STOCKHOLDERS' AGREEMENT



                  THIS  STOCKHOLDERS  AGREEMENT (the "Agreement") is dated as of
November 28, 2000, by and among USE  Acquisition  Corp., a Delaware  corporation
(the "Company"),  U.S. Energy Systems,  Inc., a Delaware corporation ("USE") and
Cinergy  Energy  Solutions,  Inc., a Delaware  corporation  ("CES"),  which is a
wholly owned subsidiary of Cinergy Solutions,  Inc. ("CSI"). Each of the parties
to  this  Agreement   (other  than  the  Company)  and  any  other   individual,
corporation,  partnership, trust, unincorporated organization or a government or
any agency or  political  subdivision  thereof (a  "Person")  who shall become a
party to or agree to be bound  by the  terms of this  Agreement  after  the date
hereof is sometimes hereinafter referred to as a "Stockholder."

                                    RECITALS

A.                  The  Company,  USE  and  CES  have  entered  into a  certain
subscription agreement (the "Subscription  Agreement") dated as of  November 28,
2000 to   acquire  4,574  shares  of  the Company's Class  B  Common Stock  (the
"Class B Stock").

B.                  The Subscription Agreement provides that the parties thereto
shall  execute  and  deliver this Stockholder's  Agreement simultaneous with the
consummation  of  the  subscription  transaction described  in  the Subscription
Agreement.

C.                  As  of  the date  hereof, USE  owns 5,426 shares  of  the
Company's Class A Common  Stock (the "Class A Stock" and together with the Class
B Stock,  the "Common  Stock"),  which together with the shares of Class B Stock
issued to CES pursuant  to  the  Subscription  Agreement  constitute  all of the
issued  and outstanding stock of the Company.

D.                 Upon the  consummation  of  the  subscription  transaction
described in the Subscription  Agreement,  the Company shall consummate a merger
transaction with Zahren Alternative Power Corporation,  a Delaware  Corporation,
("Zapco"), (the "Merger") pursuant to an  Agreement and Plan  of  Reorganization
and Merger by and among USE, the Company and Zapco dated as  of even date  with
the Subscription Agreement (the "Merger Agreement"). As a result of such Merger,
Company shall merge with and into Zapco, the separate corporate existence of the
Company shall cease and Zapco shall continue as the "Surviving Corporation"  (as
defined in the Merger Agreement) and this Stockholders Agreement shall become
the  Stockholders Agreement   of  the  Surviving  Corporation. Accordingly all
references  to the "Company" herein  shall also  refer to  the Surviving
Corporation.

E.          The Company and the  Stockholders  desire,  for their mutual benefit
and  protection,  to enter into this  Agreement  to set forth  their  respective
rights and  obligations  with respect to their  shares of Common Stock  (whether
issued or acquired hereafter, including all shares of Common Stock issuable upon
the  exercise of warrants,  options or other rights to acquire  shares of Common
Stock, or upon the conversion or exchange of any security ("Rights")).

         NOW,  THEREFORE,  in  consideration of the foregoing and for other good
and  valuable  consideration,  the  receipt and  sufficiency  of which is hereby
acknowledged, the parties hereto agree as follows:

<PAGE>

1.       MANAGEMENT

     1.1  Management.  The management  of the Company  shall be  conducted  in
accordance with the provisions of this  Agreement and the provisions  of  the
Certificate of Incorporation,  as amended (as amended and as may be amended from
time to time, the  "Certificate") and By-laws, as amended (as amended and as may
be amended from time to time, the "By-laws"), of the Company.

     1.2      Board of Directors; Board Composition; Removal and Vacancies.

             (a) Number of  Directors.  The  Board of Directors  of the Company
(the "Board") following the consummation of the transactions contemplated by the
Subscription Agreement (the "Subscription") shall be comprised of five directors
(the "Directors")  who shall be elected and removed as set forth in  subsections
(b) through (d) below. A Director need not be a Stockholder.

             (b) Election of Directors.  USE and, following the  time of  the
Subscription (the "Subscription Time"), CES  shall have  the  right to designate
four individuals and one  individual,  respectively, as nominees for election as
Directors  and as directors of any future direct or indirect  subsidiary  of the
Company (a "Future Subsidiary").  A Stockholder entitled to designate  Directors
pursuant to the immediately   preceding   sentence  shall  be  referred to as  a
"Designating  Stockholder."  The  Stockholders hereby  agree  to  vote  their
respective shares of Common  Stock in favor  of the  election  of the  Directors
designated  by each Designating Stockholder. If, at any time, a Designating
Stockholder shall notify the  Company  and  the  other  Stockholder  in  writing
of  such   Designating Stockholder's  desire to have removed from the  Board any
Director  designated by such Designating Stockholder, the Stockholders shall (i)
meet within five (5) days  after  the  date  of  such  notice for the purpose of
considering  such removal and (ii) vote at such meeting their  respective shares
of Common Stock in favor of  such  removal; provided that  the  Director  to  be
removed shall continue to hold office until so removed.  A Director may  only be
removed from the Board with the written consent of the  Designating  Stockholder
who designated such Director.

          (c) Board of Directors  following the Subscription.  The  Board of the
Company as of the Subscription Time will consist of the following persons:

<TABLE>
<CAPTION>
<S>
                                                                                <C>
           ------------------------------------------------ ----------------------------------------
                          Name of Directors                         Designating Stockholder
           ----------------------------------------------- ----------------------------------------
           Goran Mornhed                                                      USE
           ------------------------------------------------ ----------------------------------------
           Bob Benson                                                         USE
           ------------------------------------------------ ----------------------------------------
           Barbara Farr                                                       USE
           ------------------------------------------------ ----------------------------------------
           Henry Schneider                                                    USE
           ------------------------------------------------ ----------------------------------------
           M. Stephen Harkness                                                CES
           ------------------------------------------------ ----------------------------------------
</TABLE>

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<PAGE>

                  Each of such  persons  shall hold office  until such  person's
death,  resignation or removal or until such person's  successor shall have been
duly designated, where applicable, and elected by the Stockholders.

          (d) Vacancies;  Action by Stockholders. If a vacancy is created on the
Board  by  reason of the death, disability,  removal or  resignation of  any
Director, the Stockholder, which, under Section 1.2(b), is entitled to designate
such Director, shall  be  entitled  to designate a  new nominee  to serve  as
Director. Upon  notice  from such  Designating  Stockholder  to the  Company and
the other Stockholder, the Stockholders shall (i) meet within five (5) days  of
such notice for  the purpose of  considering the  election of  the  designated
nominee to fill such  vacancy  and (ii)  vote  their  shares  of  Common  Stock
in favor of such nominee.

     1.3 Officers.  The Board shall have the right to elect  officers of the
Company, to delegate to such officers  such rights,  powers and responsibilities
as the Board shall determine,  and to remove  and replace such officers. The
officers of the Company as of the  Effective  Time shall be as follows: (a)Goran
Mornhed, President and, (b) Barbara Farr as Secretary.

     1.4       Notice; Quorum and Vote.

                  (a)  Either  the  Company  or  either  Stockholder  may call a
meeting of the  Stockholders  and either the Company or any  Director may call a
meeting of the  directors  at any time by giving  notice,  specifying  the time,
place and purpose of the meeting,  to the Stockholders or the Directors,  as the
case may be, at least two days before the time  appointed.  A written  waiver of
notice,  signed or Director, as the case may be, by the Stockholder or Director,
as the case may be, entitled to notice,  whether before or after the time stated
therein, shall be deemed equivalent to notice.

                   (b) A quorum of  Directors  shall  consist of a  majority  of
Directors and, except as otherwise set forth herein,  all decisions of the Board
shall require the affirmative vote of a majority of Directors.

                  (c) A quorum of  stockholders  of the Company shall consist of
the  holders,  present  in  person  or by  proxy,  of  shares  of  Common  Stock
representing 50% or more of the votes if all of the outstanding shares of Common
Stock were  present  and voting and,  except as  otherwise  set forth  herein or
required by law, all actions of the  stockholders of the Company  (including the
election  of  Directors)  shall  require  the  affirmative  vote  of  50% of the
outstanding  shares of Class A Stock and Class B Stock entitled to vote,  voting
together as a single class, provided,  however, that each share of Class A Stock
will be  entitled  to one (1)  vote and  each  share  of  Class B Stock  will be
entitled to 0.296437937 votes.

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<PAGE>

     1.5 Voting Requirements for Required Matters. All  Stockholders shall  be
entitled to vote on any matter submitted to a vote of the Stockholders. The only
matters to be submitted to the Stockholders shall be matters  expressly required
to be submitted to the Stockholders pursuant to this Agreement or the provisions
of the   General   Corporation   Law  of  the  State  of  Delaware  (the "GCL").
Notwithstanding  any other  provision  of this  Agreement to the  contrary,  the
Directors shall not,  without the approval of 50% of the  outstanding  shares of
each of the Class A Stock and the Class B Stock,  with each voting as a separate
class, take any of the following actions on behalf of the Company:

1.       Demand additional capital from the Stockholders

2.       Borrow  money or  guarantee  the  obligations  of any Person not in the
         ordinary  course of business,  or mortgage,  pledge or grant a security
         interest in assets not in the ordinary  course of business,  in any one
         transaction or a series of related transactions.

3.       Enter  into  a  transaction   or  agreement  with  an  Affiliate  of  a
         Stockholder  other than as specifically set forth in this Agreement not
         in the ordinary course of business.

4.       Make unbudgeted acquisitions not in the ordinary course of business.

5.       Dispose of assets not in the ordinary course of business.

6.       Enter into any contract not in the  ordinary  course of business  which
         requires unbudgeted expenditures, commitments or liabilities.

7.       Amend the By-Laws or Certificate of the Company.

8.       Authorize  or  issue  any  additional  Common  Stock  or  other  equity
         interests  of the  Company or any option or  warrant to  purchase  such
         equity interests.

9.       Engage in a business activity other than the Business.

10.      Commence the process of dissolution,  liquidation,  insolvency or
         voluntary bankruptcy.

11.      Approve any merger or consolidation of the Company.

12.      Form any subsidiary.

13.      Amend or modify any credit agreement or implement any change in capital
         structure not in the ordinary course of business.

14.      Commence or settle any litigation  that involves an amount in excess of
         $100,000.

15.      Engage or terminate principal auditors or attorneys of the Company.

16.      Obtain  approval for any Company  budget and any material  expenditures
         that deviate from the Company's  budget during any Probation  Period. A

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<PAGE>
         "Probation  Period" is any period  that  commences  when the  Company's
         financial  results,   as  reflected  in  an  annual  audited  financial
         statement  for  the  Company,  differ  materially  adversely  from  the
         Company's pro forma  projections  (the  projections for 2001 - 2005 are
         annexed hereto) and terminates when the Company's financial results are
         no longer below the thresholds in such projections.

17.      Such other matters as the  Stockholders or their  designated  Directors
         shall by mutual consent determine as being appropriate.

The  matters  required  to be  submitted  to the  Stockholders  pursuant to this
Section 1.5 are referred to herein as the "Required Matters."

     1.6 Limitation on  Management Power. Notwithstanding  anything  set forth
herein or in the Certificate or By-laws and without limiting  the  authority of
the Board to oversee the management of the Company,  no officer of  the Company
shall take any of the  following actions without the prior approval of the Board
and, in the case  of the  actions  described  in Section  1.5, the required vote
of the Stockholders:  (i)  change  the line of  business  or enter into any  new
line of business;  (ii)  retain any  attorney  or  accountant  to  represent  or
provide services  to the  Company;  (iii) authorize or enter  into any agreement
or arrangement  between  the  Company and  any  of its  officers, Directors,
Stockholders or  Affiliates;  (iv)  the  Required  Matters;  or  (v) agree to do
any of the foregoing.

     1.7  Directors'  Expenses.   The Company shall reimburse  directors for all
reasonable  out-of-pocket  expenses incurred in connection with their attendance
or participation at Board meetings or other Company related business.

     1.8 Action by Stockholders and Directors. Each  Stockholder shall  vote its
shares of Common Stock and take such other action,  and  cause its nominees  to
take such action, as is necessary or appropriate in its capacity as Stockholder,
officer and/or director  of  the Company  to carry  out  the provisions of  this
Agreement.

     1.9      Additional Capital.

          (a)  Notice.  If  at any time and  from  time to  time,  the  Board
determines  by unanimous  vote that the  Company  requires additional funds (the
"Additional  Capital") in  excess of its then existing capital,  written  notice
shall be given to each Stockholder of (i) the total amount of Additional Capital
required, (ii) the  reason  the  Additional  Capital  is  required,  (iii)  each
Stockholder's proportionate share of the total Additional Capital (determined in
accordance with this Section),  and (iv) the date each Stockholder's  Additional
Capital is due and payable,  which date shall be no sooner than thirty (30) days
after the notice has been given.

          (b)  Stockholder's  Share.  A Stockholder's proportionate share of the
total Additional Capital shall be equal to the product  obtained by  multiplying

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<PAGE>

the total  Additional  Capital  required by (i) the number  of shares  of Common
Stock  held  by such  Stockholder  divided by (ii) the total number of shares of
Common Stock outstanding.

          (c) Form of  Payment.  A  Stockholder's  proportionate  share  of the
Additional Capital  shall be  payable  in  cash or  by certified check,  wire
transferred federal funds of bank  cashier's  check or in such other form as the
Board  approves  by unanimous vote.

          (d) Issuance of Additional  Shares. The Company shall issue additional
shares of Common Stock in exchange for the Additional Capital as follows:

                                   (i)      The Company  shall issue to  CES one
                                            share  of Class B Stock  for every
                                            $2,500 CES provides  to the Company
                                            pursuant to this Section.

                                   (ii)     The Company  shall  issue to USE one
                                            share of Class  A Stock  for  every
                                            $2,500 USE provides to  the Company
                                            pursuant to this Section.

     1.10 Dividends.  It is the intent of the Stockholders  that  the  primary
source of their investment return in connection with this  Agreement  shall  be
dividends and distributions  from the Company.  Accordingly,  the Stockholders
shall cause the Company to adopt  appropriate  policies of  declaring  dividends
at  the highest  level permitted  by applicable law, consistent  with prudent
business  practices and  having  due  regard  for  relevant  business, taxation,
working capital, banking covenant and operational requirements.

     1.11 Maintenance of Books and Records;  Accounts and Accounting  Method.
Unless  otherwise  agreed,  the Board  shall  cause the Company to keep full and
accurate accounts of the transactions of the Company in proper books and records
of account which  shall  set forth all information  required by  the GCL.  Such
accounts shall be maintained in accordance  with Generally  Accepted  Accounting
Principles. For  purposes  of  this  Agreement, "Generally Accepted Accounting
Principles" means the generally accepted accounting  principles set forth in the
opinions and pronouncements of the Accounting  Principles Board of  the American
Institute of  Certified Public  Accountants and statements and pronouncements of
the Financial Accounting  Standards Board or in such other  statements by  such
other entity as may be approved by a  significant  segment of the  accounting
profession in the United States. Such books and records shall be available, upon
two (2) business days' notice to the Company,  for  inspection  and  copying  at
reasonable times during business hours by any Stockholder or its duly authorized
agents or representatives  for  any  purpose  reasonably  related  to  such
Stockholder's interest as a stockholder of the Company.

     1.12 Financial  Statements.  Promptly after the end of each fiscal quarter,
the Company shall have prepared, and delivered to each Stockholder,  a quarterly
set of primary financial  statements for the Company.  This  set  of  primary
financial statements shall include (i) a balance  sheet  reflecting  the assets,
liabilities and capital accounts,  comparative to the prior year and  the  prior
year-end, and (ii) statements of operations  for  the quarter and  year-to-date,

                                       6
 <PAGE>

comparative to the prior year.  Upon the request of any  Stockholder,  the Board
of the Company shall cause the annual  financial  statements  to be  examined by
the  Company's independent  auditor  and  submitted for adoption  at the  annual
meeting  of  stockholders.

     1.13 Additional  Information.  Upon the request  of  any  Stockholder,  the
Company shall prepare additional periodic or special reports of accounts and/or
business activity considered  necessary by such equity holder, including but not
limited to, detailed reports  of sales  by  location, detailed  expense reports,
reports of capital  expenditures, details of assets and liabilities,  and  non-
financial statistical and ratio data.

     1.14  Minutes  of  Meetings.  The minutes of all proceedings and copies  of
resolutions  adopted at meetings of the Stockholders or the Board of the Company
shall be duly entered in the minute  books which shall be kept at the  executive
offices of the Company.

2.       TRANSFERABILITY OF SHARES.

     2.1  Definition of Shares. The term "Shares" as used in the balance of this
Agreement  means the  capital  stock of the Company of all  classes,  including,
without limitation, subscription rights and options with respect to such capital
stock,  capital  stock  received  by way  of  dividend  or  upon  any  increase,
reduction,  substitution  or  reclassification  of Shares,  or upon any  merger,
consolidation or other reorganization of the Company.

     2.2 Restrictions  Upon Transfer  of Shares. Except as  set  forth in this
Agreement, no  Stockholder  shall  sell,  transfer,   donate,  give,   mortgage,
pledge, hypothecate,  or otherwise  encumber or dispose of, whether voluntarily,
by operation of  law  or otherwise  (any of  the foregoing acts  being  herein
referred to as a "Transfer") any Shares now  or  hereafter  owned  by such
Stockholder.  Any Transfer  or  attempted  Transfer  of Shares,  unless pursuant
to the terms and conditions hereof,  shall be absolutely null and void, of no
force  or effect and  may be  enjoined.  No dividend shall  be  paid  or  any
distribution  made to any transferee of Shares transferred in violation hereof
nor shall any such Transfer be registered on the books of the Company. The
Transfer or attempted Transfer of any Shares in violation hereof shall not
affect the beneficial ownership of such Shares,  and,   notwithstanding   such
Transfer  or  attempted  Transfer,   the Stockholder  making such prohibited
Transfer or attempted Transfer shall retain the right to vote and the right to
receive  dividend  and  liquidation  proceeds with respect to such Shares.

      2.3  Restrictive  Legend on Certificates.  Every certificate  representing
certificated  Shares of the Company shall bear the following  legend in addition
to any other legend which may be required by applicable law:

                  "The  sale,   transfer,   pledge,   hypothecation,   or  other
                  encumbrance  or  disposition  of  the  securities  represented
                  hereby is restricted  by the terms of a certain  Stockholders'
                  Agreement  dated as of November  28,  2000 (the  "Agreement"),
                  between  the  issuer  of  such   securities  and  all  of  its
                  stockholders,  a copy of  which  is on  file at the  principal

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<PAGE>
                  place  of  business  of  such  issuer  and  is  available  for
                  inspection  by the  stockholders  during the regular  business
                  hours   of  such   issuer.   Any   sale,   transfer,   pledge,
                  hypothecation,  or other  encumbrance  or  disposition  of the
                  securities  represented  hereby shall be absolutely void if in
                  contravention  of the terms,  provisions or conditions of such
                  Agreement. The securities represented by this certificate have
                  not been  registered  under  the  Securities  Act of 1933,  as
                  amended (the "Act"),  or under any applicable state securities
                  law.  These  securities  may not be sold or transferred in the
                  absence of an effective  registration  statement under the Act
                  and any  applicable  state  securities  law or  receipt by the
                  issuer of an  opinion of  counsel  satisfactory  to the issuer
                  that  registration  under the Act and applicable  state law is
                  not required."

 3.       PERMITTED TRANSFERS.

     3.1 Permitted Transfers. Subject to the provisions of Section 3.2, the
following Transfers of Shares are permitted at any time (each a "Permitted
Transfer"),  so long as the provisions of Section 5 are not otherwise applicable
to the transferor or transferee:

           (a)      Transfers pursuant to the terms of Articles 4 and 5;

           (b)  Transfers by a  Stockholder to an entity  which was an Affiliate
of such Stockholder  before such  Transfer  and  remains  an  Affiliate of such
Stockholder after such Transfer; and

           (c) Transfers to an entity (or an entity which,  directly  or
indirectly, owns all of the stock or interests of such entity,  or an entity
which is a wholly-owned  subsidiary,  directly or indirectly,  of  such entity),
which  is  acquiring substantially all of the assets of such Stockholder subject
to the approval of the  non-transferring  Stockholder,  which approval shall not
be  unreasonably withheld.

     3.2  Additional  Requirements   of  Transfer.  Any  Transfer  permitted  by
this Agreement shall  be further   subject  to and  conditioned  upon full
compliance by the transferor and  transferee with  each  of  the following
conditions:

          (a) Each transferee  shall have  executed an  agreement  in form and
substance satisfactory  to the  Company,  by which such  transferee  shall have
agreed to become a party to and bound by the terms and conditions of this
Agreement.

          (b) Any transfer,  conveyance or other taxes resulting from such
Transfer,  and any costs or expenses  incurred by the Company in connection with
such Transfer  shall be borne,  jointly and severally,  by the transferor and/or
the  transferee  and  each  transferor  and  transferee  do hereby  jointly and
severally  agree to indemnify  and hold harmless each other party hereto from
such taxes and jointly and severally  indemnify and hold harmless the Company
from such other expenses, and agree to promptly reimburse the Company or such
other party, as the case may be, for any such taxes, costs or expenses.

                                       8
<PAGE>
          (c) No Transfer shall be made: (i) to a Person who, in accordance with
applicable  law,  lacks the  capacity to own, or otherwise  is  prohibited  from
owning, such Shares by reason of minority, incompetence or otherwise; or (ii) to
a Person  otherwise  prohibited  by  applicable  law  from  entering  into  such
transaction or holding such Shares;  or (ii) which violates any other  provision
of this Agreement.

          (d) Upon the sale, assignment, donation or other disposition of Shares
owned by a Stockholder,  such transferring Stockholder shall cause  its nominees
to submit their  resignations  as  directors  and  officers  of the  Company, in
form and substance satisfactory to the Company.

          (e) The transferor and transferee shall have  delivered to the Company
such other agreements,  instruments  and other  documents (including opinions of
counsel reasonably satisfactory to the Company) as the Company  shall request in
order to demonstrate  compliance  of any  such  Transfer with  the provisions of
this Agreement and applicable law.

           (f)  The  Transfer  will  not  result in the Company's  being subject
to the registration and reporting  requirements of the Investment Company Act of
1940, as amended.

           (g) The  Transfer  shall not cause  the Company  to become a "holding
company" or a "public utility  company" or an "affiliate" of  a "public  utility
company" as such terms are defined by the Public Utility Holding  Company Act of
1935 ("PUHCA").

           (h) The Transfer will not result in the  Company  or  any Stockholder
being  subject to any additional material  regulatory  burdens  or  adverse  tax
treatment.

          (i) The  Transfer shall not cause the Company  or its subsidiaries  to
become subject to the Federal  Power Act or Natural  Gas Act or  regulation as a
"public utility", a "local distribution  company", an "electrical  load  serving
entity" or a similar entity under the  law  of  any  state  except to the extent
that,  at the time of the Transfer,  the Company  or any subsidiary  thereof  is
already subject to regulation thereunder.

          (j) The Transfer shall not cause any Qualifying  Facility   within the
meaning of the Public Utility  Regulatory  Policies Act of 1978 ("PURPA") and 18
C.F.R. Part 292 ("Qualifying Facility") in which the Company or its subsidiaries
hold  an equity  interest to lose  its status as  such under  PURPA or  have any
material adverse effect on the  regulatory  status of any other project owned or
operated by the Company or its subsidiaries.

4.       RIGHTS OF FIRST OFFER

                  Except for Permitted Transfers under Section 3.1 hereunder and
subject to Article 5 hereof, the following shall apply:

     4.1 Right  of  First Offer.  In the event any Stockholder or its  Affiliate

                                       9

<PAGE>

desires to sell or otherwise dispose of any of its Shares,  such selling
Stockholder or Affiliate (the  "Selling  Party") shall  first  deliver a written
notice (the "Section 4.1 Notice") to the other Stockholder (the "Second  Party")
which notice shall specify the Shares to be sold (the "Offered  Shares"). Within
thirty (30) days after  receipt of the  Section 4.1 Notice by the Second  Party,
the Second Party shall have the right to offer to  purchase  (the "First Offer")
all, but not less than all,  of the  Offered Shares at a price which price shall
be  payable  only in  cash (the "First Offer  Price"),  and  on  other terms and
conditions  as  shall be  set  forth in the First Offer. Within thirty (30) days
after receipt of the First  Offer,  the  Selling  Party shall  either  accept or
reject  the  First Offer. If  the Selling Party  accepts  the First  Offer,  the
Selling  Party  shall  sell, and the Second Party  shall  purchase, the  Offered
Shares at a closing to be held at a time not later than sixty (60) days (or such
necessary  longer period specified  in Section  4.2) after  the Selling  Party's
acceptance  of the First Offer and at the place as may be  mutually agreed upon,
at which time the Offered Shares shall be  delivered free and clear of all liens
which  may have been imposed  on the  Offered  Shares and are not connected with
the  financing  or operation of the Company itself  against payment of the First
Offer Price.  In order to comply with applicable  regulatory  requirements,  the
Second Party may designate (A) a third  party to  purchase any  portion  of  the
Offered  Shares which the Second  Party is committed  to purchase  hereunder  if
the  Offered  Shares constitute  all of  Selling  Party's  Shares or (B) a third
party  reasonably acceptable to the Selling Party to purchase any portion of the
Offered  Shares which the Second Party is committed to purchase hereunder if the
Offered Shares constitute  less than all of the Selling  Party's  Shares. If the
Selling Party  rejects  or  does not  timely accept the  First  Offer, then  the
Selling Party shall have  one  hundred  and twenty (120) days (or such necessary
longer  period specified in Section 4.2) following such  rejection  within which
to consummate the sale of all of the Offered Shares at a price per share in cash
greater than the First Offer Price,  and in all other  respects upon  terms  and
conditions no less favorable than those specified in the First Offer. If no such
sale occurs within such 120-day period (or longer period as described in Section
4.2),  the Offered  Shares shall again be subject to all of the restrictions set
forth in this Section 4.1.

     4.2 Extensions.  The foregoing notwithstanding, the time periods  specified
in Section 4.1 may be extended by either Stockholder by providing written notice
to the other  Stockholder  to the extent reasonably required to  accommodate any
regulatory  approval,  shareholder  approval or removal of liens being sought in
good faith by appropriate procedures promptly initiated and diligently conducted
by the Stockholder requesting the extension,  and further, such time periods may
be extended by either  party by providing  written  notice to the other party to
the extent reasonably  required to accommodate the procurement of debt or equity
funding by USE or any third party  designated  by the Second  Party  pursuant to
Sections 4.1 for  acquisition  of the Offered  Shares,  provided such  extension
shall not to exceed six (6) months from the originally specified date.

     4.3 Tag-Along. If  the  Second Party does not elect to purchase the Offered
Shares pursuant  to  Section 4.1 above,  the  Second Party shall have the right,
but not the  obligation,  to sell to the prospective purchaser identified in the
First  Offer  the  same  proportion of  the  Second  Party's Common Stock as the
proportion  of  the Selling  Party's  Common  Stock proposed to be  sold by  the
Selling Party at the same price and otherwise  on  the same terms and conditions
on which,  and at the same time as, the  Selling Party wishes to sell its Common


                                       10
<PAGE>

Stock.  The proportionate sale right  referred to  in this  Section 4.3 shall be
exercisable by written  notice given by the Second  Party  to the Selling  Party
during the same thirty (30) day period the  Second Party  has  to make the First
Offer  referred to in Section  4.1.  The Selling Party shall not sell any of its
interest  to  the  prospective  purchaser unless  such  purchaser  honors its
obligation to  purchase  the Common Stock  from  the Second Party  as  provided
herein.  Any  purported  Transfer  of  Shares which is  inconsistent  with  this
Section 4.3 shall  be  null and  void  and of no effect. By illustration,  if a
purchaser offers to purchase CES's 4,574 shares for $4,000 per  share of Class B
Stock,  it would be required to pay $4,000 per share for USE's  Class  A  Stock,
and  it  would  be required to purchase 2,092 shares of Class B Stock and 2,482
shares of Class A Stock.

     5. REDEMPTION; EXCHANGE

          5.1  Redemption.

                (a) At the option of the Company at any time  on or before  the
second anniversary of the  Effective  Date, so long as (i) USE  has not  made  a
First Offer which has been  accepted  by CES  pursuant  to  Section  4.1  hereof
and (ii) CES has not exercised its rights  pursuant to Section 5.2, the  Class B
Stock may be redeemed in full for cash at a price equal to $14,600,000.

          (b) Notice  of redemption  of  the Class B  Stock, specifying  the
Redemption  Date and  place of redemption, shall be given by first class mail to
CES,  at its address of record in  accordance  with Section 9.1 hereto, not less
than 30 nor more  than 60  calendar days  prior to the date fixed for redemption
(the "Redemption Date"). Such notice shall also specify the redemption price.

          (c) Notice of  redemption  of shares of the Class B Stock having  been
given as provided in Section 5.1(b), then all rights of the holders of the Class
B Stock (except the right to receive the  redemption  price)  shall  cease  with
respect to such shares on the Redemption Date  and such shares shall not,  after
the Redemption  Date, be deemed to be  outstanding and shall not have the status
of Class B Stock.

          (d) Notwithstanding the foregoing, if notice  of redemption shall have
been  given  pursuant  to Section 5.1(b) and CES  shall,  prior  to the close of
business on the date ten business days next preceding the Redemption  Date, give
written notice to the Company and USE pursuant to Section  5.2(b) hereof of the
exchange of all of the shares of Class B Stock (accompanied by a certificate  or
certificates for such shares,  duly endorsed or assigned to the Company) for the
Exchange Shares, then the redemption shall not become effective and the exchange
shall become effective as provided in Section 5.2.

     5.2 Merger  Election.  Subject to and upon compliance with this Section 5.2
and the  approval  of USE's  shareholders,  which approval will be sought at the
Stockholders'  Meeting (as defined in the Merger Agreement),  so long as USE has
not made a First  Offer which has been  accepted by CES  pursuant to Section 4.1
hereof, CES shall have merger election rights as follows:

                                       11

<PAGE>

          (a)  Optional  Merger.  CES shall have the  right,  at any  time on or
before the second  anniversary  of the  Effective  Date,  at  the office of  the
Company,  to convert all, but not less than all, of the shares of Class B Stock,
pursuant  to a  tax deferred  merger (the  "Elected  Merger") in which CES  will
merge into USE or, at the  option  of USE,  a  subsidiary  of USE.  As a  result
of the Elected Merger, CSI will be issued 1,967,000 fully paid and nonassessable
shares (the "Merger  Shares") of USE's  common  stock (the "USE Common  Stock"),
subject to adjustment as set forth in Section 5.3.

          (b) Mechanics of Merger.  In order  to effectuate the Elected  Merger,
CES shall deliver a fully  executed notice of election  ("Notice  of  Election")
to  the  Company and USE at their principal  offices, indicating that  CES  has
elected to effectuate the Elected Merger. CES and CSI shall represent and
warrant,  among other things:

                         (i)      CES has engaged in no business other than as a
                                  shareholder of the Company;

                         (ii)     CES has no liabilities;

                         (iii)    no liens exist on shares of CES's stock or any
                                  of CES's assets;

                         (iv)     regarding CES's  and CSI's  due  organization,
                                  requisite  corporate power  and  authority  to
                                  enter into the Elected Merger:

                         (v)      regarding the authorization  of  the  Elected
                                  Merger by CES and CSI;

                         (vi)     regarding the absence of any conflict;

                         (vii)    regarding the obtaining of all consents;

                         (viii)   regarding the absence of any litigation:

                         (ix)     regarding the issuance of the Merger Shares
                                  without  registration under the Securities Act
                                  of 1933,  as amended;

                         (x)      the comsummation of the Elected Merger  shall
                                  not  cause  USE  or  the  Company to become a
                                  "holding company"   or  a   "public   utility
                                  company"  or  an  "affiliate"  of  a "public
                                  utility  company"  as  such terms are defined
                                  byPUHCA;

                         (xi)     the comsummation  of  the Elected Merger shall
                                  not  cause USE or the Company or any of  their


                                       12

<PAGE>

                                  subsidiaries to become  subject to the Federal
                                  Power  Act  or  Natural  Gas Act or regulation
                                  as a "public utiltiy",  a "local  distribution
                                  company", and "electrical load serving entity"
                                  or a  similar  entity  under the law  of  any
                                  state except to the extent that, at  the  time
                                  of the  Elected  Merger, USE,  the  Company or
                                  any  of their subsidiaries is  already subject
                                  to regulation thereunder; and

                         (xii)    the comsummation  of  the Elected Merger shall
                                  not  cause   any Qualifying  Facility in which
                                  USE, the Company or  any of their subsidiaries
                                  hold an equity interest to lose  its status as
                                  such  under PURPA or have any material adverse
                                  effect on the  regulatory  status of any other
                                  project owned or operated by USE,  the Company
                                  or any of their subsidiaries.

and CSI  shall  indemnify  USE if there is a breach of such  representations  as
mutually agreed to by CSI, CES and USE in the definitive documents  effectuating
the  Elected  Merger.   USE  shall  represent  and  warrant  regarding  its  due
organization,  requisite corporate power and authority to enter into the Elected
Merger, its authorization of the Elected Merger, the absence of any conflict and
as to such  other  matters  typically  found in  agreements  of this type as are
reasonably  requested  by CES and CSI.  USE  shall  indemnify  CSI if there is a
breach of such  representations as mutually agreed to by CSI, CES and USE in the
definitive documents  effectuating the Elected Merger.  Thereafter a certificate
of merger shall be executed and filed with the appropriate secretaries of state.
Upon the  effectiveness  of the Elected Merger and the surrender of the original
certificate or certificates for the shares of Class B Stock,  duly endorsed,  to
the  principal  office of USE, USE shall  deliver the Merger  Shares;  provided,
however,  that USE shall not be obligated to issue  certificates  evidencing the
shares of USE Common Stock issuable upon such exchange  unless the  certificates
evidencing  such shares of Class B Stock are  delivered  to USE.  No  fractional
shares of USE Common  Stock shall be issued upon  exchange of the Class B Stock.
In lieu of any fractional  share to which CSI would  otherwise be entitled,  USE
shall round up the number of Merger Shares to the next whole number. In the case
of a  dispute  as to the  calculation  of the  number of  Merger  Shares,  USE's
calculation shall be deemed conclusive absent manifest error.

                  USE shall issue and deliver  within  seven (7)  business  days
after the delivery to USE of the certificates representing the shares of Class B
Stock to be  exchanged  to CSI, at the address  provided  for in Section  9.1, a
certificate  or  certificates  for the number of shares of USE  Common  Stock to
which CSI shall be  entitled as  aforesaid  and  deliver a  registration  rights
agreement covering such shares that contains  substantially similar terms as the
Registration Rights Agreement between USE and CSI dated October 12, 2000.

          (c) Reservation of Shares. USE shall  at  all times reserve and keep
available out  of  its authorized but  unissued  shares of USE Common Stock such
number of shares of USE  Common  Stock as shall from time to time be  sufficient
to effect  the Elected Merger;  and if at any time the number  of authorized but

                                       13
<PAGE>

unissued shares of USE Common  Stock  shall  not be sufficient to  effect  the
Elected  Merger,  USE will take such  corporate  action as may  be necessary to
increase its authorized but  unissued  shares of USE Common Stock to such number
of shares as shall be sufficient for such purpose.

          5.3      Adjustment.  (a) The number of Merger Shares shall be subject
to adjustment as set forth below:

                                   (i)      If, prior to the Elected Merger, the
                                            number of outstanding  shares of USE
                                            Common Stock is increased by a stock
                                            split,   stock   dividend  or  other
                                            similar event,  the number of Merger
                                            Shares   shall  be   proportionately
                                            increased,   or  if  the  number  of
                                            outstanding  shares  of  USE  Common
                                            Stock is decreased by a  combination
                                            or  reclassification  of  shares  or
                                            other similar  event,  the number of
                                            Merger      Shares      shall     be
                                            proportionately decreased.

                                   (ii)     If, prior to the Elected Merger,
                                            there shall be any merger,
                                            consolidation, exchange of shares,
                                            recapitalization, reorganization or
                                            other similar event, as a result of
                                            which shares of USE  Common  Stock
                                            shall be changed into the same or a
                                            different number of shares of  the
                                            same or another class or classes of
                                            stock or securities of  USE  or
                                            another entity,  then CSI  shall
                                            thereafter have the right to receive
                                            upon  the  Elected Merger, upon  the
                                            basis and  upon  the  terms  and
                                            conditions specified herein, and in
                                            lieu of the shares of  USE  Common
                                            Stock that would have been issuable
                                            upon  the  Elected Merger if such
                                            event had not occurred, such shares
                                            of stock and/or securities as may
                                            be issued or payable with respect to
                                            or in exchange for the number  of
                                            shares of USE Common Stock that were
                                            issuable upon the Elected Merger
                                            if such  Elected Merger had occurred
                                            immediately prior to such event, and
                                            in  any  such  case   appropriate
                                            provisions shall  be  made  with
                                            respect to the rights  and interests
                                            of  CSI to  the  end  that  the
                                            provisions hereof (including,
                                            without limitation, provisions for
                                            adjustment of the number of Merger
                                            Shares issuable upon exchange of the
                                            Class B Stock) shall thereafter be
                                            applicable, as nearly  as  may  be
                                            practicable in  relation  to  any
                                            shares of stock or securities
                                            thereafter deliverable upon the
                                            exercise hereof.

                    (b) Upon any  adjustment of the number of Merger  Shares,
then and in each case the Company  shall give written  notice  thereof, by first
class mail,  postage prepaid,  addressed to CES in  accordance with Section 9.1,
which notice shall  state the number  of Merger  Shares resulting  from such
adjustment,  setting forth in  reasonable  detail the method of  calculation and

                                       14
<PAGE>

the facts upon which such calculation is based.

               (c)      In case at any time:

                                    (i)     USE shall  declare any dividend upon
                                            its Common Stock  payable in cash or
                                            stock or make any other distribution
                                            to the holders of its Common Stock;

                                   (ii)     USE shall offer for subscription pro
                                            rata to the  holders  of its  Common
                                            Stock any additional shares of stock
                                            of any class or other rights;

                                   (iii)    there    shall   be   any    capital
                                            reorganization  or  reclassification
                                            of the  capital  stock of USE,  or a
                                            consolidation or merger of USE with,
                                            or a sale  of  all or  substantially
                                            all   its   assets    to,    another
                                            corporation; or

                                   (iv)     there shall be a  voluntary  or
                                            involuntary dissolution, liquidation

or winding up of USE; then, in any one or more of said  cases, the Company shall
give, by first class mail,  postage prepaid, addressed to CES in accordance with
Section 9.1, (x) at least 30 days' prior written  notice  of  the  date on which
the  books  of USE  shall close or  a record  shall be taken  for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such  reorganization, reclassification, consolidation, merger, sale,
dissolution,  liquidation  or winding  up, and (y) in the  case of  any such
reorganization,  reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 30 days'  prior  written  notice of the date
when the  same shall take   place.  Such notice in accordance with the foregoing
clause (x) shall also  specify, in  the case  of any such dividend, distribution
or subscription  rights, the date on which the holders of USE Common Stock shall
be entitled thereto, and such notice in accordance with the foregoing clause (y)
shall also specify the date on which the holders of USE Common  Stock shall  be
entitled to exchange  their USE Common Stock for securities or other  property
deliverable  upon such  reorganization, reclassification, consolidation, merger,
sale,  dissolution,  liquidation  or winding up, as the case may be,  and in the
case of such merger  or sale,  the aggregate consideration to be received by the
holder of USE's capital stock.

6.       CLOSING OF TRANSFER.

               6.1  Deliveries  at Closing.  At the  closing of the  sale  of
Shares  pursuant to Articles 4 or 5, the selling and purchasing Persons  shall
execute and deliver to each other the various documents which  shall be required
to  carry out  their obligations hereunder including, without limitation, the
assignment and delivery of certificates  representing the purchased Shares, free
and clear of all liens, pledges and encumbrances, and any  stock powers required
in connection therewith, the execution and delivery of the Selling Stockholder's
and its Director designee resignations as directors and officers of the Company,
and all other documents required by this Agreement.

                                       15

<PAGE>

          6.2 Payment of  Purchase  Price.  All  amounts  paid  in respect  of a
purchase or repurchase of Shares  pursuant to Articles 4 or Section 5.1  hereof
shall be paid in cash at the closing thereof.

     7. CONFIDENTIALITY.

          7.1  Confidentiality.

                (a) Neither any Stockholder nor any of its  officers, directors,
managers, employees,  Affiliates,  agents or  advisors  shall without  the prior
written consent  of  the other parties:  (i)  reveal to  any  third  party  any
confidential or  proprietary  information, data,  documents, know-how  or  trade
secrets  of  the other parties  hereto  other  than information  subject  to
confidentiality  provisions of the Joint  Project Development Agreement dated as
of October  12, 2000 by and between CSI and USE or other agreements entered into
after the date hereof by the   Stockholders   that  do not relate to the Company
or  the   Business ("Confidential  Information");  or (ii) use  any Confidential
Information in any manner  which may  directly or  indirectly  adversely  affect
the  other  parties hereto  or  their Affiliates; provided, however, that any
Confidential Information may be disclosed by such Stockholder if required by law
or legal or regulatory process or  as  may be required  by  the  rules of or any
agreement with the SEC, the New York Stock Exchange, Inc. or NASDAQ (but only in
accordance with such law or legal or regulatory process) or  in  compliance with
the valid order of a court of competent  jurisdiction  or in connection with the
procurement of debt or equity funding so long as the  receiving party  agrees to
be  bound by  the confidentiality provisions  contained  in  this  Section 7.1.
Confidential  Information shall  not  include information  which  has  become
available  as a  matter  of public  record through  no act or  omission  of such
Stockholder, or any of its Affiliates, agents or advisors, or to the extent such
Confidential  Information  was  in  the possession of such  Stockholder or its
Affiliates  prior to its receipt from the other  parties  or which was  received
from a third  party without breach of confidentiality obligations.  Confidential
Information  shall not  be  used  by the receiving Stockholder  for  any reason
outside of the purpose and scope of this Agreement.  The obligations established
pursuant to this Section shall survive any  termination of this Agreement for a
period of three (3) years,  except that there  shall  be no limit  on the amount
of time  trade  secrets  must be kept confidential.

          (b) Each  Stockholder shall take reasonable efforts to ensure that the
Confidential  Information  is not  disclosed  to,  or  obtained  from  it or its
employees, officers or agents by, any Person other than personnel employed by it
or acting on its behalf who require to have access to it in order to  facilitate
the transactions  contemplated by this Agreement and the conduct of the business
of the Company in accordance with this Agreement.

          (c) The parties hereto agree that irreparable damage  shall  occur  in
the  event  of  a breach  of  Sections 7.1 (a) or (b) and that the non-breaching
parties shall be entitled to equitable relief in the event of any such breach.

                                       16

<PAGE>
         7.2      Competition of Stockholders Allowed.

                           None of USE, CSI, CES or any  of their  respective
Affiliates shall be prohibited by this Agreement from engaging in any business
or activities  that are competitive to those of the Company or any of the other
Stockholders.

         8.  TERM AND TERMINATION.

          8.1 Term of Agreement.  The term of this Agreement shall be  twenty
years, unless this Agreement shall be terminated as herein provided.

         8.2 Termination.  (a)  This Agreement shall  terminate with respect to
the  Company  and  all Stockholders upon the occurrence of any of the following
events:

               (1) The adjudication of the Company as a bankrupt,  the execution
                   of an assignment for the benefit of creditors of the Company,
                   the  appointment of  a  receiver  for  the  Company  or  the
                   voluntary or involuntary dissolution of the Company.

               (2) The execution of a written instrument, by the Company, each
                   of the Stockholders terminating this Agreement, or

               (3) Any public offering of capital stock or other securities of
                   the Company.

               (b) This Agreement shall automatically  terminate with respect to
a Stockholder in the event that his interest in his Shares completely terminates
and,  upon such complete  termination,  such  Stockholder  shall have no further
rights or obligations  hereunder other than those rights and obligations arising
prior to such  termination,  other  than the  obligations imposed  by Article 7.
If  such  Stockholder  subsequently  acquires  or  reacquires Shares, he  shall
automatically become bound  once  again  by the terms of  this  Agreement. This
Section in  no  event shall be  interpreted  so  as to relieve a Stockholder of
liability for  his breach of  or  failure  to  comply with any term or provision
hereof  arising or existing prior to or at the time  of  the termination of this
Agreement.

               (c) Upon the termination of this Agreement, the provisions of the
restrictive legend set forth in Section 2.3 of this Agreement shall  be promptly
removed from the Shares.

             8.3 Effect of  Termination. In the event of the termination of this
Agreement pursuant to Article 8, this Agreement  shall forthwith become void and
have no effect, without any liability on the part of any party hereto; provided,
however, that the termination of this Agreement shall not relieve any party from
liability for any breach of this Agreement; and further provided,  however, that
the following provisions of this Agreement shall survive  termination:  Sections
7.2, 8.3, 9.1, 9.11, 9.17 and 9.18.

                                       17

<PAGE>

9.       MISCELLANEOUS.

Notices.  (a) Any notice or other communication  required or permitted hereunder
shall be in writing and shall be delivered  personally  by hand,  by telecopy or
mail if mailed by,  registered or certified mail postage  prepaid return receipt
requested  or by  Federal  Express  or  similar  overnight  courier  service  if
addressed to the Stockholders at the addresses set forth below:

                           if to CES:

                           Cinergy Energy Solutions, Inc.
                           1000 East Main Street
                           Plainfield, IN  46168
                           Attention: M. Stephen Harkness, President & COO
                           Facsimile: 317-838-2090


                           with a copy to:

                           Cinergy Corp.
                           221 East Fourth Street
                           Cincinatti, Ohio  45201
                           Attention: Jerome A. Vennemann, Esq.
                           Facsimile:  513-287-1362

                           and

                           if to USE or the Company:

                           U.S. Energy Systems, Inc.
                           One North Lexington Avenue
                           4th Floor
                           White Plains, New York 10601
                           Attention: Goran Mornhed, President and Chief
                           Operating Officer
                           Fax:  914-271-5315

                           With a copy to:
                           Robinson Brog Leinwand Greene
                           Genovese & Gluck P.C.
                           1345 Avenue of the Americas
                           New York, New York 10105-0143

         (b)  Unless  otherwise   specified   herein,   such  notices  or  other
communications shall be deemed effective (i) on the date delivered, if delivered
personally or by a nationally  recognized  overnight courier,  (ii) one business
day  after  being  sent,  if  sent  by  telecopier  with  confirmation  of  good
transmission  and receipt,  and (iii) three  business  days after being sent, if

                                       18
<PAGE>

sent by  registered or certified  mail.  Each of the parties  herewith  shall be
entitled to specify another address by giving notice as aforesaid to each of the
other parties hereto.

     9.1  Intellectual  Property Rights.  Any intellectual  property rights held
by  a  Stockholder or its  Affiliates  that  are  made  available  to  the other
Stockholder or to  the  Company  in  the  implementation of  this Agreement will
be on  a non-exclusive  and  no profit  basis, to the extent such Stockholder is
legally or contractually able to do so.

     9.2  Names  and  Logos.  To  further  the  objectives  of  this  Agreement,
the Stockholders acknowledge  and agree that  the  Company shall  have  the non-
exclusive right to use the names  and logos of the  Stockholders  in  connection
with the implementation  of this Agreement subject to the prior written approval
of the Stockholder whose name and logos are being used.

     9.3  No  Inconsistent  Efforts or Agreements.  No Stockholder shall solicit
proposals  or enter into any  agreements  or  arrangements  of any kind with any
Person  (other  than a party  hereto)  with  respect  to the  Company  on  terms
inconsistent with the provisions of this Agreement.

     9.4 Publicity;  Publications. All media contacts and  public  announcements
by any Stockholder  or any of its  Affiliates  regarding the  matters covered by
this Agreement shall be mutually agreed  upon  by  the  parties  hereto.  Unless
otherwise  agreed to  by  the  parties  hereto, media  contacts  and  public
announcements relating to the Company  shall  be   approved  by  the  Board.
Notwithstanding the foregoing,  the  Stockholders and their Affiliates may  make
such  public announcements,  reports,  filings and disclosures  concerning this
Agreement and the  businesses  of the  Company as  may be  required by the rules
of or any agreement with the SEC, the New York Stock Exchange,  Inc. or  NASDAQ,
provided, that, such disclosing  Stockholder or Affiliate shall use reasonable
efforts to consult with the other Stockholder regarding the nature and  contents
of the contemplated  disclosure. Unless the parties hereto otherwise agree, each
and every advertisement by or on behalf of the Company shall have the "CSI" name
on the left side of such advertisement and the "U.S. Energy Systems,  Inc." name
on the right side of such advertisement.

     9.5 Cooperation Regarding Developments. To assist in achieving the purposes
and intent of this Agreement and the transactions  contemplated  hereby, each of
the Stockholders  shall from  time  to  time  brief the other on  trends in the
industry, including  legislative and legal  developments,  that impact markets
relating to the Company.

     9.6 Compliance with Laws. Each of  the  Stockholders  shall comply  in  all
material respects, and shall cause its respective  Subsidiaries to comply in all
material respects, with all applicable laws, rules or regulations of the United
States or any other jurisdiction that are or may be applicable to  the  efforts
hereunder or  the  Company  in  connection  with the  implementation of this
Agreement.

     9.7 Regulatory  Matters. The parties hereto shall cooperate with each other
to ensure that all information necessary for the making of (or responding to any

                                       19
<PAGE>


requests for further  information  consequent upon) any notifications or filings
made in respect of this Agreement, or the transactions contemplated hereby, with
any  governmental  agency or authority is supplied to the party  responsible for
such  notification  and  filings  in  order  that  such  filings  are  properly,
accurately and timely made.

     9.8  Assignment.  This Agreement shall not be assigned by any party  hereto
or by operation of law or otherwise,  provided, however, that  a merger  of  the
ultimate parent of any  Stockholder  shall not be deemed to be  an assignment by
operation of law for the purposes of this Section 9.9.

     9.9 Parties in Interest.  This Agreement  shall be binding  upon  and inure
solely  to  the benefit of each party hereto and its  successors  and  permitted
assigns, and  nothing in this  Agreement,  express or implied, is intended to or
shall confer  upon any other  Person any  rights,  benefits  or remedies  of any
nature whatsoever under or by reason of this Agreement.

     9.10 No Consequential  Damages.  Except as  otherwise provided  in  this
Agreement, it is agreed  that no Party hereto will be responsible to the  others
for any indirect, special, incidental or consequential loss or damage whatsoever
(including lost profits and opportunity costs) arising out of this Agreement.

     9.11  Severability.  The provisions of this Agreement shall  be  deemed
severable and the  invalidity or  unenforceability  of any provision  shall not
affect the validity and  enforceability of the other provisions hereof. If any
provision of this  Agreement,  or the  application  thereof  to any  Person  or
entity or any circumstance,  is  invalid  or  unenforceable, (a) a suitable  and
equitable provision shall be substituted  therefor in order to carry out, so far
as may be valid and enforceable,  the intent and purpose of such invalid and
unenforceable provision  and  (b) the  remainder of  this  Agreement  and  the
application  of such provision to other Persons, entities or circumstances shall
not be affected by such   invalidity   or   unenforceability,  nor  shall   such
invalidity  or unenforceability affect the validity or enforceability  of  such
provision, or the application thereof, in any other jurisdiction.

     9.12 Independent Parties. Nothing contained in this Agreement shall be
deemed or construed for any purpose to establish,  between the Stockholders, a
partnership or  joint  venture, a principal-agent relationship,  or an employer-
employee relationship, and neither Stockholder shall have the authority to bind
the other with  respect to the  Company  other than as may be  provided  in the
operative documents executed by the Stockholders with respect to the Company.

     9.13 Fees and Expenses.  Each  party hereto shall bear its own expenses and
costs in connection with and prior to entering this Agreement.

     9.14 Entire Agreement. This Agreement, the Registration Rights Agreement
and the Subscription  Agreement  contains the entire agreement  between the
parties with respect to the  subject  matter  hereof  and  supersedes  all prior
agreements, written  or oral.  The Joint Project  Development Agreement  between

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the Stockholders is not part of this Agreement,  is not superseded by this
Agreement and does not supersede this Agreement.

          9.15 Waivers and Amendments; Non-Contractual Remedies; Preservation of
Remedies. This  Agreement  may be  amended  only with the  prior written consent
of the Company, USE  and CES. This  Agreement may  be waived,  only by a written
instrument  signed by  the party hereto waiving compliance. No delay on the part
of any  party  in  exercising  any fight, power  or  privilege  hereunder  shall
operate as a waiver thereof nor shall any waiver on the part of any party of any
such  right,  power or  privilege,  nor  any single or partial  exercise of any
such right, power or privilege,  preclude any further  exercise  thereof or  the
exercise of any other such right,  power or  privilege.  The rights and remedies
herein  provided are cumulative  and are  not  exclusive of  any  rights or
remedies  that any party may otherwise have at law or in equity.

          9.16 Governing Law. This Agreement shall be  governed and construed in
accordance with the laws of the State of Delaware  applicable to agreements made
and to be performed  entirely within such State,  without regard to the conflict
of laws rules thereof.

          9.17  Further  Assurances.  Each of the parties  shall  execute  and
deliver such other  documents and take such other or further action as any other
party may  reasonably request so as to consummate the transactions contemplated
hereby more effectively.

          9.18 Counterparts. This Agreement may be executed in  any  number  of
counterparts, each of which  shall be deemed to be an  original  as  against any
party  whose signature  appears thereon, and all  of  which  shall  together
constitute one and the same  instrument.  This  Agreement shall  become  binding
when one or more counterparts hereof, individually or taken together, shall bear
the signatures of all of the parties reflected hereon as the signatories.

          9.19  Definitions.  The  following  terms,  as used herein,  have  the
following meanings:

                           "Affiliate" of any Person means any other Person
directly or indirectly through one or more intermediary  Persons,  controlling,
controlled by or under common control with such Person.

                           "Business" shall mean the development ownership and
operation of landfill as fueled energy project, and related activities.

                           "Code" shall mean the Internal Revenue Code of 1986,
as amended.

                           "control"  shall mean  the power  to  direct  the
management and policies of such Person directly or indirectly,  by or through
stock ownership,  agency or otherwise, or pursuant to or in connection  with an
agreement, arrangement or understanding (written or oral) with one or more other
Persons by  or through  stock  ownership, agency or  otherwise;  and  the  terms
"controlling" and "controlled" shall have meanings correlative to the foregoing.

                           "Effective Date" shall have the meaning set  forth in
the Merger Agreement.

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<PAGE>
                           "Fiscal Year" means a calendar year.

                           "Merger Agreement" means that certain Agreement and
Plan of Reorganization and Merger dated as of the date hereof by and among the
Company, USE and Zahren Alternative Power Corporation.

                           "Person" means an individual, corporation, limited
liability company, partnership, joint venture, association, trust,
unincorporated organization or other entity.

                           "Qualifying Facility" shall have the meaning set
forth in the Merger Agreement.

         9.20  Headings;  Gender.  The  headings  contained  in  this  Agreement
are for reference  purposes  only  and  shall not  affect in any way the meaning
or interpretation  of this Agreement.  The use of the neuter gender herein shall
be deemed to include the  masculine  and  feminine  genders  wherever  necessary
or appropriate,  the use of the  masculine gender shall be deemed to include the
neuter and feminine  genders and the use of the feminine  gender shall be deemed
to include the neuter and masculine genders wherever necessary or appropriate.

       9.21 Specific  Enforcement.  Each  Stockholder  acknowledges  and  agrees
that the covenants and undertakings  contained in  this  Agreement  relate  to
matters which are of a special, unique and extraordinary character and that  a
violation of any of the terms of this Agreement will cause irreparable injury to
the Company and the  Stockholders  and that the amount of such injury will  be
difficult,  if not impossible, to estimate or determine and cannot be adequately
compensated  by monetary  damages.  Therefore,  each Stockholder agrees that the
other parties  hereto  shall be entitled, in addition  to all  other rights  and
remedies available under  this  Agreement  and  applicable law,  as a matter  of
course,  to  an injunction,  restraining  order  or other  equitable relief from
any  court of competent  jurisdiction,  restraining any violation or  threatened
violation and compelling  performance of any of such terms by a Stockholder  and
by such other persons as the court shall order.

       9.22 Governing Documents.  If there is any inconsistency between  the
Certificate and By-laws and this  Agreement,  the provisions of the  Certificate
and By-laws shall be amended and the provisions of this Agreement shall govern.

       9.24  Covenants  with  Respect  to  Regulatory  Matters.   CES
covenants  and agrees that neither it nor Cinergy  Corp.,  Cinergy  Investments,
Inc., Cinergy Solutions Holding Company, Inc., Cinergy Solutions,  Inc., nor any
of their  Affiliates  will,  at any time,  without the consent of USE,  take any
action that would (a) cause any  Qualifying  Facility in which the Company holds
an equity  interest  to lose its status as such under  PURPA,  (b)  subject  the
Company to regulation as a "holding  company" or a "public utility  company," or
an "affiliate" of a "public utility company" as such terms are defined by PUHCA,
(c)  subject  the  Company  to  regulation  as  a  "public  utility",  a  "local
distribution  company",  "electrical  load serving  entity" or a similar  entity
under  the laws of any  state or (d)  cause  the  seller  and  purchaser  of any

                                       22
<PAGE>

qualified  fuel  respecting  any  Company  Project  (as  defined  in the  Merger
Agreement) to be treated as a "related person" under Section 29 of the Code. The
Company covenants and agrees that it will not, at any time,  without the consent
of CES,  take any action  that would  subject  the  Company to  regulation  as a
"holding  company" or a "public utility  company" or an "affiliate" of a "public
utility company" as such terms are defined by PUHCA.

                  9.25 In the event,  ((a) the Company as Surviving  Corporation
and Purchaser Indemnitee under the Indemnification  Agreement,  receives payment
under Sections 4(b) of the  Indemnification  Agreement in the form of USE Shares
(as defined in the Indemnification Agreement) or (b) the Merger Consideration is
reduced  pursuant to section 2.05 of the Merger  Agreement  and Section 3 of the
Escrow Agreement  through the disbursement or payment to the Company,  Surviving
Corporation  of Stock (as  defined in the Escrow  Agreement)  "USE  Shares"  and
"Stock"  shall be referred to herein as Stock then, at the option of CES (i) the
Surviving  Corporation shall dividend 45.7% of the Stock to CES and 54.3% of the
Stock to USE or (ii) USE shall have the option of (A)  repurchasing  100% of the
Stock from the Surviving  Corporation within 90 days of the receipt of the Stock
by the Company, for a cash payment equal to the amount of the Damages payment or
Merger  Consideration  reduction  represented  by the Shares,  as  calculated in
accordance with the applicable provisions of the Indemnification  Agreement, the
Merger  Agreement  and  the  Escrow  Agreement  or (B)  using  all  commercially
reasonable efforts to register the Stock for resale by the Surviving Corporation
(it being  understood  that the parties  hereto  shall  reasonably  cooperate in
connection with such  registration)  and upon such  registration,  the Surviving
Corporation  shall  sell  the  Stock  for its own  account  in  accordance  with
applicable  securities  laws. If USE is unable to register such Stock for resale
within 90 days after  receipt of such  Stock by the  Company,  then USE take the
actions described in clause (ii)(A) hereof within 180 days of the receipt of the
Stock by the Company.



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                    IN WITNESS  WHEREOF,  the parties  hereto have executed this
Agreement as of the date and year first above written.

                                 USE ACQUISITION CORP.



                                 By: /s/ Goran Mornhed
                                    ---------------------------------------
                                    Name:
                                    Title:

                                 U.S. ENERGY SYSTEMS, INC.



                                 By: /s/ Goran Mornhed
                                    --------------------------------------
                                    Name: Goran Mornhed
                                    Title: President and Chief Operating Officer

                                 CINERGY ENERGY SOLUTIONS, INC.



                                 By: /s/  M. Stehen Harkness
                                    -------------------------------------------
                                    Name: M. Stephen Harkness
                                    Title:President and Chief Operating Officer