr><tr><td>Crude Oil Costless Collars</td><td></td><td></td><td></td><td></td></tr><tr><td>10/01/10 - 09/30/11</td><td>BNP Paribas</td><td>WTI</td><td>200</td><td>Floor: $ 75.00</td></tr><tr><td></td><td></td><td></td><td></td><td>Ceiling: $ 83.25</td></tr><tr><td>Crude Oil Swaps</td><td></td><td></td><td></td><td></td></tr><tr><td>10/01/10 - 09/30/11</td><td>BNP Paribas</td><td>WTI</td><td>200</td><td>Fixed: $ 79.05</td></tr><tr><td>01/01/11 - 12/31/11</td><td>BNP Paribas</td><td>WTI</td><td>200</td><td>Fixed: $ 89.60</td></tr></table>



The following table details the fair value of the derivatives recorded in the applicable condensed consolidated balance sheet, by category:

<table><tr><td>Underlying Commodity</td><td>Location on Balance Sheet</td><td>Fair Value at December 31, 2010</td></tr><tr><td>Crude oil derivate contract</td><td>Current Liability</td><td>$ 632,000</td></tr><tr><td>Crude oil derivate contract</td><td>Current Liability</td><td>789,000</td></tr><tr><td>Crude oil derivate contract</td><td>Current Liability</td><td>304,000</td></tr><tr><td></td><td></td><td>$ 1,725,000</td></tr></table>

These contracts are accounted for using the mark-to-market accounting method and accordingly, USE recognizes all unrealized and realized gains and losses related to these contracts currently in earnings and are classified as gain (loss) on derivative instruments, net in our consolidated statements of operations. The net loss realized by us related to these instruments was $156,000, $0 and $0 for the years ended December 31, 2010, 2009 and 2008, respectively.

## Item 8 – Financial Statements

Financial statements meeting the requirements of Regulation S-X are included below.

<table><tr><td></td><td>Page</td></tr><tr><td>Report of Independent Registered Public Accounting Firm</td><td>75</td></tr><tr><td>Financial Statements</td><td></td></tr><tr><td>Consolidated Balance Sheets as of December 31, 2010 and 2009</td><td>76</td></tr><tr><td>Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008</td><td>78</td></tr><tr><td>Statement of Stockholders&#x27; Equity</td><td>80</td></tr><tr><td>Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008</td><td>83</td></tr><tr><td>Notes to Consolidated Financial Statements</td><td>85</td></tr></table>



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

U.S. Energy Corp.

We have audited the accompanying consolidated balance sheets of U.S. Energy Corp. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), U.S. Energy Corp.'s and subsidiaries' internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2011 expressed an unqualified opinion on the effectiveness of U.S. Energy Corp.'s internal control over financial reporting.

HEIN & ASSOCIATES LLP

Denver, Colorado

March 14, 2011



## U.S. ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)

<table><tr><td rowspan="2"></td><td colspan="2">December 31,</td><td colspan="2">December 31,</td></tr><tr><td>2010</td><td></td><td>2009</td><td></td></tr><tr><td>CURRENT ASSETS:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 6,010</td><td></td><td>$ 33,403</td><td></td></tr><tr><td>Marketable securities</td><td></td><td></td><td></td><td></td></tr><tr><td>Held to maturity - treasuries</td><td>17,843</td><td></td><td>22,059</td><td></td></tr><tr><td>Available for sale securities</td><td>1,364</td><td></td><td>1,178</td><td></td></tr><tr><td>Accounts receivable</td><td></td><td></td><td></td><td></td></tr><tr><td>Trade</td><td>3,932</td><td></td><td>3,882</td><td></td></tr><tr><td>Reimbursable project costs</td><td>114</td><td></td><td>2</td><td></td></tr><tr><td>Income taxes</td><td>104</td><td></td><td>353</td><td></td></tr><tr><td>Other current assets</td><td>457</td><td></td><td>1,223</td><td></td></tr><tr><td>Total current assets</td><td>29,824</td><td></td><td>62,100</td><td></td></tr><tr><td>INVESTMENT</td><td>2,834</td><td></td><td>2,958</td><td></td></tr><tr><td>PROPERTIES AND EQUIPMENT:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil &amp; gas properties under full cost method, net of $14,563 and $3,953 accumulated depletion, depreciation and amortization</td><td>70,374</td><td></td><td>26,002</td><td></td></tr><tr><td>Undeveloped mining claims</td><td>21,077</td><td></td><td>21,969</td><td></td></tr><tr><td>Commercial real estate, net</td><td>20,738</td><td></td><td>23,200</td><td></td></tr><tr><td>Property, plant and equipment, net</td><td>9,336</td><td></td><td>9,301</td><td></td></tr><tr><td>Net properties and equipment</td><td>121,525</td><td></td><td>80,472</td><td></td></tr><tr><td>OTHER ASSETS</td><td>1,833</td><td></td><td>1,193</td><td></td></tr><tr><td>Total assets</td><td>$ 156,016</td><td></td><td>$ 146,723</td><td></td></tr></table>



## U.S. ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except shares)

<table><tr><td></td><td>December 31, 2010</td><td>December 31, 2009</td></tr><tr><td>CURRENT LIABILITIES:</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 14,915</td><td>$ 6,500</td></tr><tr><td>Accrued compensation</td><td>1,669</td><td>1,748</td></tr><tr><td>Commodity risk management liability</td><td>1,725</td><td>--</td></tr><tr><td>Current portion of long-term debt</td><td>200</td><td>200</td></tr><tr><td>Other current liabilities</td><td>254</td><td>224</td></tr><tr><td>Total current liabilities</td><td>18,763</td><td>8,672</td></tr><tr><td>LONG-TERM DEBT, net of current portion</td><td>400</td><td>600</td></tr><tr><td>DEFERRED TAX LIABILITY</td><td>5,015</td><td>7,345</td></tr><tr><td>ASSET RETIREMENT OBLIGATIONS</td><td>303</td><td>211</td></tr><tr><td>OTHER ACCRUED LIABILITIES</td><td>847</td><td>762</td></tr><tr><td>SHAREHOLDERS&#x27; EQUITY:</td><td></td><td></td></tr><tr><td>Common stock, $0.01 par value; unlimited shares authorized; 27,068,610 and 26,418,713 shares issued, respectively</td><td>271</td><td>264</td></tr><tr><td>Additional paid-in capital</td><td>121,062</td><td>118,998</td></tr><tr><td>Accumulated surplus</td><td>8,713</td><td>9,485</td></tr><tr><td>Unrealized gain on marketable securities</td><td>642</td><td>386</td></tr><tr><td>Total shareholders&#x27; equity</td><td>130,688</td><td>129,133</td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$ 156,016</td><td>$ 146,723</td></tr></table>



## U.S. ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)

<table><tr><td rowspan="2"></td><td colspan="4">Years ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td><td></td></tr><tr><td>REVENUES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>$ 26,548</td><td>$ 7,581</td><td>$ 589</td><td></td></tr><tr><td>Realized (loss) on risk management activities</td><td>(156)</td><td>--</td><td>--</td><td></td></tr><tr><td>Unrealized (loss) on risk management activities</td><td>(1,725)</td><td>--</td><td>--</td><td></td></tr><tr><td>Real estate</td><td>2,509</td><td>2,768</td><td>1,633</td><td></td></tr><tr><td></td><td>27,176</td><td>10,349</td><td>2,222</td><td></td></tr><tr><td>OPERATING EXPENSES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>6,073</td><td>3,611</td><td>80</td><td></td></tr><tr><td>Oil and gas depreciation depletion and amortization</td><td>10,610</td><td>1,045</td><td>382</td><td></td></tr><tr><td>Impairment of oil and gas properties</td><td>--</td><td>1,468</td><td>--</td><td></td></tr><tr><td>Real estate</td><td>2,334</td><td>2,104</td><td>1,165</td><td></td></tr><tr><td>Impairment of real estate properties</td><td>1,540</td><td>--</td><td>--</td><td></td></tr><tr><td>Water treatment plant</td><td>1,793</td><td>1,636</td><td>1,462</td><td></td></tr><tr><td>Mineral holding costs</td><td>85</td><td>323</td><td>834</td><td></td></tr><tr><td>General and administrative</td><td>8,973</td><td>9,433</td><td>7,903</td><td></td></tr><tr><td></td><td>31,408</td><td>19,620</td><td>11,826</td><td></td></tr><tr><td>OPERATING (LOSS):</td><td>(4,232)</td><td>(9,271)</td><td>(9,604)</td><td></td></tr><tr><td>Other income and (expenses)</td><td></td><td></td><td></td><td></td></tr><tr><td>Gain/(loss) on sale of assets</td><td>115</td><td>(43)</td><td>(17)</td><td></td></tr><tr><td>Equity gain/(loss) in</td><td></td><td></td><td></td><td></td></tr><tr><td>unconsolidated investment</td><td>1,014</td><td>(1,374)</td><td>--</td><td></td></tr><tr><td>Gain on sale of marketable securities</td><td>438</td><td>--</td><td>--</td><td></td></tr><tr><td>Impairment of marketable securities</td><td>--</td><td>--</td><td>(1,023)</td><td></td></tr><tr><td>Miscellaneous income and (expenses)</td><td>113</td><td>15</td><td>83</td><td></td></tr><tr><td>Interest income</td><td>112</td><td>314</td><td>1,426</td><td></td></tr><tr><td>Interest expense</td><td>(70)</td><td>(98)</td><td>(486)</td><td></td></tr><tr><td></td><td>1,722</td><td>(1,186)</td><td>(17)</td><td></td></tr><tr><td>LOSS BEFORE INCOME TAX:</td><td>(2,510)</td><td>(10,457)</td><td>(9,621)</td><td></td></tr></table>



## U.S. ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)

<table><tr><td rowspan="2"></td><td colspan="3">Years ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Income taxes:</td><td></td><td></td><td></td></tr><tr><td>Current benefit from (provision for)</td><td>104</td><td>210</td><td>4,645</td></tr><tr><td>Deferred benefit from (provision for)</td><td>1,634</td><td>2,069</td><td>(1,319)</td></tr><tr><td></td><td>1,738</td><td>2,279</td><td>3,326</td></tr><tr><td>(LOSS) FROM CONTINUING OPERATIONS</td><td>(772)</td><td>(8,178)</td><td>(6,295)</td></tr><tr><td>DISCONTINUED OPERATIONS</td><td></td><td></td><td></td></tr><tr><td>Loss from discontinued operations</td><td>--</td><td>--</td><td>(501)</td></tr><tr><td>Gain on sale of discontinued operations (net of taxes)</td><td>--</td><td>--</td><td>5,408</td></tr><tr><td></td><td>--</td><td>--</td><td>4,907</td></tr><tr><td>NET (LOSS)</td><td>$ (772)</td><td>$ (8,178)</td><td>$ (1,388)</td></tr><tr><td>NET (LOSS) INCOME PER SHARE</td><td></td><td></td><td></td></tr><tr><td>Basic and diluted (loss)</td><td></td><td></td><td></td></tr><tr><td>from continuing operations</td><td>$ (0.03)</td><td>$ (0.38)</td><td>$ (0.27)</td></tr><tr><td>Basic and diluted income</td><td></td><td></td><td></td></tr><tr><td>from discontinued operations</td><td>--</td><td>--</td><td>0.21</td></tr><tr><td></td><td>$ (0.03)</td><td>$ (0.38)</td><td>$ (0.06)</td></tr><tr><td>Weighted average shares outstanding</td><td></td><td></td><td></td></tr><tr><td>Basic and diluted</td><td>26,763,995</td><td>21,604,959</td><td>23,274,978</td></tr></table>



U.S. ENERGY CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands except share data)

<table><tr><td></td><td colspan="2">Common Stock</td><td colspan="2">Additional Paid-In Capital</td><td>Retained Earnings</td><td colspan="2">Unrealized Gain (Loss) on Marketable Securities</td><td colspan="2">Unallocated ESOP Contribution</td><td colspan="2">Total Shareholders&#x27; Equity</td></tr><tr><td>Balance December 31, 2007</td><td>Shares</td><td>Amount</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net loss available to common shareholders</td><td>23,592,493</td><td>$ 236</td><td>$ 96,560</td><td>$ 19,051</td><td>$ (256)</td><td>$ (491)</td><td>$ (491)</td><td>$ 115,100</td><td></td><td></td><td></td></tr><tr><td>Recognized impairment on marketable securities</td><td>--</td><td>--</td><td>--</td><td>(1,388)</td><td>--</td><td>--</td><td>--</td><td>(1,388)</td><td></td><td></td><td></td></tr><tr><td>Unrealized tax effect on on the unrealized loss</td><td>--</td><td>--</td><td>--</td><td>--</td><td>256</td><td>--</td><td>--</td><td>256</td><td></td><td></td><td></td></tr><tr><td>Comprehensive (loss)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Funding of ESOP</td><td>126,878</td><td>1</td><td>207</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>(1,132)</td><td></td><td></td></tr><tr><td>Vesting of stock warrants to outside contractor</td><td>--</td><td>--</td><td>30</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>208</td><td></td><td></td></tr><tr><td>Issuance of common stock 2001 stock compensation plan</td><td>85,000</td><td>1</td><td>283</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>284</td><td></td><td></td></tr><tr><td>Vesting of stock options issued to employees</td><td>--</td><td>--</td><td>1,151</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>1,151</td><td></td><td></td></tr><tr><td>Vesting of stock options issued to outside directors</td><td>--</td><td>--</td><td>17</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>17</td><td></td><td></td></tr><tr><td>Cancellation of common stock from the ESOP</td><td>(155,811)</td><td>(2)</td><td>(489)</td><td>--</td><td>--</td><td>--</td><td>491</td><td>--</td><td></td><td></td><td></td></tr><tr><td>Issuance of common stock from stock warrants</td><td>446,698</td><td>5</td><td>1,523</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>1,528</td><td></td><td></td></tr><tr><td>Deferred tax on FAS 123R compensation</td><td>--</td><td>--</td><td>202</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>202</td><td></td><td></td></tr><tr><td>Common stock buy back program</td><td>(2,160,129)</td><td>(22)</td><td>(5,533)</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>(5,555)</td><td></td><td></td></tr><tr><td>Balance December 31, 2008</td><td>21,935,129</td><td>$ 219</td><td>$ 93,951</td><td>$ 17,663</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ 111,833</td><td></td><td></td><td></td></tr></table>

The accompanying notes are an integral part of these statements.



## U.S. ENERGY CORP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(continued)

(In thousands except share data)

<table><tr><td rowspan="2"></td><td colspan="2">Common Stock</td><td colspan="2">Additional Paid-In Capital</td><td rowspan="2">Retained Earnings</td><td rowspan="2">Unrealized Gain (Loss) on Marketable Securities</td><td rowspan="2">Total Shareholders&#x27; Equity</td></tr><tr><td>Shares</td><td>Amount</td><td></td><td></td></tr><tr><td>Balance December 31, 2008</td><td>21,935,129</td><td>$ 219</td><td>$ 93,951</td><td>$ 17,663</td><td>$ --</td><td>$ 111,833</td><td></td></tr><tr><td>Net loss available to common shareholders</td><td>--</td><td>--</td><td>--</td><td>(8,178)</td><td>--</td><td>(8,178)</td><td></td></tr><tr><td>Unrealized gain on marketable securities</td><td>--</td><td>--</td><td>--</td><td>--</td><td>602</td><td>602</td><td></td></tr><tr><td>Unrealized tax effect on on the unrealized gain</td><td>--</td><td>--</td><td>--</td><td>--</td><td>(216)</td><td>(216)</td><td></td></tr><tr><td>Comprehensive (loss)</td><td></td><td></td><td></td><td></td><td></td><td>(7,792)</td><td></td></tr><tr><td>Issuance of common stock</td><td>5,000,000</td><td>50</td><td>24,267</td><td>--</td><td>--</td><td>24,317</td><td></td></tr><tr><td>Funding of ESOP</td><td>36,583</td><td>--</td><td>217</td><td>--</td><td>--</td><td>217</td><td></td></tr><tr><td>Issuance of common stock</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2001 stock compensation plan</td><td>80,000</td><td>1</td><td>185</td><td>--</td><td>--</td><td>186</td><td></td></tr><tr><td>Issuance of common stock from stock warrants</td><td>71,088</td><td>1</td><td>232</td><td>--</td><td>--</td><td>233</td><td></td></tr><tr><td>Issuance of common stock from stock options</td><td>1,984</td><td>--</td><td>5</td><td>--</td><td>--</td><td>5</td><td></td></tr><tr><td>Vesting of stock options issued to employees</td><td>--</td><td>--</td><td>1,430</td><td>--</td><td>--</td><td>1,430</td><td></td></tr><tr><td>Vesting of stock warrants to outside contractor</td><td>--</td><td>--</td><td>9</td><td>--</td><td>--</td><td>9</td><td></td></tr><tr><td>Vesting of stock options issued to outside directors</td><td>--</td><td>--</td><td>56</td><td>--</td><td>--</td><td>56</td><td></td></tr><tr><td>Excess tax benefit on the exercise stock options and warrants</td><td>--</td><td>--</td><td>38</td><td>--</td><td>--</td><td>38</td><td></td></tr><tr><td>Common stock buy back program</td><td>(706,071)</td><td>(7)</td><td>(1,392)</td><td>--</td><td>--</td><td>(1,399)</td><td></td></tr><tr><td>Balance December 31, 2009</td><td>26,418,713</td><td>$ 264</td><td>$ 118,998</td><td>$ 9,485</td><td>$ 386</td><td>$ 129,133</td><td></td></tr></table>



## U.S. ENERGY CORP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS
(continued)
(In thousands except share data)

<table><tr><td rowspan="2"></td><td colspan="2">Common Stock</td><td rowspan="2">Additional Paid-In Capital</td><td rowspan="2">Retained Earnings</td><td rowspan="2">Unrealized Gain (Loss) on Marketable Securities</td><td rowspan="2">Total Shareholders&#x27; Equity</td></tr><tr><td>Shares</td><td>Amount</td></tr><tr><td>Balance December 31, 2009</td><td>26,418,713</td><td>$ 264</td><td>$ 118,998</td><td>$ 9,485</td><td>$ 386</td><td>$ 129,133</td></tr><tr><td>Net loss</td><td>--</td><td>--</td><td>--</td><td>(772)</td><td>--</td><td>(772)</td></tr><tr><td>Unrealized gain on marketable securities</td><td>--</td><td>--</td><td>--</td><td>--</td><td>400</td><td>400</td></tr><tr><td>Unrealized tax effect on on the unrealized gain</td><td>--</td><td>--</td><td>--</td><td>--</td><td>(144)</td><td>(144)</td></tr><tr><td>Comprehensive (loss)</td><td></td><td></td><td></td><td></td><td></td><td>(516)</td></tr><tr><td>Issuance of common stock</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td></tr><tr><td>Funding of ESOP</td><td>42,802</td><td>--</td><td>260</td><td>--</td><td>--</td><td>260</td></tr><tr><td>Issuance of common stock</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2001 stock compensation plan</td><td>80,000</td><td>1</td><td>429</td><td>--</td><td>--</td><td>430</td></tr><tr><td>Issuance of common stock from stock options - employees</td><td>275,728</td><td>3</td><td>(455)</td><td>--</td><td>--</td><td>(452)</td></tr><tr><td>Issuance of common stock from stock options and warrants - others</td><td>251,367</td><td>3</td><td>743</td><td>--</td><td>--</td><td>746</td></tr><tr><td>Vesting of stock options</td><td>--</td><td>--</td><td>1,021</td><td>--</td><td>--</td><td>1,021</td></tr><tr><td>Vesting of stock warrants</td><td>--</td><td>--</td><td>66</td><td>--</td><td>--</td><td>66</td></tr><tr><td>Balance December 31, 2010</td><td>27,068,610</td><td>$ 271</td><td>$ 121,062</td><td>$ 8,713</td><td>$ 642</td><td>$ 130,688</td></tr></table>



## U.S. ENERGY CORP.
STATEMENTS OF CASH FLOWS

<table><tr><td rowspan="3"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">For the years ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>CASH FLOWS FROM OPERATING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Net loss</td><td>$ (772)</td><td>$ (8,178)</td><td>$ (1,388)</td></tr><tr><td>Income from the sale of SGMI stock</td><td>--</td><td>--</td><td>(5,408)</td></tr><tr><td>Income from discontinued operations</td><td>--</td><td>--</td><td>501</td></tr><tr><td>Loss from continuing operations</td><td>(772)</td><td>(8,178)</td><td>(6,295)</td></tr><tr><td>Reconcile net loss to net cash used in operations</td><td></td><td></td><td></td></tr><tr><td>Depreciation, depletion &amp; amortization</td><td>12,130</td><td>5,066</td><td>1,426</td></tr><tr><td>Change in fair value of commodity price</td><td></td><td></td><td></td></tr><tr><td>risk management activities, net</td><td>1,725</td><td>--</td><td>--</td></tr><tr><td>Accretion of discount on treasury investment</td><td>(78)</td><td>(183)</td><td>(1,255)</td></tr><tr><td>Impairment of marketable securities</td><td>--</td><td>--</td><td>1,023</td></tr><tr><td>Impairment of oil and gas properties</td><td>--</td><td>1,468</td><td>--</td></tr><tr><td>Impairment of real estate properties</td><td>1,540</td><td>--</td><td>--</td></tr><tr><td>Gain on sale of marketable securities</td><td>(438)</td><td>--</td><td>--</td></tr><tr><td>Equity (gain)/loss from Standard Steam</td><td>(1,014)</td><td>1,374</td><td>--</td></tr><tr><td>Net change in deferred income taxes</td><td>(1,584)</td><td>(2,069)</td><td>1,319</td></tr><tr><td>(Gain) loss on sale of assets</td><td>(115)</td><td>43</td><td>17</td></tr><tr><td>Noncash compensation</td><td>1,710</td><td>1,935</td><td>2,536</td></tr><tr><td>Noncash services</td><td>66</td><td>65</td><td>46</td></tr><tr><td>Net changes in assets and liabilities</td><td></td><td></td><td></td></tr><tr><td>Accounts receivable</td><td>(162)</td><td>(2,843)</td><td>(342)</td></tr><tr><td>Income tax receivable</td><td>249</td><td>5,543</td><td>(3,809)</td></tr><tr><td>Other current assets</td><td>(386)</td><td>(192)</td><td>(18)</td></tr><tr><td>Accounts payable</td><td>(567)</td><td>80</td><td>(692)</td></tr><tr><td>Accrued compensation expense</td><td>6</td><td>1,000</td><td>(283)</td></tr><tr><td>Other liabilities</td><td>62</td><td>(557)</td><td>(209)</td></tr><tr><td>NET CASH PROVIDED BY</td><td></td><td></td><td></td></tr><tr><td>(USED IN) OPERATING ACTIVITIES</td><td>12,372</td><td>2,552</td><td>(6,536)</td></tr><tr><td>CASH FLOWS FROM INVESTING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Net redemption (investment in) treasury investments</td><td>4,293</td><td>29,277</td><td>(49,897)</td></tr><tr><td>Cash distributions from (to) Standard Steam</td><td>1,138</td><td>(877)</td><td>(3,455)</td></tr><tr><td>Acquisition &amp; development of real estate</td><td>--</td><td>(3)</td><td>(11,597)</td></tr><tr><td>Acquisition &amp; development of oil &amp; gas properties</td><td>(45,933)</td><td>(17,498)</td><td>(5,354)</td></tr><tr><td>Acquisition &amp; development of mining properties</td><td>(123)</td><td>(1)</td><td>(2,905)</td></tr><tr><td>Mining property option payment</td><td>1,000</td><td>2,000</td><td>--</td></tr><tr><td>Acquisition of property and equipment</td><td>(624)</td><td>(410)</td><td>(294)</td></tr><tr><td>Proceeds from sale of marketable securities</td><td>602</td><td>--</td><td>--</td></tr><tr><td>Proceeds from sale of property and equipment</td><td>118</td><td>11</td><td>1,103</td></tr><tr><td>Net change in restricted investments</td><td>(330)</td><td>4,651</td><td>1,842</td></tr><tr><td>NET CASH (USED IN)</td><td></td><td></td><td></td></tr><tr><td>PROVIDED BY INVESTING ACTIVITIES</td><td>(39,859)</td><td>17,150</td><td>(70,557)</td></tr></table>



## U.S. ENERGY CORP.
STATEMENTS OF CASH FLOWS

<table><tr><td rowspan="3"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">For the years ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>CASH FLOWS FROM FINANCING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Issuance of common stock</td><td>294</td><td>24,516</td><td>1,528</td></tr><tr><td>Tax benefit from the exercise of stock options</td><td>--</td><td>38</td><td>--</td></tr><tr><td>Proceeds from short-term construction debt</td><td>--</td><td>--</td><td>11,423</td></tr><tr><td>Proceeds from long term debt</td><td>--</td><td>--</td><td>1,875</td></tr><tr><td>Repayments of debt</td><td>(200)</td><td>(17,888)</td><td>(363)</td></tr><tr><td>Stock buyback program</td><td>--</td><td>(1,399)</td><td>(5,554)</td></tr><tr><td>NET CASH PROVIDED BY</td><td></td><td></td><td></td></tr><tr><td>FINANCING ACTIVITIES</td><td>94</td><td>5,267</td><td>8,909</td></tr><tr><td>Net cash used in operating activities of discontinued operations</td><td>--</td><td>--</td><td>(76)</td></tr><tr><td>Net cash provided by investing activities of discontinued operations</td><td>--</td><td>--</td><td>4,402</td></tr><tr><td>NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS</td><td>(27,393)</td><td>24,969</td><td>(63,858)</td></tr><tr><td>CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD</td><td>33,403</td><td>8,434</td><td>72,292</td></tr><tr><td>CASH AND CASH EQUIVALENTS AT END OF PERIOD</td><td>$ 6,010</td><td>$ 33,403</td><td>$ 8,434</td></tr><tr><td>SUPPLEMENTAL DISCLOSURES:</td><td></td><td></td><td></td></tr><tr><td>Income tax received</td><td>$ (353)</td><td>$ (5,753)</td><td>$ (945)</td></tr><tr><td>Interest paid</td><td>$ 22</td><td>$ 39</td><td>$ 69</td></tr><tr><td>NON-CASH INVESTING AND FINANCING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Unrealized gain</td><td>$ 642</td><td>$ 386</td><td>$ --</td></tr><tr><td>Acquisition and development of oil and gas properties through accounts payable</td><td>$ 8,983</td><td>$ 5,522</td><td>$ --</td></tr><tr><td>Acquisition and development of oil and gas through asset retirement obligations</td><td>$ 75</td><td>$ 58</td><td>$ --</td></tr><tr><td>Development of mining properties through asset retirement obligation</td><td>$ --</td><td>$ 9</td><td>$ --</td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008

## A. BUSINESS ORGANIZATION AND OPERATIONS

U.S. Energy Corp. was incorporated in the State of Wyoming on January 26, 1966. U.S. Energy Corp. ("USE") engages in the acquisition, exploration, holding, sale and/or development of mineral properties. Principal asset interests at December 31, 2010 are in oil and gas, molybdenum, real estate and minority ownership in a geothermal partnership. Historically, USE also participated in other base and precious metals. Our gold related mining properties were sold during 2008.

## B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

## Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and gas reserves used for depletion and impairment considerations and the cost of future asset retirement obligations. Due to inherent uncertainties, including the future prices of oil and gas, these estimates could change in the near term and such changes could be material.

## Principles of Consolidation

The financial statements of USE as of December 31, 2010 include the accounts of USE and wholly owned subsidiaries Energy One, LLC (“Energy One”) and Remington Village, LLC (“Remington Village”). The consolidated financial statements as of December 31, 2009 and December 31, 2008, include USE and Remington Village. All inter-company balances and transactions have been eliminated in consolidation. The financial statements as of December 31, 2010, 2009 and 2008 reflect USE’s ownership in a geothermal partnership, Standard Steam Trust LLC (“SST”) which is accounted for using the equity method. At December 31, 2010 USE’s ownership interest in SST was 22.8%.

## Cash and Cash Equivalents

USE considers all highly liquid investments with original maturities of three months or less to be cash equivalents. USE maintains its cash and cash equivalents in bank deposit accounts which exceed federally insured limits. At December 31, 2010 and 2009, USE had its cash and cash equivalents with several financial institutions, primarily invested in U.S. Treasury Bills. USE has not experienced any losses in such accounts and believes is the accounts are not exposed to any significant credit risk on cash and cash equivalents.

## Marketable Securities

USE categorizes its marketable securities as available-for-sale or held-to-maturity. Increases or decreases in the fair value which are considered temporary are recorded within equity as comprehensive income or losses. Gains or losses as a result of sale are recorded in operations when realized.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

## Accounts Receivable

USE determines any required allowance by considering a number of factors including the length of time trade and other accounts receivable are past due and our previous loss history. USE provides reserves for account receivable balances when they become uncollectable. Payments subsequently received on such reserved receivables are credited to the allowance for doubtful accounts. During the year ended December 31, 2010, USE recorded $76,000 in bad debt expense related to its multifamily housing project. The balance of accounts receivable at December 31, 2010 are for the sale of oil and gas and have been collected subsequent to the balance sheet date. No reserve for uncollectable receivables was booked during the year ended December 31, 2010 or 2009.

## Restricted Investments

USE accounts for cash deposits held as collateral for reclamation obligations as restricted investments. Maturities or release dates less than twelve months from the end of the reported accounting period are reported as current assets while maturities or release dates in excess of twelve months from report dates are reported as long term assets.

## Properties and Equipment

Land, buildings, improvements, machinery and equipment are carried at cost. Depreciation of buildings, improvements, machinery and equipment is provided principally by the straight-line method over estimated useful lives ranging from 3 to 45 years. Following is a breakdown of the lives over which assets are depreciated:

Machinery and Equipment:
Office Equipment 3 to 5 years
Planes 15 years
Field Tools and Hand Equipment 5 to 7 years
Vehicles and Trucks 3 to 7 years
Heavy Equipment 7 to 10 years
Buildings and Improvements:
Service Buildings 20 years
Corporate Headquarter Building 45 years



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Components of Property and Equipment as of December 31, 2010 and 2009 are as follows:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td></tr><tr><td>Oil &amp; Gas properties</td><td></td><td></td></tr><tr><td>Unproved</td><td>$ 17,926</td><td>$ 3,993</td></tr><tr><td>Wells in progress</td><td>3,694</td><td>1,367</td></tr><tr><td>Proved</td><td>63,317</td><td>24,595</td></tr><tr><td></td><td>84,937</td><td>29,955</td></tr><tr><td>Less accumulated depreciation</td><td></td><td></td></tr><tr><td>depletion and amortization</td><td>(14,563)</td><td>(3,953)</td></tr><tr><td>Net book value</td><td>70,374</td><td>26,002</td></tr><tr><td>Mining properties</td><td>21,077</td><td>21,969</td></tr><tr><td>Commercial real estate</td><td>23,084</td><td>24,600</td></tr><tr><td>Less Accumulated depreciation</td><td>(2,346)</td><td>(1,400)</td></tr><tr><td>Net book value</td><td>20,738</td><td>23,200</td></tr><tr><td>Building, land and equipment</td><td>14,564</td><td>14,196</td></tr><tr><td>Less accumulated depreciation</td><td>(5,228)</td><td>(4,895)</td></tr><tr><td>Net book value</td><td>9,336</td><td>9,301</td></tr><tr><td>Totals</td><td>$ 121,525</td><td>$ 80,472</td></tr></table>

## Oil and Gas Properties

USE follows the full cost method in accounting for its oil and gas properties. Under the full cost method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities, but does not include any costs related to production, general corporate overhead or similar activities. Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and gas reserves. Excluded from amounts subject to depletion are costs associated with unproved properties.

Under the full cost method, net capitalized costs are limited to the lower of unamortized cost reduced by the related net deferred tax liability and asset retirement obligations or the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on unescalated average prices per barrel of oil and per MMbtu of natural gas at the first of each month in the 12-month period prior to the end of the reporting period and costs, adjusted for contract provisions, financial derivatives that hedge USE’s oil and gas revenue and asset retirement obligations, (ii) the cost of properties not being amortized, and (iii) the lower of cost or market



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

value of unproved properties included in the cost being amortized, less (iv) income tax effects related to differences between the book and tax basis of the natural gas and crude oil properties. If the net book value reduced by the related net deferred income tax liability and asset retirement obligations exceeds the cost center ceiling limitation, a non-cash impairment charge is required in the period in which the impairment occurs. At December 31, 2010, the book value of our oil and gas properties did not exceed the cost center ceiling. During the year ended December 31, 2009, USE recorded a non-cash impairment of $1.5 million.

## Mineral Properties

USE capitalizes all costs incidental to the acquisition of mineral properties. Mineral exploration costs are expensed as incurred. When exploration work indicates that a mineral property can be economically developed as a result of establishing proved and probable reserves, costs for the development of the mineral property as well as capital purchases and capital construction are capitalized and amortized using units of production over the estimated recoverable proved and probable reserves. Costs and expenses related to general corporate overhead are expensed as incurred. All capitalized costs are charged to operations if USE subsequently determines that the property is not economical due to permanent decreases in market prices of commodities, excessive production costs or depletion of the mineral resource.

Mineral properties at December 31, 2010 and 2009 reflect capitalized costs associated with USE’s Mount Emmons molybdenum property near Crested Butte, Colorado. USE has entered into an agreement with Thompson Creek Metals Company USA (“TCM”) to develop this property. TCM may earn up to a 75% interest in the project for the investment of $400 million. USE’s carrying balance in the Mount Emmons property at December 31, 2010 and 2009 is as follows:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td><td></td></tr><tr><td>Costs associated with Mount Emmons beginning of year</td><td>$ 21,969</td><td>$ 23,950</td><td></td></tr><tr><td>Development costs during the year</td><td>108</td><td>19</td><td></td></tr><tr><td>Option payment from Thompson Creek</td><td>(1,000)</td><td>(2,000)</td><td></td></tr><tr><td>Costs at end of year</td><td>$ 21,077</td><td>$ 21,969</td><td></td></tr></table>

## Long-Lived Assets – Real Estate

USE evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. Impairment calculations are generally based on market appraisals. If estimated future cash flows, on an undiscounted basis, are less than the carrying amount of the related asset, an asset impairment is considered to exist. Changes in significant assumptions underlying future cash flow estimates may have a material effect on USE's financial position and results of operations. During the year ended December 31, 2010, USE recorded an impairment of $1.5 million on its multifamily housing property as it is probable that the property will be sold in the near term. (See Subsequent Event Note R) No impairments of long lived assets existed were recorded at December 31, 2009 as the market value of the asset exceeded construction costs.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

## Derivative Instruments

USE uses derivative instruments, typically fixed-rate swaps and costless collars to manage price risk underlying its oil and gas production. USE may also use puts, calls and basis swaps in the future. All derivative instruments are recorded in the consolidated balance sheets at fair value. USE offsets fair value amounts recognized for derivative instruments executed with the same counterparty. Although USE does not designate any of its derivative instruments as a cash flow hedge, such derivative instruments provide an economic hedge of our exposure to commodity price risk associated with forecasted future oil and gas production. These contracts are accounted for using the mark-to-market accounting method and accordingly, USE recognizes all unrealized and realized gains and losses related to these contracts currently in earnings and are classified as gain (loss) on derivative instruments, net in our consolidated statements of operations.

USE’s Board of Directors sets all risk management policies and reviews the status and results of derivative activities, including volumes, types of instruments and counterparties on a quarterly basis. These policies require that derivative instruments be executed only by the President or Chief Financial Officer after consultation and concurrence by the President, Chief Financial Officer and Chairman of the Board. The master contracts with approved counterparties identify the President and Chief Financial Officer as the only Company representatives authorized to execute trades.

## Fair Value of Financial Instruments

The carrying amount of cash equivalents, receivables, other current assets, accounts payable and accrued expenses approximate fair value because of the short-term nature of those instruments. The recorded amounts for short-term and long-term debt approximate the fair market value due to the variable nature of the interest rates on the short-term debt, and the fact that interest rates remain generally unchanged from issuance of the long-term debt.

## Asset Retirement Obligations

USE accounts for its asset retirement obligations under FASB ASC 410-20, "Asset Retirement Obligations." USE records the fair value of the reclamation liability on its inactive mining properties and its operating oil and gas properties as of the date that the liability is incurred. USE reviews the liability each quarter and determines if a change in estimate is required as well as accretes the discounted liability on a quarterly basis for the future liability. Final determinations are made during the fourth quarter of each year. USE deducts any actual funds expended for reclamation during the quarter in which it occurs.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

The following is a reconciliation of the total liability for asset retirement obligations:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td><td></td></tr><tr><td>Beginning asset retirement obligation</td><td>$ 211</td><td>$ 144</td><td></td></tr><tr><td>Accretion of discount</td><td>17</td><td>12</td><td></td></tr><tr><td>Liabilities incurred</td><td>75</td><td>55</td><td></td></tr><tr><td>Ending asset retirement obligation</td><td>$ 303</td><td>$ 211</td><td></td></tr><tr><td>Mining properties</td><td>$ 139</td><td>$ 128</td><td></td></tr><tr><td>Oil &amp; Gas Wells</td><td>164</td><td>83</td><td></td></tr><tr><td>Ending asset retirement obligation</td><td>$ 303</td><td>$ 211</td><td></td></tr></table>

## Revenue Recognition

USE records natural gas and oil revenue under the sales method of accounting. Under the sales method, USE recognizes revenues based on the amount of natural gas or oil sold to purchasers, which may differ from the amounts to which USE is entitled based on its interest in the properties. Natural gas balancing obligations as of December 31, 2010 and 2009 were not significant.

Revenues from real estate operations are reported on a gross revenue basis and are recorded at the time the service is provided.

## Stock Based Compensation

USE measures the cost of employee services received in exchange for all equity awards granted including stock options based on the fair market value of the award as of the grant date.

USE has computed the fair values of its options granted to employees using the Black Scholes pricing model and the following weighted average assumptions (no options were granted in 2010 or 2009):

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended</td></tr><tr><td colspan="3">December 31,</td></tr><tr><td></td><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Risk-free interest rate</td><td>--</td><td>--</td><td>3.23%</td></tr><tr><td>Expected lives (years)</td><td>--</td><td>--</td><td>6.0</td></tr><tr><td>Expected volatility</td><td>--</td><td>--</td><td>56.51%</td></tr><tr><td>Expected dividend yield</td><td>--</td><td>--</td><td>--</td></tr></table>

USE recognizes the cost of the equity awards over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. As share-based compensation expense is recognized based on awards ultimately expected to vest, the expense has been reduced for estimated forfeitures based on historical forfeiture rates.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

## Income Taxes

USE recognizes deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carry forwards.

Additionally, USE recognizes deferred tax assets for the expected future effects of all deductible temporary differences, loss carry forwards and tax credit carry forwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized. Management believes it is more likely than not that such tax benefits will be realized and a valuation allowance has not been provided.

## Net Income (Loss) Per Share

Basic earnings per share are computed based on the weighted average number of common shares outstanding. Common shares held by the ESOP are included in the computation of earnings per share. Total shares held by the ESOP at December 31, 2010, 2009, and 2008 were 685,382, 642,913, and 606,330, respectively. Diluted earnings per share is computed based on the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock, if dilutive. Using the treasury stock method, potential common shares relating to options and warrants are excluded from the computation of diluted loss per share for the years ending December 31, 2010, 2009 and 2008 because they were anti dilutive. Dilutive options and warrants totaled 1,034,446, 282,504 and 226,246 at December 31, 2010, 2009 and 2008, respectively.

## Recent Accounting Pronouncements

Accounting Standards Update No. 2010-03 - In December 2008, the Securities and Exchange Commission published a Final Rule, Modernization of the Oil and Gas Reporting Requirements. The new rule permits the use of new technologies to determine proved reserves if those technologies have been demonstrated to lead to reliable conclusions about reserves volumes. The new requirements also allow companies to disclose their probable and possible reserves to investors. In addition, the new disclosure requirements require companies to: (a) report the independence and qualifications of its reserves preparer or auditor; (b) file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit; and (c) report oil and gas reserves using an average price based upon the prior 12-month period rather than year-end prices. The use of average prices will affect impairment and depletion calculations. In January 2010, the FASB issued Accounting Standards Update No. 2010-03, Oil and Gas Reserve Estimation and Disclosure, to align the oil and gas reserve estimation and disclosure requirement of the SEC Final Rule with the ASC 932. The new disclosure requirements are effective for annual reports on Form 10-K for fiscal years ending on or after December 31, 2009. USE’s adoption of this Final rule for this annual reported dated December 31, 2009 affected our oil and gas disclosures but had no material effect on our financial position and results of operations.

Accounting Standards Update 2010-09 - In May 2009, the FASB issued FASB ASC 855, "Subsequent Events," and in February 2010, the FASB issued ASC Update 2010-09, "Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements," which establishes standards of accounting for and disclosure of events that occur after the balance sheet date but before



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

financial statements are issued. Under this standard, entities that file or furnish financial statements with the SEC, such as USE, are required to use an issued date in evaluating subsequent events. This standard, as updated, is effective February 24, 2010, and USE adopted it at that date. The adoption did not have a material impact on USE’s results of operations or financial position.

USE has reviewed other current outstanding statements from the FASB and does not believe that any of those statements will have a material adverse effect on the financial statements of USE when adopted.

## C. SUTTER GOLD MINING COMPANY, INC. (“SGMI”)

On August 22, 2008, USE sold 39,062,720 common shares of SGMI that it owned, to RMB Resources Ltd. (“RMB”), as trustee for the Telluride Investment Trust. The sale of these shares represented approximately 49.9% of the outstanding common shares of SGMI for purchase price of $5.1 million. USE recorded a gain of $5.4 million from the sale and a loss from discontinued operations of $501,000 for the year ended December 31, 2008.

Under the terms of the agreement, USE retained an equity position of approximately 3,550,361 shares and the 5% net profits interest royalty. USE also participated in a non-brokered private placement by SGMI with the purchase of 4,545,455 units for total cash consideration of $496,000. USE also received 24-month warrants, which were extended an additional 12 months to August 2011, to purchase an additional 2,272,728 common shares of SGMI at a price of Cdn. $0.15 per share. During the year ended December 31, 2010 USE sold 3,000,000 shares of SGMI to a private third party for $525,000 cash consideration and recorded a gain of $378,000.

## D. FAIR VALUE

USE adopted Financial Accounting Standards Board Accounting Standards Codification Topic 820 “Fair Value Measurements and Disclosures” (FASB ASC 820) on January 1, 2008, as it relates to financial assets and liabilities. USE adopted FASB ASC 820 on January 1, 2009, as it relates to nonfinancial assets and liabilities. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs that USE uses to measure fair value. The three levels of the fair value hierarchy defined by FASB ASC 820 are as follows:

- Level 1 — Unadjusted quoted prices available in active markets for identical assets or liabilities.

- Level 2 — Pricing inputs, other than quoted prices within Level 1, which are either directly or indirectly observable.

- Level 3 — Pricing inputs that are unobservable requiring USE to use valuation methodologies that result in management’s best estimate of fair value.

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the nonfinancial assets and liabilities and their placement in the fair value hierarchy levels. As of December 31, 2010, we held $19.2 million of investments in government securities and marketable securities. The fair value of the investments is reflected on the balance sheet as detailed below. The fair value of USE’s commodity risk management liabilities and other accrued liabilities are determined using discounted cash flow methodologies based on inputs that are not readily available in public markets. The fair value of USE’s other accrued liabilities that are reflected



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

on the balance sheet are detailed below. The other accrued liabilities are the long term portion of the executive retirement program.

<table><tr><td rowspan="2"></td><td colspan="5">(In thousands)</td></tr><tr><td colspan="5">Fair Value Measurements at December 31, 2010 Using</td></tr><tr><td></td><td colspan="2">December 31</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td></tr><tr><td>Description</td><td>2010</td><td></td><td></td><td></td><td></td></tr><tr><td>Available for sale securities</td><td>$ 1,364</td><td>$ 1,364</td><td>$ --</td><td>$ --</td><td>$ --</td></tr><tr><td>Total assets</td><td>$ 1,364</td><td>$ 1,364</td><td>$ --</td><td>$ --</td><td>$ --</td></tr><tr><td>Commodity risk management liability</td><td>$ 1,725</td><td>$ --</td><td>$ 1,725</td><td>$ --</td><td></td></tr><tr><td>Other accrued liabilities</td><td>847</td><td>--</td><td>--</td><td>847</td><td></td></tr><tr><td>Total</td><td>$ 2,572</td><td>$ --</td><td>$ 1,725</td><td>$ 847</td><td></td></tr><tr><td></td><td colspan="5">(In thousands)</td></tr><tr><td></td><td colspan="5">Fair Value Measurements at December 31, 2009 Using</td></tr><tr><td></td><td colspan="2">December 31</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td></tr><tr><td>Description</td><td>2009</td><td></td><td></td><td></td><td></td></tr><tr><td>Available for sale securities</td><td>$ 1,178</td><td>$ 1,178</td><td>$ --</td><td>$ --</td><td>$ --</td></tr><tr><td>Total assets</td><td>$ 1,178</td><td>$ 1,178</td><td>$ --</td><td>$ --</td><td>$ --</td></tr><tr><td>Other accrued liabilities</td><td>$ 762</td><td>$ --</td><td>$ --</td><td>$ 762</td><td></td></tr><tr><td>Total</td><td>$ 762</td><td>$ --</td><td>$ --</td><td>$ 762</td><td></td>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

The following table summarizes, by major security type, the fair value and unrealized gain of our investments. The unrealized gain is recorded on the consolidated balance sheet as other comprehensive income, a component of stockholders’ equity.

(In thousands)

<table><tr><td colspan="9">December 31, 2010</td></tr><tr><td rowspan="2">Description of Securities</td><td colspan="3">Less Than 12 Months</td><td colspan="3">12 Months or Greater</td><td colspan="2">Total</td></tr><tr><td>Fair Value</td><td>Unrealized Gain</td><td>Fair Value</td><td>Unrealized Gain</td><td>Fair Value</td><td>Unrealized Gain</td><td></td><td></td></tr><tr><td>Available for sale securities</td><td>$ 1,364</td><td>$ 1,003</td><td>$ --</td><td>$ --</td><td>$ 1,364</td><td>$ 1,003</td><td></td><td></td></tr><tr><td>Total</td><td>$ 1,364</td><td>$ 1,003</td><td>$ --</td><td>$ --</td><td>$ 1,364</td><td>$ 1,003</td><td></td><td></td></tr><tr><td colspan="9">December 31, 2009</td></tr><tr><td rowspan="2">Description of Securities</td><td colspan="3">Less Than 12 Months</td><td colspan="3">12 Months or Greater</td><td colspan="2">Total</td></tr><tr><td>Fair Value</td><td>Unrealized Gain</td><td>Fair Value</td><td>Unrealized Gain</td><td>Fair Value</td><td>Unrealized Gain</td><td></td><td></td></tr><tr><td>Available for sale securities</td><td>$ 1,178</td><td>$ 602</td><td>$ --</td><td>$ --</td><td>$ 1,178</td><td>$ 602</td><td></td><td></td></tr><tr><td>Total</td><td>$ 1,178</td><td>$ 602</td><td>$ --</td><td>$ --</td><td>$ 1,178</td><td>$ 602</td><td></td><td></td></tr></table>

USE’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable, other current liabilities and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value because of their immediate or short-term maturities. The carrying value of USE’s long-term debt approximates its fair market value since it interest rates have remained generally unchanged from the issuance of the long-term debt. The fair value and carrying value of our long-term debt was $600,000 and $800,000 as of December 31, 2010 and December 31, 2009, respectively.

## E. COMMODITY PRICE RISK MANAGEMENT

Through our wholly-owned affiliate Energy One, we have entered into three commodity derivative contracts (“economic hedges”) with BNP Paribas, a costless collar and two fixed price swaps, as described below. The three derivative contracts are priced using West Texas Intermediate (“WTI”) quoted prices. U.S. Energy Corp. is a guarantor of Energy One under the economic hedges. The objective of utilizing the economic hedges is to reduce the effect of price changes on a portion of USE’s future oil production, achieve more predictable cash flows in an environment of volatile oil and gas prices and to manage our exposure to commodity price risk. The use of these derivative instruments limits the downside risk of adverse price movements. However, there is a risk that such use may limit our ability to benefit from favorable price movements. Energy One may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of the its existing positions.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Energy One's commodity derivative contracts as of December 31, 2010 are summarized below:

<table><tr><td>Settlement Period</td><td>Counterparty</td><td>Basis</td><td>Quantity (Bbl/d)</td><td>Strike Price</td></tr><tr><td>Crude Oil Costless Collars</td><td></td><td></td><td></td><td></td></tr><tr><td>10/01/10 - 09/30/11</td><td>BNP Parabis</td><td>WTI</td><td>200</td><td>Floor: $ 75.00</td></tr><tr><td></td><td></td><td></td><td></td><td>Ceiling: $ 83.25</td></tr><tr><td>Crude Oil Swaps</td><td></td><td></td><td></td><td></td></tr><tr><td>10/01/10 - 09/30/11</td><td>BNP Parabis</td><td>WTI</td><td>200</td><td>Fixed: $ 79.05</td></tr><tr><td>01/01/11 - 12/31/11</td><td>BNP Parabis</td><td>WTI</td><td>200</td><td>Fixed: $ 89.60</td></tr></table>

The following table details the fair value of the derivatives recorded in the applicable condensed consolidated balance sheet, by category:

<table><tr><td>Underlying Commodity</td><td>Location on Balance Sheet</td><td>Fair Value at December 31, 2010</td></tr><tr><td>Crude oil derivate contract</td><td>Current Liability</td><td>$ 632,000</td></tr><tr><td>Crude oil derivate contract</td><td>Current Liability</td><td>789,000</td></tr><tr><td>Crude oil derivate contract</td><td>Current Liability</td><td>304,000</td></tr><tr><td></td><td></td><td>$ 1,725,000</td></tr></table>

Unrealized gains and losses resulting from derivatives are recorded at fair value on the consolidated balance sheet and changes in fair value are recognized in the unrealized gain (loss) on risk management activities line on the consolidated statement of operations. Realized gains and losses resulting from the contract settlement of derivatives are recognized in the commodity price risk management activities line on the consolidated statement of operations. During the year ended December 31, 2010 we recognized a loss of $156,000 from the contract settlements of derivatives.

## F. MINERAL PROPERTY TRANSACTIONS

## Mount Emmons Molybdenum Properties

On August 19, 2008, USE and Thompson Creek Metals Company USA (“TCM”), a Colorado corporation headquartered in Englewood, Colorado, entered into an Exploration, Development and Mine Operating Agreement for USE’s Mount Emmons molybdenum property. TCM assigned the agreement to Mt. Emmons Moly Company, a Colorado corporation and wholly owned subsidiary of TCM effective September 11, 2008. Under the terms of the agreement TCM may acquire up to a 75% interest for $400 million (option payments of $6.5 million and project expenditures of $393.5 million).

The Agreement covers two distinct periods of time: The Option Period, during which TCM may exercise an option (the “Option”) to acquire up to a 50% interest in Mount Emmons; and the Joint



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Venture Period, during which TCM will form a joint venture with USE and also have an option to acquire up to an additional 25% interest in Mount Emmons. The following table sets forth the required option and property expenditures that Thompson Creek must make to own its interest in the Mount Emmons molybdenum property:

<table><tr><td rowspan="2"></td><td rowspan="2">Option Payments to U.S. Energy</td><td colspan="2">(In thousands)</td><td rowspan="2">Total</td><td rowspan="2">(1)</td></tr><tr><td>Expenditures by Thompson Creek on the Project</td><td></td></tr><tr><td>Closing</td><td>$ 500</td><td></td><td></td><td>$ 500</td><td>(2)</td></tr><tr><td>December 31, 2008</td><td></td><td>2,000</td><td></td><td>2,000</td><td>(3)</td></tr><tr><td>January 1, 2009</td><td>1,000</td><td></td><td></td><td>1,000</td><td>(4)</td></tr><tr><td>December 31, 2009</td><td></td><td>4,000</td><td></td><td>4,000</td><td>(5)</td></tr><tr><td>January 1, 2010</td><td>1,000</td><td></td><td></td><td>1,000</td><td>(6)</td></tr><tr><td>December 31, 2010</td><td></td><td>4,000</td><td></td><td>4,000</td><td>(7)</td></tr><tr><td>January 31, 2011</td><td>1,000</td><td></td><td></td><td>1,000</td><td></td></tr><tr><td>June 30, 2011</td><td></td><td>1,500</td><td></td><td>1,500</td><td></td></tr><tr><td>Total - First Stage</td><td>3,500</td><td>11,500</td><td></td><td>15,000</td><td>(8)</td></tr><tr><td>January 2012</td><td>1,000</td><td></td><td></td><td>1,000</td><td></td></tr><tr><td>January 2013</td><td>1,000</td><td></td><td></td><td>1,000</td><td></td></tr><tr><td>February 2014</td><td>1,000</td><td></td><td></td><td>1,000</td><td></td></tr><tr><td>Stage Two Expenditures</td><td></td><td>32,000</td><td></td><td>32,000</td><td>(9)</td></tr><tr><td>Total - Second Stage</td><td>3,000</td><td>32,000</td><td></td><td>35,000</td><td>(10)</td></tr><tr><td>Stage Three Expenditures</td><td>-</td><td>350,000</td><td></td><td>350,000</td><td>(11)</td></tr><tr><td></td><td>$ 6,500</td><td>$ 393,500</td><td></td><td>$ 400,000</td><td></td></tr></table>

(1) Paid at Closing on September 11, 2008

(2) Paid during the twelve months ended December 31, 2008

(3) Paid on January 2, 2009

(4) Paid $3,847,600 and deposited $142,400 into escrow for the project

(5) Paid on December 31, 2009

(6) Paid $4,798,400 and deposited $201,600 into escrow for the project

(7) Paid on December 31, 2010

(8) If TCM has paid a total of $15 million it has option to own 15%

(9) To be paid for the development of the project by July 31, 2018

(10) If TCM has paid a total of $50 million it has option to own 50%

(11) If TCM pays 100% of the next $350 million it has option to own 75% of the project.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Costs to operate the water treatment plant at the property are being paid solely by USE until TCM elects to exercise its option to own an interest in the property.

Failure by TCM to incur the required amount of expenditures by a deadline, or make an Option Payment to USE, subject to the terms of the Agreement, the Agreement may be terminated without further obligation to USE from TCM. TCM may terminate the Agreement at any time, but if earned and elected to accept, TCM will retain the interest earned and be responsible for that share of all costs and expenses related to Mount Emmons.

The Joint Venture Period; Joint Venture Terms:

Within six months of TCM’s election to acquire the 50% interest, TCM, in its sole discretion, shall elect to form a Joint Venture and either: (i) participate on a 50%-50% basis with USE, with each party to bear their own share of expenditures from formation date; or (ii) acquire up to an additional 25% interest in the project by paying 100% of all expenditures equal to $350 million (for a total of $400 million, including the $50 million to earn the 50% interest in the second stage of the Option Period), at which point the participation would be 75% TCM and 25% USE. Provided however, if TCM makes expenditures of at least $70 million of the $350 million in expenditures and TCM decides not to fund the additional $280 million in expenditures, TCM will have earned an additional 2.5% (for a total of 52.5%). Thereafter, TCM will earn an incremental added percentage interest for each dollar it spends toward the total $350 million amount.

At any time before incurring the entire $350 million, TCM in its sole discretion, may determine to cease funding 100% of expenditures, in which event USE and TCM then would share expenditures in accordance with their participation interests at that date, in accordance with the Joint Venture. With certain exceptions, either party’s interest is subject to dilution in the event of non-participation in funding the Joint Venture’s budgets.

## Management of the Property

TCM is the Project Manager of Mount Emmons. A four person Management Committee governs the projects’ operations, with two representatives each from USE and TCM. TCM will have the deciding vote in the event of a committee deadlock.

If and when Mount Emmons goes into production, TCM will purchase USE’s share of the molybdic oxide produced at an average price as published in Platt’s Metals Weekly price less a discount with a cap and a floor. The discount band will be adjusted every five years based upon the United States’ gross domestic product.

## Oil and Gas Exploration

USE participates in oil and gas projects as a non-operating working interest owner and has active agreements with several oil and gas exploration and production companies. Our working interest varies by project, but typically ranges from approximately 5% to 65%. These projects may result in numerous wells being drilled over the next three to five years.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Williston Basin, North Dakota

From August 24, 2009 to December 31, 2010, we have drilled and completed 11 gross initial Bakken Formation wells (4.89 net), 1 gross Three Forks formation well (0.17 net) and 1 gross (0.32 net) infill Bakken formation well under the Drilling Participation Agreement with Brigham Oil & Gas, L.P. (“Brigham”) a Delaware limited partnership, wholly-owned by Brigham Exploration Company (a Delaware corporation). Four gross initial Bakken formation wells (1.15 net) and 1 infill Bakken formation wells (0.32 net) were in progress at December 31, 2010. Brigham operates all of the wells.

During the year ended December 31, 2010, we completed 7 gross wells (2.41 net) with our percentage of the net costs of $18.5 million. Four gross wells (1.22 net) were drilled and awaiting completion at December 31, 2010 with net costs to us of $9.5 million. One additional gross well (0.25 net) was being drilled at December 31, 2010 with net costs to the Company of $2.0 million.

Brigham recently announced that the interpretation of the micro-seismic data from the 18 square mile data set accumulated during the Brad Olson 9-16 #2H fracture stimulation indicates that frac wings appear to extend laterally approximately 500' on either side of the wellbore, or 1,000' in total, per well. Based on a one mile wide spacing unit, results from the micro-seismic monitoring appear to support development of at least four wells per producing horizon per 1,280 acre spacing unit, or approximately eight total Bakken and Three Forks wells per spacing unit. If the state of North Dakota allows four wells per formation in each spacing unit, the Company could ultimately drill 60 Bakken formation and 60 Three Forks formation wells for a total of 120 wells. The drilling of each well typically takes 30 days while the completion typically takes 21-28 days.

Additionally, in December 2010, we signed two agreements with Zavanna, LLC (a private oil and gas company based in Denver, Colorado), and other parties, and paid $10,987,000 cash, to acquire a 35% working interest out of Zavanna’s working interests in oil and gas leases covering approximately 6,200 net acres in McKenzie County, North Dakota (see below). Net revenue interests are expected to be in the range of 26.95% to 28%, proportionately reduced depending on Zavanna’s actual WI%.

The acreage is in two parcels – the Yellowstone Prospect and the SE HR Prospect. We expect this program will result in 31 gross 1,280 acre spacing units (with various working interests of up to 35%), with the potential of 93 gross Bakken and 93 gross Three Forks wells.

In December 2010, we committed to the drilling of two initial horizontal test wells into the Bakken Formation and paid an advance of $1,433,000 for drilling costs on an initial well in the Yellowstone Prospect; this well began drilling in January 2011. A second well was spud in February 2011. A third well (which will be the initial well on the SE HR Prospect), is expected to begin drilling in second quarter 2011.

Our interests in all the acreage is subject to reduction by operation of a 30% reversionary working interest in the separate acreage packages under each agreement. On the sooner to occur of 36 months after spudding each initial test well (the “Project Payout Period”), or our reaching “Project Payout,” our 35% working interest will be reduced to 24.5% with the NRI % also being proportionately reduced on all the acreage. Project Payout is that point in time when we have received proceeds from the sale of production (or from sale of all or part of the acreage to third parties) equal to 130% of: the $10,987,000 (paid on execution of the agreements), plus all drilling and completion costs (including dry hole costs) and surface gathering facilities, for all wells drilled on the acreage (and on any additional acreage



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

acquired in the two Areas of Mutual Interest contemplated by the agreements), referred to as the “Project Payout Properties.”

However, if Project Payout does not occur within the Project Payout Period, the reduction due to operation of the reversionary working interest will take effect on all acreage outside the Project Payout Properties, i.e., that acreage in which wells not have been drilled (including all infill locations in drilling units where the Project Payout Properties are located, and the interest in all subsequent operations thereon). After expiration of the Project Payout Period, all costs and expenses related to the Project Payout Properties will continue to be included in the Project Payout calculation until Project Payout occurs.

## U.S. Gulf Coast

During the year ended December 31, 2010, we drilled 7 gross wells (0.94 net) in the U.S. Gulf Coast. One gross well (0.50 net) was successfully completed and is currently producing, 1 gross well (0.05 net) was in progress at December 31, 2010, 1 gross well (0.05 net) was completed, but not producing and 4 gross wells (0.34 net) have been plugged and abandoned. Our net investment in these wells through December 31, 2010 was $8.7 million.

## California

Under an October 2010 agreement with Cirque Resources LP (“Cirque”) (a private exploration and development company based in Denver, Colorado), we paid $2,498,000 to Cirque to purchase a 40% working interest (32% NRI) in Cirque’s leases on 6,120 net mineral acres (2,448 acres net to our interest), in the San Joaquin Basin. Of the amount paid, $1,620,000 is an advance against our 40% working interest for the initial well, including 33% of Cirque’s 60% working interest share for the well. Cirque’s lease assignments to us, is held in escrow, until the end of the well’s drilling phase; if we have paid all the drilling costs (ours and Cirque’s carry), and the assignments will be recorded and released to us.

Completion and all other costs and expenses on the initial well and for all subsequent wells and any midstream projects (gathering, compressors, and processing/treatment facilities) will be paid by participants in proportion to their working interests. We are estimating our share of total completion costs for the initial well to be in the range of $640,000. Cirque is the operator for all operations on the prospect.

## General

We are also actively pursuing the potential of acquiring additional exploration, development or production stage oil and gas properties or companies. To further this effort, we have engaged an investment banker to assist in finding, evaluating and if necessary, financing the potential acquisition of such assets.

Full Cost Pool – Full cost pool capitalized costs are amortized over the life of production of proven properties. Capitalized costs at December 31, 2010 and 2009 which were not included in the amortized cost pool were $21.6 and $5.4 million, respectively. These costs consist of unproved wells in progress, seismic costs that are being analyzed for potential drilling locations as well as land costs and are related to unproved properties. No capitalized costs related to unproved properties are included in the amortization.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

base at December 31, 2010 and 2009. It is anticipated that these costs will be added to the full cost amortization pool in the next two years as properties are evaluated, drilled or abandoned.

Ceiling Test Analysis – USE performs a quarterly ceiling test for each of its oil and gas cost centers, which in 2010, there was only one. The ceiling test incorporates assumptions regarding pricing and discount rates and over which management has no influence in the determination of present value. In arriving at the ceiling test for the quarter ended December 31, 2010, USE used $79.43 per barrel for oil and $4.38 per MMbtu for natural gas (and adjusted for property specific gravity, quality, local markets and distance from markets) to compute the future cash flows of USE’s producing property. The discount factor used was 10%.

At December 31, 2010, the ceiling was in excess of the net capitalized costs as adjusted for related deferred income taxes and no impairment was required. We will continue to review our unproved properties based on market conditions and other changes and if appropriate, unproved property amounts may be reclassified to the amortized base of properties within the full cost pool.

During the year ended December 31, 2009, USE recorded impairments totaling $1.5 million, ($1.1 million in the first quarter of 2009 and $405,000 in the third quarter of 2009). These impairments were as a result of two factors, (1) low prices for natural gas during the quarter ended March 31, 2009, $3.58 per MMbtu and (b) a dry hole drilled during the quarter ended September 30, 2009, which resulted in costs exceeding the ceiling test.

Wells in Progress - Wells in progress represent the costs associated with unproved wells that have not reached total depth or been completed as of period end. They are classified as wells in progress and withheld from the depletion calculation and the ceiling test. The costs for these wells are then transferred to evaluated property when the wells reach total depth and are cased and the costs become subject to depletion and the ceiling test calculation in future periods.

## G. SUPPLEMENTAL FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES

## Capitalized Costs

The following table presents information regarding USE’s net costs incurred in the purchase of proved and unproved properties, and in exploration and development activities:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td><td></td></tr><tr><td>Oil &amp; Gas properties</td><td></td><td></td><td></td></tr><tr><td>Unproved</td><td>$ 17,926</td><td>$ 3,993</td><td></td></tr><tr><td>Wells in progress</td><td>3,694</td><td>1,367</td><td></td></tr><tr><td>Proved</td><td>63,317</td><td>24,595</td><td></td></tr><tr><td></td><td>84,937</td><td>29,955</td><td></td></tr></table>

USE’s DD&A per equivalent BOE was $23.64 in 2010 and $21.72 in 2009.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Undeveloped properties as of December 31, 2010 include costs incurred in the following years:

<table><tr><td rowspan="2"></td><td colspan="6">(In thousands)</td></tr><tr><td colspan="2">Acquisitions</td><td>Exploration</td><td colspan="2">Development</td><td>Total</td></tr><tr><td>2007</td><td>$ 371</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ 371</td><td></td></tr><tr><td>2008</td><td>95</td><td>--</td><td>--</td><td>--</td><td>95</td><td></td></tr><tr><td>2009</td><td>910</td><td>--</td><td>--</td><td>--</td><td>910</td><td></td></tr><tr><td>2010</td><td>13,562</td><td>6,682</td><td>--</td><td>--</td><td>20,244</td><td></td></tr><tr><td>Total</td><td>$ 14,938</td><td>$ 6,682</td><td>$ --</td><td>$ --</td><td>$ 21,620</td><td></td></tr></table>

## Costs Incurred

Costs incurred in oil and natural gas property acquisition, exploration and development activities are summarized below:

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td><td></td></tr><tr><td>Property acquisition costs:</td><td></td><td></td><td></td><td></td></tr><tr><td>Proved</td><td>$ --</td><td>$ --</td><td>$ --</td><td></td></tr><tr><td>Unproved</td><td>14,237</td><td>560</td><td>1,184</td><td></td></tr><tr><td>Exploration costs</td><td>35,899</td><td>21,107</td><td>4,194</td><td></td></tr><tr><td>Development costs</td><td>4,846</td><td>--</td><td>--</td><td></td></tr><tr><td>Total costs incurred</td><td>$ 54,982</td><td>$ 21,667</td><td>$ 5,378</td><td></td></tr></table>

## Results of Operations

Results of operations from oil and natural gas producing activities are presented below:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td colspan="2">For the years ending</td></tr><tr><td></td><td>December 31, 2010</td><td>December 31, 2009</td></tr><tr><td>Oil and gas revenues</td><td>$ 26,548</td><td>$ 7,581</td></tr><tr><td>Unrealized (loss) from risk management activities</td><td>(1,725)</td><td>--</td></tr><tr><td>Loss from risk management activities</td><td>(156)</td><td>--</td></tr><tr><td></td><td>24,667</td><td>7,581</td></tr><tr><td>Operating expenses</td><td>6,073</td><td>1,085</td></tr><tr><td>Depreciation, depletion and amortization</td><td>10,610</td><td>3,571</td></tr><tr><td>Impairment</td><td>--</td><td>1,468</td></tr><tr><td></td><td>16,683</td><td>6,124</td></tr><tr><td>Operating income (loss)</td><td>$ 7,984</td><td>$ 1,457</td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

## Oil and Natural Gas Reserves (Unaudited)

Proved reserves are estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are reserves that can reasonably be expected to be recovered through existing wells with existing equipment and operating methods.

Proved oil and natural gas reserve quantities at December 31, 2010 and 2009 and the related discounted future net cash flows before income taxes are based on the estimates prepared by Cawley, Gillespie & Associates, Inc. and Ryder Scott Company, L.P. The reserve report for the period ended December 31, 2008 was prepared by Ryder Scott Company, L.P. Such estimates have been prepared in accordance with guidelines established by the Securities and Exchange Commission.

USE’s net ownership interests in estimated quantities of proved oil and natural gas reserves and changes in net proved reserves, all of which are located in the continental United States, are summarized below:

<table><tr><td>December 31, 2010</td><td>Oil (BBLS)</td><td>Natural Gas or NGL (MCFE)</td></tr><tr><td>Beginning of year</td><td>811,789</td><td>1,646,482</td></tr><tr><td>Revisions of previous quantity estimates</td><td>(55,450)</td><td>(234,852)</td></tr><tr><td>Extensions, discoveries and improved recoveries</td><td>1,093,540</td><td>1,911,867</td></tr><tr><td>Sales of reserves in place</td><td>--</td><td>--</td></tr><tr><td>Production</td><td>(303,433)</td><td>(872,529)</td></tr><tr><td>End of Year</td><td>1,546,446</td><td>2,450,968</td></tr><tr><td>Proved developed reserves at end of year</td><td>1,362,733</td><td>2,311,682</td></tr></table>

<table><tr><td>December 31, 2009</td><td>Oil (BBLS)</td><td>Natural Gas or NGL (MCFE)</td></tr><tr><td>Beginning of year</td><td>29,798</td><td>1,000,000</td></tr><tr><td>Revisions of previous quantity estimates</td><td>(3,747)</td><td>423,839</td></tr><tr><td>Extensions, discoveries and improved recoveries</td><td>866,199</td><td>710,621</td></tr><tr><td>Sales of reserves in place</td><td>--</td><td>--</td></tr><tr><td>Production</td><td>(80,461)</td><td>(487,978)</td></tr><tr><td>End of Year</td><td>811,789</td><td>1,646,482</td></tr><tr><td>Proved developed reserves at end of year</td><td>811,789</td><td>1,646,482</td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

## Standardized Measure (Unaudited)

The standardized measure of discounted future net cash flows relating to USE’s ownership interests in proved oil and natural gas reserves as of year-end is shown below:

<table><tr><td rowspan="3"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="4">Year Ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td><td></td></tr><tr><td>Future cash inflows</td><td>$ 124,629</td><td>$ 51,024</td><td>$ 7,112</td><td></td></tr><tr><td>Future costs:</td><td></td><td></td><td></td><td></td></tr><tr><td>Production</td><td>(36,299)</td><td>(14,025)</td><td>(1,154)</td><td></td></tr><tr><td>Development</td><td>(6,774)</td><td>(104)</td><td>(64)</td><td></td></tr><tr><td>Future income tax expense</td><td>(11,622)</td><td>(8,273)</td><td>(1,993)</td><td></td></tr><tr><td>Future net cash flows</td><td>69,934</td><td>28,622</td><td>3,901</td><td></td></tr><tr><td>10% discount factor</td><td>(25,281)</td><td>(8,638)</td><td>(583)</td><td></td></tr><tr><td>Standardized measure of discounted future net cash flows</td><td>$ 44,653</td><td>$ 19,984</td><td>$ 3,318</td><td></td></tr></table>

Future cash flows for the years ended December 31, 2009 and 2010 are computed by applying average prices per barrel of oil and per MMbtu of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period to year-end quantities of proved oil and natural gas reserves. Future cash flows for the year ended December 31, 2008 is based upon the price per barrel of oil and per MMbtu of natural gas on the last day of 2008. Prices used in computing year end 2010, 2009 and 2008 future cash flows were $79.43/barrel, $61.18/barrel and $41.41/barrel, respectively, for oil and $4.38/MMbtu, $3.87/MMbtu and $5.88/MMbtu for natural gas, respectively. Future operating expenses and development costs are computed primarily by USE’s petroleum engineers by estimating the expenditures to be incurred in developing and producing USE’s proved oil and natural gas reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions.

Future income taxes are based on year-end statutory rates, adjusted for the tax basis of oil and gas properties and available applicable tax assets. A discount factor of 10% was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair market value of USE’s oil and natural gas properties. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

## Change in Standardized Measure (Unaudited)

Changes in standardized measure of future net cash flows relating to proved oil and natural gas reserves are summarized below:

<table><tr><td rowspan="3"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="4">Year Ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td><td></td></tr><tr><td>Balance at beginning of period</td><td>$ 19,984</td><td>$ 3,318</td><td>$ --</td><td></td></tr><tr><td>Sales of oil and gas, net of production costs</td><td>(20,476)</td><td>(6,496)</td><td>(509)</td><td></td></tr><tr><td>Net change in prices and production costs</td><td>3,895</td><td>297</td><td>--</td><td></td></tr><tr><td>Net change in future development costs</td><td>--</td><td>--</td><td>--</td><td></td></tr><tr><td>Extensions and discoveries</td><td>40,011</td><td>26,721</td><td>5,820</td><td></td></tr><tr><td>Revisions of previous quantity estimates</td><td>(2,519)</td><td>1,586</td><td>--</td><td></td></tr><tr><td>Previously estimated development costs incurred</td><td>--</td><td>--</td><td>--</td><td></td></tr><tr><td>Net change in income taxes</td><td>(2,138)</td><td>(4,385)</td><td>(1,993)</td><td></td></tr><tr><td>Accretion of discount</td><td>2,576</td><td>531</td><td>--</td><td></td></tr><tr><td>Changes in production rates, timing and other</td><td>3,320</td><td>(1,588)</td><td>--</td><td></td></tr><tr><td>Balance at end of period</td><td>$ 44,653</td><td>$ 19,984</td><td>$ 3,318</td><td></td></tr></table>

Sales of oil and natural gas, net of oil and natural gas operating expenses, are based on historical pretax results. Extensions and discoveries and the changes due to revisions in standardized variables are reported on a pretax discounted basis.

## H. GEOTHERMAL

During the year ended December 31, 2010, USE’s minority interest investment in Standard Steam Trust, LLC (“SST”), a Denver, Colorado based private geothermal resource acquisition and development company decreased. USE’s investment increased by recognizing a $1.0 million equity gain during the year ended December 31, 2010 and then decreased when USE received a $1.1 capital distribution from SST. USE’s net investment at December 31, 2010 was $2.8 million. Due to not funding cash calls during 2010 from SST USE’s ownership interest decreased from 23.8% to 22.8%. USE has notified SST that it does not intend to fund any future cash calls, which will result in dilution to USE’s ownership interest.

## I. ENERGY SECTOR HOUSING

Remington Village – Gillette, Wyoming.

USE owns a nine building multifamily apartment complex, with 216 units on 10.15 acres located in Gillette, Wyoming. At December 31, 2010 the net book value of the multifamily housing complex was $22.2 million and the appraised value was $21.0 million. USE recorded an impairment on the asset of $1.5 million at December 31, 2010. (See Subsequent Events, Note R)

## J. BNP RESERVE CREDIT FACILITY

On July 30, 2010, USE established a Senior Secured Revolving Credit Facility (the “Facility”) to borrow up to $75 million from BNP Paribas (“BNP”). At present, BNP is the only lender under the



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Facility. In the future, the facility may include other members of a lending syndicate (the “Lenders”) as provided for in the Facility. BNPP also is the administrative agent for the Facility, which is governed by the following documents: Credit Agreement; Mortgage, Deed of Trust, Assignment of As-Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement (the “Mortgage”); and Guaranty and Pledge Agreement (the “Guaranty”), which are referred to below together as the “Facility Documents.” The following summarizes the principal provisions of the Facility as set forth in the Facility Documents, which are filed as exhibits to this Report. The summary is qualified by reference to the complete text of the documents.

USE organized a wholly-owned subsidiary, Energy One LLC (“Energy One”), which will be the borrower under the Facility. USE has assigned to Energy One all of its rights, title and interest in certain oil and gas properties and equipment related thereto, rights under various operating agreements, proceeds from sale of production and from sale or other disposition of the properties. USE also has unconditionally and irrevocably guaranteed Energy One’s performance of its obligations under the Credit Agreement, including without limitation Energy One’s payment of all borrowings and related fees thereunder.

From time to time until expiration of the Facility (July 30, 2014), if Energy One is in compliance with the Facility Documents, Energy One may borrow, pay, and re-borrow funds from the Lenders, up to an amount equal to the Borrowing Base, which was initially established at $12 million. The Borrowing Base will be redetermined semi-annually, taking into account updated reserve reports prepared by USE’s independent consulting engineers. Any proposed increase in the Borrowing Base will require approval by all Lenders in the syndicate (presently only BNP), and any proposed Borrowing Base decrease will require approval by Lenders holding not less than two-thirds of outstanding loans and loan commitments. Using information from the June 30, 2010 financial statements and reserve reports of Energy One, BNP increased the borrowing base to $18.5 million.

Interest will be payable quarterly at the greater of the Prime Rate, the Federal Funds Effective Rate (plus 0.5%), and the adjusted LIBO for the three prior months, plus, an additional 2.25% to 3.25%, depending on the amount of the loan relative to the Borrowing Base. Interest rates on outstanding loans are adjustable each day by BNPP as administrative agent. Energy One may prepay principal at any time without premium or penalty, but all outstanding principal will be due on July 30, 2014. If there is a decrease in the Borrowing Base, the excess of outstanding loans over the Borrowing Base will be due over the six months following the redetermination.

In addition, on a quarterly basis, Energy One will pay BNP, for the account of each Lender (as applicable), a commitment fee of 0.50% of the unused amount of each Lender’s unused amount of its Facility lending commitment, computed daily until July 30, 2014.

Energy One is required to comply with customary affirmative covenants, and with negative covenants. The principal negative financial covenants (measured at various times as provided in the Credit Agreement) do not permit (i) Interest Coverage Ratio (Interest Expense to EBITDAX) to be less than 3.0 to 1; (ii) Total Debt to EBITDAX to be greater than 3.5 to 1; and (iii) Current Ratio (current assets plus unused lender commitments under the Borrowing Base) to be less than 1.0 to 1.0. EBITDAX is defined in the Credit Agreement as Consolidated Net Income, plus non-cash charges.

If Energy One fails to pay interest or principal when due, or fails to comply with the covenants in the Credit Agreement (after a reasonable cure period, if applicable), BNP as Administrative Agent may (and



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

shall, if requested by the Majority Lenders (Lenders holding not less than 2/3 of the outstanding loan principal), declare the loans immediately due, and foreclose on Energy One’s assets and enforce USE’s guaranty.

At closing, pursuant to a separate fee letter with BNP, USE paid BNP $145,000 for initial arrangement and upfront fees, $59,000 to BNPP's legal counsel for legal fees, and will be paying BNPP a commercially reasonable Facility fees in the future if the Borrowing Base is increased. Additionally, USE has paid Madison Williams and Company, investment banker to USE, $240,000 under the terms of a 2009 financial services agreement, in proportion to the initial $12 million Borrowing Base.

As of December 31, 2010 we had not borrowed from the Facility. On February 18, 2011 we borrowed $3.0 million under the Credit Facility to fund our initial participation in an Eagle Ford shale oil prospect in Zavala County, Texas.

## K. OTHER LIABILITIES AND DEBT

As of December 31, 2010 and 2009, USE had current and long term liabilities associated with the following funding commitments:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td></tr><tr><td>Other liabilities and debt:</td><td></td><td></td></tr><tr><td>Other liabilities</td><td></td><td></td></tr><tr><td>Security deposits</td><td>191</td><td>150</td></tr><tr><td>Deferred rent</td><td>58</td><td>35</td></tr><tr><td>Employee health insurance self funding</td><td>5</td><td>--</td></tr><tr><td>Accrued expenses</td><td>--</td><td>29</td></tr><tr><td>Retainage on construction in progress</td><td>--</td><td>10</td></tr><tr><td></td><td>$ 254</td><td>$ 224</td></tr><tr><td>Other long term liabilities:</td><td></td><td></td></tr><tr><td>Accrued retirement costs</td><td>$ 847</td><td>$ 762</td></tr><tr><td>Debt:</td><td></td><td></td></tr><tr><td>Long term Debt</td><td></td><td></td></tr><tr><td>Real estate note - collateralized by property, interest at 6%</td><td>$ 600</td><td>$ 800</td></tr><tr><td>Less current portion</td><td>(200)</td><td>(200)</td></tr><tr><td>Totals</td><td>$ 400</td><td>$ 600</td></tr></table>

In December 2008, USE and TCM purchased land for $4 million ($2 million in January 2009, $400,000 annually for five years). USE is responsible for one-half the purchase price. As of December 31, 2010 USE has paid $1.4 million leaving $600,000 to be paid at the rate of $200,000 per year through 2013.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

At the date of filing of this annual report USE has a $10,000,000 line of credit from a commercial bank. The line of credit has a variable interest rate (5.5% minimum). The line of credit expired January 31, 2011 but was extended by the bank to April 15, 2011. As of the date of this report none of the line of credit had been drawn down. The line of credit is collateralized by USE’s multifamily housing project, Remington Village, and a corporate aircraft.

## L. INCOME TAXES

The provision for income taxes is composed of the following:

<table><tr><td rowspan="2"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="4">Years ended December 31,</td></tr><tr><td></td><td>2010</td><td colspan="2">2009</td><td>2008</td></tr><tr><td>Current income tax (benefit)</td><td></td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ (104)</td><td>$ (210)</td><td>$ (4,551)</td><td></td></tr><tr><td>State</td><td>--</td><td>--</td><td>(94)</td><td></td></tr><tr><td></td><td>$ (104)</td><td>$ (210)</td><td>$ (4,645)</td><td></td></tr><tr><td>Deferred income tax (benefit)</td><td></td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ (1,543)</td><td>$ (1,794)</td><td>$ 1,319</td><td></td></tr><tr><td>State</td><td>(91)</td><td>(275)</td><td>--</td><td></td></tr><tr><td></td><td>$ (1,634)</td><td>$ (2,069)</td><td>$ 1,319</td><td></td></tr></table>

The effective income tax rate differs from the U.S. Federal Statutory income tax rate due to the following:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">Years ended December 31,</td></tr><tr><td></td><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Federal statutory income tax rate</td><td>$ (853)</td><td>$ (3,555)</td><td>$ (3,271)</td></tr><tr><td>State income income taxes, net of federal benefit</td><td>(50)</td><td>(209)</td><td>(96)</td></tr><tr><td>Incentive stock options</td><td>258</td><td>404</td><td>338</td></tr><tr><td>Percentage depletion carryover</td><td>(1,067)</td><td>(128)</td><td>--</td></tr><tr><td>Other</td><td>(26)</td><td>1,209</td><td>(297)</td></tr><tr><td></td><td>$ (1,738)</td><td>$ (2,279)</td><td>$ (3,326)</td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

The Components of deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td>December 31, 2010</td><td>December 31, 2009</td><td></td></tr><tr><td>Deferred tax assets:</td><td></td><td></td><td></td></tr><tr><td>Net operating loss</td><td>$ 1,857</td><td>$ 2,078</td><td></td></tr><tr><td>Derivative instruments</td><td>621</td><td>--</td><td></td></tr><tr><td>Asset retirement obligation</td><td>109</td><td>40</td><td></td></tr><tr><td>Stock based compensation</td><td>287</td><td>629</td><td></td></tr><tr><td>Deferred compensation</td><td>372</td><td>534</td><td></td></tr><tr><td>Alternative minimum tax credit</td><td>706</td><td>810</td><td></td></tr><tr><td>Contribution carryover</td><td>27</td><td>19</td><td></td></tr><tr><td>Equity investments</td><td>362</td><td>--</td><td></td></tr><tr><td>Percentage depletion carryover</td><td>1,198</td><td>128</td><td></td></tr><tr><td></td><td>5,539</td><td>4,238</td><td></td></tr><tr><td>Deferred tax liabilities:</td><td></td><td></td><td></td></tr><tr><td>Property and equipment</td><td>(10,149)</td><td>(10,700)</td><td></td></tr><tr><td>Marketable securities</td><td>(361)</td><td>--</td><td></td></tr><tr><td></td><td>(10,510)</td><td>(10,700)</td><td></td></tr><tr><td>Net deferred tax (liabilities)</td><td>(4,971)</td><td>(6,462)</td><td></td></tr><tr><td>Less: Valuation Allowance</td><td>--</td><td>--</td><td></td></tr><tr><td>Net deferred tax (liability)</td><td>$ (4,971)</td><td>$ (6,462)</td><td></td></tr></table>

During the year ended December 31, 2010, deferred tax assets increased by $1.3 million and deferred tax liabilities decreased by $0.2 million. The net change in deferred tax liabilities decreased by $1.5 million compared to the previous year. This decrease is comprised of a deferred income tax benefit $1.6 million, and a reduction to other comprehensive income of $0.1 million resulting from the future tax impact of unrealized gain on marketable securities.

USE has net operating loss carryovers as of December 31, 2010 of $6.4 million for federal income tax purposes and $4.4 million for financial reporting purposes. The difference of $2.0 million relates to tax deductions for compensation expense for financial reporting purposes for which the benefit will not be recognized until the related deductions reduce taxes payable. The net operating loss carryovers may be carried back two years and forward twenty years from the year the net operating loss was generated. The net operating losses may be used to offset taxable income through 2030. In addition, USE has alternative minimum tax credit carry-forwards of $0.7 million which are available to offset future federal income taxes over an indefinite period.

During 2010, the Internal Revenue Service (“IRS”) issued information document requests (“IDR’s”) requesting information for the tax years ended December 31, 2009, 2008 and 2007. USE responded to the IDR’s and is currently waiting on a response from the IRS as to whether or not the IRS will commence an examination of USE for those years. USE agreed to extend the statute of limitations for the 2007 tax year



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

until July 2012. USE does not anticipate any adjustments to the tax years ended December 31, 2007, 2008 and 2009.

USE adopted the applicable provisions of ASC 740 to recognize, measure, and disclose uncertain tax positions in the financial statements. Under ASC 740, tax positions must meet a “more-likely-than-not” recognition threshold to be recognized. During the year ended December 31, 2010, no adjustments were recognized for uncertain tax positions.

USE recognizes interest and penalties related to uncertain tax positions in income tax expense (benefit). No interest and penalties related to uncertain tax positions were accrued at December 31, 2010.

The tax years 2007 through 2009 for federal returns and 2006 through 2009 for state returns remain open to examination by the major taxing jurisdictions in which we operate, no material changes to unrecognized tax positions are anticipated during the next year.

## M. SEGMENTS AND MAJOR CUSTOMERS

During the years ended December 31, 2010 and December 31, 2009, and December 31, 2008, USE, for financial reporting purposes, operated in three business segments, the exploration for and sale of oil and gas, rental of multifamily housing units and mining. As of December 31, 2010, no one customer had a majority of the units under contract in USE’s multifamily housing project in Gillette, Wyoming. USE’s operating segments are reflected in the tables below:



## U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

<table><tr><td rowspan="2"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="4">For the years ended December 31,</td></tr><tr><td></td><td>2010</td><td>2009</td><td>2008</td><td></td></tr><tr><td>Revenues:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>$ 24,667</td><td>$ 7,581</td><td>$ 589</td><td></td></tr><tr><td>Real estate</td><td>2,509</td><td>2,768</td><td>1,633</td><td></td></tr><tr><td>Total revenues:</td><td>27,176</td><td>10,349</td><td>2,222</td><td></td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>16,683</td><td>6,124</td><td>462</td><td></td></tr><tr><td>Real estate</td><td>3,874</td><td>2,104</td><td>1,165</td><td></td></tr><tr><td>Mineral properties</td><td>1,878</td><td>1,959</td><td>2,296</td><td></td></tr><tr><td>Total operating expenses:</td><td>22,435</td><td>10,187</td><td>3,923</td><td></td></tr><tr><td>Interest expense</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>--</td><td>--</td><td>--</td><td></td></tr><tr><td>Real estate</td><td>--</td><td>19</td><td>417</td><td></td></tr><tr><td>Mineral properties</td><td>48</td><td>60</td><td>--</td><td></td></tr><tr><td>Total interest expense:</td><td>48</td><td>79</td><td>417</td><td></td></tr><tr><td>Operating income/(loss)</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>$ 7,984</td><td>$ 1,457</td><td>$ 127</td><td></td></tr><tr><td>Real estate</td><td>(1,365)</td><td>645</td><td>51</td><td></td></tr><tr><td>Mineral properties</td><td>(1,926)</td><td>(2,019)</td><td>(2,296)</td><td></td></tr><tr><td>Operating income/(loss)</td><td></td><td></td><td></td><td></td></tr><tr><td>from identified segments</td><td>4,693</td><td>83</td><td>(2,118)</td><td></td></tr><tr><td>General and administrative expenses</td><td>(8,973)</td><td>(9,433)</td><td>(7,903)</td><td></td></tr><tr><td>Add back interest expense</td><td>48</td><td>79</td><td>417</td><td></td></tr><tr><td>Other revenues and expenses:</td><td>1,722</td><td>(1,186)</td><td>(17)</td><td></td></tr><tr><td>(Loss) before</td><td></td><td></td><td></td><td></td></tr><tr><td>income taxes</td><td>$ (2,510)</td><td>$ (10,457)</td><td>$ (9,621)</td><td></td></tr><tr><td>Depreciation expense:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>$ 10,610</td><td>$ 1,045</td><td>$ 382</td><td></td></tr><tr><td>Real estate</td><td>1,063</td><td>3,571</td><td>517</td><td></td></tr><tr><td>Mineral properties</td><td>77</td><td>54</td><td>49</td><td></td></tr><tr><td>Corporate</td><td>380</td><td>396</td><td>478</td><td></td></tr><tr><td>Total depreciation expense</td><td>$ 12,130</td><td>$ 5,066</td><td>$ 1,426</td><td></td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

<table><tr><td rowspan="2"></td><td rowspan="2">2010</td><td colspan="3">(In thousands)</td></tr><tr><td>December 31, 2009</td><td>2008</td><td></td></tr><tr><td>Assets by segment</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and Gas properties</td><td>$ 75,639</td><td>$ 30,016</td><td>$ 8,523</td><td></td></tr><tr><td>Real estate</td><td>20,800</td><td>23,450</td><td>30,980</td><td></td></tr><tr><td>Mineral properties</td><td>21,258</td><td>21,998</td><td>24,927</td><td></td></tr><tr><td>Corporate assets</td><td>38,319</td><td>71,259</td><td>78,201</td><td></td></tr><tr><td>Total assets</td><td>$ 156,016</td><td>$ 146,723</td><td>$ 142,631</td><td></td></tr></table>

## N. SHAREHOLDERS' EQUITY

During 2010, USE issued 649,897 shares of common stock. Issued shares consist of (a) 275,728 shares as a result of the exercise of options by employees of USE; (b) 236,367 shares issued as a result of warrants being exercised (c) 80,000 shares issued to officers of USE pursuant to the 2001 Stock Compensation Plan; (d) 42,802 shares issued for the 2010 ESOP contribution and (e) 15,000 shares as a result of exercise of options by an outside director.

## Stock Option Plans

The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan for the benefit of USE’s employees. The Option Plan, as amended and renamed the 1998 Incentive Stock Option Plan (“1998 ISOP”), reserved 3,250,000 shares of USE’s $.01 par value common stock for issuance under the 1998 ISOP. Options which expired without exercise were available for reissue until the 1998 ISOP was replaced by the 2001 ISOP. The last options issued under the 1998 ISOP will expire if not exercised by January 9, 2011 and the 1998 ISOP will be terminated at that date.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

During the years ended December 31, 2010, 2008 and 2007 the following activity occurred under the 1998 ISOP:

<table><tr><td rowspan="2"></td><td colspan="3">Year ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Grants</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>--</td><td>--</td><td>--</td></tr><tr><td>Non-Qualified</td><td>--</td><td>--</td><td>--</td></tr><tr><td></td><td>--</td><td>--</td><td>--</td></tr><tr><td>Price of Grants</td><td></td><td></td><td></td></tr><tr><td>High</td><td>--</td><td>--</td><td>--</td></tr><tr><td>Low</td><td>--</td><td>--</td><td>--</td></tr><tr><td>Exercised</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>35,000</td><td>--</td><td>--</td></tr><tr><td>Non-Qualified</td><td>389,215</td><td>--</td><td>--</td></tr><tr><td></td><td>424,215</td><td>--</td><td>--</td></tr><tr><td>Total Cash Received</td><td>$ --</td><td>$ --</td><td>$ --</td></tr><tr><td>Forfeitures/Cancellations</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>--</td><td>--</td><td>77,782</td></tr><tr><td>Non-Qualified</td><td>--</td><td>--</td><td>27,617</td></tr><tr><td></td><td>--</td><td>--</td><td>105,399</td></tr></table>

(1) 263,971 shares valued at $1,396,000 were withheld from the option exercises to cover the cost of the exercises, federal income tax and statutory payroll taxes.

In December 2001, the Board of Directors adopted (and the shareholders approved) the U.S. Energy Corp. 2001 Incentive Stock Option Plan (the "2001 ISOP") for the benefit of USE's employees. The 2001 ISOP (amended by approval of the shareholders in 2004 and 2007) reserves for issuance 25% of USE's shares of common stock issued and outstanding at any time. The 2001 ISOP has a term of 10 years. Options issued under the 2001 ISOP remain exercisable until their expiration date under the terms of the 2001 ISOP.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

During the years ended December 31, 2010, 2009 and 2008 the following activity occurred under the 2001 ISOP:

<table><tr><td rowspan="2"></td><td colspan="3">Year ended December 31,</td></tr><tr><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Grants</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>--</td><td>--</td><td>248,817</td></tr><tr><td>Non-Qualified</td><td>--</td><td>--</td><td>313,683</td></tr><tr><td></td><td>--</td><td>--</td><td>562,500</td></tr><tr><td>Price of Grants</td><td></td><td></td><td></td></tr><tr><td>High</td><td>--</td><td>--</td><td>2.52</td></tr><tr><td>Low</td><td>--</td><td>--</td><td>2.52</td></tr><tr><td>Exercised</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>111,359</td><td>1,984</td><td>--</td></tr><tr><td>Non-Qualified</td><td>163,893</td><td>--</td><td>--</td></tr><tr><td></td><td>275,252</td><td>1,984</td><td>--</td></tr><tr><td>Total Cash Received</td><td>$ 63,000</td><td>$ 5,000</td><td>$ --</td></tr><tr><td>Forfeitures/Cancellations</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>--</td><td>4,000</td><td>77,221</td></tr><tr><td>Non-Qualified</td><td>--</td><td>--</td><td>482,709</td></tr><tr><td></td><td>--</td><td>4,000</td><td>559,930</td></tr></table>

 \( ^{(1)} \)  In addition to the cash exercise of 25,015 options: 43,676 shares valued at 30,000 were exchanged for exercises of 60,901 options; and 116,062 shares valued at 596,000 were withheld from the exercise of 189,336 options to cover the cost of the exercises, federal income tax and statutory payroll taxes.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

A summary of the Employee Stock Option Plans activity in all plans for the year ended December 31, 2010, 2009 and 2008 is as follows:

<table><tr><td rowspan="2"></td><td colspan="2">2010</td><td colspan="2">2009</td><td colspan="2">2008</td></tr><tr><td>Options</td><td>Weighted Average Exercise Price</td><td>Options</td><td>Weighted Average Exercise Price</td><td>Options</td><td>Weighted Average Exercise Price</td></tr><tr><td>Outstanding at beginning of the period</td><td>3,711,114</td><td>$ 3.64</td><td>3,717,098</td><td>$ 3.63</td><td>3,819,927</td><td>$ 3.75</td></tr><tr><td>Granted</td><td>--</td><td>$ --</td><td>--</td><td>$ --</td><td>562,500</td><td>$ 2.52</td></tr><tr><td>Forfeited</td><td>--</td><td>$ --</td><td>--</td><td>$ --</td><td>(5,333)</td><td>$ 4.97</td></tr><tr><td>Expired</td><td>--</td><td>$ --</td><td>(4,000)</td><td>$ 2.46</td><td>(659,996)</td><td>$ 3.37</td></tr><tr><td>Exercised</td><td>(699,467)</td><td>$ 2.63</td><td>(1,984)</td><td>$ 2.52</td><td>-</td><td>$ --</td></tr><tr><td>Outstanding at period end</td><td>3,011,647</td><td>$ 3.87</td><td>3,711,114</td><td>$ 3.64</td><td>3,717,098</td><td>$ 3.63</td></tr><tr><td>Exercisable at period end</td><td>2,404,148</td><td>$ 3.78</td><td>2,614,453</td><td>$ 3.43</td><td>2,131,269</td><td>$ 3.29</td></tr><tr><td>Weighted average fair value of options granted during the period</td><td></td><td>$ --</td><td></td><td>$ --</td><td></td><td>$ 1.41</td></tr></table>

During the year ended December 31, 2010 a total of 699,467 options were exercised by employees by the payment of $63,000 in cash and the surrender of 325,195 shares valued at $1.8 million. In the year ended December 31, 2009, 1,984 options were exercised by the payment of $5,000. No options were exercised during the year ended December 31, 2008.

Option related compensation expense is recognized over the vesting period of the options and is calculated using the Black Scholes option pricing model. USE initially assumed no forfeitures, but has subsequently reduced the cumulative expense based on historical forfeiture.

No option related compensation expense was recognized for options which vested prior to the adoption of FAS 123R. Prior to the adoption of FAS 123R, USE accounted for option compensation pursuant to APB Opinion No. 25. The following table sets forth the option compensation related expense for the years ended December 31, 2007 through the vesting period of the employee options outstanding at December 31, 2010:

<table><tr><td rowspan="2">Year Ended December 31,</td><td rowspan="2">Options Granted</td><td rowspan="2">Total Expense</td><td colspan="6">Option Related Compensation Expense for the Year Ended December 31,</td></tr><tr><td>2007</td><td>2008</td><td>2009</td><td>2010</td><td>2011</td><td>Thereafter</td></tr><tr><td>2005</td><td>700,000</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$--</td></tr><tr><td>2006</td><td>25,000</td><td>12,000</td><td>15,000</td><td>(3,000)</td><td>--</td><td>--</td><td>--</td><td>--</td></tr><tr><td>2007</td><td>1,558,000</td><td>4,355,000</td><td>592,000</td><td>1,081,000</td><td>1,167,000</td><td>757,000</td><td>756,000</td><td>2,000</td></tr><tr><td>2008</td><td>562,500</td><td>791,000</td><td>--</td><td>73,000</td><td>263,000</td><td>264,000</td><td>191,000</td><td>--</td></tr><tr><td>2009</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>-</td></tr><tr><td>2010</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>--</td><td>&lt;ecel&gt;</td><td></td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

The following table summarizes information about employee stock options outstanding and exercisable at December 31, 2010:

<table><tr><td>Grant Price Range</td><td>Options Outstanding at December 31, 2010</td><td>Weighted average remaining contractual life in years</td><td>Weighted average exercise price</td><td>Options exercisable at December 31, 2010</td><td>Weighted average exercise price</td></tr><tr><td>$2.25</td><td>125,112</td><td>0.94</td><td>$ 2.25</td><td>125,112</td><td>$ 2.25</td></tr><tr><td>$2.26 - $2.40</td><td>10,000</td><td>0.03</td><td>$ 2.40</td><td>10,000</td><td>$ 2.40</td></tr><tr><td>$2.41 - $2.46</td><td>397,319</td><td>3.50</td><td>$ 2.46</td><td>397,319</td><td>$ 2.46</td></tr><tr><td>$2.47 - $2.52</td><td>462,880</td><td>7.73</td><td>$ 2.52</td><td>275,381</td><td>$ 2.52</td></tr><tr><td>$2.53 - $3.86</td><td>373,768</td><td>4.79</td><td>$ 3.86</td><td>373,768</td><td>$ 3.86</td></tr><tr><td>$3.87 - $3.90</td><td>377,928</td><td>0.93</td><td>$ 3.90</td><td>377,928</td><td>$ 3.90</td></tr><tr><td>$3.91 - $4.97</td><td>1,264,640</td><td>6.57</td><td>$ 4.97</td><td>844,640</td><td>$ 4.97</td></tr><tr><td></td><td>3,011,647</td><td>5.16</td><td>$ 3.87</td><td>2,404,148</td><td>$ 3.78</td></tr></table>

The following table sets forth the number of options available for grant as well as the intrinsic value of the options outstanding and exercisable:

<table><tr><td></td><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Available for future grant</td><td>3,765,506</td><td>3,327,780</td><td>1,924,524</td></tr><tr><td>Intrinsic value of option exercised</td><td>$ 1,956,000</td><td>$ 14,000</td><td>$ --</td></tr><tr><td>Aggregate intrinsic value of options outstanding</td><td>$ 6,660,000</td><td>$ 8,514,000</td><td>$ --</td></tr><tr><td>Aggregate intrinsic value of options exercisable</td><td>$ 5,526,000</td><td>$ 6,543,000</td><td>$ --</td></tr></table>

## Employee Stock Ownership Plan

The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of all USE’s employees. Employees become eligible to participate in the ESOP after one year of service which must consist of at least 1,000 hours worked. After the employee becomes a participant in the plan, he or she must have a minimum of 1,000 hours of service in each plan year to be considered for allocations of funding from USE. Employees become 20% vested after three years of service and increase their vesting by 20% each year thereafter until such time as they are fully vested after eight years of service.

An employee’s total compensation paid, which is subject to federal income tax, up to an annual limit of $245,000, $245,000 and $230,000 for the years ended December 31, 2010, 2009 and 2008, respectively, is the basis for computing how much of the total annual funding is contributed into his or her personal account. An employee’s compensation divided by the total eligible compensation paid to all plan participants is the percentage that each participant receives on an annual basis. USE funds 10% of



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

all eligible compensation annually in the form of common stock and may fund up to an additional 15% to the plan in common stock. As of December 31, 2010, all shares of USE’s stock that have been contributed to the ESOP have been allocated. The estimated fair value of shares that are not vested is approximately $156,900.

During the year ended December 31, 2010, the Board of Directors of USE approved a contribution of 42,802 shares to the ESOP at the price of $6.08 for a total expense of $260,000. This compares to contributions to the ESOP during the year ended December 31, 2009 and 2008 of 36,583 and 126,876 shares to the ESOP at prices of $5.93 and $1.64 per share, respectively. The expense for the contributions during the years ended December 31, 2009 and 2008 were $217,000 and $208,000, respectively.

## Warrants to Others

As of December 31, 2010, there were 320,000 warrants outstanding to purchase shares of USE's common stock. Of the total outstanding warrants, 276,667 were exercisable. USE values these warrants using the Black-Scholes option pricing model and expenses that value over various terms based on the nature of the award. Activity for the periods ended December 31, 2010, 2009 and 2008 for warrants is presented in the following table:

<table><tr><td rowspan="3"></td><td colspan="6">Year ended December 31,</td></tr><tr><td colspan="2">2010</td><td colspan="2">2009</td><td colspan="2">2008</td></tr><tr><td>Warrants</td><td>Weighted Average Exercise Price</td><td>Warrants</td><td>Weighted Average Exercise Price</td><td>Warrants</td><td>WeightED Average Exercise Price</td></tr><tr><td>Outstanding at beginning of the period</td><td>581,367</td><td>$ 2.91</td><td>1,036,387</td><td>$ 3.43</td><td>1,445,585</td><td>$ 3.58</td></tr><tr><td>Granted</td><td>10,000</td><td>$ 5.04</td><td>--</td><td>$ --</td><td>170,000</td><td>$ 2.59</td></tr><tr><td>Forfeited</td><td>(20,000)</td><td>$ 2.52</td><td>--</td><td>$ --</td><td>--</td><td>$ --</td></tr><tr><td>Expired</td><td>--</td><td>$ --</td><td>(383,932)</td><td>$ 4.26</td><td>(132,500)</td><td>$ 3.98</td></tr><tr><td>Exercised</td><td>(251,367)</td><td>$ 2.97</td><td>(71,088)</td><td>$ 3.27</td><td>(446,698)</td><td>$ 3.42</td></tr><tr><td>Outstanding at period end</td><td>320,000</td><td>$ 2.95</td><td>581,367</td><td>$ 2.91</td><td>1,036,387</td><td>$ 3.43</td></tr><tr><td>Exercisable at period end</td><td>276,667</td><td>$ 2.93</td><td>494,701</td><td>$ 2.98</td><td>886,387</td><td>$ 3.58</td></tr><tr><td>Weighted average fair value of options granted during the period</td><td></td><td>$ 2.99</td><td></td><td>$ --</td><td></td><td>$ 1.28</td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

The following table summarizes information about non employee warrants outstanding and exercisable at December 31, 2010:

<table><tr><td>Grant Price Range</td><td>Warrants Outstanding at December 31, 2010</td><td>Weighted average remaining contractual life in years</td><td>Weighted average exercise price</td><td>Warrants exercisable at December 31, 2010</td><td>Weighted average exercise price</td></tr><tr><td>2.25</td><td>10,000</td><td>0.93</td><td>$ 2.25</td><td>10,000</td><td>$ 2.25</td></tr><tr><td>$2.25 - $2.46</td><td>100,000</td><td>1.99</td><td>$ 2.46</td><td>100,000</td><td>$ 2.46</td></tr><tr><td>$2.47 - $2.52</td><td>110,000</td><td>7.07</td><td>$ 2.52</td><td>76,667</td><td>$ 2.52</td></tr><tr><td>$2.53 - $3.86</td><td>75,000</td><td>3.35</td><td>$ 3.86</td><td>75,000</td><td>$ 2.77</td></tr><tr><td>$2.87 - $3.90</td><td>15,000</td><td>0.93</td><td>$ 3.90</td><td>15,000</td><td>$ 3.86</td></tr><tr><td>$3.91 - $5.04</td><td>10,000</td><td>9.48</td><td>$ 5.04</td><td>-</td><td>$ 3.90</td></tr><tr><td></td><td>320,000</td><td>4.21</td><td>$ 2.95</td><td>276,667</td><td>$ 2.93</td></tr></table>

These warrants are held by persons or entities other than employees and officers of USE.

USE has computed the fair values of its warrants granted to outside consultants and outside directors using the Black Scholes pricing model and the following weighted average assumptions:

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended</td></tr><tr><td colspan="3">December 31,</td></tr><tr><td></td><td>2010</td><td>2009</td><td>2008</td></tr><tr><td>Risk-free interest rate</td><td>2.24%</td><td>--</td><td>2.41% - 3.23%</td></tr><tr><td>Expected lives (years)</td><td>6.0</td><td>--</td><td>1.78 - 6.0</td></tr><tr><td>Expected volatility</td><td>63.79%</td><td>--</td><td>46.05% - 56.51%</td></tr><tr><td>Expected dividend yield</td><td>--</td><td>--</td><td>--</td></tr></table>

## O. COMMITMENTS, CONTINGENCIES AND OTHER

## Legal Proceedings

From time to time, we are party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on our financial position or results of operations. Following are currently pending legal matters:

## Water Rights Litigation –Mount Emmons Molybdenum Property

Concerning the Application of U.S. Energy, Case No. 2008CW81. On July 25, 2008, the Company filed an Application for Finding of Reasonable Diligence with the Water Court (“Water Diligence Application”) concerning the conditional water rights associated with Mount Emmons (Case No. 2008CW81). The conditional water decree (“Decree”) requires the Company to file its proposed plan of



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

operations and associated permits with the Forest Service and BLM within six years of entry of the 2002 Decree, or within six years of the final determination in the Applicant’s pending patent application, whichever occurs later. The BLM issued the mineral patents on April 2, 2004. Although, the issuance of the patents was appealed, on April 30, 2007, the United States Supreme Court made a final determination upholding BLM’s issuance of the mineral patents.

The Company believes that the deadline for filing the plan of operations specified by the Decree is April 30, 2013 (six years from the final determination of issuance of the mineral patents by the United States Supreme Court). The Forest Service has indicated that the deadline should be April 2, 2010 (six years from the issuance of the mineral patents by BLM). The United States, on behalf of the Forest Service and BLM, filed a Statement of Opposition on this specific issue only. Statements of Opposition were also filed by six other parties including the City of Gunnison, the Colorado Water Conservation Board, High Country Citizens' Alliance, Crested Butte Land Trust and others for various reasons, including requesting the Company be put on strict proof as to demonstrating evidence of reasonable diligence in developing the conditional water rights.

On March 26, 2010, BLM and the Forest Service signed a Stipulation with the Company, which resolved their opposition to the Company’s Water Diligence Application. Pursuant to the Stipulation, the Company agreed to prepare, in consultation with the BLM and Forest Service, and file no later than April 2, 2010, an initial Plan of Operations in accordance with 36 C.F.R. Sec. 228.4(d). BLM, the Forest Service and the Company also agreed the filing of this Plan of Operations would satisfy the Decree. The Company filed the Plan of Operations on March 31, 2010.

On August 11, 2010, High Country Citizen’s Alliance, Crested Butte Land Trust and Star Mountain Ranch Association, Inc. (“Opposers”) filed a Motion for Summary Judgment alleging that the Plan of Operations did not comply with the Forest Service regulations and did not satisfy certain Reality Check Limitations contained in the Water Rights Decree. On September 24, 2010, U.S. Energy filed a Response to the Motion for Summary Judgment responding that the Plan of Operations complied with the Forest Service and BLM’s regulations and satisfied the Reality Check provision contained in the Water Rights Decree and alternately that the Company had until April 30, 2013 to comply with the Reality Check provision, which is six years after the Supreme Court denied certiorari in the judicial proceeding. The U.S. Department of Justice also filed a response on behalf of the Forest Service and BLM that the Court cannot second guess the Forest Service’s determination that the Company’s Plan of Operations satisfied the Forest Service and BLM’s regulations.

On November 24, 2010 the District Court Judge denied the Opposers’s Motion for Summary Judgment and held that Company had until April 30, 2013 to comply with the Reality Check provision of the Decree, which is six years after the Supreme Court denied certiorari in the judicial proceeding. The question of the adequacy of the Water Diligence Application is pending.

## Appeal of Approval of Notice of Intent to Conduct Prospecting for the Mount Emmons Property

On January 3, 2008, the Division of Reclamation, Mining and Safety of the Colorado Department of Natural Resources (“DRMS”) approved the Company’s Notice of Intent to Conduct Prospecting for the Mount Emmons molybdenum property (“NOI”). The approved NOI provides for continued exploration of the molybdenum deposit to update, improve and verify, in accordance with current industry standards and legal requirements, mineralization data that was collected by Amax in the late 1970’s.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

On March 8, 2008, High Country Citizens’ Alliance (“HCCA”) filed a request for hearing before the Colorado Mine Land Reclamation Board (“MLRB”) appealed the NOI, claiming it was not prospecting, but rather development and mining. On May 14, 2008, the MLRB denied HCCA’s Request for Hearing and also denied their Request for a Declaratory Order. Citing Colorado law, the MLRB determined that HCCA did not have standing or the right to appeal DRMS’s approval of the NOI under Colorado law.

On August 28, 2008, HCCA appealed the MLRB’s decision in Denver District Court. Plaintiff: High Country Citizen’s Alliance v. Defendants: Colorado Mined Land Reclamation Board, Colorado Division of Reclamation Mining and Safety and U.S. Energy Corp., Case No.: 08CV6156 (District Court, 2d Jud. Dist., City and County of Denver). The MLRB has filed an answer with the Court. The DRMS and the Company (in conjunction with TCM) have both filed the responsive pleadings in addition to motions to dismiss the HCCA complaint.

On February 24, 2011, the Denver, Colorado District Court issued an Order dismissing all of HCCA’s claims concerning the appeal of U.S. Energy’s NOI holding that: (i) HCCA does not have standing to request judicial review on the merits of the DRMS’s approval of U.S. Energy’s NOI and (ii) HCCA does not have standing to request a Declaratory Order. This decision upholds MLRB’s May 14, 2008 decision denying HCCA’s Request for Hearing and their Request for a Declaratory Order because HCCA did not have standing or the right to appeal DRMS’s approval of the NOI under Colorado law.

On January 20, 2010 the Company submitted Modification MD-03 (“MD-03”) to the NOI. On November 15, 2010 DRMS issued its determination that MD-03 was complete, the activities proposed were prospecting and that MD-03 was approved. On November 19, 2010 HCCA filed an appeal with the MLRB claiming that: (i) the proposed activities were not prospecting, but rather development and mining, (ii) the current financial warranty amount was insufficient to cover the proposed activities and (iii) the permit should be conditioned upon its compliance with other federal and local governmental agency requirements.

On January 12, 2011, the MLRB on a vote 4-1 vote upheld DRMS’s approval of MD-03 and their determination that: (i) the activities proposed by the NOI and MD-03 are prospecting, not development or mining, (ii) the current financial warranty amount is sufficient to cover the proposed activities and (iii) DRMS’s decision not to make its approval of MD-03 contingent on permits or licenses that may be required by federal, other state, or local agencies was proper and affirmed that decision. On March 2, 2011, HCCA appealed MLRB’s decision on MD-03 to the Denver, Colorado District Court.

## Asset Retirement Obligations

Reclamation liabilities at December 31, 2010 were those related to the Mount Emmons molybdenum property and oil and gas wells drilled in the Gulf Coast area and Williston Basin of North Dakota.

## Mount Emmons

The Mount Emmons molybdenum property is located on fee property within the boundary of U.S. Forest Service (“USFS”) land. Although mining of the mineral resource will occur on the fee property, associated ancillary activities will occur on USFS land. USE and TCM submitted an initial Plan of Operations in accordance with 36 C.F.R. Sec. 228.4(d) on March 31, 2010. An additional Plan of Operations will be submitted to the USFS for the USFS approval, which approval is required before initial construction and mining and processing may occur. Under the procedures mandated by National Environmental Protection Act (“NEPA”), the USFS will prepare an environmental analysis in the form of



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

an Environmental Assessment and/or and Environmental Impact Statement to evaluate the predicted environmental and social economic impacts of the proposed development and mining of the Mount Emmons molybdenum property. The NEPA process provides for public review and comment of the proposed plan.

Obtaining and maintaining the various permits for the mining operations at Mount Emmons will be complex, time-consuming, and expensive. Changes in a mine’s design, production rates, quality of material mined, and many other matters, often require submission of the proposed changes for agency approval prior to implementation. In addition, changes in operating conditions beyond USE and TCM’s control, or changes in agency policy and Federal and State law, could further affect the successful permitting of the mine operations.

Although USE is confident that the Plan of Operations for Mount Emmons will ultimately be approved by the USFS, the timing and cost, and ultimate success of the mining operation cannot be predicted. The reclamation liability at December 31, 2010 for Mount Emmons was $139,000.

## Oil and Gas Wells

USE is responsible for its portion of reclamation costs on the oil and gas wells it participates in once the well is no longer economic and needs to be plugged and abandoned. At December 31, 2010, USE’s liability for its wells was $159,000. The wells are projected to be reclaimed at various times beginning in 2013 and ending in 2043. In the event that the reclamation cost changes the reclamation cost will be adjusted.

## 401(K) Plan

The Board of Directors of USE adopted the U.S. Energy Corp. 401(K) Plan ("401(K)") in 2004. USE matches 50% of an employee's salary deferrals up to a maximum contribution per employee of $4,000 annually. USE expensed $49,000, $48,000, and $51,000 for the years ended December 31, 2010, 2009 and 2008, respectively related to these contributions.

## Executive Officer Compensation

In December 2001, the Board of Directors adopted (and the shareholders approved) the 2001 Stock Award Plan to compensate its executive officers. The Stock Award Plan was amended on June 22, 2007 by a vote of the shareholders. Under the Plan, 20,000 shares may be issued annually to each officer during his employment. During the years ended December 31, 2010, 2009 and 2008, USE collectively issued 80,000, 80,000, and 85,000 shares of stock to these officers, respectively. While in USE’s employ, the officers have agreed not to sell, pledge or otherwise dispose of or encumber the shares granted under the 2001 Stock Award Plan. In consideration of this agreement USE has agreed to pay all taxes due on the shares granted to the officers.

USE is committed to pay the surviving spouse or dependent children of the former Chairman and Founder, who passed away on September 4, 2006, one year's full salary and 50% of that amount annually for an additional four years thereafter. During the three years ended December 31, 2010, 2009 and 2008, respectively USE paid $85,000 per annum under this plan. USE will pay $57,000, the remaining amount under the plan, during 2011. The Board of Directors also approved payment of 50% of the then existing wages to USE's former General Counsel for a period of five years. USE will pay $85,000 annually under



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

this agreement beginning at date of retirement, January 12, 2007, to January 12, 2012. Neither of these two retirement benefits to former officers is funded, however, an estimated liability has been accrued as of December 31, 2010 in the amount of $137,000

On October 20, 2005, the Board of Directors of USE adopted an Executive Retirement Policy for the then Chairman/CEO President/COO and CFO/Treasurer/V.P. Finance. Under the terms of the Retirement Plan, the retired executive will receive payments equaling 50% of the greater of (i) the amount of compensation the Executive Officer received as base cash pay on his/her final regular pay check or (ii) the average annual pay rate, less all bonuses, he/she received over the last five years of his/her employment with Company. To be eligible for this benefit, the executive officer must serve in one of the designated executive offices for 15 years, reach the age of 60 and be an employee of USE on December 31, 2010. Through each executive’s employment contract USE has also agreed to pay for health insurance for the executive and his spouse from date of retirement, after age 60, until the executive is eligible for Medicare. During 2007, the Board of Directors voted unanimously to fund the retirement benefit for the then active officers who qualified under the plan. The funding is held in a separate trust account that is managed by an independent trustee and is subject only to the claims of creditors in the event of insolvency of USE. At December 31, 2010, USE had funded the executive retirement account with the amount calculated by a third party actuary, of $949,000 recorded as Other Long Term Assets. Additional amounts will be deposited annually until each executive’s 60 \( ^{th} \)  birthday. At December 31, 2010, there were three officers who were included in the Retirement Plan and four that may qualify for the health insurance benefit.

Compensation expense for executives under all plans for the year ended December 31, 2010, 2009 and 2008 was $314,000, $192,000, and $108,000, respectively. The total accrued liability for executive retirement under all plans at December 31, 2010, 2009 and 2008 was $1.0 million, $915,000, and $879,000, respectively.

USE has also established a mandatory retirement age of 70 unless the board specifically requests the services of an employee or officer beyond that age. Certain officers and one employee have agreements for payment of severance in the event of a change of control of USE.

## Operating Leases

USE is the lessor of portions of the office buildings and building improvements that it owns. USE occupies the majority of its main office building. The leases are accounted for as operating leases and expire at various periods through September, 2011, and provided for minimum monthly receipts of $8,000 through December 31, 2010. Rental income under the agreements was $98,000, $138,000, and $102,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Future minimum receipts for non-cancelable operating leases are $96,000 for the year ended December 31, 2011.

## P. DISCONTINUED OPERATIONS

On August 22, 2008, USE sold its controlling interest in SGMI. As a result of the sale the revenues and expenditures of SGMI for the year ended December 31, 2008 are presented in the December 31, 2008 Statement of Operations as Discontinued Operations. USE recognized a gain of $5.4 million, net of taxes on the sale of its interest in SGMI and a loss of $501,000 for the discontinued operations of SGMI. (See Subsequent Event Note R)



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

## Q. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

<table><tr><td rowspan="3"></td><td colspan="5">(In thousands except per share data)</td></tr><tr><td colspan="5">Three Months Ended</td></tr><tr><td>December 31, 2010</td><td>September 30, 2010</td><td>June 30, 2010</td><td>March 31, 2010</td><td></td></tr><tr><td>Operating revenues</td><td>$ 6,524</td><td>$ 6,363</td><td>$ 6,826</td><td>$ 7,463</td><td></td></tr><tr><td>Operating income (loss)</td><td>$ (4,403)</td><td>$ (874)</td><td>$ (291)</td><td>$ 1,336</td><td></td></tr><tr><td>Income (loss) before income tax and discontinued operations</td><td>$ (4,021)</td><td>$ (826)</td><td>$ (120)</td><td>$ 2,457</td><td></td></tr><tr><td>Benefit from (provision for) income taxes</td><td>$ 2,087</td><td>$ 591</td><td>$ (10)</td><td>$ (930)</td><td></td></tr><tr><td>Net income (loss)</td><td>$ (1,934)</td><td>$ (235)</td><td>$ (130)</td><td>$ 1,527</td><td></td></tr><tr><td>Income (loss) per share, basic</td><td>$ (0.07)</td><td>$ (0.01)</td><td>$ --</td><td>$ 0.06</td><td></td></tr><tr><td>Basic weighted average shares outstanding</td><td>26,973,834</td><td>26,855,513</td><td>26,734,636</td><td>26,487,162</td><td></td></tr><tr><td>Income (loss) per share, diluted</td><td>$ (0.07)</td><td>$ (0.01)</td><td>$ --</td><td>$ 0.05</td><td></td></tr><tr><td>Diluted weighted average shares outstanding</td><td>26,973,836</td><td>26,855,513</td><td>26,734,636</td><td>27,785,572</td><td></td></tr></table>



## U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

<table><tr><td rowspan="3"></td><td colspan="5">(In thousands except per share data)</td></tr><tr><td colspan="5">Three Months Ended</td></tr><tr><td>December 31, 2009</td><td>September 30, 2009</td><td>June 30, 2009</td><td>March 31, 2009</td><td></td></tr><tr><td>Operating revenues</td><td>$ 6,013</td><td>$ 1,377</td><td>$ 1,499</td><td>$ 1,460</td><td></td></tr><tr><td>Operating income (loss)</td><td>$ (1,354)</td><td>$ (2,296)</td><td>$ (2,194)</td><td>$ (3,427)</td><td></td></tr><tr><td>Income (loss) before income tax and discontinued operations</td><td>$ (2,194)</td><td>$ (2,608)</td><td>$ (2,196)</td><td>$ (3,459)</td><td></td></tr><tr><td>Benefit from (provision for) income taxes</td><td>$ 992</td><td>$ 864</td><td>$ (689)</td><td>$ 1,112</td><td></td></tr><tr><td>Net (loss)</td><td>$ (1,202)</td><td>$ (1,744)</td><td>$ (2,885)</td><td>$ (2,347)</td><td></td></tr><tr><td>Loss per share, basic</td><td>$ (0.05)</td><td>$ (0.09)</td><td>$ (0.13)</td><td>$ (0.11)</td><td></td></tr><tr><td>Basic weighted average shares outstanding</td><td>22,195,694</td><td>21,288,841</td><td>21,311,266</td><td>21,654,519</td><td></td></tr><tr><td>Loss per share, diluted</td><td>$ (0.05)</td><td>$ (0.09)</td><td>$ (0.13)</td><td>$ (0.11)</td><td></td></tr><tr><td>Diluted weighted average shares outstanding</td><td>22,195,694</td><td>21,288,841</td><td>21,311,266</td><td>21,654,519</td><td></td></tr></table>



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

(In thousands except per share data)

<table><tr><td rowspan="2"></td><td colspan="5">Three Months Ended</td></tr><tr><td>December 31, 2008</td><td>September 30, 2008</td><td>June 30, 2008</td><td>March 31, 2008</td><td></td></tr><tr><td>Operating revenues</td><td>$ 1,175</td><td>$ 569</td><td>$ 329</td><td>$ 149</td><td></td></tr><tr><td>Operating loss</td><td>$ (1,688)</td><td>$ (2,648)</td><td>$ (2,499)</td><td>$ (2,769)</td><td></td></tr><tr><td>Loss before income tax and discontinued operations</td><td>$ (2,609)</td><td>$ (2,458)</td><td>$ (2,320)</td><td>$ (2,234)</td><td></td></tr><tr><td>Benefit from income taxes</td><td>$ 886</td><td>$ 1,062</td><td>$ 704</td><td>$ 674</td><td></td></tr><tr><td>Discontinued operations, net of tax</td><td>$ --</td><td>$ 5,198</td><td>$ (134)</td><td>$ (157)</td><td></td></tr><tr><td>Net income (loss)</td><td>$ (1,722)</td><td>$ 3,801</td><td>$ (1,750)</td><td>$ (1,717)</td><td></td></tr><tr><td>Income (loss) per share, basic</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Continuing operations</td><td>$ (0.08)</td><td>$ (0.06)</td><td>$ (0.07)</td><td>$ (0.06)</td><td></td></tr><tr><td>Discontinued operations</td><td>--</td><td>0.22</td><td>--</td><td>(0.01)</td><td></td></tr><tr><td></td><td>$ (0.08)</td><td>$ 0.16</td><td>$ (0.07)</td><td>$ (0.07)</td><td></td></tr><tr><td>Basic weighted average shares outstanding</td><td>22,195,694</td><td>23,505,340</td><td>23,615,657</td><td>23,749,056</td><td></td></tr><tr><td>Income (loss) per share, diluted</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Continuing operations</td><td>$ (0.08)</td><td>$ (0.06)</td><td>$ (0.07)</td><td>$ (0.06)</td><td></td></tr><tr><td>Discontinued operations</td><td>--</td><td>0.22</td><td>--</td><td>(0.01)</td><td></td></tr><tr><td></td><td>$ (0.08)</td><td>$ 0.16</td><td>$ (0.07)</td><td>$ (0.07)</td><td></td></tr><tr><td>Diluted weighted average shares outstanding</td><td>22,195,694</td><td>23,505,340</td><td>23,615,657</td><td>23,749,056</td><td></td></tr></table>

## R. SUBSEQUENT EVENTS

## Southeast Colorado Oil Prospect

On January 31, 2011 USE entered into an acquisition, exploration and development agreement with a private party in an oil and gas prospect located in Southeast Colorado.

Under the terms of the agreement, we acquired an 80% working interest in approximately 3,000 net acres. We have also agreed to carry the seller for their 20% working interest to casing point in the initial well. The dry hole cost of the well is estimated to be $250,000. We will be the operator of the project and the initial well is planned to be spud in the second quarter of 2011. All subsequent wells will be drilled on a heads up basis. The prospect is a Mississippi target with an expected total drilling depth of approximately 6,500 feet.



# U.S. ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 and 2008
(Continued)

Crimson Exploration Inc. Agreement

On February 22, 2011 USE entered into a participation agreement with Crimson Exploration Inc. (“Crimson”) to acquire a 30% working interest in an oil prospect and associated leases located in Zavala County, Texas.

Under the terms of the agreement, USE will earn a 30% working interest (22.5% net revenue interest) in approximately 4,675 gross contiguous acres (1,402.5 net mineral acres) through a combination of a cash payment and commitment well carry. All future drilling and leasing will be proportionate to each parties working interest. For competitive reasons, the financial terms of the transaction will not be disclosed at this time.

The prospect is an Eagle Ford shale oil window target in Zavala County, Texas. Crimson will operate and tentatively plans to spud the first well in the area during the second quarter of this year. The well is planned to be drilled to a total drilling depth of approximately 12,500 feet 6,000 ft. vertical, 6,500 ft. horizontal), and to be completed with 14 fracture stimulation stages.

## BNP Credit Facility

On February 18, 2011, USE borrowed an initial $3.0 million under our credit agreement with BNP Paribas to fund a portion of our initial participation in the Eagle Ford Shale oil prospect in Zavala County, Texas.

## Real Estate

In 2011 USE determined that it will use the equity in its multifamily housing project in Gillette, Wyoming to further the development of its oil and gas business. It plans on doing this by first obtaining a long term loan against the property and then selling it to a third party. USE will therefore report its real estate operations under discontinued operations during 2011.

Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

## Item 9A. Controls and Procedures

## Effectiveness of Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are assigned to ensure that required information is recorded, processed, summarized and reported within the required timeframe, as specified in the rules set forth by the SEC. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010 and, based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2010.



## Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of USE; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Forward looking statements regarding the effectiveness of internal controls during future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.

Our internal control over financial reporting as of December 31, 2010, has been audited by Hein & Associates LLP, the independent registered public accounting firm who also audited our consolidated financial statements. Hein & Associates LLP’s report on our internal control over financial reporting appears on page 128 of this Annual Report.

## Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
U.S. Energy Corp.

We have audited U.S. Energy Corp.'s (the "Company") internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. U.S. Energy Corp.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) 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 (c) 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 financial statements.

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

In our opinion, U.S. Energy Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of U.S. Energy Corp. and subsidiaries and the related consolidated statement of operations, shareholders' equity and cash flows for the year ended December 31, 2010 of U.S. Energy Corp. and our report dated March 14, 2011 expressed an unqualified opinion.

HEIN & ASSOCIATES LLP
Denver, Colorado
March 14, 2011



This page is intentionally blank.



## CORPORATE INFORMATION

Keith G. Larsen
Chairman and CEO (1)

Mark J. Larsen
President and COO, Director (1)

Robert (Scott) Lorimer
CFO, Vice-President of Finance
and Treasurer, Director (1)

Steven R. Youngbauer
Secretary and General Counsel

Michael H. Feinsten
Financial and Business Consultant,
Director, (2,3)

Stephen V. Conrad
CPA, Oil and Gas Professional,
Director (2,3,4)

Allen S. Winters
Consulting Mining Engineer and Former
V.P./General Manager for Homestake
Mining Co., Director (1,2,)

S. Russell Fraser
Former President and Director of American
Capital Access, Inc., Director (3,4)

Committees:
(1) Executive
(2) Audit
(3) Compensation
(4) Nominating

Corporate Headquarters
877 North 8th West
Riverton, WY 82501
T: 307.856.9271
F: 307.857.3050
www.usnrg.com

Stock Trading
The Company’s common
stock is traded on the
NASDAQ Capital Market
under the trading symbol
USEG

Independent Public Accounting Firm
Hein & Associates LLP
717 17th Street, 16th Floor
Denver, Colorado 80202
T: 303.298.9600

Stock Transfer Agent
Computershare Trust Co., Inc.
350 Indiana St. Suite 800
Golden, Colorado 80401
T: 303.262.0600

Annual Meeting
The Annual Shareholder Meeting will be held June 24, 2011 at
U.S. Energy Corp.'s office at
877 North 8th West
Riverton, WY 82501

## Investor Inquiries

Reggie Larsen
Director of Investor Relations
U.S. Energy Corp.
T: 307.856.9271
E: Reggie@usnrg.com

SEC Counsel
Steve Rounds
Denver, CO







U.S. ENERGY CORP.

NASDAQ: USEG www.usnrg.com