EXHIBIT 4.1

                                U.S. ENERGY CORP.
                             1998 STOCK OPTION PLAN
     As adopted by the Board of Directors on June 15, 1998 and constituting
                  a restatement of the 1989 Stock Option Plan,
       which was Amended September 1, 1992, September 3, 1993, January 6,
                 1994, December 22, 1995, and December 13, 1996.

      1. Purpose.  Restrictions  on Amount  Available  Under the Plan. This 1998
Stock  Option Plan (the  "Plan") is intended to  encourage  stock  ownership  by
employees,  consultants and directors of U.S. Energy Corp. (the  "Corporation"),
its divisions and Subsidiary Corporations,  so that they may acquire or increase
their proprietary  interest in the Corporation,  and to encourage such employees
and  directors  to remain  in the  employ  of the  Corporation  and to put forth
maximum  efforts for the success of the  business.  It is further  intended that
options  granted  by the  Committee  pursuant  to  Section 6 of this Plan  shall
constitute  "incentive  stock options"  ("Incentive  Stock Options")  within the
meaning of Section 422A of the Internal Revenue Code of 1986 and the regulations
issued thereunder (the "Code"), and options granted by the Committee pursuant to
Section  7  of  this  Plan  shall   constitute   "nonqualified   stock  options"
("Nonqualified Stock Options").

      2.  Definitions.  As used in this Plan,  the  following  words and phrases
shall have the meanings indicated:

            (a) "Disability" shall mean an Optionee's inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental  impairment that can be expected to result in death or that has lasted or
can be expected to last for a continuous period of not less than 12 months.

            (b) "Fair Market Value" per share as of a particular date shall mean
the last sale price of the Corporation's  Common Stock as reported on a national
securities  exchange or on the NASDAQ  National  Market  System or, if last sale
reporting  quotation is not available for the  Corporation's  Common Stock,  the
average  of the bid and  asked  prices  of the  Corporation's  Common  Stock  as
reported by NASDAQ or in the National Quotation Bureau, Inc.'s "Pink Sheets" or,
if such quotations are  unavailable,  the value  determined by the Committee (as
hereinafter  defined) in accordance with their discretion in making a bona fide,
good faith determination of fair market value.

            (c) "Parent  Corporation" shall mean any corporation (other than the
employer  corporation)  in an  unbroken  chain of  corporations  ending with the
employer  corporation  if,  at the  time  of  granting  an  Option,  each of the
corporations  other than the employer  corporation  owns stock possessing 50% or
more of the total  combined  voting  power of all classes of stock in one of the
other corporations in such chain.

            (d) "Subsidiary  Corporation" shall mean any corporation (other than
the employer  corporation) in an unbroken chain of  corporations  beginning with
the  employer  corporation  if, at the time of granting  an Option,  each of the
corporations  other than the last  corporation  in the unbroken chain owns stock
possessing  50% or more of the total  combined  voting  power of all  classes of
stock in one of the other corporations in such chain.


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      3.  Administration.  The Plan shall be  administered  by a committee  (the
"Committee"),  consisting of not less than two members of the Board of Directors
of the  Corporation  (the "Board").  The members of the Committee,  who shall be
selected at a duly convened meeting of the Board of Directors,  shall be persons
who have not been granted or awarded equity  securities of the Corporation under
the Plan or any other plan of the  Employer or its  affiliates,  during the year
prior to awards of securities under the Plan by the Committee.  It is the intent
of this Plan that the Committee members shall be "disinterested  administrators"
as that term is used in Rule  16b-3(c)(2)(i)  promulgated  by the Securities and
Exchange Commission. The members of the Committee shall have all powers, subject
to compliance with the Plan, to select officers and directors for  participation
in the Plan, and to make all decisions concerning the timing, pricing and amount
of a grant or award under the Plan.

      The Committee shall have the authority in its  discretion,  subject to and
not inconsistent with the express provisions of the Plan, to administer the Plan
and to exercise all the powers and authorities either specifically granted to it
under the Plan or  necessary or  advisable  in the  administration  of the Plan,
including,  without  limitation,  the authority to grant  Options;  to determine
which Options shall  constitute  Incentive Stock Options and which Options shall
constitute  Nonqualified  Stock Options;  to determine the purchase price of the
shares of Common Stock covered by each Option (the "Option Price"); to determine
the persons to whom,  and the time or times at which,  Options shall be granted;
to determine the number of shares to be covered by each Option; to interpret the
Plan; to  prescribe,  amend and rescind  rules and  regulations  relating to the
Plan; to determine the terms and provisions of the Option Agreements (which need
not be  identical)  entered into in  connection  with Options  granted under the
Plan; and to make all other determinations deemed necessary or advisable for the
administration  of the Plan.  The  Committee  may delegate to one or more of its
members  or to one or more  agents  such  administrative  duties  as it may deem
advisable,  and the Committee or any person to whom it has  delegated  duties as
aforesaid  may employ one or more  persons to render  advice with respect to any
responsibility the Committee or such person may have under the Plan.

      The Board shall fill all vacancies,  however caused, in the Committee. The
Board may from time to time appoint additional members to the Committee, and may
at any time remove one or more  Committee  members and  substitute  others.  One
member  of the  Committee  shall  be  selected  by the  Board as  chairman.  The
Committee  shall  hold its  meetings  at such  times and places as it shall deem
advisable.  All  determinations  of the Committee shall be made by a majority of
its members either present in person or participating by conference telephone at
a meeting or by written consent.  The Committee may appoint a secretary and make
such rules and  regulations  for the  conduct of its  business  as it shall deem
advisable, and shall keep minutes of its meetings.

      No member of the Board or  Committee  shall be liable for any action taken
or  determination  made in good  faith  with  respect  to the Plan or any Option
granted hereunder.

      4.  Eligibility.  Subject to certain  limitations  hereinafter  set forth,
Options may be granted to employees of (including  officers) and  consultants to
and  directors of (whether or not they are  employees)  the  Corporation  or its
present or future  divisions and Subsidiary  Corporations.  In  determining  the
persons to whom Options  shall be granted and the number of shares to be covered
by each  Option,  the  Committee  shall  take  into  account  the  duties of the
respective persons, their present and potential  contributions to the success of
the  Corporation  and such other factors as the Committee shall deem relevant in
connection  with  accomplishing  the  purpose  of the Plan.  A person to whom an
Option  has been  granted  hereunder  is  sometimes  referred  to  herein  as an
"Optionee."  An Optionee  shall be eligible to receive more than one grant of an
Option  during  the term of the Plan,  but only on the terms and  subject to the
restrictions hereinafter set forth.

      5. Stock.  The stock subject to Options  hereunder  shall be shares of the
Corporation's  Common Stock,  $.01 par value per share  ("Common  Stock").  Such
shares may, in whole or in part,  be  authorized  but unissued  shares or shares
that shall have been or that may be reacquired by the Corporation. The aggregate

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number of shares of Common Stock as to which Options may be granted from time to
time under the Plan shall not exceed 2,750,000.  The limitations  established by
the  preceding  sentences  shall be subject to adjustment as provided in Section
8(i) hereof.

      In the event  that any  outstanding  Option  under the Plan for any reason
expires or is  terminated  without  having been  exercised in full the shares of
Common Stock  allocable to the  unexercised  portion of such Option  (unless the
Plan shall have been terminated) shall become available for subsequent grants of
options under the Plan.

      6. Incentive Stock Options. Options granted pursuant to this Section 6 are
intended  to  constitute  Incentive  Stock  Options  and shall be subject to the
following  special  terms and  conditions,  in addition to the general terms and
conditions specified in Section 8 hereof.  Consultants and directors who are not
employees of the Corporation  shall not be entitled to receive Options  pursuant
to this Section 6.

      The aggregate  Fair Market Value  (determined as of the date the Incentive
Stock  Option is  granted) of the shares of Common  Stock with  respect to which
Options are  exercisable  for the first time by an Optionee  during any calendar
year may not exceed  $100,000.00.  If more than $100,000 of shares is subject to
Options held by an Optionee,  the Corporation  shall cause (A)the maximum number
of Options to be designated  ISOs and the balance to be designated  nonqualified
stock  options;  or (B)  different  share  certificates  to be  issued  on first
exercise,  such that one  certificate  shall be issued for the shares  which are
issued  under  the  ISOs,  and  another  certificate  shall  be  issued  for the
nonqualified stock options.

      Incentive  Stock  Options  granted under this Plan are intended to satisfy
all requirements for incentive stock options under the Code and, notwithstanding
any other  provision  of this Plan,  the Plan and all  Incentive  Stock  Options
granted under it shall be so construed,  and all contrary provisions shall be so
limited in scope and effect and,  to the extent they cannot be so limited,  they
shall be void.

      7. Nonqualified Stock Options.  Options granted pursuant to this Section 7
are intended to constitute  Nonqualified Stock Options and shall be subject only
to the general terms and conditions specified in Section 8 hereof.

      8. Terms and Conditions of Options.  Each Option  granted  pursuant to the
Plan shall be evidenced by a written Option  Agreement  between the  Corporation
and the  Optionee,  which  agreement  shall  comply  with and be  subject to the
following terms and conditions:

            (a) Number of Shares.  Each Option  Agreement shall state the number
of shares of Common Stock to which the Option relates.

            (b)  Type  of  Option.  Each  Option  Agreement  shall  specifically
identify the portion, if any, of the Option which constitutes an Incentive Stock
Option and the portion, if any, which constitutes a Nonqualified Stock Option.

            (c) Option  Price.  Each  Option  Agreement  shall  state the Option
Price,  which shall be not less than 100% of the Fair Market Value of the shares
of Common  Stock of the  Corporation  on the date of grant of the Option  except
that any option  granted under the Plan to a person owning more than ten percent
of the total  combined  voting  power of the Common Stock shall be at a price of
110% of such  fair  market  value  and  shall be for a term of no more than five
years, in the case of Incentive Stock Options, and not less than 80% of the Fair
Market  Value of the shares of Common  Stock of the  Corporation  on the date of
grant of the  Option in the case of Non-  Qualified  Stock  Options.  The Option
Price shall be subject to  adjustment  as provided in Section 8(i)  hereof.  The
date on which the  Committee  adopts a resolution  expressly  granting an Option
shall be considered the day on which such Option is granted.

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            (d) Method of Exercise and Medium and Time of Payment. Each exercise
of an Option granted hereunder, whether in whole or in part, shall be by written
notice to the Secretary of the  Corporation  designating the number of shares as
to which the Option is exercised, and shall be accompanied by payment in full of
the  Option  Price (in cash,  shares or  property)  for the  number of shares so
designated,  together  with any written  statements  required by any  applicable
securities  laws.  The Option  Price shall be paid in cash,  in shares of Common
Stock having a Fair Market Value equal to such Option Price or in property or in
a combination of cash,  shares and property,  and may be effected in whole or in
part (i) with monies  received from the Corporation at the time of exercise as a
compensatory  cash payment,  or (ii) with monies  borrowed from the  Corporation
pursuant to repayment  terms and conditions as shall be determined  from time to
time by the  Committee,  in its  discretion,  separately  with  respect  to each
exercise of Options and each Optionee;  provided, however, that each such method
and time for  payment  and each  such  borrowing  and terms  and  conditions  of
repayment  shall be permitted by and be in compliance  with  applicable law. The
Board of  Directors  shall have the sole and  absolute  discretion  to determine
whether or not property  other than cash or Common Stock may be used to purchase
the shares of Common Stock  hereunder  and, if so, to determine the value of the
property received.

            (e) Term and Exercise of Options.  Options shall be exercisable over
the  exercise  period  as and at the  times  the  Committee  may  determine,  as
reflected in the Option Agreement;  provided,  however, that the Committee shall
have the authority to accelerate the exercisability of any outstanding Option at
such time and under  such  circumstances  as it, in its sole  discretion,  deems
appropriate. The exercise period shall be determined by the Committee; provided,
however,  that such exercise  period shall not exceed ten years from the date of
grant of the Option. The exercise period shall be subject to earlier termination
as provided in Sections 8(f) and 8(g) hereof. An Option may be exercised,  as to
any or all full  shares  of  Common  Stock as to which  the  Option  has  become
exercisable;  provided,  however, that an Option may not be exercised at any one
time as to fewer  than 100  shares  (or such  number  of  shares as to which the
Option is then exercisable if such number of shares is less than 100).

            (f)  Termination.  Except as  provided in this  Section  8(f) and in
Section 8(g) hereof,  an Option may not be exercised unless the Optionee is then
an employee or director of or  consultant  to the  Corporation  or a division or
Subsidiary  Corporation  thereof  (or a  corporation  or a Parent or  Subsidiary
Corporation of such corporation  issuing or assuming the option in a transaction
to which  Section  425(a) of the Code  applies),  and  unless the  Optionee  has
remained  continuously  as an  employee  or  director  of or  consultant  to the
Corporation  since  the date of  grant  of the  Option.  In the  event  that the
Optionee  ceases  to  be  an  employee  or  director  of or  consultant  to  the
Corporation  (other  than by reason of death,  Disability  or  retirement),  all
Options of such Optionee that are exercisable at the time of such cessation may,
unless earlier  terminated in accordance with their terms,  be exercised  within
three months after such cessation;  provided, however, that if the employment or
consulting  relationship of an Optionee shall terminate,  or if a director shall
be removed,  for cause, all Options  theretofore granted to such Optionee shall,
to the extent not theretofore  exercised,  terminate  forthwith.  Nothing in the
Plan or in any Option  granted  pursuant  hereto shall confer upon an individual
any right to continue in the employ of the  Corporation  or any of its divisions
or  Subsidiary  Corporations  or  interfere  in any way  with  the  right of the
Corporation or its  shareholders or any such division or Subsidiary  Corporation
to terminate such  employment or other  relationship  between the individual and
the Corporation or any of its divisions and subsidiary corporations.

            (g) Death Disability or Retirement of Optionee. If an Optionee shall
die while a director of, or employed by, or a consultant to, the  Corporation or
a Subsidiary  Corporation  thereof, or within three months after the termination
of such Optionee's employment or directorship or consulting relationship,  other
than  termination for cause, or if the Optionee's  employment or directorship or
consulting relationship,  shall terminate by reason of disability or retirement,
all Options  theretofore  granted to such  Optionee  (whether  or not  otherwise
exercisable)  may, unless earlier  terminated in accordance with their terms, be
exercised  by the  Optionee  or by the  Optionee's  estate  or by a  person  who
acquired the right to exercise such Option by bequest

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or  inheritance  or  otherwise  by  reason  of the  death or  Disability  of the
Optionee,  at any time  within one year after the date of death,  Disability  or
retirement of the Optionee.

            (h) Nontransferability.  Options granted under the Plan shall not be
transferable other than by will or by the laws of descent and distribution,  and
Options  may be  exercised,  during the  lifetime of the  Optionee,  only by the
Optionee or by his guardian or legal representative.

            Any  attempted  sale,  pledge,  assignment,  hypothecation  or other
transfer  of an option  contrary  to the  provisions  hereof and the levy of any
execution,  attachment or similar  process upon an option shall be null and void
and without force or effect.

            As a condition  to the transfer of any shares of Common Stock issued
under this Plan, the Corporation may require an opinion of counsel, satisfactory
to the Corporation, to the effect that such transfer will not be in violation of
the Securities Act of 1933 or any other applicable  securities laws or that such
transfer has been registered  under federal and all applicable  state securities
laws. Further, the Corporation shall be authorized to refrain from delivering or
transferring  shares of Common  Stock  issued under this Plan until the Board of
Directors  determines that such delivery or transfer will not violate applicable
securities  laws and the Optionee has tendered to the  Corporation  any federal,
state or local tax owed by the Optionee as a result of exercising the Option, or
disposing of any Common Stock,  when the  Corporation  has a legal  liability to
satisfy such tax. The  Corporation  shall not be liable for damages due to delay
in the delivery or issuance of any stock certificate for any reason  whatsoever,
including,  but not limited to, a delay  caused by listing  requirements  of any
securities exchange or any registration requirements under the Securities Act of
1933, the  Securities  Exchange Act of 1934, or under any other state or federal
law,  rule or  regulation.  The  Corporation  is under no obligation to take any
action or incur any  expense in order to  register  or qualify  the  delivery or
transfer  of shares of  Common  Stock  under  applicable  securities  laws or to
perfect any exemption from such registration or qualification.  Furthermore, the
Corporation  will have no  liability  to any Optionee for refusing to deliver or
transfer  shares of Common  Stock if such  refusal is based  upon the  foregoing
provisions of this Paragraph.

            (i)   Effect of Certain Changes.

                  (1) If there is any  change in the  number of shares of Common
Stock through the declaration of stock  dividends,  or through  recapitalization
resulting in stock  splits,  or  combinations  or exchanges of such shares,  the
number of shares of Common  Stock  available  for  Options,  the  number of such
shares covered by outstanding  Options, and the price per share of such Options,
shall be  proportionately  adjusted by the  Committee to reflect any increase or
decrease in the number of issued shares of Common Stock; provided, however, that
any fractional shares resulting from such adjustment shall be eliminated.

                  (2) In the event of the proposed dissolution or liquidation of
the  Corporation,  in  the  event  of  any  corporate  separation  or  division,
including, but not limited to, split-up,  split-off or spin-off, or in the event
of a merger or consolidation of the Corporation  with another  corporation,  the
Committee may provide that the holder of each Option then exercisable shall have
the right to exercise such Option (at its then Option Price) solely for the kind
and  amount  of shares of stock  and  other  securities,  property,  cash or any
combination thereof receivable upon such dissolution,  liquidation, or corporate
separation or division,  or merger or consolidation by a holder of the number of
shares  of Common  Stock  for  which  such  Option  might  have  been  exercised
immediately prior to such dissolution,  liquidation,  or corporate separation or
division,  merger  or  consolidation;  or  the  Committee  may  provide,  in the
alternative,  that each Option  granted  under the Plan shall  terminate as of a
date to be fixed by the  Committee;  provided,  however,  that not less  than 30
days' written notice of the date so fixed shall be given to each  Optionee,  who
shall have the right,  during the period of 30 days preceding such  termination,
to  exercise  the  Options as to all or any part of the  shares of Common  Stock
covered  thereby,  including shares as to which such Options would not otherwise
be exercisable.

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                  (3)  Paragraph  (2) of this  Section 8(i) shall not apply to a
merger or  consolidation  in which the Corporation is the surviving  corporation
and  shares of Common  Stock are not  converted  into or  exchanged  for  stock,
securities  of  any  other  corporation,  cash  or any  other  thing  of  value.
Notwithstanding the preceding  sentence,  in case of any consolidation or merger
of another  corporation  into the  Corporation  in which the  Corporation is the
surviving  corporation  and in  which  there  is a  reclassification  or  change
(including  a change  to the right to  receive  cash or other  property)  of the
shares of Common Stock  (other than a change in par value,  or from par value to
no par value, or as a result of a subdivision or combination,  but including any
change  in such  shares  into two or more  classes  or series  of  shares),  the
Committee may provide that the holder of each Option then exercisable shall have
the right to exercise  such  Option  solely for the kind and amount of shares of
stock and other securities (including those of any new direct or indirect parent
of the Corporation),  property,  cash or any combination thereof receivable upon
such  reclassification,  change,  consolidation  or merger by the  holder of the
number of  shares  of  Common  Stock  for  which  such  Option  might  have been
exercised.

                  (4) In the  event  of a  change  in the  Common  Stock  of the
Corporation as presently constituted, which is limited to a change of all of its
authorized shares with par value into the same number of shares with a different
par value or without par value,  the shares resulting from any such change shall
be deemed to be the Common Stock within the meaning of the Plan.

                  (5) To the extent  that the  foregoing  adjustments  relate to
stock or securities of the Corporation,  such  adjustments  shall be made by the
Committee,  whose  determination  in that  respect  shall be final,  binding and
conclusive,  provided that each Incentive Stock Option granted  pursuant to this
Plan  shall not be  adjusted  in a manner  that  causes  such  option to fail to
continue to qualify as an Incentive  Stock Option  within the meaning of Section
422A of the Code.

                  (6) Except as hereinbefore  expressly provided in this Section
8(i),  this  Optionee  shall  have no rights by  reason  of any  subdivision  or
consolidation  of  shares  of stock of any  class or the  payment  of any  stock
dividend  or any other  increase or decrease in the number of shares of stock of
any class or by reason of any dissolution, liquidation, merger, or consolidation
or spin-  off of assets or stock of  another  corporation;  and any issue by the
Corporation  of shares of stock of any class,  or  securities  convertible  into
shares of stock of any class,  shall not  affect,  and no  adjustment  by reason
thereof  shall be made with  respect to, the number or price of shares of Common
Stock subject to the Option.  The grant of an Option  pursuant to the Plan shall
not affect in any way the right or power of the Corporation to make adjustments,
reclassifications,  reorganizations  or  changes  of  its  capital  or  business
structures or to merge or to consolidate  or to dissolve,  liquidate or sell, or
transfer all or part of its business or assets.

            (j)  Rights as  Shareholder  -  Non-Distributive  Intent.  Neither a
person to whom an Option is granted,  nor such  person's  legal  representative,
heir,  legatee or  distributee,  shall be deemed to be the holder of, or to have
any rights of a holder with respect to, any shares subject to such Option, until
after the Option is exercised and the shares are issued to the person exercising
such Options. Upon exercise of an Option at a time when there is no registration
statement  in effect  under the  Securities  Act of 1933  relating to the shares
issuable upon  exercise and  available for delivery of a prospectus  meeting the
requirements  of  Section  10(a)(3)  of said  Act,  shares  may be issued to the
Optionee  only  if the  Optionee  represents  and  warrants  in  writing  to the
Corporation  that the shares purchased are being acquired for investment and not
with a view to the  distribution  thereof.  No shares  shall be issued  upon the
exercise of an Option unless and until there shall have been compliance with any
then applicable  requirements of the Securities and Exchange Commission,  or any
other  regulatory  agencies  having   jurisdiction  over  the  Corporation.   No
adjustment shall be made for dividends  (ordinary or  extraordinary,  whether in
cash,  securities or other  property) or  distribution or other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 8(i) hereof.


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            (k) Other  Provisions.  The Option  Agreements  authorized under the
Plan shall contain such other provisions, including, without limitation, (i) the
imposition of restrictions upon the exercise of an Option,  and (ii) in the case
of an Incentive  Stock Option,  the inclusion of any condition not  inconsistent
with such Option qualifying as an Incentive Stock Option, as the Committee shall
deem advisable.

            (l) Forfeiture  Provisions:  All shares of Common Stock purchased on
exercise  of all  Nonqualified  Options  granted  after  the  date of this  Plan
Amendment  (and  all  shares  of  Common  Stock  purchased  on  exercise  of all
Nonqualified  Options  granted  prior to such  date  provided  that  the  holder
consents),  shall be subject to forfeiture  back to the Corporation in the event
of termination of employee,  director or consultant  status with the Corporation
on or before January 5 of the second calendar year after exercise.  For example,
Common  Stock  purchased  on  September  1, 1993 by exercise  of a  Nonqualified
Option,  will be subject to forfeiture through January 5, 1995.  Provided,  that
upon exercise of a  Nonqualified  Option at a time when there is a  registration
statement  in effect  under the  Securities  Act of 1933  relating to the shares
issuable upon exercise,  the preceding  forfeiture  provisions of this paragraph
shall immediately terminate.

      9. Agreement by Optionee  Regarding  Withholding  Taxes.  If the Committee
shall so require, as a condition of exercise, each Optionee shall agree that:

            (a) No  later  than  the  date of  exercise  of any  Option  granted
hereunder,  the  Optionee  will  pay to the  Corporation  or  make  arrangements
satisfactory to the Committee  regarding payment of any federal,  state or local
taxes of any kind  required  by law to be  withheld  upon the  exercise  of such
Option; and

            (b) The Corporation  shall,  to the extent  permitted or required by
law,  have the  right to  deduct  federal,  state  and  local  taxes of any kind
required by law to be withheld upon the exercise of such Option from any payment
of any kind otherwise due to the Optionee.

            The Corporation shall not be obligated to advise any Optionee of the
existence  of any  such  tax or the  amount  which  the  Corporation  will be so
required to withhold.

      10. Term of Plan. Options may be granted pursuant to the Plan from time to
time  within a period  of ten  years  from the date the Plan is  adopted  by the
Board, or the date the Plan is approved by the  shareholders of the Corporation,
whichever is earlier.

      11.  Amendment and Termination of the Plan. The Board at any time and from
time to time may  suspend,  terminate,  modify  or  amend  the  Plan;  provided,
however,  that any amendment that would materially increase the aggregate number
of shares of Common Stock as to which  Options may be granted  under the Plan or
materially  increase the  benefits  accruing to  participants  under the Plan or
materially  modify the  requirements as to eligibility for  participation in the
Plan shall be subject to the approval of the holders of a majority of the Common
Stock issued and outstanding, except that any such increase or modification that
may result from adjustments  authorized by Section 8(i) hereof shall not require
such  approval.   Except  as  provided  in  Section  8  hereof,  no  suspension,
termination,  modification  or  amendment of the Plan may  adversely  affect any
Option  previously  granted,  unless  the  written  consent of the  Optionee  is
obtained.

      12. Approval of Shareholders. The Plan shall take effect upon its adoption
by the Board but shall be subject to the  approval  of the holders of a majority
of the issued and outstanding  shares of Common Stock of the Corporation,  which
approval  must occur  within 12 months after the date the Plan is adopted by the
Board.

      13.  Assumption.  The  terms and  conditions  of any  outstanding  Options
granted  pursuant to this Plan shall be assumed by, be binding upon and inure to
the benefit of any successor corporation to the

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Corporation and shall continue to be governed by, to the extent applicable,  the
terms  and  conditions  of this  Plan.  Such  successor  corporation  shall  not
otherwise be obligated to assume this Plan.

      14.  Termination of Right of Action.  Every right of action arising out of
or in  connection  with the Plan by or on  behalf of the  Corporation  or of any
Subsidiary,  or by any  shareholder  of  the  Corporation  or of any  Subsidiary
against  any  past,  present  or future  member of the  Board,  or  against  any
employee, or by an employee (past, present or future) against the Corporation or
any Subsidiary,  will,  irrespective of the place where an action may be brought
and irrespective of the place of residence of any such shareholder,  director or
employee,  cease and be barred by the expiration of three years from the date of
the act or  omission in respect of which such right of action is alleged to have
risen.

      15. Tax  Litigation.  The  Corporation  shall have the right,  but not the
obligation,   to  contest,   at  its  expense,   any  tax  ruling  or  decision,
administrative or judicial,  on any issue which is related to the Plan and which
the Board  believes to be important to holders of Options  issued under the Plan
and to conduct any such contest or any litigation  arising  therefrom to a final
decision.

      IN WITNESS  WHEREOF,  the  foregoing is the 1998 Stock Option Plan of U.S.
Energy  Corp.,  as amended at September 1, 1992,  September 3, 1993,  January 6,
1994,  December 22, 1995, December 13, 1996 and June 15, 1998, and as such, this
1998 Stock Option Plan  constitutes a restatement of the 1989 Stock Option Plan.
This 1998  Stock  Option  Plan is to be  submitted  to the  shareholders  of the
Corporation for approval at the 1998 Annual Meeting of Shareholders.

U.S. ENERGY CORP.



By:      /s/  Max T. Evans
      ----------------------------
      MAX T. EVANS, Secretary


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                            STOCK OPTION AGREEMENT

      STOCK OPTION AGREEMENT made as of this ______ day of ____________,  ______
between U.S. Energy Corp., a Wyoming corporation (the "Corporation").
      In  accordance  with its 1998  Stock  Option  Plan (the  "Plan") as now or
hereafter amended, a copy of which is attached hereto and incorporated herein by
reference,  the  Corporation  desires,  in  connection  with the services of the
Optionee, to provide the Optionee with an opportunity to acquire $.01 pare value
common  stock (the "Common  Stock") of the  Corporation  on favorable  terms and
thereby increase the Optionee's  proprietary  interest in the continue  progress
and success of the business of the Corporation.
      NOW,  THEREFORE,  in consideration  of the premises,  the mutual covenants
herein set forth and other good and valuable consideration,  the Corporation and
the Optionee agree as follows:
      1.  Confirmation of Grant of Option.  Pursuant to a  determination  of the
Directors of the Corporation  (the "Board") on __________,  ______,  _______ the
Corporation,  subject to the terms of the Plan and of this  Agreement,  confirms
that the  Optionee has been  irrevocably  granted on  ____________,  ______ (the
"Date of  Grant"),  as a matter of separate  inducement  and  agreement,  and in
addition  to and not in lieu of salary or other  compensation  for  services,  a
(Qualified) (Non-Qualified) Stock Option pursuant to Section _______ of the Plan
(the "Option") to purchase an aggregate of ___________ shares of Common Stock on
the terms and  conditions  herein set forth subject to adjustment as provided in
Section 8 hereof.
      2. Purchase Price. The purchase price of shares of Common Stock covered by
the  Option  will be  $________  per  share  (the  "Option  Price")  subject  to
adjustment as provided in Section 8 hereof.
      3.  Exercise of Option.  Except as otherwise  provided in Section 8 of the
Plan,  the Option may be  exercised in whole or part at any time during the term
of the Option,  provided,  however,  no Option  shall be  exercisable  after the
expiration of the term thereof,  and no Option shall be  exercisable  unless the
holder  shall at the time of exercise  have been an employee or director of or a
consultant to the  corporation  or of any  subsidiary of the  Corporation  for a
period of at least three  months.  The Option may be exercised  only as to whole
shares in increments of 100 shares.
      The Option may be exercised,  as provided in this Section 3, by notice and
payment to the  Corporation as provided in Section 10 hereof and Section 8(d) of
the Plan.
      4. Term of Option. The term of the Option will be through  ______________,
_____,  subject to earlier  termination  or  cancellation  as  provided  in this
Agreement. Except as otherwise provided in Section 7 hereof, the Option will not
be  exercisable  unless  the  Optionee  shall,  at the time of  exercise,  be an
employee or director of or consultant to the Corporation or of a subsidiary.  As
used

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in this Agreement, the term "subsidiary" refers to and includes each "subsidiary
corporation" as defined in the Plan.
      The holder of the  Option  will not have any  rights to  dividends  or any
other rights of a shareholder with respect to any shares of Common Stock subject
to the Option until such shares  shall have been issued to him (as  evidenced by
the appropriate  transfer agent of the Corporation) upon purchase of such shares
through exercise of the Option.
      5.   Nontransferability  of  Option.  The  Option  may  not  be  assigned,
transferred  (except as provided in the next  preceding  sentence)  or otherwise
disposed of, or pledged or  hypothecated in any way (whether by operation of law
or otherwise)  otherwise  than by will or the laws of descent and  distribution,
and shall  not be  subject  to  execution,  attachment,  or other  process.  Any
assignment,  transfer, pledge,  hypothecation or other disposition of the Option
or any attempt to make any such levy of  execution,  attachment or other process
will cause the Option to terminate  immediately  upon the  happening of any such
event,  provided,  however,  that any such  termination  of the Option under the
foregoing provisions of this Section 5 will not prejudice any rights or remedies
with  the  Corporation  or any  subsidiary  may have  under  this  Agreement  or
otherwise.
      6.  Exercise  Upon  Termination.  The  Optionee's  rights to exercise this
Option upon  termination  of employment or cessation as a director or consultant
shall be as set forth in Section 8(f) of the Plan.
      7. Death,  Disability or Retirement of Optionee.  The Optionee's rights to
exercise  this Option upon the death,  disability  or retirement of the Optionee
shall be as set forth in Section 8(g) of the Plan.
      8.  Adjustments.  The  Option  shall be  subject  to  adjustment  upon the
occurrence of certain events as set forth in Section 8(i) of the Plan.
      9. No Registration.  The Optionee  understands that neither the Option nor
the shares of Common  Stock  subject  thereto  and  issuable  upon the  exercise
thereof  are  registered  under the  Securities  Act of 1933,  as  amended.  The
Optionee  represents  that the  Option  is being  acquired  by him and that such
shares  of  Common  Stock  will  be  acquired  by him  for  investment  and  all
certificates  for the shares  issued  upon  exercise of the Option will bear the
following legend:


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      The shares  represented by this Certificate have not been registered under
      the Securities Act of 1933 (the "Act"), and are "restricted securities" as
      that term is  defined  in Rule 144 under the Act.  The  shares  may not be
      offered for sale,  sold or  otherwise  transferred  except  pursuant to an
      effective  registration statement under the Act, the availability of which
      is to be established to the satisfaction of the Company.

      10. Notices. Each notice relating to this Agreement will be in writing and
delivered in person or by certified mail to the proper  address.  All notices to
the  Corporation  shall  be  addressed  to it at its  office  at Glen L.  Larsen
Building, 877 North 8th West, Riverton, WY 82501. All notices to the Optionee or
other person or persons then  entitled to exercise the Option shall be addressed
to the Optionee or such other person or persons at the Optionee's  address below
specified.  Anyone  to whom a  notice  may be given  under  this  Agreement  may
designate a new address by notice to that effect.
      11.  Approval of Counsel.  The exercise of the Option and the issuance and
delivery of shares of Common Stock pursuant thereto shall be subject to approval
by the  Corporations'  counsel  of all legal  matters in  connection  therewith,
including  compliance  with the  requirements  of the Securities Act of 1933, as
amended,  the  Securities  Exchange Act of 1934,  as amended,  applicable  state
securities laws, the rules and regulations  thereunder,  and the requirements of
any stock exchange upon which the Common Stock may then be listed.
      12. Benefits of Agreement. This Agreement will inure to the benefit of and
be binding  upon each  successor  and  assign of the  Company.  All  obligations
imposed upon the Optionee and all rights granted to the  Corporation  under this
Agreement will be binding upon the Optionee's heirs, legal  representatives  and
successors.
      13. Governmental and Other Regulations. The exercise of the Option and the
Corporation's  obligation to sell and deliver shares upon the exercise of rights
to purchase  shares is subject to all applicable  federal and state laws,  rules
and regulations,  and to such approvals by any regulatory or governmental agency
which may, in the opinion of counsel for the Corporation, be required.
      14.   Incorporation   of  the  Plan.  The  Plan  is  attached  hereto  and
incorporated  herein by  reference.  In the  event  that any  provision  in this
Agreement conflicts with a provision in the Plan, the Plan shall govern.
      IN WITNESS  WHEREOF,  the  Corporation  has caused  this  Agreement  to be
executed in its name by its President or a Vice  President and it corporate seal
to be hereunto affixed and attested by its Secretary or its Assistant  Secretary
and the  Optionee  has  hereunto  set his hand and seal all as of the date first
above written.

                                             U.S. ENERGY CORP.

(Seal)
                                             By: 
                                                 -------------------------------
                                                  JOHN L. LARSEN, President

ATTEST:


----------------------------------
MAX T. EVANS, Secretary

      The undersigned  Optionee  understands the terms of this Option  Agreement
and the attached Plan and hereby agrees to comply therewith.

Date                  , 19
                                            ------------------------------------

                                            ------------------------------------
                                            (Address of Optionee)


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