U.S. ENERGY SYSTEMS, INC.
                             STOCK OPTION AGREEMENT

Name of Optionee: Bernard Zahren

Date of Grant:    Effective Date of Merger

Number of Shares Subject to Option: 500,000

Exercise Price Per Share:  $6.00

Type of Option:   Non-qualified Stock Option

Expiration Date: [            ], 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 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  November
     28, 2000 between the Company and the Optionee (the "Employment Agreement"),
     both of which are incorporated herein for all purposes. The Option shall be
     subject to  the  terms and  conditions set forth  herein, the  Plan and the
     Employment Agreement. The Optionee hereby acknowledges receipt of a copy of
     the  Plan and Employment  Agreement and  agrees to  be  bound by all of the
     terms and conditions hereof and thereof.  In the event of any inconsistency
     between the Employment Agreement on the one hand and the Plan or this Stock
     Option Agreement on the other hand, the Employment  Agreement shall govern.
     In the event of any inconsistency between  the Plan and  this Stock  Option
     Agreement, the Plan shall govern.

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

3.   Exercise  Schedule.  (a) Except as otherwise  provided in this Stock Option
     Agreement,  the  Employment  Agreement,  or the Plan,  the Option  shall be
     exercisable in whole or in part as and when it vests.  The term  "exercise"
     or  "exercisable" as used herein shall include the conversion of the Option
     in the manner contemplated by Section 12 hereof.

         (b) The  Options  shall  vest  immediately  upon  the  Effective  Time;
     provided,  however,  that notwithstanding  anything to the contrary herein,

<PAGE>

     the Plan or the Employment  Agreement,  the Option shall not vest until the
     Plan shall have been approved by a Majority of the  Shareholders;  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.


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

5.   Method of  Payment.  Payment of the  exercise  price shall be by any of the
     following,  or a combination thereof, at the election of the Optionee:  (a)
     cash; (b) check; (c) with Shares that have been held by the Optionee for at
     least 6 months (or such other  Shares as the  Company  determines  will not
     cause the Company to realize a financial  account charge);  (d) as provided
     in  Section  12  of  this  Stock  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, [the  tenth anniversary of  the Effective
     Date], 2010. The Option shall terminate and expire on the day following the
     Plan  Date (as defined below) unless the  Plan has  been  approved  by  a
     Majority of  the  Shareholders by the latter of (I) 30  days following  the
     Effective Date and (II) the first anniversary of  the adoption  of the Plan
     by the Company's Board of Directors (the "Plan Date") provided that if  the
     Option becomes Voted  Matter as defined in  Section 3(d) of  the Employment
     Agreement the Option shall expire on the day following the Plan Date unless
     the Plan and the Option are approved by a Majority of  the Shareholders  by

                                       2

<PAGE>

     the Plan Date.  Any unexercised portion of  the Option  shall automatically
     and  without  notice terminate  and become  null and void on the terms and
     conditions and at the time(s) set forth in the Employment Agreement.

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

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

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

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

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

12.  Conversion.  (a) In  lieu of  exercise  of any  portion  of the  Option  as
     provided  herein,  and the payment of the  exercise  price  therefor in the
     manner  contemplated  by clauses (a), (b), (c) and (e) of Section 5 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.
     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

                                       3
<PAGE>

     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;
     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.


     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of [ ],
2000.



                                    COMPANY:



                                    U.S. ENERGY SYSTEMS, INC.



 By:_________________________________



         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:     [               ], 2000                    OPTIONEE:




                                             ---------------------------------
                                                    Bernard Zahren