Document:

EMPLOYMENT AGREEMENT

                  THIS EMPLOYMENT AGREEMENT ("Agreement "), dated as of November
28,  2000,  between  US  ENERGY  SYSTEMS,  INC.,  a  Delaware  corporation  (the
"Company"), and Bernard J. Zahren (the "Executive").

                              W I T N E S S E T H:

                  WHEREAS,  Zahren Alternative Power Corporation ("ZAPCO"),  the
Company and USE  Acquisition  Corp (the "Sub") are parties to an  Agreement  and
Plan of Merger dated as of the date hereof (the "Merger  Agreement";  terms used
but not otherwise defined herein shall have the meanings ascribed thereto in the
Merger Agreement) providing for the merger (the "Merger") of ZAPCO with and into
the Sub, as contemplated therein; and

                  WHEREAS, the Executive is the Chief Executive Officer of ZAPCO
and the Company desires to retain his services as the Chief Executive Officer of
the Company following the Merger; and

                  WHEREAS, the  Merger Agreement contemplates  the execution and
delivery of this Agreement by the parties hereof; and

                  WHEREAS,  the  Company and the  Executive  now desire to enter
into this Agreement in its entirety.

                  NOW,  THEREFORE,  in  consideration  of the  mutual  promises,
representations and warranties set forth herein. and for other good and valuable
consideration, it is hereby agreed as follows:

1.       Position and Duties.

(a)  Employment and Position  -Subject to the  consummation  of the Merger,  the
Company  hereby  agrees  to  employ  the  Executive  as set  forth  in the  next
succeeding sentence, and the Executive hereby accepts such employment,  upon the
terms and  conditions  set forth  herein.  The  Executive  shall  serve as Chief
Executive  Officer of the  Company and shall have such other  duties  consistent
with  such  office,  as from  time to time  may be  prescribed  by the  Board of
Directors  of the Company (the "Board ") and/or the  executive  committee of the
Board (the "Executive  Committee").  The Executive  Committee shall, among other
things,  be responsible for making  recommendations  to the Board respecting the
Company's business strategy.  The Executive Committee shall initially consist of
three  members of the Board.  The  Company  shall  nominate  the  Executive  for
election as a director at the meeting of  shareholders  to approve the Merger to
serve a three-year term if the Merger is consummated.  As of the Effective Time,
the Executive shall be named as a member of the Executive Committee.

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(b) Duties - During the "Term" (as  defined in Section 5 below),  the  Executive
shall  perform  and  discharge  the duties  that may be  assigned  to him by the
Executive  Committee  and/or  the Board  from time to time as  provided  in this
Agreement,  and the Executive shall devote his reasonable best talents,  efforts
and abilities to the performance of his duties  hereunder.  During the Term, the
Executive  shall devote all of the time  necessary to perform his duties and the
Executive shall have no other employment  whatsoever that would prevent him from
fulfilling his obligations hereunder.

(c)  Office  Location  - The  Executive's  office  shall  be  located  in  Avon,
Connecticut.  The Executive understands that the Company's corporate offices are
located in New York.  Executive  understands that he shall be required to attend
meetings at the Company's  corporate offices from time to time as well as travel
to other locations in connection with his duties.

2.       Compensation.

(a) Base Salary - During the Term,  the Company  shall pay the Executive for his
services hereunder a salary (as the same may be increased from time to time, the
"Base  Salary")  at the annual  rate of  $180,000.00,  which shall be payable in
accordance  with the  customary  payroll  practices  of the Company but not less
frequently  than  on  a  monthly  basis.  The  Base  Salary  shall  be  reviewed
periodically by the Compensation  Committee of the Board and shall be subject to
such  increases  as the  Compensation  Committee  of  the  Board,  in  its  sole
discretion, from time to time may determine.

(b)  Incentive  Bonus.  In  addition  to the Base  Salary,  during  the Term the
Executive  shall at the end of each  fiscal  year for the  Company be awarded an
annual cash bonus or bonuses determined (i) substantially in accordance with the
drafts  of the  Development  Incentive  Plan and the  Corporate  Incentive  Plan
approved by the Board and the  Shareholders  (as amended from time to time,  the
"Bonus  Plan")  annexed  hereto as Exhibit A, (ii) in  accordance  with the 2000
Executive  Incentive  Compensation  Plan (as  amended  from  time to  time,  the
"Incentive  Plan") approved by the Shareholders  annexed hereto as Exhibit A and
incorporated herein as if fully set forth and (iii) in accordance with any bonus
plan respecting the Surviving  Corporation approved by the Board of Directors of
the  Surviving  Corporation  (together  with the Bonus Plan,  the  "Plans").  In
addition,  the Executive is eligible for such other bonuses which may be awarded
by the Board in its sole  discretion  under such other  plans that the Board may
establish in its sole discretion from time to time.

(c) Options -  Simultaneous  with the  Effective  Time (as defined in the Merger
Agreement)  of the Merger,  the Company and the  Executive are executing a Stock
Option  Agreement (the "Stock Option  Agreement)  regarding  options (the "Stock
Options") to acquire  500,000 shares of Common Stock annexed hereto as Exhibit B
and incorporated herein as if fully set forth.

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<PAGE>

(d)  Withholding.  All  payments  required  to be  made  by the  Company  to the
Executive under this Agreement (whether under this Section 2 or otherwise) shall
be subject to  withholding  of  employment  and income  taxes and other  payroll
deductions  in  accordance  with  applicable  tax  requirements,  the  Company's
policies applicable to employees of the Company at the Executive's level and the
provisions of the Benefit Plans (as defined in Section 3 below).

(e) Shareholder  Consent.  Executive  acknowledges  that the Board may determine
that it is required  or  advisable  for the Board to present  the Stock  Options
Agreement,   the  Bonus  Plan  and/or  the  Incentive   Plan  to  the  Company's
shareholders  for a vote (each of the matters  described  above submitted to the
Shareholders for a vote shall be referred to as a "Voted Matter").  In the event
the Board  presents any of the foregoing  matters to the Company's  shareholders
for a vote, in order for such Voted Matter to become effective,  the affirmative
vote of a majority of the Company's shares,  present in person or represented by
proxy,  at a meeting of  shareholders  at which a quorum is present  and in fact
voting (a "Majority of the Shareholders") must approve the material terms of the
Voted  Matter,  it  being  further  understood  that  if  the  Majority  of  the
Shareholders  do not approve the Incentive Plan, none of the Stock Options shall
be effective.  The Board shall  present any Voted Matter (or the material  terms
thereof) to the Company's shareholders for a vote as soon as reasonably possible
after the  execution  of this  Agreement.  In the event any Voted Matter (or the
material  terms  thereof) is not approved by a Majority of the  Shareholders  by
April 30,  2001,  the  Executive  shall  have the  rights  set forth in  Section
5(g)(ii) hereof.

3.       Benefits.

(a) Benefit Plans - During the Term,  the Company shall provide to the Executive
all fringe benefits currently  provided,  as well as those which the Company may
generally  make  available  to  its  senior   executives,   including,   without
limitation,  benefits  provided under the Company's  pension and  profit-sharing
plans  (exclusive  of executive  bonus or executive  incentive  plans  including
without  limitation,  the  Company's  2000  Executive  Cash Bonus Plan (if any),
health  benefit  plans  (such as  medical  and  hospitalization  coverage),  and
insurance plans (such as life,  supplemental life, disability,  business travel,
accident and accidental  death and  dismemberment)  (collectively,  the "Benefit
Plans").  Such Benefit Plans shall during the Term provide for at least the same
level of benefits as the Benefit  Plans  provide for other senior  executives of
the Company at the date of this  Agreement  and at least as provided  for below.
Such Benefit Plans shall generally provide the following benefits:

o        Medical and Dental Insurance

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<PAGE>

o    401K plan with  Company,  matching  or equal, to be  structured for Company
     management
o    $1 million Life Insurance (the employee's  estate shall be the beneficiary)
o    Group Disability  Insurance: 60% of base compensation, up  to $9,000  per
     month for life

(b)  Automobiles - During the Term, the Company shall provide the Executive with
a  Company-owned  or  leased  automobile  of a type  to be  agreed  upon  by the
Executive and the Company,  or at the Executive's option a car allowance of $600
per  month in lieu  thereof.  The  Company  will bear all  insurance,  gasoline,
registration,  maintenance  and repair costs incident to the  Executive's use of
such  Company-owned  or leased or  Executive-owned  or leased  automobile in the
performance of his duties hereunder.

(c) Vacations,  sick leave and holidays.  The Executive  shall be entitled to no
less than four (4) weeks of paid  vacation  during  each year of the Term (and a
pro rata portion  thereof for any portion of the Term that is less than a fiscal
year).  In addition,  the Executive  shall be entitled to be paid sick leave and
holidays  in  accordance  with  the  Company's  usual  policies  for its  senior
executives.

(d) Company Life Insurance.  In addition to the life insurance  policy described
above,  the Company shall have the right, at its option,  to obtain an insurance
policy on the  Executive's  life (in an amount of no more than $5  million)  for
which the Company shall be the  beneficiary.  Executive shall cooperate with the
Company in obtaining any such insurance.

4.  Reimbursement  of  Expenses.  During  the  Term,  the  Company  shall pay or
reimburse the  Executive  for all  reasonable  travel,  entertainment  and other
business  expenses actually incurred or paid by the Executive in the performance
of his duties hereunder upon  presentation of expense  statements or vouchers or
such other supporting  information as the Company may reasonably  require of the
Executive.

5. Term;  Termination.  Subject to the provisions of this Section 5, the term of
the Executive's  employment under this Agreement shall commence on the Effective
Time and shall end on the fifth anniversary of the Effective Time, provided that
the  term of this  Agreement  shall  automatically  be  renewed  for  successive
additional one-year periods at the end of such five-year period and of each such
one-year  renewal  period,  unless  either  party  elects not to renew by giving
written  notice to the other at least 90 days before an annual renewal date. The
initial five-year term referred to herein, together with any renewal thereof, is
referred to in this Agreement as the "Term". The employment of the Executive may
be terminated  prior to the  expiration  of the Term in the manner  described in
this Section 5 solely on the following grounds:

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<PAGE>

(a)  Termination  by the Company for Cause - The Company shall have the right to
terminate the  employment  of the Executive  prior to expiration of the Term for
Cause (as defined in Section 5(j)(iii) below) by written notice to the Executive
specifying the particulars of the conduct of the Executive forming the basis for
such termination, as provided in this Agreement.

(b)  Termination by the Executive for Good Reason - The Executive shall have the
right to terminate his employment  hereunder prior to expiration of the Term for
Good  Reason  (as such term is defined  in  Section  5(j)(iv)  below) by written
notice to the Company  specifying  the grounds  constituting  such Good  Reason,
provided  such  written  notice  is  given  within  six  months  of the date the
Executive  reasonably  became  aware of such an  event  constituting  such  Good
Reason.

(c)      Termination upon Death - The  employment of  the  Executive  hereunder
shall terminate immediately upon his death.

(d) The Company's Option upon Disability. If the Executive becomes physically or
mentally  disabled  during the Term so that he is unable to perform the services
required  of him  pursuant  to this  Agreement  for a period  of six  successive
months,  or an aggregate of six months in any  consecutive  twelve-month  period
(the "Disability Period"), the Company shall have the option, in its discretion,
by giving  written  notice  thereof,  to terminate  the  Executive's  employment
hereunder  prior to  expiration  of the Term.  Regardless of whether the Company
exercises  such  option,  during a  period  of 18  month's  from the date of the
commencement of the Disability  Period,  the Executive shall continue to receive
his full  compensation  and other benefits  provided  herein net of any payments
received under any disability policy or program provided by the Company of which
the Executive is a beneficiary or recipient.

(e)  Termination  by the Company for other reason than under 5(a),  5(c),  5(d),
5(g) and 5(h). - The Company shall have the right to terminate the employment of
the  Executive  prior to  expiration  of the Term for  reasons  other than those
defined in 5(a),  5(c),  5(d),  5(g)(i)  and 5(h)  ("Without  Cause") by written
notice to the Executive as provided in this  Agreement.  Such notice shall state
for informational reasons only, the reason for such Termination.

(f)  Termination by the Executive for other reason than under 5(b) The Executive
shall have the right to terminate his employment  hereunder  prior to expiration
of the Term for reasons other than those  defined  under 5(b) by written  notice
given at least 90 days  prior to the  "Termination  Date" as  defined in section
5(i) below.

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<PAGE>

(g) Termination  Due To Breach of Transaction  Documents or if a Voted Matter is
Not Approved.  (i) The Company shall have the right to terminate the  employment
of the Executive  prior to expiration of the Term, in the event (A) Executive is
in material breach of his obligation under any of the Transaction  Documents (as
such term is defined in the Merger  Agreement) to which Executive is a party, or
(B) Executive had actual knowledge that any representation or warranty of Zahren
Alternative Power Corporation  ("Zapco") in any Transaction  Documents was false
any in material  respects when made or he  intentionally  caused a breach of any
material obligation of Zapco in any of the Transaction  Documents,  after giving
effect to all notices,  requirements grace and cure periods provided for in such
Transaction  Documents,  by  written  notice to the  Executive  specifying  such
breach.

                                    (ii)   The Executive shall have the right to
terminate  his  employment if  Company's shareholders  do  not approve any Voted
Matter (or  material  terms thereof) on or before April 30, 2001  provided  that
such  notice is  given within  30 days of the date  the shareholders  reject the
Voted Matter.

(h)  Termination  for  Non-Performance.  The  Company  shall  have the  right to
terminate the  Executive's  employment  hereunder prior to the expiration of the
Term for  Non-Performance (as such term is defined in Section 5(j)(v) by written
notice to the Executive  specifying  the grounds  constituting  Non-Performance,
provided such written  notice is given within six months of the date the Company
reasonably became aware of such an event constituting such Non-Performance.
(i)  Termination  Date - Any notice of  termination  given by the Company or the
Executive pursuant to the provisions of this Agreement shall specify therein the
effective date of such termination (the "Termination Date").

(j) Certain  Definitions - For purposes of this  Agreement,  the following terms
shall have the following meanings:

                                    (i) The  "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. For
purposes of  this  definition,  "control" shall mean  the  power  to direct  the
management  and policies  of such  Person, directly or indirectly, by or through
equity ownership,  agency or otherwise, or pursuant to or in connection  with an
agreement, arrangement or understanding (written or oral) with one or more other

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<PAGE>

Persons by  or through  equity ownership, agency  or  otherwise;  and the  terms
"controlling" and "controlled" shall have meanings correlative to the foregoing.

                                   (ii) "Change of Control" with  respect to the
Company, means the occurrence of any of the following:

                                        (A) the acquisition, with or without the
                  approval of the Board, directly  or indirectly (in one or more
                  related  transactions), by any  Person (other  than (i)  the
                  Executive or  an  Affiliate  of  the  Executive (ii)  Cinergy
                  Solutions Inc. or any of its Affiliates (iii) the Marmon Group
                  or  any of  its Affiliates or  (iv)  Larry Schneider  or  an
                  Affiliate of  Larry Schneider  (collectively  the  "Excluded
                  Group")) or  two or  more Persons acting  as  a  group,  of
                  beneficial ownership (as that  term is  defined in Rule 13d-3
                  under the Securities Exchange Act of 1934) of more than 30% of
                  the outstanding voting stock of the Company ("Voting Stock");

                                        (B) the merger or  consolidation  of the
                  Company  with one or more other  Persons (other  than  any one
                  or  more  of  the Excluded Group)  as a  result of which  the
                  holders  of the  outstanding Voting Stock  of  the  Company
                  immediately before the merger hold less than 30% of the Voting
                  Stock (or equivalent thereof) of  the surviving or  resulting
                  Person;

                                        (C) the  sale to any  Person (other than
                  any one or more of the Excluded Group) of all or substantially
                  all of the assets of the  Company or its subsidiaries taken as
                  a whole,  and this Agreement is not assumed  by the acquiring
                  Person in connection therewith; or

                                        (D) the  Company or any of  its  members
                  enters into any  agreement providing for any  of the foregoing
                  and  the  transaction  contemplated  thereby  is ultimately
                  consummated;

provided,  however, that for purposes of this Agreement,  the sale of any Voting
Stock (or equivalent  thereof) of the Company (or any successor  Person thereto)
pursuant to a public offering shall not constitute a Change of Control.

                              (iii)  "Cause" shall mean (A) the Executive having
been  convicted of a crime which  constitutes  a felony under applicable  law or
having  entered a plea of guilty or nolo  contendere  with  respect  thereto, or
(B) the  engaging by the Executive in illegal or fraudulent conduct with respect
to the Company.

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<PAGE>

                              (iv) "Good Reason" means the occurrence of any one
of the following events:

                                        (A) a Change of Control of the Company;

                                        (B) the assignment to the Executive of
                  any  duties inconsistent in  any material  respect  with  the
                  Executive's then position as Chief Executive Officer  of  the
                  Company  (including  status, offices, titles  and  reporting
                  relationships), authority,  duties or responsibilities, or any
                  other  action  by the  Company  which when  taken as  a  whole
                  results  in a  significant diminution  in  the  Executive's
                  position,  authority, duties  or responsibilities  as  Chief
                  Executive Officer  of the Company, excluding for  this purpose
                  any isolated,  immaterial and inadvertent action  not taken in
                  bad  faith and  which is  remedied by  the Company  within  7
                  business days  after receipt  of notice  thereof given by the
                  Executive;

                                        (C) a reduction by  the Company  in  the
                  Executive's Base Salary  without the consent of such Executive
                  or the  failure  by  the Company to  continue  in  effect any
                  material benefit  or compensation  plan, life  insurance plan,
                  health and  accident plan,  retirement or  pension plan,  or
                  disability plan in existence as of the date of this Agreement
                  (or a replacement or substitute plan providing the Executive
                  with  on  the same terms  as other senior  executives of  the
                  Company substantially similar benefits) in which the Executive
                  is participating or  the material reduction of the Executive's
                  benefits under any of such plans (or replacement or substitute
                  plans); or

                                      (D) the Company  requiring  the  Executive
                  to be  based  at  any location  other than Avon,  Connecticut,
                  or within  Hartford  County except for  requirements of travel
                  on the Company's business which travel may be on a regular and
                  extensive  basis given  the geographic scope of the Company's
                  business,  and  for travel for  meetings at  the  Company's
                  corporate offices in New York; or

                                      (E) Executive is not elected to serve a 3
                   year term as  a director  of  the Company  at the  meeting of
                   shareholders held   to approve  the Merger  or  Executive  is
                   removed as a direct or prior to the end of such  3  year term
                   without Cause  except following  a  termination  of  this
                   Agreement.

                                      (F) Executive is not appointed as a member
                  of the Executive Committee of the Board within 30 days  after
                  the Effective Time or is removed as a member  of the Executive
                  Committee prior to the third anniversary of the Effective Time
                  without  Cause, except  following a  termination  of  this
                  Agreement.

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<PAGE>

                              (v)  "Non-Performance"  means  the  continued
failure of the Executive to perform substantially his duties with the Company
(other than any such failure resulting from (1) the Executive's incapacity due
to physical or mental illness or (2) the Executive's  delivery to the Company of
a notice of termination  for Good Reason or other reason), including Executive's
failure  to comply  with the provisions of  Section 7 and 8 of  this  Agreement,
which failure  continues for a  period of  more than 7  business days  after  a
written demand  for substantial  performance is  given to the  Executive by  the
Board which specifically  identifies the manner in which the Board believes that
the  Executive  has not  substantially  performed  his
duties,

                              (vi) "Person" means any individual, corporation,
partnership, limited liability company, association, joint-stock company, trust,
unincorporated organization, joint  venture, court or government (or  political
subdivision or agency thereof).

6.       Obligations on Termination.

(a) Payment  Obligations  of the Company in Case of Termination by the Executive
for Good Reason Under Section 5(b) and the Company's  Termination  Without Cause
under Section 5(e).

                                    (i)     Upon termination of the Executive's
employment pursuant to Section 5(b) or Section  5(e),  then,  in lieu of any
further  payment  under 2(a),  the Company  shall pay the  Executive a lump sum
cash payment equal to 2.9 times the annual Base Salary then in effect,  plus any
unreimbursed  expenses and unpaid accrued benefits (collectively, the "Severance
Payment). The  Severance Payment  shall be  payable within 60 days  after  the
Termination Date.

                                    (ii)   Notwithstanding   anything   to   the
contrary contained herein or in any other agreement  between the Company and the
Executive,  in the event that the Executive's  employment is terminated pursuant
to Section 5(b) or 5(e), then (A) any stock  options  (or  equivalent  thereof)
which  vest  solely  based  on the  Executive's employment by  the  Company  for
specified  periods  of time heretofore  or  hereafter granted to  the  Executive
vested and unvested, will be automatically vested and may be exercised  in  full
(to the  extent not  previously  exercised and provided that  the  term  of the
applicable option has not otherwise expired) at any time within six months after
the  Termination  Date after  which time such options  shall expire; and (B) any
Stock Options described in the Stock Option Agreement shall be unaffected by any
termination  of employment under Section 5(b) or 5(e) and shall continue in full
force and effect. Any and all  reasonable costs and expenses, including  but not
limited  to, reasonable legal fees incurred by the  Executive in  good faith  in
enforcing or establishing any of his rights hereunder shall be immediately  paid
to  the  Executive  upon  presentation  of appropriate  documentation  to  the
Company.

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<PAGE>

                           (b)      Payment  Obligations of the  Company in case
of Termination for Non-Performance under Section 5 (h)

                                    (i)     Upon termination of the Executive's
employment for Non-Performance under Section 5(h),  then, in lieu of any further
payment under 2(a) the Company shall pay the Executive a  lump sum cash  payment
equal to 1 times the annual Base Salary  then in effect,  plus any  unreimbursed
expenses  and  unpaid  accrued benefits (collectively,  the "Severance Payment).
The Severance  Payment shall be  payable within  60 days  after the Termination
Date.

                                    (ii)   Notwithstanding   anything   to   the
contrary contained herein or in any other agreement  between the Company and the
Executive,  in the event that the Executive's employment is terminated  pursuant
to  Section 5(h)for Non-Performance,

                                            (A) then any  stock  options (or
equivalent thereof) heretofore or hereafter  granted to the Executive which have
vested,  may be exercised in full (to the  extent  not  previously exercised and
provided  that the term of  the applicable option  has not otherwise expired) at
any  time within six months after the  Termination Date  after which  time  such
options shall expire; and

                                            (B) any and all reasonable costs and
expenses, including but not limited to,  reasonable  legal fees  incurred by the
Executive in good faith in enforcing or establishing any of his rights hereunder
shall  be immediately paid  to the Executive  upon presentation  of  appropriate
documentation to the Company.

                           (c)     Payment Obligations of the Company in case of
Termination upon Death under Section 5(c).

                                    (i)     Upon termination of the Executive's
employment upon death, the Company  shall have no   payment obligations to  the
Executive hereunder, except for the payment of any  proceeds  received by the
Company from the  $1milllion  life insurance policy  described  in Section  3(a)
hereof, any accrued and unpaid compensation (including unpaid accrued benefits),
and  reimbursement  of any unreimbursed expenses.

                                    (ii)   Notwithstanding   anything   to   the
contrary contained herein or in any  other agreement between the Company and the
Executive,  in the event that the Executive's employment is terminated pursuant
to Section 5(c):

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<PAGE>
                                            (A)  then  any  stock  options (or
equivalent thereof) heretofore or hereafter  granted to the Executive which have
vested,  may be exercised in full (to the  extent  not previously  exercised and
provided  that the term of the applicable  option has not otherwise  expired) by
the Executive's estate at any time within six months after such termination; and

                                            (B) any and all reasonable costs and
expenses, including but not limited to,  reasonable  legal fees  incurred by the
Executive's  estate in good faith in enforcing or establishing any of his rights
hereunder shall be immediately paid to the  Executive's estate upon presentation
of appropriate documentation to the Company.

                           (d)      Payment Obligations of the Company in case
of Termination upon Disability under Section 5(d).

                                    (i)     Upon termination of  the Executive's
employment upon  disability,  the Executive  shall receive  the  compensation
provided for in Section 5(d) hereof plus any  unreimbursed  expenses and unpaid
accrued  benefits. Upon termination under Section 5(d), Executive shall have the
same rights under the Plans as if his  employment  continued for eighteen months
after the  commencement  of the Disability Period, except as provided in Section
6(h) below.

                                    (ii)   Notwithstanding   anything   to   the
contrary contained herein or in any other agreement  between the Company and the
Executive,  in the event that  the Executive's employment is terminated pursuant
to Section 5(d):

                                            (A) then  any  stock  options  (or
equivalent thereof) heretofore or hereafter granted to the Executive which have
vested or which vest in accordance with the terms of the Stock  Option Agreement
within the 18 month period after commencement  of  the  Disability  Period, will
vest  as  if  the  Executive's employment did not terminate and may be exercised
in full (to the extent not  previously exercised  and  provided that the term of
the  applicable  option has not  otherwise expired) at  any time  within  such
eighteen  month  period after which time such options shall expire; and

                                            (B) any and all reasonable costs and
expenses, including but not limited to,  reasonable  legal fees  incurred by the
Executive in good faith in enforcing or establishing any of his rights hereunder
shall be immediately  paid to  the  Executive upon presentation  of  appropriate
ocumentation to the Company.

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<PAGE>
                            (e)     Payment Obligations of the Company in case
of Termination under Section 5(a,) Section 5(f) or Section 5(g).

                                    (i)     Upon termination of the Executive's
employment as a result of  the  voluntary  resignation of  the Executive  under
Section 5(f)  or termination of  the Executive  by the Company for Cause  under
Section 5(a) or  under  Section  5(g)(i) the Company  shall have  no  payment
obligations to the Executive hereunder, except for the payment of any  accrued
and unpaid compensation (including unpaid accrued benefits), and reimbursement
of any unreimbursed expenses.

                                    (ii)   Notwithstanding   anything   to   the
contrary contained herein or in any other agreement between  the Company and the
Executive,  in the  event the Executive terminates  his employment  by voluntary
resignation pursuant to Section 5(f) or the Executive's employment is terminated
pursuant to Section 5(a) for Cause or pursuant to Section 5(g)(i):

                                            (A) then any stock options (or other
stock options  or equivalent  thereof) heretofore  or hereafter  granted to the
Executive which  have vested, may  be  exercised in  full (to  the  extent  not
previously exercised and provided that the term of the applicable option has not
otherwise  expired) at any time within six months  after the  Termination  Date
after  which  time such  options  shall expire; and

                                            (B) any and all reasonable costs and
expenses, including, but not limited to,  reasonable  legal fees incurred by the
Executive in good faith in enforcing or establishing any of his rights hereunder
shall  immediately be paid to the Executive  upon  presentation of  appropriate
documentation to the Company.

                           (f)      Continued Medical Dental Coverage. Upon the
termination of the Executive's employment  with the Company for whatever reason,
to the extent permitted by applicable law, the Company shall continue to provide
the  Executive (at  the  Company's expense or,  in  the  case  of  a termination
pursuant to Section 5(a) or, Section  5(f),  at the  Executive's  expense)  with
medical,  dental and hospitalization  insurance coverage for the longest of: (i)
the 18-month period from the  Termination  Date;  and (ii) the  period set forth
in  the  applicable  Benefit Plans and (iii)  such longer  period  prescribed by
applicable law.

                           (g)      Company Obligations  Upon  Termination If a
Voted Matter is Not Approved.

                                    (i)     If the Executive  terminates  this
Agreement  pursuant  to Section 5(g)(ii)  because any  Voted  Matter (or  the
material  terms  thereof) is not approved by a Majority of the Shareholders then

                                       12

<PAGE>

in lieu of any further payments under 2(a) the Company  shall pay the Executive
$500,000 plus any  unreimbursed expenses (collectively the "Severance Payment").
50% of such Severance Payment shall be made  within  60  days of the Termination
Date  and the remaining 50% shall be  made  within 420 days  of the Termination
Date.

                                    (ii)  In  the  event  that  the  Executive's
employment is terminated pursuant
to Section 5(g)(ii) then

                                            (A) any stock options heretofore or
hereafter granted  to  the Executive  pursuant  to this Agreement  pursuant to
authorized stock option plans which  have  vested  may be exercised  in full (to
the  extent  not  previously exercised and  provided that  the  term  of  the
applicable option has not otherwise expired) at any time within six months after
such cessation of employment  after which time such options shall expire and

                                            (B) any and all reasonable costs and
expenses, including but not limited to  reasonable  legal fees  incurred by the
Executive in good faith in enforcing or establishing any of his rights hereunder
shall  be  immediately paid to the Executive upon presentation  of  appropriate
documentation to the Company.

                           (h)      Obligations of Company Under Plans.
Notwithstanding anything to the contrary subject to Executive's  full compliance
under  Sections 7  and 8 hereof  after the  expiration of  this  Agreement,
the Company's  obligation to the Executive under the Plans shall not be affected
by the termination or renewal of  the  Executive's employment except as provided
in such Plans. In the event the Executive commits a  breach  of  Sections 7 or 8
after  the  expiration  or  termination of this Agreement and fails to cure such
breach  within  seven days after receiving written notice describing such breach
(provided the  Company sends  notice to Executive within  14 days  of  obtaining
actual  knowledge of the material  facts relating to such  breach),  the Company
shall  be  relieved of its  obligation to make any  further  payments  under the
Plans.  In the event the  Executive and  the Company  dispute whether  Executive
has committed an uncured breach of  Sections 7 or 8 hereof, the  Parties' rights
and obligations under the Plans shall remain in effect, except  that the Company
shall make any payments due under the Plans into an interest-bearing escrow held
by an outside escrow agent designated jointly by the parties until the earlier
 of:

                                    (i)    the passage of 180 days from the date
of the lapse of the cure period  described above (in which case the escrow shall
be released to the Executive);

                                    (ii)  an  arbitration   panel  described  in
Section 12 of this Agreement finds
that:

                                            (A) the Executive  breached Sections
7 or 8, in which  case  the  escrow shall  be released to  the Company  and  the
Company shall have no further obligations to Executive under the Plans;  or

                                       13

<PAGE>

                                            (B) the  Executive  did  not  breach
Sections 7 or 8, in which case the escrow shall be released to the Executive and
the Company shall  thereafter make payments to the Executive under the Plans in
accordance with its terms; or

                                    (iii) the Company and the Executive  deliver
a  joint written instruction to such escrow holder respecting the disposition of
the funds.

At the  request  of the  escrow  holder,  the  parties  shall  execute an escrow
agreement containing normal terms and conditions consistent with this paragraph.
The parties agree to proceed  expeditiously  under any  arbitration in which the
Executive's  rights  under  the Plans  are at issue so that the  arbitration  is
adjudicated within the 180 day period described above.

                           (i)      Liability of the Company for Compensation in
the Event of Termination - Provided the Company fully complies with this Section
6, then the Company shall have no further liability to the Executive  under this
Agreement  above in the event of termination as provided for herein.

                           (j)      Effect of Termination of Employment on  the
Plans.  Executive's rights to payments  under the Plans shall not be affected by
termination  under  Sections 5(a), 5(b),  5(c), 5(d),  5(e), 5(f),  5(g)(i)  or
5(h) except as provided in such Plans or in Section 6(g) above.

                           (k)      Effect of Termination of Employment on This
Agreement.  The  termination of the Executive's employment at  the  end of the
Term shall not terminate this Agreement and the  rights  and  obligations of the
parties  hereunder,  including  under Sections 6, 7, 8, 9 and 12, shall survive
such termination.

                  7. Trade Secrets;  Confidentiality.  The Executive  recognizes
and acknowledges that, in connection with his employment with Zapco, he has had,
and in connection with his employment  with the Company,  he will have access to
valuable  trade  secrets  and  confidential  information  of the Company and its
Affiliates  including,  but not limited to, customer lists, business methods and
processes,  marketing,  promotional,  pricing, financial information,  technical
information   and  data   relating  to  clients,   employees   and   consultants
(collectively,   "Confidential   Information")   and  that   such   Confidential
Information is being made available to the Executive only in connection with the
furtherance of his employment with the Company. The Executive agrees that during
the  Term  and for a period  of 2 years  thereafter,  the  Executive  shall  not
disclose any Confidential  Information to any Person,  except that disclosure of
Confidential  Information  will  be  permitted:  (a)  to  the  Company  and  its
respective  Affiliates and advisors;  (b) if such  Confidential  Information has
previously become available to the public through no fault of the Executive; (c)
if required by law or any court or governmental agency or body, provided that in

                                       14

<PAGE>

any such case  covered  by this  clause  (c) the  Executive  shall  provide  the
Company,  in  advance  of any  such  disclosure,  with  prompt  notice  of  such
requirement(s)  and shall  cooperate fully with the Company to the extent it may
seek to limit such  disclosure;  (d) if  necessary  to  establish  or assert the
rights of the Executive  hereunder,  provided that the Executive  shall take all
necessary  and  appropriate  steps  to  preserve  the  confidentiality  of  such
Confidential Information; or (e) if expressly consented to by the Company.

                  8.       Noncompetition and Nonsolicitation.

                           (a)      The  Executive hereby covenants  and  agrees
that during the Term and for the respective  periods  set  forth in  Appendix  A
(attached  hereto)  immediately  following  the  Termination  Date under the
respective  circumstances  set forth below,  he shall not,  without the  prior
written  consent of  the  Board, at any time, directly or indirectly, on his own
behalf or on behalf of any Person:

                                    (i)     own, manage, operate, control, be
employed by, participate in, provide consulting  services to, or be connected or
associated in any manner with the  ownership,  management,  operation or control
of  any  business  which is in competition  with  the  Company or  any  of  its
affiliates (in the business in which  the  Company or  any of its affiliates is
substantially engaged during the Term in the case of acts  committed  during the
Term or in the  business  in  which  the Company  or any of its  affiliates  is
substantially  engaged  at the  time  of termination  of Executive's Employment
in the case of acts committed after the Term) in any state of the United States
or in any foreign country in which any of them are engaged in business during
the Term in the case of acts  committed during the Term or in any state of the
United  States or in any foreign  country in which any of them are  engaged  in
business  at the time of  termination  of Executive's employment in the case of
acts committed after the Term, for as long as the Company continues  to  conduct
such business (the "Non-Compete"), provided, however,  that nothing  in  this
Agreement shall preclude the Executive from owning less than five percent of any
class of publicly traded equity of any entity;

                                    (ii) solicit or take any action to cause the
solicitation of, or recommend that, any supplier, client, customer, contractor,
vendor, agent or consultant of the Company or any of its Affiliates or other
Person having  business  relations  with  the Company,  discontinue business or
cease such relationship,  in  whole or in part,  with the Company or any of its
Affiliates  (the  "Customer and Vendor Non-Solicit");

                                    (iii)  employ  any  Person  employed  by the
Company or  any  of  its Affiliates at  the time of, or during  the  12  months
preceding, such  termination of the Executive's  employment with  the  Company
(the "Non-Hire"); or

                                       15
<PAGE>
                                    (iv)  solicit  for  employment  (other  than
through unaffiliated employment recruiting or placement firms  or  services who
are not  specifically  directed to solicit  employees of the Company or provided
with  the  names  of any such employees)  any Person  employed by the Company or
any of its  Affiliates at the time of, or during the 12 months  preceding such
termination  of  the  Executive's employment  with the Company, or otherwise
encourage or entice any such Person to leave such employment (the "Employee Non-
Solicit").

                           (b)      The Employee acknowledges and agrees that:

                                    (i)     the restrictive covenants set forth
in this Section 8 (the "Restrictive Covenants") are  reasonable and  valid  in
geographical and temporal scope and in all other respects, and

                                    (ii)  it is the  intention  of  the  parties
hereto  that  the Restrictive  Covenants be enforceable  to  the  fullest extent
permitted by applicable  law.  Therefore, if any court determines  that  any of
the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the
remainder of the  Restrictive Covenants  shall not thereby be affected and shall
be given  full  force and effect, without regard to the invalid or unenforceable
parts.  Specifically,  if any  court  of  competent  jurisdiction  should  hold
that any  portion  of the Restrictive  Covenants  is overly  broad as  to one or
more  states of the United States  or one or more  foreign  jurisdictions,  then
that  state or  states or  foreign jurisdiction  or  jurisdictions shall  be
eliminated from the territory to which the  Restrictive Covenants apply and  the
restrictions  shall  remain applicable in all other states of the  United States
and foreign jurisdictions.

                           (c)      If any court determines  that  any of  the
Restrictive Covenants, or any part thereof,  is invalid or unenforceable for any
reason,  such court shall have the power to modify such  Restrictive  Covenant,
or any part  thereof, and, in its modified form, such restrictive covenant shall
then be valid and enforceable.

                  9.  Equitable  Relief.  In the event of a breach or threatened
breach by the Executive of any of the covenants contained in this Agreement, the
Company  shall be entitled  to a  temporary  restraining  order,  a  preliminary
injunction  and/or  a  permanent  injunction   restraining  the  Executive  from
breaching  or  continuing  to  breach  any of  said  covenants.  Nothing  herein
contained  shall be construed as prohibiting the Company from pursuing any other
remedies  that may be  available to it under this  Agreement  for such breach or
threatened breach.

                  10.  Severability.  Should any provision of this  Agreement be
held, by a court of competent jurisdiction, to be invalid or unenforceable, such

                                       16

<PAGE>

invalidity or unenforceability  shall not render the entire Agreement invalid or
unenforceable,  and this Agreement and each individual provision hereof shall be
enforceable and valid to the fullest extent permitted by law.

                  11.      Successors and Assigns.

                           (a)      This  Agreement and  all  rights under  this
Agreement are personal to the Executive and  shall not  be assignable other than
by  will or the  laws  of descent. All of  the Executive's  rights  under the
Agreement shall inure to  the benefit  of his heirs, personal  representatives,
designees or other legal representatives, as the case may be.

                           (b)      This Agreement shall inure to the benefit of
and be binding  upon  the Company  and its  successors  and assigns.  Any Person
succeeding to the business of the Company by  merger, purchase, consolidation or
otherwise shall assume by contract or operation of law  the  obligations  of the
Company under this Agreement.

                  12.  Governing  Law:  Jurisdiction.  This  Agreement  shall be
construed in accordance  with and governed by the laws of the State of New York.
The parties  hereby  agree to submit any and all  disputes  arising out of or in
connection  with this Agreement to binding  arbitration  in accordance  with the
rules of the American Arbitration Association. Such arbitration shall be held in
New York City.  Each party shall select one arbitrator and the two such selected
arbitrators  shall select a third  arbitrator.  Notwithstanding  anything to the
contrary in this  Section 12,  such  parties may seek in any court of  competent
jurisdiction  any  injunctive  relief  pursuant to Section 9 of this  Agreement.
Provided that  Executive's  position in such dispute has a good faith basis, any
and all  reasonable  out of pocket costs incurred by the Executive in connection
with any dispute arising out of this Agreement shall be immediately  paid to the
Executive by the Company upon presentation of appropriate  documentation,  up to
an aggregate amount equal to $180,000.

                  13.  Notices.  All notices,  requests and demands  given to or
made upon the respective  parties hereto shall be deemed to have been given when
received or refused if mailed by registered or certified mail,  postage prepaid,
if delivered by hand,  or if delivered by Federal  Express or similar  overnight
delivery service, addressed to the parties at their addresses set forth below or
to such  other  addresses  furnished  by notice  given in  accordance  with this
Section 13:

                           (a)      if to the Company, to
                                    Company Headquarters
                                    Attention: President

                           (b)      if to the Executive, to

                                       17

<PAGE>

                                Bernard J. Zahren
                                40 Gibralter Lane
                                 Avon, CT 06001

                  14.  Complete  Understanding.  Together  with the Stock Option
Agreement, Stock Option Plans and the Plans, this Agreement supersedes any prior
contracts,  understandings,  discussions  and agreements  relating to employment
between the Executive and the Company and constitutes the complete understanding
between the parties with respect to the subject matter  hereof.  Notwithstanding
anything to the contrary  herein,  this  Agreement is not intended to affect the
Company's and the Executive's rights and obligations with respect to any matters
that   are   independent   of  the   Executive's   employment.   No   statement,
representation,  warranty or covenant has been made by either party with respect
to the subject matter hereof except as expressly set forth herein or therein.

                  15.      Modification:.

                           (a)      This Agreement may be amended or waived if,
and only if, such amendment or waiver  is in writing and signed, in the case of
an amendment, by the Company and the Executive or in  the  case of a waiver, by
the party against whom the waiver is to be  effective. Any such waiver  shall be
effective  only to the  extent specifically set forth in such writing.

                           (b)      No  failure or  delay by any  party  in
exercising any  right,  power or  privilege hereunder  shall operate as a waiver
thereof,  nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.

                  16.      Mutual Representations.

                           (a)      The Executive represents and warrants to the
Company that the execution and delivery of this Agreement and the fulfillment of
the terms hereof:

                                    (i)     will not constitute a default under
or conflict with any agreement or other instrument to which he is a party or by
which he is bound, and

                                    (ii)  do  not  require  the  consent  of any
Person.

                           (b)      The Company represents and warrants to the
Executive that this Agreement has been duly authorized, executed and delivered
by the Company and that except with respect to any Voted Matter the fulfillment
of the terms hereof:

                                     18

<PAGE>

                                    (i)     will not constitute a default under
or conflict with any agreement or other instrument to which it is a party or by
which it is bound, and

                                    (ii)  do  not  require  the  consent  of any
Person.

                           (c)      Each party hereto warrants and represents to
the other that this Agreement constitutes the valid  and binding  obligation of
such party enforceable  against such party in accordance with its terms.

                           (d)      The parties agree to indemnify, defend  and
hold each other harmless for any claim, loss,  damage,  cost,  expense including
without  limitation,  reasonable attorney  fees  arising out of or relating to a
breach  of the  foregoing representations in Section 16 (a),  (b),  and (c). The
Executive's  obligation under  this Section  16 shall be limited to an aggregate
amount of $180,000.

                  17.   Headings.   The  headings  in  this  Agreement  are  for
convenience  of  reference  only and shall not  control or affect the meaning or
construction of this Agreement.

                  18.  Counterparts.  This Agreement may be signed in any number
of counterparts,  each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.  This Agreement
shall become  effective when each party hereto shall have received  counterparts
hereof signed by the other party hereto.

                  19. Inconsistencies. In the event of any inconsistency between
this  Agreement on the one hand and the Plans or the Incentive Plan on the other
hand, this Agreement shall govern.

                  IN WITNESS  WHEREOF,  the Company has caused this Agreement to
be duly executed in its corporate name by one of its officers duly authorized to
enter into and execute this Agreement, and the Executive has manually signed his
name hereto, all as of the day and year first above written.

                                     U.S. ENERGY SYSTEMS, INC.

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

                                       19

<PAGE>

                                    EXECUTIVE

                                    /s/ Bernard J. Zahren
                                    -------------------------------
                                        Bernard J. Zahren

                                       20
<PAGE>

                                   APPENDIX A

             Noncompetition and Nonsolicitation Restriction Periods

<TABLE>
<CAPTION>
<S>

                                   <C>              <C>               <C>              <C>
                                                    Customer                           Employee
                                                    and Vendor
Reason for Termination              Non-Compete     Non-Solicit       Non-Hire         Non-Solicit
----------------------------------------------------------------------------------------------------

Executive Termination for
Good Reason -Sec. 5(b)              18 months       18 months        18 months         18 months

Company Termination
For Cause - See 5(a)                2 years         2 years          6 months          2 years

For Breach of Transaction           2 years         2 years          18 months         2 years
   Document - Sec. 5(g)(i)

For Non-Performance - Sec. 5(h)     1 year          1 year           1 year            1 year

Company Termination                 0 years         18 months        18 months         18 months
for Other Reasons - Sec. 5(e)

Voluntary Resignation not for       2 years         2 years          2 years           2 years
Good Reason - Sec. 5(f)

Company's Failure to Renew          0 years         2 years          1 year            2 years
Agreement

Executive's Failure to Renew        0 years         2 years          1 year            2 years
Agreement

Disability - Sec. 5(d)              0 years         18 months        1 year            1 year

</TABLE>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

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