SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                                                     MARKED FOR
                               FORM 10-K/A                             CHANGES
                                 AMENDMENT NO. 3

(Mark One)
[X]  Annual report pursuant to section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the fiscal year ended May 31, 2001 or
[ ]  Transition report pursuant to section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the transition period from _____ to _____
Commission file number 0-6814

                               U.S. ENERGY CORP.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

     Wyoming                                          83-0205516
--------------------------------------------     -------------------------------
     (State or other jurisdiction of                  (I.R.S. Employer
     incorporation or organization)                   Identification No.)

     877 North 8th West
     Riverton, WY                                     82501
--------------------------------------------     -------------------------------
(Address of principal executive offices)              (Zip Code)

Registrant's Telephone Number, including area code: (307) 856-9271

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

                                      NONE
--------------------------------------------------------------------------------

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

                          COMMON STOCK, $0.01 PAR VALUE
--------------------------------------------------------------------------------
                                (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES  X   NO
                                              ---     ---

     The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of August 17, 2001, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$30,467,400.

                 Class                        Outstanding at August 17, 2001
---------------------------------------     ------------------------------------
     Common Stock, $0.01 par value                    9,609,104 shares

Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.

     Annual Meeting Proxy Statement for the fiscal year ended May 31, 2001
     into Part III of the filing.

Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]








                 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

     This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, are forward-looking statements, including without
limitation the statements under Management's Discussion and Analysis of
Financial Condition and Results of Operations and the disclosures about Rocky
Mountain Gas, Inc. and plans for developing its coalbed methane acreage. In
addition, whenever words like "expect," "anticipate" or "believe" are used, we
are making forward-looking statements.

     Although we believe that our forward-looking statements are reasonable, we
don't know if our expectations will prove to be correct. Important future
factors that could cause actual results to differ materially from expectations
include: Domestic consumption rates for natural gas; domestic market prices for
natural gas, uranium, gold, and molybdenum; the amounts of gas we will be able
to produce from our coalbed methane properties; the availability of permits to
drill and operate coalbed methane wells; whether and when gas transmission lines
will be built to reasonable proximity to our coalbed methane properties; and
whether and on what terms the capital necessary to develop our properties can be
obtained. The forward-looking statements should be carefully considered in the
context of all the information set forth in this Annual Report.

                                     PART I

ITEM 1 AND ITEM 2.  BUSINESS AND PROPERTIES.

(A)  GENERAL.

     U.S. Energy Corp. is a Wyoming corporation (formed in 1966) in the business
of acquiring, exploring, developing and/or selling or leasing mineral
properties, and the mining and marketing of minerals. In this Annual Report,
"we", "Company" or "USE" refers to U.S. Energy Corp. including subsidiaries
unless otherwise specifically noted.


     In fiscal 2001, we were engaged in three industry segments: exploration of
coalbed methane properties (and holding inactive mining properties); motel, real
estate and airport operations; and contract drilling/construction operations. In
the first segment, we have three principal mineral sectors: coalbed methane gas,
uranium and gold (properties and other assets included in the latter two sectors
are shut down). The uranium properties are located on Sheep Mountain in Wyoming,
and in southeast Utah; we also hold a royalty interest in uranium claims on
Green Mountain, Wyoming, now held by Kennecott Uranium Company (see below). The
gold property is located in Sutter Creek, California, east of Sacramento.
Interests are held in other mineral properties (principally molybdenum), but are
either non-operating interests or undeveloped claims. We also operate a small
oil field in Montana. Our fiscal year ends May 31.

     The activities on the coalbed methane gas properties are conducted through
Rocky Mountain Gas, Inc ("RMG," a Wyoming corporation owned 42% by USE and 42%
by Crested Corp.; Crested is a 70.5% majority-owned subsidiary of USE, see
below). Properties of RMG are held in Wyoming and southeastern Montana. As of
the filing date of this Annual Report, RMG holds approximately 257,000 gross
mineral acres of coalbed methane properties.

     We have conducted exploratory drilling and testing on certain of the
coalbed methane properties, but in general, additional work (gathering
production data from a producing property, and on other properties, the
dewatering of completed wells, and drilling and dewatering more wells) will have
to occur to establish if we have any proved reserves. Specifically, we expect to
make a determination whether there are proved reserves on our producing property
(Bobcat property) by February 14, 2003, and on another property (Clearmont,


                                        2






which is not now in production) by April 30, 2003. We did not receive any
revenues from coalbed methane gas sales through the end of the most recent
fiscal year (May 31, 2001), although after that date, we have been selling
coalbed methane gas from the producing Bobcat property (bought in June 2002).


     For detailed information about our coalbed methane properties and business
strategy, please see "Minerals - Coalbed Methane" below.


     We don't know if anything of value will result from our activities in the
coalbed methane area: Only a limited number of exploratory wells have been
drilled, and there is not yet enough information from these wells to determine
if they contain proved reserves; gas prices are low in the Powder River Basin
(our area of activity), and continued low prices will affect not only the
economics of the producing Bobcat property, but also the economics of the
exploration projects as they move into production in the future. In addition,
delays in obtaining permits needed for continued exploration could delay our
coalbed gas plans, and more funding may be needed but may not be available.

     USE and Crested Corp. ("Crested") originally were independent companies,
with two common affiliates (John L. Larsen and Max T. Evans; Mr. Evans is now
deceased). In 1980, USE and Crested formed a joint venture ("USECC") to do
business together (unless one or the other elected not to pursue an individual
project). As a result of USE funding certain of Crested's obligations from time
to time (due to Crested's lack of cash on hand), and Crested subsequently paying
these debts by issuing common stock to USE, Crested became a majority-owned
subsidiary of USE in fiscal 1993. In fiscal 2001, Crested issued another
6,666,666 shares of its common stock to reduce Crested's debt owed to USE by
$3.0 million, which increased USE's ownership of Crested to 70.5%. All of USE's
(and Crested's) operations are in the United States. Principal executive offices
are located in the Glen L. Larsen building at 877 North 8th Street West,
Riverton, Wyoming 82501, telephone 307.856.9271.


     Most of the Company's (USE's) operations are conducted through
subsidiaries, the USECC joint venture with Crested, and jointly-owned
subsidiaries of USE and Crested.

      The Company's subsidiaries are:

                                        Percent                Primary
      Subsidiary                     Owned by USE*        Business Conducted
      ----------                     -------------        ------------------



                                                    
      Plateau Resources, Ltd.           100.0%            Uranium (Utah) - Inactive - shut down;
                                                          Motel/real estate - Active
      Energx, Ltd.                       90.0%            Gas - Inactive - shut down
      Four Nines Gold, Inc.              50.9%            Contract Drilling/Construction - Inactive
                                                          (since 2001)
      Sutter Gold Mining Company         66.3%            Gold (California) - Inactive - shut down
      Crested Corp.                      70.5%            Uranium, gold and molybdenum properties
                                                          (all inactive and shut down), and exploration
                                                          activities on coalbed methane properties
      Yellowstone Fuels Corp.            35.9%            Uranium (Wyoming) - Inactive - shut down
      Rocky Mountain Gas, Inc.           84.0%            Coalbed methane exploration
      Northwest Gold, Inc.               96.0%            Gold (Montana) - Inactive - shut down
      USECC Joint Venture                50.0%            Uranium (Wyoming, Utah), gold and
                                                          molybdenum,** all inactive and shut down;
                                                          and coalbed methane exploration




                                        3





     *Includes ownership of Crested Corp. in RMG and Sutter.


     **There are no plans to put the molybdenum property into production in the
foreseeable future. See "Inactive Mining Properties - Molybdenum.

     Until September 11, 2000, USE, USECC and Kennecott Uranium Company
("Kennecott") owned the Green Mountain Mining Venture ("GMMV"), which held a
large uranium deposit and uranium mill in Wyoming. On September 11, 2000, USE
and Crested settled litigation with Kennecott involving the GMMV by selling
their interest in the GMMV and its properties back to Kennecott for $3,250,000
and receiving a royalty interest in the uranium properties. The GMMV properties
are shut down. Kennecott also assumed all reclamation obligations on the GMMV
properties; reclamation obligations for an ion exchange facility located on
properties outside the GMMV were not assumed by Kennecott, see "Sheep Mountain
Partners - Properties" below. Other uranium properties and a uranium mill in
southeast Utah are held by Plateau Resources Ltd., a wholly-owned subsidiary of
USE. The Utah uranium properties are shut down.

     The mineral properties held by Sutter Gold Mining Company ("SGMC"), a
majority- owned subsidiary of USE, are shut down because the current price of
gold does not permit raising the capital necessary to put the properties into
production.


(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.


     During the three fiscal years ended May 31, 2001, for technical financial
presentation purposes, we operated in three business segments: (i) coalbed
methane gas exploration (and holding shut down mines and mineral properties),
(ii) motel, real estate, and airport operations, and (iii) contract drilling/
construction (principally in fiscal 2000 and the first quarter of fiscal 2001).
The principal products of the operating units within each of the reportable
industry segments for the three fiscal years ended May 31, 2001 are set forth in
the table below.

     While we technically had three segments in this three year period, most of
our activities in minerals, motel/real estate/airport, and contract
drilling/construction have ceased or have been severely curtailed. The only
current activities of a material and recurring nature are in coalbed methane,
and motel operations and management services.


     INDUSTRY SEGMENTS                           PRINCIPAL PRODUCTS


     Coalbed Methane Gas Exploration        Acquisition of coalbed methane
     (and holding of mining properties      properties, and exploration  and
     which are shut down)                   development of such properties for
                                            coalbed methane gas. This activity
                                            is material and recurring, and is
                                            our principal business focus. Sales
                                            and leases of mineral- bearing
                                            properties and, from time to time,
                                            the production and/or marketing of
                                            uranium, gold and receipt of advance
                                            royalties on molybdenum. Activities
                                            in uranium, gold and molybdenum are
                                            shut down as recurring activities.



     Motel, Real Estate and                 Operation of a motel and rental of
     Airport Operations                     real estate, operation of an
                                            aircraft fixed base operation (fuel
                                            sales, flight instruction and
                                            aircraft maintenance), and various
                                            contract services, including
                                            managerial services for subsidiary
                                            companies. Only the motel and real
                                            estate, and management services
                                            activities remain active now. Though
                                            significant in terms of
                                            contributions to revenues on a


                                        4






                                            historical basis, these operations
                                            are auxiliary to the principal
                                            business focus of the company
                                            (coalbed methane).

     Contract Drilling/Construction         Contract drilling of coalbed methane
                                            gas wells, construction of drill
                                            sites, gas pipe lines, reservoirs
                                            and reclamation of locations. This
                                            activity has been shut down.


     Percentage of Net Revenue contributions by the three segments (and by
interest on cash accounts) in the last three fiscal years were:



                                    Percentage of Net Revenues During the Year Ended
                                    ------------------------------------------------
                                       May 31,          May 31,          May 31,
                                        2001             2000             1999
                                       -------          -------          -------

                                                                   
Coalbed Methane (and
  shut down mining properties)            3%               2%                2%

Motel, Real Estate
  and Airport Operations                 15%              36%               27%
Construction Operations                  15%              46%                0%
Interest and Other                       67%              16%               71%



     In fiscal 2001, we received $442,800 in revenues from the coalbed methane
and mining properties segment, as compared to $132,600 in fiscal 2000; none of
the revenues were from coalbed methane gas sales. During fiscal 2001, there were
$108,500 from molybdenum advance royalties, and $334,300 from uranium contract
deliveries and the sale of a uranium delivery contract. During fiscal 2000 we
recorded $132,600 from advance molybdenum royalties. During fiscal 1999, there
were revenues of $150,600 from molybdenum advance royalties and $87,600 for
uranium contract deliveries. We have not received revenues from coalbed
methane/mining properties activities, other than the preceding transactions in
fiscal 2000 or 2001, as our mineral properties are either shut down (our uranium
and the Sutter California properties, and the molybdenum property which is held
by another company), or in exploration (our coalbed methane properties).

     Motel, real estate and airport operations during fiscal 2001 generated
revenues of $2,222,400, compared to $2,734,800 during fiscal 2000, with the
decrease due to a slower tourist season at the motel operation in southern Utah.

     Contract drilling and construction operations for third parties in the
coalbed methane business resulted in revenues of $2,238,600 during fiscal 2001
compared to $3,584,900 during fiscal 2000. No revenues were recognized in this
segment in fiscal 1999 . After May 31, 2001, these third-party services were
shut down.




     In coalbed methane, we compete against many companies, some of which are
much larger and better financed than the Company. The principal area of
competition is encountered in the financial ability to acquire good acreage
positions and drill wells to explore coalbed methane potential, then, if
warranted, drill production wells and install production equipment (gathering
systems, compressors, etc.).


                                        5







     We own a royalty interest in a molybdenum property in Colorado; the
property is owned by Phelps- Dodge, a worldwide integrated minerals company with
inventories of exploration, development stage, and producing properties,
involving numerous metals and other minerals. We believe that at the present
time, Phelps Dodge does not have a plan to place the molybdenum property into
production.




     In the motel, real estate and airport operations segment we own and manage
an office building (where our headquarters are located), a fixed based aircraft
operation, and small parcels of land, all in Riverton, Wyoming and a small
amount of additional acreage elsewhere in Wyoming. We also own townsites, a
motel and convenience store, and other commercial facilities in Utah. There is
no significant competition in this area ; although parcels are sold from time to
time, we are not in the land development business. In fiscal 2001, we reported
revenues from contract methane well drilling and support services. We have sold
off most of the equipment used in these operations in fiscal 2002, retaining
three drilling rigs for RMG operations as needed. As of the date of this amended
report, construction activities are limited to a few small projects in Riverton,
Wyoming. We contract out RMG's coalbed drilling and construction work to third
parties.


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


     Coalbed Methane (and Inactive Mining Properties)


COALBED METHANE


     GENERAL. Rocky Mountain Gas, Inc. ("RMG") was incorporated in Wyoming on
November 1, 1999 for business in the coalbed methane industry in Wyoming and
Montana. RMG is a subsidiary of the Company (owned 42% by the Company and 42% by
Crested), as of May 31, 2001.

     At September 25, 2002 RMG holds leases and options on approximately 277,586
gross acres of federal, state and private (fee) land in the Powder River Basin
of Wyoming and Montana. Most of this acreage was acquired in the fiscal year
ended May 31, 2001. As of September 25, 2002 there are no producing CBM wells on
any of the acreage. Not included in this acreage total is the 1,940 gross acres
in the Bobcat Property, a producing CBM property acquired by RMG in June 2002.



                                        6






     Through May 2002, 58 CBM wells have been drilled, almost all with funds
provided by industry partners CCBM, Inc. and SENGAI (see below). Reserves have
not been established for any of the properties on which wells have been drilled.

     Independent reserve evaluations will be conducted and reported by February
14, 2003 for the Bobcat property (bought as a producing property in June 2002),
and by April 30, 2003 for the Clearmont prospect (undrilled acreage acquired in
fiscal 2001, drilling started in fiscal 2002). In the case of the Bobcat
property, reliable daily production data is being obtained (well gas pressure,
water production, etc.) to provide the necessary data base for a reserve
evaluation. For the Clearmont property, the current dewatering process should be
completed and initial gas sales commence in early 2003, which will provide the
necessary data base for a reserve evaluation of that property.

     In summary, the valuation process for the investments in Bobcat will be
completed by February 14, 2003, and for Clearmont by April 30, 2003. See
"Acquisition and Exploration Capital Expenditures" below. The valuation will be
made when there is enough information to do so. If production has not reached
levels that are economic at the gas prices on evaluation date, there would be no
proved reserves on the subject property.

     We have not established that our investments in coalbed methane properties
and exploration activities will yield anything of value. We will not be able to
make that assessment until the presence, or absence, of reserves on the
properties is established. The first properties to be evaluated will be Bobcat
and Clearmont. Other properties (especially Castle Rock and Kirby) are very
large and will require the drilling of numerous exploratory wells and extended
dewatering periods for each group or "pod" of wells (from 6 to 18 months after
drilling and completion) before an assessment of reserves can be made. In some
areas where no other coalbed methane wells on adjacent properties are dewatering
the coal seam, the dewatering process could take as long as 24 months.

     Among the uncertainties we face in the process of determining if our
coalbed methane investments will yield value are the following: Prices for gas
sold in the Powder River Basin are the lowest in the United States and may not
improve enough, over a sustained time period, to make many properties economic;
capital (in addition to the $2,245,000 at May 31, 2002 remaining from CCBM,
Inc.'s drilling fund) to continue exploration efforts may be needed but not
available; and permitting issues may delay further work. An unfavorable
confluence of these uncertainties, if realized, could result in a write-down of
the carrying value of properties which don't produce enough gas at low prices to
be economic; the write-down of the carrying value of other properties which need
more wells drilled and dewatered to improve the economics of production (but the
capital isn't available); and/or the delay (whether from lack of capital or
permitting problems) in establishing reserves for the larger prospects where
many wells will have to be drilled to assess to value of the properties.

     ACQUISITION AND EXPLORATION CAPITAL EXPENDITURES

     From inception on November 1, 1999 through May 31, 2001, RMG incurred total
acquisition (purchase price and holding costs) and exploration costs (drilling
and completion) on coalbed methane properties of approximately $5,881,700.

     The following table shows certain information regarding the gross costs
incurred.



                                        7






                                            Year Ended May 31,
                                     -------------------------------
                                         2001                2000
                                     -----------         -----------
          Acquisition costs          $   870,600         $ 4,727,200
          Exploration                    283,900           --
                                     $ 1,154,500         $ 4,727,200

     Acquisition costs included amounts paid for properties , delay rentals,
lease option payments, and general and administrative costs directly
attributable to the acquisitions.

     The recorded amounts for acquisition and exploration of $5,881,700 and
$4,727,200, represent 19.3% and 15.3% of total assets at May 31, 2001 and 2000.

     We use the full-cost method of accounting for gas properties. Under this
method, all acquisition and exploration costs are capitalized in a "full-cost
pool" as incurred. Depletion of the pool will be recorded using the
unit-of-production method. To the extent that such capitalized costs in the
full-cost pool (net of depreciation, depletion and amortization and related
deferred taxes) exceed the present value (using a 10% discount rate) of
estimated future net after-tax cash flows from proved gas reserves (which will
be established by the reserve reports to be obtained by the company), the excess
costs will be charged to operations.

     If it is determined that there are no reserves on the Bobcat or Clearmont
properties, all acquisition and exploration costs previously capitalized for
those properties will be written-down and charged to operations. To the extent
reserves are established to be less than such costs, the costs will be
written-down to the amount of present value of the reserves. In this event,
assets would decrease and expenses would increase. Once incurred, a write-down
of gas properties can't later be reversed.

     In addition, if at some point in the future the exploration work on our
other prospects (in particular the larger prospects) would be delayed because of
lack of capital or permitting delays, or both, with the result that it cannot be
established whether or not proved reserves exist on the properties, the
exploration costs for those properties would be written-off.

     When reserve reports are obtained on our properties, any resulting impact
on the financial statements will be reported in the next periodic filing with
the SEC.



                                        8






     OVERVIEW OF RMG. All of the information about Rocky Mountain Gas, Inc.
which follows is as of the filing date of this amended Annual Report, unless
otherwise stated. We hold leases and options to develop approximately 277,586
gross mineral acres (including 43,711 acres we have options on) under leases
from the United States Bureau of Land Management, the states of Wyoming and
Montana, and private landowners. Table 1 shows the total gross and net lease
acres held in each prospect, and the amount of such acreage held by RMG and by
companies with which RMG has agreements for holding, acquiring and/or drilling
the prospects (CCBM, Inc. and Quaneco, L.L.C.). These agreements are summarized
under "Carrizo - Purchase and Sale Agreement" and "Quaneco - Agreement." Acreage
data assumes CCBM completes its purchase of an undivided 50% working interest in
the Kirby, Oyster Ridge, Clearmont, Sussex, Finley, Baggs North and Gillette
North prospects. CCBM will own its 50% working interest in wells drilled under
CCBM's drilling fund commitment, but if CCBM does not complete its purchase
obligations, CCBM would not be entitled to a working interest in the remaining
undrilled acreage.

     CCBM currently has purchase rights to acquire a 6.25% working interest in
the Castle Rock prospect, and owns a 6.25% working interest in eight wells in
Castle Rock, which were drilled by Suncor Energy Natural Gas America, Inc.
("SENGAI"). RMG's and CCBM's interests in the Castle Rock prospect, as shown in
Table 1, reflect the completion of SENGAI's drilling program in late calendar
2001. SENGAI elected not to exercise its option on February 8, 2002. See the
summary below, and "SENGAI - Option and Farmin Agreement."


                                        9






     RMG's staff includes a professional geologist, a landman, and field
supervisory personnel. Prospects are evaluated for coal potential using
available public and industry data, taking into account proximity to other
positions held by RMG and existing or planned gas transmission lines, and
whether drilling and production permits can be obtained and the costs thereof.
The final decision to acquire a prospect is made by the president of RMG. Well
drilling and testing is done by outside contract drilling companies. Drilling
results (cores, gas and water flow rates, and other data) are evaluated by RMG
staff, using customary technical methods, to determine if any zones encountered
in the well should be completed for production. Completion requires setting
casing pipe down to the zone(s), installing pumps, and installing and setting up
the necessary surface equipment (for example, water disposal lines and water
holding tanks for evaluation wells in Montana, pending production permitting
approval and water holding ponds in Wyoming). The decision whether to complete
the well is made by RMG's president.


     Table 1 reflects RMG's acreage position as of April 30, 2002 and does not
reflect the acreage we own in the Bobcat prospect. See "Bobcat Property." Also,
Table 1 does not reflect the reduction in net acreage held by RMG if Anadarko
Petroleum, Inc. exercises its option to back in for a 25% working interest on
43,711 gross acres within the Oyster Ridge prospect. Also, 43,711 of the acres
shown as held in Oyster Ridge, assume we continue to earn acreage under the
drill-to-earn-acreage provisions of the option agreement with Anadarko. See
"Description of Prospects - Oyster Ridge" below.

TABLE 1



                                          ROCKY MOUNTAIN GAS, INC.
                                                ACREAGE HELD

------------------------------------------------------------------------------------------------------
      Project
      and Date           Gross Lease        Net Lease        RMG Net        Quaneco Net       CCBM Net
      Acquired              Acres             Acres           Acres            Acres           Acres
------------------------------------------------------------------------------------------------------
                                                                                
    Castle Rock            123,840           111,567          48,811          55,784           6,973
     Jan. 2000
       Kirby                80,254            74,512          18,628          37,256           18,628
     Jan. 2000
   *Oyster Ridge            65,247            65,247          25,729             0             25,729
     Dec. 1999
     Clearmont              5,345             2,785           1,393              0             1,393
     Jan. 2000
       Sussex                 640               640            320               0              320
     Jan. 2000
       Finley                 160               160             80               0               80
     Jan. 2000
    Baggs North               120               120             60               0               60
     Jan. 2000
   Gillette North             80                80              40               0               40
     Jan. 2000
       Arvada                1,900             1,700           850               0              850
     Jan. 2000
       TOTAL               277,586           256,811          95,911          93,040           54,073
----------------------------------------------------------------------------------------------------


     We own a 25% working interest (20% net revenue interest) on 80,254 gross
and 74,512 net acres in the Kirby prospect (southeast Montana) and a 50% working
interest (from 30% to 50% net revenue interest) on 73,492 net acres in other
prospects (all in Wyoming). We own a 43.75% working interest (35% net revenue

                                       10





interest) in the Castle Rock prospect on 123,840 gross and 111,567 net acres in
southeast Montana. CCBM, Inc., a subsidiary of Carrizo Oil and Gas, Inc., can
purchase a 6.25% working interest in our acreage (6,973 net acres) of the Castle
Rock prospect if they meet certain payment obligations. In July 2001, we sold a
50% working interest in all our coalbed methane leases, except at Castle Rock,
to CCBM for $7,500,000, plus other considerations.

     CCBM will pay for up to $5,000,000 of drilling and completing coalbed
methane wells on the properties owned by RMG and CCBM. Drilling started on the
Clearmont prospect in Wyoming in August 2001. This drilling program should be
sufficient to drill approximately 60 coalbed methane wells to completion or
abandonment stage. We have a carried working interest in all of the wells
drilled in these programs.

     As of April 30, 2002, we had set casing on 22 wells (80 acre spacing units)
at the Clearmont prospect and are now in the process of drilling six additional
wells. No reserves have been established to date. Drilling permits for 58
additional wells have been issued for the Clearmont prospect.


     A total of 58 wells have been drilled on RMG acreage to date: five in
fiscal 2001 and 53 in fiscal 2002. Nineteen of the wells were drilled by SENGAI
in Castle Rock under the terms of the Suncor Option and Farmin Agreement (see
below). Eleven of those 19 wells were stratigraphic wells and will be reclaimed
by Suncor. Eight of those 19 wells were completed and are owned by RMG (93.75%
working interest) and CCBM (6.25% working interest)., as Quaneco opted out of
maintaining a working interest in the eight wells. Other than the Castle Rock
wells, RMG and CCBM both have a 50% working interest in all of these wells (see
Table 2 below).

     As of May 31, 2002, CCBM and RMG have spent approximately $2,755,000 of the
$5,000,000 drilling fund. We are relying on the $2,245,000 balance to pay for
100% of the drilling and completion costs on up to 36 more wells currently
permitted, for which work is scheduled from April 2002 through September 2002:
19 wells on the Clearmont prospect (estimated costs $1,700,000); 9 wells on the
Bobcat prospect (estimated costs $800,000); and 6 wells on the Arvada prospect
(estimated costs $550,000); and 2 wells on the Oyster Ridge prospect (estimated
cost $150,000) Like previous wells drilled with the CCBM drilling fund, RMG will
have a 50% carried working interest (no financial obligation to RMG for a well's
costs until after the drilling fund reaches $5,000,000 spent by CCBM). Work
would be delayed if CCBM were not able to fund these costs. Presently we do not
have the capital resources to fund these costs, and would have to obtain the
necessary capital from other industry partners or from sale of equity in the
company.


     Future annual financial obligations for our coalbed methane properties
consist of approximately $222,000 for the period through fiscal 2003 in acreage
rental fees to lessors, and drilling permit renewal fees, which will be paid 50%
by RMG and 50% by CCBM on all acreage except Castle Rock, and 21,536 acres
within Oyster Ridge which are not covered by the option with Anadarko. Those
costs and fees for Castle Rock will be paid 43.75% by RMG, 6.25% by CCBM, and
50% by Quaneco, except for the eight wells owned by RMG and CCBM, which will be
paid 93.75% by RMG and 6.25% by CCBM.

     Table 2 shows the wells drilled on RMG's prospects from May 31, 2000
through May 31, 2002. Under the agreement with Carrizo, RMG has a carried
working interest in all these wells (with the exception of a $156,634 payment
that was made by RMG to cover 50% of a non-consent cost for 12 wells; CCBM also
paid $156,634 to cover 50% of their cost in acquiring a non-consent working
interest in those 12 wells), as CCBM has paid for all drilling and completion
costs on the wells other than the 19 Castle Rock wells. RMG has a carried
working interest in the eight Castle Rock wells which were completed (out of the
19 drilled in that prospect), as SENGAI paid for all drilling and completion
costs on the eight Castle Rock wells under a drilling program completed in
December 2001. RMG owns a 93.75% working interest and CCBM owns a

                                       11





6.25% working interest in the eight Castle Rock wells (CCBM paid for its
interest in these wells, see "SENGAI - Option and Farmin Agreement"). With the
exceptions noted above, all the wells on the Oyster Ridge, Clearmont and Arvada
prospects have been drilled at CCBM's sole expense since its participation began
on June 30, 2001. Table 2 lists the number of wells drilled, the total costs and
the remaining number of wells currently permitted for drilling as of May 31,
2002.

TABLE 2



                                             ROCKY MOUNTAIN GAS, INC.


     PROSPECT                 FY 2001                   FY 2002                     TOTAL              Remaining
                        (6/1/00 - 5/31/01)         (6/1/01 - 5/31/02)                                   Permits
                      Wells            $          Wells            $        Wells            $
------------------------------------------------------------------------------------------------------------------
                                                                                        
Castle Rock             3         $ 283,894        19*       $ 2,500,000      22           $ 2,783,894       15
Kirby                   0         $    -            0        $    -            0           $    -             6
Oyster Ridge            2         $ 150,503         5        $   464,170**     7           $   614,680        0
Clearmont               0         $    -           28        $ 1,470,351      28           $ 1,470,351       59
Arvada                  0         $    -            1        $    64,790       1           $    64,790        3
------------------------------------------------------------------------------------------------------------------
TOTAL                   5         $ 434,397        53        $ 4,499,318      58           $ 4,933,715       83
------------------------------------------------------------------------------------------------------------------


     *  Drilled by SENGAI
     ** These costs include an additional $169,314 spent on the two wells
drilled during fiscal 2001.


     BOBCAT PROPERTY. On April 12, 2002, the company and Rocky Mountain Gas,
Inc. signed an agreement to purchase working interests in approximately 1,940
gross acres of coalbed methane properties in the Powder River Basin of Wyoming.
The properties are located approximately 25 miles north of Gillette, Wyoming, in
Campbell County. To date, 18 coalbed methane wells have been drilled; 13 wells
are currently hooked up and produced in June 2002 at a combined rate of
approximately 878,000 cubic feet of gas per day (878 Mcf) from the two primary
coals on the property: the Cook coal (11 wells) at 650 feet, and the Canyon coal
(2 wells) at 450 feet. Production began in late December 2001 (before RMG
acquired the property).

     There are no proved reserves established for this property.

     For June 2002, RMG received an average price of $1.10 per Mcf (1,000 cubic
feet) for the 26,342 Mcf of gas sold from the Bobcat field. See "Gathering and
Transmission of CBM Gas" below. The property was producing at uneconomic rates
of production at this price. RMG is replacing and upgrading some equipment and
adding a compressor, with the expectation of improving production volumes
through the remainder of 2002 and thereafter. An independent evaluation of CBM
reserves will be undertaken and completed by February 14, 2003, regardless of
whether production increases from the June 2002 levels, and regardless of gas
prices when the reserve evaluation is made. Reserve information will be
disclosed when available. No independent reserve evaluation has been started to
date, as RMG needed to take over operations of the field and obtain data after
the property was purchased in June 2002.


     Permits have been issued to the seller for drilling 36 more wells on 80
acre spacing.


                                                        12





     CCBM has exercised its right to participate in purchase of the Bobcat
property, for 50% of the interests in the property subject to the agreement. For
information on agreements with CCBM, please see "Carrizo - Purchase and Sale
Agreement" below. RMG operates the property.

     The seller keeps as an overriding royalty interest all net revenue interest
in the properties in excess of 80%.

     The contract closed on June 4, 2002. The company paid the seller $500,000
cash and another $150,000 by issuing 37,500 shares of restricted common stock to
the seller; CCBM paid $500,000 cash to the seller and Carrizo Oil & Gas, Inc.
issued restricted shares of its common stock valued at $150,000.

     CARRIZO - PURCHASE AND SALE AGREEMENT. On July 10, 2001, RMG closed a
Purchase and Sale Agreement with CCBM, Inc., a Delaware corporation which is
wholly-owned by Carrizo Oil & Gas, Inc., Houston, Texas (NMS "CRZO"). The
agreement between CCBM and RMG is intended to finance the further development of
the acreage prospective for coalbed methane currently owned by RMG in Montana
and Wyoming, and to acquire and develop more acreage in Wyoming and the Powder
River Basin of Montana.

     RMG has assigned CCBM an undivided 50% interest in all of RMG's existing
coalbed methane properties (with the exception of Castle Rock of which only a
6.25% working interest was assigned) for a purchase price of $7,500,000 by a
promissory note payable in principal amounts of $125,000 per month plus interest
at an annual rate of 8%, over 41 months (starting July 31, 2001) with a balloon
payment due on the forty-second month. These properties consisted of the Kirby,
Oyster Ridge, Clearmont, Sussex, Finley, Baggs North, and Gillette North
properties. The 50% undivided interest is pledged back to RMG to secure the
purchase price, and will be released 25% when 33.3% of the principal amount
($2,500,000) of the purchase price is paid, another 25% when total principal
payments reach 66.6% of the principal amount ($5,000,000) of the purchase price,
and the balance of the total 50% undivided interest when all of the principal
amount ($7,500,000) of the purchase price, has been paid.

     CCBM has the right to participate in other properties RMG may acquire (like
the Bobcat property) under the area of mutual interest ("AMI"), see Agreement
for Purchase of the Bobcat Property" above, and information on the AMI below.

     To start development, and as part of the consideration for the acquisition,
CCBM agreed to pay $5,000,000 to drill and complete from 30 to 60 wells on the
coalbed properties. RMG will be "carried" for its 50% interest in these wells,
and will not be required to pay any of such costs. After the initial $5,000,000
has been spent, RMG and CCBM each will pay for their 50% share of costs in
subsequent wells, and also will pay for their 50% share of operating costs for
the wells drilled and completed in this drilling program. Without CCBM's
consent, none of the drilling funds can be used for operations associated with
water disposal wells, gas compression beyond 100 PSIG, or for facilities
downstream of compression beyond 100 PSIG. CCBM will earn a 50% working interest
in each well location (80 acres) and gas production therefrom, regardless of the
status of payments on the promissory note.

     Drilling under the CCBM agreement started in August 2001. As of March 31,
2002, CCBM has spent approximately $1,800,000 of the $5,000,000 work commitment
on the drilling of 22 wells at Clearmont, 4 wells at Oyster Ridge, 1 well at
Arvada, and has funded $225,000 of the drilling conducted by SENGAI in Montana
as part of the Quaneco agreement. Amounts remaining out of the $5,000,000 will
be used for drilling during the remainder of fiscal 2002 and on into fiscal year
2003, or applied to property acquisitions, as agreed upon by the parties. If
less than the entire $5,000,000 is spent within two years (subject to extensions
due to force majeure), CCBM shall pay RMG one-half the unspent portion of the
$5,000,000. However, this payment obligation back to RMG is subject to RMG
complying with all of the terms and provisions of the Purchase and Sale
Agreement, the joint operating agreement, and the procedures therein set

                                       13





forth regarding authorizations for expenditures to drill $5,000,000 worth of
"reasonable wells". This means wells which meet these economic criteria: (1)
individual well cost (including hook-up to sales) must meet a projected internal
rate of return in excess of 15% at prevailing market prices; (2) the wells must
be on acreage blocks that are touching and contain minimum sizes (Kirby
prospect, at least 2,560 acres; Clearmont, at least 640 acres; and Arvada, at
least 480 acres); and (3) no more than 10 wells per calendar year at Oyster
Ridge will qualify as reasonable. The intent of this provision is for CCBM to
spend $2,500,000 on behalf of RMG. If CCBM fails to do this despite a total of
$5,000,000 of reasonable well proposals by RMG, then CCBM shall be obligated to
pay any remaining unspent portion of the $2,500,000 directly to RMG.

     In addition to its one-half share of revenues in proportion to its one-half
share of the working interest, CCBM will be entitled to a credit (applied as a
prepayment of the purchase price for the undivided 50% interest in RMG's
acreage), equal to 20% of RMG's net revenue interest from wells drilled with the
$5,000,000 drilling budget, until the amount of that credit in favor of CCBM
equals $1,250,000.

     RMG is the designated operator under a Joint Operating Agreement between
RMG and CCBM., which will govern all operations on the properties subject to the
Purchase and Sale Agreement between RMG and CCBM subject to pre-existing JOA's
with other entities, and operations or properties in the area of mutual interest
("AMI"). The AMI is established for a four-year term starting June 30, 2001 and
ending June 30, 2005. It covers the entire state of Wyoming, and the Powder
River Basin of Montana, but will be reduced if CCBM does not obtain at least $20
million for future property acquisitions (see below).

     A management committee will oversee all operations subject to the Purchase
and Sale Agreement, with two members each from CCBM and RMG, however, RMG shall
have a tie-breaking vote until the $5,000,000 drilling commitment has been
expended and until the purchase price has been paid. Once the $5,000,000
drilling commitment has been expended and the full purchase price is paid, RMG
will allocate (with Quaneco's consent) to CCBM one of RMG's managing member
positions with Powder River Gas LLC, which is the operative entity for the
Montana acreage RMG holds with Quaneco L.L.C.

     With respect to the Castle Rock prospect in Montana, which was subject to
the agreement with SENGAI, RMG was entitled to have CCBM pay for $225,000 of
RMG's drilling obligations; for this funding (part of the $5,000,000 drilling
program with CCBM), CCBM received an undivided 6.25% working interest on each
well so drilled and the 80 acre spacing allocated to each such well, i.e.
one-half of our 12.5% working interest, during the SENGAI drilling program. CCBM
made the $225,000 payment to RMG on March 26, 2002, and RMG has subsequently
paid SENGAI that amount to fulfill its outstanding obligation to SENGAI and
Quaneco. See "Quaneco - Agreement" and "SENGAI - Option and Farmin Agreement."

     Under the Purchase and Sale Agreement with CCBM, CCBM will use its best
efforts to obtain financing to raise no less than $20,000,000 to be used by RMG
to acquire more properties in the AMI. CCBM would have a 50% working interest in
properties so acquired. If CCBM's efforts are not successful by June 30, 2002,
the AMI shall be reduced to a 6-mile radius from all existing properties held
jointly by RMG and CCBM unless RMG agrees to an extension of this time frame by
no later than December 20, 2002.

     QUANECO - AGREEMENT. On January 3, 2000, RMG purchased a 50% working
interest and 40% net revenue interest in the Castle Rock and Kirby prospects in
the Powder River Basin of southeast Montana consisting of approximately 185,000
net mineral acres from Quaneco, L.L.C. (formerly Quantum Energy, L.L.C.,
Cleveland, Ohio and Oklahoma City, Oklahoma). The acreage includes 88,410 net
acres of Bureau of Land Management ("BLM") land, 14,916 net acres of state land
(Montana), and 82,775 net acres of fee land. In fiscal 2000 and 2001, RMG paid
Quaneco the cash purchase price of $5,500,000 for the acreage.

     A separate provision in the Quaneco agreement required RMG to spend
$2,500,000 to drill and complete 25 wells. Under the subsequent Option and
Farmin Agreement with SENGAI, SENGAI paid

                                       14





$2,000,000 in their first drilling program on this prospect, and RMG paid
$250,000. Of this amount, $225,000 was paid to RMG by CCBM and subsequently paid
over to SENGAI, leaving RMG with a net obligation of $25,000, which was paid.
RMG has previously performed work and paid costs for a credit of approximately
$250,000 on the Castle Rock and Kirby prospects. All of RMG's drilling
obligations to Quaneco therefore have been fulfilled.

     The Kirby prospect, owned originally by RMG and Quaneco, and now CCBM as
well, is operated through Powder River Gas, LLC, a Wyoming limited liability
company. Initial CBM well sites have been selected by the management committee
in which Quaneco and RMG currently have equal representation. USECC has the
right to provide drilling services on the first 25 wells drilled by Powder River
Gas, LLC based on competitive drilling rates in the area surrounding the wells
to be drilled. Thereafter, USECC will have the right to submit bids on a
competitive basis to Powder River Gas LLC for drilling contracts on additional
acreage. CCBM has recently acquired 50% of RMG's interest in the Kirby prospects
leaving ownership interest at 25% RMG, 25% CCBM, and 50% Quaneco.

     SENGAI - OPTION AND FARMIN AGREEMENT. On February 8, 2001, RMG closed an
Option and Farmin Agreement with Suncor Energy Natural Gas America, Inc.
("SENGAI"). SENGAI had an option to exercise on two blocks of acreage covering
111,566 net acres in southeast Montana; the option on the second block of
acreage was contingent upon SENGAI exercising its option on the first block of
acreage. The option on the first block of acreage expired on February 8, 2002,
and SENGAI did not exercise its option to purchase the first block of acreage.
Following is a summary of the option terms as related to the Option and Farmin
Agreement with SENGAI, the benefits of which will now not be realized by RMG or
Quaneco, and the benefits realized to date from the original terms of the
Agreement (i.e. drilling and well ownership)

     Under the terms of the Option and Farmin Agreement, had SENGAI exercised
its option on the first block of acreage, SENGAI would have received 75% of
RMG's 50% working interest and 25% of Quaneco LLC's 50% working interest in a
total of 111,566 net acres in southeast Montana. As this acreage was under
option with SENGAI at the time the CCBM agreement was entered into, RMG sold
CCBM 50% of the 12.5% working interest (or 6.25%) it held (see Carrizo -
Purchase and Sale Agreement). The Option and Farmin Agreement was divided into
two blocks of acreage, the first and largest of which included 105,265 net acres
and expired February 8, 2002. If SENGAI had exercised this option, the net
payment to both RMG and Quaneco would have been $3,684,299 total, and RMG's 75%
share would have been $2,763,224. The second block of acreage included 6,301 net
acres and would have expired February 8, 2003. The amounts payable to RMG and
Quaneco (had this option been exercised) would have been $239,452 total, and
RMG's share would have been $179, 589.

     Under the Option and Farmin Agreement, SENGAI committed to pay for all
costs up to $2,000,000 in a $2,250,000 drilling program on the first block of
acreage, starting in the fall of 2001. RMG had to pay the remaining $250,000 for
the drilling program (on its behalf and for Quaneco LLC, which completes RMG's
drilling commitment to Quaneco; see below). SENGAI had to complete the drilling
program regardless of whether it exercised the options. SENGAI completed this
program in the fall of 2001.

     As the first option was not exercised, all of the work paid for under the
drilling program will benefit RMG (and now CCBM and Quaneco in their respective
working interests), and SENGAI has no rights in the Castle Rock prospect or in
any wells drilled on it.

     RMG believes that SENGAI declined to exercise the option based on SENGAI's
evaluation of incomplete data generated by SENGAI's drilling program, which
SENGAI designed and executed. When SENGAI drilled the 19 exploratory wells under
its option on the Castle Rock prospect, SENGAI did not utilize the best
available procedures to detect possible CBM content. In addition, 6 of the wells
were drilled in a pod configuration but 5 of the 6 were drilled into separate
coal seams, even though efficient dewatering

                                       15





requires multiple close-spaced wells into the same coal. Eleven of the other
SENGAI-drilled wells confirmed the presence of coal at the depths originally
estimated by RMG, but otherwise insufficient data was generated by the drilling
and testing of these 11 wells to determine if the coal might be productive of
CBM.

     RMG, Quaneco and SENGAI have signed a Project Completion Agreement, whereby
Powder River Gas L.L.C. (an operating company owned equally by RMG and Quaneco)
will become the operator of record for the Castle Rock properties and SENGAI's
working interest will revert to 0% in the project. In addition, RMG has elected
to accept a 93.75% working interest in (and RMG will operate) 8 completed wells
in the Castle Rock area. CCBM has a 6.25% working interest in these 8 wells.

     RMG believes that although the data on the 8 wells to be retained by RMG is
incomplete (which wells were drilled by SENGAI), RMG will further evaluate the
data. If the results are favorable, RMG will start dewatering these wells and
establish a pod grid to drill and complete and start dewatering more wells
around each existing well to maximize dewatering efficiency. As with any CBM
project, a substantial amount of dewatering of pods of wells into the same coal
is necessary before the economics of the wells can be assessed. We have not
prepared a budget or timetable for this future work but expect to do so by March
31, 2003. This future work would start in spring 2003, subject to having the
necessary funds on hand.

     DESCRIPTION OF PROSPECTS

     Leases of federal mineral rights are obtained from the United States Bureau
of Land Management and expire from 2004 to 2009, unless RMG establishes
production on the lease, in which event the lease is held so long as coalbed
methane or other gas or oil is produced. A royalty interest of 12.5% on the
production is paid to the BLM. State leases expire from 2003 to 2004 in Wyoming
and Montana, unless RMG establishes production on the lease, in which event the
lease is held so long as coalbed methane or other gas or oil is produced. The
royalty paid to the State of Wyoming is 12.5 % to 16.666666% , and 12.5% to the
State of Montana. Annual renewal fees for non-producing Federal leases is $1.50
to $2.00 per acre, and $1.00 and $1.50 for non-producing Wyoming and Montana
leases.

     Leases on private (fee) land for coalbed methane and conventional gas
expire at various times from 2003 to 2011, unless production is established, in
which event the lease is held so long as there is production. The landowner is
paid a royalty from production of 12.5% to 20.0% , depending on the lease terms.


                                       16





Table 3



                                              ROCKY MOUNTAIN GAS, INC.

---------------------------------------------------------------------------------------------------------------------
                      Gross Leased    Net Leased       Net Leased      Net Leased       Net Leased      Net Leased
Prospect              Acres           Acres            from BLM        from State of    from State of   from Private
                                                                       Wyoming          Montana         Owners
---------------------------------------------------------------------------------------------------------------------
                                                                                        
Castle Rock               123,840      111,567          55,104             0             10,860           45,603
Kirby                     80,254        74,512          33,305             0              4,056           37,151
Oyster Ridge*             21,536        21,536          17,107           1,229              0             3,200
Clearmont                  6,305        3,745              0              640               0             3,105
Sussex                      640          640               0              640               0               0
Finley                      160          160               0              160               0               0
Baggs North                 120          120               0              120               0               0
Gillette North              80            80               0               80               0               0
Arvada                     1,900        1,700            1,200             0                0              500
---------------------------------------------------------------------------------------------------------------------


     *Does not include acres under option from Anadarko Petroleum. See
"Description of Properties - Oyster Ridge."

     Table 3 does not include acreage in the Bobcat property.

     CASTLE ROCK: The Castle Rock project consists of 123,840 gross and 111,567
net acres located in the northeastern portion of the Powder River Basin of
Montana, west of Broadus, Montana. Coals present are in the Tongue River member
of the Fort Union formation and appear comparable to coals currently being
developed by other operators south of the Castle Rock acreage near the
Montana/Wyoming border. Currently, there are no pipelines in this area. The
federal leases generally have 10-year terms and fee and state leases generally
have two to five year terms.

     KIRBY: The Kirby project consists of 80,254 gross and 74,512 net acres
located in the northwestern portion of the Powder River Basin in Montana located
in Big Horn and Rosebud Counties, Montana, north of Sheridan, Wyoming. Coals are
in the lower portion of the tertiary Fort Union formation and are similar to
productive coals in the Wyoming portion of the Powder River Basin to the south.
Redstone (recently acquired by Montana Dakota Utilities) has established
significant coalbed methane production 12 miles south of Kirby at the CX field.
At least two other operators are currently planning to drill and develop nearby
acreage. CMS's Bighorn Gas Gathering recently extended a new 20" pipeline to
within 10 miles of the Kirby project. Three exploration wells are currently
scheduled to be drilled at Kirby during the summer of 2002.

     OYSTER RIDGE: The Oyster Ridge project consists of 65,247 gross and net
acres located in southwestern Wyoming in the Ham's Fork Coal Field adjacent to
the Green River Basin. RMG and CCBM have a 100% working interest (50% each) in
21,536 acres within Oyster Ridge.

     Anadarko Petroleum, Inc. is successor to Union Pacific Land Resources
Corporation, which sold the acreage subject to UPLRC's back in option to third
parties, from whom RMG acquired the acreage in December 1999.

                                       17





     The agreement with Anadarko is a drill-to-earn-acreage agreement: we must
drill at least four wells each year, each on a new section (640 acres), to earn
a lease on each drilled section , and also to keep in force previously earned
leases in the 43,711 acres areas. Wells drilled by our seller, and by us (with
CCBM), have earned 3,200 acres, which are included in the 21,536 acres leased
presently. As of March 31, 2002, we have met our drilling obligations for the
year ended March 31, 2002. Under the terms of the agreement, we must drill 4
additional wells by March 31, 2003 to keep our agreement in force. RMG expects
to meet this drilling commitment.

     Within this prospect, 43,711 gross acres are subject to an option held by
Anadarko Petroleum, Inc. to participate as a 25% working interest owner on all
wells drilled each year. Anadarko has not yet elected to participate, and has no
working interest in the seven wells drilled to date on this prospect. If
Anadarko elects to participate in the future, working interest ownership in
affected wells would be of 37.5% RMG, 37.5% CCBM, and 25% Anadarko.

     The area is prospective for coalbed methane production from two primary
Cretaceous age coals, the Frontier and the Adaville. The Kern River pipeline,
which services southern California, crosses the property. Exploratory drilling
and completion operations on previously drilled wells resumed at Oyster Ridge in
June, 2001. To date, $621,128 has been spent on 7 exploratory wells.


     CLEARMONT: The Clearmont project consists of approximately 5,345 gross and
2,785 net acres located in the western Powder River Basin of Wyoming. RMG (and
now CCBM jointly) owns working interests ranging from 25% to 100%. The area is
characterized by several shallow Fort Union coalbeds (most notable the Roland
and Anderson coals) as well as several deeper coals that hold significant
exploration potential. Substantial coalbed methane production and development is
ongoing in the immediate area including Federated's Box Elder Creek project 12
miles to the west and the Penneco/CMS Wild Horse Creek project 15 miles to the
east. The Clearmont project is located at the convergence of the WBI Bitter
Creek and the Bighorn Sheridan Lateral pipelines. A 28 well exploration and
development drilling program began at Clearmont in August 2001 and could be in
production in 2002 depending on drilling results and gas prices. As of May 31,
2001, $1,470,351 has been spent on drilling and infrastructure at Clearmont.


     SUSSEX: RMG and CCBM hold 640 gross and net acres in this project area
located in Johnson County, Wyoming. This State lease lies 3 miles south of
Sussex, Wyoming. RMG has a 100% working interest. To date, RMG has not conducted
any significant development on the property.

     FINLEY: RMG and CCBM hold 160 gross and net acres in this project area
located in Converse County, Wyoming. This prospect is a State lease 12 miles
east of Edgerton, Wyoming. Review for a two well test is underway. To date, RMG
has not conducted any significant development on the property.

     BAGGS NORTH: This prospect contains 120 gross and net acres located in
Carbon County, Wyoming. This State lease is located 7 miles north of Baggs,
Wyoming. RMG and CCBM hold a 100% working interest in this prospect. To date,
RMG has not conducted any significant development on the property.

     GILLETTE NORTH: RMG and CCBM holds a 100% working interest in 80 gross and
net acres in this project area located in Campbell County, Wyoming. This State
lease lies at the north end of the City of Gillette. Existing coalbed methane
wells lay in the section immediately north. Permitting of two wells has begun on
RMG's property. RMG intends to conduct test drilling and production techniques
in this area which lies in the heart of the current coalbed methane play in the
Gillette area. To date, RMG has not conducted any significant development on the
property.


                                       18





     ARVADA: This prospect contains 1,900 acres located in Sheridan County,
Wyoming. RMG and CCBM hold a 100% working interest, and a 62% to 81.5% net
revenue interest. To date, RMG and CCBM have spent $64,428 on the drilling of
one 1,471' deep test well and analysis drilling results.

     COALBED METHANE WELL PERMITTING. Drilling coalbed methane wells requires
obtaining permits from various governmental agencies. The ease of obtaining the
necessary permits depends on the type of mineral ownership and the state in
which the property is located. Intermittent delays in the permitting process can
reasonably be expected throughout the development of any play. For example,
there is currently a temporary moratorium for drilling coalbed methane wells on
fee and state lands in Montana. We may shift our exploration and development
strategy as needed to accommodate the permitting process. As with all
governmental permit processes, there is no assurance that permits will be issued
in a timely fashion or in a form consistent with our plan of operations.

     On March 16, 2000, the Northern Plains Resource Council, Inc. ("NPRC")
filed suit against the Montana Board of Oil and Gas Conservation (Board)
requesting an order of the court compelling the defendant to prepare a Draft
Environmental Impact Statement ("EIS") and amendment of the Powder River and
Billings Resource Management Plans for coalbed methane development, which could
further delay development. RMG and others have filed a motion to intervene to
participate in this litigation and to ensure that some drilling can be performed
during any environmental analysis. The Board has agreed to limit issuance of CBM
well permits to 200 (of which RMG received 79 of these permits) pending
completion of the EIS, which is currently scheduled to be completed in the
summer of 2002.

     The Wyoming Department of Environmental Quality Supplemental Environmental
Impact Statement (SEIS) for the Powder River Basin in Wyoming, issued in the
fall of 1999, allowed the permitting of 5,000 CBM wells to be drilled on Federal
lands in Wyoming. More CBM well applications have been submitted causing the BLM
to begin a second EIS for the Powder River Basin Area in Wyoming. The new draft
EIS is scheduled to be completed in the fall of 2002. Development on Federal
lands in Wyoming has been stopped with the balance of the Wyoming Department of
Environmental Quality EIS permitted wells (4,000) occurring on fee and state
lands. The BLM completed an environmental assessment ("EA") in March 2001,
reviewing drainage issues, which could allow an additional 1,500 new CBM well
permits in the Gillette region of the Powder River Basin. The EA and EIS may
impact RMG's operations, as the Arvada prospect is within the affected area, and
we expect to begin applying for permits in these prospects in late 2002.

     In addition, the Wyoming and Montana Departments of Environmental Quality
have regulations applying to the surface disposal of water produced from CBM
drilling operations. CBM operators are currently seeking changes in permit
requirements and department policy that would allow operators more flexibility
to discharge water on the surface. If these changes are not made, it may be
necessary to install and operate treatment facilities or drill disposal wells to
reinject the produced water back into the underground rock formations adjacent
to the coal seams or lower sandstone horizons. If we cannot obtain the
appropriate permits or if applicable laws or regulations require water to be
disposed of in an alternative manner, the costs to dispose produced water will
likely increase. These costs could have a material effect on operations in this
area, including potentially rendering future production and development in the
affected areas uneconomic.

     RMG has received an Environmental Assessment and Finding of No Significant
Impact to drill up to 56 shallow gas sand wells. These wells are located on
Federal land held with Quaneco and would be converted to production status upon
receiving approval from the Montana Board of Oil and Gas. These wells would
evaluate potential CBM production as well as conventional gas. Regarding other
acreage held with Quaneco in Montana, the State of Montana may lift its
moratorium for CBM wells on private and state ground in Montana, and start
issuing new permits on these lands in Summer 2002 (a voluntary moratorium is
currently in place for wells on private and state ground in Montana). We have
not determined to what extent we will

                                       19





participate in this procedure, and are evaluating how best to protect our
position to have reasonable exploration for CBM wells proceed on state and fee
ground. We have permits in place until Spring 2002 in order to conduct
exploration in expectation that commercial production will be approved on
completion of the EIS.

     In August 2001, Montana and Wyoming announced an agreement for water
quality officials in both states to coordinate monitoring of water flows in the
Powder River and Little Powder River drainages, to determine the impact of
coalbed methane well water production on river water. Although usually well
water is drinkable, it may contain high sodium absorption ratios, which can
impair use of the water for irrigation purposes in clay-based soils. The
respective agencies will propose regulations to establish thresholds for
potential pollutants and require strict monitoring by local water quality
officials. If test results indicate some well water flows adversely impact river
water quality, operators could be required to put the water flow into holding
ponds or take other steps to eliminate or reduce water flows or pollutants in
the water. Implementation of the agreement may benefit continued coalbed methane
development in these areas by opening up the water discharge permitting process
in the affected areas, as water testing is completed in phases on prospects
within the affected drainage areas. Currently, we don't have acreage that would
be impacted by these regulations but future acreage could be acquired in the
affected areas.

         The following summarizes permits now in place.

Table 4


--------------------------------------------------------------------------------
                                           Expiration
Prospect           Remaining Permits       or Renewal Date
--------------------------------------------------------------------------------
Castle Rock               15               04/17/2003 and 10/17/2002
--------------------------------------------------------------------------------
Kirby*                     6               04/23/2002; 05/05/2002 and 05/16/2002
--------------------------------------------------------------------------------
Clearmont                 46               07/31/2002; 08/30/2002; 09/26/2002;
                                           10/24/2002; 11/01/002; 11/02/2002;
                                           02/04/2003 and 03/15/2003
--------------------------------------------------------------------------------
Arvada                     3               11/12/2002 and 04/22/2002
--------------------------------------------------------------------------------
    Total                 70
--------------------------------------------------------------------------------


     *RMG has requested extensions for these permits.

     Drilling permits issued by the State of Wyoming allow one year for drilling
completion; while permits issued by the State of Montana allow six months.

     Once drilled, all wells in the Clearmont and Arvada prospects remain (and
future wells in Wyoming will be) subject to a National Pollution Discharge
Elimination System ("NPDES") permit relating to water testing and discharge. All
wells in the Castle Rock and Kirby prospects remain subject to the Montana Board
of Oil and Gas Commission approval. Upon completion of drilling all of the wells
are subject to monthly reporting regarding status and production to the
respective state agencies in which they are located.

GATHERING AND TRANSMISSION OF CBM GAS

     Companies involved in CBM production generally outsource their gas
gathering, compression and transmission. We intend to outsource compression and
gathering needs as well, possibly on a competitive basis with transmission
companies in the immediate area. Negotiations with various transmission
companies have been initiated in order to better manage future capital
investment, but no contracts have been signed to date.

                                       20





     Coalbed methane production growth in the Powder River Basin has
historically been impeded by a shortage of gathering system capacity and
transport capacity out of the Basin. However, two large diameter gathering
pipelines were completed in September 1999 and a third was ready for service in
early 2000. The two completed pipelines will provide an additional 900 million
cubic feet, (MMcf), of daily gas capacity as set forth below:

     Fort Union Gas Gathering, LLC's 106-mile, 24" gathering pipeline, commenced
operations September 1, 1999, with an initial capacity of 450 MMcf per day; and

     Thunder Creek Gas Services, LLC's 126-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day.

     Additionally, CMS Energy's 110-mile, Big Horn Gas Gathering pipeline, that
connects to the northern terminus of the Fort Union pipeline, is continuing to
be expanded in length and has an initial capacity of 256 MMcf per day which can
readily be upgraded to 500 MMcf per day with the addition of booster
compression. Further, on June 19, 2000, Big Horn Gas Gathering announced the
extension of its pipeline to serve producers in the Sheridan area. This 50+ mile
extension will place a 20" high pressure pipeline within 5 miles of the Montana
border and within close proximity to the development planned by RMG, CCBM, and
Quantum on their Kirby Prospect area.

     Wyoming Interstate Gas Company's 143-mile, 24" Medicine Bow Lateral
pipeline commenced operations in November 1999 with an initial capacity of 260
MMcf per day. This pipeline will transport natural gas from the Thunder Creek
and Fort Union pipelines at the south end of the Powder River Basin to
interconnect with multiple interstate pipelines accessing markets to the east
and along the front range of Colorado. This system is already being expanded as
demand for transportation space grows. Further transmission lines are being
planned by other companies in the area.

     Wyoming operators have been realizing lower than expected prices for gas
produced in the Powder River Basin, due in part to seasonal/supply factors, but
more significantly due to a bottleneck in take away capacity. There is now ample
capacity to move gas from CBM fields within the PRB but limited interstate
movement capacity from the PRB to the major markets on the coasts and in the
midwest, which results in a negative price differential. The newly announced
Grasslands Pipeline (to be constructed to move gas to midwest and northern
markets) and the additional looping (now under construction) of the Kern River
Pipeline, will add 1,000 MMcf daily PRB take away capacity when completed by the
end of 2003, and should reduce the negative price differential.

     For June, 2002, RMG received an average price of $1.10 per Mcf (1,000 cubic
feet) of gas produced from the Bobcat field. This represents a negative price
differential of approximately 66% compared to the average price of approximately
$3.24 per Mcf received by producers nationwide. While increased pipeline
capacity planned or under construction is expected to reduce this negative price
differential by the end of 2003, there is no guarantee that the increase will
eliminate the negative price differential or even significantly reduce it.
Continued low prices would impair our ability to raise capital for RMG and
reduce revenues from production coming on line.


GENERAL INFORMATION ABOUT COALBED METHANE.

     Methane is the primary commercial component of natural gas produced from
conventional gas wells. Methane also exists in its natural state in coal seams.
Natural gas produced from conventional wells generally contains other
hydrocarbons in varying amounts which require the natural gas to be processed.
Methane gas produced from coalbeds generally contains only methane and is
pipeline-quality gas after simple water dehydration.


                                       21






     Coalbed methane production is similar to conventional natural gas
production in terms of the physical producing facilities. However, the
subsurface mechanisms that allow gas movement to the wellbore are very
different. Conventional natural gas wells require a porous and permeable
reservoir, hydrocarbon migration and a natural structural or stratigraphic trap.
Coalbed methane gas is trapped (adsorbed) in the coal itself and in the water
contained in the pore space, until released by pressure changes when the water
in the coal is removed. In contrast to conventional gas wells, new coalbed
methane wells initially produce water for several months. As the formation water
pressure decreases, methane gas is released from the structure.

     Methane production is a direct result of reducing the hydrostatic (water)
pressure in the coal formation. Three principal stages are involved:

     o    Drill wells (typically eight or more in a 'pod') down to the same coal
          formation, in contiguous 80 acre spacing per well; test the water in
          the formation and test coal samples taken from the formation. Water
          testing determines if the geochemical environment of the coal seam was
          conducive to the formation of CBM.

     o    Install gathering lines to hook up and put wells on pump to 'dewater'
          the coal formation. Hydrostatic pressure must be reduced to about 50%
          of initial pressure before enough data is obtained (water flow rates,
          CBM gas flows) to determine how much CBM the wells may produce. This
          dewatering stage may take 6 to 18 months, and in some instances 24
          months (where there is no dewatering of the coal seam occurring from
          wells drilled by others on adjacent properties).

     o    Installing (or have a transmission company install) a compressor and
          transport line to carry produced gas to a gas transmission line for
          sale to end users. Gas production starts gradually then continues to
          grow in volume as hydrostatic pressure is reduced; optimal production
          won't occur until hydrostatic pressure is reduced approximately 90%
          from initial levels.

Inactive Mining Properties - Uranium

     GENERAL. We have interests in several uranium-bearing properties in Wyoming
and Utah and in a uranium processing mill in southeastern Utah (the "Shootaring
Mill" in Garfield County). All the uranium-bearing properties are in areas which
produced significant amounts of uranium in the 1970s and 1980s. At some future
date, we could develop and operate these properties (directly or through a
subsidiary company or a joint venture) to produce uranium concentrates ("U3O8")
for sale to public utilities that operate nuclear powered electricity generating
plants. However, until uranium oxide prices improve significantly, all of the
uranium properties are shut down, and work is performed to keep the properties
ready for later activity and permitting work is done as needed (monitoring and
reporting) to keep existing permits in effect.

     The uranium properties have been shut down. Over a period of at least nine
months, substantial and expensive work would be required to put them into
production, including cleaning rock and other debris from shafts and tunnels,
pumping water out of the mines, extending the shafts and tunnels, and sampling
to ascertain whether a commercially viable ore body exists on any of the
properties.

     However, a decision to put the uranium properties into production will have
to take into account the fact that presently uranium oxide prices are lower than
mining and milling costs. These low prices are primarily due to ample supplies
of uranium being produced by other companies from lower cost (and higher grade)
deposits outside the United States, and also to stockpiles of uranium oxide
being sold off by those producers.


                                       22






     This low price situation has created conditions that have adversely
impacted our ability to go into production. We cannot predict when uranium oxide
prices might increase sufficiently to warrant putting our uranium properties
into production. Such increases may not occur for several years, if at all.

     At May 31, 2001 and 2000 (the dates of the consolidated balance sheets in
this report), there are no values carried on the balance sheets for uranium
properties.


     SHEEP MOUNTAIN - WYOMING


     Unpatented lode mining claims, underground and open pit uranium mines and
mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont
County, Wyoming and are adjacent to and west of the GMMV mining claims. From
December 21, 1988 to June 1, 1998, these properties were held by Sheep Mountain
Partners ("SMP"). On June 1, 1998, USE received back from SMP all of the Sheep
Mountain mineral properties and equipment, in partial settlement of disputes
with Nukem, Inc. ("Nukem") and its subsidiary Cycle Resource Investment Corp.
("CRIC"). The Judgment against Nukem impressing the CIS uranium supply contracts
in constructive trust with SMP remain in dispute. See "Legal Proceedings." The
Sheep Mountain Mines 1 and 2 were first operated by Western Nuclear, Inc., a
subsidiary of Phelps Dodge Corporation, in the late 1970s.

     We have recorded reclamation liabilities for the SMP properties (see note K
to the consolidated financial statements in this report). All historical costs
in the SMP properties were offset against a monetary award which was received
from Nukem during fiscal 1999.


THE PROPERTY INTERESTS OF USE IN UTAH THROUGH PLATEAU RESOURCES LIMITED
("PLATEAU") ARE:

     Plateau Resources Limited is a wholly-owned subsidiary of USE. See "Plateau
Shootaring Canyon Mill" below.


     The Tony M property contains underground uranium deposits in San Juan
County, Utah, and are located partially on Utah State leases.

     Plateau is the lessee of the Tony M property and has posted a bond securing
Plateau's obligations to reclaim these properties. The Tony M property was
originally developed by Plateau at the time Plateau was owned by Consumers Power
Company ("CPC"), a Michigan public utility. Significant areas of uranium
mineralization have been accessed and delineated by the prior owner's
underground workings. When the Tony M property was in production (while Plateau
was owned by CPC), it produced ore containing from three to eight pounds of
uranium concentrates per ton. Some of this ore was processed at the Shootaring
Mill. In addition, low grade uranium mineralization was stockpiled at the Tony M
property and at the Shootaring Mill.

     Plateau also acquired the Velvet property and the nearby Woods Complex in
the Lisbon Valley area in southeastern Utah. The Velvet Mine was developed and
permitted by its prior owner and is located approximately 178 miles by road from
the Shootaring Mill. The prior owner drove several miles of access tunnels
(adits) and drifts (access tunnels) and mined material from the workings.
However, we cannot ascertain the amount or grade of material previously mined,
nor have we ascertained by our own drilling the location and grade of remaining
mineralized material in the mine. The Woods Complex was formerly an operating
uranium mine with a remaining undeveloped resource. Access to this resource
would be by extending a drift approximately 2,500 feet from the former Woods
Mine. The Woods Mine property is not permitted, but we do not expect difficulty
in obtaining a new permit, should we seek one, because the surface facilities
would occupy the site that has been disturbed from previous operations.



                                       23





     THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT


     GMMV. In fiscal 1991, we entered into an agreement to sell 50 percent of
our interests in the Green Mountain uranium claims, and certain other rights, to
Kennecott Uranium Company ("KUC" or "Kennecott"), a subsidiary of Kennecott
Energy and Coal Company of Gillette, WY. Kennecott Energy and Coal Company is a
subsidiary of Rio Tinto plc, formerly RTZ plc of London. In consideration of the
sale to Kennecott, we received $15,000,000 cash and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures, under a joint venture agreement
(the "GMMV Agreement") to mine and mill uranium ore and market uranium oxide.
For detailed explanation , please see U.S. Energy Corp's. 1999 Form 10-K at
pages 8-11, and footnote F to the financial statements.

     The GMMV holds 521 unpatented lode mining claims (the "Green Mountain
Claims") on Green Mountain in Fremont County, Wyoming, including 105 claims on
which the Round Park (Jackpot) uranium deposit is located, and the Sweetwater
Mill (approximately 23 miles south of Green Mountain ) .

     In fiscal 2000, Kennecott filed a lawsuit to dissolve the GMMV and we
counterclaimed for damages. This lawsuit was settled on September 11, 2000.
Kennecott paid USECC $3,250,000 to acquire all of our (and Crested's and
USECC's) interest in the GMMV, its properties and the Sweetwater Uranium Mill
(with certain exceptions), and all parties' claims in the lawsuit have been
dismissed. Kennecott also assumed all reclamation and other liabilities
associated with the GMMV, its properties, the Sweetwater Mill and all
liabilities associated with the GMMV since its inception, including the
historical liabilities associated with the Sweetwater Mill prior to its
acquisition by the GMMV. We and Crested together have retained a 4% net profits
royalty in any future uranium oxide produced from the GMMV mining claims through
the Sweetwater Mill (currently shut down and not operational).




     No reclamation liabilities are recorded on our balance sheet for the GMMV
properties because they are solely Kennecott's responsibility (Kennecott assumed
all those liabilities when we settled litigation with Kennecott in September
2000 (see "GMMV" below and note K to the consolidated financial statements)).


     At such time as Kennecott has completed necessary reclamation work on the
Green Mountain unpatented lode mining claims (including the Round Park uranium
deposit proposed to be mined through the Jackpot Mine) Kennecott will quit claim
all such mining claims to us and Crested, as well as certain equipment currently
being used at the mine (including a compressor and standby generator). Kennecott
plans to keep the Sweetwater Mill.


                                       24





     PROPERTIES

     The Green Mountain Claims include the Big Eagle Properties on Green
Mountain, which contain substantial uranium mineralization, and are adjacent to
other mining claims. The Big Eagle Properties contain two open-pit mines, as
well as related roads, utilities, buildings, structures, equipment and a
stockpile of 500,000 tons of uranium material with a grade of approximately .05%
uranium concentrate ("U3O8"). Uranium concentrate means natural uranium
concentrates in the form of triuranium octoxide (U3O8) containing 0.711
(nominal) weight percent uranium in the isotope U-235. The assets include two
buildings (38,000 square feet and 8,000 square feet) formerly used by Pathfinder
Mines Corporation ("PMC") in mining operations.

     The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 11,410,000 tons grading 0.266% ("U3O8")
mineralized material . These estimates are based on extensive drilling from the
surface. Other than the two declines, no underground workings have been built,
and we have not determined the location of any underground stopes containing
mineralized material. The GMMV had planned to mine this mineralized material
from two decline tunnels (-17 percent slope) in the Jackpot Mine driven
underground from the south side of Green Mountain. The first of several
mineralized horizons in the Round Park deposits, is about 2,300 feet vertically
down from the surface of Green Mountain. This work was halted in July 1998.

     SWEETWATER MILL. In fiscal 1993, the GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately 23 miles south of the proposed Jackpot Mine, from a subsidiary of
Union Oil Company of California ("UNOCAL"), primarily in consideration of
Kennecott and the GMMV assuming environmental liabilities, and decommissioning
and reclamation obligations. The Sweetwater Mill was designed as a 3,000 ton per
day ("tpd") facility.

     As consideration for acquiring the Sweetwater Mill, GMMV agreed to
indemnify UNOCAL against certain reclamation and environmental liabilities,
which indemnification obligations are guaranteed by Kennecott Corporation
(parent of Kennecott Uranium Company). The GMMV is responsible for compliance
with mill decommissioning and land reclamation laws, for which the environmental
and reclamation bonding requirements are approximately $24,330,000, which
includes a $4,560,000 bond required by the Nuclear Regulatory Commission
("NRC"). None of the GMMV future reclamation and closure costs are reflected in
the consolidated financial statements.


     The reclamation and environmental liabilities assumed by the GMMV (and now
Kennecott's sole responsibility) consist of three categories: (1) cleanup of the
inactive open pit mine site near the Mill (the source of ore feedstock for the
mill when operating under UNOCAL), including water (heavy metals and other
contaminants) and tailings (heavy metals dust and other contaminants requiring
abatement and erosion control) associated with the pit; (2) decontamination and
cleanup and disposal of the Mill building, equipment and tailings cells after
Mill decommissioning; and (3) cleanup of the twin tunnels driven into Green
Mountain by the GMMV. The Wyoming Department of Environmental Quality ("DEQ")
exercises delegated jurisdiction from the United States Environmental Protection
Agency ("EPA") to administer the Clean Water Act and the Clean Air Act, and
directly administers Wyoming statutes on mined land reclamation. The Sweetwater
Mill is also regulated by the NRC for tailings cells and mill decontamination
and cleanup. The EPA has continuing jurisdiction under the Resource Conservation
and Recovery Act, pertaining to any hazardous materials which may be on site
when cleanup work is started.



                                       25





     PLATEAU'S SHOOTARING CANYON MILL

     ACQUISITION OF PLATEAU RESOURCES LIMITED ("PLATEAU"). In August 1993, USE
purchased from Consumers Power Company ("CPC"), all of the outstanding stock of
Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. In the purchase of the stock from CPC, we agreed to various obligations, as
disclosed in USE's 1998 Form 10-K at pages 15 and 16.

     SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
southeastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer of 1982. In 1984, Plateau placed the mill on standby because CPC
had canceled the construction of an additional nuclear energy plant.


     Plateau also owns approximately 90,000 tons of uranium mineralized material
stockpiled at the mill site and approximately 172,000 tons of mineralized
material stockpiled at the Tony M property. Included with mill assets are
tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
however, since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. Plateau applied to the NRC
to convert the source materials license from standby to operational and upon
increasing the reclamation bond, the NRC issued the new license on May 2, 1997.
Plateau has a cash bond in favor of the NRC in the amount of $8,511,200 plus an
additional $1,136,800 in government securities for bonding future reclamation.


     Plateau obtained approval of a water control permit for the tailings cell
from the Utah Water Control Division and is awaiting the NRC's review of the
operating license conditions so Plateau can continue with construction of
tailing facilities if it so desires.


     The Shootaring Mill has remained shut down because of continued low uranium
prices. Substantial expense would be incurred to upgrade the mill to operating
status and fully activate the NRC permit, and substantial work would be needed
to put the Velvet and Woods Complex properties into production for material to
run through this mill. This work would include cleaning out adits and drifts,
dewatering, and sampling to ascertain the location and grade of mineralized
material.


     TICABOO TOWNSITE


     Plateau owns Canyon Homesteads, Inc., a Utah corporation, which developed
the Ticaboo, Utah townsite 3.5 miles south of the Shootaring Mill. The townsite
includes a motel, restaurant, lounge, convenience store and single family,
mobile home and recreational vehicle sites (all with utility access), located on
a State of Utah lease near Lake Powell. An amendment was entered into on April
1, 1997 on the Utah State lease covering the Ticaboo Townsite whereby the State
will convey portions of the Townsite lease to Canyon on a sliding scale basis as
they are sold. USE and Crested are developing the Townsite in limited fashion
and are selling home and mobile home sites.


     SHEEP MOUNTAIN PARTNERS ("SMP")

     SMP PARTNERSHIP. In February 1988, USE acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap in
south-central Fremont County, Wyoming, from Western Nuclear, Inc. These Crooks
Gap mining properties are adjacent to the Green Mountain uranium properties.
USECC mined and milled uranium ore from one of the underground Sheep Mines
during fiscal

                                       26






1988 and 1989. Production ceased in fiscal 1989, because uranium could be
purchased from the spot market at prices below the mining and milling costs of
USECC. In December 1988, USECC sold 50 percent of the interests in the Crooks
Gap properties to Nukem's subsidiary Cycle Resource Investment Corporation
("CRIC") for cash. The parties thereafter contributed the properties to and
formed Sheep Mountain Partners ("SMP"), in which USECC received an undivided 50
percent interest. SMP is a Colorado general partnership formed on December 21,
1988, between USECC and Nukem, Inc. then of Stamford, CT ("Nukem") through its
wholly-owned subsidiary CRIC.


     SMP was directed by a management committee, with three members appointed by
USECC and three members appointed by Nukem/CRIC. The committee has not met since
1991 as a result of the SMP arbitration/litigation. During fiscal 1991, disputes
arose between the SMP partners which resulted in litigation. See Item 3, Legal
Proceedings.

     PROPERTIES. Until June 1, 1998, SMP owned 80 unpatented lode mining claims
on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an estimate of mineralized material. In connection with a
partial settlement of litigation/arbitration between USECC and Nukem/CRIC, SMP
conveyed these mineral properties and equipment to USECC. Any future production
from the properties will continue to be subject to sliding-scale royalty payable
to Western Nuclear, Inc. (1% to 4% on recovered uranium concentrates). As of the
filing date of this Annual Report, USE , Crested and/or USECC own 98 unpatented
lode mining claims and a 644 acre Wyoming State Mineral Lease in the Crooks Gap
area.


     An ion exchange plant is located on the SMP properties which was be used to
remove natural soluble uranium from mine water. USE began reclamation of this
facility during the first quarter of fiscal 2002. The plant is being disposed of
at the Sweetwater Mill impoundment facility (see above). These reclamation costs
were not covered by the settlement with Kennecott, because that settlement only
covered GMMV properties. We are paying for the ion exchange reclamation costs,
and Kennecott is allowing the contaminated materials to be buried at the
Sweetwater impoundment facility.


     PERMITS. Permits to operate existing mines (now shut down) on the Crooks
Gap properties have been issued by the State of Wyoming. Amendments are needed
to open new mines within the permit area. As a condition to issuance of the
permits, a NPDES water discharge permit under the Clean Water Act has been
obtained. Monitoring and treatment of water removed from the mines and
discharged in nearby Crooks Creek is generally required. During the past two
years, USECC did not discharge wastewater into Crooks Creek, and the mine water
is presently being discharged into the USECC McIntosh Pit.

     URANIUM MARKET INFORMATION.

     URANIUM SPOT MARKET. Uranium restricted spot prices were $8.75/lb. U3O8 on
June 30, 2001, an increase of 8% from $8.10 at June 30, 2000. During the first
half of 2001, total spot market volume was approximately 7 million pounds U3O8
which was about the same volume as the first half of 2000.

     URANIUM LONG-TERM MARKET. The long-term market has been active in 2001 with
the long-term contracts reported by market analysts to have exceeded 35 million
pounds of U3O8 during the first half of 2001. The uranium price indicator
published by Tradetech was at $10.00 per pound U3O8 at June 30, 2001, up from
the $9.75 at beginning of the second quarter of 2001.

                                       27





         GOLD


     SUTTER PROPERTY (California)

     SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
Sutter properties located in the Mother Lode Mining District of Amador County,
California. The entire Lincoln Project (which is the name we use for the
properties) is owned by Sutter Gold Mining Company, a Wyoming corporation
("SGMC"), and a majority-owned subsidiary of USE.

     This property has never been in production. Persistent low prices for gold
have made financing difficult, and in fiscal 1999 resulted in a substantial
write down of the SGMC assets. See "Managements Discussion and Analysis of
Financial Condition and Results of Operations" for fiscal 1999.

     Due to the depressed gold prices in the past and lack of available funding,
SGMC has deferred the start of construction of a gold mill complex and extension
of existing underground workings. A tourist visitors center has been set up (see
below) and leased to a third party for $1,500 per month plus a 4% gross royalty
on revenues. There is one caretaker employee at the Sutter operation. Except for
limited infrastructure improvements in 2000, the properties are shut down so far
as possible mining operations are concerned. The exploration permits are being
kept current as necessary to allow for possible mining activities on the
properties in the future.

     In 1998 and 1999 the company took impairments (write-downs) in the amounts
of $1,500,000 and $10,718,800, respectively, of the carrying value of the gold
properties. These two impairments wrote off almost 85% of our investment in
these properties. As a result of low market prices for gold, we determined that
we could not produce gold from these properties at a profit. The impairments
taken in 1998 and 1999 resulted in no value for mine exploration, and the
remaining assets relating to this property include raw land which is no longer
needed for mining activity, and buildings and equipment.

     We have not obtained a final feasibility study to support a determination
that the Sutter property contains proven or probable reserves of gold.


     PROPERTIES. SGMC holds approximately 216 acres of surface and mineral
rights (owned), 54 acres of surface rights (owned), 55 acres of surface rights
(leased), 154 acres of mineral rights (leased), and 366 acres of mineral rights
(owned), all on patented mining claims near Sutter Creek, Amador County,
California. The properties are located in the western Sierra Nevada Mountains at
from 1,000 to 1,500 feet in elevation; year round climate is temperate. Access
is by California State Highway 16 from Sacramento to California State Highway
49, then by paved county road approximately .4 mile outside of Sutter Creek.

     Surface and mineral rights holding costs will be approximately $90,000 from
June 1, 2001 through May 31, 2002. Property taxes for fiscal 2001 are estimated
to be $30,000.

     The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance.

     PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the SGM
and milling of production, subject to conditions relating to land use,
environmental and public safety issues, road construction and improvement, and
site

                                       28






reclamation. The permit will allow construction of mine and mill facilities in
stages if the project ever gets underway, thereby reducing initial capital
outlays. Additional permits (for road work, dust control and construction of
mill and other surface improvements) need to be applied for in due course. In
August and September 1998, the Amador County Board of Supervisors certified the
Final Subsequent Environmental Impact Report ("FSEIR") and approved all of the
amendments requested by SGMC. Amendments to the CUP will remove two tailings
dams, eliminate the need to use cyanide on-site, and eliminate mine related
traffic on two county roads. The certification and decision has been challenged
in a lawsuit filed by a local citizens' group, currently under appeal, see
"Legal Proceedings."

     VISITORS CENTER. In fiscal 2000, SGMC spent approximately $298,000 for
surface infrastructure related to improving access to the mine site, and to a
lesser extent tourist related improvements. The visitors center is being
operated by a third party. The visitors center is an exhibit of the pictures and
memorabilia from mining operations on other properties in the Sutter district in
the nineteenth century, and a guided tour of the underground workings at the
Lincoln Project. Revenues from this tourist operation were $105,400 and $68,400
in fiscal 2001 and 2000, respectively, and are included in "motel, real estate
and airport operations" in the consolidated statements of operations included in
this report. These revenues offset a majority of costs for holding the Sutter
properties.


     MOLYBDENUM

     As a holder of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent. AMAX Inc. (which was acquired by Cyprus Minerals Company and
was renamed Cyprus Amax Minerals Company in November 1993 and was acquired later
by Phelps Dodge) delineated a deposit of molybdenum containing approximately
146,000,000 tons of mineralization averaging 0.43% molybdenum disulfide on the
properties of USE and Crested.

     Advance royalties are paid in equal quarterly installments until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE and Crested. The advance royalty payments reduce the operating royalties
(6% of gross production proceeds) which would otherwise be due out of
production. There is no obligation to repay the advance royalties if the
property is not placed in production. Phelps Dodge ceased making the quarterly
installments in July 2001.


     The Agreement with AMAX also provides that USE and Crested receive
$2,000,000 if the Mt. Emmons properties are put into production and, in the
event AMAX sells its interest in the properties, USE and Crested are to receive
15% of the first $25,000,000 received by AMAX. USE and Crested have asserted
that the acquisition of Cyprus Amax by Phelps Dodge would entitle USE and
Crested to such payment, and that position has been presented to Phelps Dodge,
the successor company to Cyprus Amax. This position has been rejected by Phelps
Dodge and USE and Crested are considering remedies. USE recognized $108,500,
$132,600 and $150,600 of revenues in fiscal 2001, 2000 and 1999 related to this
royalty interest.

     AMAX Inc. and its successor companies have sought to put the Mt. Emmons
molybdenum property into production for 20 years. Due to local opposition to
mining (the property is close to the Crested Butte, Colorado recreational resort
area) and AMAX's successors' failure to diligently pursue obtaining the permits
needed to start mining, we know of no plans at this time to put the property
into production.



                                       29





     OIL AND GAS

     FORT PECK LUSTRE FIELD (MONTANA). We operate a small oil production
facility (three wells) at the Lustre Oil Field on the Ft. Peck Indian
Reservation in northeastern Montana. We receive a fee based on oil produced.
This fee and other assets of the Company collateralize a $750,000 line of credit
from a bank.


MOTEL, REAL ESTATE AND AIRPORT OPERATIONS.

     We own varying interests, alone and with Crested, in affiliated companies
engaged in real estate, and other commercial businesses. The affiliated
organizations include Western Executive Air, Inc. ("WEA") and Canyon Homesteads,
Inc. (through Plateau). Activities of these and other subsidiaries in the
business sectors include ownership and management of a commercial office
building, the townsite of Jeffrey City, Wyoming and the townsite, motel,
convenience store and other commercial facilities in Ticaboo, Utah.

     WYOMING. The Company and Crested own a 14-acre tract in Riverton, Wyoming,
with a two-story 30,400 square foot office building (including underground
parking). The first floor is rented to affiliates, nonaffiliates and government
agencies; the second floor is occupied by the Company and Crested. The property
is mortgaged to the WDEQ as security for future reclamation work on the Sheep
Mountain Crooks Gap uranium properties.

     The Company and Crested (through WEA) also own a fixed base aircraft
operation, with fuel sales, and aircraft maintenance, at the Riverton Regional
Airport, including a 10,000 square foot aircraft hangar and 7,000 square feet of
associated offices and facilities. This operation is located on land leased from
the City of Riverton for a term ending December 16, 2005, with an option to
renew on mutually agreeable terms for five years.

     The Company and Crested also own 17 semi-developed lots on 26.8 acres and
63 acres of undeveloped land near the Riverton Regional Airport, and three
mountain sites covering 16 acres in Fremont County, Wyoming.

     USECC owned various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming, where about
130 people presently live. USECC sold these properties during May 2001.

     In Riverton, Wyoming, the Company owns four city lots and a 9-acre tract
with improvements including two smaller office buildings and two other buildings
with 12,000 square feet of office facilities, and repair and maintenance shops
containing 8,000 square feet.

     COLORADO. In connection with the AMAX transaction on the Mt. Emmons
molybdenum properties near Crested Butte, Colorado, USECC acquired an option
from AMAX (later Cyprus Amax) to purchase approximately 57 acres for $200,000 in
Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals - Molybdenum"
above. The property was zoned commercial and industrial, and is adjacent to
Western State College. In fiscal 1995, USECC and Cyprus Amax agreed to exercise
the option by USE and Crested agreeing to forego six quarters of advance
royalties from Cyprus Amax (the option purchase price was $200,000), plus
payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.

                                       30





     Although initial payments on the option agreements were received, the
developer is in default on the balance. In July 1998, the Company filed a
lawsuit seeking recovery of the balance owing on promissory notes and contracts.
See "Item 3 - Legal Proceedings."

     UTAH PROPERTIES. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium - Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate.


     The motel, real estate and airport operations are not dependent upon a
single customer, or a few customers, the loss of which would have a materially
adverse effect on the Company.


                            RESEARCH AND DEVELOPMENT

     No research and development expenditures have been incurred, either on the
company's account or sponsored by customers, during the past three fiscal years.

                                  ENVIRONMENTAL

     GENERAL. Operations are subject to various federal, state and local laws
and regulations regarding the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"),
and the Comprehensive Environmental Response Compensation Liability Act
("CERCLA"). With respect to mining operations conducted in Wyoming, Wyoming's
mine permitting statutes, Abandoned Mine Reclamation Act and industrial
development and siting laws and regulations also impact us. Similar laws and
regulations in California affect SGMC operations and Utah laws and regulations
effect Plateau's operations.

     Management believes the Company complies in all material respects with
existing environmental regulations.


     As of May 31, 2001, we have recorded estimated reclamation obligations of
$8,906,800. We anticipate that the reclamation efforts may not be required to be
started for many years, and that when started, paying for those reclamation
efforts will occur over several years. For further information on the
approximate reclamation costs (decommissioning, decontamination and other
reclamation efforts for which we are primarily responsible or potentially
responsible), see note K to the consolidated financial statements included with
this report.


     CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE applied
to the NRC for permission to decommission and decontaminate the plant, and to
dispose low level waste into the Sweetwater Mill tailings cell, which is
currently underway and is anticipated to be completed in September 2001.

     OTHER ENVIRONMENTAL COSTS. Actual costs for compliance with environmental
laws may vary considerably from estimates, depending upon such factors as
changes in environmental laws and regulation (e.g., the new Clean Air Act), and
conditions encountered in minerals exploration and mining. USE does not
anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to protect the
environment, will have any substantial adverse impact on the competitive
position of the Company.


                                       31





                                    EMPLOYEES

     As of August 17, 2001, USE had approximately 55 full-time employees.
Crested uses approximately 50 percent of the time of USE employees, and
reimburses USE on a cost reimbursement basis.

                              MINING CLAIM HOLDINGS

     TITLE. Nearly all the uranium mining properties held by the GMMV, USE,
USECC and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also pay certain rental fees annually to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerabilities not associated with
other types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the government, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling metal prices,
claims which were valid when located could become invalid if challenged.

     RMG's properties and mineral leases of BLM, state and fee lands require
annual cash payments of approximately $233,000 during fiscal 2002. RMG is
obligated for $48,900 of this amount to keep the leases in effect.

     PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on operations cannot be determined conclusively until such
revision is enacted; however, such legislation could materially increase the
carrying costs of mineral properties which are located on federal unpatented
mining claims, and could increase both the capital and operating costs for such
projects and impair the ability to hold or develop such properties.

ITEM 3.  LEGAL PROCEEDINGS

     Material pending proceedings are summarized below. Other proceedings which
were pending in fiscal 2001 have been settled or otherwise finally resolved.

SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION

     In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners

                                       32





partnership for uranium mining and marketing, and activities of the parties
outside SMP. Arbitration proceedings were initiated by CRIC in June 1991 and in
July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S.
District Court (District of Colorado) in Civil No. 91B1153. Later, USECC filed
another suit for the standby costs at the SMP mines against SMP in the Colorado
State Court. The Federal Court stayed both the arbitration proceedings and the
State Court case. In February 1994, all of the parties agreed to exclusive and
binding arbitration of the disputes before the American Arbitration Association
("AAA"), for which the legal claims made by both sides included fraud and
misrepresentation, breach of contract, breach of duties owed to the SMP
partnership, and other claims.

     The AAA panel (the "Panel") entered an Order and Award (the "Order") in
April 1996 and clarified the Order on July 3, 1996, finding generally in favor
of USE and Crested on certain of their claims (including the claims for
reimbursement for standby maintenance expenses and profits denied SMP in Nukem's
trading of uranium), and in favor of Nukem/CRIC and against USE and Crested on
certain other claims, and imposing a constructive trust in favor of Sheep
Mountain Partners on uranium contracts Nukem entered into to purchase uranium
from CIS republics. USECC filed a petition for confirmation of the Order and on
June 30, 1997, and the U.S. District Court confirmed the Order in its Second
Amended Judgment (the "Judgment"). Thereafter, Nukem/CRIC appealed the Judgment
to the 10th Circuit Court of Appeals ("CCA").

     A three judge panel of the 10th CCA issued an Order and Judgment on October
22, 1998, which unanimously affirmed the Federal District Court's Second Amended
Judgment without modification. The ruling affirmed (i) the imposition of a
constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium,
the uranium acquired pursuant to those rights, and the profits therefrom; and
(ii) the damage award against Nukem/CRIC. As a result of the ruling of the 10th
CCA, USE and Crested received an additional $6,077,264 (including interest and
court costs) from Nukem in February 1999 for a total net monetary award of
$15,468,625 in the arbitration/litigation, and equitable relief in the form of
USE's and Crested's interest in SMP, which holds the constructive trust over the
CIS contracts. Nukem/CRIC filed two motions for entry of final satisfaction of
Judgment. The U.S. District Court denied both motions, Nukem again appealed to
the 10th CCA, which again affirmed the District Court's ruling, and held that
Nukem/CRIC had not demonstrated that the Judgment had been satisfied because
they had not provided USECC with an accounting of the partnerships assets.

     In February 2001, the U.S. District Court appointed a Special Master to
determine the amounts, if any, owed by Nukem to SMP pursuant to the constructive
trust. The Special Master entered an Order on July 2, 2001 regarding the
formulation of an accounting plan. The District Court has set a hearing for
October 5, 2001 on the status of the accounting.

CONTOUR DEVELOPMENT LITIGATION

     On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado, Case No. 98WM1630, against Contour Development Company, L.L.C.
and entities and persons associated with Contour Development Company, L.L.C.
(together, "Contour") seeking compensatory and consequential damages of more
than $1.3 million from the defendants for dealings in real estate owned by USE
and Crested in Gunnison, Colorado. The Contour defendants asserted a
counterclaim asking for payment of attorneys fee and costs. Discovery has been
completed and the final pretrial conference is scheduled for October 2, 2001,
when the court will schedule the trial date. Trial is expected in early 2002.

     See "Business - Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above.


                                       33





SGMC LITIGATION

     In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM near the town of Sutter Creek, Amador County,
California. A number of conditions were attached to the original CUP which
accommodated local citizen and government agency concerns about noise, waste
disposal, traffic and other aspects of the proposed mining operation.

     In 1997 and 1998, SGMC proposed amendments to the CUP for a new design of
the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. The new
design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more land for waste disposal and other purposes.
The certification and approval by the Amador County Planning Commission of the
Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by a local citizens project opposition group) to the
Amador County Board of Supervisors. In August and September 1998, the Board of
Supervisors certified the FSEIR and approved the amendments to the CUP.

     On September 28, 1998 a lawsuit was filed in Amador County Superior Court,
California (Case No. 98 CV 3298) by Concerned Citizens of Amador County as
plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. A hearing was held on June
7, 1999 and the Court denied all claims by the Plaintiffs Concerned Citizens who
appealed the decision. Oral arguments were made to the appellate court on August
20, 2001.

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

     On December 8, 2000, the shareholders approved the following matter at the
annual shareholders' meeting held at the company's offices at 877 North 8th
West, Riverton, WY

Re-election of directors:



Name of Director        Votes For      Votes Against      Abstain       Votes Withheld
----------------        ---------      -------------      -------       --------------

                                                                
John L.  Larsen         8,435,903          3,285           61,359             900
Keith G.  Larsen        8,435,903          3,285           61,359           3,731


INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.

     The following are the two executive officers of USE as of the date of this
Form 10-K/A; these persons devote their full time to the Company's business. Max
Evans was Secretary for USE and President of Crested, until his death on
February 28, 2002.

     ROBERT SCOTT LORIMER, age 50, has been the Chief Accounting Officer for
both USE and Crested for more than the past five years. Mr. Lorimer also has
been Chief Financial Officer for both these companies since May 25, 1991, their
Treasurer since December 14, 1990, and Vice President Finance since April 1998.
He serves at the will of each board of directors. There are no understandings
between Mr. Lorimer and any other person, pursuant to which he was named as an
officer, and he has no family relationship with any of the other executive
officers or directors of USE or Crested. During the past five years, Mr. Lorimer
has not been involved in any Reg. S-K Item 401(f) listed proceeding.


                                       34





     DANIEL P. SVILAR, age 72, has been General Counsel for USE and Crested for
more than the past five years. He also has served as Secretary and a director of
Crested, and Assistant Secretary of USE. His positions of General Counsel to,
and as officers of the companies, are at the will of each board of directors.
There are no understandings between Mr. Svilar and any other person pursuant to
which he was named as officer or General Counsel. He has no family relationships
with any of the other executive officers or directors of USE or Crested, except
his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar
has not been involved in any Reg. S-K Item 401(f) proceeding.

                                     PART II

ITEM 5.  MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS

(a)  Market Information

     Shares of USE common stock are traded on the over-the-counter market, and
prices are reported on a "last sale" basis by the National Market System ("NMS")
of the National Association of Securities Dealers Automated Quotation System
("Nasdaq"). The range by quarter of high and low sales prices is set forth below
for fiscal 2001 and 2000.

                                                   High             Low
                                                   ----             ---
     Fiscal year to ended May 31, 2001
          First quarter ended 8/31/00            $ 3.00           $ 1.75
          Second quarter ended 11/30/00            3.375            1.75
          Third quarter ended 2/28/01              4.00             2.00
          Fourth quarter ended 5/31/01             6.25             3.563

     Fiscal year ended May 31, 2000
          First quarter ended 8/31/99            $ 5.09           $ 3.25
          Second quarter ended 11/30/99            4.50             3.19
          Third quarter ended 2/29/00              3.88             3.13
          Fourth quarter ended 5/31/00             3.63             2.06

(b) Holders

(1) At August 17, 2001 , the closing bid price was $4.23 per share and there
were approximately 733 shareholders of record. As of August 17, 2001, we have
7,202,697 shares of common stock issued and outstanding, which do not include
shares owned by our subsidiaries or shares in officers' and directors' names
that are subject to forfeiture.

(2) Not applicable.

(c) We have not paid any cash dividends with respect to common stock. There are
no contractual restrictions on our present or future ability to pay cash
dividends, however, we intend to retain any earnings in the near future for
operations.


                                       35





ITEM 6.  SELECTED FINANCIAL DATA.

     The following tables show certain selected historical financial data for
USE for the five years ended May 31, 2001. The selected financial data is
derived from and should be read with the financial statements for USE included
in this Report.



                                                                      May 31,
                               ---------------------------------------------------------------------------------
                                    2001             2000             1999              1998            1997
                               ------------      ------------     ------------      ------------    ------------
                                                                                     
Current assets                 $  3,330,000      $  3,456,800     $ 12,718,900      $ 14,301,000    $ 4,400,900
Current liabilities               2,396,700         6,617,900        5,355,600         6,062,100       1,393,900
Working capital (deficit)           933,300        (3,161,100)       7,363,300         8,238,900       3,007,000
Total assets                     30,465,200        30,876,100       33,391,000        45,019,100      30,387,100
Long-term obligations(1)         14,981,500        14,025,200       14,526,900        14,468,600      14,377,200
Shareholders' equity              7,320,600         4,683,800       10,180,300        17,453,500      12,723,600


(1)Includes $8,906,800, $8,906,800, $8,860,900, $8,778,800, and $8,751,800 of
accrued reclamation costs on mining properties at May 31, 2001, 2000, 1999, 1998
and 1997, respectively. See Note K of Notes to Consolidated Financial
Statements.




                                                               For Years Ended May 31,
                                 -----------------------------------------------------------------------------------
                                     2001               2000              1999              1998            1997
                                 ------------     --------------     -------------     ------------     ------------
                                                                                         
Operating revenues               $  5,501,600     $    6,888,800     $   3,788,600     $  6,132,600     $  3,015,100

Loss from continuing
   operations                      (7,029,700)       (11,950,400)      (23,078,300)      (4,984,900)      (5,587,700)

Other income & expenses             8,730,800            802,200         7,020,500        5,349,900        1,595,700

(Loss) income before minority
   interests, equity in (loss)
   income of affiliates,
   discontinued operations,
   and income taxes                 1,701,100        (11,148,200)      (16,057,800)        (365,000)      (3,992,000)

Minority interest in loss
   (income) of consolidated
   subsidiaries                       220,100            509,300         4,468,400         (772,500)         672,300

Equity in loss of affiliates           --                 (2,900)          (59,100)        (575,700)        (690,800)

Income taxes                           --                --                --               --               --

Discontinued operations
   net of tax                          --                --                --               --               286,000

Preferred stock dividends            (150,000)           (20,800)          --               --               --

Net (loss) income
   to common shareholders        $  1,771,200     $  (10,662,600)    $ (11,648,500)    $   (983,200)    $ (3,724,500)




                                       36








                                                                        May 31,
                                        ----------------------------------------------------------------------
                                          2001            2000           1999           1998            1997
                                        --------       ---------       ---------      --------       ---------
Per shares financial data

                                                                                      
Operating revenues                      $   0.70       $   0.91        $   0.53       $   0.92       $   0.60

Loss from continuing operations            (0.90)         (1.57)          (3.18)         (0.75)         (0.78)

Other income & expenses                     1.11           0.11            0.93           0.80           0.23

(Loss) income before minority
   interests, equity in income
   (loss) of affiliates,
   discontinued operations,
   and income taxes                         0.21          (1.46)          (2.25)          0.05          (0.55)

Minority interest in loss (income)
   of consolidated subsidiaries              .03            .07             .63          (0.12)          0.10

Equity in loss of affiliates                --             --             (0.01)         (0.08)         (0.10)

Income taxes                                --             --              --             --             --

Preferred stock dividends                  (0.01)          --              --             --             --

Net income (loss)
   per share, basic                     $   0.23       $  (1.39)       $  (1.63)      $  (0.15)      $  (0.55)

Net income (loss)
   per share diluted                    $   0.21       $  (1.39)       $  (1.63)      $  (0.15)      $  (0.55)

Cash dividends per share                $    -0-       $    -0-        $    -0-       $    -0-       $    -0-






                                       37





ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

     The following is Management's Discussion and Analysis of significant
factors which have affected our liquidity, capital resources and results of
operations during the periods included in the accompanying financial statements.
The discussion contains forward-looking statements that involve risks and
uncertainties. Due to uncertainties in our business, actual results may differ
materially from the discussion below.

LIQUIDITY AND CAPITAL RESOURCES


     During the year ended May 31, 2001, we experienced an increase in working
capital of $4,094,400 consisting mainly as a result of the non-cash revenue
recognition of the deferred GMMV purchase option of $4,000,000. At May 31, 2000,
we had a working capital deficit of $3,161,100 as compared to working capital of
$933,300 at May 31, 2001.


     Components of the increase in working capital were increases in accounts
receivable trade $264,300; current portion of long term notes receivable of
$225,000; assets held for resale and other assets of $137,000; along with
decreases in accounts payable of $279,500; deferred GMMV purchase option of
$4,000,000, and current portion of long-term debt of $141,700. These increases
in working capital were offset by reductions in; cash of $230,900; accounts
receivable affiliates of $434,700, and inventory of $87,500, along with an
increase in the outstanding balance under the line of credit of $200,000.
Inventories decreased by $87,500 at May 31, 2002 as a result of certain retail
commercial operations in Southern Utah being subcontracted or leased as ongoing
concerns to third parties. In connection with these entities' assumption of our
retail operations in Southern Utah, the inventories associated with these retail
operations were sold to the third parties at cost. These inventories consisted
primarily of fuel and convenience store consumable inventories.

     On September 11, 2000, we entered into a settlement agreement with
Kennecott relating to a legal dispute between the joint venture partners in the
GMMV operations. As a result of this settlement, we received certain GMMV
equipment with an approximate value equal to the Company's investment in GMMV of
$727,000; cash payments of $3,250,000, and the GMMV terminated its deferred GMMV
purchase option. In exchange, we forgave our balance due from GMMV of $367,000
reducing the amounts due from affiliated entities. We used the proceeds to pay
our trade creditors and other liabilities; therefore, accounts payable
decreased.

     Accounts receivable trade at May 31, 2000, consisted primarily of amounts
due for contract drilling and construction work. These receivables were
collected during the year ended May 31, 2001. This reduction in accounts
receivable trade was offset by amounts due from the auction of certain mining
and drilling equipment during the last month of the fiscal year ended May 31,
2001. Accounts receivable affiliates were reduced due to the collection of
accounts receivable from GMMV and accounts and notes receivable from employees.
The reduction of debt from employees consisted of the payment of cash,
settlement agreements, and the receipt of 5,000 shares of the Company's common
stock which was pledged for the indebtedness. These shares were recorded as
treasury shares at the value of the principal portion of the debt reduction.

     During the year ended May 31, 2001, we sold our controlling interest in
Ruby Mining Company ("Ruby") to Admiralty Corporation ("Admiralty") of Atlanta
Georgia. Admiralty has developed technology that differentiates ferrous from
non-ferrous metals in sea water. This technology is used to explore for and
recover sunken treasures. Admiralty paid us $100,000 and signed a promissory
note for $225,000 for the purchase of Ruby. At the time of this report, the
promissory note was in default but we believe that Admiralty will pay the amount
due or we will reach other terms to satisfy the debt. We maintained a 4%
ownership position in Ruby by retaining 900,000 shares of its common stock. We
continue to be in frequent contact with Admiralty Corporation's management and
discuss the collectability of the note. Our management has been assured that the
note will be paid when funding is generated by Admiralty. We have also begun to
liquidate

                                       38





our holdings in the common stock of Ruby. The current market is approximately
$0.18 per share. Any proceeds realized from the sale of the Ruby shares will be
first applied against the loan. At such time as the note balance is paid in
full, either through the sale of Ruby stock or payments from Admiralty, the
remaining payments on the note from Admiralty once the note is paid in full will
be recognized as revenue. The sale of the Ruby stock as well as management's
discussions with Admiralty provide reasonable assurance that the note will be
collected.


     Assets held for resale and other assets increased by $137,000 as a result
of increased deferred compensation due to the funding of the 1996 Stock Award
Program. Inventories decreased by $87,500 as of May 31, 2001 as a result of our
leasing all of the commercial operations in southern Utah to third parties with
the exception of the motel which has no retail inventory. Current portion of
long-term debt was reduced by $141,700 from the proceeds of the sale of certain
equipment. The line of credit was drawn down by an additional $200,000 during
fiscal 2001 to finance operations.

     During the year ended May 31, 2001, investing and financing operations
generated cash of $983,500 and $258,500, respectively while operation activities
consumed cash of $1,472,900, for a net decrease in cash of $230,900. Other
non-cash components of the net profit for the year ended May 31, 2001 were
depreciation of $1,254,000, an impairment on mineral interests of $123,800 and
non-cash compensation of $501,700, the majority of which was the annual
contribution to the Company's ESOP. The net change in assets and liabilities
resulted in a $242,000 decrease of cash.


     Although operations resulted in a profit of $1,771,200, a large portion of
this gain was the non-cash transaction of recognizing $4,000,000 of deferred
income from GMMV as other income although we had received the cash in a previous
period.


     Investing activities provided $983,500 in cash during the twelve months
ended May 31, 2001. Proceeds from the sale of property and equipment provided
$2,608,000. Investment activity in coalbed methane properties used $1,187,800
net. This net use of cash is a result of (1) RMG purchasing $2.0 million of
coalbed methane properties, (2) RMG spending $435,600 in property development
and (3) the receipt of $1.3 million from Suncor Energy Natural Gas America, Inc.
("SENGAI"). Please see "Capital Resources." We also purchased various pieces of
equipment which used $311,400 in cash. Interest earned on cash investments held
for reclamation was reinvested, which used cash of $417,700.


     Cash was consumed in financing activities as the result of paying $828,400
on our debt. This reduction of debt was offset by new debt of $619,100 and
additional draw down of the line of credit of $200,000. The increase in debt
during fiscal 2001 was to fund the purchase of drilling and construction
equipment and the partial financing of our real estate operations in southern
Utah of $300,000. We also received $288,400 as a result of our employees
exercising options to purchase USE common shares.

     We issued 8,532 shares of our restricted common stock valued at $19,100
during year ended May 31, 2001 as non-cash compensation to our outside
directors. We also issued 15,000 shares of our common stock valued at $70,500 as
compensation to a consultant and 53,837 shares of common stock valued at
$288,000 to our employee retirement plan. As a partial retirement of employee
debt, we received 5,000 shares of stock valued at $20,600, which became treasury
stock.


                                       39






CAPITAL RESOURCES


     The primary sources of our capital resources are cash on hand; collection
of receivables; projected equity financing of our coalbed methane affiliate RMG;
production of coalbed methane gas; sale of excess mine, construction and
drilling equipment; sale of partial ownership interest in mineral properties;
proceeds under the line of credit; receipt of contracted amounts from the sale
of interests in coalbed methane properties, and the final determination of the
SMP arbitration/litigation. We also will continue to receive revenues from our
motel and real estate operations in southern Utah along with airport operations
in Wyoming.


     We currently have a $750,000 line of credit with a commercial bank. At the
time of this report (10-K), this line of credit has been drawn down by $350,000.
We also have a $500,000 line of credit through our affiliate Plateau Resources.
This line of credit is for the development of the Ticaboo town site in southern
Utah. Plateau has drawn down this financing facility $300,000 which is repayable
over 10 years. All payments on these lines of credit are current as of the
filing date of this report.

     Subsequent to May 31, 2001 we received $796,000 for 199,000 (restricted
under rule 144) shares of common stock through a private placement. We also
received $288,400 during fiscal 2001 and $310,200 during the first quarter of
2002 from employees as they exercised options. We continue to seek equity or
industry partner financing for RMG.

     We have entered into agreements with two companies to sell a portion of our
interest in our coalbed methane properties. The first agreement is an option and
farm-in agreement with Suncor Energy Natural Gas America Inc. ("SENGAI"), a
subsidiary of Suncor Energy Inc. of Alberta, Canada. SENGAI is obligated to fund
$2,000,000 of a $2,250,000 drilling program in 112,000 acres in part of our
Montana coalbed methane properties. SENGAI, under the agreement, may exercise
its option by paying $3,684,300, of which we would receive $2,763,200, in
February of 2002. Should SENGAI exercise this option it would own a 50% working
interest and a 40% net revenue interest in the 112,000 acres. Our interest would
be reduced to 12.5% working interest and 10% net revenue interest should SENGAI
exercise its option, subject to further reduction to 6.25% and 5% respectively
by separate agreement with Carrizo.

     We also have entered into a purchase and sale agreement with CCBM, Inc.
("CCBM"), a wholly owned subsidiary of Carrizo Oil & Gas, Inc. of Houston Texas.
CCBM signed a promissory note in the amount of $7,500,000 to purchase a 50%
undivided interest in all of our coalbed methane properties. The promissory note
bears interest at an annual rate of 8% and is payable at the rate of $125,000
per month plus interest for forty-one months with a balloon on the forty-second
month.

     CCBM is also obligated to fund an initial drilling program in the amount of
$5,000,000 of which $2,500,000 will be credited to RMG's benefit. Of this amount
$250,000 will be committed to satisfy RMG's commitment under the SENGAI drilling
program (as well as the remaining obligation under the Quantum agreement). For
this advance of funds, CCBM will receive a 50% interest in RMG's interest in
those wells drilled under the SENGAI initial drilling program and a 6.25 %
working interest, and a 5% net revenue interest in the 112,000 acres which are
subject to the SENGAI option. Should SENGAI not exercise its option, CCBM has
the option to purchase an additional 18.75% of the total ownership in the
112,000 acres at the

                                       40





same price per net acre in the SENGAI agreement. If this occurs both RMG and
CCBM would own undivided 25% interests in the 112,000 acres.

     We believe that these cash resources will be sufficient to sustain
operations during fiscal 2002. We will continue to pursue equity and industry
partner financing to fund our portion of RMG's obligations under the drilling
programs.

CAPITAL REQUIREMENTS


     The primary requirements for our working capital during fiscal 2002 are
expected to be development of coalbed methane properties; the cost of holding
our shut down uranium properties; the shut down SGMC properties holding costs,
and general and administrative costs. Estimated working capital requirements for
the full fiscal year 2002 are $5.3 million; development and holding costs for
coalbed methane properties $550,000; costs to hold shut down uranium properties
and associated real estate assets $380,000; shut down SGMC properties holding
costs $230,000, and general and administrative costs $4,140,000. These
allocations and estimates may vary depending on the level of acquisition and
drilling RMG participates in during the year.

                    EXPLORATION OF COALBED METHANE PROPERTIES
                    -----------------------------------------

     The majority of the fiscal 2002 exploration costs associated with the
coalbed methane properties of RMG has been funded through the SENGAI and CCBM
agreements. Under the CCBM purchase and sale agreement, if properties are
drilled that are owned 50% by RMG, we may be required to fund the drilling costs
for the interest ownership of the remaining non-participating parties. Should we
be required to fund any non-participating entities portion of the exploration
programs, there is a back-in provision on each property which gives RMG a
disproportionate amount of the production revenues until our cost and additional
amounts are recovered before the non-participating parties begin to receive
production funds.

                  HOLDING COSTS OF SHUT DOWN URANIUM PROPERTIES
                  ---------------------------------------------


     SMP URANIUM PROPERTIES


     The holding costs associated with the Sheep Mountain uranium properties
were approximately $33,300 per month during fiscal 2001. We continue to
implement cost cutting measures to reduce the holding costs. We are obligated to
reclaim the GMIX plant which was used to extract uranium from mine waters. We
have begun the process of reclamation and are moving and burying the GMIX plant
in the Sweetwater mill tailings cell, which belonged to the GMMV and is now
owned by Kennecott. During fiscal 2001, we expended $16,600. As of the quarter
ended February 28, 2002, the reclamation of the GMIX plant has been completed
for an additional amount of $360,000. The company is seeking final approval by
the reclamation from the regulatory agencies.


     PLATEAU RESOURCES URANIUM PROPERTIES

     Plateau owns the Ticaboo townsite, motel, convenience store, boat storage,
restaurant and lounge. Prior to fiscal 2002, we operated all of these entities.
A decision was made to lease out all but the motel operations during fiscal
2002. This decision relieved us of the obligation and expense of employees,
inventory and risk of loss for the leased operations.


                                       41






     Additionally, Plateau owns and maintains the Tony M uranium property and
Shootaring Canyon Uranium Mill. The uranium property and mill are both shut
down. We are pursuing alternative uses for these properties including the
potential sale of the uranium mill.

     SUTTER GOLD MINING COMPANY Properties

     Due to the depressed market price of gold, further work on the SGMC
properties has been deferred into the future. SGMC developed a tourism business
to cover the holding costs of the properties until such time as the price for
gold recovers. A decision was made to lease out the tourism business to a third
party. The revenues received from the lease cover a majority of our holding
costs associated with the mine shop and mineral leases. We have one employee at
the SGMC properties to preserve the core property land and equipment. SGMC is in
the process of evaluating the potential of selling certain of the non essential
land positions that it has acquired in developing a mine plan.


                                  DEBT PAYMENTS
                                  -------------

     Debt to non-related parties at May 31, 2001 was $2,294,500 as compared to
$1,184,200 at May 31, 2000. The increase in debt to non-related parties consists
primally of debt due on the financing of equipment and our corporate aircraft
which was previously leased. The balance of the debt to non-related parties, is
for the purchase of land and buildings by SGMC. All payments on the debt are
current.

     At May 31, 2001, the Company had borrowed $850,000 of its line of credit.
As of the date of the Form 10-K, the outstanding amount under the line of credit
was $350,000. This debt is secured by the pledge of equipment and real estate
assets of the Company.

                            FEDERAL INCOME TAX ISSUES
                            -------------------------

     The Internal Revenue Service ("IRS") audited our books and records for the
fiscal years ended May 31, 1993, 1994, 1995 and 1996. We have attended appeals
hearings in the Denver office of the IRS and have resolved all issues raised in
the IRS audits. Pursuant to these settlements, there were no material taxes due
as a result of the IRS audit. The fiscal years through May 31, 1996 are
therefore considered closed.

                                RECLAMATION COSTS
                                -----------------

     With the exception of any amounts that may become needed in excess of the
cash bond on the GMIX reclamation project, it is not anticipated that any of our
working capital will be used in fiscal 2002 for the reclamation of any of its
mineral property interests. The reclamation obligations are long term and are
either bonded through the use of cash bonds or the pledge of assets.

     The reclamation liability on the Plateau uranium properties is $7,382,100
which is reflected on the Balance Sheet as a reclamation liability. This
liability is fully funded by cash investments which are recorded as long term
restricted assets.

     The reclamation costs of the Sheep Mountain properties are $1,496,800 and
are covered by a reclamation bond which is secured by a pledge of certain of our
real estate assets.

     The reclamation of SGMC gold properties is approximately $27,900. This
reclamation obligation is bonded with a cash bond.


                                       42





                              RESULTS OF OPERATIONS
                              ---------------------

FISCAL 2001 COMPARED TO FISCAL 2000
-----------------------------------

Revenues:
---------

     Revenues during fiscal 2001 decreased $1,387,200 from revenues for the
previous year to $5,501,600. This decrease was primarily as a result of a
decrease in contract drilling and construction and motel, real estate and
airport operations revenues. These decreases were offset by increases in mineral
sales and management fees.


     During fiscal 2001, we received $108,500 from advance royalties, and
$334,300 from uranium contract deliveries and the sale of a uranium delivery
contract. The uranium delivered under this contract was purchased from the
market as our uranium mines are shut down. During fiscal 2000 we recorded
$132,600 from advance royalties.


     Contract drilling and construction revenues decreased by $1,346,300 during
the fiscal year 2001 due to reduced contract work for third parties. Revenues
from motel, real estate and airport operations decreased from $2,734,800 at May
31, 2000 to $2,222,400 at May 31, 2001. This decrease is as result of the mine
tour at SGMC and the boat storage, restaurant and convenience store operations
being leased out by Plateau during fiscal 2001.

     Management fees increased $161,300 to $597,800 during fiscal 2001. This
increase was due to RMG operations on which we receive a management fee.

Costs and Expenses:
-------------------


     Costs and expenses decreased by $6,307,900 during fiscal 2001 to
$12,531,300 from $18,839,200 during the previous year. This reduction in costs
and expenses came as a result of reduced contract drilling/ construction
operation expense of $2,428,700; reduced motel, real estate and airport
operations expense of $151,100; provision for doubtful accounts of $708,600; and
general and administrative costs and expenses of $3,805,900. These reductions in
costs and expenses were offset by increases in mineral holding costs of
$662,600; and abandonment of mining equipment of $123,800.


     Contract drilling and construction costs and expenses were reduced as a
result of the curtailment of contract operations for third parties during fiscal
2001. General and administrative costs during fiscal 2000 were significantly
higher than those experienced during fiscal 2001 due to a non-cash charge to
operations of $3,139,100 as a result of the issuance of common shares of RMG
stock below the market. Other reductions in General and Administrative costs and
expenses during fiscal 2001 were related to a reduction of staff.


     Operations for the fiscal year ended May 31, 2001, resulted in earnings of
$1,771,200 or $0.21 per share fully diluted as compared to a loss of $10,662,600
or $1.39 per share fully diluted for the fiscal year ended May 31, 2000.


Other Income and Expenses:
--------------------------

     As a result of the settlement of the Kennecott litigation, $7,132,800 was
recorded as revenue during fiscal 2001. This revenue has two components: (1)
Non-cash revenues as a result of the recognition of

                                       43





$4,000,000 of a deferred GMMV purchase option payment that was received in 1997
and (2) the receipt of cash from Kennecott as a result of the settlement,
$3,132,800 - net of accounts receivable from GMMV.

     During the fiscal 2001, we recognized a gain of $1,163,600 from the sale of
equipment that was determined to be surplus. One component of this amount was
the sale of certain GMMV assets that were distributed to the Company upon the
resolution of the GMMV litigation. The other main components of this increase
are the final royalty payment received from the sale of The Brunton Company of
$233,000, and the sale of a real estate property in Colorado of $264,600.

FISCAL 2000 COMPARED TO FISCAL 1999
-----------------------------------

Revenues:
---------


     During fiscal 2000, the Company recognized revenues from advance royalties
on its molybdenum property, $132,600, contract drilling and construction work in
the coalbed methane industry, $3,584,900, motel, real estate and airport
operations, $2,734,800. The Company also recognized revenues from management
fees of $436,500.

     Total revenues during fiscal 2000 were $6,888,800, an increase of
$3,100,200 from revenues of $3,788,600 in fiscal 1999. This increase was as a
result of $3,584,900 of contract drilling and construction revenues being
recorded during fiscal 2000. There were no similar revenues in fiscal 1999. This
increase in revenues was offset by decreased revenues from royalties, mineral
sales of $87,600, motel, real estate and airport operations of $148,000 and
management fees of $231,100.

     The decrease in mineral sales is as a result of the Company recognizing
revenues of $87,600 from the sale of uranium under a SMP contract during fiscal
1999. No revenues were recognized from sales of uranium during fiscal 2000. All
minerals sold under contracts were purchased on the open market as all of the
Company's properties are shut down. This decrease in uranium sales plus the a
decrease in the market price for molybdenum, which reduced the advance royalty
from Cyprus Amax during fiscal 2000 by $18,000, accounted for the reduction in
mineral sales revenues.


     Motel, real estate and airport operations decreased by $148,000 as a result
of reduced equipment rental revenues received by the Company for the rental of
equipment to the GMMV during fiscal 2000 as compared to fiscal 1999. The reduced
activity at GMMV during fiscal 2000 also was the main contributor to the reduced
management fee revenue when compared with fiscal 1999.

Operating Costs and Expenses:
-----------------------------


     Costs and expenses were reduced in fiscal 2000 by $8,027,700 to $18,839,200
from $26,866,900 during fiscal 1999. This reduction was primary as a decrease in
the impairment of mineral properties of $13,224,400. No impairment of mineral
properties was taken during fiscal 2000. During fiscal 1999, the Company
determined that an impairment should be taken on the SGMC assets of $10,718,300
and the Yellow Stone Fuels Corp.("YSFC") assets of $2,506,100. The impairment of
the SGMC and YSFC assets related to the recoverability of the Company's
investment in the mineral properties and equipment based on the then market
prices for gold and uranium. Other decreases in costs and expenses were a
$51,600 reduction in motel, real estate and airport operations as a result of
cost cutting efforts.

     Increases in costs and expenses during fiscal 2000 over fiscal 1999 are
$332,300 in mineral holding costs; $4,164,400 in contract drilling and
construction operations.



                                       44





     Costs and expenses in mineral operations during fiscal 2000 increased as a
result of increased activities for the Company's own account where mineral
operations in previous years were associated primary with joint ventures that
either reimbursed a portion or all of the costs. Contract drilling and
construction costs recorded during fiscal 2000 have no comparative costs and
expenses during fiscal 1999. These costs include all labor, equipment operating
and repair expenses and other costs associated with contract drilling and
construction. Prior to fiscal 2000, there were no contract drilling and
construction operations.

     General and Administrative costs and expenses increased by $408,000 during
fiscal 2000. Included in this increase is non-cash compensation of $3,139,100
which was as a result of the issuance of common shares of RMG stock below
market. The increase in General and Administrative costs and expenses was offset
by reductions of General and Administrative costs and expenses at SGMC and other
Company operations resulting in a net decrease in General and Administrative
costs and expenses of $2,731,100.

Other Income  and Expenses
------------  ------------

     During fiscal 1999, we recognized $6,077,300 in income from a partial
settlement of certain SMP litigation matters. There was no similar income
recognized during fiscal 2000.


     Operations resulted in a loss of $10,622,600 or $1.39 per share fully
diluted as compared to a loss of $11,648,500 or $1.63 per share fully diluted
during fiscal 1999.

                                FUTURE OPERATIONS
                                -----------------

     We have generated losses in two of the last three years as a result of
holding costs and permitting activities in the mineral segment along with
impairments of mineral assets. We have maintained some of our investments in
gold and uranium properties that continue to generate no operating revenues.
These properties require expenditures for items such as permitting, care and
maintenance, holding fees, corporate overhead and administrative expenses.
Success in the minerals industry is dependent on the price that a producer can
receive for its minerals. We cannot predict what the long term price for gold
and uranium will be and therefore cannot predict when, or if, we will generate
net income from these operations. We believe we have sufficient capital
resources to maintain our mineral properties on a standby basis through fiscal
2002. Development activities of the mineral properties and expansion of
commercial operations are dependent on the Company obtaining equity financing or
commercial loans. It may also be necessary to generate cash through the sale of
equipment or other assets.

     At May 31, 2001 we are committed to be in the coalbed methane business well
into the future. Uranium prices and market projections are being evaluated.
Decisions to liquidate part or all of the Company's uranium holdings are being
considered. We are also evaluating its commitment to the gold business and at
what time the price for gold may recover.

                          EFFECTS OF CHANGES IN PRICES
                          ----------------------------

     Mineral operations are significantly affected by changes in commodity
prices. As prices for a particular mineral increase, prices for prospects for
that mineral also increase, making acquisitions of such properties costly, and
sales advantageous. Conversely, a price decline facilitates acquisitions of
properties containing that mineral, but makes sales of such properties more
difficult. Operational impacts of changes in mineral commodity prices are common
in the mining industry.

                                       45





     NATURAL GAS. Our decisions to expand into the coalbed methane gas industry
were predicated on the projections for natural gas prices.


     URANIUM AND GOLD. Changes in the prices of uranium and gold will affect our
operational decisions the most. Currently, both gold and uranium are at
historical low prices. We continually evaluate market trends and data. We do not
plan to go forward with any additional work on our uranium and gold properties
until the market price for these metals increase and remain at profitable
levels.

     MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are not
expected to materially affect our operations during fiscal 2002. A significant
and sustained increase in demand for molybdenum would be required for the
development of the Mt. Emmons properties by Phelps Dodge since it has another
producing molybdenum mine.


ITEM 8.  FINANCIAL STATEMENTS

     Financial statements meeting the requirements of Regulation S-X for the
Company follow immediately.

                                       46





               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To U.S. Energy Corp.:

We have audited the accompanying consolidated balance sheet of U.S. ENERGY CORP.
(a Wyoming corporation) AND SUBSIDIARIES as of May 31, 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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
subsidiaries as of May 31, 2001, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.





                                                     GRANT THORNTON LLP

Denver, Colorado,
July 27, 2001



                                       47





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To U.S. Energy Corp.:

We have audited the accompanying consolidated balance sheet of U.S. ENERGY CORP.
(a Wyoming corporation) AND SUBSIDIARIES as of May 31, 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended May 31, 2000. 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 auditing standards generally accepted
in the 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, 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
subsidiaries as of May 31, 2000, and the results of their operations and their
cash flows for each of the two years in the period ended May 31, 2000, in
conformity with accounting principles generally accepted in the United States.





                                                     ARTHUR ANDERSEN LLP

  Denver, Colorado,
  September 11, 2000



                                       48





                       U.S. ENERGY CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS



                                                             May 31,
                                                 ------------------------------
                                                     2001              2000
                                                 ------------      ------------
CURRENT ASSETS:
                                                             
     Cash and cash equivalents                   $    685,500      $    916,400
     Accounts receivable:
       Trade, net of allowance of $27,800           1,319,300         1,055,000
       Affiliates                                      74,200           508,900
     Current portion of long-term notes               225,000              --
     Assets held for resale and other                 983,800           846,800
     Inventory                                         42,200           129,700
                                                 ------------      ------------
       Total current assets                         3,330,000         3,456,800

INVESTMENTS AND ADVANCES:
     Affiliates                                        16,200             9,600
     Restricted investments                         9,778,700         9,361,000
                                                 ------------      ------------
       Total investments and advances               9,794,900         9,370,600

PROPERTIES AND EQUIPMENT:

     Land                                           1,771,800         1,999,000
     Buildings and improvements                     8,425,400         8,819,800
     Machinery and equipment                        5,536,900        10,386,200
     Proved oil properties, full cost method        1,773,600         1,773,600
     Unproved coalbed methane properties,
       excluded from amortization                   5,881,700         4,727,200
                                                 ------------      ------------

       Total property and equipment                23,389,400        27,705,800
     Less-Accumulated depreciation,
       depletion and amortization                  (7,285,100)      (10,948,900)
         Net property and equipment                16,104,300        16,756,900

OTHER ASSETS:
     Accounts and notes receivable:
       Real estate sales                               42,400            58,600
       Employees                                      180,300           295,200
     Deposits and other                             1,013,300           938,000
       Total other assets                           1,236,000         1,291,800
                                                 ------------      ------------
     Total assets                                $ 30,465,200      $ 30,876,100
                                                 ============      ============





           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.


                                       49





                       U.S. ENERGY CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND SHAREHOLDERS' EQUITY



                                                                     May 31,
                                                         ------------------------------
                                                             2001               2000
                                                         ------------      ------------
CURRENT LIABILITIES:
                                                                     
     Accounts payable and accrued expenses               $  1,404,300      $  1,683,800
     Deferred GMMV purchase option                               --           4,000,000
     Current portion of long-term debt                        142,400           284,100
     Line of credit                                           850,000           650,000
                                                         ------------      ------------
       Total current liabilities                            2,396,700         6,617,900

LONG-TERM DEBT                                              2,152,100           900,100

RECLAMATION LIABILITY                                       8,906,800         8,906,800

OTHER ACCRUED LIABILITIES                                   2,777,800         3,073,500

DEFERRED TAX LIABILITY                                      1,144,800         1,144,800

MINORITY INTERESTS                                          1,177,800         1,124,600

COMMITMENTS AND CONTINGENCIES

FORFEITABLE COMMON STOCK,
     $.01 par value; 433,788 and 396,608
     shares issued, forfeitable until earned                2,748,600         2,584,600

PREFERRED STOCK,
     $.01 par value; 1,000 shares authorized,
       200 shares issued and outstanding                    1,840,000         1,840,000

SHAREHOLDERS' EQUITY:
     Common stock, $.01 par value; 20,000,000 shares
       authorized; 8,989,047 and 8,763,155
       shares issued, respectively                             90,000            87,700
     Additional paid-in capital                            38,681,600        37,797,700
     Accumulated deficit                                  (28,300,000)      (30,071,200)
     Treasury stock at cost, 949,725 and 944,725
       shares, respectively                                (2,660,500)       (2,639,900)
     Unallocated ESOP contribution                           (490,500)         (490,500)
                                                         ------------      ------------
         Total shareholders' equity                         7,320,600         4,683,800
                                                         ------------      ------------
       Total liabilities and shareholders' equity        $ 30,465,200      $ 30,876,100
                                                         ============      ============



           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.


                                       50





                       U.S. ENERGY CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                       Year Ended May 31,
                                                      ------------------------------------------------
                                                           2001              2000              1999
                                                      ------------      ------------      ------------

OPERATING REVENUES:
                                                                                 
    Motel, real estate and airport operations         $  2,222,400      $  2,734,800      $  2,882,800
    Contract drilling and construction                   2,238,600         3,584,900              --
    Mineral sales                                          334,300              --              87,600
    Mineral royalties                                      108,500           132,600           150,600
    Management fees                                        597,800           436,500           667,600
                                                      ------------      ------------      ------------
                                                         5,501,600         6,888,800         3,788,600

OPERATING COSTS AND EXPENSES:
    Motel, real estate and airport operations            3,236,200         3,387,300         3,438,900
    Contract drilling and construction operations        1,750,500         4,179,200            14,800
    Mineral holding costs                                3,369,300         2,706,700         2,374,400
    General and administrative                           4,051,500         7,857,400         7,449,400
    Impairment of mineral properties                          --                --          13,224,400
    Abandonment of mining equipment                        123,800              --                --
    Provision for doubtful accounts                           --             708,600           365,000
                                                      ------------      ------------      ------------
                                                        12,531,300        18,839,200        26,866,900
                                                      ------------      ------------      ------------

OPERATING LOSS                                          (7,029,700)      (11,950,400)      (23,078,300)

OTHER INCOME & EXPENSES
    Gain on sales of assets                              1,163,600            71,400           140,100
    Litigation settlements, net                          7,132,800              --           6,077,300
    Interest income                                        699,700           813,600           847,600
    Interest expense                                      (265,300)          (82,800)          (44,500)
                                                      ------------      ------------      ------------
                                                         8,730,800           802,200         7,020,500
                                                      ------------      ------------      ------------

INCOME (LOSS) BEFORE MINORITY
    INTEREST AND EQUITY OF LOSS
     OF AFFILIATES                                       1,701,100       (11,148,200)      (16,057,800)

MINORITY INTEREST IN LOSS
    OF CONSOLIDATED SUBSIDIARIES                           220,100           509,300         4,468,400

EQUITY IN LOSS OF AFFILIATES                                  --              (2,900)          (59,100)
                                                      ------------      ------------      ------------




(Continued)


           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.


                                       51





                       U.S. ENERGY CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (CONTINUED)




                                                                      Year Ended May 31,
                                                      ------------------------------------------------
                                                            2001             2000             1999
                                                      ------------     -------------     -------------

                                                                                
INCOME (LOSS) BEFORE
     INCOME TAXES                                        1,921,200       (10,641,800)      (11,648,500)

PROVISION FOR INCOME TAXES                                    --                --                --
                                                      ------------     -------------     -------------

NET INCOME (LOSS)                                        1,921,200       (10,641,800)      (11,648,500)

PREFERRED STOCK DIVIDENDS                                 (150,000)          (20,800)             --
                                                      ------------     -------------     -------------

NET INCOME (LOSS) AVAILABLE

     TO COMMON SHAREHOLDERS                           $  1,771,200     $ (10,662,600)    $ (11,648,500)
                                                      ============     =============     =============

NET INCOME (LOSS) PER SHARE BASIC
     FROM CONTINUED OPERATIONS                                0.23             (1.39)            (1.63)
     FROM DISCONTINUED OPERATIONS                             --                --                --
                                                      ------------     -------------     -------------
                                                              0.23             (1.39)            (1.63)
                                                      ============     =============     =============

NET INCOME (LOSS) PER SHARE DILUTED
     FROM CONTINUED OPERATIONS                                0.21             (1.39)            (1.63)
     FROM DISCONTINUED OPERATIONS                             --                --                --
                                                      ------------     -------------     -------------
                                                              0.21             (1.39)            (1.63)
                                                      ============     =============     =============

BASIC WEIGHTED AVERAGE
     SHARES OUTSTANDING                                  7,826,001         7,673,475         7,137,114
                                                      ============     =============     =============

DILUTED WEIGHTED AVERAGE
     SHARES OUTSTANDING                                  8,487,680         7,673,475         7,137,114
                                                      ============     =============     =============




           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.


                                       52





                       U.S. ENERGY CORP. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



                                                Common Stock        Additional
                                         -----------------------      Paid-In      Accumulated
                                         Shares           Amount      Capital        Deficit
                                         ------           ------    ----------     -----------

                                                                      
Balance May 31, 1998                    7,523,492   $     75,200   $ 28,526,200   $ (7,760,100)

Funding of ESOP                            89,600            900        357,500           --
Issuance of employee options
   below market value                        --             --          262,000           --
Issuance of common stock
   for services rendered                  131,136          1,300        386,400           --
Issuance of common stock
   for exercise of YSFC exchange          677,167          6,800      2,591,500           --
Fair value of warrants and options
   issued for services rendered              --             --          176,000           --
Fair value of warrants issued for
   exercise of YSFC exchange                 --             --          167,000           --
Issuance of common
   stock to acquire SGMC
   special warrants, net of
   offering costs                          89,059          1,000        278,900           --
Purchase of treasury stock                   --             --             --             --
Forfeitable shares earned                  40,170            400        269,400           --
Net loss                                     --             --             --      (11,648,500)
                                        ---------   ------------   ------------   ------------

Balance May 31, 1999                    8,550,624   $     85,600   $ 33,014,900   $(19,408,600)
                                        =========   ============   ============   ============


                                      53a



                                           Treasury Stock          Unallocated         Total
                                         -----------------------       ESOP        Shareholders'
                                         Shares        Amount      Contribution        Equity
                                         ------        ------      ------------    -------------


                                                                        
Balance May 31, 1998                      865,943   $ (2,460,800)   $   (927,000)   $ 17,453,500

Funding of ESOP                              --             --              --           358,400
Issuance of employee options
   below market value                        --             --              --           262,000
Issuance of common stock
   for services rendered                     --             --              --           387,700
Issuance of common stock
   for exercise of YSFC exchange             --             --              --         2,598,300
Fair value of warrants and options
   issued for services rendered              --             --              --           176,000
Fair value of warrants issued for
   exercise of YSFC exchange                 --             --              --           167,000
Issuance of common
   stock to acquire SGMC
   special warrants, net of
   offering costs                            --             --              --           279,900
Purchase of treasury stock                 64,589       (123,800)           --          (123,800)
Forfeitable shares earned                    --             --              --           269,800
Net loss                                     --             --              --       (11,648,500)
                                          -------   ------------    ------------    ------------

Balance May 31, 1999                      930,532   $ (2,584,600)   $   (927,000)   $ 10,180,300
                                          =======   ============    ============    ============



Total Shareholders' Equity at May 31, 1999 does not include 339,208 shares currently issued but
forfeitable if certain conditions are not met by the recipients.  "Basic and Diluted Weighted
Average Shares Outstanding" also includes the 812,915 shares of U.S. Energy common stock held by
majority-owned subsidiaries, which, in consolidation, are treated as treasury shares.


The accompanying notes to consolidated financial statements are an integral part of these statements.



                                       53b








                       U.S. ENERGY CORP. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                   (CONTINUED)



                                              Common Stock          Additional
                                         -----------------------      Paid-In      Accumulated
                                         Shares           Amount      Capital        Deficit
                                         ------           ------    ----------     -----------

                                                                      

Balance May 31, 1999                    8,550,624   $     85,600   $ 33,014,900   $(19,408,600)

Funding of ESOP                           123,802          1,200        370,200           --
Issuance of common stock
   to outside directors                     6,020            100         21,000           --
Issuance of common stock
   for purchase of subsidiary stock        73,109            700        259,900           --

Forfeitable shares earned                   9,600            100         88,000           --
Treasury stock from consolidation
   of subsidiaries Ruby Mining Co.
   and Northwest Gold, Inc.                  --             --             --             --
Unrealized gain on sale of
   subsidiary stock                          --             --        1,053,700           --
Non-cash compensation
   paid by subsidiary                        --             --        2,990,000           --
Writedown of unallocated
   ESOP contribution                         --             --             --             --

Net Loss                                     --             --             --      (10,662,600)
                                     ------------   ------------   ------------   ------------

Balance May 31, 2000                    8,763,155   $     87,700   $ 37,797,700   $(30,071,200)
                                     ============   ============   ============   ============



                                      54a




                                             Treasury Stock          Unallocated         Total
                                           ----------------------       ESOP        Shareholders'
                                           Shares        Amount      Contribution        Equity
                                           ------        ------      ------------    -------------


                                                                        
Balance May 31, 1999                      930,532   $ (2,584,600)   $   (927,000)   $ 10,180,300

Funding of ESOP                              --             --              --           371,400
Issuance of common stock
   to outside directors                      --             --              --            21,100
Issuance of common stock
   for purchase of subsidiary stoc           --             --              --           260,600

Forfeitable shares earned                    --             --              --            88,100
Treasury stock from consolidation
   of subsidiaries Ruby Mining Co.
   and Northwest Gold, Inc.                14,193        (55,300)           --           (55,300)
Unrealized gain on sale of
   subsidiary stock                          --             --              --         1,053,700
Non-cash compensation
   paid by subsidiary                        --             --              --         2,990,000
Writedown of unallocated
   ESOP contribution                         --             --           436,500         436,500

Net Loss                                     --             --              --       (10,662,600)
                                          -------   ------------    ------------    ------------

Balance May 31, 2000                      944,725   $ (2,639,900)   $   (490,500)   $  4,683,800
                                          =======   ============    ============    ============



Total Shareholders' Equity at May 31, 2000 does not include 396,608 shares currently issued but
forfeitable if certain conditions are not met by the recipients.  "Basic and Diluted Weighted
Average Shares Outstanding" also includes the 827,108 shares of U.S. Energy common stock held
by majority-owned subsidiaries, which, in consolidation, are treated as treasury shares.


The accompanying notes to consolidated financial statements are an integral part of these statements.




                                      54b








                       U.S. ENERGY CORP. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                   (CONTINUED)



                                              Common Stock          Additional
                                         -----------------------      Paid-In      Accumulated
                                         Shares           Amount      Capital        Deficit
                                         ------           ------    ----------     -----------

                                                                      

Balance May 31, 2000                    8,763,155   $     87,700   $ 37,797,700   $(30,071,200)

Funding of ESOP                            53,837            500        287,500           --
Issuance of common stock
   to outside directors                     8,532            100         19,100           --
Forfeitable shares earned                  29,820            300        193,900           --
Issuance of common stock
   for services rendered                   15,000            200         70,400           --
Treasury stock from payment
   on balance of note receivable             --             --             --             --
Sale of Ruby Mining                          --             --           25,800           --
Issuance of common stock
   for exercised options                  118,703          1,200        287,200           --
Net income                                   --             --             --        1,771,200
                                        ---------   ------------   ------------   ------------

Balance May 31, 2001                    8,989,047   $     90,000   $ 38,681,600   $(28,300,000)
                                        =========   ============   ============   ============



                                      55a




                                             Treasury Stock          Unallocated         Total
                                           ----------------------       ESOP        Shareholders'
                                           Shares        Amount      Contribution        Equity
                                           ------        ------      ------------    -------------


                                                                        

Balance May 31, 2000                      944,725   $ (2,639,900)   $   (490,500)   $  4,683,800

Funding of ESOP                              --             --              --           288,000
Issuance of common stock
   to outside directors                      --             --              --            19,200
Forfeitable shares earned                    --             --              --           194,200
Issuance of common stock
   for services rendered                     --             --              --            70,600
Treasury stock from payment
   on balance of note receivable            5,000        (20,600)           --           (20,600)
Sale of Ruby Mining                          --             --              --            25,800
Issuance of common stock
   for exercised options                     --             --              --           288,400
Net income                                   --             --              --         1,771,200
                                     ------------   ------------    ------------    ------------

Balance May 31, 2001                      949,725   $ (2,660,500)   $   (490,500)   $  7,320,600
                                     ============   ============    ============    ============



Total Shareholders' Equity at May 31, 2001 does not include 433,788 shares currently issued but
forfeitable if certain conditions are not met by the recipients.  "Basic and Diluted Weighted
Average Shares Outstanding" also includes  814,496 shares of common stock held by majority-owned
subsidiaries, which, in consolidation, are treated as treasury shares.


The accompanying notes to consolidated financial statements are an integral part of these statements.




                                       55b





                       U.S. ENERGY CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                  Year Ended May 31,
                                                         2001            2000             1999
                                                     ------------    -------------   -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
                                                                            
     Net income (loss)                               $  1,771,200    $ (10,662,600)  $ (11,648,500)
     Adjustments to reconcile net income (loss)
       to net cash used in operating activities:
         Minority interest in loss of
           consolidated subsidiaries                     (220,100)        (509,300)     (4,468,400)
         Depreciation and amortization                  1,254,000        1,273,000       1,115,100
         Impairment of mineral interests                  123,800             --        13,224,400
         Noncash services                                  19,100           21,100          25,300
         Equity in loss from affiliates                      --              2,900          59,100
         SMP settlement                                      --               --         5,026,000
         Gain on sale of assets                        (1,163,600)         (71,400)       (140,100)
         Provision for doubtful accounts                     --            708,600         465,000
         Non-cash compensation                            501,700        3,361,400         914,000
         Deferred income                               (4,000,000)            --              --
         Other                                               --               --           (36,300)
         Net changes in assets and liabilities:
           Accounts and notes receivable                1,241,000         (536,500)        946,500
           Other assets                                  (112,700)          92,200         147,700
           Accounts payable and accrued expenses         (887,300)        (217,200)     (1,318,800)
           Reclamation and other                             --             45,900          82,100
                                                     ------------    -------------   -------------
NET CASH (USED IN) PROVIDED BY
     OPERATING ACTIVITIES                              (1,472,900)      (6,491,900)      4,393,100

CASH FLOWS FROM INVESTING ACTIVITIES:
     Exploration of coalbed
       methane gas properties                        $ (1,187,800)   $  (4,727,200)  $        --
     Proceeds from sale of property and equipment       2,608,000           78,300         470,300
     Increase in restricted investments                  (417,700)        (200,600)       (271,300)
     Purchase of property and equipment                  (311,400)      (2,240,000)     (1,076,000)
     Investments in affiliates                            292,400          (12,500)         54,200
                                                     ------------    -------------   -------------
NET CASH PROVIDED BY (USED IN)
     INVESTING ACTIVITIES                                 983,500       (7,102,000)       (822,800)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of common stock          $    288,400    $        --     $        --
     Proceeds from issuance of preferred stock               --          1,840,000            --
     Proceeds from sale of stock by subsidiary               --          2,160,000            --
     Proceeds from long-term debt                         619,100          886,400          48,000
     Net proceeds from lines of credit                    200,000          650,000            --
     Purchase of treasury stock                           (20,600)            --          (123,800)
     Repayments of long-term debt                        (828,400)      (1,246,300)       (395,200)
     Cash acquired in purchase of subsidiary                 --             47,200       1,423,200
                                                     ------------    -------------   -------------
NET CASH PROVIDED BY
     FINANCING ACTIVITIES                                 258,500        4,337,300         952,200
                                                     ------------    -------------   -------------


           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.


                                       56





                       U.S. ENERGY CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONTINUED)



                                                                     Year Ended May 31,
                                                        -------------------------------------------
                                                            2001            2000           1999
                                                        ------------    ------------   ------------
                                                                              
NET (DECREASE) INCREASE IN
     CASH AND CASH EQUIVALENTS                              (230,900)     (9,256,600)     4,522,500

CASH AND CASH EQUIVALENTS AT
     BEGINNING OF PERIOD                                     916,400      10,173,000      5,650,500
                                                        ------------    ------------   ------------
CASH AND CASH EQUIVALENTS AT
     END OF PERIOD                                      $    685,500    $    916,400   $ 10,173,000
                                                        ============    ============   ============

SUPPLEMENTAL DISCLOSURE
     Income tax paid                                    $       --      $       --     $       --
                                                        ============    ============   ============

     Interest paid                                      $    265,300    $     35,800   $     44,500
                                                        ============    ============   ============

NON-CASH INVESTING AND
     FINANCING ACTIVITIES:

     Satisfaction of receivable - affiliate
        with stock in affiliate                         $  3,000,000    $    196,700   $    275,000
                                                        ============    ============   ============

     Acquisition of assets through issuance of debt     $  1,631,700    $    506,000   $    756,000
                                                        ============    ============   ============

     Sale of assets through accounts receivable         $  1,164,500    $       --     $       --
                                                        ============    ============   ============

     Issuance of stock to purchase subsidiary           $       --      $       --     $  2,878,200
                                                        ============    ============   ============

     Issuance of stock as deferred compensation         $    358,400    $    201,000   $    267,900


     Issuance of stock for services                     $     70,500    $       --     $     68,800
                                                        ============    ============   ============

     Issuance of stock for retired employees            $    194,400    $     88,100   $    269,800
                                                        ============    ============   ============

     Valuation of stock options and warrants            $       --      $       --     $    343,000
                                                        ============    ============   ============



           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.


                                       57




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001

A.   BUSINESS ORGANIZATION AND OPERATIONS:

     U.S. Energy Corp. and subsidiaries (the "Company" or "USE") was
incorporated in the State of Wyoming on January 26, 1966. The Company engages in
the acquisition, exploration, holding, sale and/or development of mineral and
coalbed methane gas properties, the production of petroleum properties and
marketing of minerals and methane gas. Principal mineral interests are in
uranium, gold, molybdenum and coalbed methane. None of the Company's mineral
properties are currently in production. The Company holds various real and
personal properties used in commercial activities. The Company also performs
contract drilling and construction work on third party properties. Most of these
activities are conducted through the joint venture discussed below and in Note
D.


     The Company was engaged in the maintenance of two uranium properties, one a
joint venture with Kennecott Uranium Company ("Kennecott") known as the Green
Mountain Mining Venture ("GMMV"), and the second known as Sheep Mountain
Partners ("SMP"). Both of these ventures have been involved in significant
litigation (see Note K). All issues and disputes in the SMP litigation have been
resolved with the exception of purchase rights and the profits therefrom on
certain CIS related uranium contracts. The resolution of the other issues
resulted in the payment of cash to the Company and the receipt of the SMP
mineral properties and one uranium delivery contract. The remaining issues have
been referred to a special master for resolution by the U.S. District Court of
Colorado. The litigation with Kennecott has been settled. Sutter Gold Mining
Company ("SGMC"), a Wyoming corporation owned 66.3% by the Company at May 31,
2001, manages the Company's interest in gold properties. The Company also owns
100% of the outstanding stock of Plateau Resources Limited ("Plateau"), which
owns a nonoperating uranium mill and support facilities in southeastern Utah.
Currently, the mill is nonoperating but has been granted a license to operate
subject to certain conditions. Rocky Mountain Gas, Inc. ("RMG") was formed in
fiscal 2000 to consolidate all methane gas operations of the Company. The
Company owns and controls 84% of RMG as of May 31, 2001.


     The Company has generated significant net losses prior to fiscal 2001
resulting in an accumulated deficit of approximately $28,300,000 at May 31,
2001. The Company has a working capital balance of approximately $933,300 at May
31, 2001. The Company's cash balance has decreased from $916,400 at the prior
year end to $685,500 at May 31, 2001. At year end, the Company did not have the
working capital necessary to continue to fund anticipated development activities
in its coalbed methane properties. The Company has therefore entered into joint
ventures to develop its properties. In order to reduce its overhead costs, the
Company reduced its staff during 2001. In addition, the Company continues to
believe that it will ultimately receive more cash from the final settlement of
the SMP litigation. Taken together, the Company believes it will be able to meet
its obligations during the upcoming year.


                                       58




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


B.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements of USE and subsidiaries include the
accounts of the Company, the accounts of its majority-owned subsidiaries Plateau
(100%), Energx, Ltd ("Energx") (90%), Four Nines Gold, Inc. ("FNG") (50.9%),
SGMC (66.3%), Crested Corp. ("Crested") (70.5%), Yellowstone Fuels Corp.
("YSFC") (35.9%) Rocky Mountain Gas ("RMG") (82%), Northwest Gold, Inc. ("NWG")
(96%) and the USECC Joint Venture ("USECC"), a consolidated joint venture which
is equally owned by U.S. Energy Corp. and Crested, through which the bulk of
their operations are conducted.

     Prior to fiscal 2001, Ruby Mining Company ("Ruby") which was 91% owned by
the Company, was also consolidated. During 2001, Ruby was sold to a third party
and therefore is no longer consolidated.

     With the exception of YSFC, investments in joint ventures and all 20% to
50% owned companies are accounted for using the equity method (see Note E). YSFC
was an equity investee through February 1999, at which time the Company
purchased the majority of the shares of common stock of YSFC owned by outside
shareholders by issuing 677,167 shares of Company's common stock. As a result of
the common directors and control of YSFC by USE and its employees, YSFC was
consolidated as of March 1, 1999. SGMC was an equity investee through March 1998
when the Company purchased special warrant units from certain investors and
increased its ownership to 59%, requiring consolidation subsequent to April 1,
1998 (see Note F). Investments of less than 20% are accounted for by the cost
method. All material intercompany profits, transactions and balances have been
eliminated.

CASH EQUIVALENTS

     The Company considers all highly liquid investments with original
maturities of three months or less to be restricted cash equivalents.

RESTRICTED INVESTMENTS

     Based on the provisions of Statement of Financial Accounting Standards No.
115 ("SFAS 115"), the Company accounts for its restricted investment in certain
securities as held-to-maturity. Held-to-maturity securities are measured at
amortized cost and are carried at the lower of aggregate cost or fair market
value.

INVENTORIES

     Inventories consist primarily of retail inventory of aviation and
automobile fuel and associated aircraft parts for motel, real estate and airport
operations, mining supplies and gold stockpiles. Retail inventories are stated
at lower of cost or market using the average cost method. Mine supplies and gold
stockpile inventories are stated at the lower of cost or market.


                                       59




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


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.

          Office Equipment                   3 to 5 years
          Field Tools and Hand Equipment     5 to 7 years
          Vehicles and Trucks                3 to 7 years
          Heavy Equipment                    7 to 10 years
          Service Buildings                  20 years
          Corporate Headquarters             45 years


     The Company capitalizes all costs incidental to the acquisition and
exploration of mineral properties as incurred. Costs are charged to operations
if the Company determines that aproperty is not economical. Costs and expenses
related to general corporate overhead are expensed as incurred.

     The Company has acquired substantial mining properties and associated
facilities at minimal cash cost, primarily through the assumption of reclamation
and environmental liabilities. Certain of these properties are owned by various
ventures in which the Company is either a partner or venturer. (See Note K.)

OIL AND GAS PROPERTIES


     The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs,
are capitalized.

     All capitalized costs of oil and gas properties including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimates of proved reserves. Investments in unproved properties
and major development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If
the results of an assessment indicate that the properties are impaired, the
amount of the impairment is added to the capitalized costs to be amortized.

     In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties.

                                       60




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)



     As of May 31, 2001 the Company had not begun testing the exploratory wells
it had drilled (ie. had not begun the dewatering process). Until sufficient
wells are drilled and completed on a prospect, and sufficiently dewatered, the
amount of reserves (if any) cannot be determined. This process can take up to 24
months from when the first few wells are drilled. The Company therefore cannot
determine at May 31, 2001 if an impairment of acquisition and impairment costs
has occurred. In the event that the drilling and dewatering efforts do not
produce economic reserves, the acquisition, exploration and development costs
associated with the property will be written off.


     Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.

LONG-LIVED ASSETS


     The Company evaluates its long-lived assets (other than oil and gas
properties which are discussed above) for impairment when events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
If the sum of estimated future cash flows on an undiscounted basis is less than
the carrying amount of the related asset, an asset impairment is considered to
exist. The related impairment loss is measured by comparing estimated future
cash flows on a discounted basis to the carrying amount of the asset. Changes in
significant assumptions underlying future cash flow estimates may have a
material effect on the Company's financial position and results of operations.
An uneconomic commodity market price, if sustained for an extended period of
time, or an inability to obtain financing necessary to develop mineral
interests, may result in asset impairment. During fiscal 2001, the Company
recorded an impairment on its mineral assets of $123,800 in YSFC. During fiscal
1999, the Company recorded an impairment of $10,718,300 on its mineral assets in
SGMC and $2,506,100 on its mineral assets in YSFC. As of May 31, 2001,
management believes no further impairment is necessary. See Note F for further
discussion.


FAIR VALUE OF FINANCIAL INSTRUMENTS

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


                                       61




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


REVENUE RECOGNITION


     Revenues from motel, real estate and airport operations are for the rental
of motel rooms, boat storage facilities and mobile home lots at the Company's
operations in southern Utah as well as the rental of office space in office
buildings in Riverton, Wyoming. Airport operations consist of the sale of
aviation fuel, repair and maintenance of aircraft and rental of hanger space.
All these revenues are reported on a gross revenue basis and are recorded at the
time the service is provided.

     Revenues from mineral sales consist of the sale of uranium to a delivery
contract and the sale of that contract to a third party supplier. The sale of
uranium is reported on a net basis. The Company has not produced any uranium
from its properties during the period covered by the enclosed financial
statements and has purchased all uranium delivered under its supply contracts
from the open market as all the Company's uranium operations are shut down.

     Mineral royalties which are non-refundable are recognized as revenue when
received (see Note F).

     Management fees are recorded as a percentage of actual costs for services
provided for subsidiaries and partnerships for which the Company provides
management services. The Company is also paid a management fee for overseeing
oil production on the Fort Peck Reservation in Montana. Management fees are
recorded when the service is provided.




     Revenues from motel, real estate and airport operations, which represent
primarily real estate activity and an airport fixed base operation, are
recognized as goods and services are delivered. Revenues from
construction/drilling contracts are recognized as work is completed. Oil and gas
revenue is recognized at the time of product delivery.


INCOME TAXES

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

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

                                       62




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


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

NET (LOSS) INCOME PER SHARE

     The Company reports net (loss) income per share pursuant to Statement of
Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding. 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 to purchase common stock,
if dilutive.

COMPREHENSIVE INCOME

     There are no components of comprehensive income which have been excluded
from net income and, therefore, no separate statement of comprehensive income
has been presented.

RECENT ACCOUNTING PRONOUNCEMENTS

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes fair value accounting and reporting standards for
derivative instruments and hedging activities. The Company adopted SFAS No. 133
in the first quarter of fiscal 2001 and such adoption had no significant effect
on the Company's financial statements.

     The Company evaluated the effect of SFAS 140 on its financial statements
and determined that the recently issued standard would not materially impact
either the preparation of or the Company's financial position or results of
operations. Management of the Company has reviewed all other recently issued
standards and determined that they will not have a material affect on its
financial position or results of operations.

USE OF ESTIMATES

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

C.       RELATED-PARTY TRANSACTIONS:

     The Company provides management and administrative services for affiliates
under the terms of various management agreements. Revenues from services by the
Company to unconsolidated affiliates were

                                       63




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


$132,500, $39,900 and $584,400 in fiscal 2001, 2000, and 1999, respectively. The
Company has $74,200 of receivables from unconsolidated subsidiaries as of May
31, 2001.

     As of May 31, 2001, the Company had notes receivable due from certain
directors and employees of the Company totaling $180,300 due December 31, 2001.
This indebtedness is secured by 161,500 shares of the Company's common stock.
During fiscal 2001, this debt was reduced by $114,900.

D.   USECC JOINT VENTURE:

     The Company operates the Glen L. Larsen office complex; an aircraft hangar
with a fixed base operation, office space and certain aircraft; holds interests
in various mineral operations; conducts oil and gas operations; and transacts
all operating and payroll expenses through a joint venture with Crested, the
USECC joint venture.

E.   INVESTMENTS IN AND ADVANCES TO AFFILIATES:

     The Company's restricted investments secure various decommissioning,
reclamation and holding costs. Investments are comprised of debt securities
issued by the U.S. Treasury that mature at varying times from three months to
one year from the original purchase date. As of May 31, 2001 and 2000, the cost
of debt securities was a reasonable approximation of fair market value. These
investments are classified as held-to- maturity under SFAS 115 and are measured
at amortized cost.

     The Company's investment in and advances to affiliates are as follows:



                                                         Carrying Value at May 31,
                                   Consolidated       --------------------------------
                                     Ownership              2001               2000

                                                                 
     Powder River Gas LLC               --            $    16,200         $      9,600


     Equity loss from investments accounted for by the equity method are as
follows:



                                                   Year Ended May 31,
                                   ----------------------------------------------------
                                        2001              2000                 1999
                                   ------------       -----------         -------------
                                                                 
     Ruby Mining Company**         $    --            $   (2,900)**       $     (3,100)
     YSFC***                            --                  --                 (56,000) ***

                                   $    --            $   (2,900)         $    (59,100)


** Consolidated beginning December 1, 1999. This represents the equity loss
through November 30, 1999. Ruby was sold during fiscal 2001 and is no longer
consolidated.


                                       64




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


*** Consolidated beginning March 1, 1999. This represents the equity loss
through February 28, 1999 at which time the Company acquired additional shares
of YSFC and thereby obtained control.

     Condensed combined balance sheets and statements of operations of the
Company's equity investees for fiscal 2000 include Ruby Mining Company.

     See Note F for a discussion of the reduction in the carrying value of such
investee assets.

F.   MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:

GMMV
----

     During fiscal 1990, the Company entered into an agreement with Kennecott, a
wholly-owned, indirect subsidiary of The RTZ Corporation plc, for Kennecott to
acquire a 50% interest in certain uranium mineral properties in Wyoming known as
the Green Mountain Properties. During the life of the venture, the parties
entered into various amendments to the GMMV agreement.

     As a result of sustained depressed uranium prices, the GMMV properties were
maintained on a standby basis. During fiscal 2000, certain disputes arose in the
GMMV venture and Kennecott sued the Company. On September 11, 2000, the parties
settled all disputes by Kennecott paying the Company $3.25 million and Kennecott
assuming all reclamation liabilities of the GMMV Properties.

SMP
---

     During fiscal 1989, the Company, through USECC, entered into an agreement
to sell a 50% interest in their Sheep Mountain properties to Nukem's subsidiary
CRIC. USECC and CRIC immediately contributed their 50% interests in the
properties to a newly-formed partnership, Sheep Mountain Partners ("SMP"). SMP
was established to further explore uranium mineralization on the claims on Sheep
Mountain, acquire uranium supply contracts and market uranium. Certain disputes
arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP.
These disputes have been in litigation/arbitration for the past ten years. See
Note K for a description of the investment and a discussion of the related
litigation/arbitration.

     Due to the litigation and arbitration proceedings involving SMP for the
past ten years, the Company has expensed all of its costs related to SMP and has
had no carrying value of its investment in SMP for either 2001 or 2000 as
proceeds from litigation and arbitration proceedings were accounted for under
the cost recovery method of accounting as discussed in Note K. The Company's
direct loss generated from its investment in SMP, which represents mine standby
costs incurred directly by the Company, was $399,300, $711,300 and $704,10 for
the years ended May 31, 2001, 2000 and 1999, respectively.

     As part of a partial settlement agreement dated June 1, 1998, the Company
was awarded the return of its Sheep Mountain uranium mines and certain other
properties. Accordingly, all mine standby costs and other holding costs were
expensed by the Company during fiscal 2001, 2000 and 1999.


                                       65




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


PHELPS DODGE
------------


     During prior years, the Company conveyed interests in mining claims to AMAX
Inc. ("AMAX") in exchange for cash, royalties, and other consideration. There
are no remaining values on the balance sheets of the Company at May 31, 2001,
2000 or 1999, relating to these claims. AMAX merged with Cyprus Minerals
("Cyprus Amax") which was purchased by Phelps Dodge Mining Company ("Phelps
Dodge") in December of 1999. The properties have not been placed into production
as of May 31, 2001.


     AMAX and later Cyprus Amax, paid the Company an annual advance in royalty
of 50,000 pounds of molybdenum (or its cash equivalent). During fiscal 2000,
Phelps Dodge assumed this obligation and made payments to the Company during
fiscal 2001. Phelps Dodge is entitled to a partial credit against future
royalties for any advance royalty payments made, but such royalties are not
refundable if the properties are not placed into production. The Company
recognized $108,500, $132,600 and $150,100 of revenue from the advance royalty
payments in fiscal 2001, 2000 and 1999, respectively. Phelps Dodge has not made
the payment of the advance royalty during the first quarter of 2002. The Company
considers this a breach of Phelps Dodge's contractual obligations.

     Phelps Dodge may elect to return the properties to the Company, which would
cancel future obligations under the advance royalty obligation. If Phelps Dodge
formally decides to place the properties into production, it is obligated to pay
$2,000,000 to the Company. Also, per the contract with AMAX, the Company is to
receive 15% of the first $25,000,000, or $3,750,000, if the molybdenum
properties are sold, which the Company believes has occurred.

     The Company has recently entered into discussions with Phelps Dodge
concerning the purchase of the properties from Cyprus Amax.

SUTTER GOLD MINE COMPANY
------------------------


     SGMC was established in 1990 to conduct operations on mining leases and to
produce gold from the Lincoln properties in California. The SGMC Lincoln Project
property is shut down . SGMC has not generated any significant revenue and has
no assurance of future revenue. All acquisition and mine exploration costs since
inception were initially capitalized. Due to the decline in the spot price for
gold and the lack of adequate financing, SGMC has shut the SGMC operation down
SGMC requires capital contributions from affiliates or other sources to maintain
its current activities.

     Primarily as a result of the sustained decline in gold prices and the
uncertainty of when prices might recover, the Company


                                       66




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)



evaluated the carrying value of its SGMC properties for impairment, and in
fiscal 1999 and 1998, the Company recorded an impairment in the amount of
$10,718,300 and $1,500,000 respectively .

     This impairment, which was taken as required under the provisions of SFAS #
121, resulted in a write- off of nearly 85% of the cost of these assets to
values that were estimated to be fair market values at that time based on the
salvage values of equipment and the local tax assessor's assessed values of the
land, buildings and improvements.

     Since the date of the last impairment in 1999, the Company has annually
determined whether or not events or changes in circumstances had occurred
suggesting that additional impairment of the assets of Sutter under SFAS # 121
was necessary. We did not deem it necessary to further impair the assets in 2000
or 2001 based on the assessed valuations of the property. An offer to purchase a
portion of the land in Sutter during 2002 and current assessed valuations of the
property and improvements suggest that the Sutter property lis still valued at
or below fair market value.

     The Company will continue to evaluate the carrying value of its long-lived
assets and long-lived assets to be disposed of under the provisions of SFAS #
121 and will obtain third-party appraisals of the properties during fiscal 2003
as additional support for the carrying values of the property.



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

                                       67




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


     During 1999, the Company issued 89,059 shares of common stock to acquire an
additional 207,500 SGMC Special Warrants. This purchase increased the Company's
ownership of SGMC to 63%. During fiscal 2000, the Company issued an additional
15,357 shares of its common stock to acquire 5,500 additional SGMC Special
Warrants. This purchase increased the Company's ownership of SGMC to 66%.

     Additional financing will be required in order to develop SGMC.

YELLOW STONE FUELS CORP.
------------------------

     In fiscal 1998, the Company became contractually obligated to exchange its
common stock for common stock of YSFC, plus interest, because certain conditions
were not met (See Note J). As a result of depressed market prices for uranium,
YSFC was not successful in the public offering of its common stock. As a result,
the terms of the exchange agreement became effective between the Company and
YSFC shareholders. The Company therefore issued 677,167 shares of its common
stock. The exchange offer for YSFC remained effective until September 13, 1999.

     Due to continued low uranium market prices and the inability to raise
financing to place the YSFC properties into production, the Company recorded an
impairment of $123,800 in fiscal 2001 and $2,506,100 in 1999 related to YSFC's
mineral assets, which is classified as impairment of mineral assets in the
accompanying Consolidated Statements of Operations. The impairment was
specifically related to the YSFC mining equipment in fiscal 2001.

PLATEAU RESOURCES LIMITED
-------------------------

     During fiscal 1994, the Company entered into an agreement with Consumers
Power Company to acquire all the issued and outstanding common stock of Plateau,
a Utah corporation. Plateau owns a uranium processing mill and support
facilities and certain other real estate assets through its wholly-owned
subsidiary Canyon Homesteads, Inc. in southeastern Utah. The Company paid
nominal cash consideration for the Plateau stock and agreed to assume all
environmental liabilities and reclamation bonding obligations. At May 31, 2001,
Plateau had a cash security in the amount of $9,664,000 to cover reclamation of
the properties (see Note K).


     The Company is currently evaluating the best utilization of Plateau's
properties. Evaluations are ongoing to determine when, or if, the mine and mill
properties should be placed into production. The primary factor in these
evaluations relates to the current depressed uranium market. Revenues are being
generated from the townsite assets which include a motel, C-store, lounge,
restaurant, boat storage facility and housing.


     The convenience store, lounge and restaurant, and boat storage facility are
leased to third party companies. The Company receives rent on these facilities
and a percentage of the revenues of each operation. The Company is also
considering the possibility of selling the mill facility.


                                       68




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)



RUBY MINING COMPANY
-------------------

     During fiscal 2001, the Company sold its controlling interest in Ruby
Mining Company to Admiralty Company. The Company retained 900,000 shares of Ruby
Mining common stock; received $100,000 upon closing, and a promissory note in
the amount of $225,000. Although the promissory note is currently in default,
management believes that Admiralty will pay the balance due during the second
quarter of 2002.

ROCKY MOUNTAIN GAS, INC.
------------------------

     During fiscal 2000, the Company organized RMG to enter into the coalbed
methane gas business. RMG is engaged in the acquisition of coalbed methane gas
leases and the exploration, development and production of methane gas from those
properties. The Company owns and controls 84% of RMG. RMG sold 55,500 shares and
1,206,333 shares of its common stock in a private placement during fiscal 2001
and 2000 respectively, for total proceeds of approximately $3,721,900.

     RMG entered into an agreement with Quantum Energy, L.L.C. (Quantum has
since changed its name to ("Quaneco")) on January 3, 2000 to purchase a 50%
working interest and 40% net revenue interest in approximately 185,000 acres of
unproven leasehold interests in the Powder River Basin of southeastern Montana.
The terms of the Quantum agreement were payments of $3,200,000 on closing,
$1,000,000 on or before May 1, 2000 and $1,300,000 on or before December 31,
2000. RMG also had a $2,500,000 work commitment to drill approximately 25 wells
on the Quantum properties by November 30, 2000.

     During fiscal 2001, RMG and Quaneco entered into an Option and Farmin
Agreement with Suncor (Natural Gas) America, Inc. ("SENGAI") on 112,000 acres in
southeast Montana. SENGAI paid $1,705,000 for the right to exercise the option,
of which $1,278,800 was due to RMG. These funds were applied to the final
payment due under to Quaneco agreement. All amounts due to Quaneco had been paid
as of May 31, 2001.

     SENGAI also committed to assume $2,000,000 of the remaining $2,250,000
drilling commitment that RMG had under its drilling commitment to Quaneco. If
SENGAI exercises its option on the acreage an additional $3,923,700 will be due
to the Company and Quantum, of which $2,942,800 will be due to the Company. Upon
Exercise of the option, SENGAI is also committed to fund a disproportional
$841,400 on the second drilling program on the properties.


                                       69




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


     If SENGAI exercises its option, RMG will own a 12.5% working interest and a
10% revenue interest in the 112,000 acres (subject to the CCBM agreement).
Should SENGAI not elect to exercise its option, RMG will revert to a 50% working
interest, 40% revenue interest in the acreage.

     RMG also acquired a 100% working interest (82% revenue interest) in 63,000
net mineral acres in southwest Wyoming. These coalbed methane gas leases are in
the greater Green River Basin. RMG purchased these leases for cash and drilling
commitments.

     On July 10, 2001, RMG closed a Purchase and Sale Agreement with CCBM, Inc.
("CCBM"), a wholly-owned subsidiary of Carrizo Oil & Gas, Inc. of Houston,
Texas. CCBM purchased an undivided 50% interest in all of RMG's existing coalbed
properties. CCBM signed a $7,500,000 Promissory Note payable in principal
amounts of $125,000 per month plus interest at annual rate of 8% over 41 months
(starting July 31, 2001) with a balloon payment due on the forty-second month.

     The 50% undivided interest is pledged back to RMG to secure the purchase
price, and will be released 25% when 33.3% of the principal amount of the
purchase price is paid, another 25% when the total principal payments reach 66%
of the principal amount of the purchase price and the balance when the total
principal amount is paid.

     CCBM has also agreed to fund $5,000,000 for an initial drilling program. If
CCBM fails to expend $5,000,000 in the drilling program or $2,500,000 for RMG's
benefit, CCBM will be obligated to pay any remaining unspent portions of the
$2,500,000 directly to RMG. If CCBM defaults on its purchase obligation CCBM
will still earn a 50% working interest in each well location (80 acres) and
production therefrom. CCBM's ownership will be earned on these wells regardless
of the status of the payments on the promissory note.

     CCBM will be entitled to a credit (applied as a prepayments of the purchase
price for the production of the undivided 50% interest in RMG's acreage), equal
to 20% of RMG's net revenue interest from wells drilled with the $5,000,000
until CCBM equals $1,250,000 from production proceeds.


                                       70




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


OIL AND GAS PROPERTIES AND EQUIPMENT INCLUDED THE FOLLOWING:



                                                                May 31,
                                             ---------------------------------------------
                                                2001             2000             1999
                                             -----------      -----------      -----------

Oil and gas properties:
                                                                      
     Subject to amortization                 $ 1,773,600      $ 1,773,600      $ 1,773,600
     Not subject to amortization:
         Acquired in fiscal 2001               1,154,500             --               --
         Acquired in fiscal 2000               4,727,200        4,727,200             --
         Acquired in fiscal 1999                    --               --               --
         Acquired prior to fiscal 1999              --               --               --
                                             -----------      -----------      -----------
                                               7,655,300        6,500,800        1,773,600

     Accumulated depreciation, depletion
         and amortization                     (1,773,600)      (1,773,600)      (1,773,600)
                                             -----------      -----------      -----------

         Net oil and gas properties          $ 5,881,700      $ 4,727,200      $      --
                                             ===========      ===========      ===========



     The Company began drilling of its coalbed methane properties during fiscal
2001. At such time as production begins on these properties the cost associated
with the development of such production will be added to the amortization base.
Production is projected to begin in the second half of fiscal 2002 or the
beginning of fiscal 2003.

G.   DEBT:

LINES OF CREDIT
---------------

     The Company had a $1,000,000 line of credit from a commercial bank. The
line of credit had a variable interest rate (8.5% as of May 31, 2001). The
weighted average interest rate for 2001 was 9.8%. As of May 31, 2001, $850,000
was outstanding on this line of credit. The line of credit is secured by certain
real property and a share of the net proceeds of fees from production from
certain oil wells.


                                       71




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


LONG-TERM DEBT
--------------

     The components of long-term debt as of May 31, 2001 and 2000 are as
follows:



                                                                        May 31,
                                                             ----------------------------
                                                                2001              2000
                                                             -----------      -----------
                                                                        
     USECB installment notes - secured by equipment;
         interest at 7.9% to 11.4%, matures in 2002-2015     $ 1,670,200      $   315,500
     SGMC installment notes - secured by
         certain mining properties, interest at
         7.5% to 8.0%, maturity from 2001 - 2007                 624,300          740,800
     RMG installment note - secured by
         coalbed methane leases, interest at 8%;
         repaid in fiscal 2001                                      --            106,200
     FNG installment note - secured by FNG
         equipment, interest at 8.9%;
         repaid in fiscal 2001                                      --             21,700
                                                             -----------      -----------
                                                               2,294,500        1,184,200
     Less current portion                                       (142,400)        (284,100)
                                                             -----------      -----------
                                                             $ 2,152,100      $   900,100
                                                             ===========      ===========


     Principal requirements on long-term debt are $142,400, $123,800; $126,500;
$105,000; $94,600; $1,702,200 for the years 2002 through 2006 and thereafter,
respectively.

H.   INCOME TAXES:

     The components of deferred taxes as of May 31, 2001 and 2000 are as
follows:



                                                            May 31,
                                                ------------------------------
                                                    2001              2000
                                                ------------      ------------
     Deferred tax assets:
                                                            
          Deferred compensation                 $    279,000      $    213,400
          Net operating loss carryforwards         8,180,000         9,583,200
          Tax Credits                                 15,000            17,900
          Non-deductible reserves and other          840,000         1,146,000
          Tax basis in excess of book basis        2,850,400         3,876,500
                                                ------------      ------------
     Total deferred tax assets                    12,164,400        14,837,000
                                                ------------      ------------

     Deferred tax liabilities:
          Development and exploration costs        2,157,200         2,014,300
                                                ------------      ------------
     Total deferred tax liabilities                2,157,200         2,014,300
                                                ------------      ------------
                                                  10,007,200        12,822,700
     Valuation allowance                         (11,152,000)      (13,967,500)
                                                ------------      ------------
     Net deferred tax liability                 $ (1,144,800)     $ (1,144,800)
                                                ============      ============



                                       72




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


     The Company has established a valuation allowance of $11,152,000 and
$13,967,500 against deferred tax assets due to the losses incurred by the
Company in past fiscal years. The Company's ability to generate future taxable
income to utilize the NOL carryforwards is uncertain.

     The income tax provision (benefit) is different from the amounts computed
by applying the statutory federal income tax rate to income before taxes. The
reasons for these differences are as follows:



                                                           Year Ended May 31,
                                             ---------------------------------------------
                                                 2001             2000             1999
                                             -----------      -----------      -----------

                                                                      
     Expected federal income tax             $   602,200      $(3,618,200)     $(3,960,500)
     Net operating losses not previously
          benefitted and other                 2,213,300          (10,600)         422,100
     Valuation allowance                      (2,815,500)       3,628,800        3,538,400
                                             -----------      -----------      -----------
          Income tax provision               $      --        $      --        $      --
                                             ===========      ===========      ===========


     There were no taxes currently payable as of May 31, 2001, 2000 or 1999
related to continuing operations.

     At May 31, 2001, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$25,000,000 which will expire from 2002 to 2021 and investment tax credit
carryforwards of $15,000 which, if not used, will expire from 2001 to 2002. The
Internal Revenue Code contains provisions which limit the NOL carryforwards
available which can be used in a given year when significant changes in company
ownership interests occur. In addition, the NOL and credit amounts are subject
to examination by the tax authorities.

     The Internal Revenue Service has audited the Company's and subsidiaries tax
returns through the year ended May 31, 1996. The Company's income tax
liabilities are settled through fiscal 1996.

I.   SEGMENTS AND MAJOR CUSTOMERS:


     The Company's primary business activity is coalbed methane gas property
acquisition and exploration (and holding shut down mining properties) The
Company has no producing mines. Other reportable industry segments include
motel, real estate/airport operations, and contract drilling/construction
activities. The following is information related to these industry segments:



                                       73




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)




                                                                      Year Ended May 31, 2001
                                            --------------------------------------------------------------------

                                                  Coalbed
                                                  Methane           Motel/          Contract
                                               (and holding      Real Estate/       Drilling/
                                            costs for inactive      Airport       Construction
                                            mining properties)    Operations       Operations       Consolidated
                                            ------------------   ------------     ------------      ------------

                                                                                        
Revenues                                     $    442,800        $  2,222,400     $ 2,238,600       $  4,903,800
                                             ============        ============     ===========
Other revenues                                                                                           597,800
                                                                                                    ------------
     Total revenues                                                                                 $  5,501,600
                                                                                                    ============
Operating (loss) profit                      $ (2,866,400)       $ (1,013,800)    $   488,100       $ (3,392,100)
                                             ============        ============     ===========
Other revenue, income and expenses                                                                     9,328,600
General corporate and other expenses                                                                  (4,235,400)
Equity in loss of affiliates and
     minority interest in subsidiaries                                                                   220,100
                                                                                                    ------------
     Income before income taxes                                                                     $  1,921,200
                                                                                                    ============
Identifiable net assets at May 31, 2001      $ 18,424,900        $  5,616,400     $ 1,050,500       $ 25,091,800
                                             ============        ============     ===========
Investments in affiliates                                                                                 16,200
Corporate assets                                                                                       5,357,200
                                                                                                    ------------
     Total assets at May 31, 2001                                                                   $ 30,465,200
                                                                                                    ============
Capital expenditures                         $  1,280,200        $  1,326,800     $   256,000
                                             ============        ============     ===========
Depreciation, depletion and
     amortization                            $    129,700        $    271,100     $   324,700
                                             ============        ============     ===========


                                       74




                                        U.S. ENERGY CORP. AND SUBSIDIARIES

                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                   MAY 31, 2001
                                                    (CONTINUED)




                                                                     Year Ended May 31, 2000
                                            --------------------------------------------------------------------

                                                  Coalbed
                                                  Methane           Motel/          Contract
                                               (and holding      Real Estate/       Drilling/
                                            costs for inactive      Airport       Construction
                                            mining properties)    Operations       Operations       Consolidated
                                            ------------------   ------------     ------------      ------------

                                                                                        
Revenues                                     $    132,600        $  2,734,800     $ 3,584,900       $  6,452,300
                                             ============        ============     ===========
Other revenues                                                                                           436,500
                                                                                                    ------------
     Total revenues                                                                                 $  6,888,800
                                                                                                    ============
Operating (loss) profit                      $ (2,518,600)       $   (652,500)    $  (594,300)      $ (3,765,400)
                                             ============        ============     ===========
Other revenue, income and expenses                                                                       530,100
General corporate and other expenses                                                                  (7,912,900)
Equity in loss of affiliates and
     minority interest in subsidiaries                                                                   506,400
                                                                                                    ------------
     Loss before income taxes                                                                       $(10,641,800)
                                                                                                    ============
Identifiable net assets at May 31, 2000      $ 17,543,700        $  4,880,900     $ 2,163,300       $ 24,587,900
                                             ============        ============     ===========
Investments in affiliates                                                                                  9,600
Corporate assets                                                                                       6,278,600
                                                                                                    ------------
     Total assets at May 31, 2000                                                                   $ 30,876,100
                                                                                                    ============
Capital expenditures                         $  4,749,300        $    944,600     $ 1,551,800
                                             ============        ============     ===========
Depreciation, depletion and
     amortization                            $     72,600        $    148,100     $   155,400
                                             ============        ============     ===========


                                       75




                                        U.S. ENERGY CORP. AND SUBSIDIARIES

                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                   MAY 31, 2001
                                                    (CONTINUED)




                                                                       Year Ended May 31, 1999
                                            -------------------------------------------------------------------

                                                 Coalbed
                                                 Methane            Motel/          Contract
                                              (and holding       Real Estate/       Drilling/
                                            costs for inactive      Airport       Construction
                                            mining properties)    Operations       Operations       Consolidated
                                            ------------------   ------------     ------------      ------------

                                                                                        
Revenues                                     $    238,200        $  2,882,800     $   --            $  3,121,000
                                             ============        ============     ===========
Other revenues                                                                                           667,600
                                                                                                    ------------
     Total revenues                                                                                 $  3,788,600
                                                                                                    ============
Operating loss                               $ (2,071,600)       $   (556,100)    $   (14,800)      $ (2,642,500)
                                             ============        ============     ===========
Other revenue, income and expenses                                                                     7,323,100
General corporate and other expenses                                                                 (20,738,400)
Equity in loss of affiliates and
     minority interest in subsidiaries                                                                (4,409,300)
                                                                                                    ------------
     Loss before income taxes                                                                       $(11,648,500)
                                                                                                    ============
Identifiable net assets at
     May 31, 1999                            $ 10,632,900        $  8,107,300     $   144,700       $ 18,884,900
                                             ============        ============     ===========
Investments in affiliates                                                                                 24,600
Corporate assets                                                                                      14,481,500
                                                                                                    ------------
     Total assets at May 31, 1999                                                                   $ 33,391,000
                                                                                                    ============
Capital expenditures                         $    725,400        $    944,200     $   --
                                             ============        ============     ===========
Depreciation, depletion and
     amortization                            $    300,200        $    348,600     $    77,600
                                             ============        ============     ===========



     During fiscal 1999, the $238,200 in revenues were received from the sale of
uranium purchased on the open market (none was produced from the Company's
uranium properties, which are all shut down). There were no uranium sales during
fiscal 2000.


J.   SHAREHOLDERS' EQUITY:

     The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan
(the "Option Plan") for the benefit of USE's key employees. The Option Plan, as
amended, reserves 2,750,000 shares of the Company's $.01 par value common stock
for issuance under the Option Plan. During fiscal 1992, the Company issued
371,200 non-qualified options to certain of its executive officers, Board
members and others at prices ranging from $2.75 to $2.90 per share. These
options will expire on April 14, 2002 and April 30, 2002. During fiscal 1999,
the Company issued 837,500 options under the Option Plan, including 299,462
non-qualified and 538,038 qualified options. The non-qualified options were
issued at a price below fair market value, resulting in the recognition of
$262,000 in compensation expense at the time of issuance. During fiscal 2001,
the Company issued 1,499,000 options under the Option Plan, including 918,763
non- qualified and 580,237 qualified options. Various employees exercised
118,703 of the outstanding options raising $288,400 of capital.


                                       76




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


     The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee
Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE employees. During
fiscal 2001, 2000 and 1999, the Board of Directors of USE contributed 53,837,
123,802 and 89,600 shares to the ESOP at prices of $5.35, $3.00 and $4.00 per
share, respectively. The Company has recognized $288,000, $371,400 and $358,400
in fiscal 2001, 2000 and 1999, respectively related to these contributions. USE
has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and
38,550 shares on the open market. These loans, which are secured by pledges of
the stock purchased, bear interest at the rate of 10% per annum. The loans are
reflected as unallocated ESOP contribution in the equity section of the
accompanying Consolidated Balance Sheets.

     In May 1996, the Board of Directors of USE approved an annual incentive
compensation arrangement ("1996 Stock Award Program") for its CEO and four other
officers of the Company payable in shares of the Company's common stock. The
1996 Stock Award Program was subsequently modified to reflect the intent of the
directors which was to provide incentive to the officers of the Company to
remain with USE. The shares are to be issued annually pursuant to the
recommendation of the Compensation Committee on or before January 15 of each
year, beginning January 15, 1997, as long as each officer is employed by the
Company. The officers will receive up to an aggregate total of 67,000 shares per
year for the years 1997 through 2002. The shares under the plan are forfeitable
until retirement, death or disability of the officer. The shares are held in
trust by the Company's treasurer and are voted by the Company's non-employee
directors. As of May 31, 2001, 282,158 total shares have been issued to the five
officers of the Company under the 1996 Stock Award Plan.

     In December 1997, the Company entered into a warrant purchase agreement
with an investment advisory firm to purchase 225,000 shares of the Company's
common stock at an exercise price of $10.50/share expiring December 2, 2000. The
warrants were issued in exchange for services to be provided during the period
from December 1997 to December 1998. The Company determined the fair value
associated with these warrants to be $186,000, which will be recognized ratably
over the term of the related advisory agreement. Accordingly, $108,000 was
recognized as expense in fiscal 1998 and $78,000 in fiscal 1999.

     During fiscal 1998, the Company and YSFC entered into an Exchange Rights
Agreement (the "Agreement"). Under the Agreement the YSFC private placement
shareholders and related broker agent had the right, but not the obligation, to
exchange their shares in YSFC for USE common stock if YSFC's common shares were
not listed and available for quotation on the NASDAQ marketing system by March
1998. The Company exchanged 677,167 shares of its common stock during fiscal
1999, at a fair value of $2,591,500, for 1,131,500 shares of YSFC common stock
or 9% of the outstanding shares of YSFC. During fiscal 2000, the Company issued
an additional 57,752 shares of its common stock valued at $206,900 for an
additional 96,250 shares of YSFC common stock or an additional 1% of the
outstanding shares of YSFC common stock. The exchange rate for USE shares was
the price paid for the YSFC's common shares plus 10% per annum return to the
investor from the date of purchase. The number of USE shares exchanged was based
on the exchange rate for a share of USE common stock for the five business days
prior to the date of notice given by the YSFC shareholder to exchange their
shares.

     In January 1998, the Company entered into a warrant purchase agreement with
another investment advisory firm to purchase 200,000 shares of the Company's
common stock at an exercise price of $7.50/share

                                       77




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


expiring January 20, 2000. The warrants were issued in exchange for services to
be provided during the period from January 1998 to January 1999. The Company
determined the fair value associated with these warrants to be $264,000, which
was recognized ratably over the term of the related advisory agreement.
Accordingly, $27,000 was recognized as an expense in fiscal 2000 and $176,000 in
fiscal 1999.

     In February of 1999, the Company entered into a warrant purchase agreement
with a consulting firm to purchase 20,000 shares of the Company's common stock
at an exercise price of $2.62 expiring January 31, 2002. The warrants were
issued in exchange for services to be provided during the period from February
1999 to February 2000. The Company determined the fair value associated with
these warrants to be $36,000, which is recognized ratably over the term of the
consulting agreement. Accordingly, $9,000 was recognized as an expense in fiscal
1999 and $27,000 in fiscal 2000.

     Also, during fiscal 1999, the Company issued warrants in exchange for
outstanding YSFC warrants, which were originally issued for services provided by
outside consultants in connection with the agreement discussed above. The
Company issued 67,025 warrants at an exercise price of $3.64 expiring September
19, 2002. The Company determined the fair value associated with these warrants
to be $167,000, which was recorded as an additional investment in YSFC during
fiscal 1999.

     In February 1999, the Company entered into a consulting agreement with an
individual to provide consulting and other services for a period of 24 months,
commencing on February 8, 1999 and ending on January 31, 2001. As consideration
for services to be performed, the Company granted the individual 25,000 shares
of the Company's common stock at a grant price of $2.75 per share and entered
into a 5 year warrant purchase agreement to purchase up to 75,000 shares of the
Company's common stock at an exercise price of $2.25 per share, expiring
February 8, 2004. The Company determined the fair value associated with the
stock grant to be $68,750 and the warrants to be $140,000, which were recognized
ratably over the term of the consulting agreement. Accordingly, $69,550;
$104,400; and $34,800 were recognized as an expense in fiscal 2001, 2000 and
1999, respectively related to this agreement.

     During fiscal 2000, the Company issued 200 shares of its $.01 par value
mandatorily convertible preferred stock for $2,000,000. A commission of $160,000
was paid to an independent broker on this transaction. This preferred stock is
mandatorily convertible into either 677,667 shares of common stock of RMG or
into shares of common stock of the Company at the market price of the Company's
common stock on the date of conversion. The preferred shares are convertible at
the earlier of the date RMG completes an initial public offering of its common
stock or April 11, 2002. The convertible preferred shares pay dividends at the
rate of 7.5% per annum while they are outstanding. These preferred shares have
been reflected outside of shareholders' equity in the accompanying consolidated
balance sheets due to the convertible nature of the securities into common stock
of RMG.

     During fiscal 2001, the Company entered into a consulting agreement with a
company to provide consulting and other services for a period of 18 months,
commencing on May 14, 2001 and ending on November 14, 2002. As consideration for
services to be performed, the Company issued the Company 15,000 shares of the
Company's common stock at a grant price of $4.70 per share and entered into two
stock option agreements to purchase up to 10,000 shares of the Company's common
stock at an exercise price of

                                       78




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


$4.70, expiring May 14, 2003. This option is exercisable upon the condition that
the Company's common stock market price closes at or above $6.50 per share for
ninety (90) consecutive days prior to the expiration date of May 14, 2003. The
fair value of this grant was estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for the grants: expected dividends; expected volatility of 73%;
risk-free interest rate of 4.29%; and expected life of two years. The exercise
price of all options equaled or exceeded market price of the stock at the date
of grant. The second option is to purchase 20,000 shares of the Company's common
stock at an exercise price of $4.70 per share will be granted to the Company if
and when the Company's common stock market price closes at or above $10.00 per
share for ninety (90) consecutive days prior to its expiration date on May 14,
2003. The fair value of the option was $19,780 which is being amortized over the
service period.

     The Company entered into two five year option Agreements on July 31, 2001,
to allow outside consultants to purchase 80,000 shares of its common stock at
$4.30 per share. The Company determined that the value of the Options is $52,144
which will be recognized as expense during fiscal 2002 to 2003. The fair value
of this grant was estimated on the date of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used for
the grants: no expected dividends; expected volatility of 73%; risk-free
interest rate of 4.27%; and expected life of five years. The exercise price of
all options equaled or exceeded market price of the stock at the date of grant.

     The Board of Directors of the Company issues shares of stock as bonuses to
certain directors, employees and third parties. The stock bonus shares have been
reflected outside of the Shareholders' Equity section in the accompanying
Consolidated Balance Sheets as such shares are forfeitable to the Company until
earned. During fiscal 1993, the Company's Board of Directors amended the stock
bonus plan. As a result, the earn-out dates of certain individuals were extended
until retirement. For the years ended May 31, 2001, 2000 and 1999, the Company
had compensation expense of $358,500; $201,000; and $173,300, respectively,
resulting from these issuances. A schedule of total forfeitable shares for the
Company is set forth in the following table:


                                       79




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


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

     May 1990                   40,300          $  9.75        $   392,900
     June 1990                  66,300            11.00            729,300
     November 1992              10,660             N/A               N/A
     May 1993                   20,000             3.375            67,500
     November 1993              18,520             3.00             55,600
     January 1994               18,520             4.00             74,100
     January 1995               13,520             3.75             50,700
     February 1996               7,700            15.125           116,500
     December 1996              28,380            10.875           308,600
     December 1996               8,452            11.50             97,200
     August 1997                 7,320            10.875            79,600
     August 1997                 5,706            10.875            62,100
     May 1998                   67,000             6.56            439,500
                               -------          --------       -----------
     Balance at
       May 31, 1998            312,378                           2,473,600

     May 1999                   67,000          $  4.00            268,000
     Shares earned             (40,170)           --              (269,900)
                               -------          --------       -----------
     Balance at
       May 31, 1999            339,208                           2,471,700
     May 2000                   67,000          $  3.00            201,000
       Shares earned            (9,600)           --               (88,100)
                               -------          --------       -----------
     Balance at
       May 31, 2000            396,608                           2,584,600
     May 2001                   67,000          $  5.35            358,400
       Shares earned           (29,820)           --              (194,400)
                               -------          --------       -----------
     Balance at
       May 31, 2001            433,788                         $ 2,748,600
                               =======                         ===========

     During 2001, 2000 and 1999; 29,820, 9,600 and 40,170 shares were earned,
respectively.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")

     SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25; accordingly, for purposes of the pro forma disclosures presented below,

                                       80




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                  (CONTINUED)


the Company has computed the fair values of all options granted using the
Black-Scholes pricing model and the following weighted average assumptions (no
options were granted during 2000):

                                       2001           2000            1999
                                       ----           ----            ----
     Risk-free interest rate           4.29%           --             4.65%
     Expected lives                     --             --           10 years
     Expected volatility               73.1%           --             102%
     Expected dividend yield            --             --              0%

     To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon expiration at the end of the ten years. All
options are initially assumed to vest. Cumulative compensation cost recognized
in pro forma net income or loss with respect to options that are forfeited prior
to vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Pro forma stock-based compensation, net of the effect of
forfeitures, was $2,746,600, $0 and $2,314,700 for 2001, 2000 and 1999,
respectively.

     If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:



                                                   Year Ended May 31,
                                    ------------------------------------------------
                                        2001             2000              1999
                                    ------------    --------------    --------------
Net loss to common shareholders
                                                             
     As reported                    $ 1,771,200     $ (10,662,600)    $ (11,648,500)
     Pro forma                      $  (975,400)    $ (10,662,600)    $ (13,963,200)
Net loss per common share
     As reported, Basic             $       .23     $        (1.39)   $       (1.63)
     As reported, Diluted           $       .22     $        (1.33)   $       (1.63)
     Pro forma, Basic               $      (.12)    $        (1.39)   $       (1.96)
     Pro forma, Diluted             $      (.12)    $        (1.33)   $       (1.96)


     Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note B, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.


                                       81




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


     A summary of the Stock Option Plan activity for the years ended May 31,
2001 and 2000 is as follows:



                                                                   Year Ended May 31,
                                      --------------------------------------------------------------------------
                                                2001                     2000                        1999
                                      ---------------------     ----------------------     ---------------------
                                                   Weighted                   Weighted                  Weighted
                                                   Average                    Average                   Average
                                                   Exercise                   Exercise                  Exercise
                                        Options      Price       Options      Price         Options     Price
                                        -------      -----       -------      -----         -------     -----
                                                                                      
   Outstanding at beginning
       of year                        1,300,200      2.79       1,300,200      2.79          534,700     3.00
   Granted                            1,499,000      2.69         --            --           837,500     2.00
   Forfeited                            (82,500)     2.88         --            --           (67,000)    1.00
   Expired                             (149,000)     4.00         --            --            --          --
   Exercised                           (118,700)     2.60         --            --            (5,000)    1.00
                                      ----------                ---------                  --------
   Outstanding at end of year         2,449,000      2.66       1,300,200      2.79        1,300,200     2.79
                                      ==========                =========                  ========
   Exercisable at end of year         2,449.000      2.66       1,300,200      2.79        1,300,200     2.79
                                      ==========                =========                  ========

   Weighted average fair
       value of options
       granted during the year                      $1.83                       --                      $2.54


     The following table summarized information about employee stock options
outstanding and exercisable at May 31, 2001:



                                               Weighted
     Weighted            Number of              Average                 Number
      Average             Options              Remaining              of Options
     Exercise         Outstanding at          Contractual           Exercisable at
       Price           May 31, 2001          Life in years           May 31, 2001
     --------         ------------           ------------           ------------

                                                            
      $2.00               291,800                7.33                   291,800
       2.69             1,430,000                8.62                 1,430,000
       2.75                31,400                 .92                    31,400
       2.88               462,500                7.33                   462,500
       2.90               233,300                 .87                   233,300
                        ---------                                     ---------
                        2,449,000                                     2,449,000
                        =========                                     =========



                                       82




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


K.   COMMITMENTS, CONTINGENCIES AND OTHER:

LEGAL PROCEEDINGS

     SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION

     The partners in SMP have been involved in a legal dispute over the past 10
years. After a ruling from the American Arbitration Association ("AAA") on the
matter, in April 1996, Nukem, Inc., asked for and received a remand to the AAA
Panel of the ruling. The Panel clarified its order on July 3, 1996. The Panel's
Orders were confirmed by the U.S. District Court of Colorado and Nukem appealed
to the 10th Circuit Court of Appeals ("CCA"). The CCA affirmed the lower Court's
Judgment. Nukem moved for Satisfaction of Judgment which was denied by the
District Court. Nukem again appealed but the 10th CCA ruled against Nukem and
affirmed the lower Court's order holding that Nukem must account to Sheep
Mountain Partners on the CIS contracts. The U.S. District Court has appointed a
Special Master to determine the value of the purchase rights, the pounds of
uranium purchased under those rights and the profits therefrom as ordered in the
Judgment. The Special Master is currently conducting an accounting.

     KENNECOTT LITIGATION

     On November 10, 1999, Kennecott Uranium Company and Kennecott Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp., and USECC in the Sixth Judicial District Court, Campbell County,
Wyoming, No. 224006. On September 11, 2000, the parties entered into a
settlement agreement to resolve all issues in the lawsuit. Under the settlement
agreement, USECC sold all of its interests in the GMMV and the GMMV properties,
to an affiliate of Kennecott. The purchase consideration was $3,250,000 in cash
and a 4% net profits royalty interest in certain of the mining claims at the Big
Eagle and Jackpot Mines. Kennecott assumed all reclamation obligations on the
GMMV properties.

     SUTTER GOLD MINING COMPANY LITIGATION

     On September 28, 1998, a lawsuit was filed in Amador County Superior Court,
California by Concerned Citizens of Amador County as plaintiffs, against the
County of Amador, the Amador County Board of Supervisors, and Sutter Gold Mining
Company as a real party in interest. The lawsuit challenges the actions of
Amador County and its Board of Supervisors in certifying the Final Subsequent
Environmental Impact Report (FSEIR) and approving the amended Conditional Use
Permit (CUP).

     A hearing was held on June 7, 1999, and on August 30, 1999, the Honorable
Susan C. Harlan, Judge of the Superior Court in Amador County, issued a detailed
written Memorandum of Opinion, denying every cause of action of
Appellants'/Petitioners' Petition for writ of Mandate, and upholding the
County's certification of the FSEIR and approval of the amended CUP. In
September 1999, the Concerned Citizens appealed Amador County Superior Court's
decision to the Court of Appeals of the State of California Third Appellate
District. On appeal, Appellants presented a more targeted approach, alleging
only two violations of the Planning and Zoning Law and two violation of
California Environmental Quality Act. SGMC and the

                                       83




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


County filed their respective Respondent Briefs. Oral arguments were made to the
Appellate Court on August 20, 2001. A decision is expected soon.

     CONTOUR DEVELOPMENT LITIGATION

     On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado, Case No. 98WM1630, against Contour Development Company, L.L.C.
and entities and persons associated with Contour Development Company, L.L.C.
(together, "Contour") seeking compensatory and consequential damages of more
than $1.3 million from the defendants for dealings in real estate owned by USE
and Crested in Gunnison, Colorado. The Contour defendants asserted a counter
claim asking for payment of attorney's fees and costs. Discovery has been
completed and the final pretrial conference is scheduled for October 2, 2001,
when the court will schedule the trial date. Trial is expected in early 2002.

RECLAMATION AND ENVIRONMENTAL LIABILITIES


     Most of the Company's exploration activities are subject to federal and
state regulations that require the Company to protect the environment. The
Company conducts its operations in accordance with these regulations. The
Company's current estimates of its reclamation obligations and its current level
of expenditures to perform ongoing reclamation may change in the future. At the
present time, however, the Company cannot predict the outcome of future
regulation or its impact on costs. Nonetheless, the Company has recorded its
best estimate of future reclamation and closure costs based on currently
available facts, technology and enacted laws and regulations. Certain regulatory
agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land
Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ")
review the Company's reclamation, environmental and decommissioning liabilities,
and the Company believes its recorded amounts are consistent with those reviews
and related bonding requirements. To the extent that planned production on its
properties is delayed, interrupted or discontinued because of regulation or the
economics of the properties, the future earnings of the Company would be
adversely affected. The Company believes it has accrued all necessary
reclamation costs and there are no additional contingent losses or unasserted
claims to be disclosed or recorded. The Company has not disposed of any
properties for which it has a commitment or is liable for any known
environmental liabilities.


     The majority of the Company's environmental obligations relate to former
mining properties acquired by the Company. Since the Company currently does not
have properties in production, the Company's policy of providing for future
reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures or costs. For the obligations
recorded on acquired properties, including site-restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over several
years, and since these properties are all considered future production
properties, those expenditures, particularly the closure costs, may not be
incurred for many years. The Company also does not believe that any significant
capital expenditures to monitor or reduce hazardous substances or other
environmental impacts are currently required. As a result, the near term
reclamation obligations are not expected to have a significant impact on the
Company's liquidity.


                                       84




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)



     As of May 31, 2001, the Company has recorded estimated reclamation
obligations of $8,906,800 which is included in Reclamation and Other Long-term
Liabilities in the accompanying Consolidated Balance Sheets. None of these
liabilities have been discounted, and the Company has not recorded any potential
offsetting recoveries from other responsible parties or from any insurance
companies.


     The Company currently has four mineral properties or investments that
account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC.
The environmental obligations and the nature and extent of cost sharing
arrangements with other potentially responsible parties, as well as any
uncertainties with respect to joint and several liability of each are discussed
in the following paragraphs:

SMP
---


     The Company is responsible for the reclamation obligations, environmental
liabilities and liabilities for injuries to employees in mining operations with
respect to the Sheep Mountain properties. The reclamation obligations, which are
established by regulatory authorities, were reviewed by the Company and the
regulatory authorities during fiscal 2001 and they jointly determined that the
reclamation liability was $1,496,800. The obligation will be satisfied over the
life of the mining project which is estimated to be at least 20 years. The
Company self bonded this obligation by mortgaging certain of its real estate
assets, including the Glen L. Larsen building, and by posting cash bonds.


GMMV
----

     During fiscal 1991, the Company acquired developed mineral properties on
Green Mountain known as the Big Eagle Property. The GMMV also acquired a uranium
mill known as the Sweetwater Mill. As part of the settlement of the GMMV
litigation with Kennecott in September 2000, the Company was released from any
and all reclamation and environmental obligations related to the GMMV.

SUTTER GOLD MINING COMPANY
--------------------------


     SGMC's mineral properties are shut down and have never been in production.
There has been minimal surface disturbance on the Sutter properties. Reclamation
obligations consist of closing the mine entry and removal of a mine shop. The
reclamation obligation to close the property has been set by the State of
California at $27,800 which is covered by a cash reclamation bond. This amount
was recorded by SGMC as a reclamation liability as of May 31, 2001.


PLATEAU RESOURCES, LIMITED
--------------------------


     The environmental and reclamation obligations acquired with the acquisition
of Plateau include obligations relating to the Shootaring Mill. Based on the
bonding requirements, Plateau transferred $2,500,000 to a trust account as
financial surety to pay future costs of mill decommissioning, site reclamation
and long-term site surveillance. In fiscal 1997, Plateau requested that the mill
be placed on operational status.


                                       85




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)



The NRC increased the reclamation liability to $6,784,000 as a result of this
request . As of May 31, 2001, a cash deposit for reclamation in the amount of
$9,664,000 was held by Plateau's escrow agent to satisfy the obligation of
reclamation.


EXECUTIVE COMPENSATION
----------------------

     The Company is committed to pay the estates of certain of their officers
one years' salary and an amount to be determined by the Boards of Directors, for
a period of up to five years thereafter. This commitment applies only in the
event of the death or total disability of those officers who are full-time
employees of the Company at the time of total disability or death. Certain
officers and employees have employment agreements with the Company.

L.   DISCONTINUED OPERATIONS.

     In February 1996, the Company completed the sale of 100% of the 8,267,450
outstanding shares of common stock of Brunton to a third party for $4,300,000 in
accordance with a Stock Purchase Agreement dated January 30, 1996 (the "Purchase
Agreement"). The Company received $300,000 at execution of the Purchase
Agreement and approximately $3,000,000 at closing. The Company has also since
been paid in full on the $1,000,000 balance. In addition, the Company was
entitled to receive 45% of the profits before taxes as defined in the Purchase
Agreement related to Brunton products existing at the time the Purchase
Agreement was executed for a period of 4 years and three months, beginning
February 1, 1996. The Company received payments of $297,100, $52,000, $94,900
and $292,600 for profits in 2001, 2000, 1999 and 1998, respectively.

M.   SUBSEQUENT EVENT

     Subsequent to May 31, 2001, the Company received $796,000 for 199,000
shares of its restricted common stock through a private placement. The Company
also received $310,200 subsequent to May 31, 2001 as a result of employees
exercising their options to purchase the Company's common stock.


                                       86




                       U.S. ENERGY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2001
                                   (CONTINUED)


N.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



                                                                    Three Months Ended
                                        ---------------------------------------------------------------------------
                                             May 31,         February 28,         November 30,        August 31,
                                              2001               2001                2000                 2000
                                        ---------------      --------------     ---------------     ---------------

                                                                                        
Net Revenues                            $      371,600       $     650,600       $   1,024,100      $    3,455,300

Gross Profits                           $   (1,641,900)      $  (2,024,100)      $  (2,189,100)     $   (1,174,600)

Net Earnings (loss)                     $   (1,341,800)      $  (1,857,800)      $   5,676,200      $     (705,400)

Earnings (loss) per Share, basic        $        (0.17)      $       (0.24)      $        0.73      $        (0.09)

Basic Weighted Average
     Shares Outstanding                      7,847,680           7,819,446           7,818,430           7,818,430

Earnings (loss) per share,
     diluted                            $        (0.16)      $       (0.23)      $        0.69      $        (0.09)

Diluted Weighted Average
     Shares Outstanding                      8,243,135           8,216,054           8,215,038           8,215,038





                                                                    Three Months Ended
                                        ---------------------------------------------------------------------------
                                             May 31,          February 28,        November 30,         August 31,
                                              2000               2000                1999                 1999
                                        ---------------      --------------     ---------------     ---------------

                                                                                        
Net Revenues                            $    2,086,500       $   1,793,700       $   1,760,400      $    1,248,200

Gross Profits                           $   (5,536,200)      $  (2,796,800)      $  (1,511,600)     $   (1,397,200)

Net Earnings (loss)                     $   (5,623,000)      $  (2,610,400)      $  (1,317,600)     $   (1,111,600)

Earnings (loss) per Share, basic        $        (0.74)      $       (0.39)      $       (0.16)     $        (0.15)

Basic Weighted Average
     Shares Outstanding                      7,697,569            8,021,781          7,258,291           7,258,291

Earnings (loss)per share,
     diluted                            $        (0.75)      $       (0.33)      $       (0.16)     $        (0.15)

Diluted Weighted Average
     Shares Outstanding                      8,027,914           8,021,781           7,258,291           7,258,291



                                       87





                         REPORT OF INDEPENDENT CERTIFIED
                         PUBLIC ACCOUNTANTS ON SCHEDULE


To U.S. Energy Corp:

In connection with our audit of the consolidated financial statements of U.S.
ENERGY CORP. (a Wyoming Corporation) AND SUBSIDIARIES referred to in our report
dated July 27, 2001, which is included in the Company's annual report on Form
10-K, we have also audited Schedule II for the year ended May 31, 2001. In our
opinion, this schedule presents fairly, in all material respects, the
information to be set forth therein.



                               GRANT THORNTON LLP

Denver, Colorado
July 27, 2001


                                       88





                                U.S. ENERGY CORP.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



                          Balance       Additions
                         beginning     charged to                    Balance end
                         of period      expenses      Deductions      of period
                         ---------     ----------     ----------     -----------

                                                         
May 31, 1999             $ 27,800      $ 465,000      $ 465,000      $ 27,800
                                                                     ========

May 31, 2000               27,800        708,600        708,600      $ 27,800
                                                                     ========

May 31, 2001               27,800           --             --        $ 27,800
                                                                     ========



                                       89





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ON ACCOUNTING AND FINANCIAL DISCLOSURE.

(a) During the previous eleven years, Arthur Andersen, LLP of Denver, Colorado
was engaged as the independent accountant to audit the Company's financial
statements. Arthur Andersen LLP has reported on all fiscal years from May 31,
1990 through May 31, 2000, and assisted in Management's review of the company's
financial statements for the quarters ended August 31, 2000 and November 30,
2000. On September 8, 2000, the company's board of directors at the
recommendation of its audit committee, ordered its Chief Financial Officer to
seek bids from various accounting firms to conduct its annual audits.

(I) On January 31, 2001, Arthur Andersen LLP was advised by the Company that it
had been replaced.

(II) Arthur Andersen LLP's audit reports for the last two fiscal years have not
contained an adverse opinion or a disclaimer of opinion, and neither such report
was qualified nor modified as to uncertainty, audit scope or accounting
principles.

(III) The decision to change accountants was made by the board of directors.

(IV) During the two most recent fiscal years and during the interim period from
May 31, 2000 to the date of replacement of independent accountant, there have
been no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.

(V) Not applicable.

(b) On January 31, 2001, the Company engaged Grant Thornton LLP of Suite 1800,
1600 Broadway, Denver, Colorado 80202 as its new independent accountant,
pursuant to the recommendation of the audit committee.

     The concurrence letter from Arthur Andersen LLP was filed as an exhibit to
the Form 8-K Report reporting the change in accountants, filed February 5, 2001.

                                    PART III

     In the event a definitive proxy statement containing the information being
incorporated by reference into this Part III is not filed within 120 days of May
31, 2001, we will file such information under cover of a Form 10-K/A.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


     The information required by Item 10 with respect to directors and certain
executive officers in incorporated herein by reference to our Proxy Statement
for the 2001 Annual Meeting of Shareholders, under the captions "Proposal 1:
Election of Directors," "Filing of Reports Under Section 16(a)," and "Business
Experience and Other Directorships of Directors and Nominees." The information
regarding the remaining executive officers is contained in Part I of this
report.


ITEM 11.  EXECUTIVE COMPENSATION.


     The information required by Item 11 is incorporated herein by reference to
the Proxy Statement for the 2001 Annual Meeting of Shareholders, under the
captions "Executive Compensation," and "Directors' Fees and Other Compensation."



                                       90





ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by Item 12 is incorporated herein by reference to
the Proxy Statement for the 2001 Annual Meeting of Shareholders, under the
caption "Security Ownership of Certain Beneficial Owners and Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by Item 13 is incorporated herein by reference to
the Proxy Statement for the 2001 Annual Meeting of Shareholders, under the
caption "Certain Relationships and Related Transactions."

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORMS 8-K.

(1) The following financial statements are filed as a part of the Report in
Item 8:

     Consolidated Financial Statements                                  Page No.
     U.S. Energy Corp. and Subsidiaries                                 --------

          Report of Independent Public Accountants
          Grant Thornton LLP..................................................47

          Report of Independent Public Accountants
          Arthur Andersen LLP.................................................48

          Consolidated Balance Sheets - May 31, 2001 and 2000..............49-50

          Consolidated Statements of Operations
          for the Years Ended May 31, 2001, 2000 and 1999..................51-52

          Consolidated Statements of Shareholders'
          Equity for the Years Ended May 31, 2001, 2000 and 1999...........53-55

          Consolidated Statements of Cash Flows
          for the Years Ended May 31, 2001, 2000 and 1999..................56-57

          Notes to Consolidated Financial Statements.......................58-87

          Report of Independent Certified
          Public Accountants on Schedule......................................88

          Schedule II - Valuation and Qualifying Accounts.....................89

(2) Not applicable.



                                       91





(3)  Exhibits Required to be Filed. Each individual exhibit filed herewith is
     sequentially paginated corresponding to the pagination of the entire Form
     10-K. As a result of this pagination, the page numbers of documents filed
     herewith containing a table of contents will not be the same as the page
     number contained in the original hard copy.

Exhibit                                                               Sequential
   No.                  Title of Exhibit                                Page No.
--------  ----------------------------------------------------        ----------

3.1       USE Restated Articles of Incorporation.............................[2]

3.1(a)    USE Articles of Amendment to
          Restated Articles of Incorporation.................................[4]

3.1(b)    USE Articles of Amendment (Second) to
          Restated Articles of Incorporation
          (Establishing Series A Convertible Preferred Stock.................[9]

3.2       USE Bylaws, as amended through April 22, 1992......................[4]

4.1       Amendment to USE 1998 Incentive
          Stock Option Plan
          (To include Family Transferability
          of Options Under SEC Rule 16b.....................................[11]

4.2       USE 1998 Incentive Stock Option Plan
          and Form of Stock Option Agreement 1/99............................[8]

4.3       USE Restricted Stock Bonus Plan,
          as amended through 2/94............................................[5]

4.4       Form of Stock Option Agreement, and Schedule
          Options Granted January 1, 1996....................................[6]

4.5       Form of Stock Option Agreement and Schedule,
          Options Granted January 10, 2001..................................[11]

4.6       [intentionally left blank)

4.7       USE 1996 Officers' Stock Award Program (Plan)......................[7]

4.8       USE Restated 1996 Officers' Stock Award Plan and
          Amendment to USE 1990 Restricted Stock Bonus Plan..................[7]

10.1      USECC Joint Venture Agreement - Amended as of 1/20/89..............[1]

10.2      Management Agreement with USECC....................................[3]

10.3      Professional Services Agreement and Option
          R. J. Falkner & Company,Inc.......................................11]

10.4      Professional Services Agreement and Warrant
          Riches and Resources, Inc.........................................[11]


                                                        92





10.5-10.60  [intentionally left blank]

10.61     Closing Agreement - Addendum to Agreement
          for Purchase and Sale of Assets (see Exhibit 10.62)...............[11]

10.62     Agreement for Purchase and Sale of Assets
          (Rocky Mountain Gas, Inc. and Quantum Energy LLC)..................[9]

10.63     Purchase and Sale Agreement
          CCBM, Inc. (subsidiary of Carrizo Oil & Gas, Inc.)
          and Rocky Mountain Gas, Inc.......................................[12]

16.       Concurrence Letter from Arthur Andersen LLP
          on Change of Accounting Firms.....................................[10]

21.1      Subsidiaries of Registrant........................................[11]

99.1      Certification Pursuant to Section 1350 of Chapter 63
          of Title 18 of the United States Code................................*

*  Filed herewith.
_____________


Unless otherwise indicated, the SEC File Number for each of the following
documents incorporated by reference is 000-6814.

[1]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Annual Report on Form 10-K for the year ended May 31,
          1989, filed August 29, 1989.

[2]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Annual Report on Form 10-K for the year ended May 31,
          1990, filed September 14, 1990.

[3]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Annual Report on Form 10-K for the year ended May 31,
          1991, filed September 13, 1991.

[4]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Annual Report on Form 10-K for the year ended May 31,
          1992, filed September 14, 1992.

[5]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Form S-1 registration statement, initial filing (SEC File
          No. 333-1689), filed June 18, 1996.

[6]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Annual Report on Form 10-K for the year ended May 31,
          1996, filed September 13, 1996.

[7]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Annual Report on Form 10-K for the year ended May 31,
          1997, filed September 15, 1997.

[8]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Annual Report on Form 10-K for the year ended May 31,
          1998, filed September 14, 1998.


                                       93





[9]       Incorporated by reference from the like-numbered exhibit to the
          Registrant's Form 10-K for the year ended May 31, 2000, filed
          September 13, 2000.

[10]      Incorporated by reference from the like-numbered exhibit to the
          Registrant's Form 8-K filed February 5, 2001.

[11]      Incorporated by reference from the like-numbered exhibit to the
          Registrant's Form 10-K for the year ended May 31, 2001, filed August
          29, 2001.

[12]      Incorporated by reference from the like-numbered exhibit to the
          Registrant's Form 10-K/A amendment no. 1 for the year ended May 31,
          2001, filed June 18, 2002.

(b)       Reports filed on Form 8-K.

          During the fourth quarter of the fiscal year ended on May 31, 2001,
          the Registrant filed no Form 8-K Reports.

(c)       Required exhibits are attached hereto and listed above under Item 14
          (a)(3).

(d)       Required financial statement schedules are listed and attached hereto
          in Item 14(a)(2).



                                       94





                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                            U.S. ENERGY CORP. (Registrant)


Date:  January 13, 2003                By:   /s/  John L. Larsen
                                            ------------------------------------
                                            John L. Larsen,
                                            Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


Date:  January 13, 2003                By:    /s/  John L. Larsen
                                            ------------------------------------
                                            John L. Larsen, Director


Date:  January 13, 2003                By:    /s/  Keith G. Larsen
                                            ------------------------------------
                                            Keith G. Larsen, Director


Date:  January 13, 2003                By:    /s/  Harold F. Herorn
                                            ------------------------------------
                                            Harold F. Herron, Director


Date:  January 13, 2003                By:    /s/  Nick Bebout
                                            ------------------------------------
                                            Nick Bebout, Director


Date:  January 13, 2003                By:    /s/  H. Russell Fraser
                                            ------------------------------------
                                            H. Russell Fraser, Director


Date:  January 13, 2003                By:   /s/  Don C. Anderson
                                            ------------------------------------
                                            Don C. Anderson, Director


Date:  January 13, 2003                By:    /s/  Robert Scott Lorimer
                                            ------------------------------------
                                            Robert Scott Lorimer,
                                            Principal Financial Officer/
                                            Chief Accounting Officer


                                       95




                                  CERTIFICATION


         I, Robert Scott Lorimer, certify that:

1. I have reviewed this amended annual report on Form 10-K/A of U.S. Energy
Corp.;

2. Based on my knowledge, this amended report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, misleading with respect to the period covered by this amended report.

3. Based on my knowledge, the financial statements, and other financial
information included in this amended report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this amended report.


DATED this 13th day of January 2003.



                                                  /s/  Robert Scott Lorimer
                                                 -------------------------------
                                                 Robert Scott Lorimer
                                                 Chief Financial Officer



                                  CERTIFICATION


         I, John L. Larsen, certify that:

1. I have reviewed this amended annual report on Form 10-K/A of U.S. Energy
Corp.;

2. Based on my knowledge, this amended report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, misleading with respect to the period covered by this amended report.

3. Based on my knowledge, the financial statements, and other financial
information included in this amended report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this amended report.


DATED this 13th day of January 2003.


                                                  /s/  John L. Larsen
                                                 -------------------------------
                                                 John L. Larsen,
                                                 Chief Executive Officer



                                       96