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:     562,500

Exercise Price Per Share:      $3.00

Type of Option:  Non-qualified Stock Option

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

Section 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 up 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  shall  be subject to the
                  terms  and  conditions  set forth  herein. 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 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.

Section 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.
Section 3.        Exercise Schedule.  Except as otherwise provided in this Stock
                  Option Agreement, the Employment Agreement, or the Plan,  the
                  Option shall be exercisable in whole

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                  or in part as and when it vests.  Commencing one year from the
                  date of grant set forth above,  the Option shall vest in three
                  cumulative  annual increments of 187,500 Shares each. The term
                  "exercise" or  "exercisable"  as used herein shall include the
                  conversion of the Option in the manner contemplated by Section
                  12 hereof.

                  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.

Section 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.

Section 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 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.

Section 6.        Termination of Option.  Subject to  earlier  termination  as
                  provided in this Section

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                  6, 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.

Section 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 this  Option
                  shall be binding upon the  executors,  administrators,  heirs,
                  successors and assigns of the Optionee.

Section 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.

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

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

Section 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.

Section 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:


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

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                           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 12(c); 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.

                  (c)  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.


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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

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