U.S. Energy Systems, Inc.
                         515 N. Flagler Drive, Suite 702
                         West Palm Beach, Florida 33401



                            Dated as of July 31, 2000


Lawrence I. Schneider
Henry Schneider
Energy Systems Investors, L.L.C.
920 Park Avenue, Apt. 4D
New York, New York 10028

                           Re:      Plan of Recapitalization

Ladies and Gentlemen:

                  The parties hereto have agreed,  subject to the conditions set
forth below and as more fully set forth herein,  that a plan of recapitalization
(the  "Plan  of   Recapitalization")   of  U.S.   Energy   Systems,   Inc.  (the
"Corporation")  would be effected  under which:  (i) the dividends  payable with
respect to the  1,138,888  shares of Series A Convertible  Preferred  Stock (the
"Series A Stock")  outstanding  would be reduced;  (ii) a reserve  fund would be
established  to ensure the payment in part of the dividends  with respect to all
of the shares of Series A Stock  outstanding;  (iii) the  interest  payable with
respect to the limited recourse  promissory note bearing interest at the rate of
9.25% per annum in the original  principal amount of $7,741,378.90  (the "Note")
would be reduced; and (iv) the Series B Warrants,  in the form annexed hereto as
Exhibit A (the  "Warrants"),  to acquire  1,500,000 shares of the  Corporation's
Common  Stock at an  exercise  price of $4.00 per  share  would be issued to the
persons  identified  in  accordance  with  Section  1(b)  hereof.  To effect the
foregoing,  Energy Systems Investors, L.L.C. ("ESI"), Lawrence I. Schneider ("L.
Schneider") and Henry Schneider ("H.  Schneider") (H. Schneider and L. Schneider
being collectively referred to herein as the "Schneiders"),  and the Corporation
hereby agrees as follows (ESI and the Schneiders and any other subsequent holder
of Series A Stock required to become a party to this or other similar  agreement
are hereby referred to collectively as "Series A Stockholders"):

1.       Dividend and Interest Rate Reduction; Issuance of Warrants.

                  (a)  Notwithstanding  anything to the contrary in the Note nor
the  Corporation's  Certificate of Designation filed with the Secretary of State
of Delaware (the "Delaware


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Secretary")  on March 23, 1998,  as amended by a certificate  of increase  filed
with the Delaware  Secretary on July 31, 2000 (as amended from time to time, the
"Certificate  of  Designation"),  the parties hereto agree that commencing as of
the date all the conditions set forth in Section 3(a) herein have been waived by
all the parties  hereto or  satisfied  (the  "Effective  Date"),  the  dividends
payable on each  share of Series A Stock  shall be $0.54 per share  (subject  to
adjustment  as  provided  in the  Certificate  of  Designation)  per annum  (the
"Adjusted  Dividend Rate") (i.e., the dividend payable through and including the
Effective  Date shall be calculated at the rate provided for in the  Certificate
of  Designation  and  thereafter,  shall be calculated at the Adjusted  Dividend
Rate) and the interest rate on the Note shall be reduced from 9.25% per annum to
6.25% per annum (i.e.,  the interest payable through and including the Effective
Date shall be calculated  at the rate  provided for in the Note and  thereafter,
shall be  calculated  at the rate  provided  for  herein).  (The rate of default
interest on the Note shall not be  effected  by this Plan of  Recapitalization).
From and after the Effective Date, any and all determinations  required under or
with respect to the Certificate of Designation  shall use the Adjusted  Dividend
Rate for the Series A Stock.

                  (b) The Corporation shall, upon execution of this agreement of
Plan of  Recapitalization,  issue one or more of the Warrants to the persons and
in the quantities  identified  pursuant to a written instruction letter executed
by ESI and the Schneiders.

2.       Dividend Payment Protection Fund.

                  (a) To ensure in part the  payment  of cash  dividends  on the
Series A Stock,  the  Corporation  covenants that commencing as of the Effective
Date it will (i) set apart (in the manner  contemplated  by the last sentence of
Section 3(b) of the Certificate of  Designation)  promptly a fund (the "Dividend
Payment  Fund")  consisting  of  $1,229,999.04  in cash (the  "Dividend  Payment
Protection Amount"), and (ii) within six months following the application of all
or a portion of the Dividend  Payment Fund pursuant to Section 2(c), it will set
apart (in the manner  contemplated  by the last  sentence of Section 3(b) of the
Certificate of Designation),  the amount so applied pursuant to Section 2(c) but
only to the extent the Dividend Payment  Protection Amount exceeds the amount in
the  Dividend  Payment  Fund and  subject to such  further  reduction  as may be
appropriate  pursuant to Section  2(d) hereof.  Notwithstanding  anything to the
contrary herein,  the Corporation  shall not be required to set apart funds with
respect to dividends payable after March 1, 2004 and the maximum amount that the
Corporation shall be

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required to set apart shall not exceed in the  aggregate  $0.158 for each dollar
in the principal amount of the Note that has been paid.

                  (b) All funds set apart  pursuant to the provisions of Section
2(a)  shall be applied  in  accordance  with the  provisions  of  Section  2(c),
provided,  however,  that  after  March 1,  2004,  the  Corporation  may use the
Dividend  Payment  Fund to pay any and all  dividends  on the  Series  A  Stock,
notwithstanding the limitations set forth in Section 2(c).

                  (c)  If on  any  Dividend  Payment  Date  (as  defined  in the
Certificate of Designation), the Corporation determines that the funds available
to it (without  recourse to the Dividend  Payment Fund) are  insufficient to pay
the  dividends  required  on such date to be paid with  respect  to the Series A
Stock or that  such  payment  out of the  Corporation's  funds  (other  than the
Dividend   Payment  Fund)  would  be  violative  of  applicable  law  (including
creditors'  rights or similar laws),  the  Corporation  shall,  except as may be
otherwise  required  by law or its  Certificate  of  Incorporation  (which  term
includes any applicable  certificates of  designations or similar  instruments),
pay such dividends from the Dividend  Payment Fund, net of any interest  payment
due under the Note on such date.

                  (d) The  Corporation  shall be entitled  to withdraw  from the
Dividend  Payment  Fund from time to time such sums as the Board of Directors of
the Corporation determines in good faith will not be required for the payment of
dividends  on the Series A Stock  because  (i) of a  reduction  in the number of
outstanding  shares  of Series A Stock,  (ii) the  amount  held in the  Dividend
Payment Fund exceeds the Dividend Payment Protection Amount, (iii) the amount of
dividends that must be paid with respect to all the outstanding shares of Series
A  Stock  at the  dividend  rate  provided  for in  this  agreement  of  Plan of
Recapitalization at any time after the date hereof through March 1, 2004 is less
than  the  Dividend Protection  Payment Amount or (iv) the  obligations of  the
Corporation  pursuant  to  Section 2 hereof  are otherwise secured, including
without  limitation, by  means of a letter  of credit  or guaranty issued  by  a
banking or other institution.

                  (e)   Notwithstanding   anything   to  the   contrary  in  the
Certificate  of  Designation,  in the event the funds set apart pursuant to this
Section 2 are  insufficient  to pay all  applicable  dividends  on the  Series A
Stock,  then such  funds  shall be  applied  to the Series A Stock on a pro-rata
basis.



<PAGE>


3. Conditions to Effectiveness of the Plan; Covenants with Respect to the Plan.

                  (a) The parties hereto covenant and agree to cooperate and use
commercially  reasonable  efforts to cause the satisfaction (but not the waiver)
of the conditions set forth in Section 3(b).

                  (b)  The  effectiveness  of  the  Plan  of   Recapitalization,
including without limitation,  the exercisability of the Warrants, the reduction
of the dividend  rate on the Series A Stock,  the reduction of the interest rate
on the Note, the establishment  and  implementation of the Dividend Payment Fund
and the other obligations  imposed on the parties to this Agreement  pursuant to
Sections 1 and 2 hereof shall be subject to the  satisfaction (or the waiver) by
all of the parties hereto of the following conditions:

                           (i)      a private letter ruling shall have been
obtained from the Internal Revenue   Service to the effect that the consummation
of  the  Plan  of  Recapitalization will not  have  an adverse tax effect on the
parties hereto; and

                           (ii)     the issuance of the Warrants has been
approved by  the  stockholders of the Corporation  to  the  extent required by
Nasdaq.

                  In the event such conditions have not been waived or satisfied
by December 31, 2001,  this agreement  respecting  the Plan of  Recapitalization
shall  terminate  and  be of no  further  force  or  effect  and  this  Plan  of
Recapitalization shall be deemed abandoned and terminated (and the Warrants will
be of no further force or effect).

4.       Miscellaneous.

                  (a) The Schneiders and ESI jointly and severally represent and
warrant to the Corporation  that (i) immediately  prior to the execution of this
agreement,  they own, in the aggregate, all of the issued and outstanding shares
of Series A Stock free and clear of any and all liens,  claims and encumbrances,
other than the encumbrances imposed pursuant to the Pledge Agreement dated as of
July 31,  2000 by and  between  ESI and the  Corporation  and (ii)  there are no
outstanding options or other rights to acquire such shares of Series A Stock.



<PAGE>




                  (b)  The  Series  A   Stockholders   agree  to   present   all
certificates  representing  Series A Stock now owned or  hereafter  acquired  by
them, for the placement  thereon of the following legend (and such other legends
as the Corporation in good faith deems  appropriate),  which will remain thereon
as long as Series A Stock is outstanding  (or, if this Plan of  Recapitalization
is terminated pursuant to Section 3 hereof, until the date of such termination):

                  The securities  represented by this certificate are subject to
                  the  provisions  of an agreement  of Plan of  Recapitalization
                  dated  as of  July  31,  2000,  between  the  Corporation,  L.
                  Schneider,  H. Schneider and Energy Systems Investors,  L.L.C.
                  Such agreement,  among other things,  restricts the payment of
                  dividends on these  securities and limits the  transferability
                  of these  securities.  A copy of said  agreement is on file at
                  the office of the Secretary of the Corporation.

The  Corporation  may enter a stop  transfer  order with the  transfer  agent or
agents of  Series A Stock  against  the  transfer  of  Series A Stock  except in
compliance with the  requirements  of this agreement.  The Series A Stockholders
agree that they will not transfer or otherwise dispose of their shares of Series
A Stock,  until the proposed  transferee  has entered into an agreement with the
Company and the other  Series A  Stockholders  containing  terms and  provisions
similar to those set forth herein.

                  (c)  For  the  convenience  of  the  parties,  any  number  of
counterparts  of this  agreement may be executed by the parties  hereto and each
such  executed  counterpart  shall be,  and  shall be deemed to be, an  original
instrument.

                  (d) All notices,  requests,  demands and other  communications
which are  required or may be given under this  agreement  (including  all legal
process in regard  hereto)  shall be in writing and shall be deemed to have been
duly  given or  made:  if by  hand,  immediately  upon  delivery;  if by  telex,
telecopier,  telegram or similar  electronic  device,  immediately upon sending,
provided it is sent on a business  day, but if not,  then  immediately  upon the
beginning  of the first  business day after being sent;  if by Federal  Express,
Express Mail or any other overnight delivery service,  on the first business day
after dispatch; and if mailed by certified mail, return receipt requested, three
(3) business  days after  mailing.  All notices,  requests and demands are to be
given or made to the  parties  at the  addresses  set forth on the first page of
this agreement (or to such


<PAGE>



other  address  as a party  may  designate  by  notice  in  accordance  with the
provisions of this Section 3(d)).

                  (e) Except as otherwise provided or contemplated  herein, from
and after the date that there are no shares of Series A Stock are outstanding or
earlier termination of this agreement of Plan of Recapitalization, the covenants
of the parties set forth herein  shall be of no further  force or effect and the
parties shall be under no further obligation with respect thereto.

                  (f)  This  agreement  of Plan  of  Recapitalization  shall  be
governed by and construed and enforced in accordance  with the laws of the State
of Delaware applicable to contracts made and to be performed therein.

                  Kindly  acknowledge  your consent to the  foregoing by signing
your name where indicated below.


                                              U.S. Energy Systems, Inc.


                                          By: Goran Mornhed
                                              ------------------------
                                              Goran Mornhed, President
ACKNOWLEDGED AND AGREED:

Energy Systems Investors, L.L.C.


By: Henry Schneider
    ------------------------
    Henry Schneider, Manager

/s/ Henry Schneider
---------------------------------
    Henry Schneider

/s/ Lawrence I. Schneider
---------------------------------
    Lawrence I. Schneider