Summary of KENTUCKY USA ENERGY, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Statement Regarding Forward-Looking Information

This report contains forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words "believe", "expects", "anticipates", "intends", "estimates", "projects", "target", "goal", "plans", "objective", "should", or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, the availability and pricing of additional capital to finance operations, including the drilling of our initial gas wells, longer term drilling programs and additional leasehold acquisitions, the viability of the shale gas fields in the Illinois Basin in western Kentucky, our ability to build and maintain a successful operations infrastructure and to effectively drill and develop producing wells, the successful negotiation and execution of cost-effective third-party gas drilling and distribution agreements, the continued commitment of drill rig operators and future economic conditions and the volatility and decreases in energy prices.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Background

Kentucky USA Energy, Inc. (the "Company" or "we") was incorporated in the State of Delaware on September 29, 2006 under the name Las Rocas Mining Corp. On October 26, 2007, the Company changed its name to Kentucky USA Energy, Inc. to facilitate the merger discussions with KY USA Energy, Inc. ("KY USA"). On May 2, 2008, the Company, KY Acquisition Corp., a wholly-owned subsidiary of the Company ("Acquisition Sub"), and KY USA entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), which closed on May 2, 2008. Pursuant to the terms of the Merger Agreement, Acquisition Sub merged with and into KY USA, which became a wholly-owned subsidiary of the Company (the "Merger").

KY USA was incorporated in the Commonwealth of Kentucky on October 5, 2007 to acquire, explore and develop oil and gas resource properties, with a primary focus initially on shale gas in the Illinois Basin in western Kentucky. KY USA has secured a 75% net revenue interest in a leasehold in Western Kentucky covering approximately 3,000 acres targeting gas extraction from the New Albany Shale. We have identified approximately 40-50 drilling locations on this leasehold. Our net (75%) recoverable "proved developed producing reserves1" as of October 31, 2008, are estimated at 1.369 billion cubic feet of gas ("Bcf"), while "proved undeveloped primary reserves2" are estimated at 17.794 Bcf, for a total proved developed and un-developed reserves of 19.163 Bcf. This leasehold is directly adjacent to producing wells.

Prior to the Merger our fiscal year end was February 28 and the fiscal year end of KY USA was October 31. Following published SEC accounting and financial reporting interpretations and guidance and in connection with the Merger, we have changed our fiscal year end to October 31 to match that of KY USA. As a result of this change, we are filing this quarterly report with the SEC for the quarter ended July 31, 2008.

Following the closing of the Offering (defined below), we began drilling activities at our initial well locations previously identified. We have continued these drilling efforts using the net proceeds from our initial loan under the Credit Facility (defined below).

Results of Operations for the Three Month Periods Ended January 31, 2009 and 2008

We are still in our exploration stage and have generated no revenues to date.

All productive and non-productive costs incurred in connection with the acquisitions of, exploration for and development of our gas reserves are capitalized using the full cost method of accounting. These costs include lease acquisitions, geological and geophysical work, and the costs of drilling, completing and equipping our gas wells. For the three month periods ended January 31, 2009 and 2008, we incurred such total capitalized costs of $1,115,260 and $5,500, respectively. The increase from 2008 to 2009 was a result of our beginning to drill our first wells.

We incurred general and administrative expenses of $42,622 and $7,550 for the three month periods ended January 31, 2009 and 2008, respectively. These expenses consisted of costs incurred in connection with the start-up and day to day operation of our business.

Amortization of loan fees for the three month period ended January 31, 2009 totaled $91,099. These costs are related to the Note and the Loan. We had no such costs for the three months ended January 31, 2008.

We incurred professional expenses of $384,605 and $56,776 for the three month periods ended January 31, 2009 and 2008, respectively. The increase in these expenses primarily resulted from consulting agreements and annual SEC filing requirements.

1. According to Securities and Exchange Commission ("SEC") definitions, "proved developed reserves" are those that are expected to be recovered from existing wells with existing equipment and operating methods.
2. According to SEC definitions, "proved undeveloped reserves" are those that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required.

Our interest expense for the three month periods ended January 31, 2009 and 2008, were $74,136 and $221,630, respectively. This cost is attributable to interest due and paid on the Note and on the Loan. During the three month period ended January 31, 2009, we recognized a net loss on a derivative liability relating to the Note in the amount of $66,284, due to a revaluation of the derivative liability to market at October 31, 2008.

We have generated no revenues to date. Our net operating loss from inception through January 31, 2009 was $4,031,272.

Liquidity and Capital Resources

Our cash and cash equivalents balance as of January 31, 2009 was $83,768.

On May 9, 2008, KY USA borrowed $100,000 from one individual as a bridge loan to be used for working capital purposes. In addition, upon the closing of the Merger, this lender received warrants to purchase 200,000 shares of our Common Stock, such warrants having an initial exercise price of $1.00 per share and expiring five years after issuance.

On May 29, 2008 we closed a private offering (the "Offering") of an 8% senior secured convertible note (the "Note") and warrants (the "Warrants") to purchase 2,500,000 shares of the Company's common stock, $0.0001 par value per share (the "Common Stock"), to one institutional investor (the "Investor") for aggregate gross proceeds of $2.5 million, as more fully described in our Form 8-K filed with the SEC on June 4, 2008. We have used the net proceeds of the Offering of approximately $1,857,600 (after expenses of the Offering) to repay bridge loans made to KY USA, to begin drilling at one or more of the five locations that, as previously disclosed, we have identified for initial wells, and for general working capital purposes.

On June 27, 2008, KY USA closed on a senior secured credit facility (the "Credit Facility") with NSES 12, LLC, a funding vehicle of New Stream Capital (the "Lender"), pursuant to which KY USA may borrow up to $10,000,000 in the aggregate, under certain conditions, as more fully described in our Form 8-K filed with the SEC on July 1, 2008. Under the Credit Facility, KY USA borrowed $2,500,000 on June 27, 2008 (the "Initial Loan") and may borrow up to an additional aggregate amount of $7,500,000 in installments of a minimum of $2,500,000 each (each, an "Installment Loan"), solely at the discretion of the Lender. The proceeds of the Initial Loan amount, net after expenses of the transaction, including a $200,000 credit facility fee paid to the Lender at closing and a $200,000 consulting fee paid to one consultant, have been used by KY USA for ongoing working capital purposes, including the costs and expenses relating to the drilling of our initial gas wells in the New Albany shale on KY USA's leasehold in western Kentucky.

On February 12, 2008, we received the first Installment Loan in an amount of $2.5 million. To date, we have received $5,000,000 under the Credit Facility which requires that we comply with financial covenants relating to, among other things, collateral and current ratio coverage. As of October 31, 2008, we were not in compliance with the 1.0 to 1.0 current ratio requirement of the Credit Agreement. This breach of the current ration covenant contained in the Credit Agreement constitutes an event of default under the Credit Agreement. The breach would permit the Lender under the Credit Agreement to declare all amounts borrowed thereunder to be immediately due and payable. We intend to request from the Lender a waiver of this current ratio covenant, but we cannot assure you that we will be successful in obtaining such waiver. Additionally, even if we obtain a waiver from the Lender, we may not be able to satisfy these or other covenants in the future or be able to pursue our strategies within the constraints of these covenants.

Including the net proceeds from the Offering and the Credit Facility, we have sufficient funds to conduct our operations for approximately the next six to nine months.

If we are not successful in generating sufficient liquidity from KY USA operations or in raising sufficient capital resources on terms acceptable to us, our business, results of operations, liquidity and financial condition could suffer materially.

We presently do not have any available credit, bank financing or other external sources of liquidity, other than the net proceeds from the Offering and the New Stream Credit Facility. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding in amounts or on terms acceptable to us, if at all.

Critical Accounting Policies

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" (FIN 48), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken by the Company, including issues relating to financial statement recognition and measurement. FIN 48 requires companies to determine whether it is "more likely than not" that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 will also require significant additional disclosures. This Interpretation is effective for fiscal years beginning after December 15, 2006 for publicly traded companies. The Company does not expect the interpretation to have a material impact on the results of its operations or financial position.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not believe the standard will have a material impact on the results of its operations or financial position.

In September 2006, the Securities and Exchange Commission staff published Staff Accounting Bulletin SAB No. 108 ("SAB 108"), "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company has adopted SAB 108 and it has not had an impact on Company's financial statements.

In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities - as amended ("SFAS 159"). SFAS 159 permits entities to elect to report eligible financial instruments at fair value subject to conditions stated in the pronouncement including adoption of SFAS 157 discussed above. The purpose of SFAS 159 is to improve financial reporting by mitigating volatility in earnings related to current reporting requirements. The Company is considering the applicability of SFAS 159 and will determine if adoption is appropriate. The effective date for SFAS 159 is for fiscal years beginning after November 15, 2007.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS 141(R)"), which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141(R) requires acquisition-related costs and restructuring costs to be recognized separately from the acquisition. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company continues to evaluate the potential impact of this Interpretation on its financial position and the results of its operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.