financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position or results of operations.

3.     INVESTMENT IN PINNACLE GAS RESOURCES, INC.

On June 23, 2003, pursuant to a Subscription and Contribution Agreement by and among the Company and its wholly-owned subsidiary, CCBM, Inc., Rocky Mountain Gas, Inc. (“RMG”) and the Credit Suisse First Boston Private Equity entities, named therein (the “CSFB Parties”), CCBM and RMG contributed their respective interests, having a estimated fair value of approximately $7.5 million each, in (1) leases in the Clearmont, Kirby, Arvada and Bobcat project areas and (2) oil and naturalgas reserves in the Bobcat project area to a newly formed entity, Pinnacle Gas Resources, Inc., a Delaware corporation. In exchange for the contribution of these assets, CCBM and RMG each received 37.5% of the common stock of Pinnacle as of the closing date and options to purchase Pinnacle common stock. RMG subsequently transferred its interest in Pinnacle to U.S. Energy Corp. Subsequently, the CSFB Parties contributed additional funds to Pinnacle.

In April 2006, prior to and in connection with a private placement by Pinnacle of 7,400,000 shares of its common stock, Pinnacle issued 25 new shares of its common stock to each of its stockholders in exchange for each existing share in a stock split; Pinnacle redeemed the preferred stock held by the CSFB Parties at 110% of par value; the CSFB Parties exercised all of their warrants to purchase Pinnacle common stock on a “cashless” net exercise basis; and CCBM and U.S. Energy exercised their respective options to purchase Pinnacle common stock on a “cashless” net exercise basis. On April 11, 2006, after the stock split, the redemption of the preferred stock, the warrant and option exercises and the private placement, CCBM owned 2,459,102 shares of Pinnacle’s common stock, and its ownership of Pinnacle was 9.5% on a fully diluted basis. On such date, U.S. Energy and the CSFB Parties owned 2,459,102 and 7,306,782 shares of Pinnacle’s common stock, respectively, and their ownership of Pinnacle was 9.5% and 28.3% on a fully diluted basis, respectively. On September 22, 2006, U.S. Energy sold all of its 2,459,102 shares of Pinnacle’s common stock to the CSFB Parties.

Prior to the April 2006 Pinnacle private placement, the Company accounted for its interest in Pinnacle using the equity method. Beginning in the second quarter of 2006, the Company used the cost method to account for the Pinnacle investment.

During the second quarter of 2007, Pinnacle became a publicly traded entity on the Nasdaq Global Market. For accounting purposes, the Pinnacle stock now has a readily determinable fair value. As a result, the Company classifies the Pinnacle investment as available-for-sale and adjusts the investment to fair value through other comprehensive income. At December 31, 2007, the Company increased the book value of its Pinnacle investment by $8.3 million, $5.4 million net of tax, and reported thefair value of the stock at $11.1 million (based on the closing price of Pinnacle’s common stock on December 31, 2007).

In June 2007, the Company sold 41,894 shares of Pinnacle stock for net proceeds of $0.4 million and recognized a $0.3 million gain, which is included in other income and expenses, net on the Consolidated Statements of Operations. As of December31, 2007, the Company owned 2,417,208 shares of Pinnacle common stock.

On October 15, 2007, Pinnacle, Quest Resource Corporation (“Quest”), and Quest Merger Sub, Inc., a wholly owned subsidiary of Quest (“Merger Sub”), entered into an agreement and plan of merger whereby Merger Sub will merge with and into Pinnacle. The merger agreement provides for Quest’s acquisition of all of the issued and outstanding shares of Pinnacle’s common stock for aggregate consideration of approximately 19.1 million shares of Quest’s common stock, or approximately $207 million based on the closing price of Quest’s common stock on October 15, 2007. In February 2008, the merger agreement was amended so that each share of Pinnacle’s common stock will be converted into the right to receive 0.5278 shares of Quest’s common stock. Completion of the merger transaction is conditioned upon, among other things, adoption of the merger agreement by both Pinnacle’s and Quest’s stockholders. Quest and Pinnacle have stated that they anticipate the closing of the merger willoccur in the first or second quarter of 2008. This transaction does not impact the Company’s accounting method for the Pinnacle investment.