SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(MARK ONE)

[X]        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
           ACT OF 1934

           For the quarterly period ended July 31, 2000

[  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

           FOR THE TRANSACTION PERIOD FROM ______________ TO ______________

                             COMMISSION FILE NUMBER:
                                     0-10238

                            U.S. ENERGY SYSTEMS, INC.

         Delaware                                              52-1216347
   (State or Jurisdiction of                                 (I.R.S. Employer
    Incorporation or Organization)                       Identification Number)


                              515 N. Flagler Drive
                                    Suite 702
                            West Palm Beach, FL 33401
                    (Address of Principal Executive Offices)

                                 (561) 820-9779
                (Issuer's Telephone Number, Including Area Code)

                                       N/A
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

    Check whether the issuer:  (1) has filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.
                                            Yes  [X]          No  [  ]

    Check whether the registrant  filed all documents and reports required to be
filed by  Section  12, 13 or 15(d) of the  Exchange  Act after  distribution  of
securities under a plan confirmed by a court.
                                            Yes  [X]          No  [  ]

    State the number of shares outstanding of each of issuer's classes of common
equity, as of September 9, 2000:

            Title of Class                           Number of Shares
            --------------                           ----------------
               Common                                   7,076,332

   Transitional Small Business Disclosure Format (check one): Yes  [  ]  No  [X]

<PAGE>

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
<S>
                                                                            <C>             <C>
                                                                            July 31,        January 31,
                                                                              2000             2000
                                                                            ---------        ----------
                                                                           (unaudited)        (audited)

 ASSETS
 Current assets:
    Cash                                                                    $ 2,325,000      $   301,000
    Accounts receivable (less allowance for doubtful accounts $15,000)        1,456,000          532,000
    Notes receivable - current portion                                           20,000           20,000
    Other current assets                                                        441,000          352,000
    Life insurance claims receivable                                                  -        1,001,000
                                                                             ----------        ---------
      Total current assets                                                    4,242,000        2,206,000

 Property, plant and equipment, net                                           5,947,000        5,881,000
 Notes receivable, less current portion                                       1,754,000        1,752,000
 Accrued interest receivable                                                    459,000          459,000
 Investments in joint ventures:
    Lehi Independent Power Associates, L.C.                                     856,000          886,000
    Plymouth Cogeneration Limited Partnership                                   456,000          470,000
    Marathon Capital, LLC                                                     1,038,000                -
 Deferred acquisition costs                                                     480,000          397,000
 Deferred financing costs                                                       615,000          480,000
 Goodwill, net                                                                1,724,000        1,796,000
 Other assets                                                                    76,000           27,000
                                                                             ----------       ----------
                                                                            $17,647,000      $14,354,000
                                                                             ==========       ==========
 LIABILITIES
 Current liabilities:
    Current portion of long-term debt                                       $   188,000      $   169,000
    Notes payable - bank                                                        300,000          300,000
    Accounts payable and accrued expenses                                     1,370,000          717,000
    Payable to estate of former officer                                         290,000          375,000
    Litigation settlement payable                                                     -          900,000
                                                                             ----------        ---------
      Total current liabilities                                               2,148,000        2,461,000

 Long-term debt, less current portion                                           577,000          384,000
 Convertible subordinated secured debentures                                    366,000          366,000
 Advances from joint ventures                                                   102,000           90,000
                                                                             ----------        ---------
      Total liabilities                                                       3,193,000        3,301,000
                                                                             ----------        ---------
 Minority interests                                                             559,000          559,000
                                                                             ----------        ---------
 Commitments and contingencies

 STOCKHOLDERS' EQUITY
 Preferred stock, $.01 par value, authorized 10,000,000 shares:
    Series A, cumulative, convertible, issued and outstanding 1,138,888
      shares (liquidation value of $10,307,002)                                  11,000            3,000
    Series B, cumulative, convertible, issued and outstanding 477 shares              -                -
 Common stock, $.01 par value, authorized 50,000,000 shares; issued
    6,450,916 shares and 5,364,124 shares, respectively                          64,000           54,000
 Treasury stock, 7,600 shares of common stock at cost                           (15,000)         (15,000)
 Stock subscription receivable                                               (7,741,000)               -
 Additional paid-in capital                                                  39,320,000       18,425,000
 Accumulated deficit                                                        (17,744,000)      (7,973,000)
                                                                             ----------       ----------
      Total stockholders' equity                                             13,895,000       10,494,000
                                                                             ----------      -----------
                                                                           $ 17,647,000     $ 14,354,000
                                                                             ==========       ==========

</TABLE>
                 See notes to consolidated financial statements

                                        2

<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
<S>
                                                            <C>               <C>             <C>              <C>

                                                           Three Months Ended July 31,      Six Months Ended July 31,
                                                           ---------------------------      -------------------------
                                                               2000            1999               2000           1999
                                                            ----------      ---------        -----------     ---------
Revenues                                                   $ 2,154,000      $ 961,000        $ 3,262,000     $ 1,863,000
                                                            ----------      ---------        -----------     ----------
Costs and expenses:
    Operating expenses                                         888,000        642,000          1,629,000       1,236,000
    Administrative expenses                                    877,000        475,000          1,368,000         942,000
    Depreciation                                               173,000        144,000            338,000         278,000
    Loss from joint ventures                                     5,000         18,000             44,000          42,000
                                                             ---------      ---------          ---------       ---------
                                                             1,943,000      1,279,000          3,379,000       2,498,000
                                                             ---------      ---------          ---------       ---------
                                                               211,000       (318,000)          (117,000)       (635,000)

Interest income                                                 40,000         68,000             55,000         138,000
Interest expense                                               (27,000)       (23,000)           (63,000)        (58,000)
Minority interest                                                    -         (6,000)                 -         (11,000)
Income (loss) before non-recurring and                         -------        --------           -------         -------
    extraordinary items                                    $   224,000      $(279,000)       $  (125,000)    $  (566,000)
                                                               =======        ========           =======         =======
Compensation arising from issuance of options to
    new management team                                      1,313,000              -          1,313,000               -
Provision for severence and repositioning of the Company       581,000              -            581,000               -
Litigation settlement costs                                          -      1,138,000              2,000       1,138,000
                                                             =========       =========          =========       =========
Income (loss) before extraordinary item                     (1,670,000)    (1,417,000)        (2,021,000)     (1,704,000)

Extraordinary gain on exchange of
    debentures to preferred stock                                    -              -                  -          69,000
                                                             =========       =========          =========       =========
Net loss                                                   $(1,670,000)   $(1,417,000)       $(2,021,000)    $(1,635,000)
                                                             =========      =========          =========       =========
Dividends on preferred stock                                   (67,000)       (64,000)          (135,000)       (119,000)
Dividends on beneficial conversion of preferred stock       (7,750,000)             -         (7,750,000)              -
                                                             =========      =========          =========       =========
Loss applicable to common stock                            $(9,487,000)   $(1,481,000)       $(9,906,000)    $(1,754,000)
                                                            ==========      =========          =========       =========
Loss per share of common stock - basic and diluted:
    Loss applicable to common stock before
       extraordinary item                                  $    (1.50)    $     (0.29)       $    (1.65)     $   (0.35)
                                                            =========       =========          =========       =========
    Net loss applicable to common stock                    $    (1.50)    $     (0.29)       $    (1.65)     $   (0.34)
                                                            =========       =========          =========       =========
Weighted average number of common shares outstanding        6,313,317       5,153,005          5,995,940       5,154,718
                                                            =========       =========          =========       =========




</TABLE>

                 See notes to consolidated financial statements

                                        3
<PAGE>


<TABLE>
<CAPTION>
<S>
                                                        <C>                        <C>                          <C>
                                                         Preferred Stock-Series A  Preferred Stock-Series B     Treasury Stock
                                                         ------------------------  ------------------------     --------------
                                                            Number                 Number                       Number
                                                            of Shares     Amount   of Shares      Amount        of Shares    Amount
                                                         -------------    ------   ---------      -------       ----------   ------
BALANCE , JANUARY 31, 2000                                  277,778      $ 3,000     509           (*)           (7,600)   $(15,000)

Cash paid for fractional shares

Shares issued pursuant to anti-dilution provision
     of agreement with Energy Systems Investors,
     LLC and Lawrence Schneider

Shares issued for investment in Marathon
     Capital, LLC

Shares issued for conversion of
     Preferred Stock Series B                                                        (32)          (*)

Shares issued for exercised warrants

Shares issued for excercised options

Shares issued for excercised
     preferred option                                       861,110      $ 8,000

Compensation arising from issuance of
     options to new management team

Net Loss for the six months
     ended July 31, 2000

Dividends on Preferred Stock:
     Series A
     Series B

Dividends on beneficial conversion of
     Preferred Stock Series A

Stock subscription receivable on option exercised

                                                          ---------       ------    -----      ----               -----     -------
BALANCE, JULY 31, 2000                                    1,138,888      $11,000     477      $ -                (7,600)  $(15,000)
                                                          =========       ======    =====      ====               =====     ======
(*) Less than $1,000

</TABLE>

<PAGE>


<TABLE>
<CAPTION>
<S>                                                  <C>               <C>         <C>        <C>            <C>            <C>
                                                                                Common Stock
                                                                       ----------------------------------
                                                                                              Additional
                                                     Subscription      Number                 Paid-in       Accumulated
                                                     Receivable        of Shares   Amount     Capital       Deficit         Total
                                                     -------------     ---------   -------    ----------    ----------      -----
BALANCE , JANUARY 31, 2000                           $      -          5,356,524  $ 54,000   $18,425,000    $(7,973,000)$10,494,000

Cash paid for fractional shares                                               (2)                                                -

Shares issued pursuant to anti-dilution provision
     of agreement with Energy Systems Investors,
     LLC and Lawrence Schneider                                           24,069        (*)           (*)                        -

Shares issued for investment in Marathon
     Capital, LLC                                                        200,000     2,000       960,000                    962,000

Shares issued for conversion of
     Preferred Stock Series B                                              8,777        (*)                                      -

Shares issued for exercised warrants                                     689,448     7,000     2,751,000                  2,758,000

Shares issued for excercised options                                     164,500     1,000       515,000                    516,000

Shares issued for excercised
     preferred option                                                                          7,741,000                  7,749,000

Compensation arising from issuance of
     options to new management team                                                            1,313,000                  1,313,000

Net Loss for the six months
     ended July 31, 2000                                                                                   (2,021,000)   (2,021,000)

Dividends on Preferred Stock:
     Series A                                                                                   (113,000)                  (113,000)
     Series B                                                                                    (22,000)                   (22,000)

Dividends on beneficial conversion of
     Preferred Stock Series A                                                                  7,750,000   (7,750,000)          -

Stock subscription receivable on option exercised         (7,741,000)                                                    (7,741,000)

                                                          ----------   ---------   ------     ----------     ----------   ----------
BALANCE, JULY 31, 2000                                   $(7,741,000)  6,443,316 $ 64,000   $ 39,320,000   $(17,744,000) $13,895,000
                                                          ==========   =========   ======     ==========     ==========   ==========
(*) Less than $1,000

</TABLE>
                 See notes to consolidated financial statements

                                       4
<PAGE>


                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>
                                                                                               <C>              <C>

                                                                                               Six Months Ended July 31,
                                                                                                2000              1999
                                                                                               ------------   ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                                    $(2,021,000)   $ (1,635,000)
   Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
     Depreciation and amortization                                                                 338,000         278,000
     Equity in loss of joint ventures                                                               44,000          37,000
     Minority interest                                                                                   -          10,000
     Gain from exchange of debentures for preferred stock                                                -         (69,000)
     Write-down of assets                                                                           56,000               -
     Compensation recognized for granting of stock options                                       1,313,000               -
     Changes in:
       Accounts and notes receivable, trade                                                       (924,000)        203,000
       Other current assets                                                                        (89,000)         78,000
       Other assets                                                                               (184,000)       (107,000)
       Accounts payable and accrued expenses                                                       653,000         (75,000)
       Litigation settlement payable                                                              (900,000)      1,126,000
       Life insurance proceeds, net of costs and expenses                                          916,000               -
                                                                                                  --------       ---------
     Net cash used in operating activities                                                        (798,000)       (154,000)
                                                                                                  ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Loans to Reno Energy, LLC                                                                        (2,000)        (72,000)
   Repayments of loan by Reno Energy, LLC                                                                -         131,000
   Investment in Marathon Capital, LLC                                                             (76,000)              -
   Acquisition of equipment and leasehold improvements                                            (388,000)       (190,000)
   Deferred acquisition costs                                                                      (83,000)       (108,000)
                                                                                                   -------         -------
     Net cash used in investing activities                                                        (549,000)       (239,000)
                                                                                                   -------         -------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments of notes payable                                                                             -        (100,000)
   Payment of long-term debt                                                                       (97,000)        (76,000)
   Proceeds from long-term debt                                                                    309,000          82,000
   Proceeds from sale of preferred stock                                                                 -         234,000
   Proceeds from exercise of options and warrants                                                3,282,000               -
   Purchase of treasury shares                                                                           -         (12,000)
   Dividends on preferred stock                                                                   (135,000)       (119,000)
   Advances from joint ventures                                                                     12,000          17,000
                                                                                                 ---------          -------
     Net cash provided by financing activities                                                   3,371,000          26,000
                                                                                                 ----------        --------
NET INCREASE (DECREASE) IN CASH                                                                  2,024,000        (367,000)
Cash - beginning of period                                                                         301,000         776,000
                                                                                                 ----------       ---------
   CASH - END OF PERIOD                                                                        $ 2,325,000    $    409,000
                                                                                                 ----------       ---------
Supplemental disclosure of cash flow information:
   Cash paid for interest                                                                      $    68,000    $     38,000

Supplemental schedule of non cash operating, investing and financing activities:                                     None
   Stock subscription receivable on option exercised                                           $ 7,741,000               -
   Conversion of Series B Preferred Stock                                                               (*)              -
   Issuance of Common Stock for investment interest in Marathon Capital, LLC                   $   962,000               -
   Issuance of Common Stock pursuant to anti-dilution provision                                         (*)              -
   Compensation arising from issuance of options to new management team                        $ 1,313,000               -

(*) Less than $1,000


</TABLE>

                 See notes to consolidated financial statements

                                      5


<PAGE>
                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     SIX MONTHS ENDED JULY 31, 2000 AND 1999
                                   (UNAUDITED)


Note 1 - Basis of Presentation

    The  accompanying  unaudited  consolidated  financial  statements  have been
prepared in accordance with instructions to Form 10-QSB and, accordingly, do not
include all of the  information  and  footnotes  required by generally  accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management, all adjustments (consisting of normal accruals) considered necessary
for a fair presentation have been included. The results for the three months and
six months are not necessarily indicative of results for the full year.

    For further information see "Management's Discussion and Analysis or Plan of
Operations",  and refer to the consolidated  financial statements (including the
notes thereto) in the Company's Annual Report on Form 10-KSB for the fiscal year
ended January 31, 2000.


Note 2 - Net (Loss) Per Share

    Net (Loss) per share has been computed on the basis of the weighted  average
number of shares outstanding  during the periods.  Common stock equivalents have
not  been  included  in  the   computation   since  their   inclusion  would  be
anti-dilutive.


Note 3 - Additional Capital

    Between  February 1, 2000 and July 31, 2000 we received  $2,758,000 from the
exercise of 689,448 public  warrants.  During the same period we also received a
total of $516,000 as a result of the exercise of 164,500 stock options.  We also
received  $8,000 of cash and a  one-year  limited  recourse  promissory  note in
principal amount of approximately  $7,741,000 in connection with the exercise of
the option to acquire  861,110 shares of Series A Convertible  Preferred  Stock.
For further details, see Part II, Item 2.


Note 4 - Additional Investment

   Acquisition of 30% Interest in Marathon Capital, LLC

    In June 2000,  we acquired an  approximately  30%  interest in the equity of
Marathon  Capital,  LLC in consideration for which we issued to Marathon 200,000
shares of our common stock. The value of this stock, plus other costs related to
the investment, totaled $1,038,000. For further details see Part II, Item 2.


Note 5 - Subsequent Events

   Acquisition of 25% Interest in Castlebridge Partners, LLC

    On August 23,  2000,  our  wholly  owned  subsidiary,  U.S.  Energy  Systems
Castlebridge  LLC acquired a 25% membership  interest in Castlebridge  Partners,
LLC in  consideration  for the  issuance of 568,750  shares of our common  stock
(valued  at  $6.00  per  share)  to  Castlebridge  and  29,167  shares  to SPARK
Energy.com  Corporation for  facilitating  this  transaction.  The value of this
investment  based on market  price at closing date  totaled  approximately  $2.8
million. Further details may be found in Item II, Note 2.

                                       6

<PAGE>


Item 2 - Management's Discussion and Analysis or Plan of Operation

Results of Operations

Three Months and Six Months Ended July 31, 2000 Compared to Three Months and Six
Months Ended July 31, 1999

    Revenues for the three and six month periods were as follows:

<TABLE>
<CAPTION>
<S>
                                        <C>                             <C>
                                        Three Months Ended July         Six Months Ended July 31,
                                        31,
                                        ---------------------------     --------------------------
                                            2000          1999              2000          1999
                                         ----------    ----------        ----------    ----------
    Energy Division...................  $  966,000    $   290,000       $ 1,341,000   $   542,000
    Environmental Division............   1,188,000        671,000         1,921,000     1,321,000
                                        ----------    -----------       -----------   -----------
                                        $2,154,000    $   961,000       $ 3,262,000   $ 1,863,000
                                        ==========    ===========       ===========   ===========
</TABLE>

    Total  revenues  increased by  $1,193,000  or 124% in the three month period
ended July 31, 2000 ("Second  Quarter 2000"),  and $1,399,000 or 75% for the six
months  ended July 31,  2000  ("Six  Months  2000").  Energy  Division  revenues
increased  by $676,000 or 233% during  Second  Quarter 2000 and $799,000 or 147%
for Six Months 2000 from the corresponding periods in the prior year due to high
electricity prices in the West during the current period. Environmental Division
revenues increased by $517,000 or 77% during Second Quarter 2000 and $600,000 or
45% during Six Months 2000 from the corresponding periods in the prior year as a
result of expanded operations.

    Operating  expenses,  costs directly  related to the production of revenues,
increased 38%, or approximately  $246,000 to $888,000 in Second Quarter 2000 and
32% or approximately $393,000 for Six Months 2000 from the corresponding periods
in the prior year.  The  following  table  provides a breakdown of the Company's
operating expenses.

<TABLE>
<CAPTION>
<S>
                                        <C>                              <C>
                                        Three Months Ended July         Six Months Ended July 31,
                                        31,
                                        ---------------------------     --------------------------
                                            2000          1999              2000          1999
                                         ----------    ----------        ----------    ----------
    Energy Division...................  $  171,000    $   189,000       $   355,000   $   360,000
    Environmental Division............     717,000        453,000         1,274,000       876,000
                                        ----------    -----------       -----------   -----------
                                        $  888,000    $   642,000       $ 1,629,000   $ 1,236,000
                                        ==========    ===========       ===========   ===========

</TABLE>

    Operating expenses for the Energy Division were $18,000 or approximately 10%
lower in Second  Quarter  2000,  and for Six Months 2000 the total was $5,000 or
approximately 1% lower than in the  corresponding  periods in the previous year.
The  decreases  are  attributable  to the fact that expenses in the 1999 periods
were higher than usual due to extra equipment repairs  required.  This situation
has now normalized.  The expansion of operations of the  Environmental  Division
reflected in increased  revenues  required an increase in operating  expenses of
$264,000 or 59% for Second  Quarter 2000 and $398,000 or 45% for Six Months 2000
from the corresponding periods in the prior year.

    The  components  of general  administrative  expenses  for the three and six
month periods are as follows:

<TABLE>
<CAPTION>
<S>
                                        <C>                             <C>
                                        Three Months Ended July         Six Months Ended July 31,
                                        31,
                                        ---------------------------     --------------------------
                                            2000          1999              2000          1999
                                         ----------    ----------        ----------    ----------
    Salaries and consulting...........  $  314,000    $   210,000       $   521,000   $   412,000
    Steamboat royalties...............     113,000         36,000           161,000        72,000
    Legal and professional fees.......     159,000         83,000           218,000       140,000
    Insurance.........................      42,000         45,000            79,000        87,000
    Corporate expenses................      63,000         47,000            98,000        78,000
    Other.............................     186,000         54,000           291,000       153,000
                                        ----------    -----------       -----------   -----------
       Total..........................  $  877,000    $   475,000       $ 1,368,000   $   942,000
                                        ==========    ===========       ===========   ===========

</TABLE>

    Salaries and  consulting  costs for Second  Quarter 2000 and Six Months 2000
increased  from  the  corresponding  periods  in  the  prior  year  due  to  the
installation of the new management and development  team during the three months
ended July 31, 2000.  Steamboat royalties increased due to the revenue increases
of the  Steamboat  power  plants.  Increases  in legal  and  professional  fees,
corporate  expenses  and other  administrative  expenses  were due to  increased
activity and completion of two transactions described in Notes 4 and 5.

                                       7

<PAGE>

    During the three months ended July 31, 2000, as part of the  installation of
a new management and development team,  non-qualified  stock options were issued
to certain  employees  of the  Company.  As of issue date,  the market  price of
certain of such options  granted  exceeded the  exercise  price,  resulting in a
non-cash  charge of $1,313,000  which is shown as  compensation  recognized from
issuance of options.  We have also  provided a total of $581,000  for  estimated
severance and other costs associated with the repositioning of the Company.

    Depreciation expense, which includes amortization of goodwill,  increased to
$173,000 and $338,000 for the three and six month periods  ending July 31, 2000,
respectively,  compared  to  $144,000  and  $278,000  respectively,  in the same
periods of 1999, due to increased investment in depreciable assets, primarily in
the Environmental Division.

         Losses (gains) from Joint Ventures are detailed as follows:
<TABLE>
<CAPTION>
<S>
                                                  <C>                                 <C>

                                                  Three Months Ended July              Six Months Ended July
                                                  31,                                           31,
                                                  ---------------------------         -------------------------
                                                     2000             1999               2000           1999
                                                  -----------      ----------         ----------      ---------

    Lehi Independent Power Associates, L.C.....   $   16,000      $   16,000          $   30,000     $   31,000
    Plymouth Cogeneration Limited Partnership..      (11,000)          2,000              14,000         11,000
                                                  ----------      ----------          ----------     ----------
                                                  $    5,000      $   18,000          $   44,000     $   42,000
                                                  ==========      ==========          ==========     ==========
</TABLE>

    Primarily as a result of the one-time charges totaling $1,894,000  described
above (including  $1,313,000 of non-cash charges) our net loss for the three and
six  month  periods   ending  July  31,  2000  was   $1,670,000  and  $2,021,000
respectively.  Results of  operations  can be evaluated  by  comparing  earnings
before interest,  taxes, depreciation and amortization (EBITDA) and exclusive of
non-recurring  charges and dividends.  The following  table is presented to show
the actual  improvement  in earnings from  operations  in the current  reporting
periods.

<TABLE>
<CAPTION>
<S>
                                               <C>                    <C>             <C>              <C>
                                                  Three Months Ended July 31,        Six Months Ended July 31,
                                             -------------------------------------- -----------------------------
                                                    2000               1999             2000           1999
                                             ------------------- ------------------ -------------- --------------
     Net loss reported......................      $(1,670,000)      $ (1,417,000)    $  (2,021,000) $  (1,635,000)
     Compensation arising from issuance of
       options to new management team.......        1,313,000                --          1,313,000            --
     Provision for severance and
       repositioning of the Company.........          581,000                --            581,000            --
     Litigation settlement costs............               --          1,138,000             2,000      1,138,000
     Loss from joint ventures and
     Extraordinary gain on exchange of
       debentures to preferred stock........               --                 --              --          (69,000)
                                             ------------------   ----------------   -------------  --------------
       minority interest....................
     Operating income (loss) exclusive of
       non-recurring items..................          224,000           (279,000)         (125,000)      (566,000)

     Depreciation...........................          173,000            144,000           338,000        278,000
     Interest, net..........................           13,000             45,000            (8,000)        80,000
                                             ------------------   ----------------   -------------  -------------
     EBITDA (loss) exclusive of
       non-recurring and extraordinary
       items and before dividends...........         $410,000          $ (90,000)       $  205,000  $    (208,000)
                                                     ========          =========        =============  =============

</TABLE>

    Dividends  paid on  preferred  stock for the  three  and six  months of 2000
totaled $67,000 and $135,000, respectively,  compared to $64,000 and $119,000 in
the like periods of the  previous  year.  The increase was due  primarily to the
$250,000 additional investment in Series A Preferred Stock in June 1999.

    In July 2000, an option to acquire additional shares of Series A Convertible
Preferred Stock for $7,750,000 was exercised.  (See Part II, Item 2, for further
details.)  Under the  requirements  of Emerging Issues Task Force Memo No. 98.5,
the  difference  between the  conversion  price of the  Preferred  Stock and the
market price of the Common Stock at the day of exercise is treated as a non-cash
dividend,  which is shown on the  Consolidated  Statements  of  Operations  as a
dividend on  beneficial  conversion  of Preferred  Stock.  There is an immediate
offset in other equity accounts, so that there is no net effect on Stockholders'
Equity from this required non-cash and non-recurring adjustment.


                                       8

<PAGE>

Liquidity and Capital Resources

    At July 31, 2000,  cash  totaled  approximately  $2,325,000,  as compared to
$301,000 at January 31, 2000, an increase of  $2,024,000.  During the six months
ended  July 31,  2000,  cash  flow  from  financing  activities  of  $3,371,000,
primarily  from  proceeds of exercise of warrants and options,  was used to fund
$798,000 in  operating  activities  and $549,000 of  investing  activities,  and
provided the increase in cash and in working capital.

    During the first six months of Fiscal  2000,  the Company  used  $798,000 of
cash in operating  activities  compared  with $154,000 of cash used in operating
activities in the corresponding  period in the prior year.  Non-recurring  items
involving cash included the receipt of life insurance  proceeds from a policy on
our former President,  which, net of expenses paid during the quarter,  amounted
to $916,000. We also paid the $900,000 litigation settlement note.

    The $549,000 used in investing activities during Six Months 2000 compared to
$239,000 in the corresponding period the prior year included $83,000 of deferred
costs  expended on pending  acquisitions  as compared to $108,000 in the earlier
year.  Cash applied to  acquisition  of equipment,  mainly in the  Environmental
Division,  amounted to  $388,000 in the current  year as compared to $190,000 in
the earlier year.

    Cash  provided  by  financing  activities  in the Six  Months  2000  totaled
$3,371,000 primarily as a result of the $3,282,000 proceeds from the exercise of
warrants and options.  In the same period in 1999 financing  activities provided
cash of  $26,000.  This  included  proceeds  from the sale of Series A Preferred
Stock amounting to $234,000.

    Our receipt of net proceeds of $2,758,000  from the exercise of warrants and
$516,000  from the  exercise of options  was the primary  reason for our working
capital  increasing to $2,094,000 at July 31, 2000 from a deficit of $255,000 at
January 31, 2000.

    Our cash position and projected cash flow from  operations are sufficient to
satisfy our commitments for the next twelve months.


Cautionary Statement Relating to Forward Looking Statements

    This  Form  10-QSB  contains  certain  "forward  looking  statements"  which
represent the Company's expectations or beliefs,  including, but not limited to,
statements   concerning  industry  performance  and  the  Company's  operations,
performance,  financial condition,  growth and strategies. For this purpose, any
statements  contained in this Form 10-QSB that are not  statements of historical
fact may be  deemed to be  forward  looking  statements.  Without  limiting  the
generality of the foregoing,  words such as "may," "will," "expect,"  "believe,"
"anticipate,"  "intend,"  "could,"  "estimate"  or "continue" or the negative or
other  variations  thereof or  comparable  terminology  are intended to identify
certain  forward-looking  statements.  These  statements by their nature involve
substantial risks and  uncertainties,  certain of which are beyond the Company's
control,  and actual  results may differ  materially  depending  on a variety of
important  factors  which are noted  herein,  including  but not  limited to the
potential  impact  of  competition,   changes  in  local  or  regional  economic
conditions,  the  ability  of the  Company  to  continue  its  growth  strategy,
dependence on management and key personnel,  supervision  and regulation  issues
and the ability to find financing on terms suitable to the company.

                           PART II - OTHER INFORMATION

Item 2 - Changes in Securities

  Acquisition of 30% interest in Marathon Capital, LLC

    In June 2000,  we acquired an  approximately  30%  interest in the equity of
Marathon  Capital,  LLC,  a company  engaged  in  origination,  development  and
financing of energy projects,  in consideration  for which we issued to Marathon
200,000 shares of our common stock. The issuance of these shares was exempt from
the registration requirements of the Act pursuant to Section 4(2) thereunder.

                                       9
<PAGE>

  Acquisition of 25% interest in Castlebridge Partners, LLC

    On August 23, 2000,  U.S.  Energy  Systems  Castlebridge  LLC ("USE Sub"), a
wholly-owned  subsidiary of the Company,  entered into a subscription  agreement
with Castlebridge  Partners,  LLC ("Castlebridge")  and its two members,  Kemper
Castlebridge,  Inc.,  (a  subsidiary  of  the  Kemper  Companies),  and  GKM  II
Corporation,   (a   company   owned  by  the   management   and   employees   of
"Castlebridge"),  pursuant  to which  Castlebridge  would issue to USE Sub a 25%
Membership  Interest  (the  "Transaction").  Castlebridge,  which  operates from
offices in Chicago,  Illinois, is a risk mitigation consulting firm that focuses
on energy and similar  markets.  The  Transaction  was consummated on August 23,
2000. In connection  with the  consummation  of the  Transaction,  which will be
valued using the equity method of accounting, we issued 568,750 shares of common
stock to  Castlebridge  (valued at $6.00 per  share) and 29,167  shares to SPARK
Energy.com  Corporation for facilitating the Transaction.  The issuance of these
shares was exempt  from the  registration  requirements  of the Act  pursuant to
Section 4(2) thereunder.


  Issuance of Common Stock to Estate of Richard H. Nelson

    In September  2000, we issued 25,000 shares of common stock to the Estate of
Richard H. Nelson as part of an  agreement  with the Estate.  The value of these
shares had  previously  been  charged to earnings as of January  31,  2000.  The
issuance of these shares was exempt from the  registration  requirements  of the
Act pursuant to Section 4(2) thereunder.


Exercise of Option to Acquire Preferred Stock

    On or about July 31,  2000,  Energy  Systems  Investors,  L.L.C  ("ESI"),  a
Delaware  limited  liability  company,  controlled by Lawrence I.  Schneider and
Henry Schneider,  officers and directors of the Company, exercised its option to
acquire  861,110 shares of the Company's  Series A Convertible  Preferred  Stock
(the "Series A Stock") (ESI and its  affiliates  having  previously  acquired an
aggregate  of  277,778  shares  of  Series  A  Stock)  for a  purchase  price of
$7,749,990  (i.e.,  $9.00 per share of Series A Stock),  of which  approximately
$8,611 was paid in cash and the balance of approximately  $7,741,379 was paid in
the form of a one year limited recourse promissory note (the "Note") made by ESI
in favor of the Company;  the Note bears interest at the rate of 9.25% per annum
and the interest is payable in quarterly  installments.  The  obligations of ESI
under the Note are  secured  by the  Pledged  Collateral  (as  defined)  and are
limited to (i) the Pledged  Collateral  and (ii) not more than $100,000 of ESI's
assets (excluding the Pledged  Collateral).  The Pledged Collateral  consists of
the 861,110  shares of Series A Stock  provided that for each $8.99 in principal
amount of Note that is paid,  one share of Series A Stock is  released  from the
Pledged Collateral. ESI has agreed that the shares of Series A Stock included in
the  Pledged  Collateral  will be  voted  on all  matters  to be voted on by the
holders of the Company's  capital stock in the same proportion as the votes cast
by the holders of the Company's  outstanding capital stock. Each share of Series
A Stock is currently convertible into four shares of the Company's Common Stock.
As of July 31, 2000,  1,138,888 shares of Series A Stock were  outstanding.  The
shares of Common  Stock  issuable  upon  conversion  of this  Series A Stock are
subject to the  Registration  Rights  Agreement dated March 20, 1998 between the
Company and Energy Systems and accordingly,  the holders of the shares of Common
Stock underlying the Series A Stock have piggyback  registration  rights and one
demand  registration right with respect to such shares. ESI having  represented,
among other things, that it is an "accredited investor" (as such term is defined
in Rule 501  promulgated  under the  Securities  Act of 1933,  as  amended  (the
"Act")), the shares of Series A Stock were issued without registration under the
Act in accordance  with the  exemption  provided by Section 4(2)  thereunder.  A
certificate  of  increase  was  filed  with  the  Delaware  Secretary  of  State
increasing the number of shares designated as Series A Stock from 600,000 shares
to 1,138,888 shares.


  Plan of Recapitalization

    As of July 31, 2000, the Company and the holders of the  outstanding  shares
of  Series A Stock  (i.e.,  ESI,  Lawrence  I.  Schneider  and  Henry  Schneider
(collectively   the   "Series  A   Stockholders"))   entered   into  a  plan  of
recapitalization  (the  "Plan of  Recapitalization")  pursuant  to which (i) the
annual dividends  payable with respect to the 1,138,888 shares of Series A Stock

                                       10

<PAGE>

outstanding  would be reduced from $0.81 per share to $0.54 per share;  (ii) the
interest  payable with respect to the Note would be reduced from 9.25% per annum
to 6.25%  per  annum;  (iii)  Series B  Warrants  (the  "Warrants")  to  acquire
1,500,000 shares of the Company's Common Stock at an exercise price of $4.00 per
share  were  issued to a limited  group of  persons  designated  by the Series A
Stockholders;  and (iv) a reserve fund (the "Reserve Fund") would be established
to ensure  the  payment  in part of the  dividends  with  respect  to all of the
outstanding shares of Series A Stock. The Plan of  Recapitalization is effective
upon the waiver or satisfaction of the following conditions:

  -     A private letter ruling is obtained from the Internal Revenue Service to
        the effect  that the Plan of  Recapitalization  will not have an adverse
        tax effect on the parties thereto; and
  -     The  issuance of  the Warrants has been approved by the stockholders to
        the extent required by Nasdaq.

    If these  conditions have not been waived or satisfied by December 31, 2001,
    the Plan of Recapitalization will be terminated.

    The  Warrants  are not  exercisable  until the Plan of  Recapitalization  is
effective  and are only  exercisable  to acquire a number of shares equal to the
quotient obtained by dividing the principal amount of the Note that is paid from
time  to  time  by   5.160919269.   The   Warrants  are  void  if  the  Plan  of
Recapitalization  is terminated.  The holders of the Warrant Shares are entitled
to certain piggyback and demand registration rights. The Warrants were issued in
a  transaction  not  involving a public  offering and thus,  the issuance of the
Warrants was exempt from the  registration  requirements  of the Act pursuant to
Section 4(2) thereunder.

    The Plan of Recapitalization provides that when it is effective, the Company
will set apart approximately $1.23 million (approximately two years of dividends
at the reduced  dividend rate of $0.54 per share) (the "Reserve Fund") to ensure
the payment of dividends  on the Series A Stock.  The Reserve Fund is to be used
if and to the  extent  the  Company  determines  that it does not have the funds
available  to pay  these  dividends.  The  Reserve  Fund is to be  funded by the
payment of the note at the rate of aggregate $0.158 for each dollar in principal
amount of the Note that is paid.  The Company is not required to set apart funds
with respect to dividends payable after March 1, 2004. Furthermore,  the Company
is entitled, under certain circumstances, to withdraw from the Reserve Fund such
sums as the Board of Directors of the Company  determines  in good faith are not
required for payment of dividends on the Series A Stock.


Item 5 - Other Events

    The ten  year  non-qualified  stock  options  (collectively,  the  "Option")
granted in May 2000 to  Lawrence  Schneider  and Goran  Mornhed to acquire up to
3,312,500  shares of Common Stock at exercise prices ranging from $3.00 to $4.00
per  share  were  modified  and as a result,  these  options  vested  and may be
exercised,  subject to  stockholder  approval of the  Company's  2000  Executive
Incentive Compensation Plan.

                                       11
<PAGE>



Item 6 - Exhibits

(a)      Exhibits
                  3.1      Certificate of Amendment of Amended and Restated
                           Certificate of Incorporation of the Company

                  3.2      Certificate of Increase of Series A Convertible
                           Preferred Stock of the Company

                  4.1      Plan of Recapitalization dated as of July 31, 2000 by
                           and between the Company and the parties identified
                           therein.

                  4.2      Form of Series B Warrant to Purchase Shares of Common
                           Stock    (issued    pursuant    to   the    Plan   of
                           Recapitalization)

                  10.1     Amended and Restated Stock Option Agreement between
                           the Company and Lawrence I. Schneider dated May 10,
                           2000 with respect to 750,000 shares of Company Common
                           Stock

                  10.2     Amended and Restated Stock Option Agreement between
                           the Company and Lawrence I. Schneider dated May 10,
                           2000 with respect to 1,000,000 shares of Company
                           Common Stock

                  10.3     Amended and Restated Stock Option  Agreement  between
                           the Company and Goran Mornhed dated May 10, 2000 with
                           respect to 562,500 shares of Company Common Stock

                  10.4     Amended and Restated Stock Option  Agreement  between
                           the Company and Goran Mornhed dated May 10, 2000 with
                           respect to 1,000,000 shares of Company Common Stock

                  10.5     Pledge Agreement dated as of July 31, 2000 by and
                           between the Company and Energy Systems Investors,
                           L.L.C.

                  10.6     Limited Recourse Promissory Note  dated July 31, 2000
                           issued by Energy Systems Investors, L.L.C. in favor
                           of the Company

                  27       Financial Data Schedule


         (b)      Current Report of Form 8-K

                  On or about July 26, 2000 the Company  filed a Current  Report
         on Form 8-K  disclosing  under Item 5 the adoption of certain  employee
         benefit plans.

                  On or about August 11, 2000 the Company filed a Current Report
         on  Form  8-K  disclosing  under  Item  4 a  change  in  the  Company's
         independent auditors.

                  On or about August 30, 2000 the Company filed a Current Report
         on Form 8-K  disclosing  under Item 5 its  acquisition  of interests in
         Castlebridge (the  "Castlebridge  8-K"). On or about September 5, 2000,
         the Company filed an amendment to the Castlebridge 8-K.



                                       12

<PAGE>





                                   SIGNATURES


    Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has caused this  quarterly  report on Form 10-QSB to be signed on its
behalf by the undersigned duly authorized

Dated: September 19, 2000

U. S. Energy Systems, Inc.


By:      /s/ Lawrence I. Schneider
         --------------------------------------------
         Lawrence I. Schneider
         Chief Executive Officer


By:      /s/ Robert C. Benson
         --------------------------------------------
         Robert C. Benson
         Chief Financial and Accounting Officer