Document:

ESCROW AGREEMENT

         ESCROW  AGREEMENT  dated as of the 28th day of November,  2000,  by and
among Bernard J. Zahren, Finova Mezzanine Capital Corp., AJG Financial Services,
Inc., Environmental Opportunities Fund, Environmental Opportunities Fund Cayman,
Frederic Rose,  M&R  Associates,  Martin F.  Laughlin,  Richard C. Augustine and
Michael J. Carolan (each, a "Major Shareholder"),  AJG Financial Services, Inc.,
through its  Vice-President,  General  Counsel as agent (the "Major  Shareholder
Agent")  for the Major  Shareholders,  U.S.  Energy  Systems,  Inc.,  a Delaware
corporation ("USE"), and USE Acquisition Corp. a Delaware corporation (the "Sub"
which after consummation of the Merger shall be the "Surviving  Corporation" and
together  with USE,  the "USE  Parties"),  Cinergy  Energy  Solutions,  Inc.,  a
Delaware   corporation   ("CES"  and  together   with  the  USE   Parties,   the
"Beneficiaries"),  and Tannenbaum  Helpern  Syracuse & Hirschtritt LLP having an
office at 900 Third Ave., New York, New York, 10022 (the "Escrow Agent").

                              W I T N E S S E T H:
                  WHEREAS,  Zahren  Alternative Power Corporation  ("ZAPCO") and
the USE Parties  are  parties to an  Agreement  and Plan of  Reorganization  and
Merger dated as of the date hereof (the "Merger Agreement"); and

                  WHEREAS,   pursuant  to  the  Merger   Agreement,   the  Major
Shareholders and the  Beneficiaries  entered into an  indemnification  agreement
dated as of the date hereof (the "Indemnification Agreement"); and

                  WHEREAS,   the  Merger   Agreement  and  the   Indemnification
Agreement  contemplate the execution and delivery of an Escrow  Agreement by the
parties hereto.

                  NOW, THEREFORE, the parties hereto agree as follows:

                  1. Capitalized terms used herein without definition shall have
the same meaning as ascribed to them in the Merger Agreement.

                  2. Escrow Agent  agrees to hold and disburse (i) cash,  shares
of USE's Series C Preferred Stock ("Preferred Stock") and shares of USE's common
stock  ("Common  Stock" and  together  with the  Preferred  Stock,  the "Stock")
delivered to it pursuant to the Merger  Agreement on account of the  possibility
of a post-closing  adjustment to the Merger  Consideration (the "Working Capital
Escrow Fund") and (ii) cash and shares of Stock  delivered to it pursuant to the
Merger  Agreement  on  account  of the  obligations  of the  Major  Shareholders
pursuant to the Indemnification Agreement (the "Indemnification Escrow Fund" and

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together with the Working Capital Escrow Fund, the "Escrow  Funds")  pursuant to
the terms  hereof.  The cash  portion of the Escrow  Funds  shall be invested by
Escrow Agent in accordance with the written  direction of the Major  Shareholder
Agent from the  investments  set forth on Schedule A hereto;  as such Schedule A
may be amended by mutual agreement of CES, USE and the Major  Shareholder  Agent
from time to time,  provided,  however that in the absence of any such direction
the  Escrow  Agent  shall   deposit  and  maintain   such  cash  portion  in  an
interest-bearing  bank account at Bankers Trust Company.  Escrow Agent shall not
be responsible  for any interest earned or other earnings on the cash portion of
the Escrow  Funds,  except for such  interest  or other  earnings as is actually
received,  nor for the loss of any interest or other  earnings  arising from the
withdrawal of the cash portion of the Escrow Funds prior to the date of maturity
of any deposit.

                  3. (a) The parties acknowledge that the Working Capital Escrow
Fund shall  serve as a source of funding for amounts  owing by  shareholders  of
ZAPCO to the Surviving  Corporation as a result of the  post-closing  adjustment
pursuant to Section 2.05 of the Merger Agreement  ("Adjustment  Claims"). If the
Surviving  Corporation  shall request a  disbursement  from the Working  Capital
Escrow Fund associated  with any Adjustment  Claim, it shall give notice of such
request  (which  notice shall be executed by the Surviving  Corporation)  to the
Escrow Agent and the Major Shareholder  Agent,  which notice shall set forth the
amount requested,  the basis for such request,  and reasonable  documentation to
support such request (such notice being  substantially  in the form of Exhibit A
hereto).  The Escrow Agent shall disburse the amount requested within 10 days of
its receipt of the notice in the event the Escrow Agent shall not have  received
a notice of objection from the Major  Shareholder  Agent within such period.  In
the event the Escrow Agent shall  receive a notice of  objection  from the Major
Shareholder Agent within such period, it shall not disburse the amount requested
unless  and until it shall have  received  (i) the joint  written  notice of the
Major  Shareholder Agent and the Surviving  Corporation  setting forth the joint
direction  of such  parties  (such  notice  being  substantially  in the form of
Exhibit  B  hereto),  (ii)  a  written  instrument   representing  a  final  and
non-appealable  order or similar  direction  with respect to the  disposition of
such amount issued by the arbitrator or arbitration  forum, or (iii) a certified
copy of a final and non-appealable judgment of a court of competent jurisdiction
directing  the  disbursement  of such  funds;  the  Escrow  Agent  shall also be
entitled,  in its sole  discretion,  to deposit such Working Capital Escrow Fund
with the clerk of the court in which  any  litigation  between  the  parties  is
pending,  or with the clerk of an  appropriate  court in New York, New York. The
Escrow Agent shall make  disbursements  from the Working  Capital Escrow Fund in
the following order: (1) first, by releasing cash from such Fund; (2) second, if
there is no remaining cash in such Fund, by  liquidating  the assets (other than
the Stock) in such Fund and releasing the proceeds;  and (3) third, if there are
no assets  other than the Stock in such  Fund,  by  releasing  the Stock in such
Fund,  which shall be valued  according to the Merger  Consideration  Value,  as
defined in the Merger  Agreement;  if there are no assets in the Working Capital
Escrow Fund, the Escrow Agent shall make disbursements of cash, Common Stock and
Preferred  Stock  from the  Indemnification  Escrow  Fund in  proportion  to the
aggregate  amount of cash (including any investments  made pursuant to Section 2
hereof  and the  proceeds  thereof),  Common  Stock and  Preferred  Stock in the
Indemnification Escrow Fund, with the Stock being valued according to the Merger
Consideration Value.

                  (b) At any time after the  finalization  of the Effective Date
Balance Sheet, the Major  Shareholder  Agent may, at its option,  give notice to
the Escrow  Agent and the  Surviving  Corporation  to disburse  all amounts then
remaining  in the  Working  Capital  Escrow  Fund less the  Disputed  Amount (as

                                       2

<PAGE>

defined below) to the Major Shareholder Agent for the distribution in accordance
with the instructions  contained in such  notification.  In the event the Escrow
Agent  shall  not have  received  a notice  of  objection  (asserting  that such
conditions  have not been satisfied)  from the Surviving  Corporation  within 10
days after delivery of such notice to the Escrow Agent,  it shall be required to
disburse all amounts then remaining in the Working  Capital Escrow Fund less the
Disputed  Amount  to  the  Major  Shareholder  Agent  for  the  distribution  in
accordance with the instructions  contained in such  notification from the Major
Shareholder  Agent.  In the event that the Escrow  Agent shall  receive a timely
notice of objection  (asserting  that such  conditions  have not been satisfied)
within such period from the  Surviving  Corporation,  it shall not  disburse any
portion of the  Working  Capital  Escrow  Fund and shall  disburse  the  Working
Capital  Escrow  Fund  only in  accordance  with the  provisions  of the  fourth
sentence  of  Section  3(a)  hereof.  The  "Disputed  Amount"  is the amount (as
reasonably determined by the Surviving Corporation), including interest and fees
(including legal fees and expenses) for which the Surviving Corporation has made
Adjustment  Claims that have not been  settled and paid in  accordance  with the
provisions of Section 3(a). The Escrow Agent shall retain in the Working Capital
Escrow Fund to provide for the  Disputed  Amount an amount  equal to the Dispute
Amount as follows:  (1) first, by retaining cash from such Fund; (2) second,  if
there is not  sufficient  cash in such  Fund,  by  retaining  such of the assets
(other than the Stock) in such Fund  (valued  according to the amount that could
be obtained if they were liquidated); (3) third, if there is not sufficient cash
and assets other than the Stock in such Fund,  by  retaining  such Stock in such
Fund,  which shall be valued  according to the Merger  Consideration  Value,  as
defined in the Merger Agreement; such amounts as are not required to be retained
in the Working  Capital Escrow Fund shall be disbursed to the Major  Shareholder
Agent for  distribution  in accordance with the  instructions  contained in such
notification.

                  At any time  after  the  finalization  of the  Effective  Date
Balance  Sheet that all  Adjustment  Claims  that have been set forth in notices
provided  under  Sections 3(a) of this  Agreement  have been settled and paid in
accordance  with  the  provisions  of  Section  3(a) and no such  claims  remain
outstanding,  the Major Shareholder Agent may, at its option, give notice to the
Escrow Agent and the Surviving Corporation that the post-closing  adjustment has
been  completed.  In the event the Escrow Agent shall not have received a notice
of objection  (asserting  that such conditions have not been satisfied) from the
Surviving Corporation within 10 days after delivery of such notice to the Escrow
Agent,  it shall be required  to disburse  all  amounts  then  remaining  in the
Working  Capital  Escrow Fund to the Major  Shareholder  in accordance  with the
instructions contained in such notification from the Major Shareholder Agent. In
the event that the  Escrow  Agent  shall  receive a timely  notice of  objection
(asserting that such conditions have not been satisfied) within such period from
the  Surviving  Corporation,  it shall not  disburse  any portion of the Working
Capital Escrow Fund and shall  disburse the Working  Capital Escrow Fund only in
accordance with the provisions of the fourth sentence of Section 3(a) hereof.

                  (c) The parties  acknowledge that the  Indemnification  Escrow
Fund  shall  serve  as a source  of  funding  for  amounts  owing  by the  Major
Shareholders   to  the   Beneficiaries   pursuant   to   Section   3(a)  of  the
Indemnification  Agreement  ("Claims").  If  any  Beneficiary  shall  request  a
disbursement  from the Escrow  Fund  associated  with any  Claim,  it shall give
notice of such request (which notice shall be executed by such  Beneficiary)  to
the Escrow  Agent and the Major  Shareholders,  which notice shall set forth the

                                       3
<PAGE>

amount requested,  the basis for such request,  and reasonable  documentation to
support such request (such notice being  substantially  in the form of Exhibit C
hereto).  The Escrow Agent shall disburse the amount requested within 10 days of
its receipt of the notice in the event the Escrow Agent shall not have  received
a notice of objection from the Major  Shareholder  Agent within such period.  In
the event the Escrow Agent shall  receive a notice of  objection  from the Major
Shareholder Agent within such period, it shall not disburse the amount requested
unless  and until it shall have  received  (i) the joint  written  notice of the
Major Shareholder  Agent and such Beneficiary  setting forth the joint direction
of such  parties  (such  notice  being  substantially  in the form of  Exhibit D
hereto), (ii) a written instrument representing a final and non-appealable order
or similar  direction  with respect to the  disposition of such amount issued by
the  arbitrator or arbitration  forum,  or (iii) a certified copy of a final and
non-appealable  judgment  of a court of  competent  jurisdiction  directing  the
disbursement of such funds; the Escrow Agent shall also be entitled, in its sole
discretion,  to deposit  such Escrow  Funds with the clerk of the court in which
any  litigation  between  the  parties  is  pending,  or with  the  clerk  of an
appropriate   court  in  New  York,  New  York.  The  Escrow  Agent  shall  make
disbursements of cash, Common Stock and Preferred Stock from the Indemnification
Escrow  Fund in  proportion  to the  aggregate  amount  of cash  (including  any
investments made pursuant to Section 2 hereof and the proceeds thereof),  Common
Stock and Preferred  Stock in the  Indemnification  Escrow Fund,  with the Stock
which valued according to the Merger Consideration Value.

                  (d)  At  any  time  following  the  Release  Date,  the  Major
Shareholder  Agent may, at its option,  give notice to the Escrow  Agent and the
Beneficiaries  that the Escrow  Agent shall  disburse  to the Major  Shareholder
Agent the  Non-Disputed  Portion (as defined  below) of the Escrow Fund.  In the
event the Escrow Agent shall not have received a notice of objection from either
Beneficiary  within 10 days after delivery of such notice,  it shall be required
to disburse the  Non-Disputed  Portion to the Major  Shareholders  in accordance
with the instructions  contained in the Major Shareholder  Agent's  notification
and this  Agreement  shall  terminate.  In the event that the Escrow Agent shall
receive a notice of objection  from either  Beneficiary  within such period,  it
shall not disburse any portion of the Escrow Fund and shall  disburse the Escrow
Fund only in accordance  with the  provisions of the fourth  sentence of Section
3(c) hereof. The "Non-Disputed  Portion" equals the Escrow Fund less the product
of (i) a fraction,  the numerator of which is (A) the value of USE Shares in the
Indemnification  Escrow Fund (valued in accordance with the definition of Merger
Consideration Value) plus the amount of cash in the Indemnification Escrow Fund,
and  the   denominator  of  which  is  (B)  the  value  of  USE  Shares  in  the
Indemnification  Escrow Fund (valued in  accordance  with the  definition of USE
Shares)  plus the  amount of cash in the  Indemnification  Escrow  Fund plus the
Contingent Merger Payment,  as adjusted through such time and (ii) the amount at
issue (as reasonably  determined by the Beneficiary that provided such notice of
Claim),  including  interest and fees  (including  legal fees and expenses) (the
"Amount  at  Issue"),  under the  Claims  that  have  been set forth in  notices
provided under Section 3(c) of this Agreement and have not been settled and paid
in accordance with Section 3(c); each Beneficiary  agrees that upon a request of
the Major  Shareholder  Agent  following  the Release  Date,  it shall  promptly
prepare with  respect to each Claim that has been set forth in notices  provided
by it under Section 3(c) of this  Agreement and has not been settled and paid in
accordance with Section 3(c), a statement setting forth the Amount at Issue. The
Escrow Agent shall make  disbursements of cash, Common Stock and Preferred Stock

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<PAGE>

from the Non-Disputed  Portion of the Indemnification  Escrow Fund in proportion
to the aggregate  amount of cash  (including  any  investments  made pursuant to
Section 2 hereof and the proceeds thereof),  Common Stock and Preferred Stock in
the  Indemnification  Escrow Fund, with the Stock being valued  according to the
Merger Consideration Value.

                  At any time  following  the Release  Date that all Claims that
have been set forth in notices  provided  under  Sections 3(c) of this Agreement
have been settled and paid in accordance with the provisions of Section 3(c), no
such Claims remain outstanding,  the Major Shareholder Agent may, at its option,
give  notice  to the  Escrow  Agent  and  the  Beneficiaries  that  all of  such
conditions  have been  fulfilled.  In the event the Escrow  Agent shall not have
received a notice of  objection  from  either  Beneficiary  within 10 days after
delivery of such notice, it shall be required to disburse all amounts and Shares
then remaining in the Escrow Fund to the Major  Shareholders  in accordance with
the instructions  contained in the Major  Shareholder  Agent's  notification and
this Agreement shall terminate. In the event that the Escrow Agent shall receive
a notice of objection from either  Beneficiary  within such period, it shall not
disburse any portion of the Escrow Fund and shall  disburse the Escrow Fund only
in accordance with the provisions of the fourth sentence of Section 3(c) hereof.
The "Release Date" shall be the date eighteen months following the date hereof.

                  (e) The Escrow  Agent shall not be required to  determine  the
reasonableness  of any action or  inaction  by the Major  Shareholder  Agent but
shall be entitled to rely on such action or inaction  for the purposes of taking
any action pursuant to this Section 3.

                  4.  Escrow  Agent  shall  not be  liable  in any way or to any
person for its refusal to comply with adverse claims and demands being made upon
it, and shall not be responsible  for any act or failure to act on its part, nor
shall it have any liability under this Escrow  Agreement,  except in the case of
willful default or gross  negligence.  This Escrow Agreement shall terminate and
Escrow  Agent  shall  be  automatically  released  from all  responsibility  and
liability  upon  Escrow  Agent's  delivery  or deposit  of the  Escrow  Funds in
accordance with the provisions of this Escrow Agreement.

                  5. Escrow  Agent or any member of its firm shall be  permitted
to act as  counsel  for the  Major  Shareholders  and the  Beneficiaries  in any
dispute or question as to any matter  arising out of the Merger  Agreement,  the
Indemnification Agreement or this Escrow Agreement.

                  6. Escrow Agent may resign or be  discharged  at any time and,
in such event,  shall  deliver the Escrow  Funds  pursuant to the joint  written
instructions of the Major  Shareholder  Agent and the  Beneficiaries  or, in the
absence of such instructions,  may deposit the Escrow Funds with the clerk of an
appropriate court in New York, New York.

                  7. Escrow Agent shall be indemnified by the Major Shareholders
and the  Beneficiaries  against  any  liabilities,  damages,  losses,  costs  or
expenses incurred by, or claims or charges made against, Escrow Agent (including
reasonable counsel fees,  disbursements and court costs) by reason of its acting
or failing to act in connection with any of the matters  contemplated  by, or in

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<PAGE>

carrying  out the terms of,  this  Escrow  Agreement,  except as a result of its
willful malfeasance or gross negligence.

                  8.  Any  notice  or  communication  pursuant  to  this  Escrow
Agreement   shall  be  delivered  in  accordance  with  the  provisions  of  the
Indemnification   Agreement,   addressed  to  the  Major  Shareholders  and  the
Beneficiaries  and to the Escrow  Agent at the address set forth  above.  Notice
shall be deemed effective as provided in the Indemnification Agreement.

                    9. This Escrow Agreement, the Indemnification  Agreement and
the Merger  Agreement set forth the entire  understanding of the parties hereto.
None of the terms or provisions of this  Agreement may be amended,  supplemented
or  otherwise  modified  except by a written  instrument  executed  by the Major
Shareholders  Agent  (acting  on behalf of the Major  Shareholders),  the Escrow
Agent and the Beneficiaries.

                  10.  Each  Major   Shareholder   hereby   appoints  the  Major
Shareholder  Agent as his  representative  to take any  action and  receive  any
notice hereunder on behalf of such Major Shareholder as set forth herein.

                  11.  This  Agreement  shall  not  become  effective  until the
Effective Time (as defined in the Merger Agreement).  If the Merger Agreement is
terminated  before the Effective Time, this Agreement shall be null and void and
of no effect.

                                       6

<PAGE>

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

                              MAJOR SHAREHOLDERS:

                              AJG Financial Services, Inc.

                              By: /s/   Mark P. Strach
                                  -------------------------
                                  Name:
                                  Title:

                              BERNARD J. ZAHREN

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

                             ENVIRONMENTAL OPPORTUNITIES FUND

                             By: /s/ Kenneth Leung
                                 ---------------------------
                                Name:
                                Title:

                             ENVIRONMENTAL OPPORTUNITIES FUND/CAYMAN

                             By: /s/    Kenneth Leung
                                 ------------------------------
                                 Name:
                                 Title:

                             FINOVA MEZZANINE CAPITAL CORP.

                             By: /s/ Kevin Pearce
                                 -----------------------------------
                                 Name:
                                 Title:

                                        7

<PAGE>

                            FREDERIC ROSE

                            /s/ Frederic Rose
                            -------------------

                            M & R ASSOCIATES

                            By: /s/ Frederic Rose
                            -----------------------------
                            Name:   Frederic Rose
                            Title:  President

                            MARTIN F. LAUGHLIN

                            /s/ Martin F. Laughlin
                            -----------------------------

                            MICHAEL J. CAROLAN

                            /s/ Michael J. Carolan
                            -----------------------------

                            RICHARD J. AUGUSTINE

                            /s/ Richard J. Augustine
                            ------------------------------

                             MAJOR SHAREHOLDER AGENT:

                             AJG FINANCIAL SERVICES, INC

                             By: /s/    John C. Rosengren
                                 -------------------------
                                 Name:  John C. Rosengren
                                 Title: Vice President and
                                 General Counsel

                                       8

<PAGE>

                                 BENEFICIARIES:

                                 U.S. ENERGY SYSTEMS, INC.

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

                                 USE ACQUISITON CORP.

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

                                  CINERGY ENERGY SOLUTIONS INC.

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

                                  ESCROW AGENT:

                                  TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT LLP

                                  By: /s/ Stephen Rosenberg
                                      A Member of the Firm

                                       9

<PAGE>

                                    Exhibit A
                           FORM OF DISBURSEMENT NOTICE
                                   CERTIFICATE

          This  certificate  is being  issued  pursuant to Section  3(a) of that
certain Escrow Agreement (the "Escrow  Agreement") dated as of November 28, 2000
by and among Bernard J. Zahren,  Finova  Mezzanine  Capital Corp., AJG Financial
Services,  Inc., Environmental  Opportunities Fund, Environmental  Opportunities
Fund Cayman,  Frederic Rose,  M&R  Associates,  Martin F.  Laughlin,  Richard C.
Augustine and Michael J. Carolan (each, an "Major  Shareholder"),  AJG Financial
Services, Inc., through its Vice-President, General Counsel as agent (the "Major
Shareholder Agent") for the Major Shareholders,  Cinergy Energy Solutions, Inc.,
a  Delaware  corporation  ("CES"),   U.S.  Energy  Systems,   Inc.,  a  Delaware
corporation ("USE"), and USE Acquisition Corp. a Delaware corporation (the "Sub"
and together  with USE and CES, the  "Beneficiaries"),  and  Tannenbaum  Helpern
Syracuse &  Hirschtritt  LLP as Escrow  Agent (the  "Escrow  Agent").  Terms not
defined  in this  certificate  shall have the  meanings  set forth in the Escrow
Agreement. The undersigned, Sub, hereby certifies that:

         1.       The  undersigned  is requesting  the Escrow Agent release the
amount of $_______,  _______ shares of Common Stock and _______ shares of
Preferred Stock from the Escrow Fund.

         2. The  undersigned  is  requesting  the amount in Paragraph 1 above on
account of [brief description of the claim] (the "Claim");

         3.       Attached hereto is documentation which supports the amount of
the Claim; and

         4. A copy of this Certificate, including all attachments, has been sent
to the Major Shareholder Agent in the manner set forth in the Escrow Agreement.

         IN WITNESS  WHEREOF,  the undersigned has executed and delivered this
 Certificate as of the ________day of ----------- --------.

                                              USE ACQUISITION CORP.

                                              Name:
                                              Title:

<PAGE>

                                    Exhibit B
                        FORM OF JOINT DISBURSEMENT NOTICE
                                   CERTIFICATE

                   This  certificate is being issued pursuant to Section 3(a) of
that certain Escrow Agreement (the "Escrow  Agreement") dated as of November 28,
2000 by and among  Bernard  J.  Zahren,  Finova  Mezzanine  Capital  Corp.,  AJG
Financial  Services,  Inc.,  Environmental   Opportunities  Fund,  Environmental
Opportunities  Fund Cayman,  Frederic Rose, M&R Associates,  Martin F. Laughlin,
Richard C. Augustine and Michael J. Carolan (each, an "Major Shareholder"),  AJG
Financial Services,  Inc., through its Vice-President,  General Counsel as agent
(the "Major  Shareholder  Agent")  for the Major  Shareholders,  Cinergy  Energy
Solutions,  Inc., a Delaware corporation ("CES"),  U.S. Energy Systems,  Inc., a
Delaware  corporation  ("USE"), and USE Acquisition Corp. a Delaware corporation
(the "Sub" and together with USE and CES, the  "Beneficiaries"),  and Tannenbaum
Helpern Syracuse & Hirschtritt LLP as Escrow Agent (the "Escrow  Agent").  Terms
not defined in this certificate  shall have the meanings set forth in the Escrow
Agreement.  The undersigned,  Sub and the Major  Shareholder  Agent, each hereby
certify that:

         1. On  __________,  ___ Sub  filed a  certificate  (a copy of which was
attached to this certificate with the Escrow Agent) (the "Disputed Certificate")
with the Escrow Agent and the Major  Shareholder  Agent pursuant to Section 3(a)
of the Escrow Agreement.

         2. The Major  Shareholder  Agent  disputed  an element of the  Disputed
Certificate in accordance with the above provision of the Escrow Agreement.

         3. The  parties  hereto are now  jointly  requesting  the Escrow  Agent
release  the amount of  $_______,  _______  shares of Common  Stock and  _______
shares of Preferred  Stock from the Escrow Fund to Sub as the agreed-to  payment
with respect to the Disputed Certificate.

         IN WITNESS WHEREOF,  Sub and the Major  Shareholder Agent have executed
and delivered this Certificate as of the ________day of ___________ ________.

                                                USE ACQUISITION CORP.

                                                Name:
                                                Title:

                                                MAJOR SHAREHOLDER AGENT:

                                                --------------------------

<PAGE>

                                    Exhibit C
                           FORM OF DISBURSEMENT NOTICE
                                   CERTIFICATE

          This  certificate  is being  issued  pursuant to Section  3(c) of that
certain Escrow Agreement (the "Escrow  Agreement") dated as of November 28, 2000
by and among Bernard J. Zahren,  Finova  Mezzanine  Capital Corp., AJG Financial
Services,  Inc., Environmental  Opportunities Fund, Environmental  Opportunities
Fund Cayman,  Frederic Rose,  M&R  Associates,  Martin F.  Laughlin,  Richard C.
Augustine and Michael J. Carolan (each, an "Major  Shareholder"),  AJG Financial
Services, Inc., through its Vice-President, General Counsel as agent (the "Major
Shareholder Agent") for the Major Shareholders,  Cinergy Energy Solutions, Inc.,
a  Delaware  corporation  ("CES"),   U.S.  Energy  Systems,   Inc.,  a  Delaware
corporation ("USE"), and USE Acquisition Corp. a Delaware corporation (the "Sub"
and together  with USE and CES, the  "Beneficiaries"),  and  Tannenbaum  Helpern
Syracuse &  Hirschtritt  LLP as Escrow  Agent (the  "Escrow  Agent").  Terms not
defined  in this  certificate  shall have the  meanings  set forth in the Escrow
Agreement. The undersigned, one of the Beneficiaries, hereby certifies that:

         1. The undersigned is requesting the Escrow Agent release the amount of
$_______,  _______ shares of Common Stock and _______ shares of Preferred  Stock
from the Escrow Fund.

         2. The  undersigned  is  requesting  the amount in Paragraph 1 above on
account of [brief description of the claim] (the "Claim");

         3. Attached hereto is documentation which supports the amount of the
Claim; and

         4. A copy of this Certificate, including all attachments, has been sent
to each Major Shareholder in the manner set forth in the Escrow Agreement.

         IN WITNESS  WHEREOF,  the undersigned has executed and delivered this
Certificate as of the ________day of ----------- --------.

                                          [                            ]

                                            Name:
                                            Title:

<PAGE>

                                    Exhibit D
                        FORM OF JOINT DISBURSEMENT NOTICE
                                   CERTIFICATE

                   This  certificate is being issued pursuant to Section 3(c) of
that certain Escrow Agreement (the "Escrow  Agreement") dated as of November 28,
2000 by and among  Bernard  J.  Zahren,  Finova  Mezzanine  Capital  Corp.,  AJG
Financial  Services,  Inc.,  Environmental   Opportunities  Fund,  Environmental
Opportunities  Fund Cayman,  Frederic Rose, M&R Associates,  Martin F. Laughlin,
Richard C. Augustine and Michael J. Carolan (each, an "Major Shareholder"),  AJG
Financial Services,  Inc., through its Vice-President,  General Counsel as agent
(the "Major  Shareholder  Agent")  for the Major  Shareholders,  Cinergy  Energy
Solutions,  Inc., a Delaware corporation ("CES"),  U.S. Energy Systems,  Inc., a
Delaware  corporation  ("USE"), and USE Acquisition Corp. a Delaware corporation
(the "Sub" and together with USE and CES, the  "Beneficiaries"),  and Tannenbaum
Helpern Syracuse & Hirschtritt LLP as Escrow Agent (the "Escrow  Agent").  Terms
not defined in this certificate  shall have the meanings set forth in the Escrow
Agreement. The undersigned each hereby certify that:

         1. On __________, ___ one of the Beneficiaries (the "Requesting Party")
filed a certificate (a copy of which was attached to this  certificate  with the
Escrow Agent) (the "Disputed  Certificate")  with the Escrow Agent and the other
parties required under Section 3(c) of the Escrow Agreement.

         2. The Major  Shareholder  Agent  disputed  an element of the  Disputed
Certificate in accordance with the above provision of the Escrow Agreement.

         3. The  parties  hereto are now  jointly  requesting  the Escrow  Agent
release the amount of $_______ _______ shares of Common Stock and _______ shares
of Preferred Stock from the Escrow Fund to the Requesting Party as the agreed-to
payment with respect to the Disputed Certificate.

         IN WITNESS  WHEREOF,  the Major  Shareholder  Agent and the  Requesting
Party have executed and delivered  this  Certificate  as of the  ________day  of
___________ ________.

                                        [                             ]

                                          Name:
                                          Title:

                                          MAJOR SHAREHOLDER AGENT:

                                          ---------------------------
                                          Name:
                                          Title:REGISTRATION RIGHTS AGREEMENT

                  THIS REGISTRATION  RIGHTS AGREEMENT  ("Agreement") is dated as
of November 28, 2000 between U.S. ENERGY SYSTEMS,  INC., a Delaware  corporation
(the  "Company")  and the persons  identified on Schedule A annexed hereto (such
person,  together with the persons to whom the benefit of this  agreement may be
properly  assigned,   collectively   referred  to  as  the  "Holders"  and  each
individually, a "Holder").

                                    RECITALS

                  I. Pursuant to, among other things, that certain Agreement and
Plan of  Reorganization  and Merger dated as of November 28, 2000,  by and among
the Company, USE Acquisition Corp. and Zahren Alternative Power Corporation,  as
may be amended  from time to time (the  "Merger  Agreement"),  the  Company  has
agreed to provide the Holders  certain  registration  rights with respect to the
shares  of the  Company's  Common  Stock  (a)  issued  pursuant  to  the  Merger
Agreement, (b) issued and issuable upon the conversion of the Company's Series C
Convertible  Preferred  Stock  issued  pursuant  to the  Merger  Agreement  (the
"Preferred  Stock"),  (c)  issued and  issuable  upon  exercise  of the Series C
Redeemable  Common  Stock  Purchase  Warrants  issued  pursuant  to  the  Merger
Agreement (the "Series C Warrants"), and (d) issued or issuable upon exercise of
the Company's  Series B Warrants  (the "Series B Warrants")  to Purchase  Common
Stock   that  may  be   acquired   by   stockholders   of  Zapco   prior  to  or
contemporaneously  with the  Effective  Date (all of such shares of Common Stock
being referred to herein as the "Restricted Shares").

                  II.  Capitalized  terms used but not otherwise  defined herein
shall have the meanings ascribed thereto in the Merger Agreement.

                                    AGREEMENT

                  NOW, THEREFORE, in consideration of the premises and covenants
set forth in the Subscription Agreement, the parties agree as follows:

                  1.       INCIDENTAL (PIGGYBACK) REGISTRATION RIGHTS.

                                       1

<PAGE>

                           (a) Subject to  the limitations  set  forth  in  this
Agreement, if  the  Company  at  any time  more  than twelve  months after  the
Effective  Date (or earlier (but in no event earlier than  nine months after the
Effective  Date)  if the  Company in  good faith  believes that the registration
statement  referred to  below will continue  to be in effect and effective after
the first anniversary of the Effective Date) and prior to  the tenth anniversary
of the Effective Date proposes to file on its behalf or on behalf of  any  other
Person (the "Other Person")a registration statement (a "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), on any form
(other than  a Registration Statement  on Form S-4 or S-8 or  any successor form
not  available for registering the Restricted Shares, or any form for securities
to be offered in a transaction of the type referred  to  in Rule  145 under  the
Securities Act or to employees of the Company  pursuant to any employee  benefit
plan,  respectively)  for the general registration  of securities to be sold for
cash with respect to its Common Stock or any other class of equity security  (as
defined in Section 3(a) (11) of the Securities Exchange Act of 1934, as amended)
of the Company, it will give written notice to the  Holders at least thirty (30)
days  before the initial filing with the Securities and Exchange Commission (the
"Commission")  of such Registration  Statement, which notice shall set forth the
intended  method of disposition of the  securities proposed to be registered  by
the  Company.  The notice shall offer to include in  such filing  the  aggregate
number of shares of Restricted  Shares as the Holders may request subject to the
limitations  set forth in this Agreement.

                  (b) If any Holder desires to have Restricted Shares registered
under this  Section 1, such Holder  shall  advise the Company in writing  within
fifteen  (15) days after the date of  receipt  of such  offer from the  Company,
setting forth the amount of such  Restricted  Shares for which  registration  is
requested.  The  Company  shall  thereupon  include in such filing the number of
shares of Restricted  Shares for which  registration  is so requested;  provided
that nothing  herein shall  prevent the Company from  abandoning or delaying any
such  registration  at any time. In the event that the proposed  registration by
the  Company  is,  in whole or in  part,  an  underwritten  public  offering  of
securities  of the Company,  the Company shall not be required to include any of
the Restricted  Shares in such  underwriting  unless the Holder agrees to accept
the offering on the same terms and conditions as the shares of Common Stock,  if
any,  otherwise being sold through  underwriters  under such  registration,  and
provided, further, that if the managing underwriter advises the Company that the
inclusion of all Restricted Shares proposed to be included by the Holders in the
underwritten  public offering and other issued and outstanding  shares of Common
Stock proposed to be included therein by the persons other than the Holders (the
"Other Shares") would jeopardize the success of the Company's offering, then the
Company  shall be required to include in the offering (in addition to the number
of shares to be sold by the  Company and the Other  Person)  only that number of
Restricted Shares that the managing underwriter believes will not jeopardize the
success of the Company's  offering and the number of Restricted Shares and Other
Shares not included in such  underwritten  public  offering shall be reduced pro
rata  based  upon the number of shares of  Restricted  Shares  and Other  Shares
requested by the holders  thereof to be registered in such  underwritten  public
offering.  In the event the Company chooses a registration form which limits the
size  offering  either in terms of the  number of shares or dollar  amount,  the
Company  shall not be required to include in the  offering  (in  addition to the
number of shares to be sold by the Company) Restricted Shares which would exceed
such limits.

                                       2

<PAGE>

                  (c) Notwithstanding anything to the contrary contained in this
Section  1, in the event  that there is a firm  commitment  underwritten  public
offering of  securities  of the  Company  pursuant  to a  registration  covering
Restricted  Shares and a Holder does not elect to sell such Holder's  Restricted
Shares to the  underwriters of the Company's  securities in connection with such
offering  (and the Company  nonetheless  permits  such  shares to be  registered
pursuant to such registration statement), such Holder shall refrain from selling
such  Restricted  Shares so  registered  pursuant  to this  Section 1 during the
period of distribution of the Company's  securities by such underwriters and the
period in which the  underwriting  syndicate  participates  in the after market;
provided,  however,  that such Holder shall,  in any event,  be entitled to sell
such Holder's  Restricted  Shares commencing on the 90th day after the effective
date of such registration statement.

                  2.       DEMAND REGISTRATION RIGHTS.

                           (a) If  at  any time  at least  12 months  after  the
Effective Date  and prior to  the  tenth  anniversary of the Effective Date (the
"Registration Period"), the Company shall  receive a written request or requests
from  the  Holders of  Restricted  Shares  holding at  least 33 1/3% of the then
remaining Restricted Shares (including for the purposes of such computation  the
shares of Common  Stock  previously issued  upon  exercise or  conversion of the
Series B   Warrants  and Series  C Warrants  (collectively, the "Warrants") and
Preferred  Stock , as  the  case may be, and  the shares  of Common  Stock  then
issuable upon exercise or conversion of the Warrants and Preferred Stock, as the
case may be) with  an aggregate market  value (based  on the last reported sales
price of the Common Stock as of the business day immediately  preceding the date
that such demand is made) of not less than $750,000 (a "Registration  Request")
that the Company effect the registration on Form  S-3, of  all or any portion of
the Restricted Shares owned by  such holder(s),  the Company  will,  if eligible
to  do  so  on  such form: (i) promptly  give  written notice  of  the  proposed
registration  to all other  Holders of Restricted Shares from whom a request has
not  been  received;  and (ii) shall use  reasonable  efforts  to  cause  the
Restricted  Shares  to be  registered  under  the Securities Act and to promptly
effect and comply with  all such  requirements as may be necessary to permit the
sale or  other transfer  of  such Restricted Shares. The Company  shall  not  be
obligated  to (x)  conduct  a  special audit of its financial statements, unless
the Commission  requests such special audit or in the  case  the Holders seeking
the registration of such Restricted Shares undertake to pay the costs associated
with  such audit nor  to  (y) file and cause to become effective more than three
registration  statements in which Restricted Shares  are  to  be  sold  pursuant
to  this  Section   2(a)  (the   "Quantity Requirement).

                  (b)  Notwithstanding  the  foregoing,  the Company  may, for a
period  not to exceed 90 days (the  "Delay  Period")  postpone  the  filing  the
registration  statement  if the  Company  determines  in good  faith  that  such
registration (i) might interfere with or affect the negotiation or completion of
any material  transaction that is being pursued by the Company (whether or not a

                                       3

<PAGE>

final decision has been made to effect such transaction) or (ii) involve initial
or continuing disclosure  obligations that might not be in the best interests of
the Company's  stockholders;  provided,  however,  that the Delay Periods in any
twelve  consecutive  months may not exceed 180  consecutive  days.  If,  after a
registration  statement  becomes  effective,  the Company advises the Holders of
Restricted  Shares registered  pursuant to such registration  statement that the
Company  considers it appropriate for the registration  statement to be amended,
the Holders of  Restricted  Shares that have so been  registered  shall  suspend
immediately any further sales of such shares until the Company advises them that
the registration statement has been amended, provided, however, that the Company
shall, in good faith, amend such registration  statement as promptly as it deems
appropriate  and  provided,  further,  that the period in which such  offers and
sales shall be suspended shall be added to the  distribution  period  calculated
pursuant to Section 3(c) herein.

                  (c) In the event that after making a Registration Request, the
person(s)  making  the  request  (i)  withdraw  same,  (ii) do not  include  (or
withdraw) their Restricted Shares from the Registration Statement to be filed or
filed  pursuant to such request or (iii) do not comply with Section 3(b) hereof,
such request shall  nonetheless be counted in  calculating  whether the Quantity
Requirement has been satisfied.

                  3.       REGISTRATION PROCEDURES.

                           (a)      In connection  with  the filing  of a
registration statement pursuant hereto, the Company will:

                           (i)      prepare and file with the Commission a
registration statement with respect to such  securities  and use its  reasonable
efforts  to cause  such  registration statement to  become and  remain effective
for the  period of  distribution contemplated thereby (as determined pursuant to
Section 3(c) herein);

                           (ii)  prepare  and  file  with  the  Commission  such
amendments and supplements to  such  registration statement and  the  prospectus
used in connection  therewith  as  may be  necessary to  keep  such registration
statement effective  (and to  remain effective for  the period  of  distribution
contemplated  thereby  (as determined pursuant to Section 3(c) herein))  and  to
comply with the  provisions of the  Securities  Act with respect to the  sale or
other disposition of all securities  covered by such registration statement;

                           (iii) furnish to the Holders (except as may otherwise
be expressly provided or as the context requires,  the term  Holders  as used in
this Section 3(a) shall refer only to those  persons whose  securities are being
registered)  such number of copies of a summary  prospectus or other prospectus,
including a  preliminary prospectus,  in conformity with the requirements of the
Securities Act, and such other documents, as the Holders may reasonably request;

                           (iv) use its  reasonable  efforts  to register or
qualify  the securities covered by such  registration statement under such other
securities or  blue sky  laws of such jurisdictions  within the United States as
the Holders of  such securities  shall reasonably  request  (provided,  however,

                                       4

<PAGE>

the Company shall not be obligated to qualify  as a  foreign  corporation  to do
business  under  the  laws of any jurisdiction in which it is not then qualified
or to file any  general consent  to service or  process), and  do  such  other
reasonable  acts and things as may be required  of it  to enable the  Holders to
consummate  the  disposition  in such jurisdiction  of the securities covered by
such registration statement;

                           (v) enter  into  customary  agreements (including an
underwriting agreement in customary form)  and take  such other actions  as  are
reasonably  required in order to expedite or facilitate the  disposition of such
Common Stock and as shall be required in connection with the action taken by the
Company; and

                           (vi) promptly notify in  writing the Holders  of  the
happening of any event, during the  period of distribution, as a result of which
the  registration  statement includes an untrue  statement of a material fact or
omits to state any material fact required to be stated therein  or necessary  to
make  the  statements therein not misleading in light of the  circumstances then
existing (in which case, if so requested by the Company in writing,  the Holders
shall  promptly take action to cease making any offers of the Restricted  Shares
until receipt and distribution of a revised or supplemental prospectuses).

                  (b) In connection with any registration hereunder,  the Holder
will (i) prior to or  contemporaneously  with issuing a Registration  Request or
notifying the Company of such Holder's intent to include  Restricted Shares in a
registration  statement  to be filed by the  Company,  agree  in  writing  (such
writing to be in form and substance reasonably  satisfactory to the Company) to,
in the case of the Preferred Stock and the Warrants, convert or exercise, as the
case may be, the  securities  necessary  to provide  such  Holder that number of
shares of Common Stock to be sold  pursuant to the  registration  statement  not
later  than  immediately  prior  to the  effective  date  of  such  registration
statement,  (ii) furnish the Company in writing such information with respect to
such Holder and the proposed distribution by such Holder as reasonably requested
by the Company and all such information  necessary in order to assure compliance
with Federal and applicable state securities laws and (iii) if the Holder elects
to sell the Restricted Shares to underwriters,  enter into an agreement with the
managing  underwriters  in such  form  and  containing  such  provisions  as are
customary in the  securities  business  for such an  arrangement  between  major
underwriters  and  companies  of the  Company's  size  and  investment  stature,
provided that such agreement shall not contain any provisions  applicable to the
Company which are inconsistent with the provisions hereof and, provided further,
that the time and place of the  closing of such  agreement  shall be as mutually
agreed upon between the Company and the managing underwriter.

                  (c) For  purposes  of  Section  3(a)  hereof,  the  period  of
distribution  of  Restricted  Shares in a firm  commitment  underwritten  public
offering  shall be deemed to extend until each  underwriter  has  completed  the
distribution of all securities purchased by it (but in no event more than twelve
months from the effective date of such registration  statement),  and the period
of distribution of Restricted Shares in any other  registration  shall be deemed
to extend until the earlier of the sale of all Restricted Shares covered thereby
or twelve  months after the  effective  date  thereof.  The Company shall not be
required to keep a  registration  statement  current after the expiration of the
distribution  period with respect to the securities  registered pursuant to such
registration statement.

                                       5
<PAGE>

                  (d) In connection  with a  distribution  of Restricted  Shares
effected pursuant to a registration  statement on a non-underwritten  basis, the
Holders shall provide the Company with information regarding the status of their
sales of such Restricted  Shares,  as and when such  information is requested by
the Company.

                  4.       EXPENSES.

                  (a) All expenses  incurred in complying  with this  Agreement,
including,  without  limitation,  all  registration  and filing  fees,  printing
expenses,   fees  and  disbursements  of  counsel  for  the  Company,  fees  and
disbursements  of legal  counsel  to the  Holders  (whose  securities  are being
registered),  if any, (which fees and  disbursements  shall not exceed $3,000 in
the  aggregate  for any  registration  of  Restricted  Shares  pursuant  to this
Agreement (the "Permitted Amount")) and expenses (including  attorneys' fees) of
complying with the securities or blue sky laws of any  jurisdictions,  except to
the extent  required to be paid by  participating  selling  security  holders by
state  securities  or blue sky laws,  and except as  provided  by  Section  2(a)
herein, shall be paid by the Company.

                  (b)  Notwithstanding  anything  to the  contrary  herein,  the
Holders whose  securities  are being  registered  (and not the Company) shall be
liable for (i) fees and  disbursements  of legal  counsel to the  Holders to the
extent  same  exceed  the  Permitted  Amount,  (ii)  all  fees,   discounts  and
commissions to any underwriter or broker,  if any, and (iii) all transfer taxes,
if any.

                  5.       INDEMNIFICATION.

                           (a) INDEMNIFICATION  BY THE COMPANY.  In the event of
any registration of any Restricted  Shares  under the Securities Act pursuant to
this  Agreement, the Company shall indemnify and hold harmless the Holders, each
underwriter  of the  Restricted  Shares, if any, each  such broker or any  other
person, if any, who controls any of the foregoing persons, within the meaning of
the Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which  any of the  foregoing  persons  may become  subject under the
Securities  Act or  otherwise, insofar  as  such  losses, claims, damages  or
liabilities (or actions in respect  thereof)  arise  out of or are based upon an
untrue  statement  of a material fact  contained in  the Registration  Statement
under which such Restricted Shares were registered under the Securities Act, any
final prospectus contained therein,  or any amendment or supplement  thereto, or
arise out of or are based upon the  omission  to state  therein a material  fact
required to be stated  therein or necessary to make the  statements  therein not
misleading  or, with  respect to any  final prospectus, necessary  to make  the
statements  therein in  light of the  circumstances  under which they were made,
not misleading;  and shall reimburse the Holders, such underwriter,  broker and
each such controlling person for any legal expenses  reasonably  incurred by any
of them in connection with  defending any such loss, claim, damage, liability or
action;  provided, however,  that  the  Company  shall not be  obligated  to  so
indemnify  the Holders, such underwriter, broker or any such controlling  person
insofar as such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged  omission

                                       6
<PAGE>

made in  said Registration Statement, said final prospectus or said amendment or
supplement in reliance upon and in conformity with  information furnished to the
Company or such  underwriter  or broker by one or more of the Holders in writing
for use in preparation thereof.

                  (b) INDEMNIFICATION BY HOLDERS.  Before Restricted Shares held
by the Holders shall be included in any Registration  Statement pursuant to this
Agreement,  the  Holder  whose  Restricted  Shares  are being  registered  shall
indemnify  and hold  harmless  (in the same manner and to the same extent as set
forth in Section  5(a)  hereof  for the  indemnification  of the  Holders by the
Company) the Company,  each director of the Company, each officer of the Company
who shall sign such  Registration  Statement  and any person  who  controls  the
Company  within the meaning of the  Securities  Act,  with respect to any untrue
statement  or omission  from such  Registration  Statement  or final  prospectus
contained  therein  or any  amendment  or  supplement  thereto,  if such  untrue
statement  or omission  was (i) made in  reliance  upon and in  conformity  with
information  furnished  to the  Company by such Holder in writing for use in the
preparation of such  Registration  Statement,  final  prospectus or amendment or
supplement or (ii) contained in any Registration Statement which was utilized by
such  Holder or any  controlling  person or  affiliate  of the Holder  after the
Holder was  notified,  in accordance  with Section  3(a)(vi)  hereof,  that such
Registration  Statement  contained  an untrue  statement  of a material  fact or
omitted to state any material fact.

                  (c) INDEMNIFICATION  PROCEDURES.  Promptly after receipt by an
indemnified  party of notice of the commencement of any action involving a claim
referred  to in this  Section  5, such  indemnified  party  will,  if a claim in
respect thereof is made against any indemnifying  party,  give written notice to
the latter of such claim and/or the  commencement  of such  action.  In case any
such action is brought against an indemnified party, the indemnifying party will
be entitled to participate in and assume the defense  thereof,  jointly with any
other indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying  party to such indemnified  party of its election to assume the
defense thereof,  the  indemnifying  party shall be responsible for any legal or
other  expenses  subsequently  incurred  by the  latter in  connection  with the
defense  thereof,  provided that if any indemnified  party shall have reasonably
concluded  that  there  may be one or  more  legal  defenses  available  to such
indemnified party which conflict in any material respect with those available to
the indemnifying  party, or that such claim or litigation involves or could have
an effect upon matters beyond the scope of the indemnity  agreement  provided in
this Section 5, such  indemnifying  party shall reimburse such indemnified party
and shall not have the right to assume the  defense of such  action on behalf of
such  indemnified  party  and  such  indemnifying  party  shall  reimburse  such
indemnified  party and any person  controlling such  indemnified  party for that
portion of the fees and  expenses  of any counsel  retained  by the  indemnified
party  which are  reasonably  related to the  matters  covered by the  indemnity
agreement  provided in this Section 5. The indemnifying party shall not make any
settlement  of any claims  indemnified  against  thereunder  without the written
consent  of the  indemnified  party  or  parties,  which  consent  shall  not be
unreasonably withheld.  Notwithstanding the foregoing provisions of this Section

                                       7
<PAGE>

5, if pursuant to an  underwritten  public  offering  of the Common  Stock,  the
Company, the Holders and the underwriters enter into an underwriting or purchase
agreement  relating  to  such  offering  which  contains   provisions   covering
indemnification among the parties thereto in connection with such offering,  the
indemnification  provisions  of this Section 5 shall be deemed  inoperative  for
purposes of such offering.

<PAGE>

                  6.       CERTAIN LIMITATIONS ON REGISTRATION RIGHTS.

                           Notwithstanding  the  other provisions  of  this
Agreement, the Company shall not be obligated to register the Restricted  Shares
of a Holder if, in the opinion of counsel  to the  Company,  the sale  or  other
disposition of such  Holder's Restricted Shares may be effected pursuant to Rule
144(k) (including the  related provisions of  Rule 145) promulgated  under  the
Securities Act.

                  7.       MISCELLANEOUS.

                           (a) NOTICE GENERALLY. Any notice, demand, request,
consent, approval, declaration, delivery or other communication  hereunder to be
made pursuant to the provisions of this Agreement shall be sufficiently given or
made if in writing and either (i) delivered in person with receipt acknowledged,
(ii) delivered  by  reputable overnight  courier, telecopied and  confirmed
separately in writing by a copy mailed as follows or (iii) sent by registered or
certified mail,  return receipt requested, postage prepaid, addressed as follows
(or such  other address as may  be designated by notice  given pursuant to  this
Section 7):

 if to the Company, at    U.S. Energy Systems, Inc.
                          One North Lexington Avenue, 4th Floor
                          White Plains, New York 10601
                          Attention: President

     with a copy to       Robinson Brog Leinwand Greene Genovese & Gluck P.C.
                          1345 Avenue of the Americas
                          New York, New York 10105-0143
                          Attn: Allen J. Rothman, Esq.

if to the Holders, at     the address of the Major Shareholder Agent (as
                          defined in the Indemnification Agreement) set forth in
                          Section 19 of the Indemnification Agreement.

The  Company  shall have no  liability  for the  failure of any Holder to notify
Company of a Holder=s address change.

                  (b) SUCCESSORS AND ASSIGNS.  This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto;  provided,  however,  that,  the Holders'  rights  hereunder  may not be

                                       8
<PAGE>

assigned or transferred without the prior written consent of the Company,  which
may be withheld in the Company's sole and absolute discretion.

                  (c)  GOVERNING  LAW. This  Agreement  shall be governed by the
laws of the State of Delaware, without regard to the provisions thereof relating
to choice of laws.

                  (d) SEVERABILITY.  Wherever  possible,  each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provisions shall be ineffective to the extent
of such  prohibition or invalidity,  without  invalidating the remainder of such
provision or the remaining provisions of this Agreement.

                  (e) ENTIRE AGREEMENT;  AMENDMENTS.  This Agreement constitutes
the entire  agreement of the parties with respect to the subject  matter hereof.
This  Agreement may not be modified or amended  except by a writing  executed by
(i) the Company and (ii)  holders of a majority  of the  Restricted  Shares then
outstanding.

                  (f) COUNTERPARTS. This Agreement may be executed in any number
of separate  counterparts,  each of which  shall  collectively  and  separately,
constitute one agreement.

                  (g)  EFFECTIVE   DATE.   This  Agreement  shall  be  effective
beginning  with the Effective  Date and no party hereto shall have any rights or
obligations hereunder until such time.

                  (h) DEFINITION OF RESTRICTED SHARES.  Notwithstanding anything
to the contrary herein the term "Restricted  Shares" shall not include shares of
Common  Stock  that  are  (i)  disposed  of in  accordance  with a  registration
statement  filed  pursuant to this  Agreement or (ii)  distributed to the public
pursuant to Rule 144 under the Securities Act.

                  (i) ADDITIONAL  HOLDERS.  The persons who are  stockholders of
Zahren Alternative Power Corporation as of the date of the Merger Agreement may,
prior to the Effective  Date and subject to applicable  law,  become  parties to
this Agreement with respect to the Restricted  Shares  issuable to them pursuant
to the Merger  Agreement.  In such  event,  the Company is  authorized  to amend
Schedule A annexed hereto to give effect to such addition.

                                       9
<PAGE>

                  IN WITNESS WHEREOF,  the Company and the Holders have executed
this Agreement as of the date first above written.

                            U.S. ENERGY SYSTEMS, INC.

                            By: /s/ Goran Mornhed
                                    ------------------------
                                    Goran Mornhed, President

HOLDER

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

Finova Mezzanine Capital Corp.

By: /s/ Kevin Pearce
------------------------------------

AJG Financial Services, Inc.

By: /s/ Mark Strauch
-----------------------------------

Environmental Opportunities Fund

By: /s/ Kenneth Leung
-----------------------------------

Environmental Opportunities Fund Cayman

By: /s/ Kenneth Leung
-------------------------------------

/s/ Frederic Rose
------------------------------------
    Frederic Rose

                                       10
<PAGE>

M&R Associates

By: /s/ Frederic Rose
--------------------------------

/s/ Martin F. Laughlin
------------------------------------
    Martin F. Laughlin

/s/ Richard J. Augustine
------------------------------------
    Richard J. Augustine

/s/ Michael Carolan
------------------------------------
    Michael J. Carolan

                                       11

<PAGE>

                                   Schedule A

Name and Address of Holder

Bernard J. Zahren
the address of the Major  Shareholder  Agent
(as defined in the  Indemnification Agreement)
set forth in Section 19 of the Indemnification Agreement.

Finova Mezzanine Capital Corp.
the address of the Major Shareholder Agent
(as defined in the Indemnification Agreement)
set forth in Section 19 of the Indemnification
Agreement.

AJG Financial Services, Inc.
the address of the Major Shareholder Agent
(as defined in the Indemnification Agreement)
set forth in Section 19 of the Indemnification
Agreement.

Environmental  Opportunities Fund
the address of the Major Shareholder Agent
(as defined  in the  Indemnification  Agreement)
set forth in Section 19 of the Indemnification Agreement.

Environmental  Opportunities Fund Cayman
the address of the Major Shareholder Agent
(as defined in the Indemnification Agreement)
set forth in Section 19 of the Indemnification Agreement.

                                       12

<PAGE>

Frederic Rose
the address of the Major Shareholder Agent
(as defined in the  Indemnification Agreement)
set forth in Section 19 of the Indemnification Agreement.

M&R Associates
the address of the Major Shareholder Agent
(as defined in the Indemnification Agreement)
set forth in Section 19 of the Indemnification Agreement.

Martin F. Laughlin
the address of the Major Shareholder Agent
(as defined in the  Indemnification Agreement)
set forth in Section 19 of the Indemnification Agreement.

Richard J. Augustine
the address of the Major Shareholder Agent
(as defined in the  Indemnification Agreement)
set forth in Section 19 of the Indemnification Agreement.

Michael J. Carolan
the address of the Major Shareholder Agent
(as defined in the Indemnification Agreement)
set forth in Section 19 of the Indemnification Agreement.

                                       13

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