**SETTLEMENT
        AGREEMENT**
  
  This
        Settlement Agreement (“Settlement Agreement”) is entered into and effective as
        of the 25 th day of
        September 2006, by and between U.S. Energy Corp. and Crested Corp. (“USE/CC”),
        on the one hand, and Phelps Dodge Corporation, Mt. Emmons Mining Company,
        and
        Cyprus AMAX Minerals Company, (collectively “Phelps Dodge”), on the other. In
        this Settlement Agreement, USE/CC and Phelps Dodge may sometimes be referred
        to
        as “the Parties.”
 **RECITALS**
  WHEREAS,
        the Parties have been engaged in a lawsuit captioned Phelps
        Dodge Corp, et al. v. U.S. Energy Corp., et al. ,
        Civil
        Action No. 02-cv-00796-LTB-PAC (D. Colo.) (“Lawsuit”) concerning,
        inter alia, the rights and duties of the Parties relating to the transfer(s)
        of
        mining properties near Crested Butte, Colorado, including duties pursuant
        to
        various agreements finalized in 1987 (collectively, the “Agreements”) entered
        into between USE/CC and Phelps Dodge’s predecessor(s); and
  WHEREAS,
        on February 10, 2005, judgment on the merits in favor of Phelps Dodge was
        entered, from which USE/CC filed a timely appeal, now pending in the Tenth
        Circuit Court of Appeals as Case No. 06-1259 (the “Appeal”); and
  WHEREAS,
        on July 26, 2006, judgment awarding Phelps Dodge attorneys’ fees and costs
        was entered (“Attorneys’ Fees Judgment”), from which USE/CC filed a timely
        appeal and which was consolidated with the Appeal; and
  WHEREAS,
        on September 6, 2006, Phelps Dodge filed a cross-appeal of the Attorneys’
Fees Judgment (the “Cross-Appeal”); and
   
   WHEREAS,
        USE/CC and Phelps Dodge desire to settle all outstanding matters relating
        to the
        Lawsuit, the Appeal, and the Cross-Appeal, and to waive their respective
        appeal
        rights;
  THEREFORE,
        the Parties, in consideration of the covenants and payments herein, have
        agreed
        to the terms set out below.
  1.  Incorporation
        of Recitals :
        The
        foregoing recitals are material to this Settlement Agreement and are
        incorporated herein by this reference.
  2.  Payment
        by USE/CC to Phelps Dodge: It is
        agreed between the Parties that, concurrent with the delivery by Phelps Dodge
        to
        USE/CC of an executed copy of this Settlement Agreement, USE/CC shall pay
        Phelps\Dodge in immediately available funds Seven Million Dollars (US$7,000,000)
        (“Settlement Payment”).
  3.  Dismissal
        of the Appeal and Cross-Appeal :
        Within
        five business days of the receipt of the Settlement Payment in accordance
        with
        Paragraph 2 above, the Parties shall file the Motion to Dismiss the Appeal
        and
        Cross Appeal with Prejudice attached hereto as Exhibit A.
  4.  Attorneys’
        Fees and Other Costs :
        The
        Settlement Payment is deemed to be in full satisfaction of any and all
        attorneys’ fees, legal costs, operating costs, and any other costs or expenses
        incurred by any party, including but not limited to fees and costs relating
        to
        the Attorneys’ Fees Judgment, the Appeal, and Cross-Appeal and this Settlement
        Agreement.
  5.  Execution;
        Authority :
        The
        Parties’ signatories to this Settlement Agreement expressly represent and
        warrant that they have the authority to settle outstanding matters relating
        to
        Agreements, the Lawsuit, and the Appeal and Cross-Appeal, and the Parties’
signatories to this Settlement Agreement expressly represent and warrant
        that
        they have the authority to execute the Settlement Agreement on behalf of
        the
        signing parties they represent.
   
   6.  Warranty
        of Non-Assignment :
        The
        Parties represent and warrant that none of them have assigned or transferred,
        or
        purported to assign or transfer, to any person or entity any claims, debts,
        liabilities, demands, rights, obligations, damages, losses, causes of action,
        costs, expenses, and attorneys’ fees subject to this Settlement Agreement.
  7.  Binding
        Effect :
        This
        Settlement Agreement shall inure to the benefit of and be binding upon the
        shareholders, successors, assigns, and legal representatives of the
        Parties.
  8.  Multiple
        Counterparts :
        This
        Settlement Agreement may be executed in multiple counterparts, each of which
        shall be deemed to be and have the same force and effect of an original,
        and all
        of which, taken together, shall constitute and be construed as a single
        agreement. A facsimile signature shall be treated as an original. The Parties
        shall promptly exchange original signatures after execution.
  9.  Opportunity
        to Read and Consult :
        Each of
        the Parties to this Settlement Agreement represents that it has read it,
        has
        consulted with counsel regarding its terms, fully understands the rights
        and
        obligations described herein, and is entering into the Settlement Agreement
        freely and without duress.
  10.  Complete
        and Final Agreement :
        It is
        agreed that this Settlement Agreement embodies the complete and final agreement
        and release between the Parties as to the Lawsuit, the Appeal, and the
        Cross-Appeal. All previous covenants, promises, agreements, conditions or
        other
        understandings, either oral or written, with respect to the Lawsuit, the
        Appeal,
        and the Cross-Appeal are deemed superseded by this Settlement Agreement.
        This
        Settlement Agreement may be amended only by an instrument in writing executed
        jointly by the signing parties.
  11.  Construction :
        The
        language used in this Settlement Agreement will be deemed to be the language
        chosen by the Parties to express their mutual intent, and the Settlement
   
   Agreement
        shall not be construed against any party because of such party’s involvement in
        the preparation or drafting of this Settlement Agreement.
  12.  Severability :
        If any
        provision of this Settlement Agreement or any document executed in connection
        with this Settlement Agreement is held to be illegal, invalid or unenforceable
        under present or future laws effective during the term hereof, such provision
        shall be fully severable and shall in no way affect the validity or
        enforceability of this Settlement Agreement or any other provision herein.
        Should any section, paragraph, subparagraph, or other portion of this Settlement
        Agreement or any Exhibit incorporated herein be found invalid or be required
        to
        be modified as a matter of law in a fully authorized court or by a duly
        authorized government agency, then only that portion of this Settlement
        Agreement shall be invalid or modified. The remainder of this Settlement
        Agreement, which is still valid and unaffected, shall remain in force. If
        the
        absence of the part that is held to be invalid, illegal, or unenforceable,
        or
        modification of the part required to be modified, substantially deprives
        a party
        of the economic benefit of this Settlement Agreement, the signing parties
        shall
        negotiate in good faith reasonable and valid provisions to restore the economic
        benefit to the party deprived or to balance the signing parties’ obligations
        consistent with the intent reflected in this Settlement Agreement.
  13.  No
        Admission :
        The
        Parties agree that the settlement embodied in this Settlement Agreement,
        and all
        actions taken pursuant hereto, is made to compromise and settle the outstanding
        matters relating to the Lawsuit, the Appeal, and the Cross-Appeal without
        further litigation. It is not and shall not be interpreted as an admission
        of
        any liability or wrongdoing by any party. No statement appearing in this
        Settlement Agreement or in any Exhibit to this Settlement Agreement or any
        other
        document to carry out the terms of this Settlement Agreement is, or should
        be
        interpreted as, an admission or statement against interest. This
   
   Settlement
        Agreement, its terms and all negotiations relating thereto shall not be used
        by
        any party in any other proceedings or otherwise for any purpose except to
        the
        extent necessary to enforce this Settlement Agreement.
  14.  Title
        and Headings; Enforceability :
        The
        titles and headings to the paragraphs in this Settlement Agreement are inserted
        for convenience and reference only, and are not intended to be a part of
        or to
        affect the meaning of or interpretation of this Settlement Agreement. The
        provisions of this Settlement Agreement shall, where possible, be interpreted
        in
        a manner to sustain their legality and enforceability.
  15.  Effect
        on Prior Agreements :
        This
        Settlement Agreement does not terminate, modify or amend the
        Agreements.
  16.  Choice
        of Law : This
        Agreement and all disputes arising hereunder shall be interpreted under and
        governed by the laws of the State of Colorado.
 
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        of page intentionally left blank]
  
  
 PHELPS
        DODGE CORPORATION
 
 
 
 By: /s/
        S.
        David Colton
 Title:
        Sr. Vice President and General Counsel
 Printed
        Name: S. David Colton
 
 MT.
        EMMONS MINING COMPANY
 
 
 
 By: /s/
        S.
        David Colton
 Title:
        Sr. Vice President and General Counsel
 
 CYPRUS
        AMAX MINERALS COMPANY
 
 
 
 By: /s/
        S.
        David Colton
 Title:
        Sr. Vice President and General Counsel
 
 U.S.
        ENERGY CORP.
 
 
 
 By: /s/
        Mark J. Larsen
 Title:
        President
 
 CRESTED
        CORP.
 
 
 
 By: /s/
        Keith G. Larsen
 Title:
        CEO
 
 
 
 
 
 Settlement
        Agreement Execution Page