U.S. ENERGY SYSTEMS, INC.

                             STOCK OPTION AGREEMENT


Name of Optionee:    Goran Mornhed

Date of Grant:    May 10, 2000

Number of Shares Subject to Option:    1,000,000

Exercise Price Per Share:      $4.00

Type of Option:  Non-qualified Stock Option

Expiration Date: May 9, 2010 (subject to earlier termination)

1.                Grant  of  Option. U.S. Energy  Systems, Inc.  (the "Company")
                  hereby  grants  to  the  Optionee  identified  above  (the
                  "Optionee") an  option  (the "Option") to  purchase u p to the
                  number of shares of  the  Company's  Common  Stock, $0.01  par
                  value per share set forth above (the "Shares"), at an exercise
                  price per share equal to  the  exercise  price set forth above
                  (the "Exercise Price").  The Option is not intended to qualify
                  as an ISO. The Option was issued pursuant to the (a) Company's
                  2000 Executive Incentive Compensation  Plan  (the "Plan")  and
                  (b) employment agreement dated as of May 10, 2000 between  the
                  Company and the Optionee (the "Employment Agreement"), both of
                  which are  incorporated  herein for  all purposes. The  Option
                  shall be subject to the terms and conditions set forth herein,
                  the Plan and the  Employment  Agreement. The  Optionee  hereby
                  acknowledges receipt  of  a copy  of  the  Plan and Employment
                  Agreement and agrees  to  be bound  by  all of  the  terms and
                  conditions  hereof  and  thereof.  In the event of any
                  inconsistency between the Employment Agreement on the one hand
                  and the Plan or this Stock Option Agreement on the other hand,
                  the Employment Agreement  shall  govern.  In  the event of any
                  inconsistency between  the  Plan  and this Stock  Option
                  Agreement, the Plan shall govern.

2.                Definitions.  Unless  otherwise  provided  herein,  terms used
                  herein  that  are  defined  in  the  Plan  or  the  Employment
                  Agreement  and not  defined  herein  shall  have the  meanings
                  attributed thereto in the Plan or the Employment Agreement, as
                  the case may be.

3.                Exercise Schedule.   (a)  Except as otherwise provided in this
                  Stock Option Agreement, the Employment Agreement, or the Plan,
                  the Option shall be

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                  exercisable  in whole or in part as and when it vests.  Except
                  as  provided  in Section  3(b),  the Option  shall vest on the
                  second  anniversary of the date of grant set forth above.  The
                  term "exercise" or  "exercisable" as used herein shall include
                  the  conversion  of the Option in the manner  contemplated  by
                  Section 12 hereof.

                           (b) Except as set forth in Section  3(e)  hereof,  if
                           the market  value per share of the  Company's  Common
                           Stock  (as  determined  in the  manner  set  forth in
                           Section 3(d),  the "Market Value Per Share")  exceeds
                           from time to time the dollar  amount set forth  under
                           the  column  "Market  Value  Per  Share" in the table
                           below for at least 20 out of 30  consecutive  trading
                           days,  then  the  number  of  Options  equal  to  the
                           difference   between  the  (i)  product  obtained  by
                           multiplying  1,000,000 by the  Multiplier (as defined
                           below)  set forth in the same row in the table  below
                           as the Market Value Per Share that has been exceeded,
                           less (ii) the  number  of  Options  which  previously
                           vested   pursuant  to  this   Section  3,  will  vest
                           immediately.  The  Market  Value  Per  Share  and the
                           Multiplier are set forth in the following table:


                    Market Value Per Share              Multiplier
                    ----------------------             -----------
                         $4.80                            0.1
                          5.60                            0.2
                          6.40                            0.3
                          7.20                            0.4
                          8.00                            0.5
                          8.80                            0.6
                          9.60                            0.7
                         10.40                            0.8
                         11.20                            0.9
                         12.00                            1.0

                           (c) In the event and to the extent  that the  Options
                           vest as a result of the  application  of Section 3(b)
                           of this Stock Option  Agreement,  then any subsequent
                           acceleration  of the  vesting of Options  pursuant to
                           Section 3(b) will occur only if and to the extent the
                           Market Value Per Share with respect to any subsequent
                           proposed  acceleration  exceeds the Market  Value Per
                           Share in the table  above  for all prior  accelerated
                           vesting(s)  of  Options  pursuant  to  Section 3. For
                           example,   if  the  vesting  of  Options  accelerated
                           because the Market Value Per Share for the  requisite
                           period exceeded $6.40 and 300,000 Option vested, then
                           the  accelerated  vesting  of  Options  on  the  next
                           subsequent  occasion  will only  occur if the  Market
                           Value  Per  Share for the  requisite  period  exceeds
                           $7.20,  in which case 100,000  Options  (400,000 less
                           300,000) shall vest.

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<PAGE>

                           (d) For  purposes of the Option and this Stock Option
                           Agreement,  Market  Value  Per  Share  shall  be  the
                           closing  price of a Share as of the day in  question,
                           as reported with respect to the  principal  market or
                           quotation  system in which  Shares are then traded or
                           quoted,  or, if no such closing  prices are reported,
                           on the basis of the  closing  bid price as of the day
                           in  question  on the  principal  market or  quotation
                           system on which Shares are then traded or quoted, or,
                           if  not  so  traded  or  quoted,  as  furnished  by a
                           professional  securities  dealer  making a market  in
                           such stock selected by the Committee.

                           (e) Notwithstanding  anything to the contrary herein,
                           the  Plan or the  Employment  Agreement,  the  Option
                           shall  not  vest  until  the  Plan  shall  have  been
                           approved  by  a  Majority  of  the   Shareholders  by
                           November 15, 2000  provided  that if the Stock Option
                           becomes a Voted  Matter as defined in Section 3(d) of
                           the  Employment  Agreement  the Option shall not vest
                           until  the  Option  and  the  Plan  shall  have  been
                           approved  by  a  Majority  of  the   Shareholders  by
                           November 15, 2000

4.                Method of Exercise.  The  Option shall be exercisable in whole
                  or in part by written notice which shall state the election to
                  exercise the Option, the number of Shares in respect  of which
                  the Option is being exercised, and such other  representations
                  and  agreements  as  to  the  holder's investment  intent with
                  respect  to  such Shares as may be  required  by  the  Company
                  pursuant  to the provisions of the Plan.  Such written  notice
                  shall be signed by the  Optionee  and shall  be  delivered  in
                  person or by certified mail to the Secretary  of  the Company.
                  The  written  notice  shall be accompanied by payment  of  the
                  exercise price in the manner contemplated by Section 5 hereof.
                  This Option shall be  deemed  to  be exercised  after both (a)
                  receipt by the Company of such written notice  accompanied  by
                  the  exercise price and the Option and (b)  arrangements  that
                  are  reasonably  satisfactory to the Committee have been  made
                  for  Optionee's payment  to the Company of the amount that  is
                  necessary to be withheld in accordance with applicable Federal
                  or  state  withholding  requirements.  The  Company  and  the
                  Optionee shall work cooperatively,  expeditiously  and in good
                  faith to make such withholding arrangements. No Shares will be
                  issued  pursuant to the Option unless and until such  issuance
                  and such exercise shall comply with all relevant provisions of
                  applicable  law, including  the  requirements  of  any stock
                  exchange (including any automated  system of quotation)  upon
                  which the Shares then may be traded or quoted.

5.                Method of Payment.  Payment of the exercise  price shall be by
                  any  of  the  following,  or a  combination  thereof,  at  the
                  election of the Optionee: (a) cash; (b) check; (c) with Shares
                  that have been held by the  Optionee for at least 6 months (or
                  such other Shares as the Company determines will not cause the
                  Company  to  realize  a  financial  account  charge);  (d)  as
                  provided in Section 12 of this Stock


                                        3

<PAGE>




                  Option Agreement;  or (e) such other  consideration or in such
                  other  manner  as  may  be  determined  by  the  Board  or the
                  Committee in its absolute discretion.

6.                Termination of Option.  Subject  to  earlier  termination  as
                  provided in the following sentence, the Option shall terminate
                  on, and in no event shall the Option be exercisable after, May
                  9, 2010.  The Option shall terminate and expire on November 16
                  , 2000 unless the Plan has been  approved by a Majority of the
                  Shareholders by November 15, 2000 provided  that if the Option
                  becomes  Voted  Matter  as  defined in Section 3(d)  of  the
                  Employment  Agreement  the Option shall expire on November 16,
                  2000 unless the Plan and the Option are approved by a Majority
                  of  the  Shareholders  by  November 15, 2000.  Any unexercised
                  portion of the Option shall automatically and  without  notice
                  terminate and become null and void on the terms and conditions
                  and at the time(s) set forth in the Employment Agreement.

7.                Transferability. The Option is not transferable otherwise than
                  by will or the laws of descent  and  distribution,  and during
                  the lifetime of the  Optionee the Option shall be  exercisable
                  only by the Optionee. The terms of the Option shall be binding
                  upon the  executors,  administrators,  heirs,  successors  and
                  assigns of the Optionee.

8.                No Rights of Stockholder Nor Rights to Continued Employment.
                  Neither  the  Optionee  nor  any  personal  representative (or
                  beneficiary)  shall  be, or shall  have any of  the rights and
                  privileges of, a stockholder of the Company  with  respect  to
                  any shares of Stock purchasable or issuable upon the  exercise
                  of  the Option, in whole or in part, prior  to  the  date  the
                  Option  is  deemed  to  have been  exercised. Notwithstanding
                  Section 1 of this Stock Option Agreement, neither  the  Option
                  nor this Stock Option Agreement shall confer upon the Optionee
                  any right to continued employment or service with the Company.

9.                Inapplicability of Section 9 of the Plan.  The provisions of
                  Section 9 of the Plan shall not be applicable to the Option.

10.               Law Governing.  This Agreement shall be governed in accordance
                  with  and  governed  by the  internal  laws  of the  State  of
                  Delaware.

11.               Notices.  Any notice under this Agreement  shall be in writing
                  and shall be given in the  manner  specified  in Section 13 of
                  the Employment Agreement.

12.               Conversion.  (a) In lieu of  exercise  of any  portion  of the
                  Option as provided  herein,  and the  payment of the  exercise
                  price  therefor in the manner  contemplated  by Sections 5(a),
                  5(b),  5(c)  and  5(e)  hereof,  the  Option  (or any  portion
                  thereof)  may, at the election of the  Optionee,  be converted
                  into the nearest whole number of Shares determined pursuant to
                  the following formula:


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<PAGE>


                           Number of Shares = NOS multiplied by (MVPS minus EP)
                                                                 --------------
                                                                   ( MVPS )

                           where:

                           NOS is the number of Options to be exercised;

                           MVPS is the  Market  Value  Per  Share on the date of
                           exercise, which shall be determined in the manner set
                           forth in Section 3(d) without regard to the table set
                           forth in Section 3(b); and

                           EP is the  Exercise  Price in effect on the  business
                           day next preceding the date of exercise.

                  (b)  Notwithstanding  anything  to the  contrary  herein,  the
                  conversion  privilege  afforded under this Section 12 may only
                  be used if,  at the date of  exercise,  the  Market  Value Per
                  Share is greater than the Exercise Price then in effect.


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<PAGE>


IN WITNESS  WHEREOF,  the undersigned have executed this Agreement as of May 10,
2000.

                                     COMPANY:

                                     U.S. ENERGY SYSTEMS, INC.


                                     By: /s/ Lawrence I. Schneider
                                             -----------------------
                                             Lawrence I. Schneider,
                                             Chief Executive Officer


         Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof,  and hereby accepts
this Option  subject to all of the terms and  provisions  thereof.  Optionee has
reviewed the Plan and this Option in their  entirety,  has had an opportunity to
obtain  the  advice  of  counsel  prior to  executing  this  Option,  and  fully
understands all provisions of the Option.

Dated:     May 10, 2000                     OPTIONEE:

                                           /s/ Goran Mornhed
                                           ---------------------------------
                                                Goran Mornhed