================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

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

      For the quarterly period ended March 31, 2005

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR
      THE TRANSITION PERIOD FROM __________ TO  __________.


                             COMMISSION FILE NUMBER:
                                     0-10238

                            U.S. ENERGY SYSTEMS, INC.

              Delaware                                          52-1216347
   (State or other jurisdiction of                           (I.R.S. Employer
   incorporation or organization)                         Identification Number)

                           One North Lexington Avenue
                                 Fifteenth Floor
                             White Plains, NY 10601
                    (Address of Principal Executive Offices)

                                 (914) 993-6443
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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  [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
                          Yes  [ ]   No  [X]

      State the number of shares outstanding of each of issuer's classes of
common equity, as of May 13, 2005: 11,970,061 shares of Common Stock


<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                                    CONTENTS


PART I: Financial Information
                                                                            PAGE
Item 1:  Financial Statements

Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004.........3


Consolidated Statements of Operations and Comprehensive Income
  for the three months ended March 31, 2005 and 2004...........................5


Consolidated Statements of Cash Flows for the three months ended
  March 31, 2005 and 2004......................................................6


Notes to Consolidated Financial Statements.....................................7


Item 2:  Management's Discussion and Analysis of Financial Condition
         and Results of Operations............................................11

Item 3:  Quantitative and Qualitative Disclosures About Market Risk...........13

Item 4:  Controls and Procedures..............................................13


PART II. Other Information

Item 6:  Exhibits.............................................................14

Signatures....................................................................18


                                       2
<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>
ASSETS                                                                       March 31, 2005  December 31, 2004*
                                                                             --------------  -----------------
                                                                              (Unaudited)     (As Restated)
<S>                                                                             <C>             <C>
Current Assets:
   Cash                                                                         $ 14,746        $ 15,982
   Restricted Cash and Marketable Securities                                      30,025          29,609
   Accounts Receivable (less allowance for doubtful accounts of $46 and
     $1,313 in 2005 and 2004, respectively)                                        5,152           4,857
   Installment Sale Partnership Interest and Interest
     Receivable, Current Portion                                                   2,711           2,494
   Other Current Assets                                                            1,826           1,639
                                                                                --------        --------
     Total Current Assets, Net                                                    54,460          54,581

Property, Plant and Equipment, Net                                                41,160          41,901
Construction in Progress                                                             198             198
Installment Sale Partnership Interest, less Current Portion                       23,312          23,537
Investments                                                                        1,175             801
Debt Issuance Costs, Net of Accumulated Amortization                              11,068          11,266
Goodwill                                                                          26,618          26,618
Foreign Currency Hedge                                                             2,279           2,414
Deferred Tax Asset                                                                14,812          14,605
Other Assets                                                                          57              11
                                                                                --------        --------
     Total Assets                                                               $175,139        $175,932
                                                                                ========        ========

LIABILITIES
Current Liabilities:
   Current Portion Long-Term Debt                                               $  1,567        $  1,517
   Accounts Payable and Accrued Expenses                                           4,370           4,057
   Deferred Revenue Installment Sale Partnership Interest, Current Portion           272             398
                                                                                --------        --------
     Total Current Liabilities                                                     6,209           5,972

Long-Term Debt less Current Portion                                               85,529          86,297
Deferred Revenue Installment Sale Partnership Interest, less Current Portion       2,725           2,699
Deferred Royalty                                                                   5,598           5,686
Illinois Subsidy Liability                                                        27,602          26,346
                                                                                --------        --------
     Total Liabilities                                                           127,663         127,000

Minority Interests                                                                10,428          10,733
</TABLE>


                                       3
<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                 March 31, 2005  December 31, 2004*
                                                                                 --------------  -----------------
                                                                                    (unaudited)    (as restated)
<S>                                                                                 <C>            <C>
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par Value, Authorized 10,000,000 Shares:
   Series B, Cumulative, Convertible, Issued and Outstanding 368 Shares                    --             --
   Series C Cumulative, Convertible, Issued and Outstanding 100,000 Shares,                 1              1
   Series D, Cumulative, Convertible, Issued and Outstanding 1,138,888 Shares              11             11

Common Stock, $.01 par Value, Authorized 50,000,000 Shares, issued
   12,333,974                                                                             123            123
Treasury Stock, at Cost                                                                (2,204)        (2,204)
Additional Paid-in Capital                                                             63,857         64,063
Accumulated Deficit                                                                   (26,483)       (25,805)
Accumulated Other Comprehensive Income                                                  1,743          2,010
                                                                                    ---------      ---------
   Total Stockholders' Equity                                                          37,048         38,199
                                                                                    =========      =========
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $ 175,139      $ 175,932
                                                                                    =========      =========
</TABLE>

                 See notes to consolidated financial statements
         *Derived from the Company's audited Consolidated Balance Sheet
                              at December 31, 2004


                                       4
<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                            AND COMPREHENSIVE INCOME
                                   (Unaudited)
                    (in Thousands, except Earning per Share)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                           ------------------
                                                                      March 31, 2005  March 31, 2004
                                                                      --------------  --------------
<S>                                                                      <C>           <C>
Revenues                                                                 $  5,024      $  5,117
                                                                         --------      --------
Costs and Expenses:
     Operating Expenses                                                     2,179         2,218
     General and Administrative Expenses                                    1,207         8,422
     Depreciation and Amortization                                          1,095           978
                                                                         --------      --------
Total Costs and Expenses                                                    4,481        11,618
                                                                         --------      --------

INCOME (LOSS) FROM OPERATIONS                                                 543        (6,501)

OTHER INCOME (LOSS):
Interest Income                                                               820           347
Interest Expense                                                           (2,714)       (1,848)
Dividend Income                                                                --            15
Foreign Currency Transaction Income                                           345            --
Other expenses                                                                 (4)           --
ICC Related Expense                                                           (12)           --
Minority Interest                                                              80            (5)
                                                                         --------      --------

Loss from continuing operations before income taxes                          (942)       (7,992)
Income Tax Benefit                                                            111         3,566
                                                                         --------      --------
LOSS BEFORE DISCONTINUED OPERATIONS                                          (831)       (4,426)

Income from Discontinued Operations (Net of Tax)                              150           452
                                                                         --------      --------

NET LOSS                                                                     (681)       (3,974)

Dividends on Preferred Stock                                                 (207)         (207)
                                                                         --------      --------

LOSS APPLICABLE TO COMMON STOCK                                          $   (888)     $ (4,181)
                                                                         ========      ========

EARNINGS(LOSS) PER SHARE OF COMMON STOCK:
     Loss per Share of Common Stock Continuing Operations                $   (.09)     $   (.39)
     Income per Share of Common Stock Discontinued Operations            $    .02      $    .04
     Loss Per Share of Common Stock                                      $   (.07)     $   (.35)

     Weighted Average Number of Common Stock Outstanding
       - Basic and Diluted                                                 11,970        11,890

COMPREHENSIVE LOSS, NET OF TAX
     Net Loss                                                            $   (681)     $ (3,974)
     Other Comprehensive Loss                                                (267)         (109)
                                                                         --------      --------

     Total Comprehensive Loss                                            $   (948)     $ (4,083)
                                                                         ========      ========
</TABLE>

                 See notes to consolidated financial statements


                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                  THREE MONTHS ENDED
                                                                                  ------------------
                                                                            March 31, 2005   March 31, 2004
                                                                            --------------   --------------
<S>                                                                            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income (Loss)                                                         $   (681)     $ (3,974)
     Adjustments to reconcile Net Income to Net Cash provided by
       (used in) Operating Activities:
         Depreciation                                                               897           918
         Amortization                                                               198            60
         Minority Interest                                                         (305)            5
         Deferred Income Taxes                                                     (205)       (3,566)
         Unrealized Gains                                                          (267)           --
         Foreign Currency Translation Adjustment                                   (389)         (109)
         Valuation Allowance on Investment                                           --         6,336
     Changes In:
         Accounts and Notes Receivable Trade                                       (295)        1,510
         Other Current Assets                                                      (187)          517
         Other Assets                                                               (46)       (2,120)
         Accounts Payable and Accrued Expenses                                      314           777
         Deferred Revenue and Other                                                (100)         (178)
         Foreign Currency Hedge                                                     134            --
         Rate Incentive Liability                                                 1,256         1,354
     Net Effect of Discontinued Operations                                           --          (367)
                                                                               --------      --------
     Net Cash Provided by Operating Activities                                      324         1,163
                                                                               --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Restricted Cash                                                               (416)       (1,284)
     Change in Investments                                                         (373)           --
     Acquisitions of Property and Equipment                                        (156)          (81)
     Construction in Progress                                                        --          (101)
                                                                               --------      --------
     Net Cash Used in Investing Activities                                         (945)       (1,466)
                                                                               --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from Notes Receivable                                                   8           341
     Payment of Long-Term Debt                                                     (328)       (1,152)
     Deferred Royalty                                                               (88)           --
     Dividends on Preferred Stock                                                  (207)         (207)
                                                                               --------      --------
     Net Cash Used in Financing Activities                                         (615)       (1,018)
                                                                               --------      --------

NET DECREASE IN CASH                                                             (1,236)       (1,321)

     Cash - beginning of period                                                  15,982         3,210
                                                                               --------      --------
     Cash - end of period                                                      $ 14,746      $  1,889
                                                                               ========      ========
</TABLE>

                 See notes to consolidated financial statements


                                       6
<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND MARCH 31, 2004
                 (amounts in Thousands, except per share data)


NOTE A -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and Regulation S-X, and
accordingly, do not include all of the information and footnotes required by
accounting principles generally accepted in the United States 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 are not necessarily indicative of
results for the full year. For a more complete discussion of significant
accounting policies and certain other information, you should refer to the
financial statements included in the U.S. Energy Systems Inc.'s (the "Company")
Annual Report Form 10-K for the year ended December 31, 2004, as amended.

NOTE B -- RESTATEMENT

On May 16, 2005 the Company filed a current report on Form 8-K announcing that
an error had been identified relating to accounting for a foreign currency loan
and related hedge arrangement entered into in April 2004 in connection with the
CDN $107 million debt arrangement between a majority owned subsidiary, US Energy
Biogas Corp ("USEB") and the Countryside Power Income Fund and its subsidiaries
(the "Countryside Debt").

The accounting issue relates to the Application of Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation, as amended ("SFAS No.
52") and Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended ("SFAS No. 133").

The Company is restating its financial statements for the year ended December
31, 2004 and for the interim periods ended June 30, 2004 and September 30, 2004
to reflect the impact of the changes in the current exchange rate for debt
service payments beyond the expiration of the hedge arrangement in April 2007,
to reflect the outstanding principal amount of the Countryside Debt using the
current exchange rate in effect at the end of the applicable period and to
record changes in the fair value of the hedge arrangement.

The following table isolates each of the restated amounts in the Company's
Consolidated Balance Sheet as of December 31, 2004:

<TABLE>
<CAPTION>
                                                             RESTATED        AS ORIGINALLY REPORTED
                                                             --------        ----------------------
<S>                                                         <C>                    <C>
     Consolidated Balance Sheet:
          Foreign Currency Hedge                              $2,414                 $1,207
          Deferred Tax Asset                                 $14,605                $12,409
          Total Assets                                      $175,932               $172,529
          Long-Term Debt                                     $87,814                $80,521
          Minority Interests                                 $10,733                $12,662
          Accumulated Deficit                               $(25,805)              $(23,516)
          Acc. Other Comprehensive Income                     $2,010                 $1,682
          Total Stockholder's Equity                         $38,199                $40,160
          Total Liabilities and Stockholders Equity         $175,932               $172,529
</TABLE>

Unrelated to the restatement of the 2004 financial statements, the Company has
reclassified restricted cash from cash in the consolidated statement of cash
flows.


                                       7
<PAGE>

Significant accounting policies followed in the preparation of the financial
statements are as follows:

NOTE C-- BASIS OF REPORTING

The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned and majority-owned subsidiaries. Investments in
joint ventures are accounted for under the equity method. Investments in
partnerships, in which our ownership does not exceed 1%, are unconsolidated and
carried at cost. All inter-company accounts and transactions have been
eliminated in the consolidation.

NOTE D -- REVENUE RECOGNITION

Revenues are recognized upon delivery of energy or service.

NOTE E -- EARNINGS SHARE DATA

Income (Loss) per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the periods. In arriving at income available to common stockholders, preferred
stock dividends have been deducted. Potential common shares, amounting to 5,167
have not been included due to their anti-dilutive effect for 2005 and 2004.

NOTE F -- STOCK-BASED COMPENSATION

The Company has elected to account for its stock-based compensation plans using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 (APB No. 25), Accounting for Stock Issued to Employee's and discloses the pro
forma effects on net loss and loss per share had the fair value of options been
expensed. Under the provisions of APB No. 25, compensation arising from the
grant of stock options is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of grant over the amount an
employee must pay to acquire the stock. There were no stock options granted or
vested for the three month periods ended March 31, 2005 and 2004.

NOTE G -- FOREIGN CURRENCY

The functional currency for our foreign operations is the local currency. For
these foreign entities, we translate income statement amounts at average
exchange rates for the period, and we translate assets and liabilities at the
end-of-period exchange rates. We report translation adjustments on inter-company
foreign currency transactions of a long-term nature in Other Comprehensive
Income. Foreign currency transaction gains or losses are recognized in the
period incurred and are included in Other Income (Loss) in the consolidated
statement of operations.

NOTE H -- INVESTMENTS IN DERIVATIVES

The Company holds derivative financial instruments for the sole purpose of
hedging the risks relating to changes in foreign currency exchange rates, the
variability of which impacts future earnings and cash flows. The Company
documents its risk management strategy and hedge effectiveness at the inception
of and during the term of the hedge. Changes in the fair market value of our
foreign currency cash flow hedge derivatives are recorded each period in other
comprehensive income.

NOTE I -- SUBSIDIARIES AND AFFILIATES

      (1) U.S. Energy Biogas Corp. ("USEB"). On May 11, 2001 we, together with
Cinergy Energy Solutions, Inc. ("Cinergy Energy"), acquired through a merger,
Zahren Alternative Power Corporation ("Zapco"), and renamed such entity U.S.
Energy Biogas Corp. We own 54.26% and Cinergy Energy, a wholly owned subsidiary
of Cinergy Corp. ("Cinergy"), owns 45.74% of Biogas.


                                       8
<PAGE>

         (2) USE Canada Energy Corp. ("USE Canada"). On June 11, 2001 USE
Canada Acquisition Corp., a wholly-owned Canadian subsidiary of the Company,
purchased 100% of the issued and outstanding stock of Trigen Energy Canada
Company, and renamed it USE Canada Energy Corp. ("USE Canada"). Effective
December 31, 2003 USE Canada became a discontinued operation pending its sale to
the Countryside Fund. On April 8, 2004, USE Canada was sold to the Countryside
Fund.

      (3) Scandinavian Energy Finance, Limited /EnergiSystems I Sverige
AB("SEFL"). During the three month period ended March 31, 2004, the Company
reserved $7,700 against its investment in and receivables from SEFL due to
pending litigation. This reserve, which amount was charged to general and
administrative expenses in our consolidated statement of operations, included a
$6,336 reserve against its equity investment and $1,364 against receivables due
the Company from SEFL. Subsequently, in 2004, an additional $475 was reserved
against additional receivables. During the quarter ended June 30, 2004, after
giving effect to the repayment to the Company of $1,086 in amounts owed by SEFL,
the entire investment was written off against the reserve.

NOTE J -- RESTRICTED CASH AND MARKETABLE SECURITIES

USEB's financing arrangements with the Countryside Income Fund and subsidiaries
(the "Countryside Fund") established various reserve accounts which are also
collateral for the financing with the Countryside Fund. These accounts include
the Illinois Subsidy Liability Reserve Account, a debt service reserve account
and an improvement reserve account. The funds held in the improvement reserve
account can be utilized to fund capital expenditures. The funds in the Illinois
Subsidy Liability Reserve Account (the "Illinois Accounts") are to be utilized
to retire the Illinois subsidy liability as it becomes due.

Restricted cash and marketable securities were as follows:

                                               March 31, 2005  December 31, 2004
                                               --------------  -----------------

      Illinois Subsidy Liability Reserve Accounts     $24,144           $23,438
      Improvement Reserve                               3,653             4,022
      Debt Service Reserve                              2,090             2,011
      Project Contract Reserve                            138               138
                                                      -------           --------
                                                      $30,025           $29,609

Included in the Illinois Subsidy Liability Reserve Accounts at March 31, 2005 is
$22,144 that is managed by a professional investment manager under investment
allocation parameters established by the Company. The amounts managed by the
professional manager, as of March 31, 2005, included $13,276 invested in equity
fund accounts, $7,295 invested in debt accounts, and $1,573 being held in cash
or cash equivalent accounts. The cost basis of the investments, which have been
invested since July 2004, is $20,696.

NOTE K - ILLINOIS RETAIL RATE PROGRAM

USEB has 10 operating projects in Illinois which are receiving a subsidy for
each kilowatt hour ("kwh") of electricity sold to the local utility under the
Illinois Retail Rate Program. In accordance with the Illinois Retail Rate
Program, the utility has contracted, for a ten year period, with each project to
purchase electricity for an amount that exceeds the utility's Avoided Cost (what
it would otherwise pay for the generation of electricity). The excess paid above
avoided cost is the subsidy. The utility then receives a tax credit from the
State of Illinois ("Illinois") equal to the amount of that excess. Each project
is obligated to begin to repay the subsidy to Illinois after the project has
recouped its capital investment and retired all debt associated with the
financing and construction of the project but, in any case, no later than 10
years from the date the project commenced commercial operations. All subsidy
liabilities must be fully repaid to Illinois (without interest) by the end of
the actual useful life of the project but no later than 20 years from the date
the project commenced commercial operations.

This subsidy is accounted for reporting purposes in a manner similar to an
original issue discount whereby the amount to be repaid in the future is
discounted to its net present value and the discount is amortized (as interest
expense) over the 10-year period until repayment begins. The amount of power
generation revenue recognized each period is equal to the Avoided Cost rate plus
the difference between the subsidy received by the project and the net present
value of the subsidy. This unamortized discount and the liability are shown net
on the consolidated balance sheet as Illinois Subsidy Liability.


                                       9
<PAGE>

USEB is required by the Countryside Fund to deposit funds into the Illinois
Subsidy Liability Reserve Accounts for repayment of the Illinois subsidy
liability. The Illinois Accounts are classified as restricted cash and
marketable securities (see NOTE J). The amount deposited into the Illinois
Accounts is based upon the amount of subsidy received and contemplates an annual
return sufficient to fund the current period subsidy liability repayment as it
becomes due. Regular deposits combined with actual and expected returns on those
deposits may not be sufficient to fully repay the respective liabilities as they
become due. Should the amounts in the Illinois Accounts be insufficient to fully
repay the obligations, any shortfall would have to be funded from the project's
operations or assets.

Following is a summary of significant dates pertaining to a project's
participation in the Illinois Retail Rate Program.

<TABLE>
<CAPTION>
                                                                                             Estimated
                                   Commencement of               Expiration of             Commencement
                                     Commercial                 Illinois Retail           of Repayment of
         Project                     Operations                  Rate Program          Subsidy Liability(1)
-----------------------------------------------------------------------------------------------------------
<S>                                <C>                          <C>                       <C>
         Countryside                 April, 2001                  April, 2011                May, 2011
         Dolton                       May, 1998                    May, 2008                June, 2008
         Dixon Lee                   July, 1999                   July, 2009               August, 2009
         Morris                    December, 2000               December, 2010             January, 2011
         Roxana                    November, 1999               November, 2009            December, 2009
         Upper Rock                  April, 2000                  April, 2010                May, 2010
         122nd Street                July, 1998                   July, 2008               August, 2008
         Brickyard                 September, 1999              September, 2009            October, 2009
         Streator                   January, 2000                January, 2010            February, 2010
         Willow Ranch               January, 1998                January, 2009            February, 2009
</TABLE>

(1)   The estimated commencement of the repayment of the liability is based upon
      management's assumptions. One year before a project's eligibility for
      participation in the program terminates, a proposed repayment schedule
      must be presented to the Illinois Commerce Commission for their approval.
      Until any repayment schedule is approved by the Illinois Commerce
      Commission, it will continue to be an estimated schedule.

The funds held in the Illinois Accounts are currently invested in equities and
fixed income securities. These investments are being managed by a third-party
professional money manager with the investment allocations being approved by the
management of the Company and USEB. The amount held in the Illinois Accounts as
of March 31, 2005 was $24,144. The amount of the subsidy liability owed to
Illinois as of March 31, 2005 was $50,669. It is anticipated that repayments of
the incentive will begin in 2008 and continue through 2021.

Under the terms of the Illinois Retail Rate Program, estimated rates are paid
for production sold to the utility with that rate being trued up annually, on
the anniversary date of the commencement of commercial operations of the
applicable project, to the actual rates paid for electricity by the local
municipality. After the actual rate is determined, sales for the preceding
calendar year, retroactive to the last anniversary date, are adjusted based upon
the actual rate. If the actual rate is greater than the estimated rate,
additional sales proceeds are paid to the project. If the actual rate is less
than the estimated rate, then prior sales proceeds received, equal to the excess
amounts paid, must be refunded to the utility. This actual rate then becomes the
estimated rate for the subsequent year.

In the past, the annual reconciliation of estimated rates to actual rates has
resulted in both increases and decreases in retroactive revenue. USEB cannot
predict whether any changes in future rates will result in increases or
decreases in revenues from the Illinois projects. The Company receives
approximately 19% of its revenues from the subsidy paid under the Illinois
Retail Rate Program.

From time to time during the past few years including 2004 and 2005, proposed
changes to or the elimination of the Illinois Retail Rate Program have been
introduced in the Illinois legislature. While legislation has not been adopted,
the adoption of legislation or the implementation of rules that would reduce or
eliminate the benefits received by the Company under this program would have a
material adverse effect on the Company.

NOTE L -- TRANSACTIONS WITH AFFILIATES

USEB is a general partner in alternative energy and equipment finance
transactions with related unconsolidated limited partnerships and collects
management fees from the partnerships. Fees earned from such general partner
undertakings amount to $198 for the three months ended March 31, 2005 and $73
for the three months ended March 31, 2004.


                                       10
<PAGE>

USEB reimburses its shareholders, including the Company, for a majority of the
costs incurred by them for the benefit of USEB. These costs include management
and accounting salary and benefit costs, office expenses associated with the
accounting services and an allocation of rent expenses. The total reimbursements
for the three month periods ended March 31, 2005 and 2004 were $217 and $194,
respectively.

NOTE M -- FOREIGN CURRENCY TRANSACTIONS

USEB's debt obligation to the Countryside Fund requires that debt service
payments be made in Canadian dollars. USEB has entered into a cash flow foreign
currency hedge agreement with financial institutions fixing the Canadian dollar
to US dollar exchange rate at $1.331 Canadian dollar per US dollar. This hedge
agreement, in an amount equal to the debt service payments, expires on March 31,
2007. Subsequent to the expiration of the hedge agreement, USEB's debt service
payments to the Countryside Fund are subject to fluctuations in the currency
exchange rate.

As required by SFAS No. 52 and SFAS No. 133, USEB has adjusted the outstanding
principal on the debt owed to the Countryside Fund to reflect the currency
exchange rate as of the end of the financial reporting period. The gain or loss
resulting from the adjustment of the outstanding principal from that recorded in
the previous reporting periods is recorded as Foreign Currency Transaction
Income(Loss).

Following is a summary of the Foreign Currency Transaction account as of March
31, 2005(the exchange rates are Canadian dollars per one US dollar and are
stated whole dollars, all other amounts are in $000's):

      Currency Exchange Rate at Loan Origination, April 8, 2004     $1.3140
      Currency Exchange Rate at December 31, 2004                   $1.2047
      Currency Exchange Rate as of March 31, 2005                   $1.2096
      Cumulative Translation Adjustments Beginning
               Of Reporting Period                                   $6,988
      Cumulative Translation Adjustments End
               Of Reporting Period                                   $6,643
      Aggregate Adjustment for the Current
               Reporting Period Income/ (Expense)                      $345
      Deferred Income Taxes Allocated
               To Adjustment in the Reporting Period                   $147

NOTE N - OTHER COMPREHENSIVE INCOME/(LOSS)

The other Comprehensive loss for the three months ended March 31, 2005 is
comprised of $(303) of unrealized losses on available for sale marketable
securities and $36 in gains associated with foreign currency exchange rates. The
$(109) loss reported for the three months ended March 31, 2004 is comprised of
losses associated with foreign currency exchange rates.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

In March 2005, a special committee of independent directors was organized to
evaluate a potential combination with a private company in a related line of
business. We continue to explore such opportunity. No assurance can be given
that such transaction will be complete, or that if completed, it will be on
terms favorable to current stockholders.

On May 9, 2005, Duke Energy Corporation and Cinergy Corp. announced that they
were merging. An affiliate of Cinergy owns a minority interest in US Energy
Biogas Corp. and we or our subsidiaries are parties to various agreements with
Cinergy affiliates pursuant to which, among other things, Biogas would enhance
current power projects or develop new projects. We are currently unable to
determine the impact of this merger on our relationship with Cinergy or these
opportunities.


                                       11
<PAGE>

RESULTS OF OPERATIONS

The net loss for the three months ended March 31, 2005 of $681 was a decrease of
$3,293 from the $3,974 net loss reported for the three months ended March 31,
2004. This decrease was primarily due to the $4,774 after tax expense recorded
in 2004 pertaining to the reserve for the SEFL investment offset by $866 in
additional interest expenses associated with the Countryside Fund debt which
closed in April 2004 and $505 of increased general and administrative expenses
related to the Countryside Fund transaction that were incurred during the three
months ended March 31, 2004 and capitalized.

Revenues for the three month period ended March 31, 2005 were $5,024, a decrease
of $93, or 2%, from the $5,117 reported for the three month period ended March
31, 2004. The decrease was the primarily the result of the reallocation of
expenses reimbursed to Biogas which were recorded as revenues for the period
ended March 31, 2004 and offset directly against operating expenses for the
three month period ended March 31, 2005.

Total operating expenses for the three months ended March 31, 2005 were $2,179,
a decrease of $39 or 1.8% from the $2,218 reported for the three month period
ended March 31, 2004.

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

                                               Three Months Ended
                                     March 31, 2005         March 31, 2004
                                     --------------         --------------
        Salaries and Consulting           $431                   $659
        Legal and Professional             122                    128
        Insurance                           55                     96
        Corporate Expenses                 148                     52
        SEFL Reserve                         0                  7,700
        Royalty Expense                    132                     24
        Other                              319                   (237)
                                        ------                 ------
        Total                           $1,207                 $8,422

General and administrative expenses increased by $485 or 67% in the first three
months of 2005 compared with the first three months of 2004, excluding the
effect of the SEFL reserve of $7.7 million in 2004. The primary reason for this
increase was the capitalization during the three month period ended March 31,
2004 of approximately $505 of general and administrative expenses related to the
Countryside transaction and $88 of royalty expense related to the Countryside
Fund transaction for the three months ended March 31, 2005, an obligation that
did not exist during the 2004 period.

Excluding the general and administrative costs associated with the Countryside
transaction, the royalty expense related to the Countryside transaction and the
SEFL reserve, general and administrative for the three month periods ended March
31, 2005 and 2004 were $1,119 and $1,227, respectively.

Depreciation and amortization expense increased by $117 or 12% in the first
quarter of 2005 compared with the first quarter of 2004 due principally to the
increase in the amortization of debt issuance costs associated with the
Countryside transaction.

Interest income increased by 136% in first quarter 2005 from first quarter 2004
as a result of the $14,000 note, bearing interest at the rate of 15% per annum,
issued to us in April 2004 by AJG Financial Services; this increase was
partially offset by a decrease in interest earned on the Installment Sale
Partnership Interest notes as a result of the continuing reduction in
outstanding principal on such notes. The reduction in outstanding principal is
the result of the continuing amortization of the principal amounts due to note
payments.

Interest expense increased to $2,714 for the three months ended March 31, 2005,
an increase of $866 or 47% when compared to the $1,848 in interest for the three
months ended March 31, 2004. This increase is solely due to additional interest
paid to the Countryside Fund resulting from the refinancing of the USEB debt.

Foreign Currency Transaction income was $345 for the three months ended March
31, 2005 and represents the adjustment, as required by SFAS 52, Foreign Currency
Translations, to the outstanding principal owed to the Countryside Fund to
reflect the change in the currency exchange rate from the start of the reporting
period. The Canadian dollar to US dollar exchange rate increased to $1.2096 from
$1.2047 as of December 31, 2004 resulting in a net gain for the period of $345,
after adjustments relating to our foreign currency cash flow hedge. The Deferred
Income Tax asset was reduced by $147 to reflect the tax effect of the
Translation gain. See Note M to the Consolidated Financial Statements. During
the three months ended March 31, 2004, there was no Foreign Currency Transaction
adjustment as the Countryside debt arrangements were entered into on April 8,
2004.

Provision for income taxes resulted in a tax benefit for the three months ended
March 31, 2005 of $111, a decrease of $3,455 from the $3,566 in tax benefits
reported for the three months ended March 31, 2004. The amount reported for the
three months ended March 31, 2004 included the tax benefit related to the
reserve against the SEFL investment. The $111 benefit for the three months ended
March 31, 2005 is comprised of the benefit related to the recognition of net
operating losses generated by USEB operations.


                                       12
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2005, unrestricted cash amounted to $14,746 compared with $15,982
of unrestricted cash at December 31, 2004. The debt arrangements between the
Countryside Fund and the USEB projects require these subsidiaries to maintain
various restricted cash accounts, which, at March 31, 2005, amounted to $30,025.
Included in the restricted cash and marketable securities is $22,144 that is
managed by a professional investment manager under investment allocation
parameters established by the Company. The amounts managed by the professional
manager, as of March 31, 2005, included $13,276 invested in equity fund
accounts, $7,295 invested in debt accounts, and $1,573 being held in cash or
cash equivalent accounts. The cost basis of the investments, which have been
invested since July 2004, is $20,696.

During the three months ended March 31, 2005, cash flow from operating
activities was $324, a decrease of $839 from the $1,163 generated by operating
activities for the three month period ended March 31, 2004. The primary reason
for this decrease was the elimination of the discontinued operations from the
2005 operating period.

Cash used in investing activities decreased to $945 for the three months ended
March 31, 2005 from the $1,466 used during the three months ended March 31,
2004, a decrease of $521. This decrease was primarily the result of an $868
decrease in amounts transferred to the Illinois Subsidy Liability Reserve
Accounts due to a decrease in the amount of subsidy received by the USEB
projects offset by a $373 increase in investments made by USEB pertaining to the
expansion of the landfill gas collection systems at two of USEB's projects.

Cash used in financing activities decreased to $615 for the three month period
ended March 31, 2005, a decrease of $403 from the $1,018 used in financing
activities for the three months ended March 31, 2004. The decrease is primarily
due to a reduction in principal payments made on outstanding debt resulting from
the Countryside Fund transaction.

USEB's financing arrangements with the Countryside Fund limit the ability of
USEB and its subsidiaries to distribute funds to the Company or to make
improvements or expand certain projects unless specified conditions are
satisfied.

We continue to evaluate current and forecasted cash flow as a basis to determine
financing operating requirements and capital expenditures. We believe that we
have sufficient cash flow from operations and working capital including
unrestricted cash on hand to satisfy all obligations under outstanding
indebtedness, to finance anticipated capital expenditures and to fund working
capital requirements during the next twelve months.

CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS

This Form 10-Q contains certain "forward looking statements" which represent our
expectations or beliefs, including, but not limited to, statements concerning
industry performance and our operations, performance, financial condition,
growth and strategies. For this purpose, any statements contained in this Form
10-Q 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 forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond our 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, our ability to continue our growth
strategy, dependence on management and key personnel, supervision and regulation
issues and the ability to find financing on terms suitable to us. Additional
factors which may impact our business, prospects, operating results and
financial condition are described under the caption "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2004, as amended.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations, changes in equity investment prices and changes in
corporate tax rates.

Generally the Company does not enter into any interest rate or derivative
transactions as a hedge against these market risks as the underlying assets and
investments are long-term in nature. However, the foreign currency hedge entered
into by USEB as discussed in Note M to the Consolidated Financial Statements
eliminates the impact of fluctuations in exchange rates on our Countryside debt
service payments through March 31, 2007. This issue is discussed in more detail
in our Annual Report on Form 10-K for the year ended December 31, 2004, as
amended.


                                       13
<PAGE>

Item 4:  Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

The Company has established a series of systems and procedures to assure full
and timely disclosure of material information respecting the Company. Our Chief
Executive Officer and Chief Accounting Officer (the person who performs the
functions of the Chief Financial Officer), carried out an evaluation of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based on such evaluation, they concluded that
our disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings.

PART II - Other Information


Item 6:  Exhibits

--------    --------------------------------------------------------------------
Exhibit
Number      Description
--------    --------------------------------------------------------------------

3.1         Restated Certificate of Incorporation of the Company filed with the
            Secretary of State of Delaware (1)

3.2         Certificate of Amendment of Amended and Restated Certificate of
            Incorporation of the Company (4)

3.3         Amended and Restated By-Laws of US Energy (5)

3.4         Form of Certificate of Designation for US Energy's Series C
            Preferred Stock (8)

3.5         Form of Certificate of Designation for US Energy's Series D
            Preferred Stock (8)

3.6         Certificate of Correction to Certificate of Designation of Series B
            Preferred Stock (8)

4.1         Specimen Stock Certificate (1)

4.2         Certificate of Designation of Series B Convertible Preferred Stock
            of the Company as filed with the Secretary of the State of Delaware
            (7)

4.3         Amended and Restated Plan of Recapitalization dated as of July 31,
            2000 by and between the Company and the parties identified therein
            (8)

4.4         Form of Series B Warrant to Purchase Shares of Common Stock (4)

4.5         Form of Series C Redeemable Common Stock Purchase Warrant of US
            Energy (5)

10.1        Purchase Agreement, dated as of January 24, 1994, between Lehi
            Co-Gen Associates, L.C. and Lehi Envirosystems, Inc. (2)

10.2        Operating Agreement among Far West Capital, Inc., Suma Corporation
            and Lehi Envirosystems, Inc. dated January 24, 1994 (2)

10.3        Agreement among the Company, Plymouth Envirosystems, Inc., IEC
            Plymouth, Inc. and Independent Energy Finance Corporation dated
            November 16, 1994 (1)

10.4        Amended and Restated Agreement of Limited Partnership of Plymouth
            Cogeneration Limited Partnership between PSC Cogeneration Limited
            Partnership, Central Hudson Cogeneration, Inc. and Plymouth
            Envirosystems, Inc. dated November 1, 1994 (1)

10.5        Amended and Restated Agreement of Limited Partnership of PSC
            Cogeneration Limited Partnership among IEC Plymouth, Inc.,
            Independent Energy Finance Corporation and Plymouth Envirosystems,
            Inc. dated December 28, 1994 (1)


                                       14
<PAGE>

--------    --------------------------------------------------------------------
Exhibit
Number      Description
--------    --------------------------------------------------------------------

10.6        Security Agreement and Financing Statement among the Company, Lehi
            Envirosystems, Inc., Plymouth Envirosystems, Inc. and Anchor Capital
            Company, LLC dated June 14, 1995, as amended (1)

10.7        Certificate of Designations (1)

10.8        Loan and Option Agreement dated August, 1996 by and among NRG
            Company, LLC and Reno Energy, LLC and ART, LLC and FWC Energy, LLC,
            and Amendments thereto (1)

10.9        Form of Debenture Conversion Agreement (1)

10.10       Subscription Agreement, dated March 20, 1998, between the Company
            and Energy Systems Investors, LLC (3)

10.11       Registration Rights Agreement, dated March 20, 1998, between the
            Company and Energy Systems Investors, LLC (3)

10.12       Amended and Restated Stock Option Agreement between the Company and
            Lawrence I. Schneider dated May 10, 2000 with respect to 750,000
            shares of the Company Common Stock (4)

10.13       Amended and Restated Stock Option Agreement between the Company and
            Goran Mornhed dated May 10, 2000 with respect to 1,000,000 shares of
            the Company Common Stock (4)

10.14       Pledge Agreement dated as of July 31, 2000 by and between the
            Company and Energy Systems Investors, L.L.C. (4)

10.15       Limited Recourse Promissory Note dated July 31, 2000 issued by
            Energy Systems Investors, L.L.C. in favor of the Company (4)

10.16       Registration Rights Agreement dated November 28, 2000 by and among
            US Energy and the Zapco Stockholders (5)

10.17       Performance Guaranty dated as November 28, 2000 of US Energy (5)

10.18       Performance Guaranty of Cinergy Solutions Holding Company, Inc.
            dated as of November 28, 2000 (5)

10.19       Subscription Agreement dated as of November 28, 2000 by and among US
            Energy, US Energy Sub and Cinergy Energy (5)

10.20       Stockholders Agreement dated as of November 28, 2000 by and among US
            Energy, US Energy Sub and Cinergy Energy (5)

10.21       Indemnification Agreement dated as of November 28, 2000 by and among
            US Energy, US Energy Sub and Cinergy Energy (5)

10.22       Employment Agreement dated as of May 10, 2000 by and between the
            Company and Lawrence Schneider (6)

10.23       Employment Agreement dated as of May 10, 2000 by and between the
            Company and Goran Mornhed (6)

10.24       2000 Executive Incentive Compensation Plan (6)

10.25       2000 Executive Bonus Plan (6)

10.26       Stock Option Agreement between the Company and Lawrence Schneider
            with respect to 1,000,000 shares of Common Stock (6)

10.27       Stock Option Agreement between the Company and Goran Mornhed with
            respect to 187,500 shares of Common Stock (6)

10.28       Stock Option Agreement between the Company and Goran Mornhed with
            respect to 562,500 shares of Common Stock (6)


                                       15
<PAGE>

--------    --------------------------------------------------------------------
Exhibit
Number      Description
--------    --------------------------------------------------------------------

10.29       Standby Payment Agreement dated as of June 11, 2001 by and among
            U.S. Energy Systems, Inc., USE Canada Acquisition Corp. and AJG
            Financial Services, Inc. (9)

10.30       Development Incentive Plan (10)

10.31       Corporate Incentive Plan (10)

10.32       Finance Incentive Plan (10)

10.33       Employment Agreement dated as of January 1, 2002 between the Company
            and Edward Campana (10)

10.34       Employment Agreement dated as of September 8, 2000 between the
            Company and Henry Schneider (10)

10.35       Agreement by and among AJG Financial, as agent, U.S. Energy, Cinergy
            Energy, U.S. Energy Biogas and Tannenbaum, Helpern as agent dated as
            of October 16, 2003 (11)

10.36       Escrow letter by and among, Tannenbaum, Halpern escrow agent, AJG
            Financial, Cinergy Energy, US Energy, U.S. Energy Biogas Corp (11)

10.37       Amended and Restated Subordinated Note from U.S. Energy Biogas Corp.
            to AJG Financial Services, Inc. (11)

10.38       Loan Agreement dated as of November 3, 2003 (11)

10.39       2003 Finance Incentive Plan (11)

10.40       2003 Development Incentive Plan (11)

10.41       Royalty Agreement dated as of April 8, 2004 by and between U.S.
            Energy Biogas Corp., Countryside Canada Power, Inc., the Registrant
            and Cinergy Energy Solutions, Inc. (12)

10.42       Amendment to Note Purchase Agreement dated as of April 8, 2004 by
            and between U.S. Energy Biogas Corp., Avon Energy Partners, LLC and
            the other parties identified therein (12)

10.43       Amendment to Indenture of Trust and Security Agreement dated as of
            April 8, 2004 by and among US Energy Biogas Corp., Countryside
            Canada Power, Inc. and the other parties identified therein (12)

10.44       Amendment dated April 8, 2004 among BMC Energy LLC, Countryside
            Canada Power Inc. and the other parties identified therein to the
            (i) Security Agreement dated as of May 2, 2001 among BMC Energy LLC,
            Countryside Canada Power, Inc. (as successor to AJG Financial
            Services, Inc.) and the other parties identified therein and (ii)
            Cash Collateral Pledge and Security Agreement dated as of April 30,
            2001 among BMC Energy, LLC, Countryside Canada Power, Inc. (as
            successor to ABB Energy Capital, LLC) and the other parties
            identified therein (12)

10.45       Form of Restricted Stock Unit for Directors (13)

10.46       Form of Restricted Stock Unit for Officers (13)

10.47       Purchase Agreement dated September 30, 2004 among AJG Financial
            Services, Inc. and U.S. Energy Biogas Corp. (13)

10.48       Assignment Agreement dated September 30, 2004 among AJG Financial
            Services, Inc. and U.S. Energy Biogas Corp. (13)

10.49       Severance Agreement and Mutual Release is by and between Edward M.
            Campana and US Energy Systems, Inc.(14)

10.50       Severance Agreement, Mutual Release and Consulting Agreement by and
            between Allen J. Rothman and US Energy Systems, Inc.(14)


                                       16
<PAGE>

--------    --------------------------------------------------------------------
Exhibit
Number      Description
--------    --------------------------------------------------------------------

10.51       Employment Agreement dated as of May 10, 2005 by and between the
            Company and Lawrence I. Schneider

10.52       Description of compensation program for directors

31.1        Rule 13a-14(a)/15d-14(a) certifications

31.2        Rule 13a-14(a)/15d-14(a) certifications

32.1        Section 1350 certification

-------------
(1)   Incorporated by reference to the Company's Registration Statement on Form
      SB-2 (File No. 333-94612)

(2)   Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the year ended January 31, 1994

(3)   Incorporated by reference to the Company's Current Report on Form 8-K
      filed on March 26, 1998

(4)   Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      for the quarter ended July 31, 2000

(5)   Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      for the quarter ended October 31, 2000

(6)   Incorporated by reference to the Company's Current Report on Form 8-K
      dated May 4, 2000

(7)   Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the year ended January 31, 1999

(8)   Incorporated by reference to the Company's Report on Form 10-KSB for the
      period ended December 31, 2000

(9)   Incorporated by reference to the Company's Current Report on Form 8-K
      dated June 11, 2001

(10)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      dated August 14, 2002

(11)  Incorporated by reference to the Company's Report on Form 10-K for the
      period ended March 31, 2003, as amended

(12)  Incorporated by reference to the Company's Report on Form 10-Q for the
      period ended March 31, 2004

(13)  Incorporated by reference to the Company's Report on Form 10-Q for the
      period ended September 30, 2004

(14)  Incorporated by reference to the Company's Annual Report on Form 10K, as
      amended, for the year ended December 31, 2004



                                       17
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


U.S. ENERGY SYSTEMS, INC.


By:      /s/Lawrence I. Schneider
         -----------------------------------
         Lawrence I. Schneider                               Dated: May 23, 2005
         Chief Executive Officer
         (Principal Executive Officer)


By:      /s/Richard Augustine
         -----------------------------------
         Richard J. Augustine                                Dated: May 23, 2005
         Chief Accounting Officer
         (Principal Accounting and Financial Officer)



                                       18