SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q
(Mark One)

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

      For the quarterly period ended June 30, 2005

                                       OR

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


                             COMMISSION FILE NUMBER:
                                     0-10238

                            U.S. ENERGY SYSTEMS, INC.

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

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

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


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                                Yes  |X|          No  |_|

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

      State the number of shares outstanding of each of issuer's classes of
common equity, as of July 22, 2005: 12,003,450 shares of Common Stock


                                       1
<PAGE>

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


PART I: Financial Information
                                                                            PAGE
Item 1:  Financial Statements

Consolidated Balance Sheets as of June 30, 2005 and
  December 31, 2004............................................................3

Consolidated Statements of Operations and Comprehensive Income
  for the three months and six months ended June 30, 2005 and 2004.............5

Consolidated Statements of Cash Flows for the six months
  ended June 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................................13

Item 3:  Quantitative and Qualitative Disclosures About Market Risk...........19

Item 4:  Controls and Procedures..............................................19


PART II. Other Information

Item 6:   Exhibits............................................................20

Signatures....................................................................24


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
ASSETS                                                                      June 30, 2005      December 31, 2004
                                                                             ------------      -----------------
                                                                             (Unaudited)          (Audited, As
                                                                                                    Restated)
<S>                                                                          <C>                  <C>
Current Assets:
   Cash ..................................................................   $     14,206         $     15,982
   Restricted Cash and Marketable Securities .............................         30,210               29,609
   Accounts Receivable (less allowance for doubtful accounts of $46 and
     $107 in 2005 and 2004, respectively) ................................          4,884                4,857
   Installment Sale Partnership Interest and Interest Receivable, Current
     Portion .............................................................          1,401                2,494
   Other Current Assets ..................................................          1,921                1,639
                                                                             ------------         ------------
     Total Current Assets, Net ...........................................         52,622               54,581

Property, Plant and Equipment, Net .......................................         40,555               41,901
Construction in Progress .................................................            198                  198
Installment Sale Partnership Interest, less Current Portion ..............         23,114               23,537
Investments ..............................................................          1,187                  801
Debt Issuance Costs, Net of Accumulated Amortization .....................         10,871               11,266
Goodwill .................................................................         26,618               26,618
Foreign Currency Hedge ...................................................          1,651                2,414
Deferred Tax Asset .......................................................         15,147               14,605
Other Assets .............................................................             56                   11
                                                                             ------------         ------------
     Total Assets ........................................................   $    172,019         $    175,932
                                                                             ============         ============

LIABILITIES
Current Liabilities:
   Current Portion Long-Term Debt ........................................   $      1,572         $      1,517
   Accounts Payable and Accrued Expenses .................................          3,461                4,057
   Deferred Revenue Installment Sale Partnership Interest, Current Portion            397                  398
                                                                             ------------         ------------
     Total Current Liabilities ...........................................          5,430                5,972

Long-Term Debt less Current Portion ......................................         83,804               86,297
Deferred Revenue Installment Sale Partnership Interest, less Current
     Portion .............................................................         16,500               16,699
Deferred Royalty .........................................................          5,553                5,686
Illinois Subsidy Liability ...............................................         29,429               26,346
                                                                             ------------         ------------
     Total Liabilities ...................................................        140,716              141,000

Minority Interests .......................................................          2,858                4,329
</TABLE>

                 See notes to consolidated financial statements


                                       3
<PAGE>

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

<TABLE>
<CAPTION>

                                                                               June 30, 2005    December 31, 2004
                                                                                ------------    -----------------
                                                                                 (Unaudited)       (Audited, As
                                                                                                     Restated)
<S>                                                                             <C>                <C>
STOCKHOLDERS' EQUITY ........................................................             --                 --
Preferred Stock, $.01 par Value, Authorized 10,000,000 Shares:
   Series B, Cumulative, Convertible, Issued and Outstanding 368 Shares .....             --
   Series C Cumulative, Convertible, Issued and Outstanding 100,000 Shares, .              1                  1
   Series D, Cumulative, Convertible, Issued and Outstanding 1,138,888 Shares             11                 11

Common Stock, $.01 par Value, Authorized 50,000,000 Shares, issued 12,333,974            123                123
Treasury Stock, at Cost .....................................................         (2,204)            (2,204)
Additional Paid-in Capital ..................................................         63,687             64,063
Accumulated Deficit .........................................................        (34,927)           (33,401)
Accumulated Other Comprehensive Income ......................................          1,754              2,010
                                                                                ------------       ------------
   Total Stockholders' Equity ...............................................         28,445             30,603
                                                                                ------------       ------------
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...............................   $    172,019       $    175,932
                                                                                ============       ============
</TABLE>

                 See notes to consolidated financial statements


                                       4
<PAGE>

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



<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                 --------------------    --------------------
                                                                 June 30,    June 30,    June 30,     June 30,
                                                                   2005        2004        2005        2004
                                                                 --------    --------    --------    --------
<S>                                                              <C>         <C>         <C>         <C>
Revenues .....................................................   $  4,476    $  4,479    $  9,500    $  9,596
                                                                 --------    --------    --------    --------

Costs and expenses:
    Operating Expenses .......................................      2,296       2,714       4,475       4,931
    General and Administrative Expenses ......................      1,223         960       2,430       1,682
    Depreciation and Amortization ............................      1,096       1,088       2,191       2,066
    Reserve for SEFL Investment ..............................                    476                   8,176
                                                                 --------    --------    --------    --------
         Total Costs and Expenses ............................      4,615       5,238       9,096      16,855
                                                                 --------    --------    --------    --------

Income (Loss) From Operations ................................       (139)       (759)        404      (7,259)

Interest Income ..............................................        790         780       1,610       1,128
Dividend Income ..............................................                     --          --          15
Other Income .................................................        272                     256
Foreign Currency Transaction .................................      1,307       1,148       1,652       1,148
Interest Expense .............................................     (2,706)     (2,588)     (5,420)     (4,436)
Transaction Cost Expenses ....................................                (12,230)                (12,230)
Minority Interest ............................................       (342)      5,707        (262)      5,700
                                                                 --------    --------    --------    --------

Loss Before Taxes ............................................       (818)     (7,942)     (1,760)    (15,934)
Income Tax Benefit(Expense) ..................................        (25)       (406)         86       3,160
                                                                 --------    --------    --------    --------
Income (loss) Before Discontinued Operations and Gain on
  Sale of Subsidiaries .......................................        (843)     (8,348)     (1,674)    (12,774)

Income From Discontinued Operations (Net of Tax) .............         --          43          --         495

Gain on Sale of Subsidiaries and Partnership Interest ........         --       6,560         150       6,560
                                                                 --------    --------    --------    --------


NET LOSS .....................................................       (843)     (1,745)     (1,524)     (5,719)

DIVIDENDS ON PREFERRED STOCK .................................       (206)       (207)       (413)       (414)
                                                                 --------    --------    --------    --------

LOSS APPLICABLE TO COMMON STOCK ..............................   $ (1,049)   $ (1,952)   $ (1,937)   $ (6,133)
                                                                 ========    ========    ========    ========

LOSS PER SHARE OF COMMON STOCK:
    Income(Loss)Loss  Per Share of Common Stock -
      Basic and Diluted ......................................   $  (0.09)   $  (0.17)   $  (0.16)   $  (0.52)
                                                                 ========    ========    ========    ========

Weighted Average Number of Common Shares
  Outstanding - Basic ........................................     12,003      11,890      12,003      11,890
                                                                 ========    ========    ========    ========
Weighted Average Number of Common Shares
  Outstanding - Diluted ......................................     17,091      17,053      17,091      17,053
                                                                 ========    ========    ========    ========

OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net Income ...................................................   $   (843)   $ (1,745)   $ (1,524)   $ (5,719)
Gain (Loss) on  Foreign Currency  Translation ................         11        (467)       (256)       (467)
                                                                 --------    --------    --------    --------
Total Comprehensive Income ...................................   $   (832)   $ (2,212)   $ (1,780)   $ (6,186)
                                                                 ========    ========    ========    ========
</TABLE>

                 See notes to consolidated financial statements

                                       5
<PAGE>
                    U.S. ENERGY SYSTEMS, INC AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in Thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                          ---------------------
                                                       June 30, 2005   June 30, 2004
                                                       -------------   -------------
<S>                                                       <C>             <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
     Net Income (Loss) ...............................    $ (1,524)       $ (5,719)
     Adjustments to reconcile Net Income/(loss)
       to Net Cash used in Operating Activities:
         Depreciation ................................       1,796           1,807
         Amortization ................................         395             259
         Minority Interest ...........................      (1,473)         (5,702)
         Deferred Income Taxes .......................        (542)         (3,159)
         Unrealized Gains/(Losses) ...................        (256)           (207)
         Foreign Currency Translation Adjustment .....      (1,771)         (1,363)
         Gain on Sale of Subsidiary ..................          --          (6,560)
         Reserve for Investment in SEFL ..............          --           8,176
     Changes In:
         Accounts and Notes Receivable Trade .........         (27)          3,216
         Other Current Assets ........................        (282)          1,238
         Other Assets ................................         (45)            257
         Accounts Payable and Accrued Expenses .......        (596)            265
         Deferred Revenue and Other ..................        (200)           (350)
         Foreign Currency Hedge ......................         763              --
         Rate Incentive Liability ....................       3,083           3,113
     Net Effect of Discontinued Operations ...........          --              --
                                                          --------        --------
     Net Cash Used In Operating Activities ...........        (679)         (4,729)
                                                          --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Restricted Cash .................................        (601)         (8,050)
     Change in Investments ...........................        (386)         15,638
     Acquisitions of Property and Equipment ..........        (450)           (253)
     Construction in Progress ........................          --             595
     Goodwill ........................................          --            (400)
                                                          --------        --------
     Net (Cash Used In)/Provided By Investing
      Activities .....................................      (1,437)          7,530
                                                          --------        --------

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
     Proceeds from Notes Receivable ..................       1,516           1,528
     Proceeds from Long Term Debt ....................          --          23,849
     Payment of Long-Term Debt .......................        (667)         (6,250)
     Debt Issuance Costs .............................          --          (9,558)
     Deferred Royalty ................................        (133)          5,844
     Additional Paid in Capital ......................        (376)           (414)
                                                          --------        --------
     Net Cash Used in Financing Activities ...........         340          14,999
                                                          --------        --------

NET INCREASE(DECREASE) IN CASH .......................      (1,776)         17,800

     Cash - beginning of period ......................      15,982           3,210
                                                          --------        --------
     Cash - end of period ............................    $ 14,206        $ 21,010
                                                          ========        ========
</TABLE>

                 See notes to consolidated financial statements


                                       6
<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE MONTH AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                  (Amounts in Thousands, Except Per-Share Data)

NOTE A -- BASIS OF PRESENTATION

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

NOTE B -- RESTATEMENTS

1.    Currency Transaction

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

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

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

2.    Gain Recognition

On August 22, 2005, the Company filed a Current Report on Form 8-K announcing a
change in the application of accounting change to principles relating to the
accounting for the payment received by USEB for the sale of certain ownership
interests in Illinois based generating project entities previously sold to AJG
Financial Services, Inc. (AJG). On April 8, 2004 AJG made a cash down payment of
$2,000 and delivered a $14,000 note payable to a subsidiary of USEB to satisfy
AJG's obligation for the purchase of the ownership interests. The note matures
in 2024, requires scheduled payments of principal and interest and bears
interest at a rate of 15% per annum. Payments on the note are limited to cash
distributions from the project entities with any excesses to the scheduled
payments being applied as an additional principal payment and any deficits to
scheduled being deferred. Recourse on the note is limited to AJG's ownership
interests in the partnership.

The original accounting treatment for the receipt of this payment reflected in
US Energy's financial statements filed on Form 10-Q for the interim periods
ended June 30, 2004 and September 30, 2004, as amended, Form 10-K for the year
ended December 31, 2004, as amended and Form 10-Q for the quarter ended March
31, 2005, included the recording of a non-recurring gain during the interim
period ended June 30, 2004. This gain recorded represented the gain for both the
cash and note received.


                                       7
<PAGE>

The accounting issues requiring the restatement of this gain relate to the
application of Staff Accounting Bulletin No. 30, Accounting for Divestiture of a
Subsidiary or Other Business Operation, as amended ("SAB No. 30") and Staff
Accounting Bulletin No. 81, Gain Recognition on the Sale of a Business to a
Highly Leverage Entity, as amended ("SAB No. 81"; together with SAB No. 30, the
"Bulletins"). The issues pertain to the gain associated with the note portion of
the compensation received. The accounting Bulletins provide and management
determined that since the payments on the note portion of the compensation
received are wholly dependent upon the future operations of the assets being
sold, any gain associated with the note should be deferred and not recognized
until such time as actual principal payments are received on the note.

To comply with the Bulletins, the Company will be restating its financial
statements for the year ended December 31, 2004 and for the interim periods
ended June 30, 2004 and September 30, 2004 and for the quarter ending March 31,
2005 to eliminate $7,598 of the non-recurring gain, the amount of the gain that
was related to the note. Future principal payments received on the note will be
recorded as gains for financial statement purposes. These changes will have no
effect on the cash flows of the Company.

The following tables isolate each of the restated amounts described in Notes
B(1) and B(2)in the Company's Consolidated Balance Sheet as of December 31, 2004
and Statement of Operations and Other Comprehensive Income for the three and six
months ended June 30, 2004 and the twelve months ended December 31, 2004:


<TABLE>
<CAPTION>
                                  AFTER FOREIGN
                                    CURRENCY        AFTER FOREIGN
                                 TRANSACTION AND      CURRENCY
CONSOLIDATED BALANCE SHEET AT   GAIN RECOGNITION     TRANSACTION      AS ORIGINALLY
DECEMBER 31, 2004                  RESTATEMENT       RESTATEMENT        REPORTED
-----------------------------     ------------      ------------      ------------
<S>                               <C>               <C>               <C>
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
Minority Interests                $      4,331      $     10,733      $     12,662
Total Liabilities                 $    145,331      $    137,733      $    119,707
Accumulated Deficit               $    (33,403)     $    (25,805)     $    (23,516)
Acc. Other Comprehensive Income   $      2,010      $      2,010             1,682
Total Stockholder Equity          $     30,601      $     38,199      $     40,160
Total Liabilities and
  Stockholder Equity              $    175,932      $    175,932      $    172,529
</TABLE>


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                         AFTER FOREIGN
                                           CURRENCY        AFTER FOREIGN
STATEMENT OF OPERATIONS                 TRANSACTION AND      CURRENCY
FOR THE THREE MONTHS ENDED             GAIN RECOGNITION     TRANSACTION     AS ORIGINALLY
JUNE 30, 2004                            RESTATEMENT       RESTATEMENT       REPORTED
--------------------------               ------------      ------------     ------------
<S>                                      <C>               <C>              <C>
Foreign Currency Transaction Income      $      1,148      $      1,148     $         --
Gain on Sale of Subsidiary               $      6,560      $      9,944     $      9,944
Minority Interest                        $      5,707      $      3,841     $      4,156
Income Tax Benefit(Expense)              $       (403)     $      5,674     $      6,133
Net Income(Loss)                         $     (1,745)     $      5,853     $      5,479
Net income Applicable to Common Stock    $     (1,952)     $      5,646     $      5,272
Income(Loss) Per Share of Common Stock   $      (0.17)     $       0.47     $       0.44
</TABLE>


<TABLE>
<CAPTION>
                                              AFTER FOREIGN
                                                CURRENCY        AFTER FOREIGN
                                             TRANSACTION AND      CURRENCY
STATEMENT OF OPERATIONS                     GAIN RECOGNITION     TRANSACTION     AS ORIGINALLY
FOR THE SIX MONTHS ENDED JUNE 30, 2004         RESTATEMENT       RESTATEMENT       REPORTED
--------------------------------------        ------------      ------------     ------------
<S>                                           <C>               <C>              <C>
Foreign Currency Transaction Income           $      1,148      $      1,148     $         --
Gain on Sale of Subsidiary                    $      6,560      $      9,944     $      9,944
Minority Interest                             $      5,700      $      3,834     $      4,151
Income Tax Benefit                            $      3,160      $      9,240     $      9,698
Net Income(Loss)                              $     (5,719)     $      1,879     $      1,505
Net Income(Loss) Applicable to Common Stock   $     (6,133)     $      1,465     $      1,091
Income Per Share of Common Stock              $      (0.52)     $       0.09     $       0.09
</TABLE>


<TABLE>
<CAPTION>
                                              AFTER FOREIGN
                                                CURRENCY        AFTER FOREIGN
STATEMENT OF OPERATIONS                      TRANSACTION AND      CURRENCY
FOR THE TWELVE MONTHS ENDED                 GAIN RECOGNITION     TRANSACTION     AS ORIGINALLY
DECEMBER 31, 2004                              RESTATEMENT       RESTATEMENT       REPORTED
---------------------------                 ----------------    ------------     ------------
<S>                                           <C>               <C>              <C>
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)
</TABLE>


NOTE C-- BASIS OF REPORTING

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

                                       9
<PAGE>

NOTE D -- REVENUE RECOGNITION

Revenues are recognized upon delivery of energy or service.

NOTE E -- EARNINGS PER SHARE DATA

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

NOTE F -- STOCK-BASED COMPENSATION

The Company has elected to account for its stock-based compensation plans using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 (APB No. 25), Accounting for Stock Issued to Employee's and discloses the pro
forma effects on net loss and loss per share had the fair value of options been
expensed. Under the provisions of APB No. 25, compensation arising from the
grant of stock options is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of grant over the amount an
employee must pay to acquire the stock. No stock options were granted or vested
during the three and six months ended June 30, 2005 and 2004.

NOTE G -- FOREIGN CURRENCY

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

NOTE H -- INVESTMENTS IN DERIVATIVES

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

NOTE I -- SUBSIDIARIES AND AFFILIATES

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

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

      (3) Scandinavian Energy Finance, Limited /EnergiSystems I Sverige AB
("SEFL"). During the six months ended June 30, 2004, the Company reserved $8,176
against its investment in and receivables due from SEFL due to pending
litigation. This reserve was charged to general and administrative expenses in
our consolidated statement of operations for the period. During the three months
ended June 30, 2004, the entire investment and outstanding receivables were
written off against the reserve.


                                       10
<PAGE>

NOTE J -- RESTRICTED CASH AND MARKETABLE SECURITIES

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

Restricted cash and marketable securities were as follows:

                                                       June 30,     December 31,
                                                         2005          2004
                                                     ------------   ------------
Illinois Subsidy Liability Reserve Accounts          $     24,638   $     23,438
Improvement Reserve                                         3,327          4,022
Debt Service Reserve                                        2,107          2,011
Project Contract Reserve                                      138            138
                                                     ------------   ------------
                                                     $     30,210   $     29,609
                                                     ============   ============

Included in the Illinois Subsidy Liability Reserve Accounts at June 30, 2005 is
$22,638 that is managed by a professional investment manager under investment
allocation parameters established by the Company. The amounts managed by the
professional manager, as of June 30, 2005, included $13,798 invested in equity
fund accounts, $7,552 invested in debt accounts, and $1,288 being held in cash
or cash equivalent accounts. The original cost basis of the investments, which
have been invested since July 2004, is $21,026.

The reduction in the amount held in the Improvement Reserve is due to
withdrawals made to fund improvements in the gas collection systems for the
Tucson, Dixon Lee and SPSA landfill gas projects.

NOTE K - ILLINOIS RETAIL RATE PROGRAM

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

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

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


                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                               Commencement of Commercial      Expiration of Illinois     Estimated Commencement of Repayment
          Project                      Operations               Retail Rate Program             of Subsidy Liability(1)
       --------------               -----------------             -----------------             --------------------
<S>                                  <C>                          <C>                                <C>
        Countryside                   April, 2001                   April, 2011                        May, 2011
          Dolton                       May, 1998                     May, 2008                         June, 2008
         Dixon Lee                     July, 1999                    July, 2009                       August, 2009
          Morris                     December, 2000                December, 2010                    January, 2011
          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
</TABLE>

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

The funds held in the Illinois Accounts are currently invested in equities and
fixed income securities. These investments are being managed by a third-party
professional money manager with the investment allocations being approved by the
management of the Company and USEB. The amount held in the Illinois Accounts as
of June 30, 2005 was $24,638. The amount of the subsidy liability owed to
Illinois as of June 30, 2005 was $53,620. It is anticipated that repayments of
the incentive will begin in 2008 and continue through 2021.

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

In the past, the annual reconciliation of estimated rates to actual rates has
resulted in both increases and decreases in retroactive revenue. USEB cannot
predict whether any changes in future rates will result in increases or
decreases in revenues from the Illinois projects. For the six months ended June
30, 2005, the Company received approximately 27% of its revenues from the
subsidy paid under the Illinois Retail Rate Program.

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

NOTE L -- TRANSACTIONS WITH AFFILIATES

USEB is a general partner in alternative energy and equipment finance
transactions with related unconsolidated limited partnerships and collects
management fees from the partnerships. Fees earned from such general partner
undertakings amount to $246 for the six months ended June 30, 2005 and $327 for
the six months ended June 30, 2004

USEB reimburses its shareholders, including the Company, for a majority of the
costs incurred by them for the benefit of USEB. These costs include management
and accounting salary and benefit costs, office expenses associated with the
accounting services and an allocation of rent expenses. The total reimbursements
for the six month period ended June 30, 2005 and 2004 were $155 and $196,
respectively.

NOTE M -- FOREIGN CURRENCY TRANSACTIONS

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

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


                                       12
<PAGE>

Following is a summary of the Foreign Currency Transaction account as of June
30, 2005 (the exchange rates are Canadian dollars per one US dollar and are
stated whole dollars; all other amounts are in $000's):

<TABLE>
<CAPTION>
                                                                      Three Months Ended    Six Months Ended
                                                                        June 30, 2005         June 30, 2005
                                                                         -----------          -----------
<S>                                                                      <C>                  <C>
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 March 31, 2005                              $    1.2096          $    1.2096
Currency Exchange Rate as of June 30, 2005                               $    1.2287          $    1.2287
Cumulative Translation Adjustments Beginning Of Reporting Period         $     6,643          $     6,988
Cumulative Translation Adjustments End Of Reporting Period               $     5,336          $     5,336
Aggregate Adjustment for the Current Reporting Period Income/(Expense)   $     1,307          $     1,652
Deferred Income Taxes Allocated To Adjustment in the Reporting Period    $       497          $       525
</TABLE>

NOTE N - OTHER COMPREHENSIVE INCOME/(LOSS)

The Other Comprehensive Loss for the six months ended June 30, 2005 of $256 is
comprised of $88 of unrealized losses on available for sale marketable
securities and $168 in losses associated with foreign currency exchange rates.
The $467 loss reported for the six months ended June 30, 2004 is comprised of
losses associated with foreign currency exchange rates.


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


RESULTS OF OPERATIONS

For the three month and six month ended June 30, 2004, financial results
included a number of non-recurring items further discussed below. These items
included the recording of income and expenses associated with the Countryside
Power Income Fund (CPIF) asset sale, refinancing and associated transactions,
the establishment of a reserve for costs in excess of fair value against the
SEFL investment, a gain resulting from the receipt by USEB of payment for that
sale of 50% interest in a partnership and the payment of expenses, including
employee incentive compensation. To provide the most directly comparable
financial measure for results of operations for the periods presented, the
non-recurring items recorded during the three and six month periods ended 2004
are isolated in the tables below.

The results of operations for the three month period ended June 30, 2004,
isolating the non-recurring items, are as follows:


                                       13
<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
     Proforma Financial Statements for the Three Months Ended June 30, 2004
                        Adjusted for Non Recurring Items
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                   Adjustments for
                                                                        ---------------------------------------
                                                                                  Non-recurring Items
                                                                        ---------------------------------------

                                                                                                                    For the Three
                                                                                                                    Months Ended
                                                         Actual  Three                                             June 30, 2004
                                                          Months Ended                                           after elimination
                                                         June 30, 2004     CPIF        IEGP II       Reserve       of non recurring
                                                          As Restated   Transaction      Sale        for SEFL          items
                                                           ---------     ---------     ---------     ---------       ---------
<S>                                                        <C>           <C>           <C>           <C>             <C>
Revenues ...............................................   $   4,479                                                 $   4,479
                                                           ---------     ---------     ---------     ---------       ---------

Costs and expenses:
    Operating Expenses .................................       2,714                                                     2,714
    General and Administrative Expenses ................         960           583                                       1,543
    Depreciation and Amortization ......................       1,088                                                     1,088
    Reserve for SEFL ...................................         476                                      (476)              0
    Gain from Joint Ventures ...........................           0                                                         0
                                                           ---------     ---------     ---------     ---------       ---------
         Total Costs and Expenses ......................       5,238           583             0          (476)          5,345
                                                           ---------     ---------     ---------     ---------       ---------

Income(Loss) From Operations ...........................        (759)         (583)            0           476            (866)

Interest Income ........................................         780                                                       780
Dividend Income ........................................           0                                                         0
Foreign Currency Transaction ...........................       1,148                                                     1,148
Interest Expense .......................................      (2,588)                                                   (2,588)
Transaction Cost Expenses ..............................     (12,230)       12,230                                           0
Minority Interest ......................................       5,707        (4,982)          567                         1,292
                                                           ---------     ---------     ---------     ---------       ---------
Income before taxes ....................................      (7,942)        6,665           567           476            (234)

Income tax (expense) benefit ...........................        (406)       (4,906)          760          (181)         (4,733)
                                                           ---------     ---------     ---------     ---------       ---------

Income before Disposal of Segment and
  Discontinued Operations...............................      (8,348)        1,759         1,327           295          (4,967)

Gain/(Loss) on Disposal of Segment .....................       6,560        (4,560)       (2,000)                            0

Income from discontinued operation net of income tax ...          43                                                        43
                                                           ---------     ---------     ---------     ---------       ---------
NET INCOME (LOSS) ......................................      (1,745)       (2,801)         (673)          295          (4,924)

DIVIDENDS ON PREFERRED STOCK ...........................        (207)                                                     (207)
                                                           ---------     ---------     ---------     ---------       ---------

INCOME (LOSS) APPLICABLE TO COMMON STOCK ...............   $  (1,952)    $  (2,801)    $    (673)    $     295       $  (5,131)
                                                           =========     =========     =========     =========       =========
</TABLE>


                                       14
<PAGE>

The results of operations for the six month period ended June 30, 2004,
isolating the non-recurring items, are as follows:


                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
      Proforma Financial Statements for the Six Months Ended June 30, 2004
                        Adjusted for Non Recurring Items
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                   Adjustments for
                                                                        ---------------------------------------
                                                                                  Non-recurring Items
                                                                        ---------------------------------------

                                                                                                                For the Six
                                                                                                                months Ended
                                                      Actual  Six                                              June 30, 2004
                                                      Month Ended                                             after Elimination
                                                     June 30, 2004     CPIF        IEGP II       Reserve      of Non Recurring
                                                      As Restated   Transaction      Sale        for SEFL         Items
                                                       --------      --------      --------      --------        --------
<S>                                                    <C>           <C>           <C>           <C>             <C>
Revenues ...........................................   $  9,596                                                  $  9,596
                                                       --------      --------      --------      --------        --------

Costs and expenses:
    Operating Expenses .............................      4,931                                                     4,931
    General and Administrative Expenses ............      1,682         1,140                                       2,822
    Depreciation and Amortization ..................      2,066                                                     2,066
    Reserve for SEFL ...............................      8,176                                    (8,176)              0
    Gain for Joint Ventures ........................          0                                                         0
                                                       --------      --------      --------      --------        --------
         Total Costs and Expenses ..................     16,855         1,140             0        (8,176)          9,819
                                                       --------      --------      --------      --------        --------

Income From Operations .............................     (7,259)       (1,140)            0         8,176            (223)

Interest Income ....................................      1,128                                                     1,128
Dividend Income ....................................         15                                                        15
Foreign Currency Transaction .......................      1,148                                                     1,148
Interest Expense ...................................     (4,436)                                                   (4,436)
Transaction Cost Expenses ..........................    (12,230)       12,230                                           0
Minority Interest ..................................      5,700        (4,915)          567                         1,352
                                                       --------      --------      --------      --------        --------
Income before taxes ................................    (15,934)        6,175           567         8,176          (1,016)

Income tax (expense) benefit .......................      3,160        (4,720)          760        (3,107)         (3,907)
                                                       --------      --------      --------      --------        --------

Income before Disposal of Segment and
  Discontinued Operations ..........................    (12,774)        1,455         1,327         5,069          (4,923)

Gain/Loss on Disposal of Segment ...................      6,560        (4,560)       (2,000)                            0

Income from discontinued operation net of income tax        495                                                       495
                                                       --------      --------      --------      --------        --------
NET INCOME (LOSS) ..................................     (5,719)       (3,105)         (673)        5,069          (4,428)

DIVIDENDS ON PREFERRED STOCK .......................       (414)                                                     (414)
                                                       --------      --------      --------      --------        --------

INCOME  APPLICABLE TO COMMON STOCK .................   $ (6,133)     $ (3,105)     $   (673)     $  5,069        $ (4,842)
                                                       ========      ========      ========      ========        ========
</TABLE>


                                       15
<PAGE>

Following is a description of the non-recurring items recorded during the three
and six months ended June 30, 2004 which are being isolated for the most
directly comparable financial measure purposes:

      CPIF Transaction: On April 8, 2004, Countryside Power Income Fund (CPIF),
a newly formed Canadian income fund the Company sponsored, completed its initial
public offering of trust units in Canada pursuant to which it raised
approximately $113 million in net proceeds. Utilizing these proceeds, CPIF
acquired all of the capital stock of USE Canada Holdings Corp. from the Company,
purchased the existing senior debt relating to certain of USEB's projects and
acquired a royalty interest in USEB. Additional advances were made to USEB to
fund transaction costs and establish certain reserves. As the result of the CPIF
transaction, the Company recorded non-recurring gains associated with the sale
of the stock in USEY Canada Holdings Corp., non-recurring expenses related to
the refinancing of the USEB debt and non-recurring expenses related to incentive
compensation during the six months ended June 30, 2004.

      IEGP II Sale: In April, 2004, AJG Financial Services, Inc. paid a
subsidiary of USEB for an interest it had previously acquired in Illinois
Electrical Generation Partners, II L.P., an entity which holds the ownership
interests in certain USEB project entities. The amount USEB received was $16,000
which was comprised of $2,000 in cash and a non-recourse note for $14,000. (See
Note B to the Financial Statements Item 2. GAIN RECOGNITION.)

      Reserve for SEFL: During the six months ended June 30, 2004, the Company
reserved its entire investment in Scandinavian Energy Finance, Limited (SEFL)
due to pending litigation. The establishment of this reserve resulted in a
non-recurring expense for the period. The investment was subsequently written
off against the reserve.

The following most directly comparable financial measures for the three and six
months ended June 30, 2005 and 2004 are based upon the June 30, 2004 amounts
after the isolation of the non-recurring items as reflected above.

The net loss for the three months ended June 30, 2005 of $843 was a decrease of
$4,081 from the $4,924 loss, excluding isolated, non recurring items, for the
three months ended June 30, 2004. The decrease in the loss is the result of
decreases in operating expenses of $730, decreases in income tax expense, $4,708
and increases in earning on the investment of reserve account, $261, offset by
increases in minority interest expense, $1,634. The decrease in income tax
expense is due to adjustments made during 2004 to the deferred tax asset
value.

The net loss for the six months ended June 30, 2005 of $1,524 was a decrease of
$2,904 from the $4,428 loss, excluding isolated, non recurring items, for the
six months ended June 30, 2004. The decrease in the loss is the result of
decreases in operating expenses of $723, decreases in income tax expense,
$3,993, and increases in interest income of $482 offset by decreases in revenues
of $128 and increases in interest expense, $984, and minority interest expense,
$1,644. The decrease in income tax expense is due to adjustments made during
2004 to the deferred tax asset value.


Revenues for the three months ended June 30, 2005 were $4,476, a decrease of $3
from the $4,479 reported for the three months ended June 30, 2004. For the six
months ended June 30, 2005, revenues were $9,500, a decrease of $96, 1%, from
the $9,596 for the corresponding 2004 period. The decreases were decreases in
USEY revenues pertaining to equity investments offset, in part, by increases in
revenues from USEB. The following table summarizes the comparison of revenue
items:

<TABLE>
<CAPTION>
                                    Three Months Ended               Six Months Ended
                                      (in thousands)                  (in thousands)
                              ----------------------------   -----------------------------
                              June 30, 2005  June 30, 2004   June 30, 2005   June 30, 2004
                              -------------  -------------   -------------   -------------
<S>                            <C>             <C>             <C>             <C>
USEB Revenues                  $    4,476      $    4,315      $    9,500      $    9,436
USEY Revenues                          --             164              --             160
                               ----------      ----------      ----------      ----------
        Total                  $    4,476      $    4,479      $    9,500      $    9,596
                               ==========      ==========      ==========      ==========
</TABLE>


                                       16
<PAGE>

Total operating expenses for the three and six months ended June 30, 2005 were
$2,296 and $4,475, respectively representing decreases of $418, 15%, and $456,
9%, from the $2,714 and $4,931 reported for the corresponding periods in 2004.
The decreases are due to reduction in operating expenses pertaining to the USEB
portfolio including decreases in operating payroll, $44 and $63, insurance $21
and $42 and property taxes, $17 and $23, respectively The balance of the
decreases were comprised of reductions in general plant net operating expenses.


The components of general and administrative expenses were as follows:

<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED               SIX MONTHS ENDED
                              ----------------------------   -----------------------------
                              June 30, 2005  June 30, 2004   June 30, 2005   June 30, 2004
                              -------------  -------------   -------------   -------------
<S>                            <C>            <C>              <C>              <C>
Salary and Benefits            $      543     $      754       $    1,033       $    1,441
Insurance                              75             48               88               95
Corporate Expenses                    405            458              803              981
Countryside Development Fee            72             69              131               69
Directors' Fees and Expenses           47             85              163               83
Royalty Expense                        81            129              212              153
                               ----------     ----------       ----------       ----------
Totals                         $    1,223     $    1,543       $    2,430       $    2,822
                               ==========     ==========       ==========       ==========
</TABLE>

General and administrative expenses for the three and six months ended June 30,
2005 decreased by $320, or 20%, and $392, or 14%, from the corresponding 2004
periods. These comparisons are after the exclusion of non recurring items in
2004. Salaries and Benefits decreased by $211 and $408 from the corresponding
2004 periods due to a reduction in management staff and the consolidation of
management positions and responsibilities. Corporate expenses decreased by $53
and $178 for the respective periods primarily due to a reduction in rent for the
USEB offices, a decrease in corporate organizational fees due to a change in the
methodology utilized to calculate the amount due plus the expiration of a long
term consulting agreement in December 2004. The $69 increase in the Countryside
Development fee and the $59 increase in Royalty Expense are due to inclusion, in
the six month period ended June 30, 2005, of two full quarters of such fees and
expenses whereas the 2004 period included one quarter's fee, since these
agreements were implemented on April 8, 2004. Directors' fees increased due to
an increase in the number of Directors meetings and the compensation paid for
the attendance at those meetings.

Depreciation and amortization expenses were $1,096 and $2,191 for the three and
six month periods ended June 30, 2005. This represents increases of $8 and $125,
respectively above that recorded for the corresponding 2004 periods. The
increase for the six month period is due principally to the increase in the
amortization of debt issuance costs associated with the CPIF transaction. The
CPIF transaction closed on April 8, 2004 therefore only one quarter's
amortization of debt issuance costs was expensed in the 2004 periods whereas the
2005 periods included two quarter's worth of amortization expense.

Interest income was $790 and $1,610 for the three and six month periods ended
June 30, 2005 reflecting net increases of $10 and $482 from the amount reported
for the comparable 2004 periods. The components of the net increases are as
follows:

                                       Three Months Ended     Six Months Ended
                                        ---------------       ---------------
                                         June 30, 2005         June 30, 2005
                                        ---------------       ---------------
IEGP II Note Receivable                 $            37       $           558
Installment Sale
   Partnership Notes                                (32)                 (115)
Cash Investments                                      5                    39
                                        ---------------       ---------------
Total                                   $            10       $           482
                                        ===============       ===============


                                       17
<PAGE>

The increases related to the IEGP II Note Receivable are due to the fact that
the note was executed on April 8, 2004 and therefore the three and six month
periods ended June 30, 2004 contained only one quarter's interest income related
to the note. The decrease in interest earned on the Installment Sale Partnership
Interest Notes is the result of the continuing reduction in outstanding
principal on the notes. The reduction in outstanding principal is the result of
the continuing amortization of the principal amounts due to note payments. The
increase in interest from cash invested is derived from an increase in the
amount of cash invested due to the CPIF transaction.

Interest expense was $2,706 and $5,420 for the three and six months ended June
30, 2005, representing increases of $118, 5%, and $984, 22%, from the
corresponding 2004 periods. These increases are due to additional interest paid
to the Countryside Fund resulting from the refinancing of the USEB debt.

Foreign Currency Transaction income was $1,307 and $1,652 for the three and six
month periods ended June 30, 2005. This represents increases of $159 and $504
when compared to the respective 2004 periods. These amounts represents the
adjustment, as required by SFAS 52, Foreign Currency Translations, to the
outstanding principal owed to the Countryside Fund to reflect the change in the
currency exchange rate from the start of the reporting period. The Canadian
dollar to US dollar exchange rate increased to $1.2287 as of June 30, 2005 from
$1.2047 as of December 31, 2004 resulting in a net gain for the six months ended
June 30, 2005 of $1,593, after adjustments relating to our foreign currency cash
flow hedge. The Deferred Income Tax asset was reduced by $627 to reflect the tax
effect of the Translation gain. See Note M to the Consolidated Financial
Statements.

Provision for income taxes resulted in a tax expense for the three months period
ended June 30, 2005 of $25. For the six month period ended June 30, 2005 the
provision yielded a tax benefit of $86. These amounts represent decreases in tax
benefits from the $587 and $1,413 tax benefits reported for the corresponding
periods in 2004. The reduction is primarily due to tax affecting the foreign
currency transactions discussed in Note M to the financial statements. The
benefits for the three and six month periods ended June 30, 2005 are comprised
of the benefits related to the recognition of net operating losses generated by
USEB operations.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005, unrestricted cash amounted to $14,206 compared with $15,982 of
unrestricted cash at December 31, 2004. The debt arrangements between the
Countryside Fund and the USEB projects require these subsidiaries to maintain
various restricted cash accounts, which, at June 30, 2005, amounted to $30,072.
Included in the restricted cash and marketable securities is $22,638 that is
managed by a professional investment manager under investment allocation
parameters established by the Company and USEB. The amounts managed by the
professional manager, as of June 30, 2005, included $13,798 invested in equity
fund accounts, $7,552 invested in debt accounts, and $1,288 being held in cash
or cash equivalent accounts. The cost basis of the investments, which have been
invested since July 2004, is $21,026.

During the six months ended June 30, 2005, cash used by operating activities was
$679, a decrease of $4,050 from the $4,729 used by operating activities for the
six month period ended June 30, 2004. The primary reason for this decrease was
the elimination of the discontinued operations from the 2005 operating period.

Cash from investing activities decreased to $1,437 in cash used for the six
months ended June 30, 2005 from the $7,530 provided by investing activities for
the six months ended June 30, 2004, a decrease of $8,967. This decrease was
primarily the result of cash provided from the CPIF transaction during the six
month period ended June 20, 2004 plus investments made by USEB during the 2004
period pertaining to the expansion of the landfill gas collection systems at two
of USEB's projects.

Cash provided by financing activities decreased to $340 for the six months ended
June 30, 2005, a decrease of $14,659 from the $14,999 provided by financing
activities for the six months ended June 30, 2004 The decrease is primarily due
to the cash provided by the CPIF transaction during the six months ended June
30, 2004.

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

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


                                       18
<PAGE>

CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS

This Form 10-Q contains certain "forward looking statements" which represent our
expectations or beliefs, including, but not limited to, statements concerning
industry performance and our operations, performance, financial condition,
growth and strategies. For this purpose, any statements contained in this Form
10-Q that are not statements of historical fact may be deemed to be forward
looking statements. Without limiting the generality of the foregoing, words such
as "may," "will," "expect," "believe," "anticipate," "intend," "could,"
"estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond our control, and actual results may differ
materially depending on a variety of important factors which are noted herein,
including but not limited to the potential impact of competition, changes in
local or regional economic conditions, our ability to continue our growth
strategy, dependence on management and key personnel, supervision and regulation
issues and the ability to find financing on terms suitable to us. Additional
factors which may impact our business, prospects, operating results and
financial condition are described under the caption "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2004, as amended.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

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

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

Item 4:  Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

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

PART II - Other Information

Item 6:  Exhibits

<TABLE>
<CAPTION>
------------------ ---------------------------------------------------------------------------------------------------
<S>                <C>
Exhibit
Number             Description
------------------ ---------------------------------------------------------------------------------------------------
3.1                Restated  Certificate  of  Incorporation  of the  Company  filed  with the  Secretary  of State of
                   Delaware (1)
------------------ ---------------------------------------------------------------------------------------------------
</TABLE>


                                       20
<PAGE>

<TABLE>
<CAPTION>
------------------ ---------------------------------------------------------------------------------------------------
<S>                <C>
Exhibit
Number             Description
------------------ ---------------------------------------------------------------------------------------------------
3.2                Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (4)
------------------ ---------------------------------------------------------------------------------------------------
3.3                Amended and Restated By-Laws of US Energy (5)
------------------ ---------------------------------------------------------------------------------------------------
3.4                Form of Certificate of Designation for US Energy's Series C Preferred Stock (8)
------------------ ---------------------------------------------------------------------------------------------------
3.5                Form of Certificate of Designation for US Energy's Series D Preferred Stock (8)
------------------ ---------------------------------------------------------------------------------------------------
3.6                Certificate of Correction to Certificate of Designation of Series B Preferred Stock (8)
------------------ ---------------------------------------------------------------------------------------------------
4.1                Specimen Stock Certificate (1)
------------------ ---------------------------------------------------------------------------------------------------
4.2                Certificate of Designation  of Series B Convertible  Preferred  Stock of the Company as filed with
                   the Secretary of the State of Delaware (7)
------------------ ---------------------------------------------------------------------------------------------------
4.3                Amended  and  Restated  Plan of  Recapitalization  dated as of July 31,  2000 by and  between  the
                   Company and the parties identified therein (8)
------------------ ---------------------------------------------------------------------------------------------------
4.4                Form of Series B Warrant to Purchase Shares of Common Stock (4)
------------------ ---------------------------------------------------------------------------------------------------
4.5                Form of Series C Redeemable Common Stock Purchase Warrant of US Energy (5)
------------------ ---------------------------------------------------------------------------------------------------
10.1               Purchase  Agreement,  dated as of January 24, 1994, between Lehi Co-Gen Associates,  L.C. and Lehi
                   Envirosystems, Inc. (2)
------------------ ---------------------------------------------------------------------------------------------------
10.2               Operating Agreement among Far West Capital,  Inc., Suma Corporation and Lehi  Envirosystems,  Inc.
                   dated January 24, 1994 (2)
------------------ ---------------------------------------------------------------------------------------------------
10.3               Agreement  among the Company,  Plymouth  Envirosystems,  Inc., IEC Plymouth,  Inc. and Independent
                   Energy Finance Corporation dated November 16, 1994 (1)
------------------ ---------------------------------------------------------------------------------------------------
10.4               Amended  and  Restated  Agreement  of  Limited  Partnership  of  Plymouth   Cogeneration   Limited
                   Partnership between PSC Cogeneration  Limited Partnership,  Central Hudson Cogeneration,  Inc. and
                   Plymouth Envirosystems, Inc. dated November 1, 1994 (1)
------------------ ---------------------------------------------------------------------------------------------------
10.5               Amended and Restated  Agreement of Limited  Partnership of PSC  Cogeneration  Limited  Partnership
                   among IEC Plymouth, Inc., Independent Energy Finance Corporation and Plymouth Envirosystems,  Inc.
                   dated December 28, 1994 (1)
------------------ ---------------------------------------------------------------------------------------------------
10.6               Security Agreement and Financing Statement among the Company,  Lehi Envirosystems,  Inc., Plymouth
                   Envirosystems, Inc. and Anchor Capital Company, LLC dated June 14, 1995, as amended (1)
------------------ ---------------------------------------------------------------------------------------------------
10.7               Certificate of Designations (1)
------------------ ---------------------------------------------------------------------------------------------------
10.8               Loan and Option Agreement dated August,  1996 by and among NRG Company,  LLC and Reno Energy,  LLC
                   and ART, LLC and FWC Energy, LLC, and Amendments thereto (1)
------------------ ---------------------------------------------------------------------------------------------------
10.9               Form of Debenture Conversion Agreement (1)
------------------ ---------------------------------------------------------------------------------------------------
10.10              Subscription  Agreement,  dated March 20, 1998,  between the Company and Energy Systems Investors,
                   LLC (3)
------------------ ---------------------------------------------------------------------------------------------------
10.11              Registration  Rights  Agreement,  dated March 20,  1998,  between  the Company and Energy  Systems
                   Investors, LLC (3)
------------------ ---------------------------------------------------------------------------------------------------
10.12              Amended and Restated Stock Option  Agreement  between the Company and Lawrence I. Schneider  dated
                   May 10, 2000 with respect to 750,000 shares of the Company Common Stock (4)
------------------ ---------------------------------------------------------------------------------------------------
10.13              Amended and Restated  Stock Option  Agreement  between the Company and Goran Mornhed dated May 10,
                   2000 with respect to 1,000,000 shares of the Company Common Stock (4)
------------------ ---------------------------------------------------------------------------------------------------
10.14              Pledge  Agreement  dated as of July  31,  2000 by and  between  the  Company  and  Energy  Systems
                   Investors, L.L.C. (4)
------------------ ---------------------------------------------------------------------------------------------------
10.15              Limited Recourse  Promissory Note dated July 31, 2000 issued by Energy Systems  Investors,  L.L.C.
                   in favor of the Company (4)
------------------ ---------------------------------------------------------------------------------------------------
10.16              Registration  Rights  Agreement  dated  November  28,  2000 by and among US  Energy  and the Zapco
                   Stockholders (5)
------------------ ---------------------------------------------------------------------------------------------------
10.17              Performance Guaranty dated as November 28, 2000 of US Energy (5)
------------------ ---------------------------------------------------------------------------------------------------
10.18              Performance Guaranty of Cinergy Solutions Holding Company, Inc. dated as of November 28, 2000 (5)
------------------ ---------------------------------------------------------------------------------------------------
10.19              Subscription  Agreement  dated as of November  28, 2000 by and among US Energy,  US Energy Sub and
                   Cinergy Energy (5)
------------------ ---------------------------------------------------------------------------------------------------
10.20              Stockholders  Agreement  dated as of November  28, 2000 by and among US Energy,  US Energy Sub and
                   Cinergy Energy (5)
------------------ ---------------------------------------------------------------------------------------------------
10.21              Indemnification  Agreement dated as of November 28, 2000 by and among US Energy, US Energy Sub and
                   Cinergy Energy (5)
------------------ ---------------------------------------------------------------------------------------------------
10.22              Employment  Agreement  dated as of May 10, 2000 by and between the Company and Lawrence  Schneider
                   (6)
------------------ ---------------------------------------------------------------------------------------------------
10.23              Employment Agreement dated as of May 10, 2000 by and between the Company and Goran Mornhed (6)
------------------ ---------------------------------------------------------------------------------------------------
10.24              2000 Executive Incentive Compensation Plan (6)
------------------ ---------------------------------------------------------------------------------------------------
10.25              2000 Executive Bonus Plan (6)
------------------ ---------------------------------------------------------------------------------------------------
10.26              Stock  Option  Agreement  between the Company and  Lawrence  Schneider  with  respect to 1,000,000
                   shares of Common Stock (6)
------------------ ---------------------------------------------------------------------------------------------------
10.27              Stock Option  Agreement  between the Company and Goran  Mornhed with respect to 187,500  shares of
                   Common Stock (6)
------------------ ---------------------------------------------------------------------------------------------------
10.28              Stock Option  Agreement  between the Company and Goran  Mornhed with respect to 562,500  shares of
                   Common Stock (6)
------------------ ---------------------------------------------------------------------------------------------------
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)
------------------ ---------------------------------------------------------------------------------------------------
</TABLE>


                                       21
<PAGE>

<TABLE>
<CAPTION>
------------------ ---------------------------------------------------------------------------------------------------
<S>                <C>
Exhibit
Number             Description
------------------ ---------------------------------------------------------------------------------------------------
10.39              2003 Finance Incentive Plan (11)
------------------ ---------------------------------------------------------------------------------------------------
10.40              2003 Development Incentive Plan (11)
------------------ ---------------------------------------------------------------------------------------------------
10.41              Royalty  Agreement dated as of April 8, 2004 by and between U.S. Energy Biogas Corp.,  Countryside
                   Canada Power, Inc., the Registrant and Cinergy Energy Solutions, Inc. (12)
------------------ ---------------------------------------------------------------------------------------------------
10.42              Amendment to Note Purchase  Agreement  dated as of April 8, 2004 by and between U.S. Energy Biogas
                   Corp., Avon Energy Partners, LLC and the other parties identified therein (12)
------------------ ---------------------------------------------------------------------------------------------------
10.43              Amendment to Indenture of Trust and Security  Agreement  dated as of April 8, 2004 by and among US
                   Energy Biogas Corp., Countryside Canada Power, Inc. and the other parties identified therein (12)
------------------ ---------------------------------------------------------------------------------------------------
10.44              Amendment  dated April 8, 2004 among BMC Energy LLC,  Countryside  Canada Power Inc. and the other
                   parties  identified therein to the (i) Security Agreement dated as of May 2, 2001 among BMC Energy
                   LLC,  Countryside Canada Power, Inc. (as successor to AJG Financial Services,  Inc.) and the other
                   parties  identified  therein and (ii) Cash  Collateral  Pledge and Security  Agreement dated as of
                   April 30, 2001 among BMC Energy,  LLC,  Countryside Canada Power, Inc. (as successor to ABB Energy
                   Capital, LLC) and the other parties identified therein (12)
------------------ ---------------------------------------------------------------------------------------------------
10.45              Form of Restricted Stock Unit for Directors (13)
------------------ ---------------------------------------------------------------------------------------------------
10.46              Form of Restricted Stock Unit for Officers (13)
------------------ ---------------------------------------------------------------------------------------------------
10.47              Purchase  Agreement  dated September 30, 2004 among AJG Financial  Services,  Inc. and U.S. Energy
                   Biogas Corp. (13)
------------------ ---------------------------------------------------------------------------------------------------
10.48              Assignment  Agreement dated September 30, 2004 among AJG Financial Services,  Inc. and U.S. Energy
                   Biogas Corp. (13)
------------------ ---------------------------------------------------------------------------------------------------
10.49              Severance  Agreement and Mutual Release is by and between Edward M. Campana and US Energy Systems,
                   Inc.(14)
------------------ ---------------------------------------------------------------------------------------------------
10.50              Severance  Agreement,  Mutual Release and Consulting Agreement by and between Allen J. Rothman and
                   US Energy Systems, Inc.(14)
------------------ ---------------------------------------------------------------------------------------------------
10.51              Employment Agreement dated as of May 10, 2005 by and between the Company and Lawrence I. Schneider
------------------ ---------------------------------------------------------------------------------------------------
10.52              Description of compensation program for directors
------------------ ---------------------------------------------------------------------------------------------------
31.1               Rule 13a-14(a)/15d-14(a) certifications
------------------ ---------------------------------------------------------------------------------------------------
31.2               Rule 13a-14(a)/15d-14(a) certifications
------------------ ---------------------------------------------------------------------------------------------------
32.1               Section 1350 certification
------------------ ---------------------------------------------------------------------------------------------------
(1)                Incorporated  by  reference  to the  Company's  Registration  Statement  on Form  SB-2  (File  No.
                   333-94612)
------------------ ---------------------------------------------------------------------------------------------------
(2)                Incorporated  by  reference  to the  Company's  Annual  Report on Form  10-KSB  for the year ended
                   January 31, 1994
------------------ ---------------------------------------------------------------------------------------------------
(3)                Incorporated by reference to the Company's Current Report on Form 8-K filed on March 26, 1998
------------------ ---------------------------------------------------------------------------------------------------
(4)                Incorporated by reference to the Company's  Quarterly  Report on Form 10-QSB for the quarter ended
                   July 31, 2000
------------------ ---------------------------------------------------------------------------------------------------
(5)                Incorporated by reference to the Company's  Quarterly  Report on Form 10-QSB for the quarter ended
                   October 31, 2000
------------------ ---------------------------------------------------------------------------------------------------
(6)                Incorporated by reference to the Company's Current Report on Form 8-K dated May 4, 2000
------------------ ---------------------------------------------------------------------------------------------------
</TABLE>


                                       22
<PAGE>

<TABLE>
<CAPTION>
------------------ ---------------------------------------------------------------------------------------------------
<S>                <C>
Exhibit
Number             Description
------------------ ---------------------------------------------------------------------------------------------------
(7)                Incorporated  by  reference  to the  Company's  Annual  Report on Form  10-KSB  for the year ended
                   January 31, 1999
------------------ ---------------------------------------------------------------------------------------------------
(8)                Incorporated  by reference to the  Company's  Report on Form 10-KSB for the period ended  December
                   31, 2000
------------------ ---------------------------------------------------------------------------------------------------
(9)                Incorporated by reference to the Company's Current Report on Form 8-K dated June 11, 2001
------------------ ---------------------------------------------------------------------------------------------------
(10)               Incorporated by reference to the Company's Quarterly Report on Form 10-QSB dated August 14, 2002
------------------ ---------------------------------------------------------------------------------------------------
(11)               Incorporated  by  reference  to the  Company's  Report on Form 10-K for the period ended March 31,
                   2003, as amended
------------------ ---------------------------------------------------------------------------------------------------
(12)               Incorporated by reference to the Company's Report on Form 10-Q for the period ended March 31, 2004
------------------ ---------------------------------------------------------------------------------------------------
(13)               Incorporated by reference to the Company's  Report on Form 10-Q for the period ended September 30,
                   2004
------------------ ---------------------------------------------------------------------------------------------------
(14)               Incorporated  by reference to the Company's  Annual  Report on Form 10K, as amended,  for the year
                   ended December 31, 2004
------------------ ---------------------------------------------------------------------------------------------------
</TABLE>


                                       23
<PAGE>

                                   SIGNATURES


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


U. S. ENERGY SYSTEMS, INC.

By:  /s/ Asher E. Fogel
     ------------------
     Asher E. Fogel                                     Dated: August 22, 2005
     Chief Executive Officer
     (Principal Executive Officer)




By:  /s/ Richard J. Augustine
     ------------------------
     Richard J. Augustine                               Dated: August 22, 2005
     Chief Accounting Officer
     (Principal Accounting and Financial Officer)


                                       24