**SECURITIES        AND EXCHANGE COMMISSION**

**WASHINGTON,        DC 20549 **

**FORM        10-Q**

|   | x  | **QUARTERLY                  REPORT PURSUANT TO SECTION 13 OR 15****(d)                  OF****THE                  SECURITIES EXCHANGE ACT OF                  1934** |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | o | **TRANSITION                  REPORT PURSUANT TO SECTION 13 OR 15****(d)****OF                  THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM**                      **TO **                     **.** |
|--|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**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**

**(914)        993-6443**

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

**CONTENTS**

| **PART                    I: Financial Information**                                                                                                                                           |     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                                                           | **PAGE** |
| **Item****1:** Financial                    Statements                                                                                                                                    |     |
|                                                                                                                                                                                           |     |
| Consolidated                    Balance Sheets as of September 30, 2005 and December 31,                    2004                                                                               | 3        |
|                                                                                                                                                                                           |     |
| Consolidated                    Statements of Operations and                    Comprehensive Income for the three months and nine months ended                    September 30, 2005 and 2004 |  5  |
|                                                                                                                                                                                           |     |
| Consolidated                    Statements of Cash Flows for                    the nine months ended September 30, 2005 and 2004                                                              |  6  |
|                                                                                                                                                                                           |     |
| Notes                  to Consolidated                  Financial Statements                                                                                                              |  7  |
|                                                                                                                                                                                           |     |
| **Item                    2:**Management’s                    Discussion and Analysis                    of Financial Condition and Results of Operations                                |     |
|                                                                                                                                                                                           |     |
| **Item                    3:**Quantitative                    and Qualitative Disclosures About Market Risk                                                                                    | 20       |
|                                                                                                                                                                                           |     |
| **Item                    4:**Controls                    and Procedures                                                                                                                       | 21       |
|                                                                                                                                                                                           |     |
| **PART                    II. Other Information**                                                                                                                                              |     |
|                                                                                                                                                                                           |     |
| **Item                    6:**                    Exhibits                                                                                                                                     | 21       |
|                                                                                                                                                                                           |     |
| Signatures                                                                                                                                                                                     | 26       |
|                                                                                                                                                                                           |     |

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

**CONSOLIDATED        BALANCE SHEETS**

**(In        thousands, except share data)**

| **ASSETS**                                                                                                                                                   |   | **September                  30,****2005** |    | **December                  31,****2004**   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|---------------------------------------------|--------|
|                                                                                                                                                         |   | **(Unaudited)**                            |    | **(Audited,                  As Restated)** |   |
| Current                  Assets:                                                                                                                             |   |                                       |    |                                        |   |
| Cash                                                                                                                                                         |   | $                                          | 13,375  |                                        | $      | 15,982 |   |
| Restricted                  Cash and Marketable Securities                                                                                                   |   |                                       | 30,976  |                                        |   | 29,609 |   |
| Accounts                  Receivable (less allowance for doubtful accounts of $46 and $107                  in 2005                  and 2004, respectively) |   |                                       | 4,765   |                                        |   | 4,857 |   |
| Installment                  Sale Partnership Interest and Interest Receivable, Current                  Portion                                             |   |                                       | 1,748   |                                        |   | 2,494 |   |
| Other                  Current Assets                                                                                                                        |   |                                       | 2,309   |                                        |   | 1,639 |   |
| Total                  Current Assets, Net                                                                                                                   |   |                                       | 53,173  |                                        |   | 54,581 |   |
|                                                                                                                                                         |   |                                       |    |                                        |   |   |   |
| Property,                  Plant and Equipment, Net                                                                                                          |   |                                       | 39,848  |                                        |   | 41,901 |   |
| Construction                  in Progress                                                                                                                    |   |                                       | 198     |                                        |   | 198 |   |
| Installment                  Sale Partnership Interest, less Current Portion                                                                                 |   |                                       | 22,669  |                                        |   | 23,537 |   |
| Investments                                                                                                                                                  |   |                                       | 1,207   |                                        |   | 801 |   |
| Debt                  Issuance Costs, Net of Accumulated Amortization                                                                                        |   |                                       | 10,674  |                                        |   | 11,266 |   |
| Goodwill                                                                                                                                                     |   |                                       | 26,618  |                                        |   | 26,618 |   |
| Foreign                  Currency Hedge                                                                                                                      |   |                                       | 2,278   |                                        |   | 2,414 |   |
| Deferred                  Tax Asset                                                                                                                          |   |                                       | 13,087  |                                        |   | 14,605 |   |
| Other                  Assets                                                                                                                                |   |                                       | 56      |                                        |   | 11 |   |
| Total                  Assets                                                                                                                                |   | $                                          | 169,808 |                                        | $      | 175,932 |   |
|                                                                                                                                                         |   |                                       |    |                                        |   |   |   |
| **LIABILITIES**                                                                                                                                              |   |                                       |    |                                        |   |   |   |
| Current                  Liabilities:                                                                                                                        |   |                                       |    |                                        |   |   |   |
| Current                  Portion Long-Term Debt                                                                                                              |   | $                                          | 1,879   |                                        | $      | 1,517 |   |
| Accounts                  Payable and Accrued Expenses                                                                                                       |   |                                       | 4,069   |                                        |   | 4,057 |   |
| Deferred                  Revenue Installment Sale Partnership Interest, Current                  Portion                                                    |   |                                       | 273     |                                        |   | 398 |   |
| Total                  Current Liabilities                                                                                                              |   |                                       | 6,221   |                                        |   | 5,972 |   |
|                                                                                                                                                         |   |                                       |    |                                        |   |   |   |
| Long-Term                  Debt less Current Portion                                                                                                         |   |                                       | 87,285  |                                        |   | 86,297 |   |
| Deferred                  Revenue Installment Sale Partnership Interest, less Current                  Portion                                               |   |                                       | 16,353  |                                        |   | 16,699 |   |
| Deferred                  Royalty                                                                                                                            |   |                                       | 5,494   |                                        |   | 5,686 |   |
| Illinois                  Subsidy Liability                                                                                                                  |   |                                       | 30,530  |                                        |   | 26,346 |   |
| Total                  Liabilities                                                                                                                           |   |                                       | 145,883 |                                        |   | 141,000 |   |
|                                                                                                                                                         |   |                                       |    |                                        |   |   |   |
| Minority                  Interests                                                                                                                          |   |                                       | 6,241   |                                        |   | 9,175 |   |

*See        notes to consolidated financial statements*
** **

----

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

**CONSOLIDATED        BALANCE SHEETS (CONTINUED)**

**(In        thousands, except share data)**

|                                                                                                            |   | **September                  30,****2005** |    | **December                  31,****2004**   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|---------------------------------------------|--------|
|                                                                                                            |   | **(Unaudited)**                            |    | **(Audited,                  As restated)** |   |
| **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                  12,406,693 |   |                                       | 125     |                                        |   | 123 |   |
| Treasury                  Stock, at Cost                                                                        |   |                                       | (2,204  | )                                           |   | (2,204 | ) |
| Additional                  Paid-in Capital                                                                     |   |                                       | 63,659  |                                        |   | 64,062 |   |
| Accumulated                  Deficit                                                                            |   |                                       | (46,038 | )                                           |   | (38,246 | ) |
| Accumulated                  Other Comprehensive Income                                                         |   |                                       | 2,130   |                                        |   | 2,010 |   |
| Total                  Stockholders’ Equity                                                               |   |                                       | 17,684  |                                        |   | 25,757 |   |
| **TOTAL                  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                           |   | $                                          | 169,808 |                                        | $      | 175,932 |   |

*See        notes to consolidated financial statements*

----

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

**CONSOLIDATED        STATEMENTS OF OPERATIONS**

**AND        COMPREHENSIVE INCOME**

**(Unaudited)**

*(in        Thousands, except Earnings per Share)*

|                                                                                                   |   | **THREE                  MONTHS ENDED**  | **NINE                  MONTHS ENDED**     |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------------------------------------------|
|                                                                                                   |   |                                          | **September                  30,****2005** |   |   | **September                  30,****2004** |   |   | **September                  30,****2005** |   |   | **September                  30,****2004** |   |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                               |   | $                                             | 4,616                                      |   | $ | 6,213 |   | $ | 14,116 |   | $ | 15,809 |   |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Costs                  and expenses:                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Operating                  Expenses                                                                    |   |                                          | 2,126                                      |   |   | 2,523 |   |   | 6,601 |   |   | 7,454 |   |
| General                  and Administrative Expenses                                                   |   |                                          | 1,393                                      |   |   | 1,733 |   |   | 3,932 |   |   | 3,415 |   |
| Depreciation                  and Amortization                                                         |   |                                          | 1,095                                      |   |   | 1,232 |   |   | 3,286 |   |   | 3,298 |   |
| Loss                  From Joint Ventures                                                              |   |                                          | (162                                       | ) |   |   |   |   | (271 | ) |   | -- |   |
| Reserve                  for SEFL Investment                                                           |   |                                          | --                                         |   |   | (1,087 | ) |   | -- |   |   | 7,089 |   |
| Total                  Costs and Expenses                                                              |   |                                          | 4,452                                      |   |   | 4,401 |   |   | 13,548 |   |   | 21,256 |   |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Income                  (Loss) From Operations                                                         |   |                                          | 164                                        |   |   | 1,812 |   |   | 568 |   |   | (5,447 | ) |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Interest                  Income                                                                       |   |                                          | 857                                        |   |   | 806 |   |   | 2,467 |   |   | 1,933 |   |
| Dividend                  Income.                                                                      |   |                                          | --                                         |   |   | -- |   |   | -- |   |   | 15 |   |
| Other                  Income                                                                          |   |                                          | 257                                        |   |   | 2,313 |   |   | 513 |   |   | 2,313 |   |
| Foreign                  Currency Transaction                                                          |   |                                          | (4,039                                     | ) |   | (4,346 | ) |   | (2,387 | ) |   | (3,198 | ) |
| Interest                  Expense                                                                      |   |                                          | (2,695                                     | ) |   | (2,406 | ) |   | (8,115 | ) |   | (6,842 | ) |
| Transaction                  Cost Expenses                                                             |   |                                          | --                                         |   |   | 45 |   |   | -- |   |   | (12,185 | ) |
| Minority                  Interest                                                                     |   |                                          | 1,014                                      |   |   | 525 |   |   | 752 |   |   | 6,227 |   |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Income(Loss)                  Before Taxes                                                             |   |                                          | (4,442                                     | ) |   | (1,251 | ) |   | (6,202 | ) |   | (17,184 | ) |
| Income                  Tax Benefit (Expense)                                                          |   |                                          | (1,826                                     | ) |   | 575 |   |   | (1,740 | ) |   | 3,735 |   |
| Loss                  Before Discontinued Operations and Gain on Sale of                  Subsidiaries |   |                                          | (6,268                                     | ) |   | (676 | ) |   | (7,942 | ) |   | (13,449 | ) |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Income                  From Discontinued Operations (Net of Tax)                                      |   |                                          | --                                         |   |   | -- |   |   | 150 |   |   | 495 |   |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Gain                  on Sale of Subsidiaries and Partnership Interest.                                |   |                                          | --                                         |   |   | -- |   |   | -- |   |   | 6,560 |   |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| NET                  LOSS                                                                              |   |                                          | (6,268                                     | ) |   | (676 | ) |   | (7,792 | ) |   | (6,394 | ) |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| DIVIDENDS                  ON PREFERRED STOCK                                                          |   |                                          | (206                                       | ) |   | (207 | ) |   | (619 | ) |   | (621 | ) |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| LOSS                  APPLICABLE TO COMMON STOCK                                                       |   | $                                             | (6,474                                     | ) | $ | (883 | ) | $ | (8,411 | ) | $ | (7,015 | ) |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| LOSS                  PER SHARE OF COMMON STOCK:                                                       |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Loss                  Per Share of Common Stock - Basic and Diluted                                    |   | $                                             | (0.52                                      | ) | $ | (0.07 | ) | $ | (0.68 | ) | $ | (0.59 | ) |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Weighted                  Average Number of Common Shares Outstanding - Basic                          |   |                                          | 12,407                                     |   |   | 11,890 |   |   | 12,407 |   |   | 11,890 |   |
| Weighted                  Average Number of Common Shares Outstanding - Diluted                        |   |                                          | 17,611                                     |   |   | 17,053 |   |   | 17,611 |   |   | 17,053 |   |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| OTHER                  COMPREHENSIVE INCOME(LOSS), NET OF TAX:                                         |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |
| Net                  Loss                                                                              |   | $                                             | (6,268                                     | ) | $ | (676 | ) | $ | (7,792 | ) | $ | (6,394 | ) |
| Gain                  (Loss) on Foreign Currency Translation                                           |   |                                          | 377                                        |   |   | 122 |   |   | 121 |   |   | (345 | ) |
| Total                  Comprehensive Income(Loss)                                                      |   | $                                             | (5,891                                     | ) | $ | (554 | ) | $ | (7,671 | ) | $ | (6,739 | ) |
|                                                                                                   |   |                                          |                                       |   |   |   |   |   |   |   |   |   |   |

*See        notes to consolidated financial statements*

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

**CONSOLIDATED        STATEMENTS OF CASH FLOWS**

*(in        Thousands)*

*(unaudited)*

|                                                                                                                          |   |   | **FOR                    THE NINE MONTHS****ENDED                    SEPTEMBER 30,** |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------------|
|                                                                                                                          |   |   | **2005**                                                                             |   |   | **2004** |   |
| CASH                    FLOWS USED IN OPERATING ACTIVITIES:                                                                   |   |   |                                                                                 |   |   |   |   |
| Net                    Loss                                                                                                   |   | $      | (7,791                                                                               | ) | $ | (6,394 | ) |
| Adjustments                    to reconcile Net Loss to Net Cash Provided by(Used in Operating                    Activities: |   |   |                                                                                 |   |   |   |   |
| Depreciation                                                                                                                  |   |   | 2,693                                                                                |   |   | 2,799 |   |
| Amortization                                                                                                                  |   |   | 593                                                                                  |   |   | 500 |   |
| Minority                    Interest                                                                                          |   |   | (2,934                                                                               | ) |   | 860 |   |
| Deferred                    Income Taxes                                                                                      |   |   | 1,518                                                                                |   |   | 7,705 |   |
| Unrealized                    Gains/(Losses)                                                                                  |   |   | 120                                                                                  |   |   |   |   |
| Foreign                    Currency Translation Adjustment                                                               |   |   | --                                                                                   |   |   | 3,198 |   |
| Gain                    on Sale of Subsidiary                                                                            |   |   | --                                                                                   |   |   | (20,561 | ) |
| Reserve                    for Investment in SEFL                                                                        |   |   | --                                                                                   |   |   | 8,337 |   |
| Changes                    In:                                                                                                |   |   |                                                                                 |   |   |   |   |
| Accounts                    and Notes Receivable Trade                                                                        |   |   | 92                                                                                   |   |   | 3,473 |   |
| Other                    Current Assets                                                                                       |   |   | (670                                                                                 | ) |   | 826 |   |
| Other                    Assets                                                                                               |   |   | (45                                                                                  | ) |   | 250 |   |
| Accounts                    Payable and Accrued Expenses                                                                      |   |   | 11                                                                                   |   |   | (1,741 | ) |
| Deferred                    Revenue and Other                                                                                 |   |   | (471                                                                                 | ) |   | (2,938 | ) |
| Foreign                    Currency Hedge                                                                                     |   |   | 136                                                                                  |   |   | ------- |   |
| Rate                    Incentive Liability                                                                                   |   |   | 4,184                                                                                |   |   | 4,375 |   |
| Net                    Cash (Used In)/Provided by Operating Activities                                                        |   |   | (2,564                                                                               | ) |   | 689 |   |
|                                                                                                                          |   |   |                                                                                 |   |   |   |   |
| CASH                    FLOWS FROM INVESTING ACTIVITIES:                                                                      |   |   |                                                                                 |   |   |   |   |
| Restricted                    Cash                                                                                            |   |   | (1,367                                                                               | ) |   | (18,068 | ) |
| Change                    in Investments                                                                                      |   |   | (405                                                                                 | ) |   | 15,776 |   |
| Acquisitions                    of Property and Equipment                                                                     |   |   | (640                                                                                 | ) |   | (524 | ) |
| Construction                    in Progress                                                                                   |   |   | --                                                                                   |   |   | 595 |   |
| Goodwill                                                                                                                      |   |   | --                                                                                   |   |   | (400 | ) |
| Net                    Cash Used In Investing Activities                                                                      |   |   | (2,412                                                                               | ) |   | (2,621 | ) |
|                                                                                                                          |   |   |                                                                                 |   |   |   |   |
| CASH                    FLOWS PROVIDED BY FINANCING ACTIVITIES:                                                               |   |   |                                                                                 |   |   |   |   |
| Proceeds                    from Notes Receivable                                                                             |   |   | 1,614                                                                                |   |   | 69 |   |
| Proceeds                    from Long Term Debt                                                                               |   |   | --                                                                                   |   |   | 22,088 |   |
| Payment                    of Long-Term Debt                                                                                  |   |   | 1,350                                                                                |   |   | (9,274 | ) |
| Debt                    Issuance Costs                                                                                        |   |   | --                                                                                   |   |   | (9,558 | ) |
| Deferred                    Royalty                                                                                           |   |   | (193                                                                                 | ) |   | 5,686 |   |
| Additional                    Common Stock                                                                                    |   |   | 2                                                                                    |   |   | -- |   |
| Additional                    Paid in Capital                                                                                 |   |   | (404                                                                                 | ) |   | (621 | ) |
| Net                    Cash Provided by Financing Activities                                                                  |   |   | 2,369                                                                                |   |   | 8,390 |   |
|                                                                                                                          |   |   |                                                                                 |   |   |   |   |
| NET                    INCREASE(DECREASE) IN CASH                                                                             |   |   | (2,607                                                                               | ) |   | 6,458 |   |
|                                                                                                                          |   |   |                                                                                 |   |   |   |   |
| Cash                    - beginning of period                                                                                 |   |   | 15,982                                                                               |   |   | 10,336 |   |
| Cash                    - end of period                                                                                       |   | $      | 13,375                                                                               |   | $ | 16,794 |   |
|                                                                                                                          |   |   |                                                                                 |   |   |   |   |

*See        notes to consolidated financial statements*

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

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR        THE THREE MONTH AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND        2004**

**(Amounts        in Thousands, Except Share Data)**

**NOTE        A — BASIS OF PRESENTATION **

**NOTE        B — RESTATEMENTS AND PRIOR PERIOD ADJUSTMENT**

**1.  **
**Foreign          Currency Transaction**

**2.  **
**Gain          Recognition**

----

| **CONSOLIDATED                  BALANCE SHEET AT DECEMBER 31, 2004** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION AND GAIN RECOGNITION                  RESTATEMENT** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION RESTATEMENT** |   |   | **AS                  ORIGINALLY REPORTED** |   |
|----------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------|--------|--------|---------------------------------------------|--------|
| Foreign                  Currency Hedge                              |   | $      | 2,414                                                                                                     |   | $      | 2,414                                                               |   | $      | 1,207                                       |   |
| Deferred                  Tax Asset                                  |   | $      | 14,605                                                                                                    |   | $      | 14,605                                                              |   | $      | 12,409                                      |   |
| Total                  Assets                                        |   | $      | 175,932                                                                                                   |   | $      | 175,932                                                             |   | $      | 172,529                                     |   |
| Long-Term                  Debt                                      |   | $      | 87,814                                                                                                    |   | $      | 87,814                                                              |   | $      | 80,521                                      |   |
| Deferred                  Revenue                                    |   | $      | 17,097                                                                                                    |   | $      | 3,097                                                               |   | $      | 3,097                                       |   |
| Total                  Liabilities                                   |   | $      | 141,000                                                                                                   |   | $      | 127,000                                                             |   | $      | 119,707                                     |   |
| Minority                  Interests                                  |   | $      | 9,175                                                                                                     |   | $      | 15,577                                                              |   | $      | 17,506                                      |   |
| Accumulated                  Deficit                                 |   | $      | (38,246                                                                                                   | )      | $      | (29,929                                                             | )      | $      | (28,360                                     | )      |
| Acc.                  Other Comprehensive Income                     |   | $      | 2,010                                                                                                     |   | $      | 2,010                                                               |   |   | 1,682                                       |   |
| Total                  Stockholder Equity                            |   | $      | 25,758                                                                                                    |   | $      | 33,355                                                              |   | $      | 35,316                                      |   |
| Total                  Liabilities and Stockholder Equity            |   | $      | 175,932                                                                                                   |   | $      | 175,932                                                             |   | $      | 172,529                                     |   |

----

| **STATEMENT                  OF OPERATIONS****FOR                  THE THREE MONTHS ENDED SEPTEMBER 30, 2004** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION AND GAIN RECOGNITION                  RESTATEMENT** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION RESTATEMENT** |   |   | **AS                  ORIGINALLY REPORTED** |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------|--------|--------|---------------------------------------------|--------|
| Foreign                  Currency Transaction   Income                                               |   | $      | (4,346                                                                                                    | )      | $      | (4,346                                                              | )      | $      | -------                                     |   |
| Gain                  on Sale of Subsidiary                                                                    |   | $      | ---------                                                                                                 |   | $      | ---------                                                           |   | $      | -------                                     |   |
| Minority                  Interest                                                                             |   | $      | 525                                                                                                       |   | $      | 525                                                                 |   | $      | (670                                        | )      |
| Income                  Tax Benefit(Expense)                                                                   |   | $      | 575                                                                                                       |   | $      | 575                                                                 |   | $      | (1,157                                      | )      |
| Net                  Income(Loss)                                                                              |   | $      | (676                                                                                                      | )      | $      | (676                                                                | )      | $      | 743                                         |   |
| Net                  income Applicable to Common Stock                                                         |   | $      | (883                                                                                                      | )      | $      | (883                                                                | )      | $      | 536                                         |   |
| Income(Loss)                  Per Share of Common Stock                                                   |   | $      | (0.07                                                                                                     | )      | $      | (0.07                                                               | )      | $      | 0.04                                        |   |

|  **STATEMENT                  OF OPERATIONS****FOR                  THE NINE MONTHS ENDED****SEPTEMBER                  30, 2004** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION AND GAIN RECOGNITION                  RESTATEMENT** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION RESTATEMENT** |   |   | **AS                  ORIGINALLY REPORTED** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------|--------|--------|---------------------------------------------|--------|
| Foreign                  Currency Transaction Income                                                                               |   | $      | (3,198                                                                                                    | )      | $      | (3,198                                                              | )      | $      | -------                                     |   |
| Gain                  on Sale of Subsidiary                                                                                             |   | $      | 6,560                                                                                                     |   | $      | 9,945                                                               |   | $      | 9,945                                       |   |
| Minority                  Interest                                                                                                      |   | $      | 6,227                                                                                                     |   | $      | 4,360                                                               |   | $      | 3,481                                       |   |
| Income                  Tax Benefit                                                                                                     |   | $      | 3,735                                                                                                     |   | $      | 9,815                                                               |   | $      | 8,541                                       |   |
| Net                  Income(Loss)                                                                                                       |   | $      | (6,394                                                                                                    | )      | $      | 1,204                                                               |   | $      | 2,249                                       |   |
| Net                  Income(Loss) Applicable to Common                  Stock                                                           |   | $      | (7,015                                                                                                    | )      | $      | 583                                                                 |   | $      | 1,628                                       |   |
| Income                  Per Share of Common Stock                                                                                       |   | $      | (0.59                                                                                                     | )      | $      | 0.05                                                                |   | $      | 0.13                                        |   |

|    **STATEMENT                  OF OPERATIONS****FOR                  THE TWELVE MONTHS ENDED DECEMBER 31, 2004** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION AND GAIN RECOGNITION                  RESTATEMENT** |   |   | **AFTER                  FOREIGN CURRENCY TRANSACTION RESTATEMENT** |   |   | **AS                  ORIGINALLY REPORTED** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------|--------|--------|---------------------------------------------|--------|
| Foreign                  Currency Transaction Income                                                                        |   | $      | (6,689                                                                                                    | )      | $      | (6,689                                                              | )      | $      | -------                                     |   |
| Gain                  on Sale of Subsidiary                                                                                      |   | $      | 6,560                                                                                                     |   | $      | 9,944                                                               |   | $      | 9,944                                       |   |
| Minority                  Interest                                                                                               |   | $      | 5,856                                                                                                     |   | $      | 3,990                                                               |   | $      | 2,061                                       |   |
| Income                  Tax Benefit                                                                                              |   | $      | 6,694                                                                                                     |   | $      | 12,774                                                              |   | $      | 10,003                                      |   |
| Net                  Income(Loss)                                                                                                |   | $      | (9,244                                                                                                    | )      | $      | (1,646                                                              | )      | $      | 644                                         |   |
| Net                  Income(Loss) Applicable to Common                  Stock                                               |   | $      | (10,072                                                                                                   | )      | $      | (2,474                                                              | )      | $      | (184                                        | )      |
| Income                  Per Share of Common Stock                                                                                |   | $      | (0.85                                                                                                     | )      | $      | (0.21                                                               | )      | $      | (0.02                                       | )      |

**NOTE        C**
**BASIS        OF REPORTING**

----

**NOTE        D — REVENUE RECOGNITION **

**NOTE        E — EARNINGS PER SHARE DATA **

**NOTE        F — STOCK-BASED COMPENSATION**

**NOTE        G — FOREIGN CURRENCY**

**NOTE        H — INVESTMENTS IN DERIVATIVES**

**NOTE        I — SUBSIDIARIES AND AFFILIATES**

**1.        U.S. Energy Biogas Corp. (“USEB”).**

**2.        USE Canada Energy Corp. (“USE Canada”).**

**3.        Scandinavian Energy Finance, Limited /EnergiSystems I Sverige AB        (“SEFL”).**

**NOTE        J — RESTRICTED CASH AND MARKETABLE SECURITIES**

----

|   |                                                           |   |   | September                    30, 2005 |   |   | December                    31, 2004 |   |
|--------|----------------------------------------------------------------|--------|--------|---------------------------------------|--------|--------|--------------------------------------|--------|
|   | Illinois                    Subsidy Liability Reserve Accounts |   | $      | 25,401                                |   | $      | 23,438                               |   |
|   | Improvement                    Reserve                         |   |   | 3,342                                 |   |   | 4,022                                |   |
|   | Debt                    Service Reserve                        |   |   | 2,095                                 |   |   | 2,011                                |   |
|   | Project                  Contract Reserve                      |   |   | 138                                   |   |   | 138                                  |   |
|   |                                                           |   | $      | 30,976                                |   | $      | 29,609                               |   |

**NOTE        K - ILLINOIS RETAIL RATE PROGRAM**

| **Project**                   |   | **Commencement                  of****Commercial                  Operations** |   | **Expiration                  of Illinois****Retail                  Rate Program** |   | **Estimated                  Commencement of****Repayment                  of Subsidy Liability****(1)** |
|-------------------------------|--------|--------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|
| 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                                                                           |
| Roxanna                       |   | 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,                  2008                                                      |   | February,                  2008                                                                          |

| (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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTE        L — TRANSACTIONS WITH AFFILIATES**

**NOTE        M — FOREIGN CURRENCY TRANSACTIONS**

----

|                                                                                                     |   |   | **Three                  Months Ended****September                  30, 2005** |   |   | **Nine                  Months Ended****September                  30, 2005** |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------|--------|
| Currency                  Exchange Rate at Loan Origination, April 8, 2004                               |   | $      | 1.3140                                                                         |   | $      | 1.3140                                                                        |   |
| Currency                  Exchange Rate at December 31, 2004                                             |   | $      | 1.2047                                                                         |   | $      | 1.2047                                                                        |   |
| Currency                  Exchange Rate as of June 30, 2005                                              |   | $      | 1.2287                                                                         |   | $      | 1.2287                                                                        |   |
| Currency                  Exchange Rate as of September 30, 2005                                    |   | $      | 1.1713                                                                         |   | $      | 1.1713                                                                        |   |
| Cumulative                  Translation Adjustments Beginning Of Reporting Period                        |   | $      | 5,336                                                                          |   | $      | 6,988                                                                         |   |
| Cumulative                  Translation Adjustments End Of Reporting Period                              |   | $      | 9,375                                                                          |   | $      | 9,375                                                                         |   |
| Aggregate                  Adjustment for the Current Reporting Period                  Income/(Expense) |   | $      | 4,039                                                                          |   | $      | 2,387                                                                         |   |
| Deferred                  Income Taxes Allocated To Adjustment in the Reporting                  Period  |   | $      | 1,038                                                                          |   | $      | 1,046                                                                         |   |

**NOTE        N - OTHER COMPREHENSIVE INCOME/(LOSS)**

|                                                                        |   |   | **THREE                  MONTHS ENDED**   |   |  **NINE                  MONTHS ENDED** |                                       |
|-----------------------------------------------------------------------------|--------|--------|-----------------------------------------------------|--------|----------------------------------------------|--------------------------------------------|
|                                                                        |   |   | **September                  30,****2005**          |   |                                         | **September                  30,****2004** |   |   | **September                  30,****2005** |   |   | **September                  30,****2004** |   |
| Unrealized                  Gains/(Losses) on Available for Sale Securities |   | $      | 219                                                 |   | $                                            | (107                                       | ) | $ | 130 |   | $ | (107 | ) |
| Foreign                  Currency Exchange Rates                            |   |   | 158                                                 |   |                                         | 229                                        |   |   | (9 | ) |   | (238 | ) |
| Totals                                                                      |   | $      | 377                                                 |   | $                                            | 122                                        |   | $ | 121 |   | $ | (345 | ) |

**NOTE        O - DEFERRED INCOME TAXES**

**NOTE        P - PRIOR PERIOD ADJUSTMENT**

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

**RESULTS        OF OPERATIONS**

----

----

**U.S.        ENERGY SYTEMS, INC. AND SUBSIDIARIES**

**Proforma        Financial Statements for the Three Months Ended September 30,        2004**

**Adjusted        for Non Recurring Items**

**(Unaudited)**

|                                                                             |   |                                                                                                     | **Adjustments                    for****Non-recurring                    Items** |   |                    |   |   |                                    |   |   |
|----------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|--------|-------------------------|--------|--------|-----------------------------------------|--------|--------|
|                                                              |   | **Actual                    Three Months Ended September 30, 2004 As                    Restated**  |                                                                             |   | **CPIF****Transaction** |   |   | **Gain****From****Debt****Acquisition** |   |   | **IEGP                    II****Sale** |   |   | **Reserve                    for SEFL** |   |   | **For                    the****Three                    Months Ended September 30, 2004 after elimination of non recurring                    items** |   |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                         | $      | 6,213                                                                                                    |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   | $ | 6,213 |   |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Costs                    and expenses:                                           |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Operating                    Expenses                                            |   | 2,523                                                                                                    |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   | 2,523 |   |
| General                    and Administrative Expenses                           |   | 1,733                                                                                                    |                                                                             |   | 300                     |   |   |                                    |   |   |   |   |   |   |   |   | 2,033 |   |
| Depreciation                    and Amortization                                 |   | 1,232                                                                                                    |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   | 1,232 |   |
| Reserve                    for SEFL                                              |   | (1,087                                                                                                   | )                                                                                |   |                    |   |   |                                    |   |   |   |   |   | 1,087 |   |   | ---- |   |
| Gain                    from Joint Ventures                                      |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Total                    Costs and Expenses                                      |   | 4,401                                                                                                    |                                                                             |   | 300                     |   |   |                                    |   |   | 0 |   |   | 1,087 |   |   | 5,788 |   |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Income(Loss)                    From Operations                                  |   | 1,812                                                                                                    |                                                                             |   | (300                    | )      |   |                                    |   |   | 0 |   |   | (1,087 | ) |   | 425 |   |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Interest                    Income                                               |   | 806                                                                                                      |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   | 806 |   |
| Dividend                    Income                                               |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Foreign                    Currency Transaction                                  |   | (4,346                                                                                                   | )                                                                                |   |                    |   |   |                                    |   |   |   |   |   |   |   |   | (4,346 | ) |
| Other                    Income                                                  |   | 2,313                                                                                                    |                                                                             |   |                    |   |   | (2,729                                  | )      |   |   |   |   |   |   |   | (416 | ) |
| Interest                    Expense                                              |   | (2,406                                                                                                   | )                                                                                |   |                    |   |   |                                    |   |   |   |   |   |   |   |   | (2,406 | ) |
| Transaction                    Cost Expenses                                     |   | 45                                                                                                       |                                                                             |   | (45                     | )      |   |                                    |   |   |   |   |   |   |   |   | ---- |   |
| Minority                    Interest                                             |   | 525                                                                                                      |                                                                             |   |                    |   |   | 772                                     |   |   |   |   |   |   |   |   | 1,297 |   |
| Income                    before taxes                                           |   | (1,251                                                                                                   | )                                                                                |   | (345                    | )      |   | (1,957                                  | )      |   | 0 |   |   | (1,087 | ) |   | (4,640 | ) |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Income                    tax (expense) benefit                                  |   | 575                                                                                                      |                                                                             |   | 131                     |   |   | 1,037                                   |   |   |   |   |   | 413 |   |   | 2,156 |   |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Income                    before Disposal of Segment and Discontinued Operations |   | (676                                                                                                     | )                                                                                |   | (214                    | )      |   | (920                                    | )      |   | 0 |   |   | (674 | ) |   | (2,484 | ) |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Gain/(Loss)                    on Disposal of Segment                            |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   | 0 |   |   |   |   |   | ---- |   |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Income                    from discontinued operation net of income tax          |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   | ---- |   |
| NET                    INCOME (LOSS)                                             |   | (676                                                                                                     | )                                                                                |   | (214                    | )      |   | (920                                    | )      |   | 0 |   |   | (674 | ) |   | (2,484 | ) |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| DIVIDENDS                    ON PREFERRED STOCK                                  |   | (207                                                                                                     | )                                                                                |   |                    |   |   |                                    |   |   |   |   |   |   |   |   | (207 | ) |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |
| INCOME                    (LOSS) APPLICABLE TO COMMON STOCK                      |   | (883                                                                                                     | )                                                                                | $      | (214                    | )      | $      | (920                                    | )      | $      | 0 |   | $ | (674 | ) | $ | (2,691 | ) |
|                                                                             |   |                                                                                                     |                                                                             |   |                    |   |   |                                    |   |   |   |   |   |   |   |   |   |   |

----

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

**Proforma        Financial Statements for the Nine Months Ended September 30,        2004**

**Adjusted        for Non Recurring Items**

**(Unaudited)**

|                                                                           |   |                                                                                                        |    | **Adjustments                  for**** ****Non-recurring                  Items** |   |                                                        |   |                                 |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                      |   | **Actual****Nine                  Month Ended September 30,****2004****As                  Restated**  |    |  **CPIF****Transaction**                                                          |   |  **Gain                  from****Debt****Acquisition** |   | **IEGP                  II****Sale** |   |  **Reserve                  for****SEFL** |   | **For                  the****Nine                  months Ended September 30,****2004                  after Elimination of****Non                  Recurring Items** |   |
|                                                                           |   |                                                                                                        |    |                                                                              |   |                                                   |   |                                 |   |    |   |   |   |
| Revenues                                                                       |   | $                                                                                                           | 15,809  |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   | $ | 15,809 |   |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Costs                  and expenses:                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  Expenses                                            |   |                                                                                                        | 7,454   |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | 7,454 |   |
| General                  and Administrative Expenses                           |   |                                                                                                        | 3,415   |                                                                                   |   | 1,503                                                       |   |                                 |   |   |   |   |   |   |   |   |   | 4,918 |   |
| Depreciation                  and Amortization                                 |   |                                                                                                        | 3,298   |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | 3,298 |   |
| Reserve                  for SEFL                                              |   |                                                                                                        | 7,089   |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   | (7,089 | ) |   | ---- |   |
| Gain                  for Joint Ventures                                       |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Total                  Costs and Expenses                                      |   |                                                                                                        | 21,256  |                                                                                   |   | 1,503                                                       |   |                                 | 0      |   |   | 0 |   |   | (7,089 | ) |   | 15,670 |   |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income                  From Operations                                        |   |                                                                                                        | (5,447  | )                                                                                      |   | (1,503                                                      | )      |                                 | 0      |   |   | 0 |   |   | 7,089 |   |   | 139 |   |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  Income                                               |   |                                                                                                        | 1,933   |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | 1,933 |   |
| Dividend                  Income                                               |   |                                                                                                        | 15      |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | 15 |   |
| Foreign                  Currency Transaction                                  |   |                                                                                                        | (3,198  | )                                                                                      |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | (3,198 | ) |
| Other                  Income/(Expenses)                                       |   |                                                                                                        | 2,313   |                                                                                   |   |                                                        |   |                                 | (2,729 | ) |   |   |   |   |   |   |   | (416 | ) |
| Interest                  Expense                                              |   |                                                                                                        | (6,842  | )                                                                                      |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | (6,842 | ) |
| Transaction                  Cost Expenses                                     |   |                                                                                                        | (12,185 | )                                                                                      |   | 12,185                                                      |   |                                 |   |   |   |   |   |   |   |   |   | ---- |   |
| Minority                  Interest                                             |   |                                                                                                        | 6,227   |                                                                                   |   | (3,445                                                      | )      |                                 | 772    |   |   | 567 |   |   |   |   |   | 4,121 |   |
| Income                  before taxes                                           |   |                                                                                                        | (17,184 | )                                                                                      |   | 7,237                                                       |   |                                 | (1,957 | ) |   | 567 |   |   | 7,089 |   |   | (4,248 | ) |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income                  tax (expense) benefit                                  |   |                                                                                                        | 3,735   |                                                                                   |   | 1,017                                                       |   |                                 | 1,037  |   |   | 760 |   |   | (2,694 | ) |   | 3,855 |   |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income                  before Disposal of Segment and Discontinued Operations |   |                                                                                                        | (13,449 | )                                                                                      |   | 8,254                                                       |   |                                 | (920   | ) |   | 1,327 |   |   | 4,395 |   |   | (393 | ) |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Gain/Loss                  on Disposal of Segment                              |   |                                                                                                        | 6,560   |                                                                                   |   | (4,560                                                      | )      |                                 |   |   |   | (2,000 | ) |   |   |   |   | ---- |   |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income                  from discontinued operation net of income tax          |   |                                                                                                        | 495     |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | 495 |   |
| NET                  INCOME (LOSS)                                             |   |                                                                                                        | (6,394  | )                                                                                      |   | 3,694                                                       |   |                                 | (920   | ) |   | (673 | ) |   | 4,395 |   |   | 102 |   |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| DIVIDENDS                  ON PREFERRED STOCK                                  |   |                                                                                                        | (621    | )                                                                                      |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   | (621 | ) |
|                                                                           |   |                                                                                                        |    |                                                                                   |   |                                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| INCOME                  APPLICABLE TO COMMON STOCK                             |   | $                                                                                                           | (7,015  | )                                                                                      | $      | 3,694                                                       |   | $                                    | (920   | ) | $ | (673 | ) | $ | 4,395 |   | $ | (519 | ) |

----

**CPIF        Transaction: **

**Gain        on Acquisition of Debt**

**IEGP        II Sale: **

**Reserve        for SEFL: **

**Deferred        Tax Asset Valuation Allowance**

**Comparative        Financial Statements**

----

|                                                |   |   |  **THREE                  MONTHS ENDED**  |   |   | **NINE                  MONTHS ENDED**  |   |
|-----------------------------------------------------|--------|--------|-----------------------------------------------------|--------|--------|----------------------------------------------|--------|
|                                                |   |   | **September                  30,****2005**          |   |   | **September                  30,****2004**   |   |   | **September                  30,****2005** |   |   | **September                  30,****2004** |   |
| Salary                  and Benefits                |   | $      | 468                                                 |   | $      | 872                                          |   | $ | 1,500 |   | $ | 2,315 |   |
| Insurance                                           |   |   | 45                                                  |   |   | 37                                           |   |   | 133 |   |   | 132 |   |
| Corporate                  Expenses                 |   |   | 212                                                 |   |   | 656                                          |   |   | 791 |   |   | 1,520 |   |
| Legal                  and Accounting               |   |   | 234                                                 |   |   | 88                                           |   |   | 567 |   |   | 264 |   |
| Countryside                  Development Fee        |   |   | 92                                                  |   |   | 69                                           |   |   | 224 |   |   | 138 |   |
| Directors’                  Fees and Expenses |   |   | 229                                                 |   |   | 61                                           |   |   | 392 |   |   | 145 |   |
| Royalty                  Expense                    |   |   | 113                                                 |   |   | 250                                          |   |   | 325 |   |   | 404 |   |
| Totals                                              |   | $      | 1,393                                               |   | $      | 2,033                                        |   | $ | 3,932 |   | $ | 4,918 |   |

----

|   |                                                                 |   |   | **Three                  Months Ended****September                  30, 2005** |   |   | **Nine                  Months Ended****September                  30, 2005** |   |
|--------|----------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------|--------|
|   | IEGP                  II Note Receivable                             |   |   | (161                                                                           | )      |   | 557                                                                           |   |
|   | Installment                  Sale Partnership                  Notes |   |   | (41                                                                            | )      |   | (156                                                                          | )      |
|   | Cash                  Investments                                    |   |   | 253                                                                            |   |   | 133                                                                           |   |
|   | Total                                                                |   |   | 51                                                                             |   |   | 534                                                                           |   |

**LIQUIDITY        AND CAPITAL RESOURCES**

----

**Obligation        for an Equity Contribution**

**Installment        Sale Note Proceeds/Internal Revenue Code Section 29**

**CAUTIONARY        STATEMENT RELATING TO FORWARD LOOKING STATEMENTS**

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**Item        3: Quantitative and Qualitative Disclosures about Market        Risk**

**Item        4: Controls and Procedures**

**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) |

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| **Exhibit****Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                    |
| 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)                                                                                                                                                                                                                                                                                                                             |

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| **Exhibit****Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

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| **Exhibit****Number** |   | **Description**                                                                                                                                                                                         |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 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) |
| 10.51                 |   | Employment                          Agreement dated as of May 10, 2005 by and between the Company                          and Lawrence                          I. Schneider (15)                      |
| 10.52                 |   | Description                          of compensation program for directors (16)                                                                                                                         |
| 10.53                 |   | Employment                          Agreement dated as of August 17 2005 by and between the                          Company and Asher                          Fogel.                                  |
| 10.54                 |   | Employment                          Agreement dated as of August 17 2005 by and between the                          Company and Henry                          Schneider.                              |
| 10.55                 |   | Agreement                          dated as of October 7, 2005 by and between the Company,                          Marathon Capital                          LLC and VTEX Energy Inc.                  |
| 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                                          |

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| **Exhibit****Number** |   | **Description**                                                                                                                                                                                        |
|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (14)                  |   | Incorporated                          by reference to the Company’s Annual Report on Form 10K, as amended, for                          the year ended December 31, 2004                         |
| (15)                  |   | Incorporated                          by reference to the Company’s Quarterly Report on Form 10-Q for the period                          ended March 31, 2004 filed with the SEC on May 23,2005 |
| (16)                  |   | Incorporated                          by reference to the Company’s Current Report on Form 8-K filed with the                          SEC on or about October 3,                          2005  |

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**SIGNATURES**

|                                           |                                                                                       |                                     |
|------------------------------------------------|--------------------------------------------------------------------------------------------|------------------------------------------|
|                                           | U.                  S. ENERGY SYSTEMS, INC.                                                |
|                                      |                                                                                  |                                |
| Dated: November                  25, 2005 | By:                                                                              | /s/ Asher                  E. Fogel |
|                                           | Asher                  E. Fogel                                                            |
|                                           | Chief                    Executive Officer(Principal Executive                    Officer) |

|                                           |                                                                                                       |                                           |
|------------------------------------------------|------------------------------------------------------------------------------------------------------------|------------------------------------------------|
|                                           |                                                                                                       |
| Dated: November                  25, 2005 | By:                                                                                              | /s/ Richard                  J. Augustine |
|                                           | Richard                  J. Augustine                                                                      |
|                                           | Chief                    Accounting Officer(Principal Accounting and Financial                    Officer) |

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