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:     187,500

Exercise Price Per Share:      $3.00

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 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 is not intended to qualify as
         an  incentive  stock  option  within  the meaning of Section 422 of the
         Code. The  Option  was issued pursuant  to the (a)  Company's  1998
         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 the 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.  The Option shall be exercisable in whole or in part
         commencing as 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.

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4.       Method of Exercise.  This  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
         arrangments.  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 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.  Any  unexercised
         portion of the Option shall automatically 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 a 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.

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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:

                           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 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 the Employment
Agreement  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 Mornhead
                                     ---------------------------------
                                         Goran Mornhed



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