U.S. Energy Corp. (USEG, NASDAQ)
Industry: Oil & Gas E&P
Annual report, fiscal year 2009


## Building Strength
in Oil and Gas

Annual Report 2009




## Corporate Profile

U.S. Energy Corp. is a diversified natural resource development company with a primary focus on the production of oil and gas in the Rocky Mountain and Gulf Coast Regions. The Company has entered into a Drilling Participation Agreement with Brigham Exploration Company in their Rough Rider acreage in the Williston Basin of North Dakota, and also has active drilling partnerships with three gulf coast operators. The company has set a year-end daily production goal of 2,500 BOE/D in 2010 (30-day trailing average).

Additionally, the Company has entered into a $400 million option agreement with Thompson Creek Metals to develop the Mt. Emmons molybdenum project in Colorado, and has a 22.8% minority interest in Standard Steam Trust, LLC whose assets include interests in eight geothermal projects in the western United States, located on more than 100,000 acres of BLM, state and fee land.



## Broad Geographic Reach



## 2010 Goals and Objectives

- Drill and complete nine additional Bakken wells with Brigham Exploration Company in North Dakota's Williston Basin, including an initial Three Forks test well; drill first Bakken offset well

- Drill 14 additional wells in the Gulf Coast/West Texas with current partners PetroQuest, Yuma Exploration, and Houston Energy

• Acquire additional acreage in the Bakken play

• Enter into additional JV’s with industry partners

• Significant revenue increase in 2010 over 2009

- Increase reserves to 1.8 Mboe from 1.1 Mboe at year end 2010

- Increase production to 2,500 BOE/D by year end 2010 (30-day trailing average)

• Begin to monetize geothermal holdings

- Advance the Mt. Emmons molybdenum project with Thompson Creek Metals

Oil & Gas Revenue
millions of dollars



Operating Revenues
millions of dollars



Reserves (BOE)
millions






# Message from the President

“Looking forward, we believe that our exploration and development program with Brigham will serve as a catalyst for revenue and oil and gas reserve growth for years to come.”

While 2009 was a year of uncertainty and economic turmoil for many companies, it was a year that presented tremendous opportunity for U.S. Energy Corp. By following sound management principles based on our past experiences in the natural resource sector, we entered the year with a strong balance sheet, unlike many oil and gas companies. With discipline and acute deal timing, we were ultimately able to exit the year with significant revenue and reserve increases and a strong foundation for future growth.

Our paramount goal following the sale of our uranium assets in 2007 has been to transition from a mining deal company with inconsistent cash flows, to an oil and gas company with consistent revenue, cash flow and earnings growth. By exercising patience in a period of high commodity prices (2007-2008) we found that our business principles served us well once again in 2009 when we were presented with an opportunity to participate in an oil and gas exploration venture with Brigham Exploration Company (“Brigham”). In August 2009, we entered a Drilling Participation Agreement (“DPA”) with Brigham that called for the drilling of horizontal wells in the center of the Williston Basin in North Dakota. Under the terms of the DPA, we are initially participating in the drilling of 15 long lateral (~10,000’) horizontal wells in separate 1,280 acre spacing units targeting the oil rich Bakken formation. Our confidence in exploring a new area of the Basin was led by Brigham’s operating capabilities, which are based on their industry-leading advancement of multi-stage frac completion technology. Positive results followed quickly and by year end, with six of the 15 initial wells completed, we saw an immediate impact. At year end, our revenues had increased 420% and our proven oil and gas reserves had increased 552%, compared to 2008.
Looking forward, we believe that our exploration and development program with Brigham will serve as a catalyst for revenue and oil and gas reserve growth for years to come. Since year end 2009, we have drilled and completed three more Bakken wells and we will drill and complete at least six more by the end of 2010. We also anticipate drilling at least one Bakken offset well and one Three Forks formation test well with Brigham during 2010. The exciting thing however, is that upon drilling each initial well in a spacing unit we also earn working interests in each unit. In doing so, we will have positioned ourselves to participate in up to 90 gross drilling locations in a core area of the Williston Basin (including the wells drilled so far) over the next four to six years with one of the leading operators in the basin. Overall, this drilling program could require another $500-600 million in CAPEX over the next four to six years, of which an anticipated $150 million (~28%) would be funded by U.S. Energy Corp. To do so, and to expand activities with our other oil and gas partners, we must remain in a position of economic strength. In this regard, and in light of improving economic and banking conditions, we will be pursuing the establishment of a reserve-based credit facility this year. To further supplement our growth in the E&P sector, we have a fully-paid $24.5 million industry-related housing complex in Gillette, Wyoming that can provide an additional source of capital when needed.

To continue our momentum from 2009, we have budgeted $26.5 million for oil and gas exploration in 2010. Our drilling activity will remain active in two primary regions of the country, the Williston Basin and the Gulf Coast region. With Brigham and our Gulf Coast partners, we anticipate participating in the drilling of 24 wells in 2010 at varying percentage interests. Our drilling success rate with each of these companies combined to date is 76%,




led by Brigham at 100%, and I am confident that we will continue to see a high drilling success rate going forward, particularly in the Williston Basin. We have also budgeted $15 million for additional acquisitions in 2010 and we are actively pursuing those opportunities to further expand our holdings and daily production rates.

As we continue to seek additional oil and gas investment opportunities in 2010, our primary focus will be on oil exploration and production. While we remain concerned about the stability of the gas markets in a period of continued global and domestic economic recovery, abundant supply availability and low prices, we will continue to seek opportunities in this commodity if reasonable value oriented deal terms present themselves. In regards to oil exploration however, we remain confident in this commodity and we are actively seeking additional joint ventures and acquisitions in this arena to add to our current production rate of ~1,300 BOE/D. To further complement this effort, we are also aggressively expanding our drilling participation activities in the Gulf Coast region and anticipate participating in up to 14 conventional oil and gas wells with our partners PetroQuest Energy, Houston Energy and Yuma Exploration in 2010. Our goal is to increase our production to 800 net BOE/D from these combined Gulf Coast drilling programs by year end. In combining our currently anticipated Williston Basin and Gulf Coast programs, our overall objective is to exit the year with a 30-day trailing average production level of 2,500 BOE/D.
Turning to our Mount Emmons molybdenum project in Colorado, I am pleased to report that Mt. Emmons Moly Company (“Mt. Emmons Moly”), a wholly owned subsidiary of Thompson Creek Metals Company USA continues to advance the project in a very meaningful way. Since August 2008, Mt. Emmons Moly has met a $7.5 million spending commitment through year end 2009 and they have budgeted $7-9 million for the project in 2010. In this regard, it is possible that they could meet their first $15 million spending threshold (to earn the right to acquire a 15% interest in the project) in 2010, earlier than contractually required.

The work that is being accomplished by Mt. Emmons Moly includes extensive pre-feasibility, engineering and environmental studies along with continued permitting activities. All of this initial work is being conducted in anticipation of a multi-million dollar underground infill drilling program that is expected to commence in the near future. The underground drilling program will allow Mt. Emmons Moly to further define the mineralized resource and to continue and ultimately finalize the mine, facility and infrastructure designs for the project. The culmination of this preliminary work, including the infill drilling program, is then anticipated to be compiled into a full feasibility study for the project. Concurrently, this data will also be utilized to draft a formal mine Plan of Operations that is anticipated to be filed in the future with the U.S. Forest Service.



# “I am proud of our accomplishments in 2009, yet I eagerly look forward to the results of 2010 based on our efforts of last year.”

Mount Emmons is a well known “world class” mineralized resource that has the potential to become a significant source of molybdenum for U.S. and global markets. We are fortunate to have an outstanding partner in this project and we continue to make meaningful progress in advancing the project under their leadership. It is the goal of both companies to design and build an environmentally sound project in all aspects of the operation and to create long term employment opportunities for the residents of Gunnison County, Colorado. The work and diligent consideration that Mt. Emmons Moly has made relative to environmental planning in each and every component of the project provides us with great comfort and optimism as the project moves forward. I look forward to providing milestone updates about the project in the years to come.

In 2009, Standard Steam Trust (“SST”) continued to expand its geothermal lease holdings by adding approximately 45,000 acres to its portfolio. With these new leases, their total geothermal acreage holdings at year end stood in excess of 100,000 net acres and it is anticipated that their portfolio will continue to grow. During late 2008 and into 2009, U.S. Energy Corp. funded approximately $4.3 million into SST and at year end our equity position today is 22.8%. Reflecting this equity position, in April 2010 U.S. Energy Corp. received its first cash distribution of $1.1 million (of a $5 million total distribution) from SST and we are excited about the prospect of receiving further value from this investment as industry interest and development continues in this sector.

In summary, I am confident that 2010 will be a year of significant revenue and oil and gas reserve growth for the Company. We look to build upon our recent success in the Williston Basin and we will also pursue further diversity in additional drilling partnerships and acquisitions throughout the year. In the meantime, we will continue to benefit from the technical expertise of each of our oil and gas partners and Thompson Creek, which has allowed us to keep our overhead low while working with some of the finest operators in the oil and gas and mining sectors.

In closing, I am proud of our accomplishments in 2009, yet I eagerly look forward to the results of 2010 based on our efforts of last year. We have established a foundation for strong revenue growth for this year and beyond, as we plan for the future we will continue to strive to maintain a strong balance sheet, utilize debt conservatively, and to exercise patience and prudent deal timing going forward. Each of these business practices has served us well in the past and I am confident they will serve us well in the future.

As always, I am honored to serve as the President of your company and to work with a solid and proven management team and a very qualified and impressive group of partners. I appreciate your support and I look forward to reporting our accomplishments in the quarters ahead.

Sincerely,



Mark J. Larsen

President



## Management Team









## Keith G. Larsen

Chairman and CEO

Keith 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.

## Mark J. Larsen

President and COO

Mark 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 on June 1, 2005. He is also a former director of Pinnacle Gas Resources, a public coalbed methane company founded by Credit Suisse First Boston. He received a B.S. in Business Management from the University of Wyoming.

## Robert (Scott) Lorimer

CFO, Vice-President of Finance, and Treasurer

Scott is the CFO, VP 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., Scott 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

Steve 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.



## 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, 2009, 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, 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 ended 12/31/09</td><td>6.79</td><td>3.65</td></tr><tr><td>Calendar year ended December 31, 2008</td><td></td><td></td></tr><tr><td>First quarter ended 03/31/08</td><td>$ 4.45</td><td>$ 3.17</td></tr><tr><td>Second quarter ended 06/30/08</td><td>3.30</td><td>2.42</td></tr><tr><td>Third quarter ended 09/30/08</td><td>3.27</td><td>1.87</td></tr><tr><td>Fourth quarter ended 12/31/08</td><td>2.60</td><td>1.52</td></tr></table>

At March 11, 2010 the closing market price was $6.41 per share. There were approximately 2,132 shareholders of record, with 26,418,713 shares of common stock issued and outstanding at December 31, 2009.

We paid a onetime special $0.10 per share cash dividend to common shareholders of record on July 6, 2007. There are no contractual restrictions on our present or future ability to pay cash dividends.



## SELECTED FINANCIAL DATA

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

(In thousands except per share data)

<table><tr><td rowspan="2"></td><td colspan="5">Years ended December 31,</td></tr><tr><td>2009</td><td>2008</td><td>2007</td><td>2006</td><td>2005</td></tr><tr><td>Current assets</td><td>$ 62,100</td><td>$ 72,767</td><td>$ 82,729</td><td>$ 43,325</td><td>$ 7,841</td></tr><tr><td>Current liabilities</td><td>8,672</td><td>19,983</td><td>8,093</td><td>11,595</td><td>1,232</td></tr><tr><td>Working capital</td><td>53,428</td><td>52,784</td><td>74,636</td><td>31,730</td><td>6,609</td></tr><tr><td>Total assets</td><td>146,723</td><td>142,631</td><td>131,404</td><td>51,901</td><td>38,107</td></tr><tr><td>Long-term obligations(1)</td><td>1,573</td><td>1,870</td><td>1,283</td><td>882</td><td>7,950</td></tr><tr><td>Shareholders&#x27; equity</td><td>129,133</td><td>111,833</td><td>115,100</td><td>37,468</td><td>26,027</td></tr></table>

 \( ^{(1)} \) Includes $211,000 of accrued reclamation costs on properties at December 31, 2009, $144,100 at December 31, 2008,

$133,400 at December 31, 2007, $124,400 at December 31, 2006, and $5,669,000 at December 31, 2005.

See Note M of Notes to Financial Statements

For the years ended December 31,

<table><tr><td></td><td>2009</td><td>2008</td><td>2007</td><td>2006</td><td>2005</td></tr><tr><td>Operating revenues</td><td>$ 9,627</td><td>$ 2,287</td><td>$ 1,174</td><td>$ 880</td><td>$ 850</td></tr><tr><td>Loss from continuing operations</td><td>(9,256)</td><td>(9,521)</td><td>(14,539)</td><td>(14,668)</td><td>(6,067)</td></tr><tr><td>Other income &amp; expenses</td><td>(1,201)</td><td>(100)</td><td>108,824</td><td>2,118</td><td>(484)</td></tr><tr><td>Gain (loss) before minority interest, income taxes and discontinued operations</td><td>(10,457)</td><td>(9,621)</td><td>94,285</td><td>(12,550)</td><td>(6,551)</td></tr><tr><td>Minority interest in (income) loss of consolidated subsidiaries</td><td>--</td><td>--</td><td>(3,551)</td><td>88</td><td>185</td></tr><tr><td>Benefit from (provision for) income taxes</td><td>2,279</td><td>3,326</td><td>(32,367)</td><td>15,332</td><td>--</td></tr><tr><td>Discontinued operations, net of tax</td><td>--</td><td>4,907</td><td>(2,004)</td><td>(1,819)</td><td>15,207</td></tr><tr><td>NET (LOSS) INCOME</td><td>$ (8,178)</td><td>$ (1,388)</td><td>$ 56,363</td><td>$ 1,051</td><td>$ 8,841</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>$ 0.45</td><td>$ 0.10</td><td>$ 0.06</td><td>$ 0.04</td><td>$ 0.05</td></tr><tr><td>Loss from continuing operations</td><td>(0.43)</td><td>(0.41)</td><td>(0.71)</td><td>(0.88)</td><td>(0.38)</td></tr><tr><td>Other income &amp; expenses</td><td>(0.06)</td><td>--</td><td>5.32</td><td>0.12</td><td>(0.03)</td></tr><tr><td>Gain (loss) before minority interest, income taxes and discontinued operations</td><td>(0.49)</td><td>(0.41)</td><td>4.61</td><td>(0.76)</td><td>(0.39)</td></tr><tr><td>Minority interest in income of consolidated subsidiaries</td><td>--</td><td>--</td><td>(0.17)</td><td>--</td><td>--</td></tr><tr><td>Benefit from (provision for) income taxes</td><td>0.11</td><td>0.14</td><td>(1.58)</td><td>0.81</td><td>--</td></tr><tr><td>Discontinued operations, net of tax</td><td>--</td><td>0.21</td><td>(0.10)</td><td>--</td><td>0.94</td></tr><tr><td>NET (LOSS) INCOME</td><td>$ (0.38)</td><td>$ (0.06)</td><td>$ 2.76</td><td>$ 0.05</td><td>$ 0.55</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

The Company’s strategy is to enhance value for our shareholders through the development of a well-balanced portfolio of natural resource-based assets. These natural resource-based assets include (1) the acquisition and development of oil and gas properties, (2) exploration and development of geothermal properties, (3) energy related real estate developments and (4) a molybdenum property, The Company accomplishes these tasks by deploying its available cash reserves as well as joint venturing certain of its projects with industry participants. Each of these activities has different time horizons as well as levels of risk. Capitalized dollar amounts invested in each of these areas at December 31, 2009 and December 31, 2008 were as follows:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td colspan="2">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td></tr><tr><td>Evaluated Oil and Gas Properties</td><td>$ 24,595</td><td>$ 5,320</td></tr><tr><td>Unevaluated Oil and Gas Properties</td><td>$ 5,360</td><td>$ 2,968</td></tr><tr><td>Investment in Geothermal Properties</td><td>$ 2,958</td><td>$ 3,455</td></tr><tr><td>Commercial Real Estate</td><td>$ 24,600</td><td>$ 24,467</td></tr><tr><td>Undeveloped Mining Properties</td><td>$ 21,969</td><td>$ 23,950</td></tr><tr><td></td><td>$ 79,482</td><td>$ 60,160</td></tr></table>

The 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’s primary investment focus at December 31, 2009 remains in the acquisition and development of oil and gas properties. Oil and gas investments are made through industry partners who to date serve as the operator on the properties. As of December 31, 2009, the Company has invested with four industry partners and has drilled 14 gross wells. At December 31, 2009, nine of these wells were producing oil and gas, two were in the process of being completed and the remaining three wells were dry holes.



On August 24, 2009, the Company entered into an agreement with a wholly owned subsidiary of Brigham Exploration Company (“Brigham”) to jointly explore for oil and gas in up to 19,200 acres in the Williston Basin of North Dakota. As of December 31, 2009, six wells had been drilled and completed and two additional wells were being drilled under this agreement for a total cost to the Company of $20.1 million for its participating interest. The Company and Brigham plan on drilling an additional 7 wells under this agreement during 2010.

The Company also has agreements with PetroQuest Energy, Inc. (“PetroQuest”), Yuma Exploration Company, Inc. (“Yuma”) and Houston Energy L.P. (“Houston Energy”). The Company also plans on drilling wells with all these industry partners during 2010.

- The Company, through its investment of $4.3 million, owns 23.8% ownership of a geothermal limited partnership, Standard Steam Trust, LLC. (“SST”). The Company recorded an equity loss from SST during the year ended December 31, 2009 of $1.4 million for a net investment at December 31, 2009 of $3.0 million. The Company’s investment in geothermal properties is not expected to return cash flows from operations. Rather, it is the Company’s plan to work with other industry partners in the exploration and development of geothermal properties and when sufficient data has been gathered, sell them to utilities or large firms desiring the opportunity to construct and operate geothermal power plants. The investment in the geothermal industry allows the Company to participate in the development of power resources in an environmentally friendly industry. Returns on the geothermal investment are anticipated in the next two to five years.

- The Company continues to receive cash flows, revenues and net profits from its energy related multifamily housing development in north eastern Wyoming. The Company does not plan to build or acquire any additional multifamily housing projects.

- The Company’s investment in the molybdenum property in Colorado, Mount Emmons, is a long term investment. The Company entered into an Option Agreement with Thompson Creek Metals Company USA (“TCM”) on August 19, 2008. Under the agreement, TCM may acquire up to 75% ownership of the Mount Emmons property after expending $400 million.

The principal factors affecting the Company are the success of oil and gas exploration activities, commodity prices, the grade of mineral deposits, permitting and costs associated with exploration and development of the prospects.



## Liquidity and Capital Resources

The Company maintained its strong liquidity position throughout the year ended December 31, 2009, notwithstanding its use of cash from entering into the oil and gas drilling agreement with Brigham and others; the retirement of the construction loan on the multifamily housing project; its investment in the geothermal industry as well as normal operating expenses. The Company also experienced $2.6 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, 2009 as compared to the year ended December 31, 2008:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td><td></td></tr><tr><td>Current ratio \( ^{(1)} \)</td><td>7.16 to 1</td><td>3.64 to 1</td><td></td></tr><tr><td>Working capital \( ^{(2)} \)</td><td>$ 53,428</td><td>$ 52,784</td><td></td></tr><tr><td>Total debt</td><td>$ 800</td><td>$ 1,875</td><td></td></tr><tr><td>Total cash and marketable securities less debt</td><td>$ 55,840</td><td>$ 41,474</td><td></td></tr><tr><td>Total stockholders&#x27; equity</td><td>$ 129,133</td><td>$ 111,833</td><td></td></tr><tr><td>Total liabilities to equity</td><td>.14 to 1</td><td>.27 to 1</td><td></td></tr></table>

(1) Current Assets divided by Current Liabilities

(2) Current Assets less Current Liabilities

The Company’s 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, 2009, the Company’s only debt is related to the acquisition of a property near the Mount Emmons molybdenum property. The Company may seek reserve based debt during 2010 to fund the acquisition of additional oil and gas properties and production. In addition, the Company has in place a $10 million line of credit available.



Components of the $644,000 increase in working capital for the years ended December 31, 2009 and 2008 were as follows:

<table><tr><td rowspan="3"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="2">December 31,</td><td rowspan="2">Increase (Decrease)</td></tr><tr><td>2009</td><td>2008</td></tr><tr><td>Cash and Cash Equivalents</td><td>$ 33,403</td><td>$ 8,434</td><td>$ 24,969</td></tr><tr><td>Marketable Securities</td><td></td><td></td><td></td></tr><tr><td>U.S. Treasuries</td><td>22,059</td><td>51,152</td><td>(29,093)</td></tr><tr><td>Available for sale securities</td><td>1,178</td><td>576</td><td>602</td></tr><tr><td>Accounts Receivable</td><td></td><td></td><td></td></tr><tr><td>Trade</td><td>3,882</td><td>600</td><td>3,282</td></tr><tr><td>Reimbursable project costs</td><td>2</td><td>442</td><td>(440)</td></tr><tr><td>Income taxes</td><td>353</td><td>5,896</td><td>(5,543)</td></tr><tr><td>Restricted investments</td><td>--</td><td>4,929</td><td>(4,929)</td></tr><tr><td>Other current assets</td><td>1,223</td><td>738</td><td>485</td></tr><tr><td>Current Assets</td><td>62,100</td><td>72,767</td><td>(10,667)</td></tr><tr><td>Accounts Payable</td><td>6,500</td><td>898</td><td>5,602</td></tr><tr><td>Accrued compensation</td><td>1,748</td><td>682</td><td>1,066</td></tr><tr><td>Short term construction debt</td><td>--</td><td>16,813</td><td>(16,813)</td></tr><tr><td>Current portion of long-term debt</td><td>200</td><td>875</td><td>(675)</td></tr><tr><td>Other current liabilities</td><td>224</td><td>715</td><td>(491)</td></tr><tr><td>Current Liabilities</td><td>8,672</td><td>19,983</td><td>(11,311)</td></tr><tr><td>Working Capital</td><td>$ 53,428</td><td>$ 52,784</td><td>$ 644</td></tr></table>

Major changes in working capital during the year ended December 31, 2009 were:

## Current Assets

- Cash increased by $25 million primarily as a result of the Company selling 5 million shares of its common stock in a public offering during the fourth quarter of 2009 for $24.3 million after offering costs. The Company used its cash as well as monetization of U.S. Treasuries in operations, oil and gas exploration and well completion costs, mineral property holding expenses, and investment in geothermal assets. Please see the discussion below regarding cash flows for the twelve months ended December 31, 2009.

- The increase in accounts receivable trade during the year ended December 31, 2009 corresponds with increased oil and gas sales in 2009 and is due to the lag time (30 to 60 days) between production and receipt of payment for production. The reduction of receivables of reimbursable project costs resulted from the collection of amounts due the Company at December 31, 2008 on the Mount Emmons molybdenum property.



- During 2009, the Company received $5.8 million from the Internal Revenue Service as a refund of income taxes paid in 2007. The loss incurred during the twelve months ended December 31, 2009 will be carried back against taxes paid in 2007. This carry back results in an additional amount receivable from the Internal Revenue Service of $353,000, for a net change of $5.5 million in the account receivable for income taxes.

- Restricted investments, cash held in an interest bearing account, decreased by $4.9 million due to the release of funds held in escrow as additional collateral for the construction loan of the multifamily housing project in Gillette, Wyoming. The construction loan of $16.8 million was repaid during the first quarter of 2009. The increase in other current assets at December 31, 2009 over the prior year relate primarily to increased pre paid insurance costs and increased inventories of oil and gas as a result of increased production during the year ended December 31, 2009.

## Current Liabilities

- Accounts payable increased significantly as a result of drilling and completion costs associated with oil and gas activities in the Williston Basin with Brigham prior to December 31, 2009 which were not invoiced until January 2010.

- Accrued compensation expense increased as a result of the accrual of a bonus payable to all employees of the Company. The bonus is approximately $1.4 million. The accrued bonus at December 31, 2009 resulted from officers and employees accomplishing corporate and personal goals and financial results pursuant to a compensation plan, the Performance Compensation Plan, that was proposed by the Company’s compensation committee and adopted by the full board of directors in April of 2009. The bonus will be paid in the first quarter of 2010. At December 31, 2008, there was a one-time bonus of $529,000 accrued for an officer. All other accrued compensation is the accrual of retirement benefits to two retired officers which will be paid through 2011.

- In an effort to maximize the return on cash reserves invested in U.S. Treasuries, the Company repaid a construction loan on its multifamily housing project in the amount of $16.8 million during the first quarter of 2009. At December 31, 2009, there was no debt against the housing project.

- At December 31, 2008, the Company had debt of $1,875,000 for the purchase of a property near the Mount Emmons molybdenum project. During the year ended December 31, 2009, the Company retired $1,075,000 of this debt leaving $200,000 as current debt and $600,000 as long term debt which will be retired at the rate of $200,000 per annum through December 31, 2013.

- The primary reduction in other current liabilities was the release of $478,000 of retainage due the contractor that construct the multifamily housing project in north east Wyoming.



## 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, 2009, 2008 and 2007:

<table><tr><td rowspan="2"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="4">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td><td>2007</td><td></td></tr><tr><td>Cash provided by (used in) Operations</td><td>$ 2,552</td><td>$ (6,536)</td><td>$ (29,411)</td><td></td></tr><tr><td>Cash provided by (used in) Investing Activities</td><td>$ 17,150</td><td>$ (70,557)</td><td>$ 86,820</td><td></td></tr><tr><td>Cash provided by Financing Activities</td><td>$ 5,267</td><td>$ 8,910</td><td>$ 255</td><td></td></tr></table>

Change in Cash and Cash Equivalents and U.S. Treasuries

<table><tr><td></td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Net Increase (Decrease) in cash and cash equivalents</td><td>$ 24,969</td><td>$ (63,857)</td><td>$ 55,318</td></tr><tr><td>Net (redemption) investment in U.S. Treasury investments</td><td>(29,093)</td><td>49,897</td><td>-</td></tr><tr><td>Net change in cash and U.S. Treasuries</td><td>$ (4,124)</td><td>$ (13,960)</td><td>$ 55,318</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, 2009 follows:

## Operations:

Operations for the year ended December 31, 2009 resulted in a net after tax loss of $8.2 million. This loss included $9.9 million in non cash expenses related to depreciation, depletion, impairment on oil and gas properties, and equity loss from Standard Steam Trust, LLC. (“SST”) – the Company’s investment in the geothermal industry, and non cash compensation. The Company also received $5.8 million in a refund from the Internal Revenue Service.

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

## Investing Activities:

Cash provided by Investing Activities:

- The vast majority of cash provided by Investing Activities is as a result of the redemption of U.S. Treasuries in the amount of $29.3 million.

- TCM paid the first option payment of $1.0 million in January 2009 and prepaid the second option payment of $1.0 million in December 2009. The second option payment was not due until January 2010.



- Net proceeds from the release of restricted investments of $4.6 million is the release of cash, held as additional collateral, by the construction loan lender, when the construction loan was repaid during the first quarter of 2009.

Cash consumed in Investing Activities:

- The Company invested an additional $877,000 in SST during the year ended December 31, 2009 to fund SST’s operating overhead and the acquisition of additional prospective geothermal properties.

- The Company invested $17.5 million in oil and gas properties.

- The Company invested $410,000 in property and equipment, $254,000 for the improvement of certain equipment within the water treatment plant at the Mount Emmons water treatment plant, $133,000 in improvements at the Company’s multifamily housing project and $23,000 in the acquisition of office equipment.

## Financing Activities:

Cash provided by Financing Activities:

- The Company sold five million shares of its common stock in a public offering during the fourth quarter of 2009. The shares were priced at $5.25 per share for which the Company received $24.3 million net, after offering expenses plus an additional $238,000 for the exercise of employee options and warrants to third party consultants.

Cash consumed in Financing Activities:

- The Company retired $17.9 million in long term debt. The retired debt consisted of $16.8 million due under a construction loan for the Company’s multifamily housing project and $1.1 million due under a note for the purchase of a 160 acre parcel of property purchased in the vicinity of the Mount Emmons molybdenum project.

- The Company completed its $8.0 million stock buyback program by purchasing 706,071 shares of its common stock for $1.4 million, or an average cost per share of $1.98 per share.

## Capital Resources

## 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. The Company plans to continue its exploration for and development of oil and gas properties and may also acquire existing production.



The following table is a summary of the Company’s estimated reserves as of December 31, 2009:

<table><tr><td>Estimated net proved reserves:</td><td>Bakken</td><td>Gulf Coast</td><td>Total</td></tr><tr><td>Producing:</td><td></td><td></td><td></td></tr><tr><td>Oil (bbls)</td><td>749,213</td><td>36,884</td><td>786,097</td></tr><tr><td>Gas (Mcf)</td><td>569,296</td><td>908,000</td><td>1,477,296</td></tr><tr><td>NGL (bbls)</td><td>--</td><td>24,031</td><td>24,031</td></tr><tr><td>Non-producing:</td><td></td><td></td><td></td></tr><tr><td>Oil (bbls)</td><td>--</td><td>25,692</td><td>25,692</td></tr><tr><td>Gas (Mcf)</td><td>--</td><td>24,000</td><td>24,000</td></tr><tr><td>NGL (bbls)</td><td>--</td><td>--</td><td>--</td></tr><tr><td>Total (BOE)</td><td>844,096</td><td>241,940</td><td>1,086,036</td></tr><tr><td>Future net income before income taxes</td><td>$ 31,047,000</td><td>$ 5,848,000</td><td>$ 36,895,000</td></tr><tr><td>PV10</td><td>$ 20,768,000</td><td>$ 4,992,000</td><td>$ 25,760,000</td></tr></table>

Estimated proved reserves (on a BOE basis) at December 31, 2009 increased by 889,738 BOE or approximately 453% over estimated proved reserves at December 31, 2008. Most of the increase is related to the six proved Bakken wells at December 31, 2009.

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, 2009 ($61.18 per barrel of oil and $3.866 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 F to the Company’s Consolidated Financial Statements.

<table><tr><td></td><td>Year Ended December 31, 2009</td></tr><tr><td>Estimated future net revenues discounted at 10%</td><td>$ 25,760,000</td></tr><tr><td>Future income tax expense (discounted)</td><td>(5,776,000)</td></tr><tr><td>Standardized measure of discounted future net cash flows</td><td>$ 19,984,000</td></tr></table>



## Cash on Hand

At December 31, 2009, the Company had $33.4 million in cash and cash equivalents and $22.1 million in U.S. Treasuries. The Company has invested its cash in interest bearing accounts, with the majority invested in U.S. Government Treasuries. During the past two years, this investment policy has insured the preservation of principal and yielded a return. Additionally, the investment of the Company’s surplus cash in U.S. Treasuries has insured that the Company would not become an inadvertent investment company.

## Commercial Bank

Line of Credit – During January 2010, the Company entered into a $10.0 million line of credit with a commercial bank (an increase from the $5.0 million line of credit at the same bank in 2009). 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 line of credit is available until January 31, 2011 at which time it may be renewed depending on the financial strength and needs of the Company. The credit line is secured by the Company’s multifamily housing project in north east Wyoming and a corporate aircraft.

## Equity Market

The Company 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, the Company sold 5 million shares of its common stock for $5.25 per share or $26.3 million, $24.3 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

The Company owns a 216 unit multifamily housing property in Gillette, Wyoming, known as Remington Village. The property averaged an occupancy rate of 88% during 2009 and was 80% occupied as of December 31, 2009. Occupancy is dependent on coal mining operations, oil and gas exploration and construction of a power generating plant in the area. As with all sectors of the energy industry, there was a slow down during 2009 in the Gillette, Wyoming area. The property generated positive cash flow of $1.7 million during 2009 and is projected to remain in that range of cash flow during 2010. To reach these levels occupancy rates will have to average 88% and costs and expenses remain similar to those experienced in 2009.

Although the property is pledged as collateral for the Company’s $10 million line of credit, there is no debt against the property. The Company may seek long term financing on the property during 2010 to further its oil and gas exploration and development projects. The Company plans on holding the property until the local real estate market improves, at which time the property may be sold. The company has $24.5 million invested in the property.



The Company entered into and agreement with TCM for the permitting and development of the Mount Emmons molybdenum property, 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 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 two of these payments as of December 31, 2009, one of which was prepaid in December 2009 for the January 2010 option payment.

Once permitted and placed into production, Mount Emmons is expected to provide the Company with long term capital resources. Historical records filed by predecessor owners of the Mount Emmons molybdenum property 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.

## Future Receipts of Royalties and Contractual Commitments from Uranium Properties

The Company retained a 4% Net Profits Royalty on a portion of the Green Mountain uranium property in Wyoming which is owned and operated 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 the Company’s uranium properties, the Company is 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 the Company 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

The direct capital requirements of the Company during 2010 are the funding of the drilling and completion of nine additional wells with Brigham in the Bakken formation, 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 Mount Emmons molybdenum project, operations at Remington Village, possible additional funding of geothermal operations and general and administrative costs.

## Oil and Gas Exploration and Development

The total amount of capital expenditures that the Company has budgeted for the exploration and development of oil and gas resources during 2010 is $41.5 million. These costs are not firm commitments. Provided that the Company has the capital available, it plans on spending these funds to develop additional reserves to increase revenues and cash flows. The following is a breakdown of the budgeted amounts by area.



Under its agreement with Brigham, the Company is committed to drill and complete an additional nine wells in the Williston Basin during 2010. The Company has budgeted $18.6 million for these activities. The actual amount expended on the nine wells will vary from the budgeted amount as a result of larger or smaller ownership interests of Brigham. Other factors which can cause actual to vary from budgeted amounts are drilling conditions, problems encountered on site and weather. The wells to be drilled in 2010 will be approximately 10,000 feet in depth with 10,000 foot laterals to be completed with 28 to 32 frac stages. The first six wells drilled with Brigham have cost approximately $6.3 million each on an 8/8 \( ^{th} \)  basis.

By electing to participate in all of the initial wells available to us, we have earned the rights to drill up to 30 total wells in the Bakken formation and an additional 30 wells in the Three Forks formation, for a total of 60 wells, based on current spacing rules in North Dakota. If the spacing is ultimately increased to three wells per 1,280 acre spacing unit, the potential number of drilling locations could increase to 90. Working interests earned will vary according to Brigham’s initial working interest, after-payout provisions and the provisions governing each stage of the program. At our current and projected drilling rates, we expect that it will take four to six years to drill all of the wells in these units.

## Gulf Coast

The Company has budgeted $4.4 million to drill up to four wells with PetroQuest in the Gulf coast area in 2010. Weather and down hole problems can cause wells in this area to cost more than anticipated. The Company has drilled one successful gas well and one dry hole with PetroQuest.

The Company has budgeted $1.5 million to drill up to three shallow inland oil and gas wells with Houston Energy. These wells have a lower risk of weather challenges due to the fact that they are inland.

The Company has budgeted $1.7 million to drill six wells and maintain leases as well as complete interpretation of seismic data with Yuma in 2010.

## Other

The Company has budgeted $240,000 for the maintenance of leases during 2010 as well as $15.0 million for the acquisition of either prospective oil and gas properties or existing production.

## Mount Emmons Molybdenum Property

Under the terms of its agreement with TCM, the Company is responsible for all costs associated with operating the water treatment plant at the Mount Emmons molybdenum property. Annual operating costs during 2010 are projected to be approximately $1.7 million. Additionally, the Company has budgeted $1.6 million for capital improvements in the plant which are expected to improve its efficiency.

The Company and TCM purchased a 160 acre parcel of property near the Mount Emmons property. 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, the Company will be responsible for one half of the holding and operating costs of the acreage which are expected to be minimal.



Through December 31, 2009, TCM has expended $7.6 million on the property which includes $2.5 million in option payments to the Company. Although TCM is contractually obligated to spend $5.0 million during 2010 it has budgeted $8.4 million for the project in 2010. Both the contractual amount as well as budgeted amount include the $1.0 million option payment to the Company which was pre-paid by TCM in December 2009. As per the terms of the agreement with TCM, the Company will not be required to fund any of the proposed work to be performed on the property during 2010 unless TCM terminates the agreement. TCM, as project manager, is preparing and evaluating engineering and environmental reports and studies to prepare a Plan of Operations, and anticipates submitting it to the U.S. Forest Service (“USFS”) in 2010. All the costs of developing and submitting this plan will be paid for by TCM as per the agreement.

## Real Estate

Cash operating expenses at Remington Village are projected to be $1.1 million for 2010. The Company does 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. The Company may seek long term financing of the property during 2010 to provide capital for the exploration and development or acquisition of oil and gas properties and or production. At December 31, 2009, the Company had invested $24.5 million in the property.

## Geothermal and Alternative Energy Projects

The Company invested $4.3 million in a geothermal company, Standard Steam Trust, LLC, (“SST”) as of December 31, 2009. This investment was reduced by an equity loss of $1.4 million leaving a net investment at December 31, 2009 of $3.0 million. As a result of not funding a cash call in December of 2009, the Company’s ownership interest of SST was reduced from 25% to 23.8%. SST plans on continuing its temperature gradient drilling and the acquisition of additional prospective geothermal properties during 2010. The Company has not budgeted any capital resources for further investment in SST during 2010 but may elect to participate in cash calls during the year. The Company is not obligated to fund cash calls and will suffer further dilution if it does not fund.

## Reclamation Costs

The Company has two reclamation obligations:

• Oil and Gas

Bakken – The Company’s reclamation obligation on the six wells drilled in the Williston Basin as of December 31, 2009 is $37,000.

Gulf Coast – The Company’s reclamation on all Gulf Coast wells drilled as of December 31, 2009 is $45,800.

No reclamation is expected to be performed on the existing wells at December 31, 2009 during the year ended December 31, 2010. 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.



## • Mount Emmons molybdenum property –

The asset retirement obligation for the Mount Emmons molybdenum property at December 31, 2009 is $128,500. As the Mount 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. The Company’s objective, upon closure of the proposed mine at the Mount Emmons property, is to eliminate long-term liabilities associated with the property.

## Results of Operations

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. Non cash expenses during the years ended December 31, 2009 and 2008 are as follows:

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td colspan="2">Year ended December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td></tr><tr><td>Depreciation, depletion and amortization</td><td>$ 5,066</td><td>$ 1,426</td></tr><tr><td>Impairment of oil and gas properties</td><td>1,468</td><td>--</td></tr><tr><td>Impairment of marketable securities</td><td>--</td><td>1,023</td></tr><tr><td>Equity loss from SST</td><td>1,374</td><td>--</td></tr><tr><td>Non cash compensation</td><td>1,935</td><td>2,536</td></tr><tr><td>Non cash services</td><td>65</td><td>46</td></tr><tr><td>Totals</td><td>$ 9,908</td><td>$ 5,031</td></tr></table>

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 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. Tabular representation of the increases in revenues as well as the loss from operations for the four quarters of 2009 and the years ended December 31, 2009 and 2008 is as follows:

<table><tr><td rowspan="2"></td><td colspan="6">(In thousands)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td colspan="3">2009 Quarters Ended</td><td rowspan="2">September 30,</td><td rowspan="2">December 31,</td><td>2009</td><td colspan="2">2008</td></tr><tr><td>Revenues</td><td>March 31,</td><td>June 30,</td><td>September 30,</td><td>December 31,</td><td>2009</td><td>2008</td></tr><tr><td>Operating Expenses</td><td>2,683</td><td>2,603</td><td>2,322</td><td>4,741</td><td>12,349</td><td>9,627</td><td>2,287</td><td></td></tr><tr><td>Depreciation, Depletion and Amortization</td><td>1,089</td><td>981</td><td>848</td><td>2,148</td><td>5,066</td><td>1,426</td><td></td><td></td></tr><tr><td>Impairment</td><td>1,063</td><td></td><td>405</td><td></td><td>1,468</td><td>-</td><td></td><td></td></tr><tr><td></td><td>4,835</td><td>3,584</td><td>3,575</td><td>6,889</td><td>18,883</td><td>11,808</td><td></td><td></td></tr><tr><td>Operating Loss</td><td>(3,422)</td><td>(2,190)</td><td>(2,291)</td><td>(1,353)</td><td>(9,256)</td><td>(9,521)</td><td></td><td></td></tr></table>

Fourth quarter revenues are on average four times greater than the first three quarters of 2009. The increase is as a result of the Company’s drilling activity in the Williston Basin wells with Brigham. The fourth quarter revenues are 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 are a result of the increased depletion recognized on the increased oil production during the quarter. Also included in the increased operating expenses is a $1.4 million bonus accrual pursuant to the Company’s adopted performance compensation plan. The bonus will not be 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 has not only increased revenue trends but has also cut the operating loss by half on a quarterly basis. As additional wells are drilled and completed during 2010 it is believed that this trend will continue. 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. The following table details the results of operations from the oil and gas sector on a quarterly basis for 2009 and an annual basis for the years ended December 31, 2009 and 2008:

<table><tr><td rowspan="2"></td><td colspan="9">(In thousands)</td></tr><tr><td colspan="5">2009 Quarters Ended</td><td colspan="4">Year ended December 31,</td></tr><tr><td>Oil &amp; Gas</td><td>March 31,</td><td>June 30,</td><td>September 30,</td><td>December 31,</td><td>2009</td><td>2008</td><td></td><td></td><td></td></tr><tr><td>Revenues</td><td>$ 674</td><td>$ 645</td><td>$ 593</td><td>$ 4,932</td><td>$ 6,844</td><td>$ 571</td><td></td><td></td><td></td></tr><tr><td>Operating expenses</td><td>$ 99</td><td>$ 71</td><td>$ (29)</td><td>$ 207</td><td>$ 348</td><td>$ 62</td><td></td><td></td><td></td></tr><tr><td>Depreciation, depletion and amortization</td><td>713</td><td>607</td><td>475</td><td>1,776</td><td>3,571</td><td>382</td><td></td><td></td><td></td></tr><tr><td>Impairment</td><td>1,063</td><td>--</td><td>405</td><td>--</td><td>1,468</td><td>--</td><td></td><td></td><td></td></tr><tr><td></td><td>$ 1,875</td><td>$ 678</td><td>$ 851</td><td>$ 1,983</td><td>$ 5,387</td><td>$ 444</td><td></td><td></td><td></td></tr><tr><td>Operating (loss) gain</td><td>$ (1,201)</td><td>$ (33)</td><td>$ (258)</td><td>$ 2,949</td><td>$ 1,457</td><td>$ 127</td><td></td><td></td><td></td></tr></table>

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 following table summarizes production volumes, average sales prices and operating revenues for the years ended December 31, 2009 and 2008:

<table><tr><td rowspan="3"></td><td colspan="2">Year ending December 31,</td><td colspan="2">2009 Period Compared to 2008 Period</td></tr><tr><td>2009</td><td>2008</td><td>Increase (Decrease)</td><td>% Increase (Decrease)</td></tr><tr><td>Production volumes</td><td></td><td></td><td></td></tr><tr><td>Oil and condensate (Bbls)</td><td>80,461</td><td>2,330</td><td>78,131</td><td>3353%</td></tr><tr><td>Natural gas (Mcf)</td><td>487,978</td><td>73,635</td><td>414,343</td><td>563%</td></tr><tr><td>Average sales prices</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and condensate (per Bbl)</td><td>$ 60.01</td><td>$ 36.78</td><td>$ 23.23</td><td>63%</td></tr><tr><td>Natural gas (per Mcf)</td><td>4.13</td><td>6.59</td><td>(2.46)</td><td>-37%</td></tr><tr><td>Operating revenues (in thousands)</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and condensate</td><td>$ 4,829</td><td>$ 86</td><td>$ 4,743</td><td>5534%</td></tr><tr><td>Natural gas</td><td>2,015</td><td>485</td><td>1,530</td><td>315%</td></tr><tr><td>Total operating revenue</td><td>6,844</td><td>571</td><td>6,273</td><td>1099%</td></tr><tr><td>Lease operating expense</td><td>(348)</td><td>(62)</td><td>(286)</td><td>460%</td></tr><tr><td>DD&amp;A</td><td>(3,571)</td><td>(382)</td><td>(3,189)</td><td>835%</td></tr><tr><td>Impairment</td><td>(1,468)</td><td>--</td><td>(1,468)</td><td>100%</td></tr><tr><td>Gain</td><td>$ 1,457</td><td>$ 127</td><td>$ 1,330</td><td>1049%</td></tr></table>



The Company plans to drill and complete an additional nine wells in the Williston Basin during 2010. Factors that could affect the income from operations in 2010 on wells to be drilled are:

- Lower working interests in the wells due to lower ownership interest in the leases held by Brigham

- Brigham has elected to participate at 50% which will reduce both the cost to the Company as well as the revenues if the wells are successful

• Lower market prices for oil and gas during 2010

• Higher drilling and operating expenses

• Steeper decline rates than currently anticipated

• Mechanical and geological problems with the wells

The Company’s 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">Real Estate</td><td colspan="6">(In thousands)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td>March 31,</td><td>June 30,</td><td>September 30,</td><td>December 31,</td><td></td><td>2009</td><td>2008</td><td></td></tr><tr><td>Revenues</td><td>$ 734</td><td>$ 745</td><td>$ 686</td><td>$ 603</td><td>$ 2,768</td><td>$ 1,633</td><td></td><td></td></tr><tr><td>Operating Expenses</td><td>280</td><td>237</td><td>245</td><td>297</td><td>1,059</td><td>648</td><td></td><td></td></tr><tr><td>Interest Expense</td><td>19</td><td>-</td><td>-</td><td>-</td><td>19</td><td>417</td><td></td><td></td></tr><tr><td>Depreciation, Depletion and Amortization</td><td>232</td><td>261</td><td>262</td><td>290</td><td>1,045</td><td>517</td><td></td><td></td></tr><tr><td></td><td>531</td><td>498</td><td>507</td><td>587</td><td>2,123</td><td>1,582</td><td></td><td></td></tr><tr><td>Operating Gain</td><td>$ 203</td><td>$ 247</td><td>$ 179</td><td>$ 16</td><td>$ 645</td><td>$ 51</td><td></td><td></td></tr></table>

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 is 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.



## Mount 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 Mount Emmons molybdenum property and thereby recorded $1.6 million in costs and expenses for that facility and $323,000 in holding costs of the Mt. Emmons molybdenum property 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 molybdenum property.

## 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 is 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 will be 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 is 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 Mount Emmons property, $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.



During the twelve months ended December 31, 2008, the Company recorded a loss of $1.4 million as compared to a gain of $56.4 million during 2007. The decrease in net earnings for 2008 as compared to 2007 is primarily due to a gain on the sale of uranium assets during 2007 in the amount of $111.7 million. Other components in the net change to the results of operations were (a) increased Revenues during 2008 from real estate rentals and the sale of oil and gas, (b) decreased Operating Costs and Expenses during 2008, (c) reduced Other Income and Expenses, (d) the elimination of minority interest in the gain of consolidated subsidiaries, (e) increased gain from discontinued operations during 2008 as a result of the sale of the Company’s controlling interest in Sutter Gold Mining, Inc. (“SGMI”) and (f) changes in the provision for and benefit from Income Taxes.

## Operating Revenues:

Rental revenues of $1.5 million were received from Remington Village, during 2008. There were no revenues from Remington Village in 2007 as there were no units available for rent during the early construction period. Other real estate revenues decreased $832,000 during 2008 from those recorded during 2007. The decrease was as a result of the Company selling lots at its southern Utah real estate property during 2007 while no similar sales occurred during 2008 as the entire property was ultimately sold during 2007. The Company recorded its first revenues from its successful well drilled in the Gulf Coast during 2008 of $571,000. There was no oil or gas production during 2007. The reduction of $157,000 in management fee and other revenues during the twelve months ended December 31, 2008 is as a result of no management fees being charged on the uranium properties during 2008 as all the uranium properties were sold in 2007. Lower management fees were charged against Mount Emmons as the Company was the operator from March 31, 2008 through August 19, 2008 during which time there were no management fees charged. The Company charged management fees for services it provided under the contract with Kobex to the Mount Emmons property during the twelve months ended December 31, 2007.

Operating revenues therefore increased by $1.1 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007.

## Operating Costs and Expenses:

Operating Costs and Expenses decreased by $3.9 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. Operating Costs and Expenses related to other real estate and general and administrative costs were reduced while expenses associated with the Remington Village project, oil and gas production and mineral holding costs increased.

Operating costs for Remington Village during 2008 were $839,000. These costs consist of contract property management services, maintenance, insurance and general administration costs and $469,000 of depreciation. There were no operating costs relating to Remington Village during 2007.

There were no costs and expenses for the production of oil and gas during 2007. During 2008, the Company recorded expenses of $444,000 for its portion of the operating costs and expensed for the producing well in the Gulf Coast.



Mineral holding and water treatment costs increased by $1.2 million during 2008 over the same costs and expenses during 2007. The increases were for the cost of operating and maintaining the water treatment plant at Mount Emmons, of $1.5 million and $834,000 for costs and expenses incurred by the Company for engineering studies during the time it served as manager of the property. This increase is as a result of the withdrawal of Kobex from the Mount Emmons molybdenum property on March 31, 2008. Subsequent to March 31, 2008 the Company paid the holding costs related to the Mount Emmons property while Kobex paid these costs during 2007. After August 19, 2008, the Company continued to pay all costs associated with the water treatment plant and TCM paid all other costs associated with the property.

General and administrative costs and expenses were reduced primarily as a result of a bonus which was paid to all employees and directors of the Company 2007 at the closing of the sale of the Company’s uranium assets to Uranium One and the payment of an early retirement severance package for one of the Company’s officers. Although there was no similar bonus paid during 2008, the Company did pay one half of a $500,000 bonus to one of its officers which was approved on March 7, 2008. The approved bonus to the officer was for services rendered over many years, was comparable to a similar bonus paid two former officers for similar services, is net of taxes and is payable in eight equal quarterly payments beginning on March 31, 2008 and ending December 31, 2009.

## Other Income and Expenses:

During 2007, there were transactions relating to gains and losses from the sale of uranium assets and marketable securities, while there were no similar transactions during 2008. The combined income recognized from the sale of the uranium assets and sale of securities during 2007 compared to no similar activities during 2008 accounted for the majority of the decrease of other income and expenses of $108.9 million.

During 2008, the Company recorded a net loss of $17,000 on the sale of its used corporate aircraft and other miscellaneous equipment due to some repairs that had to be made to the aircraft prior to the sale. The Company netted $1.1 million from the sale of the aircraft when it was sold. The loss recorded during 2008 from the sale of assets is compared to a gain of $2.3 million during 2007. The gain recorded in 2007 was as a result of the sale of a townsite in southern Utah and the receipt of payments due under the Mount Emmons agreement with Kobex as well as an agreement related to the uranium properties which were sold to Uranium One.

Interest Income – The Company recognized $1.4 million in interest income during 2008, which is $1.4 million less than the interest income received during 2007. The decrease during 2008 is as a result of lower levels of cash being invested at significantly lower interest rates. At December 31, 2008, the Company was earning between .22% and 1.91% on its U.S. Treasury Bills. This low interest rate is reflective of the condition of global economics. The Company continues to seek the deployment of surplus funds into investments and operations which will yield a higher return.

Interest Expense during 2008 increased $426,000 over the interest expense recorded during 2007 to $486,000. The increase is as a result of completion of Remington Village. As each of the nine buildings were completed, the Company no longer capitalized construction loan interest on that building but rather expensed it. The interest thus expensed on the construction loan resulted in the increased interest expense.



During 2007, the Company acquired the minority interest shares of Crested Corp. As a result of that acquisition and the sale of SGMI, there are no minority interest in gains and losses of consolidated subsidiaries at December 31, 2008. The Company reported a minority interest in the gain of consolidated subsidiaries for the year ended December 31, 2007 of $3.6 million. The minority interest gain in consolidated subsidiaries recorded during the year ended December, 2007 was primarily the minority interest gain of $3.6 million of Crested. On a consolidated basis, all previous minority interest losses of Crested that were absorbed by the Company through consolidation have been fully reinstated through December 31, 2007.

During 2008, the Company sold its controlling interest in SGMI. The Company recognized a gain of $5.4 million on the sale of the shares of SGMI and a loss of $501,000 from the discontinued operations of SGMI. This results in a net gain on the sale of the SGMI shares of $4.9 million. As a result of the Company’s controlling interest in SGMI, the Company has shown the loss from SGMI which was previously consolidated as a loss from discontinued operations of $2,003,600 at December 31, 2007.

Due to the loss recorded during the year ended December 31, 2008, the Company recorded a net benefit from income taxes during the year then ended of $3.3 million. During the year ended December 31, 2007 the Company recorded a provision for income taxes of $32.4 million.

As a result of the above described changes in revenues, costs and expenses, the Company recorded a loss of $1.4 million during the year ended December 31, 2008, or a loss of $0.06 per share as compared to a gain of $56.4 million or $2.75 earnings per share basic and $2.54 per share diluted during the year ended December 31, 2007.

## Critical Accounting Policies

Mineral Properties - The Company 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 the Company 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, 2009 and December 31, 2008 reflect capitalized costs associated with the Company’s Mount Emmons molybdenum property near Crested Butte, Colorado. The Company has 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. The Company received the first two of six anticipated annual payments in the amount of $1.0 million during 2009. These payments were applied as a reduction of the Company’s investment in the Mount Emmons property.

The Company reviews its investment in the Mount Emmons property 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 $10.00 per pound at December 31, 2008 to $11.50 per pound at December 31, 2009 and the reduction of the book value of Mount Emmons by $2.0 million as a result of TCM’s option payments, as well as the continued support of TCM in the form of a $8.4 million budget for 2010 work on the property, the Company has determined that no impairment is needed to the book value of the property.



Oil and Gas Properties - The Company 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 unevaluated 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 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.

Ceiling Test - The Company performs a quarterly ceiling test for each of its oil and gas cost centers, which in 2009 and 2008, 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, 2009, the Company used $61.18 per barrel for oil and $3.866 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, 2009, the ceiling was in excess of the net capitalized costs as adjusted for related deferred income taxes and no impairment beyond the $1.5 million impairment taken in the first three quarters of 2009 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.

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 will also be used to measure ceiling test impairments and to compute depreciation, depletion and amortization. The revised rules are effective for reserve estimation at December 31, 2009 with first reporting for calendar year companies in their 2009 annual reports.

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 - The Company records the fair value of the reclamation liability on its oil and gas and non operating mining properties as of the date that the liability is incurred. The Company reviews the liability each quarter and determines if a change in estimate is required as well as accretes the liability on a quarterly basis for the future liability. Final determinations are made during the fourth quarter of each year. The Company deducts any actual funds expended for reclamation during the quarter in which it occurs.

Revenue Recognition - The Company records oil and natural gas revenue under the sales method of accounting. Under the sales method, the Company recognizes revenues based on the amount of oil or natural gas sold to purchasers, which may differ from the amounts to which the Company is entitled based on its interest in the properties. Gas balancing obligations as of December 31, 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 - The Company 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.

The Company 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.

Income Taxes - The Company 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.



The Company 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.

The Company 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 the Company when adopted.

## 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 Mount Emmons property.

## 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, 2009 the Cushing, OK WTI spot price for oil had increased to $74.47 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 $3.27 per mcf in January 2000. The price per mcf at December 31, 2009 was $6.24.

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 the Company’s projected 2010 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, 2009 and December 31, 2008 was $11.50 per pound and $10.00 per pound, respectively. The price of molybdenum will have a direct impact on the development of Mount Emmons. Should the price for molybdenum remain at the December 2009 level or be even further reduced, the development of the Mount Emmons property could be delayed or permanently put on hold.



## Contractual Obligations

Contractual obligations at December 31, 2009 consist of debt to third parties of $800,000 of which $200,000 is due in 2010, executive retirement of $915,000 and asset retirement obligations of $211,000. The executive retirement benefits are paid to former executive officers who qualify under the terms of the Company’s Executive Retirement Plan. Asset retirement obligations will be satisfied during the next 34 years. The following table shows the scheduled debt payment and expenditures for budgeted asset retirement obligations as of December 31, 2009:

<table><tr><td rowspan="3"></td><td colspan="8">(In thousands)</td></tr><tr><td colspan="7">Payments due by period</td><td></td></tr><tr><td>Total</td><td colspan="2">Less than one Year</td><td colspan="2">One to Three Years</td><td colspan="2">Three to Five Years</td><td>More than Five Years</td></tr><tr><td>Long-term debt obligations</td><td>$ 800</td><td>$ 200</td><td>$ 600</td><td>$ --</td><td>$ --</td><td>$ --</td><td></td><td></td></tr><tr><td>Executive retirement</td><td>$ 915</td><td colspan="2">153</td><td colspan="2">165</td><td colspan="2">--</td><td>597</td></tr><tr><td>Asset retirement obligation</td><td>$ 211</td><td colspan="2">--</td><td colspan="2">--</td><td colspan="2">26</td><td>185</td></tr><tr><td>Totals</td><td>$ 1,926</td><td>$ 353</td><td colspan="2">$ 765</td><td colspan="2">$ 26</td><td>$ 782</td><td></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 balance sheets of U.S. Energy Corp. and subsidiary (the “Company”) as of December 31, 2009 and 2008, and the related statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 financial statements referred to above present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

/s/ Hein & Associates LLP

HEIN & ASSOCIATES LLP

Denver, Colorado
March 12, 2010



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of U.S. Energy Corp. and Subsidiaries (the Company) for the year ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 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, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of U.S. Energy Corp. and Subsidiaries, for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note J to the consolidated financial statements, effective January 1, 2007, the Company changed its method of accounting for uncertain tax positions. As discussed in Note B to the consolidated financial statements, effective January 1, 2009, the Company changed its presentation of noncontrolling interests.

/s/ Moss Adams LLP

Scottsdale, Arizona

March 12, 2008, except as to the reclassification adjustments to reflect discontinued operations described in Note N as to which the date is March 12, 2009, and except as to the presentation of noncontrolling interests as to which the date is March 12, 2010.



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

<table><tr><td></td><td>December 31, 2009</td><td>December 31, 2008</td></tr><tr><td>CURRENT ASSETS:</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 33,403</td><td>$ 8,434</td></tr><tr><td>Marketable securities</td><td></td><td></td></tr><tr><td>Held to maturity - treasuries</td><td>22,059</td><td>51,152</td></tr><tr><td>Available for sale securities</td><td>1,178</td><td>576</td></tr><tr><td>Accounts receivable</td><td></td><td></td></tr><tr><td>Trade</td><td>3,882</td><td>600</td></tr><tr><td>Reimbursable project costs</td><td>2</td><td>442</td></tr><tr><td>Income taxes</td><td>353</td><td>5,896</td></tr><tr><td>Restricted investments</td><td>--</td><td>4,929</td></tr><tr><td>Other current assets</td><td>1,223</td><td>738</td></tr><tr><td>Total current assets</td><td>62,100</td><td>72,767</td></tr><tr><td>INVESTMENT</td><td>2,958</td><td>3,455</td></tr><tr><td>PROPERTIES AND EQUIPMENT:</td><td></td><td></td></tr><tr><td>Oil &amp; gas properties under full cost method, net of $3,953 and $382 accumulated depletion, depreciation and amortization</td><td>26,002</td><td>7,906</td></tr><tr><td>Undeveloped mining claims</td><td>21,969</td><td>23,950</td></tr><tr><td>Commercial real estate, net</td><td>23,200</td><td>23,998</td></tr><tr><td>Property, plant and equipment, net</td><td>9,301</td><td>9,639</td></tr><tr><td>Net properties and equipment</td><td>80,472</td><td>65,493</td></tr><tr><td>OTHER ASSETS</td><td>1,193</td><td>916</td></tr><tr><td>Total assets</td><td>$ 146,723</td><td>$ 142,631</td></tr></table>



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

<table><tr><td></td><td>December 31, 2009</td><td>December 31, 2008</td></tr><tr><td>CURRENT LIABILITIES:</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 6,500</td><td>$ 898</td></tr><tr><td>Accrued compensation</td><td>1,748</td><td>682</td></tr><tr><td>Short-term construction debt</td><td>--</td><td>16,813</td></tr><tr><td>Current portion of long-term debt</td><td>200</td><td>875</td></tr><tr><td>Other current liabilities</td><td>224</td><td>715</td></tr><tr><td>Total current liabilities</td><td>8,672</td><td>19,983</td></tr><tr><td>LONG-TERM DEBT, net of current portion</td><td>600</td><td>1,000</td></tr><tr><td>DEFERRED TAX LIABILITY</td><td>7,345</td><td>8,945</td></tr><tr><td>ASSET RETIREMENT OBLIGATIONS</td><td>211</td><td>144</td></tr><tr><td>OTHER ACCRUED LIABILITIES</td><td>762</td><td>726</td></tr><tr><td>COMMINTMENTS AND CONTINGENCIES</td><td></td><td></td></tr><tr><td>SHAREHOLDERS&#x27; EQUITY:</td><td></td><td></td></tr><tr><td>Common stock, $.01 par value; unlimited shares authorized; 26,418,713 and 21,935,129 shares issued, respectively</td><td>264</td><td>219</td></tr><tr><td>Additional paid-in capital</td><td>118,998</td><td>93,951</td></tr><tr><td>Accumulated surplus</td><td>9,485</td><td>17,663</td></tr><tr><td>Unrealized gain on marketable securities</td><td>386</td><td>--</td></tr><tr><td>Total shareholders&#x27; equity</td><td>129,133</td><td>111,833</td></tr><tr><td>Total liabilities and shareholders&#x27; equity</td><td>$ 146,723</td><td>$ 142,631</td></tr></table>



## U.S. ENERGY CORP.
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>2009</td><td colspan="2">2008</td><td>2007</td></tr><tr><td>OPERATING REVENUES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil &amp; gas</td><td>$ 6,844</td><td>$ 571</td><td></td><td>--</td></tr><tr><td>Real estate</td><td>2,768</td><td>1,633</td><td></td><td>934</td></tr><tr><td>Management fees and other</td><td>15</td><td>83</td><td></td><td>240</td></tr><tr><td></td><td>9,627</td><td>2,287</td><td></td><td>1,174</td></tr><tr><td>OPERATING COSTS AND EXPENSES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>3,919</td><td>444</td><td></td><td>--</td></tr><tr><td>Impairment of oil and gas properties</td><td>1,468</td><td>--</td><td></td><td>--</td></tr><tr><td>Real estate</td><td>2,104</td><td>1,165</td><td></td><td>380</td></tr><tr><td>Water treatment plant</td><td>1,636</td><td>1,462</td><td></td><td>--</td></tr><tr><td>Mineral holding costs</td><td>323</td><td>834</td><td></td><td>1,093</td></tr><tr><td>General and administrative</td><td>9,433</td><td>7,903</td><td></td><td>14,240</td></tr><tr><td></td><td>18,883</td><td>11,808</td><td></td><td>15,713</td></tr><tr><td>OPERATING LOSS</td><td>(9,256)</td><td>(9,521)</td><td></td><td>(14,539)</td></tr><tr><td>OTHER INCOME &amp; (EXPENSES):</td><td></td><td></td><td></td><td></td></tr><tr><td>(Loss) gain on sales of assets</td><td>(43)</td><td>(17)</td><td></td><td>2,339</td></tr><tr><td>Gain on sale of uranium assets</td><td>--</td><td>--</td><td></td><td>111,728</td></tr><tr><td>Equity loss in unconsolidated investment</td><td>(1,374)</td><td>--</td><td></td><td>--</td></tr><tr><td>Loss on sale of marketable securities</td><td>--</td><td>--</td><td></td><td>(8,318)</td></tr><tr><td>Impairment of marketable securities</td><td>--</td><td>(1,023)</td><td></td><td>--</td></tr><tr><td>Gain of foreign exchange</td><td>--</td><td>--</td><td></td><td>430</td></tr><tr><td>Loss from dissolution of subsidiaries</td><td>--</td><td>--</td><td></td><td>(118)</td></tr><tr><td>Dividends</td><td>--</td><td>--</td><td></td><td>23</td></tr><tr><td>Interest income</td><td>314</td><td>1,426</td><td></td><td>2,800</td></tr><tr><td>Interest expense</td><td>(98)</td><td>(486)</td><td></td><td>(60)</td></tr><tr><td></td><td>(1,201)</td><td>(100)</td><td></td><td>108,824</td></tr><tr><td>(LOSS) GAIN BEFORE PROVISION FOR INCOME TAXES AND DISCONTINUED OPERATIONS</td><td>(10,457)</td><td>(9,621)</td><td></td><td>94,285</td></tr><tr><td>INCOME TAXES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Current benefit from (provision for)</td><td>210</td><td>4,645</td><td></td><td>(17,589)</td></tr><tr><td>Deferred benefit from (provision for)</td><td>2,069</td><td>(1,319)</td><td></td><td>(14,778)</td></tr><tr><td></td><td>2,279</td><td>3,326</td><td></td><td>(32,367)</td></tr><tr><td>(LOSS) GAIN FROM CONTINUING OPERATIONS</td><td>(8,178)</td><td>(6,295)</td><td></td><td>61,918</td></tr></table>

The accompanying notes are an integral part of these statements.



## U.S. ENERGY CORP.
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>2009</td><td>2008</td><td>2007</td><td></td></tr><tr><td>DISCONTINUED OPERATIONS</td><td></td><td></td><td></td><td></td></tr><tr><td>Loss from discontinued operations</td><td>--</td><td>(501)</td><td>(2,004)</td><td></td></tr><tr><td>Gain on sale of discontinued operations (net of taxes)</td><td>--</td><td>5,408</td><td>--</td><td></td></tr><tr><td></td><td>--</td><td>4,907</td><td>(2,004)</td><td></td></tr><tr><td>NET (LOSS) INCOME</td><td>(8,178)</td><td>(1,388)</td><td>59,914</td><td></td></tr><tr><td>NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS</td><td>--</td><td>--</td><td>(3,551)</td><td></td></tr><tr><td>NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS</td><td>$ (8,178)</td><td>$ (1,388)</td><td>$ 56,363</td><td></td></tr><tr><td>PER SHARE DATA</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic (loss) earnings from continuing operations</td><td>$ (0.38)</td><td>$ (0.27)</td><td>$ 2.85</td><td></td></tr><tr><td>Basic (loss) earnings from discontinued operations</td><td>--</td><td>0.21</td><td>(0.10)</td><td></td></tr><tr><td>Basic (loss) earnings per share</td><td>$ (0.38)</td><td>$ (0.06)</td><td>$ 2.75</td><td></td></tr><tr><td>Diluted (loss) earnings from continuing operations</td><td>$ (0.38)</td><td>$ (0.27)</td><td>$ 2.63</td><td></td></tr><tr><td>Diluted (loss) earnings from discontinued operations</td><td>--</td><td>0.21</td><td>(0.09)</td><td></td></tr><tr><td>Diluted (loss) earnings per share</td><td>$ (0.38)</td><td>$ (0.06)</td><td>$ 2.54</td><td></td></tr><tr><td>BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING</td><td>21,604,959</td><td>23,274,978</td><td>20,469,846</td><td></td></tr><tr><td>DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING</td><td>21,604,959</td><td>23,274,978</td><td>22,189,828</td><td></td></tr></table>



U.S. ENERGY CORP.
STATEMENT OF SHAREHOLDERS' EQUITY

<table><tr><td rowspan="2">Balances December 31, 2006</td><td colspan="2">Common Stock</td><td colspan="2">Additional Paid-In Capital</td><td colspan="2">Retained Earnings</td><td colspan="2">Treasury Stock</td><td colspan="2">Unallocated ESOP</td><td colspan="2">Total Shareholders&#x27; Equity</td></tr><tr><td>Amount</td><td>S</td><td>196</td><td>S</td><td>7,741</td><td>S</td><td>(39,102)</td><td>S</td><td>306</td><td>S</td><td>(924)</td><td>S</td></tr><tr><td>Net income available to common shareholders</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>56,363</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>56,366</td></tr><tr><td>Unrealized loss on marketable securities</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(726)</td><td>-</td><td>-</td><td>-</td><td>(726)</td></tr><tr><td>Unrealized loss on other investments</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>164</td><td>-</td><td>-</td><td>-</td><td>164</td></tr><tr><td>Unrealized loss on the unrealized loss on the unrealized loss on the unrealized loss on the unrealized loss on the</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>



U.S. ENERGY CORP.
STATEMENT OF SHAREHOLDERS' EQUITY

<table><tr><td rowspan="2"></td><td colspan="2">(In thousands except share data)</td><td colspan="2">Unrealized Gain (Loss) on Marketable Securities</td><td colspan="2">Unallocated ESOP Contribution</td><td rowspan="2">Total Shareholders&#x27; Equity</td></tr><tr><td>Common Stock Shares</td><td>Additional Paid-In Capital</td><td>Retained Earnings</td><td>Securities</td><td></td><td></td></tr><tr><td>Balance December 31, 2007</td><td>23,592,493</td><td>5</td><td>236</td><td>5</td><td>(1,905)</td><td>5</td><td>(1,388)</td></tr><tr><td>Net loss available to common shareholders recognized impairment on marketable securities</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Unrealized tax effects on marketable securities</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Other comprehensive (loss)</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(1,132)</td></tr><tr><td>Comprehensive (loss)</td><td>126,878</td><td>-</td><td>207</td><td>-</td><td>-</td><td>-</td><td>208</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>30</td></tr><tr><td>Issuance of common stock</td><td>85,000</td><td>-</td><td>283</td><td>-</td><td>-</td><td>-</td><td>284</td></tr><tr><td>2001 stock compensation plan</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Vesting of stock options</td><td>-</td><td>-</td><td>1,151</td><td>-</td><td>-</td><td>-</td><td>1,151</td></tr><tr><td>Issued to employees</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Vesting of stock options</td><td>-</td><td>-</td><td>17</td><td>-</td><td>-</td><td>-</td><td>17</td></tr><tr><td>Issuance of restricted securities</td><td>(155,811)</td><td>(2)</td><td>(489)</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Cancellation of common stock</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>from the ESOP</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>1,528</td></tr><tr><td>Issuance of common stock warrants to stock warrantees</td><td>446,598</td><td>5</td><td>1,523</td><td>-</td><td>-</td><td>-</td><td>202</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>202</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>(5,555)</td></tr><tr><td>Balance December 31, 2008</td><td>21,935,129</td><td>5</td><td>29,3951</td><td>5</td><td>17,663</td><td>5</td><td>11,833</td></tr></table>



U.S. ENERGY CORP

STATEMENT OF SHAREHOLDERS' EQUITY

<table><tr><td rowspan="2"></td><td colspan="2">(in thousands except share data)</td><td colspan="2">Unrealized Gain on Marketable Securities</td><td colspan="2">Total Shareholders&#x27; Equity</td></tr><tr><td>Common Stock Shares</td><td>Additional Paid-in Capital</td><td>Retained Earnings</td><td>S</td><td>S</td><td>S</td></tr><tr><td>Balance December 31, 2008</td><td>21,935,129</td><td>S</td><td>19</td><td>S</td><td>17,663</td><td>111,833</td></tr><tr><td>Net loss available to common shareholders</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Unrecognized gain on marketable securities</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Unrealized tax effect on the unrealized gain</td><td>-</td><td>-</td><td>-</td><td>-</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>(8,178)</td></tr><tr><td>Issuance of common stock</td><td>5,000,000</td><td>50</td><td>242,267</td><td>-</td><td>-</td><td>602</td><td>602</td></tr><tr><td>Funds of ESOP</td><td>36,583</td><td>-</td><td>217</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Issuance of common stock</td><td>80,000</td><td>1</td><td>185</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>2001 stock compensation plan</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Issuance of common stock</td><td>71,088</td><td>1</td><td>232</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Issuance of common stock</td><td>1,984</td><td>-</td><td>5</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Issuance of stock options</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Vesting of stock options</td><td>-</td><td>-</td><td>1,430</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Issued to employees</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Vesting of stock warrants</td><td>-</td><td>-</td><td>9</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Vesting of contract</td><td>-</td><td>-</td><td>56</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Issued to outside directors</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Excess tax benefit on the exercise of stock options and warrants</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Stock options and warrants</td><td>26,418,713</td><td>S</td><td>264</td><td>S</td><td>118,998</td><td>9,485</td><td>S</td></tr><tr><td>Comprehensive buy back program</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Balance December 31, 2009</td><td>26,418,713</td><td>S</td><td>264</td><td>S</td><td>118,998</td><td>9,485</td><td>S</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>2009</td><td>2008</td><td>2007</td></tr><tr><td>CASH FLOWS FROM OPERATING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Net (loss) income</td><td>$ (8,178)</td><td>$ (1,388)</td><td>$ 59,914</td></tr><tr><td>Gain on the sale of SGMI stock</td><td>--</td><td>(5,408)</td><td>--</td></tr><tr><td>Loss from discontinued operations</td><td>--</td><td>501</td><td>2,004</td></tr><tr><td>(Loss) gain from continuing operations</td><td>(8,178)</td><td>(6,295)</td><td>61,918</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 and amortization</td><td>5,066</td><td>1,426</td><td>438</td></tr><tr><td>Accretion of discount on treasury investment</td><td>(183)</td><td>(1,255)</td><td>--</td></tr><tr><td>Impairment of marketable securities</td><td>--</td><td>1,023</td><td>--</td></tr><tr><td>Impairment of oil and gas properties</td><td>1,468</td><td>--</td><td>--</td></tr><tr><td>Gain on sale of assets to Uranium One</td><td>--</td><td>--</td><td>(111,728)</td></tr><tr><td>Gain on foreign exchange</td><td>--</td><td>--</td><td>(430)</td></tr><tr><td>Loss on sale of marketable securities</td><td>--</td><td>--</td><td>8,318</td></tr><tr><td>Equity loss from Standard Steam</td><td>1,374</td><td>--</td><td>--</td></tr><tr><td>Deferred income taxes</td><td>(2,069)</td><td>1,319</td><td>14,778</td></tr><tr><td>Loss (gain) on sale of assets</td><td>43</td><td>17</td><td>(2,356)</td></tr><tr><td>Noncash compensation</td><td>1,935</td><td>2,536</td><td>1,284</td></tr><tr><td>Noncash services</td><td>65</td><td>46</td><td>142</td></tr><tr><td>Net changes in assets and liabilities</td><td></td><td></td><td></td></tr><tr><td>Accounts receivable</td><td>(2,843)</td><td>(342)</td><td>(755)</td></tr><tr><td>Income tax receivable</td><td>5,543</td><td>(3,809)</td><td>(903)</td></tr><tr><td>Other current assets</td><td>(192)</td><td>(18)</td><td>(246)</td></tr><tr><td>Accounts payable</td><td>80</td><td>(692)</td><td>680</td></tr><tr><td>Accrued compensation</td><td>1,000</td><td>(283)</td><td>(958)</td></tr><tr><td>Other liabilities</td><td>(557)</td><td>(209)</td><td>377</td></tr><tr><td>NET CASH PROVIDED BY</td><td></td><td></td><td></td></tr><tr><td>(USED IN) OPERATING ACTIVITIES</td><td>2,552</td><td>(6,536)</td><td>(29,441)</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>2009</td><td>2008</td><td>2007</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>$29,277</td><td>$(49,897)</td><td>$--</td></tr><tr><td>Investment in Standard Steam</td><td>(877)</td><td>(3,455)</td><td>--</td></tr><tr><td>Acquisition and development of real estate</td><td>(3)</td><td>(11,597)</td><td>(7,517)</td></tr><tr><td>Acquisition and development of oil and gas properties</td><td>(17,498)</td><td>(5,354)</td><td>(2,910)</td></tr><tr><td>Acquisition and development of mining properties</td><td>(1)</td><td>(2,905)</td><td>(485)</td></tr><tr><td>Minining property option payment</td><td>2,000</td><td>--</td><td>--</td></tr><tr><td>Acquisition of property and equipment</td><td>(410)</td><td>(294)</td><td>(6,429)</td></tr><tr><td>Proceeds from sale of property and equipment</td><td>11</td><td>1,103</td><td>3,978</td></tr><tr><td>Proceeds from sale of marketable securities</td><td>--</td><td>--</td><td>92,251</td></tr><tr><td>Proceeds from sale of uranium assets</td><td>--</td><td>--</td><td>14,023</td></tr><tr><td>Net change in notes receivable</td><td>--</td><td>--</td><td>560</td></tr><tr><td>Net change in investments in affiliates</td><td>--</td><td>--</td><td>349</td></tr><tr><td>Net change in restricted investments</td><td>4,651</td><td>1,842</td><td>(7,000)</td></tr><tr><td>NET CASH PROVIDED BY</td><td></td><td></td><td></td></tr><tr><td>(USED IN) INVESTING ACTIVITIES</td><td>17,150</td><td>(70,557)</td><td>86,820</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>$24,516</td><td>1,528</td><td>3,217</td></tr><tr><td>Issuance of subsidiary stock</td><td>--</td><td>--</td><td>340</td></tr><tr><td>Tax benefit from the exercise of stock options</td><td>38</td><td>--</td><td>1,242</td></tr><tr><td>Payment of cash dividend</td><td>--</td><td>--</td><td>(2,108)</td></tr><tr><td>Proceeds from short-term construction debt</td><td>--</td><td>11,423</td><td>--</td></tr><tr><td>Proceeds from long term debt</td><td>--</td><td>1,875</td><td>164</td></tr><tr><td>Repayments of debt</td><td>(17,888)</td><td>(362)</td><td>(1,134)</td></tr><tr><td>Stock buyback program</td><td>(1,399)</td><td>(5,554)</td><td>(1,466)</td></tr><tr><td>NET CASH PROVIDED BY</td><td></td><td></td><td></td></tr><tr><td>FINANCING ACTIVITIES</td><td>5,267</td><td>8,910</td><td>255</td></tr><tr><td>Net cash used in operating activities of discontinued operations</td><td>--</td><td>(76)</td><td>(2,260)</td></tr><tr><td>Net cash provided by (used in) investing activities of discontinued operations</td><td>--</td><td>4,402</td><td>(56)</td></tr><tr><td>NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS</td><td>24,969</td><td>(63,857)</td><td>55,318</td></tr><tr><td>CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD</td><td>8,434</td><td>72,292</td><td>16,974</td></tr><tr><td>CASH AND CASH EQUIVALENTS AT END OF PERIOD</td><td>$33,403</td><td>$ 8,434</td><td>$ 72,292</td></tr></table>

The accompanying notes are an integral part of these statements.



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

<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>SUPPLEMENTAL DISCLOSURES:</td><td>2009</td><td>2008</td><td>2007</td><td></td></tr><tr><td>Income tax (received) paid</td><td>$ (5,753)</td><td>$ (945)</td><td>$ 17,250</td><td></td></tr><tr><td>Interest paid</td><td>$ 39</td><td>$ 69</td><td>$ 60</td><td></td></tr><tr><td>NON-CASH INVESTING AND FINANCING ACTIVITIES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Unrealized gain</td><td>$ 386</td><td>$ --</td><td>$ 563</td><td></td></tr><tr><td>Acquisition &amp; development of oil and gas properties through accounts payable</td><td>$ 5,522</td><td>$ --</td><td>$ --</td><td></td></tr><tr><td>Acquisition &amp; development of oil and gas properties through asset retirement obligations</td><td>$ 58</td><td>$ --</td><td>$ --</td><td></td></tr><tr><td>Development of mining properties properties through asset retirement obligations</td><td>$ 9</td><td>$ --</td><td>$ --</td><td></td></tr></table>



# U.S. ENERGY CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 and 2007

## A. BUSINESS ORGANIZATION AND OPERATIONS

U.S. Energy Corp. was incorporated in the State of Wyoming on January 26, 1966. U.S. Energy Corp. (the "Company" or "USE") engages in the acquisition, exploration, holding, sale and/or development of mineral properties. Principal asset interests at December 31, 2009 are in oil and gas, molybdenum, geothermal and real estate. Historically, the Company also participated in other base and precious metals. Our uranium and gold assets were sold during 2008 and 2007.

## 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 the Company as of December 31, 2009 and December 31, 2008 include only the accounts of the Company and its wholly owned subsidiary Remington Village, LLC (“Remington Village”). The consolidated financial statements contained in this report for the year ended December 31, 2007 also include subsidiaries of the Company which were either merged into the Company or liquidated and dissolved during 2008 and 2007. These subsidiaries were majority-owned or controlled subsidiaries: Plateau Resources Limited, (“Plateau”) (100%), Four Nines Gold, Inc. (“FNG”) (50.9%), SGMI (54.4%), Yellow Stone Fuels, Inc. (“YSFI”) (49.1%), Crested Corp. (“Crested”) (70.9%), and the USECC Joint Venture (“USECC”), a consolidated joint venture which was equally owned by the Company and Crested. On December 15, 2008, the Company purchased a 25% ownership interest in Standard Steam Trust LLC (“SST”) which is accounted for using the equity method. At December 31, 2009 the Company’s ownership interest in SST was reduced to 23.8%.

## Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts which exceed federally insured limits. At December 31, 2009 and 2008, the Company had its cash and cash equivalents with several financial institutions, primarily invested in U.S. Treasury Bills. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

## Marketable Securities

The Company 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.



## Accounts Receivable

The Company determines any required allowance by considering a number of factors including the length of time trade and other accounts receivable are past due and the Company's previous loss history. The Company 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, 2009, the Company recorded $109,000 in uncollectable receivables related to its multi family housing project. The balance of accounts receivable at December 31, 2009 are for the sale of oil and gas and have been received subsequent to the balance sheet date. No reserve for uncollectable receivables was booked during the year ended December 31, 2009 and 2008.

## Restricted Investments

The Company 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



Components of Property and Equipment as of December 31, 2009 and 2008 are as follows:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">December 31,</td></tr><tr><td></td><td>2009</td><td></td><td>2008</td></tr><tr><td>Oil &amp; gas properties</td><td></td><td></td><td></td></tr><tr><td>Unevaluated</td><td>$     3,993</td><td>$     2,968</td><td></td></tr><tr><td>Well in progress</td><td>1,367</td><td>--</td><td></td></tr><tr><td>Evaluated</td><td>24,595</td><td>5,320</td><td></td></tr><tr><td></td><td>29,955</td><td>8,288</td><td></td></tr><tr><td>Less accumulated depreciation</td><td></td><td></td><td></td></tr><tr><td>depletion and amortization</td><td>(3,953)</td><td>(382)</td><td></td></tr><tr><td>Net book value</td><td>$     26,002</td><td>$     7,906</td><td></td></tr><tr><td>Mining properties</td><td>$     21,969</td><td>$     23,950</td><td></td></tr><tr><td>Commercial real estate</td><td>$     24,600</td><td>$     24,467</td><td></td></tr><tr><td>Less accumulated depreciation</td><td></td><td></td><td></td></tr><tr><td>depletion and amortization</td><td>(1,400)</td><td>(469)</td><td></td></tr><tr><td>Net book value</td><td>$     23,200</td><td>$     23,998</td><td></td></tr><tr><td>Building, land and equipment</td><td>$     14,196</td><td>14,399</td><td></td></tr><tr><td>Less accumulated depreciation</td><td></td><td></td><td></td></tr><tr><td>depletion and amortization</td><td>(4,895)</td><td>(4,760)</td><td></td></tr><tr><td>Net book value</td><td>$     9,301</td><td>$     9,639</td><td></td></tr><tr><td>Totals</td><td>$     80,472</td><td>$     65,493</td><td></td></tr></table>

## Oil and Gas Properties

The Company 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 unevaluated 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 the Company’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 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. During the year ended December 31, 2009, the Company recorded a non-cash impairment of $1.1 million during the quarter ended March 31, 2009 and $404,000 during the quarter ended September 30, 2009.

## Mineral Properties

The Company 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 the Company 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, 2009 and 2008 reflect capitalized costs associated with the Company’s Mount Emmons molybdenum property near Crested Butte, Colorado. The Company 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. The Company’s carrying balance in the Mount Emmons property at December 31, 2009 and 2008 is as follows (in thousands):

<table><tr><td>Costs associated with Mount Emmons at December 31, 2008</td><td>$ 23,950</td></tr><tr><td>Development costs during the year ended December 31, 2009</td><td>9</td></tr><tr><td>Accretion of asset retirement obligation</td><td>10</td></tr><tr><td>Option payments received from TCM</td><td></td></tr><tr><td>January, 2009</td><td>(1,000)</td></tr><tr><td>December, 2009</td><td>(1,000)</td></tr><tr><td>Costs at December 31, 2009</td><td>$ 21,969</td></tr></table>

## Long-Lived Assets – Real Estate

The Company evaluates its 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 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 the Company's financial position and results of operations. At December 31, 2009 and 2008, no impairment existed on the Company's long-lived assets as the appraised value at December 31, 2009 and 2008 exceeded construction and carrying value and rental rates remained strong and costs within projected limits.

## 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

The Company accounts for its asset retirement obligations under FASB ASC 410-20, "Asset Retirement Obligations." The Company 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. The Company 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. The Company deducts any actual funds expended for reclamation during the quarter in which it occurs.

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 colspan="3">For the years ended December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td><td></td></tr><tr><td>Beginning asset retirement obligation</td><td>$     144</td><td>$     133</td><td></td></tr><tr><td>Accretion of discount</td><td>12</td><td>9</td><td></td></tr><tr><td>Liabilities incurred</td><td>55</td><td>25</td><td></td></tr><tr><td>Liabilities settled</td><td>--</td><td>(23)</td><td></td></tr><tr><td>Ending asset retirement obligation</td><td>$     211</td><td>$     144</td><td></td></tr><tr><td></td><td colspan="3">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td><td></td></tr><tr><td>Mining properties</td><td>$     128</td><td>$     119</td><td></td></tr><tr><td>Oil &amp; Gas Wells</td><td>83</td><td>25</td><td></td></tr><tr><td>Ending asset retirement obligation</td><td>$     211</td><td>$     144</td><td></td></tr></table>



## Revenue Recognition

The Company records natural gas and oil revenue under the sales method of accounting. Under the sales method, the Company recognizes revenues based on the amount of natural gas or oil sold to purchasers, which may differ from the amounts to which the Company is entitled based on its interest in the properties. Natural gas balancing obligations as of December 31, 2009 and 2008 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.

Management fees are recorded when the service is provided. Management fees are for operating and overseeing services performed on mineral properties in which the Company participates with joint venture or industry partners.

## Stock Based Compensation

The Company 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.

The Company has computed the fair values of its options granted to employees using the Black Scholes pricing model and the following weighted average assumptions:

For the year ended December 31,

<table><tr><td></td><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Risk-free interest rate</td><td>--</td><td>3.23%</td><td>4.82%</td></tr><tr><td>Expected lives (years)</td><td>--</td><td>6.00</td><td>10.00</td></tr><tr><td>Expected volatility</td><td>--</td><td>56.51%</td><td>48.80%</td></tr><tr><td>Expected dividend yield</td><td>--</td><td>--</td><td>--</td></tr></table>

The Company 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.

## Income Taxes

The Company 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, the Company 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, 2009, 2008, and 2007 were 642,913, 606,330 and 541,735, 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, 2009 and 2008 because they were anti-dilutive. Potential shares relating to options and warrants were included in the diluted earnings per share for the year ended December 31, 2007. Dilutive options and warrants totaled 282,504, 226,246, and 1,719,982 at December 31, 2009, 2008 and 2007, respectively.

## Recent Accounting Pronouncements

FASB Codification Discussion - We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.” The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows.

The FASB recognized the complexity of its standard-setting process and embarked on a revised process in 2004 that culminated in the release on July 1, 2009, of the FASB Accounting Standards Codification, \( ^{™} \)  sometimes referred to as the Codification or ASC. The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, the Company refers to topics in the ASC. The above change was made effective by the FASB for periods ending on or after September 15, 2009.

FASB ASC 810-10 - In June 2009, the FASB issued an amendment to ASC 810-10, Consolidation. As a result, in December 2009, the FASB issued ASC 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This guidance amends ASC 810-10-15 to replace the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a Variable Interest Entity (“VIE”) with a primarily qualitative approach focused on identifying which enterprise has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE and requires additional disclosures about an enterprise’s involvement in VIEs. This guidance is effective as of the beginning of the reporting entity’s first annual reporting period that begins after November 15, 2009 and earlier adoption is not permitted. The adoption of ASC 810-10 is not expected to have a material effect on our financial position and results of operations.



FASB ASC 810-10-65 - In December 2007, the FASB issued guidance now codified as ASC Section 810-10-65, “Consolidation—Transition and Open Effective Date Information” (“ASC 810-10-65”), which requires companies to treat non-controlling interests (commonly referred to as minority interest) as a separate component of shareholders’ equity and not as a liability. This pronouncement will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. ASC 810-10-65 is effective for periods beginning on or after December 15, 2008 and will impact the accounting for non-controlling interests after the effective date, to the extent the Company enters into an acquisition with a non-controlling interest. The adoption of this standard resulted in a different presentation of noncontrolling interests on the Company’s consolidated financial statements.

FASC ASC 815-10-50 - In March 2008, the FASB issued guidance related to the disclosures about derivative instruments and hedging activities under FASB ASC 815-10-50, Derivatives and Hedging. This guidance requires companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under applicable guidance, and (c) how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. These disclosure requirements are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has no hedges in place as of December 31, 2009. If the Company elects to hedge production in 2010 it will comply with FASB ASC 815-10-50.

Accounting Standards Update No. 2009-01 - In June 2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC 105, Generally Accepted Accounting Principles. This guidance states that the ASC will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Once effective, the Codification’s content will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. This is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC 105 as of September 30, 2009 and thus have incorporated the new Codification citations in place of the corresponding references to legacy 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. The Company’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 No. 2009-05 - In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and Disclosures. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure the fair value using one or more of the following techniques: a valuation technique that uses the quoted price of the identical liability or similar liabilities when traded as an asset, which would be considered a Level 1 input, or another valuation technique that is consistent with ASC 820. This Update is effective for the first reporting period (including interim periods) beginning after issuance. The Company adopted this guidance as of September 30, 2009, which did not have a material impact on our consolidated financial statements.

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

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

## C. RELATED-PARTY TRANSACTIONS

## Sutter Gold Mining Company, Inc. (“SGMI”)

On August 22, 2008, the Company 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. Under the terms of the agreement, the Company retained an equity position of approximately 3,550,361 shares and the 5% net profits interest royalty. The Company 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. Based on these transactions, the Company owns approximately 8,095,816 shares or 7.8% of SGMI. As a result of participating in the private placement the Company also received 24-month warrants to purchase an additional 2,272,728 common shares of SGMI at a price of Cdn. $0.15 per share.

The Company recorded a gain of $5.4 million from the sale of its controlling interest in SGMI during the year ended December 31, 2008. The Company also recorded losses from discontinued operations of SGMI of $501,000 and $2.0 million for the years ended December 31, 2008 and 2007, respectively.



## D. FAIR VALUE

The Company 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. The Company 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 the Company 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 is 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 the Company of valuation methodologies that result in management’s best estimate of fair value.

The Company’s 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. The fair value of the Company’s asset retirement obligations 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 the asset retirement obligations and other accrued liabilities are reflected on the balance sheet as detailed below.

<table><tr><td rowspan="2">Description</td><td rowspan="2">December 31, 2009</td><td colspan="4">Fair Value Measurements at December 31, 2009 Using</td></tr><tr><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><td></td></tr><tr><td>Asset retirement obligations</td><td>$ 211</td><td>$ --</td><td>$ --</td><td>$ 211</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>$ 973</td><td>$ --</td><td>$ --</td><td>$ 973</td><td></td></tr><tr><td rowspan="2">Description</td><td rowspan="2">December 31, 2008</td><td colspan="4">Fair Value Measurements at December 31, 2008 Using</td></tr><tr><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><td></td></tr><tr><td>Asset retirement obligations</td><td>$ 144</td><td>$ --</td><td>$ --</td><td>$ 144</td><td></td></tr><tr><td>Other accrued liabilities</td><td>726</td><td>--</td><td>--</td><td>726</td><td></td></tr><tr><td>Total</td><td>$ 870</td><td>$ --</td><td>$ --</td><td>$ 870</td><td></td></tr></table>

See Note B for a roll forward of the asset retirement obligation.



As of December 31, 2009, the Company held $23.2 million of investments in government securities and marketable securities. The fair value of the investments is reflected on the balance sheet as detailed below.

<table><tr><td rowspan="2">Description</td><td rowspan="2">December 31, 2009</td><td colspan="4">Fair Value Measurements at December 31, 2009 Using</td></tr><tr><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><td></td></tr><tr><td>Held to maturity - treasuries</td><td>$ 22,059</td><td>$ 22,059</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</td><td>$ 23,237</td><td>$ 23,237</td><td>$ --</td><td>$ --</td><td></td></tr><tr><td rowspan="2">Description</td><td rowspan="2">December 31, 2008</td><td colspan="4">Fair Value Measurements at December 31, 2008 Using</td></tr><tr><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><td></td></tr><tr><td>Held to maturity - treasuries</td><td>$ 51,152</td><td>$ 51,152</td><td>$ --</td><td>$ --</td><td></td></tr><tr><td>Available for sale securities</td><td>576</td><td>576</td><td>--</td><td>--</td><td></td></tr><tr><td>Total</td><td>$ 51,728</td><td>$ 51,728</td><td>$ --</td><td>$ --</td><td></td></tr></table>

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



December 31, 2009

<table><tr><td rowspan="2"></td><td colspan="3">Less Than 12 Months</td><td colspan="3">12 Months or Greater</td><td colspan="3">Total</td></tr><tr><td>Fair Value</td><td colspan="2">Unrealized (Loss)/Gain</td><td>Fair Value</td><td colspan="2">Unrealized (Loss)/Gain</td><td></td><td>Fair Value</td><td>Unrealized (Loss)/Gain</td></tr><tr><td>Description of Securities</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Held to maturity - treasuries</td><td>$ 22,059</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ 22,059</td><td>$ --</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>--</td><td>1,178</td><td></td><td>602</td><td></td></tr><tr><td>Total</td><td>$ 23,237</td><td>$ 602</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ 23,237</td><td>$ 602</td><td></td><td></td></tr></table>

December 31, 2008

<table><tr><td rowspan="2"></td><td colspan="3">Less Than 12 Months</td><td colspan="3">12 Months or Greater</td><td colspan="3">Total</td></tr><tr><td>Fair Value</td><td colspan="2">Unrealized (Loss)/Gain</td><td>Fair Value</td><td colspan="2">Unrealized (Loss)/Gain</td><td></td><td>Fair Value</td><td>Unrealized (Loss)/Gain</td></tr><tr><td>Description of Securities</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Held to maturity - treasuries</td><td>$ 51,152</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ 51,152</td><td>$ --</td><td></td><td></td></tr><tr><td>Available for sale securities</td><td>576</td><td>--</td><td>--</td><td>--</td><td>--</td><td>576</td><td>--</td><td></td><td></td></tr><tr><td>Total</td><td>$ 51,728</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ 51,728</td><td>$ --</td><td></td><td></td></tr></table>

The Company’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable, other current liabilities and long-term debt and short-term construction 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 the Company 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 carrying value of the Company short-term construction debt, at December 31, 2008, approximates its fair market value since it bears interest at a floating market interest rate. The following are estimated fair values and carrying values of our other financial instruments at each of these dates:

<table><tr><td rowspan="2">Description</td><td colspan="3">December 31, 2009</td><td colspan="3">December 31, 2008</td></tr><tr><td>Carry Amount</td><td>Fair Value</td><td>Carry Amount</td><td>Fair Value</td><td></td><td></td></tr><tr><td>Long-term debt</td><td>$     800</td><td>$     800</td><td>$     1,875</td><td>$     1,875</td><td></td><td></td></tr><tr><td>Short-term construction debt</td><td>$      --</td><td>$      --</td><td>$     16,813</td><td>$     16,813</td><td></td><td></td></tr></table>

## E. 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 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 rowspan="2">(In thousands) Expenditures by Thompson Creek on the Project</td><td colspan="2">Total</td></tr><tr><td>$</td><td>500</td></tr><tr><td>Closing</td><td>$ 500</td><td></td><td></td><td></td></tr><tr><td>December 31, 2008</td><td></td><td>2,000</td><td></td><td>2,000</td></tr><tr><td>January 1, 2009</td><td>1,000</td><td></td><td></td><td>1,000</td></tr><tr><td>December 31, 2009</td><td></td><td>4,000</td><td></td><td>4,000</td></tr><tr><td>January 1, 2010</td><td>1,000</td><td></td><td></td><td>1,000</td></tr><tr><td>December 31, 2010</td><td></td><td>4,000</td><td></td><td>4,000</td></tr><tr><td>January 31, 2011</td><td>1,000</td><td></td><td></td><td>1,000</td></tr><tr><td>June 30, 2011</td><td></td><td>1,500</td><td></td><td>1,500</td></tr><tr><td>Total - First Stage</td><td>$ 3,500</td><td>$ 11,500</td><td>$ 15,000</td><td></td></tr><tr><td>January 2012</td><td>$ 1,000</td><td></td><td>$ 1,000</td><td></td></tr><tr><td>January 2013</td><td>1,000</td><td></td><td>1,000</td><td></td></tr><tr><td>January 2014</td><td>1,000</td><td></td><td>1,000</td><td></td></tr><tr><td>Stage Two Expenditures</td><td></td><td>32,000</td><td>32,000</td><td></td></tr><tr><td>Total - Second Stage</td><td>$ 3,000</td><td>$ 32,000</td><td>$ 35,000</td><td></td></tr><tr><td>Stage Three Expenditures</td><td>$ --</td><td>$ 350,000</td><td>$ 350,000</td><td></td></tr><tr><td></td><td>$ 6,500</td><td>$ 393,500</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) If Thompson Creek has paid a total of $15 million it will own 15%

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

(8) If Thompson Creek has paid a total of $50 million it will own 50%

(9) If Thompson Creek pays 100% of the next $350 million it will own 75% of the project.



Costs to operate the water treatment plant at the property will be 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

The Company 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.



On August 24, 2009, the Company and Brigham Oil & Gas, L.P. (“Brigham”) a Delaware limited partnership wholly-owned by Brigham Exploration Company (a Delaware corporation), entered into a Drilling Participation Agreement (the “DPA”). The DPA provides for the Company and Brigham to jointly explore for oil in the Bakken and Three Forks formations, in up to fifteen 1,280 acre spacing units (19,200 gross acres) in a portion of Brigham’s Rough Rider prospect in Williams and McKenzie Counties, North Dakota. The terms of the DPA call for the drilling of up to 15 initial Bakken wells in 15 separate 1,280 acre spacing units. Under the terms of the DPA, the Company committed to drilling six initial wells (and earning subsequent working interests in six 1,280 acre spacing units) and exercised its option to drill nine additional wells (and earning subsequent working interests in nine additional 1,280 acre spacing units). Upon the drilling and completion of the first or initial well in each 1,280 acre spacing unit, the Company will earn 36% of Brigham’s original working interest in the remaining acreage (or drilling locations) in each 1,280 acre unit or 19,200 gross acres in the Rough Rider project area.

Under the DPA the wells to be drilled are broken into three groups. The first group consists of six wells, the second group of four wells and the final of five wells. The Company participated for 65% of Brigham’s original working interest in each initial well drilled in the first six well program. As of December 31, 2009, Brigham elected to participate in the next 9 wells at 50% of their working interest which decreased the Company’s participation in those wells to 50% from the 65% participation interest on the first six wells. Each participation amount for both Brigham and the Company will be subject to dilution or expansion based on other working interest owners’ participation in the initial wells and/or subsequent wells in each 1,280 acre spacing unit. Upon receiving a pooled payout of all of the costs and expenses incurred to drill and complete the six initial wells in the six initial 1,280 acre spacing units, the Company will assign back 35% of its 65% of Brigham’s original working interest to Brigham after which the Company will own 42.25% of Brigham’s original working interest in the initial well in each 1,280 acre spacing unit. The Company is also entitled to a pooled payout on the second group of four wells similar to the first six well program. Participation in the third group of five wells and spacing units entitles the Company to a well by initial well per spacing unit payout before a 27.7% back in assignment to Brigham.

At December 31, 2009, 6 wells, 2.99 net wells to the Company, had been drilled and completed with net costs of $18.7 million. There were an additional 2 wells, 0.58 net wells to the Company, being drilled at December 31, 2009 at a net cost of $1.4 million. The remaining seven wells will be drilled during 2010. As a result of participating in all 15 wells, the Company will earn the rights to drill up to 30 total wells in the Bakken formation and an additional 30 wells in the Three Forks formation for a total of 60 wells, based on current spacing in North Dakota. Brigham operates all of the wells. If the spacing is ultimately increased to three wells per 1,280 acre spacing unit, the potential number of drilling locations could increase to 90. The drilling of each well typically takes 30 days while the completion typically takes 21-28 days.

Full cost pool capitalized costs are amortized over the life of production of proven properties. Capitalized costs at December 31, 2009 and 2008 which were not included in the amortized cost pool were $5.4 and $3.0 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, 2009 and 2008. 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 – The Company performs a quarterly ceiling test for each of its oil and gas cost centers, which in 2009, 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, 2009, the Company used $61.18 per barrel



for oil and $3.866 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 the Company’s producing property. The discount factor used was 10%.

During the year ended December 31, 2009, the Company recorded impairments totaling $1.5 million, $1.1 million in the first quarter of 2009 and $405,000 in the third quarter of 2009. This impairment was 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 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.

## Sale of Mineral Interests

## Uranium One Asset Purchase Agreement (“Uranium One”) - Uranium

On April 30, 2007, the Company and certain of its then subsidiary companies, completed the sale of uranium assets, including a uranium mill in Utah and unpatented mining claims in Wyoming, Colorado, Arizona and Utah and certain contractual rights the Company had with a third party for the development of uranium properties. The uranium assets were sold to SXR Uranium One Inc. (“Uranium One,”) headquartered in Toronto, Canada with offices in South Africa and Australia (Toronto Stock Exchange and Johannesburg Stock Exchange, “UUU”), and certain of its private subsidiary companies. Uranium One assumed liabilities associated with the uranium assets it acquired, including (but not limited to) those future reclamation liabilities associated with the uranium mill in Utah, and the mining claims.

The Company holds a 4% net profits interest on Rio Tinto’s Jackpot uranium property located on Green Mountain in Wyoming. This interest was not included in the sale of uranium assets to Uranium One.

On October 29, 2007, Uranium One purchased a commercial property associated with uranium assets it had previously purchased from the Company, for $2.7 million. Cash proceeds from the sale of the property were $2.6 million. The Company recorded a gain on the sale of assets from the sale of the property of $472,000.



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

## Capitalized Costs

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

<table><tr><td rowspan="3"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="2">Year Ended December 31,</td><td></td></tr><tr><td>2009</td><td>2008</td><td></td></tr><tr><td>Unproved oil and gas</td><td></td><td></td><td></td></tr><tr><td>properties and wells in progress</td><td>$ 5,360</td><td>$ 2,968</td><td></td></tr><tr><td>Proved oil and gas properties</td><td>24,595</td><td>5,320</td><td></td></tr><tr><td>Total capitalized costs</td><td>$ 29,955</td><td>$ 8,288</td><td></td></tr><tr><td>Accumulated depreciation, depletion and amortization (DD&amp;A)</td><td>(3,953)</td><td>(382)</td><td></td></tr><tr><td>Net capitalized costs</td><td>$ 26,002</td><td>$ 7,906</td><td></td></tr></table>

The Company’s DD&A per equivalent BOE was $22.07 in 2009 and $25.20 in 2008.

Undeveloped properties as of December 31, 2009 include costs incurred in the following years:

<table><tr><td rowspan="2"></td><td colspan="5">(In thousands)</td></tr><tr><td>Acquisitions</td><td>Exploration</td><td>Development</td><td>Total</td><td></td></tr><tr><td>2007</td><td>$ 1,729</td><td>$ --</td><td>$ --</td><td>$ 1,729</td><td></td></tr><tr><td>2008</td><td>544</td><td>--</td><td>--</td><td>544</td><td></td></tr><tr><td>2009</td><td>1,075</td><td>2,012</td><td>--</td><td>3,087</td><td></td></tr><tr><td>Total</td><td>$ 3,348</td><td>$ 2,012</td><td>$ --</td><td>$ 5,360</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">(In thousands)</td></tr><tr><td colspan="3">Year Ended December 31,</td><td></td></tr><tr><td></td><td>2009</td><td>2008</td><td>2007</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>560</td><td>1,184</td><td>2,910</td><td></td></tr><tr><td>Exploration costs</td><td>21,107</td><td>4,194</td><td>--</td><td></td></tr><tr><td>Development costs</td><td>--</td><td>--</td><td>--</td><td></td></tr><tr><td>Total costs incurred</td><td>$ 21,667</td><td>$ 5,378</td><td>$ 2,910</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="3"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="4">Year Ended December 31,</td></tr><tr><td>2009</td><td>2008</td><td>2007</td><td></td></tr><tr><td>Oil and natural gas revenues</td><td>$ 6,844</td><td>$ 571</td><td>$ --</td><td></td></tr><tr><td>Less:</td><td></td><td></td><td></td><td></td></tr><tr><td>Oil and natural gas operating costs</td><td>348</td><td>62</td><td>--</td><td></td></tr><tr><td>Depreciation, depletion and amortization</td><td>3,571</td><td>382</td><td>--</td><td></td></tr><tr><td>Impairment</td><td>1,468</td><td>--</td><td>--</td><td></td></tr><tr><td></td><td>5,387</td><td>444</td><td>--</td><td></td></tr><tr><td>Results of operations from oil and natural gas</td><td>$ 1,457</td><td>$ 127</td><td>$ --</td><td></td></tr></table>

## 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, 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.

The Company’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, 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>



<table><tr><td>December 31, 2008</td><td>Oil (BBLS)</td><td>Gas (MCF)</td></tr><tr><td>Beginning of year</td><td>--</td><td>--</td></tr><tr><td>Revisions of previous quantity estimates</td><td>--</td><td>--</td></tr><tr><td>Extensions, discoveries and improved recoveries</td><td>32,128</td><td>1,073,635</td></tr><tr><td>Sales of reserves in place</td><td>--</td><td>--</td></tr><tr><td>Production</td><td>(2,330)</td><td>(73,635)</td></tr><tr><td>End of Year</td><td>29,798</td><td>1,000,000</td></tr><tr><td>Proved developed reserves at end of year</td><td>29,798</td><td>1,000,000</td></tr></table>

## Standardized Measure (Unaudited)

The standardized measure of discounted future net cash flows relating to the Company’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>2009</td><td colspan="2">2008</td><td>2007</td></tr><tr><td>Future cash inflows</td><td>$ 51,024</td><td>$ 7,112</td><td>$ --</td><td></td></tr><tr><td>Future costs:</td><td></td><td></td><td></td><td></td></tr><tr><td>Production</td><td>(14,025)</td><td>(1,154)</td><td></td><td></td></tr><tr><td>Development</td><td>(104)</td><td>(64)</td><td></td><td></td></tr><tr><td>Future income tax expense</td><td>(8,273)</td><td>(1,993)</td><td></td><td></td></tr><tr><td>Future net cash flows</td><td>28,622</td><td>3,901</td><td></td><td></td></tr><tr><td>10% discount factor</td><td>(8,638)</td><td>(583)</td><td></td><td></td></tr><tr><td>Standardized measure of discounted future net cash flows</td><td>$ 19,984</td><td>$ 3,318</td><td>$ --</td><td></td></tr></table>

Future cash flows are computed by applying 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 to year-end quantities of proved oil and natural gas reserves. Average prices used in computing year end 2009 and 2008 future cash flows were $61.18/barrel and $41.41/barrel, respectively, for oil and $3.866/MMbtu and $5.88/MMbtu for natural gas, respectively. Future operating expenses and development costs are computed primarily by the Company’s petroleum engineers by estimating the expenditures to be incurred in developing and producing the Company’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 the Company’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.



## 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>2009</td><td colspan="2">2008</td><td>2007</td></tr><tr><td>Balance at beginning of period</td><td>$ 3,318</td><td>$ --</td><td>$ --</td><td></td></tr><tr><td>Sales of oil and gas, net of production costs</td><td>(6,496)</td><td>(509)</td><td></td><td></td></tr><tr><td>Net change in prices and production costs</td><td>297</td><td></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>26,721</td><td>5,820</td><td></td><td></td></tr><tr><td>Revisions of previous quantity estimates</td><td>1,586</td><td></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>(4,385)</td><td>(1,993)</td><td></td><td></td></tr><tr><td>Accretion of discount</td><td>531</td><td></td><td></td><td></td></tr><tr><td>Changes in production rates, timing and other</td><td>(1,588)</td><td></td><td></td><td></td></tr><tr><td>Balance at end of period</td><td>$ 19,984</td><td>$ 3,318</td><td>$ --</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. Sales of oil and natural gas properties, extensions and discoveries, purchases of minerals in place and the changes due to revisions in standardized variables are reported on a pretax discounted basis.

## G. GEOTHERMAL

During the year ended December 31, 2009, the Company increased its minority interest in Standard Steam Trust, LLC (“SST”), a Denver, Colorado based private geothermal resource acquisition and development company, to $4.3 million from $3.5 million at December 31, 2008. The Company recognized a $1.4 million equity loss during the year ended December 31, 2009. The Company’s net investment at December 31, 2009 was $3.0 million. Due to not funding yearend cash call from SST the Company’s ownership interest decreased from 25% to 23.8%.

SST is managed by Terra Caliente, LLC (“Terra”), also a private Denver based company, with oversight by an advisory board (USE is one of three members) as to budgets, major expenditures, sale or other disposition of prospects, and similar matters. SST was formed to explore for, acquire and develop geothermal properties to the level where they could be sold to industry partners for the development of electrical generation plants.

## H. ENERGY SECTOR HOUSING

Remington Village – Gillette, Wyoming.

During 2008, the Company completed construction of a nine building multifamily apartment complex, with 216 units on 10.15 acres located in Gillette, Wyoming.

In August 2007, Zions Bank provided secured construction financing (also guaranteed by USE). The amount due under the construction loan was $16.8 million at December 31, 2008. Total cost to buy the



land, pay a developer’s fee, obtain permits and entitlements, site work and construction, was approximately $24.5 million. During the year ended December 31, 2009 the Company retired the construction loan on the property of $16.8 million from cash reserves.

## I. OTHER LIABILITIES AND DEBT

As of December 31, 2009 and 2008, the Company had current and long term liabilities associated with the following funding commitments:

Other Liabilities and Debt:

Other Liabilities

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td><td></td></tr><tr><td>Retainage on construction in progress</td><td>$ 10</td><td>$ 488</td><td></td></tr><tr><td>Employee health insurance self funding</td><td>--</td><td>23</td><td></td></tr><tr><td>Deferred rent</td><td>35</td><td>29</td><td></td></tr><tr><td>Security deposits</td><td>150</td><td>103</td><td></td></tr><tr><td>Accrued expenses</td><td>29</td><td>72</td><td></td></tr><tr><td></td><td>$ 224</td><td>$ 715</td><td></td></tr><tr><td>Other long term liabilities:</td><td></td><td></td><td></td></tr><tr><td>Accrued retirement costs</td><td>$ 762</td><td>$ 726</td><td></td></tr><tr><td>Debt</td><td></td><td></td><td></td></tr><tr><td></td><td colspan="3">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td><td></td></tr><tr><td>Short Term Debt</td><td></td><td></td><td></td></tr><tr><td>Construction note - collateralized by property, interest at 2.71%</td><td>$ --</td><td>$ 16,813</td><td></td></tr><tr><td>Long Term Debt</td><td></td><td></td><td></td></tr><tr><td>Real estate note - collateralized by property, interest at 6%</td><td>$ 800</td><td>$ 1,875</td><td></td></tr><tr><td>Less current portion</td><td>(200)</td><td>(875)</td><td></td></tr><tr><td>Totals</td><td>$ 600</td><td>$ 1,000</td><td></td></tr></table>

In December 2008, the Company and TCM purchased land for $4 million ($2 million in January 2009, $400,000 annually for five years). The Company is responsible for one-half the purchase price. As of December 31, 2009 the Company has paid $1.2 million leaving $800,000 to be paid at the rate of $200,000 per year through 2013.

At the date of filing of this annual report the Company 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 expires January 31, 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 certain the Company’s multifamily housing project, Remington Village, and the Company’s aircraft.



## J. INCOME TAXES

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

<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>2009</td><td>2008</td><td>2007</td><td></td></tr><tr><td>Book income before income taxes</td><td>$ (10,457)</td><td>$ (4,714)</td><td>$ 88,730</td><td></td></tr><tr><td>Equity income from non consolidated tax sub</td><td>--</td><td>--</td><td>3,551</td><td></td></tr><tr><td>Add back losses from non consolidated tax subs</td><td>--</td><td>--</td><td>2,010</td><td></td></tr><tr><td>Prior year true-up and rate change</td><td>153</td><td>(171)</td><td>(265)</td><td></td></tr><tr><td>Reverse income from discontinued operations</td><td>--</td><td>(4,907)</td><td>--</td><td></td></tr><tr><td>Tax impact of adjustment resulting from basis study</td><td>3,179</td><td>--</td><td>--</td><td></td></tr><tr><td>Tax impact of change in asset classification</td><td>--</td><td>(549)</td><td>--</td><td></td></tr><tr><td>Tax impact of percentage depletion carryover</td><td>(355)</td><td>--</td><td>--</td><td></td></tr><tr><td>Permanent differences</td><td>1,150</td><td>1,106</td><td>(2,549)</td><td></td></tr><tr><td>Taxable income before temporary differences</td><td>$ (6,330)</td><td>$ (9,235)</td><td>$ 91,477</td><td></td></tr><tr><td>Expected Federal and State Tax Benefit (35% for 200 expected Federal Tax Benefit (34% for 2009)</td><td>--</td><td>(3,232)</td><td>32,017</td><td></td></tr><tr><td>Expected State Tax Benefit</td><td>(2,152)</td><td>--</td><td>--</td><td></td></tr><tr><td>(2% net of federal benefit)</td><td>(127)</td><td>--</td><td>--</td><td></td></tr><tr><td>Total Expected Tax Benefit</td><td>$ (2,279)</td><td>$ (3,232)</td><td>$ 32,017</td><td></td></tr><tr><td>Federal deferred income tax expense (benefit)</td><td>$ (1,794)</td><td>$ 1,319</td><td>$ 14,778</td><td></td></tr><tr><td>Federal current expense (benefit)</td><td>(210)</td><td>(4,551)</td><td>17,239</td><td></td></tr><tr><td>Total federal income tax expense (benefit)</td><td>$ (2,004)</td><td>$ (3,232)</td><td>$ 32,017</td><td></td></tr><tr><td>Current state income tax expense net of federal benefit</td><td>--</td><td>(94)</td><td>350</td><td></td></tr><tr><td>Deferred state income tax expense net of federal benefit</td><td>(275)</td><td>--</td><td>--</td><td></td></tr><tr><td>Total provision (benefit)</td><td>$ (2,279)</td><td>$ (3,326)</td><td>$ 32,367</td><td></td></tr></table>



The tax impact of change in asset classification relates to the Company’s investment in shares of Sutter Gold Mining, Inc. that it owned at December 31, 2008. When this asset was previously accounted for as a subsidiary, no deferred tax asset for the excess of tax basis over book basis was recognized. As this investment is now being treated as a marketable security, subject to impairment, a deferred tax asset was established in 2008.

In 2009, the Company performed a basis study to reconcile its book basis in depreciable property to its tax basis in such property. As a result of this study the Company determined that its deferred tax liability related to these basis differences was understated. Accordingly, the Company increased the associated deferred tax liability in 2009. This increase is reflected above in the tax impact of adjustment resulting from basis study.

The components of deferred taxes as of December 31, 2009 and 2008 are as follows:

<table><tr><td rowspan="2"></td><td colspan="3">(In thousands)</td></tr><tr><td colspan="3">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td><td></td></tr><tr><td>Current deferred tax assets:</td><td></td><td></td><td></td></tr><tr><td>Tax basis in excess of book</td><td>$ 349</td><td>$ 550</td><td></td></tr><tr><td>Non-deductible reserves and other</td><td>534</td><td>43</td><td></td></tr><tr><td>Total net current deferred tax assets/(liabilities)</td><td>$ 883</td><td>$ 593</td><td></td></tr><tr><td>Non-current deferred tax assets:</td><td></td><td></td><td></td></tr><tr><td>Deferred compensation</td><td>$ 629</td><td>$ 651</td><td></td></tr><tr><td>Accrued reclamation</td><td>76</td><td>50</td><td></td></tr><tr><td>Net operating loss carryover</td><td>2,078</td><td>--</td><td></td></tr><tr><td>Alternative Minimum Tax credit carryover</td><td>810</td><td>--</td><td></td></tr><tr><td>Charitable contributions carryover</td><td>19</td><td>--</td><td></td></tr><tr><td>Percentage depletion carryover</td><td>128</td><td>--</td><td></td></tr><tr><td>Total noncurrent deferred tax assets</td><td>3,740</td><td>701</td><td></td></tr><tr><td>Non-current deferred tax liabilities:</td><td></td><td></td><td></td></tr><tr><td>Book basis in excess of tax basis</td><td>(8,529)</td><td>(7,884)</td><td></td></tr><tr><td>Book basis in excess of tax basis - oil and gas</td><td>(2,520)</td><td>(1,750)</td><td></td></tr><tr><td>Accrued reclamation</td><td>(36)</td><td>(12)</td><td></td></tr><tr><td>Total deferred tax liabilities</td><td>(11,085)</td><td>(9,646)</td><td></td></tr><tr><td>Total net non-current deferred tax assets/(liabilities)</td><td>$ (7,345)</td><td>$ (8,945)</td><td></td></tr></table>

A valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax assets will not be realized. No valuation allowance is provided at December 31, 2009 and December 31, 2008 as the Company believes that it is more likely than not that the deferred tax assets will be utilized in future years.



During the year ended December 31, 2009, net current deferred tax assets increased by $289,000 and net non-current deferred tax liabilities decreased by $1.6 million. The total change in net deferred tax liabilities was a decrease of $1.9 million. This decrease comprised of a deferred income tax benefit $2.1 million, the reduction of other comprehensive income in the amount of $217,000 resulting from the future tax impact of unrealized gain on marketable securities, and an increase to additional paid in capital of $38,000 resulting from the exercise of certain incentive stock options and warrants.

The book basis in excess of tax basis in the schedule above relates primarily to the $7.3 million difference created from the excess of the purchase price over the carrying value of the assets acquired in the purchase of the remaining minority interest of Crested Corp. in 2007.

At December 31, 2009, the Company has a net operating loss carry-forward for federal income tax purposes of $5.1 million which is available to offset future federal taxable income through 2029. In addition, the Company has alternative minimum tax credit carry-forwards of $810,000 which are available to offset future federal income taxes over an indefinite period.

Current taxes receivable at December 31, 2009 is comprised of $353,000 of federal income taxes. At December 31, 2008, current taxes receivable was $5.9 million.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrued interest or penalties at December 31, 2009 or December 31, 2008.

Pursuant to ASC 740-10, the Company identified and evaluated any potential uncertain tax positions. The Company has concluded that there are no uncertain tax positions requiring recognition in the financial statements.

The Internal Revenue Service has audited the Company’s and subsidiaries’ tax returns through the year ended May 31, 2000. The Company’s income tax liabilities are settled through fiscal 2000.

## K. SEGMENTS AND MAJOR CUSTOMERS

During the years ended December 31, 2009 and December 31, 2008, the Company, 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, 2009, no one customer had a majority of the units under contract in the Company’s multifamily housing project in Gillette, Wyoming.

During the year ended December 31, 2007, the Company was involved in one reportable business segment, commercial activities which include operations managed by third parties and the sale of real estate lots at the Company’s commercial real estate property in southern Utah which has been sold. The Company also received management fees for mineral properties which were not consolidated business segments in prior years but are broken out separately in the attached table for comparison. The Company’s operating segments are reflected in the tables below:



## SEGMENT INFORMATION

<table><tr><td rowspan="2"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="3">For the years ended December 31,</td><td></td></tr><tr><td></td><td>2009</td><td>2008</td><td>2007</td><td></td></tr><tr><td>Revenues:</td><td></td><td></td><td></td><td></td></tr><tr><td>Real estate</td><td>$ 2,768</td><td>$ 1,633</td><td>$ 934</td><td></td></tr><tr><td>Oil &amp; gas</td><td>6,844</td><td>571</td><td>--</td><td></td></tr><tr><td>Other</td><td>15</td><td>83</td><td>240</td><td></td></tr><tr><td>Total revenues:</td><td>9,627</td><td>2,287</td><td>1,174</td><td></td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td></tr><tr><td>Real estate</td><td>2,104</td><td>1,165</td><td>380</td><td></td></tr><tr><td>Oil and gas</td><td>3,919</td><td>444</td><td>--</td><td></td></tr><tr><td>Impairment of oil &amp; gas properties</td><td>1,468</td><td>--</td><td>--</td><td></td></tr><tr><td>Mineral properties</td><td>1,636</td><td>834</td><td>1,093</td><td></td></tr><tr><td>Total operating expenses:</td><td>9,127</td><td>2,443</td><td>1,473</td><td></td></tr><tr><td>Interest expense</td><td></td><td></td><td></td><td></td></tr><tr><td>Real estate</td><td>19</td><td>417</td><td>--</td><td></td></tr><tr><td>Oil &amp; gas</td><td>--</td><td>--</td><td>--</td><td></td></tr><tr><td>Mineral properties</td><td>60</td><td>--</td><td>--</td><td></td></tr><tr><td>Total interest expense:</td><td>79</td><td>417</td><td>--</td><td></td></tr><tr><td>Operating gain/(loss)</td><td></td><td></td><td></td><td></td></tr><tr><td>Real estate</td><td>$ 645</td><td>51</td><td>554</td><td></td></tr><tr><td>Oil &amp; gas</td><td>1,457</td><td>127</td><td>--</td><td></td></tr><tr><td>Mineral properties</td><td>(1,681)</td><td>(751)</td><td>(853)</td><td></td></tr><tr><td>Operating (loss)</td><td>421</td><td>(573)</td><td>(299)</td><td></td></tr><tr><td>Other revenues and expenses:</td><td>(10,878)</td><td>(9,048)</td><td>91,033</td><td></td></tr><tr><td>(Loss)/gain before discontinued operations and income taxes</td><td>$ (10,457)</td><td>$ (9,621)</td><td>$ 90,734</td><td></td></tr><tr><td>Depreciation, depletion and amortization expense:</td><td></td><td></td><td></td><td></td></tr><tr><td>Real estate</td><td>$ 1,045</td><td>$ 517</td><td>$ 41</td><td></td></tr><tr><td>Oil &amp; gas</td><td>3,571</td><td>382</td><td>--</td><td></td></tr><tr><td>Mineral properties</td><td>54</td><td>49</td><td>36</td><td></td></tr><tr><td>Corporate</td><td>396</td><td>478</td><td>361</td><td></td></tr><tr><td>Total depreciation expense</td><td>$ 5,066</td><td>$ 1,426</td><td>$ 438</td><td></td></tr></table>



<table><tr><td rowspan="2"></td><td colspan="2">(In thousands)</td></tr><tr><td colspan="2">December 31,</td></tr><tr><td></td><td>2009</td><td>2008</td></tr><tr><td>Assets by segment</td><td></td><td></td></tr><tr><td>Real estate</td><td>$ 23,450</td><td>$ 30,980</td></tr><tr><td>Oil &amp; Gas properties</td><td>30,016</td><td>8,523</td></tr><tr><td>Mineral properties</td><td>21,998</td><td>24,927</td></tr><tr><td>Corporate assets</td><td>71,259</td><td>78,201</td></tr><tr><td>Total assets</td><td>$ 146,723</td><td>$ 142,631</td></tr></table>

## L. SHAREHOLDERS' EQUITY

During 2009, the Company issued 5,189,655 shares of common stock. Issued shares consist of (a) 5,000,000 shares issued in a public offering during the fourth quarter; (b) 36,583 shares issued for the 2009 ESOP contribution; (c) 80,000 shares issued to officers of the Company pursuant to the 2001 Stock Compensation Plan; (d) 71,088 shares issued as a result of warrants being exercised and (e) 1,984 shares as a result of the exercise of options by an employee of the Company.

## Stock Buyback Plan

During the year ended December 31, 2009, the Company completed its $8.0 million stock buyback plan. The Company purchased 706,071 shares for $1.4 million or an average purchase price of $1.98 per share. During prior years the Company purchased 2,388,129 shares at an average cost of $6.6 million or $2.76 per share. The total number of shares purchased under the stock buyback program was 3,094,200 shares for approximately $8.0 million or an average purchase price of $2.59 per share.

## Stock Option Plans

The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan for the benefit of the Company’s employees. The Option Plan, as amended and renamed the 1998 Incentive Stock Option Plan (“1998 ISOP”), reserved 3,250,000 shares of the Company’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.



During the years ended December 31, 2009, 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>2009</td><td>2008</td><td>2007</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>--</td><td>--</td><td>141,687</td></tr><tr><td>Non-Qualified</td><td>--</td><td>--</td><td>481,566</td></tr><tr><td></td><td>--</td><td>--</td><td>623,253</td></tr><tr><td>Total Cash Received</td><td>$ --</td><td>$ --</td><td>$ 546,400 \)  \( ^{(1)} \)</td></tr><tr><td>Forfeitures/Cancellations</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>--</td><td>77,782</td><td>--</td></tr><tr><td>Non-Qualified</td><td>--</td><td>27,617</td><td>--</td></tr><tr><td></td><td>--</td><td>105,399</td><td>--</td></tr></table>

 \( ^{(1)} \)  In addition to the cash exercise of options, shares valued at $890,400 were exchanged for the exercise of 402,780 of the total shares

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 the Company's employees. The 2001 ISOP (amended by approval of the shareholders in 2004 and 2007) reserves for issuance 25% of the Company'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.



During the years ended December 31, 2009, 2008 and 2007 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>2009</td><td>2008</td><td>2007</td></tr><tr><td>Grants</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>--</td><td>248,817</td><td>1,310,400</td></tr><tr><td>Non-Qualified</td><td>--</td><td>313,683</td><td>247,600</td></tr><tr><td></td><td>--</td><td>562,500</td><td>1,558,000</td></tr><tr><td>Price of Grants</td><td></td><td></td><td></td></tr><tr><td>High</td><td>--</td><td>2.52</td><td>4.97</td></tr><tr><td>Low</td><td>--</td><td>2.52</td><td>4.97</td></tr><tr><td>Exercised</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>1,984</td><td>--</td><td>342,220</td></tr><tr><td>Non-Qualified</td><td>--</td><td>--</td><td>454,051</td></tr><tr><td></td><td>1,984</td><td>--</td><td>796,271</td></tr><tr><td>Total Cash Received</td><td>5,000</td><td>--</td><td>1,424,100 (1)</td></tr><tr><td>Forfeitures/Cancellations</td><td></td><td></td><td></td></tr><tr><td>Qualified</td><td>4,000</td><td>77,221</td><td>197,029</td></tr><tr><td>Non-Qualified</td><td>-</td><td>482,709</td><td>49,400</td></tr><tr><td></td><td>4,000</td><td>559,930</td><td>246,429</td></tr></table>

 \( ^{(1)} \)  In addition to the cash exercise of options there were 145,729 shares valued at 792,600 exchanged for exercises of 328,047 options.



A summary of the Employee Stock Option Plans activity in all plans for the year ended December 31, 2009, 2008 and 2007 is as follows:

<table><tr><td rowspan="3"></td><td colspan="6">Year ended December 31,</td></tr><tr><td colspan="2">2009</td><td colspan="2">2008</td><td colspan="2">2007</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>3,717,098</td><td>$ 3.63</td><td>3,819,927</td><td>$ 3.75</td><td>3,927,880</td><td>$ 2.92</td></tr><tr><td>Granted</td><td>-</td><td>$ -</td><td>562,500</td><td>$ 2.52</td><td>1,558,000</td><td>$ 4.97</td></tr><tr><td>Forfeited</td><td>-</td><td>$ -</td><td>(5,333)</td><td>$ 4.97</td><td>(246,429)</td><td>$ 4.89</td></tr><tr><td>Expired</td><td>(4,000)</td><td>$ 2.46</td><td>(659,996)</td><td>$ 3.37</td><td>--</td><td>--</td></tr><tr><td>Exercised</td><td>(1,984)</td><td>$ 2.52</td><td>--</td><td>$ -</td><td>(1,419,524)</td><td>$ 2.57</td></tr><tr><td>Outstanding at period end</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>Exercisable at period end</td><td>2,614,453</td><td>$ 3.43</td><td>2,131,269</td><td>$ 3.29</td><td>2,486,927</td><td>$ 3.10</td></tr><tr><td>Weighted average fair value of options granted during the period</td><td></td><td>$ --</td><td></td><td>$ 1.41</td><td></td><td>$ 3.28</td></tr></table>

During the year ended December 31, 2009 a total of 1,984 options were exercised by an employee by the payment of $5,000. No options were exercised during the year ended December 31, 2008. The exercise of 1,419,524 options during the year ended December 31, 2007 resulted in the net issuance of 1,109,894 shares. The options were exercised due to the payment of cash for 688,697 shares and cashless exercise of 730,827 options as a result of the cancellation of 309,630 shares.

Option related compensation expense is recognized over the vesting period of the options and is calculated using the Black Scholes option pricing model. The Company 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, the Company 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, 2009:

<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>12,100</td><td>15,300</td><td>(3,200)</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>2007</td><td>1,558,000</td><td>4,354,700</td><td>592,100</td><td>1,081,300</td><td>1,166,700</td><td>756,800</td><td>755,700</td><td>2,100</td></tr><tr><td>2008</td><td>562,500</td><td>791,000</td><td>-</td><td>72,800</td><td>263,100</td><td>263,700</td><td>191,400</td><td>-</td></tr><tr><td>2009</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>&lt;nl&gt;</td></tr><tr><td></td><td>2,845,500</td><td>$5,157,800</td><td>$607,400</td><td>$1,150,900</td><td>$1,429,800</td><td>$1,020,500</td><td>$947,100</td><td>$ 2,100</td></tr></table>



The following table summarizes information about employee stock options outstanding and exercisable at December 31, 2009:

<table><tr><td>Grant Price Range</td><td>Options Outstanding at December 31, 2009</td><td>Weighted average remaining contractual life in years</td><td>Weighted average exercise price</td><td>Options exercisable at December 31, 2009</td><td>Weighted average exercise price</td></tr><tr><td>$2.25</td><td>177,668</td><td>1.94</td><td>$ 2.25</td><td>177,668</td><td>$ 2.25</td></tr><tr><td>$2.26 - $2.40</td><td>434,215</td><td>1.03</td><td>$ 2.40</td><td>434,215</td><td>$ 2.40</td></tr><tr><td>$2.41 - $2.46</td><td>462,019</td><td>4.50</td><td>$ 2.46</td><td>462,019</td><td>$ 2.46</td></tr><tr><td>$2.47 - $2.52</td><td>560,516</td><td>8.73</td><td>$ 2.52</td><td>185,521</td><td>$ 2.52</td></tr><tr><td>$2.53 - $3.86</td><td>373,768</td><td>5.79</td><td>$ 3.86</td><td>373,768</td><td>$ 3.86</td></tr><tr><td>$3.87 - $3.90</td><td>377,928</td><td>1.93</td><td>$ 3.90</td><td>377,928</td><td>$ 3.90</td></tr><tr><td>$3.91 - $4.97</td><td>1,325,000</td><td>7.57</td><td>$ 4.97</td><td>603,334</td><td>$ 4.97</td></tr><tr><td></td><td>3,711,114</td><td>5.57</td><td>$ 3.64</td><td>2,614,453</td><td>$ 3.43</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>2009</td><td>2008</td><td>2007</td></tr><tr><td>Available for future grant</td><td>3,327,780</td><td>1,924,524</td><td>1,927,904</td></tr><tr><td>Intrinsic value of option exercised</td><td>$ 13,900</td><td>$ -</td><td>$ 4,227,900</td></tr><tr><td>Aggregate intrinsic value of options outstanding</td><td>$ 8,514,100</td><td>$ -</td><td>$ 2,852,700</td></tr><tr><td>Aggregate intrinsic value of options exercisable</td><td>$ 6,542,500</td><td>$ -</td><td>$ 2,852,700</td></tr></table>

## Employee Stock Ownership Plan

The Board of Directors of the Company adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of all the Company’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 the Company. 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, $230,000 and $225,000 for the years ended December 31, 2009, 2008 and 2007, 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. The Company funds 10% of 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, 2009, all shares of the Company’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, 2009, the Board of Directors of the Company approved a contribution of 36,583 shares to the ESOP at the price of $5.93 for a total expense of $217,000. This compares to contributions to the ESOP during the year ended December 31, 2008 and 2007 of 126,876



and 84,995 shares to the ESOP at prices of $1.64 and $4.25 per share, respectively. The expense for the contributions during the years ended December 31, 2008 and 2007 were $208,000 and $361,000 respectively.

During prior years, the Company loaned the ESOP $1,014,000 to purchase 125,000 shares from the Company and 38,550 shares on the open market. The Company paid the ESOP 2,350 shares as dividends on the shares the ESOP had purchased. During the year ended May 31, 1996, 10,089 of these shares were used to fund the Company's annual funding commitment and reduce the loan to the Company by $87,000. During a previous year, the loans were also adjusted by $437,000 to reflect their value at the time. During 2008, the Company accepted, and the ESOP returned, the remaining 155,811 shares that were being held as collateral as full satisfaction of the debt. The shares were cancelled by the Company.

## Warrants to Others

As of December 31, 2009, there were 581,367 warrants outstanding to purchase shares of the Company's common stock. Of the total outstanding warrants, 494,701 were exercisable. The Company 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, 2009, 2008 and 2007 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">2009</td><td colspan="2">2008</td><td colspan="2">2007</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>1,036,387</td><td>$ 3.43</td><td>1,445,585</td><td>$ 3.58</td><td>1,821,323</td><td>$ 3.57</td></tr><tr><td>Granted</td><td>-</td><td>$ -</td><td>170,000</td><td>$ 2.59</td><td>31,215</td><td>$ 3.28</td></tr><tr><td>Forfeited</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Expired</td><td>(383,932)</td><td>$ 4.26</td><td>(132,500)</td><td>$ 3.98</td><td>(47,355)</td><td>$ 3.72</td></tr><tr><td>Exercised</td><td>(71,088)</td><td>$ 3.27</td><td>(446,698)</td><td>$ 3.42</td><td>(359,598)</td><td>$ 3.47</td></tr><tr><td>Outstanding at period end</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>Exercisable at period end</td><td>494,701</td><td>$ 2.98</td><td>886,387</td><td>$ 3.58</td><td>1,445,585</td><td>$ 3.58</td></tr><tr><td>Weighted average fair value of options granted during the period</td><td></td><td>$ --</td><td>$ 1.28</td><td></td><td>$ 2.20</td><td></td></tr></table>



The following table summarizes information about non employee warrants outstanding and exercisable at December 31, 2009:

<table><tr><td>Grant Price Range</td><td>Warrants Outstanding at December 31, 2009</td><td>Weighted average remaining contractual life in years</td><td>Weighted average exercise price</td><td>Warrants exercisable at December 31, 2009</td><td>Weighted average exercise price</td></tr><tr><td>2.25</td><td>10,000</td><td>1.93</td><td>$ 2.25</td><td>10,000</td><td>$ 2.25</td></tr><tr><td>$2.26 - $2.40</td><td>10,000</td><td>1.03</td><td>$ 2.40</td><td>10,000</td><td>$ 2.40</td></tr><tr><td>$2.41 - $2.46</td><td>100,000</td><td>4.49</td><td>$ 2.46</td><td>100,000</td><td>$ 2.46</td></tr><tr><td>$2.47 - $2.52</td><td>130,000</td><td>8.73</td><td>$ 2.52</td><td>43,334</td><td>$ 2.52</td></tr><tr><td>$2.53 - $2.77</td><td>192,455</td><td>0.33</td><td>$ 2.77</td><td>192,455</td><td>$ 2.77</td></tr><tr><td>$2.78 - $3.86</td><td>118,912</td><td>3.94</td><td>$ 3.86</td><td>118,912</td><td>$ 3.86</td></tr><tr><td>$3.87 - $3.90</td><td>20,000</td><td>1.93</td><td>$ 3.90</td><td>20,000</td><td>$ 3.90</td></tr><tr><td></td><td>581,367</td><td>3.76</td><td>$ 2.91</td><td>494,701</td><td>$ 2.98</td></tr></table>

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

The Company 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 December 31,</td></tr><tr><td>2009</td><td>2008</td><td>2007</td></tr><tr><td>Risk-free interest rate</td><td>--</td><td>2.41% - 3.23%</td><td>4.38%</td></tr><tr><td>Expected lives (years)</td><td>--</td><td>1.78 - 6.0</td><td>0.29 - 2.79</td></tr><tr><td>Expected volatility</td><td>--</td><td>46.05% - 56.51%</td><td>48.12%</td></tr><tr><td>Expected dividend yield</td><td>--</td><td>--</td><td>--</td></tr></table>

## M. COMMITMENTS, CONTINGENCIES AND OTHER

## Legal Proceedings

Water Rights Litigation –Mount Emmons Molybdenum Property

1. Concerning the Application of the United States of America in the Gunnison River, Gunnison County, Case No. 99CW267. This case involves an application filed by the United States of America to appropriate 0.033 cubic feet per second of water for wildlife use and for incidental irrigation of riparian vegetation at the Mount Emmons Iron Bog Spring, located in the vicinity of Mount Emmons. MEMCO filed a Statement of Opposition to protect proposed mining operations against any adverse impacts by the water requirements of the Iron Bog on such operations. This case is pending while the parties attempt to reach a settlement on the proposed decree terms and conditions.



2. 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 concerning the conditional water rights associated with Mount Emmons. The conditional water decree (“Decree”) requires the Company to file its proposed plan of operations and associated permits (“Plan”) 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. Although the BLM issued the mineral patents on April 2, 2004, the patents remained subject to a challenge by High Country Citizens’ Alliance, the Town of Crested Butte, and the Board of County Commissioners of Gunnison County (collectively “Protestors”). The Company vigorously defended this legal action through the Federal District Court for the District of Colorado and the Tenth Circuit Court of Appeals. 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 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 State of Colorado, and High Country Citizens’ Alliance in September 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. Although, the Company and TCM will be prepared to file a Plan by the April 2, 2010 proposed deadline, the Company and TCM will pursue a ruling from the Water Court that the deadline specified in the Decree requires the filing of the Plan by the April 30, 2013.

## Ordinance Related to the Crested Butte Watershed

On May 19, 2008, the Town Council adopted a revised Watershed Ordinance. The Company and TCM intend to work with the Town of Crested Butte concerning activities at Mount Emmons consistent with lawful and applicable rules, regulations, and statutes. It is possible that unexpected delays, and/or increased costs, may be encountered in developing a new mine plan for Mount Emmons as a result of the revised Watershed Ordinance.

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

On March 8, 2008, High Country Citizens’ Alliance (“HCCA”) filed a request for hearing before the Colorado Land Reclamation Board (“Board”) of the approval of a Notice of Intent to Conduct Prospecting Notice for the Mount Emmons molybdenum property (“NOI”), which was approved by the Division of Reclamation, Mining and Safety of the Colorado Department of Natural Resources (“DRMS”) on January 3, 2008. The NOI as approved provided 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.



On March 28, 2008, the Company and the Colorado Attorney General’s Office filed independent Motions to Dismiss alleging among other matters that: (i) HCCA had no standing to appeal the NOI; (ii) the NOI is not an appealable decision under Colorado law; (iii) HCCA’s appeal is not timely; and (iv) the appeal is based on information obtained in violation of Colorado law.

On May 14, 2008, the Board denied HCCA’s Request for Hearing and also denied their Request for a Declaratory Order. Citing Colorado law, the Board 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 Board’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 Board 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. No hearing date has been scheduled in the District Court of Colorado concerning DRMS’s issuance of the NOI to the Company for the Mount Emmons molybdenum property.

## Water Treatment Facility – Permit Renewal Protest

The Company received a NPDES Permit renewal for Mount Emmons from the Colorado Department of Public Health and Environment – Water Quality Division (“Water Quality Division”) effective September 1, 2008. The NPDES Permit is for a five (5) year period (2008 - 2013). On August 28, 2008, the Town of Crested Butte, Board of County Commissioners for the County of Gunnison and High Country Citizens’ Alliance (“Petitioners”) filed a Request for Adjudicatory Hearing before the Water Quality Division to challenge the NPDES Permit. The Petitioners seek revisions to the Permit that would require the Company to maintain a prepaid operating contract and provide additional financial security for long term operation of the plant.

A hearing before the Administrative Law Judge (“ALJ”) in the Office of Administrative Courts was held on October 2, 2009 in Denver, Colorado. On October 30, 2009 the ALJ issued an order upholding the issuance of the NPDES Permit and rejecting the Petitioners’ request for financial assurances as a condition of the NPDES permit.

## Asset Retirement Obligations

Reclamation liabilities at December 31, 2009 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. The Company and TCM expect to submit a Plan of Operations to the USFS in 2010 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 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 the Company 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 the Company 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, 2009 for Mount Emmons was $128,000.

## Oil and Gas Wells

The Company 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, 2009, the Company’s liability for its wells was $83,000. 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 the Company adopted the U.S. Energy Corp. 401(K) Plan ("401(K)") in 2004. The Company matches 50% of an employee's salary deferrals up to a maximum contribution per employee of $4,000 annually. The Company expensed $48,000, $51,000 and $60,000 for the years ended December 31, 2009, 2008 and 2007, 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, 2009, 2008 and 2007, the Company collectively issued 80,000, 85,000 and 62,500 shares of stock to these officers, respectively. While in the Company’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 the Company has agreed to pay all taxes due on the shares granted to the officers.

The Company is committed to pay the surviving spouse or dependent children of the former Chairman and Founder, who passed away on September 4, 2006, one years' full salary and 50% of that amount annually for an additional four years thereafter. During the years ended December 31, 2009, 2008 and 2007, the Company paid $85,000, $85,000 and $116,000, respectively under this plan. The Company will continue to pay $85,000, or the pro-rata amount on an annual basis, until September 5, 2011. The Board of Directors also approved payment of 50% of the then existing wages to the Company's former General Counsel for a period of five years. The Company will pay $85,000 annually under this agreement beginning at date of retirement, January 12, 2007, to January 12, 2012. Neither of these two retirement benefits to former officers are funded.

On October 20, 2005, the Board of Directors of the Company adopted an Executive Retirement Policy for the then Chairman/CEO President/COO, CFO/Treasurer/V.P. Finance and Senior Vice President. 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 the Company on December 31, 2010. Through each executive’s employment contract the Company 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 the Company. At December 31, 2009, the Company had funded the executive retirement account with the amount calculated by a third party actuary, of $619,000. Additional amounts will be deposited annually until each executive’s 60 \( ^{th} \)  birthday. At December 31, 2009, 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, 2009, 2008 and 2007 was $192,000, $108,000 and $565,000, respectively. The total accrued liability for executive retirement under all plans at December 31, 2009, 2008 and 2007 was $915,000, $879,000 and $927,000, respectively.

The Company 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 the Company.

## Operating Leases

The Company is the lessor of portions of the office buildings and building improvements that it owns. The Company 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 provide for minimum monthly receipts of $7,000 through December 2010.

The total costs of the office buildings and building improvements totaled $4.8 million as of December 31, 2009 and 2008, respectively and accumulated depreciation amounted to $2.6 million and $2.5 million as of December 31, 2009 and 2008, respectively. Rental income under the agreements was $138,000, $102,000 and $136,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Future minimum receipts for non-cancelable operating leases are as follows:

<table><tr><td>Years Ending December 31,</td><td>Amount</td></tr><tr><td>2009</td><td>$134,000</td></tr><tr><td>2010</td><td>96,000</td></tr></table>



## N. DISCONTINUED OPERATIONS

On August 22, 2008, the Company sold its controlling interest in SGMI. As a result of the sale the revenues and expenditures of SGMI for the years ended December 31, 2008 are presented in the December 31, 2008 Statement of Operations as Discontinued Operations. The revenues and expenses associated with SGMI during the years ended December 31, 2007 have also been reclassified to Discontinued Operations in the Statements of Operations presented in this report. The following table represents the gain (loss) from discontinued operations as well as the gain from the sale of the discontinued operations during the year ended December 31, 2008.

<table><tr><td rowspan="3"></td><td colspan="4">(In thousands)</td></tr><tr><td colspan="4">Year ending December 31,</td></tr><tr><td>2009</td><td colspan="2">2008</td><td>2007</td></tr><tr><td>Gain on sale of discontinued segment</td><td></td><td></td><td></td><td></td></tr><tr><td>Gain</td><td>$ --</td><td>$ 4,223</td><td>$ --</td><td></td></tr><tr><td>Taxes paid</td><td>--</td><td>1,185</td><td>--</td><td></td></tr><tr><td></td><td>$ --</td><td>$ 5,408</td><td>$ --</td><td></td></tr><tr><td>Gain (loss) from discontinued operations</td><td></td><td></td><td></td><td></td></tr><tr><td>Sutter Gold Mining</td><td></td><td></td><td></td><td></td></tr><tr><td>Revenues</td><td>$ --</td><td>$ 27</td><td>$ 41</td><td>(1)</td></tr><tr><td>Expenditures</td><td>--</td><td>(466)</td><td>(2,247)</td><td></td></tr><tr><td>Other</td><td>--</td><td>(62)</td><td>202</td><td></td></tr><tr><td></td><td>$ --</td><td>$ (501)</td><td>$ (2,004)</td><td></td></tr><tr><td>Total gain (loss) from discontinued operations</td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>$ --</td><td>$ 4,907</td><td>$ (2,004)</td><td></td></tr></table>

(1) The Company’s Statement of Operations contained in this report for the year ended December 31, 2007 is $3,600 less as a result of the recognition of intercompany management fees which were previously eliminated.



## O. 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, 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>$ 5,536</td><td>$ 1,284</td><td>$ 1,394</td><td>$ 1,413</td><td></td></tr><tr><td>Operating loss</td><td>$ (1,353)</td><td>$ (2,291)</td><td>$ (2,190)</td><td>$ (3,422)</td><td></td></tr><tr><td>Loss from continuing 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>Discontinued operations, net of tax</td><td>$ --</td><td>$ --</td><td>$ --</td><td>$ --</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></td><td></td><td></td><td></td><td></td></tr><tr><td>Continuing operations</td><td>$ (0.05)</td><td>$ (0.09)</td><td>$ (0.13)</td><td>$ (0.11)</td><td></td></tr><tr><td>Discontinued operations</td><td>--</td><td>--</td><td>--</td><td>--</td><td></td></tr><tr><td></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></td><td></td><td></td><td></td><td></td></tr><tr><td>Continuing operations</td><td>$ (0.05)</td><td>$ (0.09)</td><td>$ (0.13)</td><td>$ (0.11)</td><td></td></tr><tr><td>Discontinued operations</td><td>--</td><td>--</td><td>--</td><td>--</td><td></td></tr><tr><td></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>



(In thousands except per share data)

<table><tr><td rowspan="2"></td><td colspan="6">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><td></td></tr><tr><td>Operating revenues</td><td>$ 1,240</td><td>$ 569</td><td>$ 329</td><td>$ 149</td><td></td><td></td></tr><tr><td>Operating loss</td><td>$ (1,605)</td><td>$ (2,648)</td><td>$ (2,499)</td><td>$ (2,769)</td><td></td><td></td></tr><tr><td>Loss from continuing operations</td><td>$ (2,608)</td><td>$ (2,458)</td><td>$ (2,320)</td><td>$ (2,234)</td><td></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><td></td></tr><tr><td>Discontinued operations, net of tax</td><td>$ --</td><td>$ 5,197</td><td>$ (134)</td><td>$ (157)</td><td></td><td></td></tr><tr><td>Net (loss) income</td><td>$ (1,722)</td><td>$ 3,801</td><td>$ (1,750)</td><td>$ (1,717)</td><td></td><td></td></tr><tr><td>(Loss) income per share, basic</td><td></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><td></td></tr><tr><td>Discontinued operations</td><td>--</td><td>0.22</td><td>--</td><td>(0.01)</td><td></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><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><td></td></tr><tr><td>(Loss) income per share, diluted</td><td></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><td></td></tr><tr><td>Discontinued operations</td><td>--</td><td>0.22</td><td>--</td><td>(0.01)</td><td></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><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><td></td></tr></table>



(In thousands except per share data)

<table><tr><td rowspan="2"></td><td colspan="6">Three Months Ended</td></tr><tr><td>December 31, 2007</td><td colspan="2">September 30, 2007</td><td colspan="2">June 30, 2007</td><td>March 31, 2007</td></tr><tr><td>Operating revenues</td><td>$ 238</td><td>$ 627</td><td>$ 230</td><td>$ 230</td><td>$ 79</td><td></td></tr><tr><td>Operating loss</td><td>$ (2,404)</td><td>$ (1,843)</td><td>$ (8,360)</td><td>$ (1,932)</td><td></td><td></td></tr><tr><td>Gain/(loss) from continuing operations</td><td>$ (1,325)</td><td>$ (2,719)</td><td>$ 95,791</td><td>$ (1,012)</td><td></td><td></td></tr><tr><td>(Provision for) benefit from income taxes</td><td>$ 771</td><td>$ 2,521</td><td>$ (36,008)</td><td>$ 348</td><td></td><td></td></tr><tr><td>Discontinued operations, net of tax</td><td>$ (310)</td><td>$ (552)</td><td>$ (488)</td><td>$ (654)</td><td></td><td></td></tr><tr><td>Net income (loss)</td><td>$ (864)</td><td>$ (750)</td><td>$ 59,295</td><td>$ (1,318)</td><td></td><td></td></tr><tr><td>Income (loss) per share, basic</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Continuing operations</td><td>$ (0.03)</td><td>$ (0.01)</td><td>$ 2.97</td><td>$ (0.04)</td><td></td><td></td></tr><tr><td>Discontinued operations</td><td>(0.01)</td><td>(0.03)</td><td>(0.02)</td><td>(0.03)</td><td></td><td></td></tr><tr><td></td><td>$ (0.04)</td><td>$ (0.04)</td><td>$ 2.95</td><td>$ (0.07)</td><td></td><td></td></tr><tr><td>Basic weighted average shares outstanding</td><td>21,791,468</td><td>20,558,882</td><td>20,087,999</td><td>19,413,931</td><td></td><td></td></tr><tr><td>Income (loss) per share, diluted</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Continuing operations</td><td>$ (0.03)</td><td>$ (0.01)</td><td>$ 2.67</td><td>$ (0.04)</td><td></td><td></td></tr><tr><td>Discontinued operations</td><td>(0.01)</td><td>(0.03)</td><td>(0.02)</td><td>(0.03)</td><td></td><td></td></tr><tr><td></td><td>$ (0.04)</td><td>$ (0.04)</td><td>$ 2.65</td><td>$ (0.07)</td><td></td><td></td></tr><tr><td>Diluted weighted average shares outstanding</td><td>21,791,468</td><td>20,558,882</td><td>22,378,861</td><td>19,413,931</td><td></td><td></td></tr></table>



# Officers and Directors



Keith G. Larsen
Chairman and CEO (1)



Mark J. Larsen
President and COO (1)



Robert (Scott) Lorimer
CFO, Vice-President of
Finance, and Treasurer (1,5)

Steven R. Youngbauer
Secretary and General
Counsel (5)



Michael H. Feinsten
Financial and Business
Consultant, Director
(1,2,3,4,5)



Michael T. Anderson
Private Consultant, CPA,
Director (2,3,4,5)



Allen S. Winters
Consulting Mining Engineer
and Former V.P./ General
Manager for Homestake
Mining Co., Director (2,3,4,5)

S. Russell Fraser
Former President and
Director of American Capital
Access, Inc., Director (2,3,4,5)

Committees: (1) Executive, (2) Audit, (3) Compensation, (4) Nominating, (5) Compliance

## Corporate Information

## 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

## 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.