Summary of U S GLOBAL INVESTORS INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion reviews and analyzes the consolidated results of operations for the past three fiscal years and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements, and Selected Financial Data.
Recent Trends and Continuing Disruptions in Worldwide Financial Markets Due to the consequences of the meltdown in the subprime mortgage market beginning in 2007, the worldwide financial markets have encountered intense volatility due to uncertainty and disruption within the credit markets. This disruption continued into 2008 and 2009 causing global equities to decline worldwide. The Company's investment advisory fees and operating revenue primarily depend on the value of its assets under management, and continued global market fluctuations impact the funds' asset levels, thereby affecting income and results of operations.
This global strain has resulted in a seizing of the international credit markets resulting in unprecedented worldwide governmental actions. For instance, on September 7, 2008, the U.S. Government moved to guarantee the outstanding debt of Fannie Mae and Freddie Mac. On September 19, 2008, the U.S. Treasury Department announced a temporary guarantee program for publicly available money market funds which elected to participate in the program.
Furthermore, on October 3, 2008, the U.S. Congress enacted the Emergency Economic Stabilization Act of 2008, which sanctioned the Treasury Secretary to create the Troubled Assets Relief Program and authorize the purchase of up to $700 billion of troubled assets. Despite these aggressive governmental programs and actions, the global financial markets continue to remain extremely volatile. What began as the sub-prime mortgage default concern has swelled to practically every aspect of the global financial marketplace. Since late 2007, the markets continue to experience uncertainty and disruption resulting in the sharp decline in equity markets and dislocation in the credit markets. The equity markets suffered from pullback in consumer spending, which led to weak performance in the global markets, increased unemployment, and significant declines in the values of assets owned by financial institutions. This worldwide disruption has spread to tangential areas including currencies and commodities, which directly impact the Company and the assets it manages. The sustained volatility throughout the financial world continued throughout the Company's fiscal year. Returns on many major equity indices have significantly declined from June 30, 2008, which had a dramatic effect on assets under management and revenues. Total assets under management at June 30, 2008, were $5.8 billion versus $2.2 billion at June 30, 2009.
Business Segments
U.S. Global, with principal operations located in San Antonio, Texas, manages two business segments.
First, the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors, and second, the Company invests for its own account in an effort to add growth and value to its cash position. For more details on the results of our core operations, see Note 14 Financial Information by Business Segment. The Company generates substantially all its operating revenues from the investment management of products and services for USGIF and two offshore clients. Although the Company generates the majority of its revenues from its investment advisory segment, the Company holds a significant amount of its total assets in investments. As of June 30, 2009, the Company held approximately $7.0 million in investments, of which approximately $5.5 million, or 14.9% of total assets, was invested in

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the Funds and other offshore clients and $1.5 million, or 4.0% of total assets, in other entities. The following is a brief discussion of the Company's two business segments.
Investment Management Products and Services Investment management revenues are largely dependent on the total value and composition of assets under management. Fluctuations in the markets and investor sentiment directly impact the Funds' asset levels, thereby affecting income and results of operations. During fiscal year 2009, average assets under management decreased 53.4% to $2.5 billion, primarily due to significant decreases in the natural resource and foreign equity funds under management through both net outflows and market depreciation.

                                                        Average Assets under Management
                                                             (Dollars in Millions)
                            2009           2008           % Change           2008           2007           % Change
Natural resource           $ 1,318        $ 2,818             (53.2 %)      $ 2,818        $ 2,427              16.1 %
International equity           558          1,601             (65.1 %)        1,601          1,506               6.3 %
Fixed income                   513            617             (16.9 %)          617            593               4.0 %
Domestic equity                 54             89             (39.3 %)           89             84               6.0 %

Total SEC-registered
funds                        2,443          5,125             (52.3 %)        5,125          4,610              11.2 %
Other advisory
clients                         90            312             (71.2 %)          312            236              32.2 %

Average assets under
management                 $ 2,533        $ 5,437             (53.4 %)      $ 5,437        $ 4,846              12.2 %

Investment Activities
Management believes it can more effectively manage the Company's cash position
by maintaining certain types of investments utilized in cash management and
continues to believe that such activities are in the best interest of the
Company.
The following summarizes the market value, cost and unrealized gain or loss on
investments as of June 30, 2009, and June 30, 2008.

                                                                                                                 Unrealized holding
                                                                                                                 gains (losses) on
                                                                                           Unrealized            available-for-sale
                Securities                        Market Value            Cost            Gain (Loss)          securities, net of tax
Trading1                                         $    4,511,497        $ 6,276,578        $ (1,765,081 )                           N/A
Available-for-sale2                                   2,536,665          2,002,826             533,839        $                352,334

Total at June 30, 2009                           $    7,048,162        $ 8,279,404        $ (1,231,242 )


Trading1                                         $    6,991,843        $ 6,275,478        $    716,365                             N/A
Available-for-sale2                                   1,246,769          1,739,795            (493,026 )      $               (325,397 )

Total at June 30, 2008                           $    8,238,612        $ 8,015,273        $    223,339

1 Unrealized and realized gains and losses on trading securities are included in earnings in the statement of operations.

2 Unrealized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income as a separate component of shareholders' equity until realized.

As of June 30, 2009, and 2008, the Company held approximately $1.5 million and $2.4 million, respectively, in investments other than the clients the Company advises.

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Investments in securities classified as trading are reflected as current assets on the consolidated balance sheet at their fair market value. Unrealized holding gains and losses on trading securities are included in earnings in the consolidated statements of operations and comprehensive income. Investments in securities classified as available for sale, which may not be readily marketable, are reflected as non-current assets on the consolidated balance sheet at their fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income as a separate component of shareholders' equity until realized.
Investment income (loss) from the Company's investments includes:
• realized gains and losses on sales of securities;

• unrealized gains and losses on trading securities;

• realized foreign currency gains and losses;

• other-than-temporary impairments on available-for-sale securities; and

• dividend and interest income.

Investment income can be volatile and may vary depending on market fluctuations, the Company's ability to participate in investment opportunities, and timing of transactions. A significant portion of the unrealized gains and losses is concentrated in a small number of issuers. For fiscal years 2009, 2008, and 2007, the Company had net realized gains (losses) of approximately $(2,457,000), $(152,000), and $737,000, respectively. Due to market volatility, the Company expects that gains or losses will continue to fluctuate in the future.

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Consolidated Results of Operations
The following is a discussion of the consolidated results of operations of the Company and a detailed discussion of the Company's revenues and expenses.

                                2009              2008            % Change            2008              2007           % Change
Net income (loss) (in
thousands)                   $ (2,238 )        $ 10,837            (120.6 %)       $ 10,837          $ 13,759            (21.2 %)
Net income (loss) per
share
Basic                        $  (0.15 )        $   0.71            (121.1 %)       $   0.71          $   0.91            (22.0 %)
Diluted                      $  (0.15 )        $   0.71            (121.1 %)       $   0.71          $   0.90            (21.1 %)
Weighted average
shares outstanding (in
thousands)
Basic                          15,276            15,247                              15,247            15,162
Diluted                        15,298            15,275                              15,275            15,242

For the year ended June 30, 2009, no options were included in the computation of diluted earnings per share because they would be antidilutive due to the net loss.
Year Ended June 30, 2009, Compared with Year Ended June 30, 2008 The Company posted net after-tax loss of $2,237,579 ($0.15 loss per share) for the year ended June 30, 2009, compared with net after-tax income of $10,836,810 ($0.71 per share) for the year ended June 30, 2008. This decrease in profitability is primarily attributable to the following factors:
Revenues
Total consolidated revenues for the year ended June 30, 2009, decreased $32,898,978, or 59%, compared with the year ended June 30, 2008. This decrease was primarily attributable to the following:
• Investment advisory fees declined by $28.4 million primarily as a result of decreased assets under management in the natural resources and international equity funds.

• Investment income decreased by $6.1 million primarily as a result of declines in the market value of trading securities in the natural resources and international equity sectors as well as an other-than-temporary impairment as a result of declines in the market value of available-for-sale securities.

Expenses
Total consolidated expenses for the year ended June 30, 2009, decreased by $12,706,203, or 32%, compared with the prior year. This decrease was primarily attributable to the following:
• Subadvisory fees decreased by 74%, or $6.8 million, due to a change in the subadvisory contract (discussed in Note 2 Significant Accounting Policies
- Revenue Recognition) as well as decreased assets in the funds being subadvised;

• Platform fees decreased by 45%, or $4.1 million, due to decreased asset inflows through broker-dealer platforms and decrease in asset values due to market declines;

• Employee compensation expense decreased by 26%, or $3.6 million, primarily due to a decline in incentive bonuses and fewer employees;

• General and administrative expenses increased 28%, or $1.9 million, primarily due to proxy-related costs associated with the merger of the USGIF and USGAF trusts.

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Year Ended June 30, 2008, Compared with Year Ended June 30, 2007 The Company posted net after-tax income of $10,836,810 ($0.71 per share) for the year ended June 30, 2008, compared with net after-tax income of $13,759,249 ($0.91 per share) for the year ended June 30, 2007. The decrease in profitability in fiscal year 2008 primarily resulted from a decrease of $3.5 million in advisory fees, an increase of $1.5 million in platform fee expense, and an increase of $1.0 million in employee compensation and benefits. These factors were somewhat offset by an increase of $918,000 in transfer agent fees and a decrease of $676,000 in general and administrative expenses.

Revenues

                                                               %                                                %
(Dollars in Thousands)        2009            2008           Change            2008            2007          Change
Investment advisory
fees:
Natural resource funds      $  8,990        $ 17,186           (47.7 %)      $ 17,186        $ 15,191           13.1 %
International equity
funds                          6,749          19,963           (66.2 %)        19,963          18,727            6.6 %
Domestic equity funds            730           1,605           (54.5 %)         1,605           1,776           (9.6 %)
Fixed income funds               295             764           (61.4 %)           764             728            4.9 %

Total mutual fund
advisory fees                 16,764          39,518           (57.6 %)        39,518          36,422            8.5 %
Other advisory fees              924           6,538           (85.9 %)         6,538          13,095          (50.1 %)

Total investment
advisory fees                 17,688          46,056           (61.6 %)        46,056          49,517           (7.0 %)
Transfer agent fees            5,942           8,455           (29.7 %)         8,455           7,537           12.2 %
Distribution fees              2,867               -           100.0 %              -               -            0.0 %
Administrative service
fees                           1,215               -           100.0 %              -               -            0.0 %
Investment income
(loss)                        (4,616 )         1,447          (419.0 %)         1,447           1,357            6.7 %
Other revenues                    44              81           (45.7 %)            81             193          (58.2 %)

Total                       $ 23,140        $ 56,039           (58.7 %)      $ 56,039        $ 58,604           (4.4 %)

Investment Advisory Fees. Investment advisory fees, the largest component of the Company's revenues, are derived from two sources: SEC-registered mutual fund advisory fees, which in fiscal 2009 accounted for 95% of the Company's total advisory fees, and offshore investment advisory fees, which accounted for 5% of total advisory fees.
SEC-registered mutual fund investment advisory fees are calculated as a percentage of average net assets, ranging from 0.375% to 1.375%, and are paid monthly. These advisory fees decreased by approximately $22.8 million, or 58%, in fiscal 2009 over fiscal 2008 primarily as a result of decreased assets under management, particularly in the international equity and natural resource funds. Mutual fund investment advisory fees are also affected by changes in assets under management, which include:
• market appreciation or depreciation;

• the addition of new client accounts;

• client contributions of additional assets to existing accounts;

• withdrawals of assets from and termination of client accounts;

• exchanges of assets between accounts or products with different fee structures; and

• the amount of fees voluntarily reimbursed.

A special meeting of shareholders of USGIF and USGAF was held on September 23, 2008, to consider several proposals. The proposals were approved effective October 1, 2008, and included (i) a reorganization of the USGIF and USGAF funds from two separate Massachusetts business trusts into a single Delaware statutory trust under the name USGIF, (ii) a new advisory agreement for the USGIF funds and (iii) a new distribution plan for the nine equity USGIF funds under which USGB is paid a fee at an annual rate of 0.25 percent of the average daily net assets of each fund. With respect to four equity funds, the new advisory agreement also increased the base advisory fee and changed to the advisory fee breakpoints. In addition, administrative services that were part of the previous advisory

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agreement were removed and became the subject of a separate agreement. Under the new administrative services agreement, the Funds no longer reimburse the Company for certain legal and administrative services, but instead pay the Company compensation at an annual rate of 0.08 percent of the average daily net assets of each fund for administrative services provided by the Company to USGIF. A full discussion of the proposals is set forth in proxy materials filed with the SEC by USGIF and USGAF. The Company incurred a total of $3.7 million in merger-related costs, of which $3.5 million was recorded in the first quarter of fiscal 2009.
As of October 1, 2008, the nine equity USGIF funds include a base advisory fee that, beginning in October 2009, will be adjusted upwards or downwards by 0.25 percent if there is a performance difference of 5 percent or more between a Fund's performance and that of its designated benchmark index over the prior rolling 12 months.
Prior to October 1, 2008, the Company voluntarily waived or reduced its advisory fees and/or agreed to pay expenses on seven of thirteen Funds. Effective October 1, 2008, the Company contractually agreed to cap the expenses of all thirteen Funds through September 30, 2009. Thereafter, these caps will continue on a modified and voluntary basis at the discretion of the Company. The aggregate fees waived and expenses borne by the Company were $5,566,000; $1,422,000; and $1,178,000, in fiscal years 2009, 2008, and 2007, respectively. The above waived fees include amounts waived under an agreement whereby the Company has voluntarily agreed to waive fees and/or reimburse the U.S. Treasury Securities Cash Fund and the U.S. Government Securities Savings Fund to the extent necessary to maintain the respective Fund's yield at a certain level as determined by the Company (Minimum Yield). Reflecting increased demand in the market for government securities, yields on such products have decreased to record lows. In certain products, the gross yield is not sufficient to cover all of the Funds' normal operating expenses and fee waivers have been used to maintain positive or zero net yields. For the fiscal year ended June 30, 2009, fees waived and/or expenses reimbursed as a result of this agreement were $537,700 and $15,718 for the U.S. Treasury Securities Cash Fund and the U.S. Government Securities Savings Fund, respectively. The Company may recapture any fees waived and/or expenses reimbursed within three years after the end of the Fund's fiscal year of such waiver and/or reimbursement to the extent that such recapture would not cause the Fund's yield to fall below the Minimum Yield. Thus, $170,642 of these waivers are recoverable by the Company through December 31, 2011 and $382,776 through December 31, 2012. Management believes these waivers could increase in the future. Such increases in fee waivers could be significant and will negatively impact the Company's revenues and net income. Management cannot predict the impact of the waivers due to the number of variables and the range of potential outcomes. The Company expects to continue to waive fees and/or pay for fund expenses if market and economic conditions warrant. However, subject to the Company's commitment to certain funds with respect to fee waivers and expense limitations, the Company may reduce the amount of Fund expenses it is bearing.
On November 6, 2008, effective immediately, the Company terminated its relationship with Endeavour Financial Corp. ("EFC") as the subadviser to its equity portfolio. As investment adviser, the Company was paid a monthly advisory fee based on the net asset value of the portfolio and an annual performance fee, if any, based on a percentage of consolidated net income from operations in excess of a predetermined percentage return on equity. The Company recorded advisory fees from EFC totaling $661,262; $5,326,438; and $11,041,050 for the fiscal years 2009, 2008, and 2007, respectively.
The Company continues to provide advisory services for two offshore clients and receives monthly advisory fees based on the net asset values of the clients and performance fees, if any, based on the overall increase in net asset values. The Company recorded fees from these clients totaling $263,101, $1,198,007 and $1,913,302 for the fiscal years 2009, 2008, and 2007, respectively. The performance fees for these clients are calculated and recorded quarterly in accordance with the terms of the advisory agreements. These fees may fluctuate significantly from year to year based on factors that may be out

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of the Company's control. For more information, see Item 1A. "Risk Factors" and the section entitled "Revenue Recognition" under Critical Accounting Policies. Frank Holmes, CEO, serves as a director of the offshore clients.
The Company receives additional revenue from several sources including custodial fee revenues, revenues from mailroom operations, and investment income. Transfer Agent Fees. United Shareholder Services, Inc., a wholly owned subsidiary of the Company, provides transfer agency and mailing services for Company clients. The Company receives an annual fee per account as well as transaction- and activity-based fees as compensation for services rendered as transfer agent, and is reimbursed for out-of-pocket expenses associated with processing shareholder information. In addition, the Company collects custodial fees on IRAs and other types of retirement plans invested in USGIF. Transfer agent fees are, therefore, significantly affected by the number of client accounts.
Transfer agent fees decreased by $2.5 million in fiscal 2009, primarily as a result of a decline in the number of shareholder accounts and number of transactions.
The increase in transfer agent fees in fiscal years 2008 and 2007 was primarily a result of an increase in the number of mutual fund shareholder accounts due to improved performance of the natural resource and international equity funds and the result of the revised fee structure effective April 1, 2007, which incorporated transaction- and activity-based fees.
Distribution Fees. As noted above, a new distribution plan was approved effective October 1, 2008, for the nine equity USGIF funds under which USGB is paid a fee at an annual rate of 0.25 percent of the average daily net assets of each fund.
Administrative Service Fees. As noted above, effective October 1, 2008, administrative services that were part of the pervious advisory agreement were removed and became the subject of a separate agreement. Under the new administrative services agreement, the Funds no longer reimburse the Company for certain legal and administrative services, but instead pay the Company compensation at an annual rate of 0.08 percent of the average daily net assets of each Fund for administrative services provided by the Company to the Funds. Investment Income. Investment income (loss) from the Company's investments includes:
• realized gains and losses on sales of securities;

• unrealized gains and losses on trading securities;

• realized foreign currency gains and losses;

• other-than-temporary impairments on available-for-sale securities; and

• dividend and interest income.

This source of revenue is dependent on market fluctuations and does not remain at a consistent level. Timing of transactions and the Company's ability to participate in investment opportunities largely affect this source of revenue. Investment income decreased by $6.1 million in fiscal 2009 compared to fiscal 2008. This decrease can be attributable primarily to declines in the market value of trading securities in the natural resources and international equity sectors as well as an other-than-temporary impairment as a result of declines in the market value of available-for-sale securities. Of the $6.1 million decrease in fiscal 2009, $3.2 million related to decrease in investment income in investments in the Funds and the offshore clients.
Investment income increased by $90,000 in fiscal 2008 compared to fiscal 2007. This increase was attributed primarily to increases in unrealized gains on corporate investments.
Included in investment income were other-than-temporary impairments of $2,456,618 for the fiscal year ending 2009, There were no other-than-temporary impairments for the fiscal years ending 2008 and 2007.

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Expenses

                                                               %                                               %
(Dollars in Thousands)        2009            2008          Change            2008            2007          Change
Employee compensation
and benefits                $ 10,017        $ 13,608          (26.4 %)      $ 13,608        $ 12,560            8.3 %
General and
administrative                 8,696           6,805           27.8 %          6,805           7,482           (9.0 %)
Platform fees                  4,946           9,049          (45.3 %)         9,049           7,528           20.2 %
Subadvisory fees               2,415           9,223          (73.8 %)         9,223           8,935            3.2 %
Advertising                      407             488          (16.6 %)           488             509           (4.1 %)
Depreciation                     270             284           (4.9 %)           284             244           16.5 %

Total                       $ 26,751        $ 39,457          (32.2 %)      $ 39,457        $ 37,258            5.9 %

Employee Compensation and Benefits. Employee compensation and benefits decreased by $3.6 million, or 26.4%, in 2009 and increased by $1.0 million, or 8.3%, in fiscal 2008. The decrease in 2009 was primarily due to decrease in incentive bonuses and fewer employees. The increase in 2008 was primarily due to incentive bonuses associated with strong mutual fund performance, mutual fund asset growth, strong offshore advisory client performance and increased shareholder accounts. . . .