U S ENVIROSYSTEMS INC /DE/, SB-2/A, 1996-09-12

U S ENVIROSYSTEMS INC /DE/
SB-2/A, 1996-09-12
MOTORS & GENERATORS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1996

REGISTRATION NO. 333-04612

AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
U.S. ENERGY SYSTEMS, INC.
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

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

DELAWARE 4931 52-1216347
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)

RICHARD H. NELSON
PRESIDENT
515 NORTH FLAGLER DRIVE, U.S. ENERGY SYSTEMS, INC.
SUITE 202 515 NORTH FLAGLER DRIVE, SUITE 202
WEST PALM BEACH, FL 33401 WEST PALM BEACH, FL 33401
(407) 820-9779 (407) 820-9779
(ADDRESS AND TELEPHONE NUMBER OF (NAME, ADDRESS AND TELEPHONE
PRINCIPAL NUMBER OF AGENT FOR SERVICE)
EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)

COPIES TO:
DAVID ALAN MILLER, ESQ.
GREGORY KATZ, ESQ. NOAH SCOOLER, ESQ.
REID & PRIEST LLP GRAUBARD MOLLEN & MILLER
40 WEST 57TH STREET 600 THIRD AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10016
(212) 603-2000 (212) 818-8800
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01.......... 1,868,750(2) $4.00 $7,475,000 $ 2,578
- ------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase War-
rants................................ 1,868,750(3)(8) $ .10 $ 186,875 $ 64
- ------------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 1,868,750(4)(8) $4.00 $7,475,000 $ 2,578
- ------------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 162,500(5)(8) $5.96 $ 949,000 $ 328
- ------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase War-
rants................................ 162,500(6)(8) $.149 $ 23,725 $ 9
- ------------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 162,500(7)(8) $4.00 $ 650,000 $ 224
- ------------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 1,805,000(9) $4.00 $7,220,000 $ 2,490
- ------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase War-
rants................................ 500,000(10)(8) $ .10 50,000 $ 17.24
- ------------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 500,000(11)(8) $4.00 $2,000,000 $ 690
- ------------------------------------------------------------------------------------------------------
TOTAL................................. $8,978.24
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.

(2) Includes 243,750 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(3) Includes 243,750 Redeemable Common Stock Purchase Warrants ("Warrants")
which the Underwriters have the option to purchase to cover over-
allotments, if any.
(4) Represents shares issuable upon exercise of the Warrants registered
hereunder.
(5) Represents shares issuable upon exercise of an option to be issued to the
Representative (the "Representative's Purchase Option").
(6) Represents Warrants issuable upon exercise of the Representative's
Purchase Option.
(7) Represents shares issuable upon exercise of Warrants subject to the
Representative's Purchase Option.
(8) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the
number of Warrants and shares issuable upon exercise of the Warrants are
subject to the antidilution provisions of the Warrants and the
Representative's Purchase Option.
(9) Represents shares issuable in a concurrent secondary offering.

(10) Represents Warrants registered in a concurrent secondary offering.

(11) Represents shares issuable upon exercise of the warrants registered in a
concurrent secondary offering.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED SEPTEMBER 12, 1996

PROSPECTUS

U.S. ENERGY SYSTEMS, INC.

1,625,000 SHARES OF COMMON STOCK AND
1,625,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

U.S. Energy Systems, Inc. (the "Company") hereby offers (the "Offering")
1,625,000 shares of Common Stock (the "Common Stock") and 1,625,000 Redeemable
Common Stock Purchase Warrants (the "Warrants" and, together with the Common
Stock, the "Securities"). Each Warrant entitles the holder to purchase one
share of Common Stock for $4.00 during the four-year period commencing one year
from the date of this Prospectus. The Warrants are redeemable at a price of
$.01 per Warrant, at any time after the Warrants become exercisable, upon not
less than 30 business days' prior written notice, if the last sale price of the
Common Stock has been at least 150% (initially $6.00) of the exercise price of
the Warrants for the 20 consecutive trading days ending on the third day prior
to the date on which the notice of redemption is given. See "Description of
Securities."

The Company's Common Stock is sporadically traded on the NASD OTC Bulletin
Board. Prior to this Offering, there has been no public market for the Warrants
nor has there been an established trading market for the Common Stock. There
can be no assurance that such a market will develop for the Securities as a
result of this Offering. The Company has applied for inclusion of the Common
Stock and the Warrants on the Nasdaq SmallCap Market under the proposed symbols
USEE and USEEW, respectively. For information regarding the factors considered
in determining the initial public offering prices of the Securities and the
exercise price of the Warrants, see "Underwriting."

-----------

THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE
A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION
AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING
ON PAGE 9 AND "DILUTION" ON PAGE 20.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $4.00 $.40 $3.60
- --------------------------------------------------------------------------------
Per Warrant............................... $.10 $.01 $.09
- --------------------------------------------------------------------------------
Total(3).................................. $6,662,500 $666,250 $5,996,250
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) Does not include a 3% non-accountable expense allowance payable to the
Representative. The Company has also agreed to grant to the Representative
an option (the "Representative's Purchase Option") to purchase 162,500
shares of Common Stock at $5.96 per share and/or 162,500 Warrants at $.149
per Warrant and to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."

(2) Before deducting expenses payable by the Company, including the
Representative's non-accountable expense allowance of $199,875 ($229,856 if
the Underwriters' over-allotment option is exercised in full), estimated at
$571,250.
(3) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
243,750 shares of Common Stock and/or an additional 243,750 Warrants upon
the same terms and conditions as set forth above, solely to cover over-
allotments, if any. If such over-allotment option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $7,661,875, $766,188 and $6,895,687, respectively. See
"Underwriting."

The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
the Offering and to reject any order in whole or in part. It is expected that
delivery of the certificates representing the Securities will be made against
payment therefor at the offices of the Representative in New York City on or
about , 1996.

GAINES, BERLAND INC.

The date of this Prospectus is , 1996
<PAGE>

AVAILABLE INFORMATION

The Company is subject to informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected without charge and copied at prescribed rates at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048, and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661.
The Company's Common Stock is quoted on the NASD OTC Bulletin Board and
certain of the Company's reports, proxy materials and other information may be
available for inspection at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended ("Securities Act"), with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits filed as part thereof and otherwise incorporated
therein. Copies of the Registration Statement and the exhibits may be
inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at the
address set forth above.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
OR WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. At or prior to the consummation of the Offering,
the Company will consummate the following transactions (the "Closing
Transactions"): (i) a private placement to two investors of 1,600,000 shares of
the Company's 11% cumulative redeemable convertible preferred stock (the "11%
Preferred Stock") and 500,000 warrants ("Private Warrants") having the same
terms and conditions as the Warrants for an aggregate consideration of
$3,500,000 (the "Private Placement"), (ii) the acquisition of a 50% interest in
two geothermal plants known as Steamboat 1 and 1A for $4,982,000 (including
$50,000 as a downpayment which was previously paid by the Company) (the
"Steamboat Acquisition"), (iii) the conversion of $500,000 of convertible
subordinated debentures (the "Convertible Debentures") into 125,000 shares of
Common Stock and 125,000 Private Warrants (the "Debenture Conversion") and (iv)
the exchange of the 57,500 currently outstanding shares of the Company's Series
One Preferred Stock for 205,000 shares of Common Stock (the "Preferred Stock
Exchange"). The consummation of this Offering is a condition to the
consummation of the Closing Transactions and the consummation of the Closing
Transactions is a condition to the consummation of this Offering. Accordingly,
if any of the Closing Transactions is not consummated, this Offering will be
terminated. Except as otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option, the
Representative's Purchase Option, the Warrants offered hereby or any of the
Company's other outstanding options and warrants to purchase Common Stock. All
numbers and amounts specified herein reflect a one for forty reverse stock
split effective May 6, 1996, unless otherwise indicated.

THE COMPANY

U.S. Energy Systems, Inc. is engaged in the cogeneration and independent
power plant ("IPP") industries as a project developer, owner and operator.
Cogeneration is the process of producing two or more energy forms (typically
electricity and heat) simultaneously from the same fuel source. A cogeneration
facility is a power plant which produces electricity and, simultaneously,
recovers waste heat to use in place of heat which would otherwise be made from
conventional sources such as furnaces or boilers. An IPP is a power plant which
is not owned and operated by a regulated public electric utility company.
Frequently, IPPs are cogeneration facilities. Federal and state laws have been
promulgated to promote competition in the sale of electric energy and to
encourage cogeneration and independent power facilities.

The Company's strategy is to seek projects requiring power production or
cogeneration and to become an equity participant with the owners, developers or
other involved parties in return for the Company's expertise in the
structuring, design, management and operation of the projects. Often, at the
time of the Company's initial involvement, such projects will have advanced
beyond the conceptualization stage to a point where the engineering, management
and project coordination skills the Company offers are required to proceed.
Projects in which the Company is involved or is negotiating to become involved
include (a) acquiring and operating existing IPPs and cogeneration facilities
in the United States, (b) developing, constructing, and operating new IPPs and
cogeneration facilities in the United States and in certain overseas markets,
(c) designing and constructing cogeneration and IPPs for third party owners,
and (d) developing, constructing and selling energy-efficient products using
cogeneration technology such as non-electric air conditioning.

As a major element of its strategy, the Company intends to focus on projects
such as shopping malls, healthcare centers, food processing centers, hotels and
other facilities where large quantities of electricity, air conditioning and
hot water are required on a continuous and simultaneous basis. The Company has
signed a letter of intent with the owners of Bluebeard's Castle, a large resort
and commercial complex in St. Thomas, United States Virgin Islands ("USVI"), to
build and operate a 3 megawatt cogeneration plant and a 120,000 gallon per day
water recovery system in the resort's property. Under the letter of intent the
Company, the resort manager

3
<PAGE>

and the resort owners would own the cogeneration plant and water system and
share revenues. The Company has received initial funding from the resort owners
and the first of six engine generators is being installed during September
1996. The Company has also entered into a joint development agreement with the
Cowen Investment Group ("Cowen") to develop, build and operate cogeneration
plants at shopping malls. Toward this end, the joint venture has been in
discussions with two of the major mall owners in the United States. Under the
joint development agreement, savings from the cogeneration systems would be
shared equally by the mall owners and the joint development company (in which
the Company would have a 40% profit interest). Under the joint development
agreement, the Company will perform all project development functions other
than securing the financing. See "Business--Current Operations and On-Going
Projects."

The Company has a history of losses substantially throughout its existence
and, except for the distribution of $20,000 from the Plymouth State College
project (described below) in August 1996, has not received any cash
distributions from its investments since emerging from bankruptcy in 1993. To
provide the Company with a source of revenues to enable it to expand its
business, concurrently with the Offering, the Company will acquire, for a total
investment of $4,982,000 (including $50,000 as a downpayment which was
previously paid by the Company), a 50% interest in two geothermal power plants,
known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the "Steamboat
Facilities"), which it will operate under a co-management agreement with its
partner. Electricity is produced in geothermal plants by extracting heat from
the earth to drive turbines, thereby generating the electricity. Geothermal
power is considered a highly environmentally sound method of producing
electricity, but it can only be produced in areas where specific geological
formations exist. A substantial portion of the net proceeds of this Offering
and the Private Placement will be used for the Steamboat Acquisition. The
Company regards the Steamboat Acquisition as a key element toward achieving its
objectives in the independent power plant industry.

In January 1994, the Company purchased a 50% equity interest in a limited
liability company which owns a cogeneration facility in Lehi, Utah. The Company
expects the Lehi plant to be operational in the third quarter of this fiscal
year. However, the Company and its partners may decide to sell a portion of the
operating machinery and to purchase replacement equipment, thereby increasing
the plant's output capacity and efficiency. If such sale and replacement is
undertaken, the receipt of operational revenues would be delayed until the
second quarter of the next fiscal year. As there are no contracts in effect at
this time for the sale of power from this plant, receipt of revenues will also
be dependent upon the Company entering into such contracts with customers. See
"Business--Current Operations and On-Going Projects--Lehi Cogeneration
Project."

The Steamboat and Lehi projects enable the Company to participate in what it
believes is a growing market for independently produced electricity in the
western United States. Additionally, in 1994 the Company acquired a 50%
interest in a partnership which owns and operates a cogeneration plant which
produces 2.5 megawatts of electricity and 25 million British Thermal Units
("BTUs") for heating at Plymouth State College in Plymouth, New Hampshire. The
Plymouth facility provides 100% of the electrical and heating requirements for
the campus, which is part of the University of New Hampshire system, under a
twenty year contract.

The Company also intends to pursue projects which can utilize waste products
or other alternative fuels, such as used motor oil and tires, which provide
environmental and ecological benefits and also provide potential for earnings
because of low fuel costs.

The Company was incorporated in the State of Delaware on May 6, 1981. The
executive offices of the Company are located at 515 North Flagler Drive, Suite
202, West Palm Beach, Florida 33401. Its telephone number is (407) 820-9779.

4
<PAGE>

CLOSING TRANSACTIONS

Concurrently with the closing of the Offering, the Company will consummate
the Private Placement pursuant to which it will sell (i) 1,600,000 shares of
the 11% Preferred Stock to Enviro Partners, L.P. ("Enviro") for $3,100,000 and
(ii) 500,000 Private Warrants to Energy Management Corporation ("EMC") for
$400,000. The 11% Preferred Stock will be convertible on a share-for-share
basis into Common Stock, will vote on a share-for-share basis with the Common
Stock, will have a preferential dividend of 11% (payable in additional shares
of 11% Preferred Stock during the first two years and thereafter in cash or in
shares of 11% Preferred Stock at the option of the Company) and a liquidation
preference of $3,100,000 plus accrued dividends. The 11% Preferred Stock is
redeemable at the option of the Company at any time after four years from
issuance and is mandatorily redeemable ten years after issuance, at a
redemption price equal to the liquidation preference. The terms and conditions
of the Private Warrants are identical to those of the Warrants, and entitle the
holder to purchase one share of Common Stock for $4.00, subject to adjustments
in certain circumstances, during the period commencing one year and ending five
years from the date of this Prospectus. Both the Warrants and the Private
Warrants are redeemable by the Company, at a price of $.01 per warrant, at any
time after they become exercisable, upon not less than 30 business days' prior
written notice, if the last sale price of the Common Stock has been at least
150% (initially $6.00) of the exercise price of the Warrants for the 20
consecutive trading days ending on the third day prior to the date on which the
notice of redemption is given. See "Description of Securities."

The terms for the Private Placement were initially negotiated prior to
December 1995. The investors in the Private Placement agreed to invest $3.5
million in return for a specific percentage of the Company, subject to the
Company being able to raise at least another $6 million through either another
private placement or a public offering. The specific percentage would be
reduced proportionally to the size of the additional financing over $6 million.
A specific sales price was not set, but only a percentage of ownership. The
price attributed to the shares to be issued to the Private Placement investors
has been determined by the ultimate capitalization after a public offering,
accounting for the number of common shares for which the preferred shares could
be converted to attain the specific ownership percentage, and then dividing the
numerical shares by the dollar amount invested. The specific advantages for the
Company of this arrangement would be that there would be no discounts or costs
(other than the investors' legal fees) attached to the amount to be invested in
the Private Placement. In addition, the Private Placement investors would
contribute substantial financial and management skills which the Company would
need as it achieved growth objectives. Based on the terms of the agreement and
the Offering, following the Offering and the Private Placement, Enviro will
hold approximately 40.1% of the voting power of the Company, and, if the
Private Warrants held by EMC are exercised, the Private Placement investors
together would hold approximately 46.7% of the voting power of the Company. See
"Risk Factors--Concentration of Voting Power."

Also concurrently with the closing of the Offering, the Company will acquire
a 50% interest in Steamboat Envirosystems, L.C. ("Steamboat LLC"), which will
purchase the Steamboat Facilities from Far West Electric Energy Fund, L.P. (the
current owner of Steamboat 1) and 1-A Enterprises (the current owner of
Steamboat 1-A). The Company will contribute a total of $4,982,000 (including
$50,000 as a downpayment which was previously paid by the Company) to Steamboat
LLC from the proceeds of the Offering and the Private Placement to enable
Steamboat LLC to complete the acquisition and retire a mortgage and certain of
the royalty interests to which the Steamboat Facilities are subject. See "Use
of Proceeds--Steamboat Acquisition" and "Business--Current Operation and On-
Going Projects--Steamboat Geothermal Power Plants."

The Debenture Conversion and the Preferred Stock Exchange will also occur
concurrently with the Closing of the Offering. These transactions, combined
with the repayment of debt to be made with a portion of the proceeds of the
Offering and the Private Placement, will result in a substantial reduction of
the Company's indebtedness. The information in this Prospectus assumes that all
holders of the Convertible Debentures have agreed to participate in the
Debenture Conversion. As of September 11, 1996, three of the 26 holders of
Convertible Debentures, representing $150,000 in principal amount, have not
agreed to the interest rate reduction from 18% to 9% per annum. Accordingly,
the Company's annual interest expense will be $13,500 greater than the Pro
Forma amounts shown in this Prospectus. See "Use of Proceeds" and Pro Forma
Financial Statements.

5
<PAGE>

THE OFFERING

1,625,000 shares of Common Stock and 1,625,000
Securities offered..... Warrants. Each Warrant entitles the holder to
purchase one share of Common Stock for $4.00
during the four-year period commencing one year
from the date of this Prospectus. Each Warrant is
redeemable at a price of $.01 per Warrant at any
time after the Warrants become exercisable, upon
not less than 30 business days prior written
notice, if the last sale price of the Common
Stock on Nasdaq has been at least 150% (initially
$6.00) of the then-exercise price of the Warrants
for the 20 consecutive trading days ending on the
third day prior to the date on which the notice
of redemption is given. See "Description of
Securities."

Common Stock outstanding 439,650 shares
prior to the Offering......

Common Stock to be 2,394,650 shares(1)(2)
outstanding after the
Offering..............

The net proceeds to be received from the sale of
Use of proceeds........ the Securities offered hereby are estimated to be
approximately $5,425,000 (approximately
$6,275,000 if the Underwriters' over-allotment
option is exercised in full). Such net proceeds
and the $3,500,000 in proceeds from the Private
Placement will be used as follows: (i) $4,932,000
for the Steamboat Acquisition, (ii) $2,626,000 to
repay indebtedness (including $50,000 which was
borrowed to make a downpayment on the Steamboat
Acquisition) and (iii) the balance for working
capital. See "Use of Proceeds" and "Business."

Proposed Nasdaq SmallCap
Market Symbols............. Common Stock: USEE
Warrants: USEEW

RISK FACTORS

The securities offered hereby are speculative and involve a high degree of
risk and substantial dilution. Among the principal risks to be considered are:
(i) the Company has incurred and continues to incur substantial losses, (ii)
the Company's profitability will be dependent, to a significant extent, on the
continued successful operations of the Steamboat Facilities, (iii) prior to
this Offering, the Company has significant working capital and stockholders'
equity deficits, and (iv) the Company may require additional capital to
undertake future projects. See "Risk Factors" and "Dilution."
- --------
(1) Includes (i) 439,650 shares of Common Stock outstanding prior to the
Offering, (ii) 1,625,000 shares of Common Stock being issued pursuant to
the Offering, (iii) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued
in the Preferred Stock Exchange.
(2) Does not include an aggregate of 4,594,975 shares of Common Stock reserved
and to be reserved for issuance following completion of the Offering
including (i) 291,850 shares issuable on exercise of currently outstanding
options and warrants, (ii) 2,575,000 shares issuable on exercise of the
Warrants, the Representative's Purchase Option and the Warrants issuable on
exercise of the Representative's Purchase Option and the Private Warrants
being issued in the Private Placement and the Debenture Conversion, (iii)
1,600,000 shares issuable upon conversion of 11% Preferred Stock to be
issued to Enviro, and (iv) 128,125 shares issuable upon conversion of
Convertible Debentures which will remain outstanding after the Offering.

6
<PAGE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The Summary Financial Information set forth below is derived from the
historical financial statements appearing elsewhere in this Prospectus and
should be read in conjunction with such financial statements, including the
notes thereto. The Pro Forma Statements of Operations data for the year ended
January 31, 1996 and the six months ended July 31, 1996 give effect to the
Closing Transactions and to the acquisition of a 50% interest in Steamboat LLC
as if they had occurred at the beginning of the periods. The Pro Forma Balance
sheet data as at July 31, 1996 give effect to the Offering and to the Closing
Transactions as if such transactions had occurred on such date. See Pro Forma
Financial Statements, "Use of Proceeds" and historical financial statements.

STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
JANUARY 31, 1996 1995 JULY 31, 1996 1995
------------------------------ ----------- ------------------------- ----------
HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE USE USE/SB (1) USE
---------- --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from
joint ventures......... $ (17) $ 1,690 $ (76) $ (92) $ 831 $ (62)
Operating and adminis-
trative
expenses............... (853) (853) (1,006) (408) (408) (421)
Interest expense (2).... (604) (116) (319) (328) (46) (223)
------- --------- ------- ------- --------- -------
Income (loss) before in-
come taxes............. (1,474) 721 (1,401) (828) 377 (706)
Income taxes (3)........ -- (238) -- -- (125) --
------- --------- ------- ------- --------- -------
Income (loss) before ex-
traordinary items...... (1,474) 483 (1,401) (828) 252 (706)
Preferred dividends..... (21)(4a) (341)(4b) (29)(4a) (171)(4b)
------- --------- ------- ------- --------- -------
Income (loss) available
for common stockhold-
ers*................... $(1,495) $ 142 $(1,401) $ (857) $ 81 (706)
======= ========= ======= ======= ========= =======
(Loss) per share of Com-
mon Stock*............. $ (3.41) $ (3.38) $ (1.95) $ (1.61)
======= ======= ======= =======
(Loss) per share of Com-
mon Stock--Supplemental
(5)*................... $ (1.28) $ (0.65)
======= =======
Pro forma net income per
share of Common Stock
(6)*................... $ 0.08 $ 0.04
========= =========
Shares used in computing
net income per share of
Common Stock (6)....... 438,773 1,813,851 415,022 439,650 2,013,936 438,296
======= ========= ======= ======= ========= =======

BALANCE SHEET DATA:
<CAPTION>
JULY 31, 1996
------------------------------
HISTORICAL PRO FORMA (7)
---------- -------------
<S> <C> <C>
Current assets.......... $ 21 $1,388
Investment in joint ven-
tures.................. 1,834 6,766
Total assets............ 2,076 8,154
Current liabilities..... 2,815 1,264
Long-term liabilities... 2,818 1,343
11% Preferred Stock..... 3,100
Working capital......... (2,794) 124
Stockholders' equity
(deficit).............. (3,557) 2,447
</TABLE>

7
<PAGE>

- --------
* Before extraordinary item.

(1) Includes (a) adjusted operating results of the Steamboat Facilities for the
year ended December 31, 1995, and the six months ended June 30, 1996, (b)
elimination of deferred note payable discount, elimination of interest
payments on notes payable and bridge loans to be repaid from the proceeds
of this Offering, and (c) elimination of interest on $500,000 principal
amount of Convertible Debentures converted into Common Stock and Private
Warrants, with substantially all the remainder paying interest at 9% per
annum.

(2) Adjusted for reduction of Convertible Debenture interest to 9%, and
elimination of interest costs on $500,000 principal amount of Convertible
Debentures converted into Common Stock and Private Warrants and on bridge
loans and notes payable which will have been paid from the proceeds of this
Offering. Also adjusts for the elimination of certain unamortized deferred
costs of these notes and loans. As of September 11, 1996, three of the 26
holders of Convertible Debentures, representing $150,000 in principal
amount, have not agreed to the interest rate reduction from 18% to 9% per
annum. Accordingly, the Company's annual interest expense will be $13,500
greater than the Pro Forma amounts shown in this Prospectus.

(3) A pro forma provision for income taxes was calculated after providing for a
limit on the net operating loss deduction assuming an ownership change had
taken place at the beginning of the 1996 fiscal year and the beginning of
the six month period ended July 31, 1996.

(4a) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(4b) Provision for dividends on 11% Preferred Stock to be sold to Enviro
Partners, L.P. for $3,100,000. Dividends are payable in 11% Preferred
Stock.

(5) Supplemental loss per share is based on the weighted average number of
shares outstanding and 534,431 (at January 31, 1996) and 586,826 (at July
31, 1996) of the shares to be issued in the Offering for the repayment of
debt.

(6) Pro forma net income per share is based on the weighted average number of
shares outstanding, the shares issued in the Debenture Conversion and the
Preferred Stock Exchange, the dividend on the 11% Preferred Stock, and
shares issued in the Offering to obtain funds required for the acquisition
of the Steamboat Facilities and the retirement of debt (1,119,461 shares at
January 31, 1996 and 1,244,286 shares at July 31, 1996). Assumed exercise
of options and warrants and the conversion of the 11% Preferred Stock have
not been reflected as they would be anti-dilutive.

(7) Reflects the sale of Securities offered hereby, the Private Placement, the
Debenture Conversion, the Preferred Stock Exchange and the anticipated use
of proceeds for the Steamboat Acquisition and the repayment of
indebtedness, including accrued interest to September 15, 1996, as
contemplated in "Use of Proceeds."

8
<PAGE>

RISK FACTORS

Prospective purchasers of the securities offered hereby should carefully
consider the following factors, as well as the information contained elsewhere
in this Prospectus.

NO SIGNIFICANT REVENUES; HISTORY OF LOSSES/UNCERTAIN PROFITABILITY; WORKING
CAPITAL, CASH FLOW AND STOCKHOLDERS' EQUITY DEFICITS; AUDITORS' OPINION WITH
EXPLANATORY PARAGRAPH

The Company has a history of losses substantially throughout its existence
and, except for the distribution of $20,000 from the Plymouth State College
project in August 1996, has not received any cash distributions from its
investments since its reorganization in 1993. To date, the Lehi power plant
has not been operational. See "Current Operations and On-Going Projects."
Although the Company believes that there may be profit and cash flow from the
Lehi power plant starting in the third quarter of this fiscal year, there can
be no assurances that this will occur. Operations at the plant may be delayed
until the second quarter of the next fiscal year if the Company decides to
sell certain operating machinery and replace it by purchasing equipment that
would ultimately increase output capacity and efficiency. The Plymouth
cogeneration plant historically had not provided revenues or cash flow to the
Company because of costs related to equipment adjustments and operational
reserves required by the terms of its financing, and there can be no assurance
that any cash flow will be available in the foreseeable future. The Company
received a distribution of $20,000 in August 1996.

For the years ended January 31, 1996 and 1995, the Company incurred net
losses of $1,391,000 and $1,316,000 respectively, and for the six months ended
July 31, 1996, the Company incurred a net loss of $828,000. At July 31, 1996,
as a result of these and earlier accumulated losses, the Company had a working
capital deficit of $2,794,000 and a stockholders' equity deficit of
$3,557,000. There can be no assurance that the Company will ever be able to
generate cash flows sufficient to meet its obligations and sustain operations.
The independent auditors' report for the fiscal year ended January 31, 1996
states that these factors raise substantial doubt about the Company's ability
to continue as a going concern. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements.

LIMITED AVAILABLE CAPITAL; POSSIBLE NEED FOR ADDITIONAL FINANCING

While the Company believes that the proceeds from this Offering and the
Private Placement, together with anticipated cash flow from operations, will
be sufficient to meet its anticipated cash requirements for the next twelve
months, there is no assurance in this regard. The Company's continued
existence will be dependent upon its ability to generate cash flows from its
operations sufficient to meet its obligations as they become due. Unless the
Company can generate cash flows from operations to fund its working capital
needs, the Company will be required to obtain additional equity or debt
financing to continue to operate its business. If the Company should require
additional capital, there can be no assurance that such capital will be
available to the Company, or if available, it would be on terms acceptable to
the Company. If additional funds are raised by issuing equity securities,
significant dilution to existing stockholders may result. Any inability by the
Company to obtain additional financing, if required, will have a material
adverse effect on the operations of the Company, including the possible
cessation of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Use of Proceeds."

PRIOR BANKRUPTCY; DEFERRED TAXES

In late 1986, the Company, then called Cogenic Energy Systems, Inc., was
impaired by a $2,100,000 judgment resulting from a contractual dispute.
Although ultimately settled, the protracted court case caused delays in
planned expansion and sales and led to a serious cash shortage. In mid-1989,
the Company filed for protection under Chapter 11 of the Bankruptcy Code and a
Plan of Reorganization was confirmed by the bankruptcy court in 1993. The Plan
required the payment of outstanding taxes. Of those taxes, $110,000 was
required to be paid upon the merger of Utility Systems Florida, Inc. ("USF")
into the Company (see "Business--The Company"), but has been deferred pursuant
to a verbal agreement with the Internal Revenue Service as long as the Company
continues to meet its remaining pre-bankruptcy tax obligations ($373,000 at
July 31, 1996),

9
<PAGE>

which it is amortizing on a monthly basis over a six year period. The Company
does not intend to pay this deferred $110,000 amount out of the proceeds of
this Offering but to continue the deferral until either the Internal Revenue
Service requires payment or the Board of Directors deems cash flow to be
satisfactory.

EMERGING INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE

Although the cogeneration and IPP industries have been in existence for a
number of years, they are still in their development stages. As is typically
the case in an emerging industry, demand and market acceptance for their
products and services are subject to a high level of uncertainty. The Company
began developing new projects after USF merged with the reorganized Cogenic
Energy Systems, Inc. in November 1993, but has not yet commenced significant
marketing activities and currently has limited marketing experience as well as
limited financial, personnel and other resources to undertake extensive
marketing activities.

PROJECT DEVELOPMENT AND ACQUISITION RISKS

It is anticipated that certain types of projects, if undertaken, will
require the Company to raise additional capital and there can be no assurance
that such capital will be available on acceptable terms. The Company's ability
to develop new projects is also dependent on a number of other factors outside
its control, including obtaining power agreements, governmental permits and
approvals, fuel supply and transportation agreements, electrical transmission
agreements, site agreements and construction contracts, and there can be no
assurance that the Company will be successful in doing so. Project development
is subject to environmental, engineering and construction risks. If additional
financing is not available on acceptable terms, the Company may have to
cancel, decline or defer new projects. Further, projects which are
successfully developed may still face risks inherent in start-up businesses,
such as lack of market acceptance.

POTENTIAL REDUCTION IN REVENUE FROM STEAMBOAT GEOTHERMAL PROJECTS

The current power purchase agreements with Sierra Pacific Power Company
("Sierra") provide for price adjustments in December 1996 for Steamboat 1 and
in December 1998 for Steamboat 1A. Under the contracts, Steamboat LLC is
required to sell power to Sierra for additional 10-year periods at the then-
prevailing short-term avoided costs for electricity for Sierra. If the price
adjustments were to be made now, the new prices based on the contract formula
would be substantially less than the existing contract rates. Although
Management believes that revenues generated will still be in excess of the
costs of production, there is no assurance that future prices at which the
electricity generated by the Steamboat Facilities may be sold will exceed the
cost of production, or that Steamboat LLC will generate adequate cash flow
from operations to meet its investing and financing requirements. Although the
prices are variable and fluctuate, if, as expected, a substantial reduction in
power prices for Steamboat 1 takes place in December 1996, the result would
mean a decrease in the amount of net earnings of Steamboat LLC which the
Company will receive, which, depending on the extent of the price reductions,
could result in the Company reflecting a net loss. However, Management
believes that a more satisfactory price is likely to be obtained for the
electricity generated in the Steamboat Facilities through negotiations with
Sierra or otherwise, although no assurance can be given that such efforts will
be successful.

The Company will pay $1,000,000 into Steamboat LLC for the purpose of buying
out certain royalty interests and to fund certain improvements to the
Steamboat Facilities which are expected to result in higher electricity
output. While negotiations with certain royalty owners have already begun, and
the Company and its partners believe that these interests can be bought out,
no agreements have yet been concluded and no potential savings from royalty
reductions are reflected in the pro forma financial statements presented
herein. Additional royalty agreements, applying only to Steamboat 1, call for
payment of a total of 30% of the net revenue of Steamboat 1 after certain
deductions, starting March 1, 1997. The resulting effect on the net income of
Steamboat LLC and on the Company's after tax income will depend on the other
elements of power sales revenues outlined above. Assuming the reduction in
income from power sales discussed above, and the buyout of no royalty
interests, the cost of these net revenue royalties could be in the range of
$50,000 to $100,000 annually.

Negotiations with these interests have also already begun, and, although no
assurance can be given, Management believes they will be successfully
purchased. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma

10
<PAGE>

Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro
Forma Condensed Combined Statement of Operations," "Management's Discussion
and Analysis of Financial Condition and Plan of Operation--Plan of Operation"
and "Business--Current Operations and On-Going Projects."

RELIANCE ON PRESIDENT

The Company will be dependent upon its executive officers and key employees,
particularly its President, Richard Nelson. The unexpected loss of the
services of Mr. Nelson could have a detrimental effect on the Company.
Although the Company plans to add additional full-time employees after the
Offering, the Company presently has only three current full-time employees and
contracts with independent contractors for the conduct of certain engineering,
accounting, administrative and legal functions.

GENERAL OPERATING RISKS

The operation of power generation facilities involves many risks, including
the breakdown or failure of power generation equipment, transmission lines or
other equipment or processes and performance below expected levels of output
or efficiency. Although the facilities in which the Company is or will be
involved contain certain redundancies and back-up mechanisms, there can be no
assurance that any such breakdown or failure would not prevent the affected
facility from performing under applicable power agreements. The development
and operation of geothermal energy resources are subject to risks and
uncertainties similar to those experienced in the development of oil and gas
resources. The successful exploitation of a geothermal energy resource
ultimately depends upon the heat content of the extractable fluids, the
geology of the reservoir, the total amount of recoverable reserves, and
operational factors relating to the extraction of fluids, including operating
expenses, energy price levels, and capital expenditure requirements relating
primarily to the drilling of new wells. In connection with the development of
a project, the Company estimates the productivity of the geothermal resource
and the expected decline in such productivity. The productivity of a
geothermal resource may decline more than anticipated, resulting in
insufficient recoverable reserves being available for sustained generation of
the electrical power capacity desired. See "Business --Current Operations and
On-Going Projects."

GOVERNMENT REGULATION

Under present federal law, the Company is not and will not be subject to
regulation as a holding company under the Public Utilities Holding Company Act
("PUHCA") as long as each power plant in which it has an interest is a
qualifying facility ("QF") under the Public Utility Regulation Policy Act of
1978 ("PURPA"). A QF that is a cogeneration facility must produce not only
electricity but also useful thermal energy for use in an industrial or
commercial process or heating or cooling applications in certain proportions
to the facility's total energy output and must meet certain energy efficiency
standards. Under PURPA, a regulated public electric utility company must
purchase electricity at its avoided cost from an IPP which has QF status. QF
status is granted to IPP's which use fossil fuel in a manner which allows for
recovery and use of a certain percentage of otherwise rejected heat thereby
achieving a higher degree of fuel efficiency. QF status is also granted to
IPP's which use renewable energy sources such as geothermal, hydro, solar,
wind, and waste products without regard to heat recovery. An IPP using fossil
fuel, which loses its ability to use recovered heat, could fall below the
efficiency standards and thereby lose its QF status. The regulated public
electric utility company, which may have been required to purchase electricity
from the IPP, could thereafter refuse to purchase such electricity. IPP's
which have QF status, and which are not fossil fuel driven, cannot lose QF
status. See "Business--Government Regulation."

11
<PAGE>

public officials and private individuals may seek to enforce. There can be no
assurance that new or existing laws and regulations which would have a
materially adverse affect would not be adopted or revised, nor can there be
any assurance that the Company will be able to obtain all necessary licenses,
permits, approvals and certificates for proposed projects or that completed
facilities will comply with all applicable permit conditions, statutes or
regulations. In addition, regulatory compliance for the construction of new
facilities is a costly and time consuming process, and intricate and changing
environmental and other regulatory requirements may necessitate substantial
expenditures for permitting and may create a significant risk of expensive
delays or significant loss of value in a project if the project is unable to
function as planned due to changing requirements or local opposition.

ENVIRONMENTAL RISKS

As is the case in all power projects, strict environmental regulations
established by federal, state and local authorities involving air and other
emissions must be met. While the Company takes every precaution to insure that
such regulations are met at all times, and projects are not entered into which
do not or cannot meet such regulations, there is no assurance that such
regulations can always be met. Should a condition occur in which emissions
standards at a specific project fall below allowable standards, there could be
costs involved in remediating such conditions. Additionally, as with all
industrial sites, there are standards for the safe handling of fuels and
chemicals which must be met. Again, the Company takes every precaution to
insure such standards are met. Exigencies may occur--a fuel spillage for
example--which would require remediation with attendant costs.

Areas in which the Company is acquiring geothermal projects are subject to
frequent low-level seismic disturbances, and more significant seismic
disturbances are possible. While such power generation facilities are built to
withstand relatively significant levels of seismic disturbance, and the
Company believes it will be able to maintain adequate insurance protection,
there can be no assurance that earthquake, property damage or business
interruption insurance will be adequate to cover all potential losses
sustained in the event of serious seismic disturbances or that such insurance
will continue to be available on commercially reasonable terms.

UNCERTAINTY OF COMPETITIVE ENVIRONMENT

In addition to competition from electric utilities in the markets where the
projects are located, the Company also faces competition from approximately
150 companies currently involved in the cogeneration and independent power
market. Virtually all of these companies are larger and better financed than
the Company. Although the Company believes that it will be entering segments
of the marketplace where it will not face extensive competition, there is no
assurance that it will be able to do so, and it will thereby be disadvantaged
if it has to compete with the larger and better financed companies. The entire
industry also may face competition from existing investor owned utility
companies and may be adversely affected by the prices charged by such
companies for conventional energy sources, which, in turn, are affected by
inflation and availability of fossil fuel.

INSURANCE

Although the Company maintains insurance of various types to cover many of
the risks that apply to its operations, including $2,000,000 of general
liability insurance as well as separate insurance for each project, the
Company's planned insurance will not cover every potential risk associated
with its operations. The occurrence of a significant adverse event, the risks
of which are not fully covered by insurance, could have a material adverse
effect on the Company's financial condition and results of operations.
Moreover, no assurance can be given that the Company will be able to maintain
adequate insurance in the future at rates it considers reasonable.

SUBSTANTIAL PORTION OF PROCEEDS TO PAY DEBTS; POTENTIAL CONFLICTS OF INTEREST
BETWEEN THE COMPANY AND CERTAIN OF ITS OFFICERS

A substantial amount of the net proceeds of this Offering and the Private
Placement will be used to repay the Company's current indebtedness. A portion
of such repayment will benefit directly or indirectly several of

12
<PAGE>

the Company's officers, directors and stockholders. In order to induce all
holders of Convertible Debentures to convert at least one-third of their
Convertible Debentures, the Company agreed to reduce the conversion rate from
$16 per share to the same price as that being offered to the public, $4.00 per
share. There are 26 holders of Convertible Debentures, all of whom have been
afforded the opportunity to obtain the same more favorable conversion rate.
The Chairman of the Board, a director, and two principal stockholders of the
Company are holders of an aggregate amount of $425,000 of the Company's
Convertible Debentures. Accrued interest on such indebtedness, adjusted to
September 15, 1996, which will be repaid from the proceeds of the Offering,
amounts to $99,200. As part of the Debenture Conversion the conversion rate of
the Convertible Debentures held by those holders consenting to participate,
which remain outstanding after the Debenture Conversion, will be reduced to
$8.00 per share from the present $16.00 per share and the interest rate will
be reduced to 9% from the present 18%. As of September 11, 1996, three of the
26 holders of Convertible Debentures, representing $150,000 in principal
amount, have not agreed to the interest rate reduction from 18% to 9% per
annum. Accordingly, the Company's annual interest expense will be $13,500
greater than the Pro Forma amounts shown in this Prospectus. See "Use of
Proceeds" and "Description of Securities--Convertible Debentures." The
President, the Chairman, two directors and two principal stockholders will
also benefit by the payment to them of an aggregate of $1,119,900 (including
accrued interest to September 15, 1996) for a loan made by them to enable the
Company to obtain its interest in the co-generation facility at Plymouth State
College in New Hampshire. Additionally, Messrs. Nelson and Rosen have each
deferred portions of their salaries and $219,250 and $162,500, respectively,
will be owed to them as of September 15, 1996. The deferred salaries will not
be paid from net proceeds of this Offering, but from cash flow, if and when,
in the opinion of the Board of Directors, cash flow is sufficient. Messrs.
Nelson and Rosen will also benefit from the release of their pledges of an
aggregate of 97,250 shares of the Company's Common Stock owned by them in
connection with certain bridge loans made to the Company by Anchor Capital
Company, LLC ("Anchor") and Solvation, Inc. ("Solvation"), which loans are
being repaid with a portion of the proceeds. See "Use of Proceeds" and
"Certain Transactions."

CONCENTRATION OF VOTING POWER

Following the Offering and the Private Placement, Enviro will own 1,600,000
shares of 11% Preferred Stock, which votes with and is convertible into, on a
share-for-share basis, the Common Stock. Accordingly, Enviro will hold
approximately 40.1% of the combined voting power of the 11% Preferred Stock
and Common Stock immediately after the Offering. The 11% Preferred Stock, as a
class, will have the right to designate two directors (the "Designated
Directors") out of the five members of the Board of Directors, and no action
may be taken by the Board of Directors without the approval of at least one of
the Designated Directors. Therefore, Enviro will have the ability to influence
or control most of the Company's actions. This concentration of voting power
may also have the effect of delaying or preventing any change of control of
the Company not approved by Enviro. If the 500,000 Private Warrants held by
EMC were exercised, the combined voting power of Enviro and EMC--entities that
are indirectly owned by different members of the same family--would represent
46.7% of total voting power, assuming no other issuances of Common Stock prior
to such exercise.

LIMITED MARKET FOR THE COMMON STOCK; OFFERING PRICES DETERMINED BY NEGOTIATION

Prior to the Offering, there has been a limited trading market for the
Common Stock and no trading market for the Warrants. Although the Common Stock
has been sporadically traded on the OTC Bulletin Board, and the Common Stock
and Warrants will trade on the Nasdaq SmallCap Market upon conclusion of the
Offering, there can be no assurance that an active public trading market for
the Common Stock or Warrants will develop and continue after the Offering. The
initial offering prices of the Securities in the Offering have been determined
by negotiations between the Company and the Representative and may bear no
relation to the market prices of the Common Stock and Warrants after the
Offering. See "Underwriting."

EFFECT OF WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES OUTSTANDING AFTER
OFFERING

The Company has outstanding options and warrants which provide for the
purchase of an aggregate of 291,850 shares of Common Stock at prices ranging
from $4.00 to $10.00 per share. The Warrants, if exercised, would result in
the issuance of 1,625,000 shares of Common Stock. The Underwriters' over-
allotment option, if fully exercised, including the related Warrants, would
result in the issuance of 487,500 shares of Common Stock. The Representative's
Purchase Option, if fully exercised, including the related Warrants, would
result in the

13
<PAGE>

issuance of 325,000 shares of Common Stock. The 11% Preferred Stock to be
issued will be convertible into 1,600,000 shares of Common Stock. See
"Description of Securities--11% Preferred Stock." The Private Warrants to be
issued, if exercised, would result in the issuance of 625,000 shares of Common
Stock. See "Description of Securities--Warrants." An additional 128,125 shares
of Common Stock are issuable upon conversion of remaining Convertible
Debentures. These issuances of Common Stock, totalling 5,082,475 shares, would
have a dilutive effect on the Company's stockholders by decreasing their
percentage ownership in the Company. Moreover, the holders of such securities
would be most likely to exercise or convert such securities at a time when the
Company could obtain capital by a new offering of securities on terms more
favorable than those provided by such securities. Consequently, the terms on
which the Company could obtain additional capital may be adversely affected.
See "Capitalization" and "Underwriting."

IMMEDIATE AND SUBSTANTIAL DILUTION

This Offering involves an immediate dilution of approximately $2.98 per
share of Common Stock, (approximately 75% of the offering price of the Common
Stock) between the offering price per share of the Common Stock and the pro
forma net tangible book value per share of the Common Stock immediately after
the completion of this Offering and the Closing Transactions. See "Dilution."

REGISTRATION RIGHTS

This Registration Statement includes a shelf registration (the "Shelf
Registration") to enable Enviro to sell to the public the 1,600,000 shares of
Common Stock into which the shares of 11% Preferred Stock are convertible.
Enviro has agreed that it will not sell such shares for a period of nine
months from the closing of the Secondary Offering without the Representative's
consent. The Shelf Registration also covers the 500,000 Private Warrants being
acquired by EMC and the underlying shares of Common Stock issuable on the
exercise of such Private Warrants. EMC has given Theodore Rosen, the Company's
Chairman of the Board, a right of first refusal to purchase such Private
Warrants if at any time during the nine month period following the date of
this Prospectus EMC decides to sell such Private Warrants. Mr. Rosen has
agreed with the Representative that he will exercise such right of first
refusal in the event EMC decides to sell the Private Warrants during such nine
month period and that any Private Warrants purchased by Mr. Rosen will not be
sold by him until at least 13 months from the date of this Prospectus. The
Shelf Registration also enables the holders of the 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange to sell their shares. The
125,000 shares of Common Stock to be issued in the Debenture Conversion and
the 11,400 shares of Common Stock previously issued in the acquisition of
Plymouth Cogeneration Limited Partnership ("Plymouth Cogeneration") are not
included in the Shelf Registration; however they are available for sale in
accordance with Rule 144. The Common Stock to be issued in the Preferred Stock
Conversion is subject to an agreement with the Representative regarding
restrictions on resale. See "Shares Eligible for Future Sale--Registration
Rights."

POSSIBLE RULE 144 SALES

Upon consummation of the Offering, the Company will have outstanding
2,394,650 shares of Common Stock. All of the 1,625,000 shares sold in the
Offering (assuming no exercise of the Underwriters' over-allotment option),
will be freely transferable by persons other than affiliates (as defined in
regulations under the Securities Act) without restriction or further
registration under the Securities Act.

Of the 439,650 shares of Common Stock outstanding prior to the Offering,
64,650 are "restricted securities" within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of registration under the
Securities Act, unless an exemption from registration is available, including
the exemption provided by Rule 144. Under Rule 144 as currently in effect, of
such 64,650 shares, 43,250 shares are currently eligible for sale, and the
remaining 21,400 shares will be eligible for such sale in or after November
1996, subject in each instance to the volume limitations of the Rule. The
205,000 shares of Common Stock to be issued in the Preferred Stock Exchange
and the 125,000 shares of Common Stock to be issued upon the Debenture
Conversion will be restricted securities. Although registered pursuant to the
Shelf Registration, Anchor will not sell the

14
<PAGE>

205,000 shares of Common Stock it will receive in the Preferred Stock Exchange
without the Representative's prior written approval for a period of 9 months
from the date of this Prospectus. The foregoing does not give effect to any
shares issuable on exercise of outstanding options and warrants. The effect of
the offer and sale of such shares may be to depress the market price for the
Company's Common Stock. See "Underwriting" and "Shares Eligible for Future
Sale--Possible Rule 144 Sales."

POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION

The Warrants may be called for redemption by the Company once they become
exercisable and the Representative has given its prior consent at a redemption
price of $.01 per Warrant upon not less than 30 business days' prior written
notice if the last sale price of the Common Stock has been at least $6.00
(150% of the exercise price of the Warrants) on all 20 of the last trading
days ending on the third day prior to the date on which notice is given.
Notice of redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous
for them to do so, to sell the Warrants at the current market price when they
may otherwise wish to hold the Warrants, or to accept the redemption price,
which would be substantially less than the market value of the Warrants at the
time of redemption. The Company is required to maintain the effectiveness of a
current registration statement relating to the exercise of the Warrants and,
accordingly, the Company will be unable to redeem the Warrants unless there is
a currently effective prospectus and registration statement under the
Securities Act covering the issuance of underlying securities. Also, lack of
qualification or registration under applicable state securities laws may mean
that the Company would be unable to issue securities upon exercise of the
Warrants to holders in certain states, including at the time when the Warrants
are called for redemption. See "Description of Securities--Warrants."

AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS

The Company's Certificate of Incorporation authorizes the issuance of
Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights which
could adversely affect the voting power or other rights of holders of the
Company's Common Stock. In the event of issuance, the Preferred Stock could be
utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company, which could have the effect
of discouraging bids for the Company and, thereby, preventing stockholders
from receiving a premium for their shares over the then-current market prices.
See "Description of Securities."

The Delaware General Corporation Law includes provisions which are intended
to encourage persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Company's directors rather than
pursue non-negotiated takeover attempts. These existing takeover provisions
may have a significant effect on the ability of a stockholder to benefit from
certain kinds of transactions that may be opposed by the incumbent directors.
See "Description of Securities--Anti-Takeover Provisions."

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS

The Company will be able to issue shares of its Common Stock upon exercise
of the Warrants only if there is then a current prospectus relating to the
issuance of such Common Stock and only if such Common Stock is qualified for
sale or exempt from qualification under applicable securities laws of the
jurisdictions in which the various holders of the Warrants reside. The Company
has undertaken to keep current a prospectus which will permit the purchase and
sale of the Common Stock underlying the Warrants, but there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify for sale the shares of Common Stock underlying the Warrants
in those states in which the securities are to be offered, no assurance can be
given that such qualification will be obtained. The Warrants may be deprived
of any value and the market for the Warrants may be limited if a current
prospectus covering the Common Stock issuable upon the exercise

15
<PAGE>

of the Warrants is not kept effective or if such Common Stock is not qualified
or exempt from qualification in the jurisdictions in which the holders of the
Warrants then reside. See "Description of Securities--Warrants."

QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISKS OF LOW-PRICED
SECURITIES

Application has been made for quotation of the Common Stock on the Nasdaq
SmallCap Market, which is administered by the National Association of
Securities Dealers, Inc. (the "NASD"). For the Company's securities to be
eligible for inclusion on Nasdaq, the Company must, among other things,
maintain at least $2,000,000 in total assets and have at least $1,000,000 of
capital and surplus and the bid price of the Common Stock must be at least
$1.00 per share, provided, however, that, if the Company's stock falls below
such minimum bid price, it will remain eligible for continued inclusion if the
market value of the public float is at least $1,000,000 and the Company has at
least $2,000,000 in capital and surplus. Although the Company anticipates
satisfying the listing criteria following the consummation of the Offering,
there can be no assurance that it will be able to continue to meet the
required standards once it is listed. If it should fail to meet one or more of
such standards, its securities would be subject to deletion from Nasdaq. If
this should occur, trading, if any, in the Common Stock and the Warrants would
then continue to be conducted in the over-the-counter market on the OTC
Bulletin Board, an NASD-sponsored inter-dealer quotation system, or in what
are commonly referred to as "pink sheets." As a result, an investor may find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Company's securities. In addition, if the Company's
securities cease to be quoted on Nasdaq and the Company fails to meet certain
other criteria, they would be subject to Commission rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited
investors. For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchaser and have received
the purchaser's written consent to the transaction prior to sale. The broker-
dealer also must provide the customer with current bid and offer quotations
for the securities, the compensation of the broker-dealer and its salesperson
in the transaction, and monthly account statements showing the market value of
each such security held in the customer's account. In addition, prior to
effecting a transaction in such a security the broker-dealer must deliver a
standardized risk disclosure document prepared by the Commission that provides
information about low-priced securities and the nature and level of risks in
the market for such securities. Consequently, if the Company's securities were
no longer quoted on Nasdaq, these rules may affect the ability of broker-
dealers to sell the Company's securities and the ability of purchasers in this
Offering to sell their securities in the secondary market.

LIMITATIONS ON REPRESENTATIVE'S MARKET MAKING ACTIVITIES

The Representative has the right to act as the Company's agent in connection
with any future solicitation of warrantholders to exercise their Warrants.
Unless granted an exemption by the Commission from Rule 10b-6 promulgated
under the Exchange Act, the Representative will be prohibited, during certain
periods when the Warrants are exercisable, from engaging in any market-making
activities with regard to the Company's securities until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Representative may have to receive a fee for
soliciting the exercise of the Warrants. The Warrants are not exercisable
until one year after the date of this Prospectus. As a result, the
Representative may be unable to continue to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. Such
limitations could impair the liquidity and market prices of the Common Stock
and Warrants.

DIVIDENDS UNLIKELY

The Company has never declared or paid dividends on its Common Stock and
currently does not intend to pay dividends in the foreseeable future. The
payment of dividends in the future will be at the discretion of the Board of
Directors and will be payable only after payment of dividends on the Preferred
Stock. See "Dividend Policy."

16
<PAGE>

LIMITED LIABILITY OF DIRECTORS

The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be liable to the corporation or its
stockholders for expenses incurred in derivative or third party actions
arising from a breach of their fiduciary duty as directors, except in certain
circumstances. Accordingly, except in such circumstances, the Company's
directors will not be liable to the Company or its stockholders for breach of
such duty.

USE OF PROCEEDS

The net proceeds to be received from the sale of the securities offered
hereby are estimated to be approximately $5,425,000 (approximately $6,275,000
if the Underwriters' over-allotment is exercised in full). The proceeds from
the Offering together with $3,500,000 obtained in the Private Placement will
be used as follows and are more fully described below:

<TABLE>
<S> <C> <C> <C>
Steamboat Acquisition:
For purchase of Steamboat Facilities........... $1,575,000
Less deposit already paid...................... (50,000)
----------
1,525,000
Mortgage purchase and contribution............. 2,407,000
Additional contribution for purchase of royalty
interests and capital expenditures to fund
improvements to Steamboat Facilities.......... 1,000,000
----------
Total Steamboat Acquisition...................... 4,932,000 55.3%
Repayment of debt, with interest to September 15,
1996:
Plymouth loan.................................. $1,209,000
Anchor bridge loan............................. 756,000
Solvation bridge loan.......................... 263,000
Other bridge loan.............................. 62,000
Accrued interest on debentures................. 336,000
----------
Total repayment of debt.......................... 2,626,000 29.4%
----------
Total proceeds used.............................. 7,558,000
Balance to working capital....................... 1,367,000 15.3%
---------- -----
Total proceeds as above.......................... $8,925,000 100.0%
========== =====
</TABLE>

The foregoing represents Management's best estimate of its allocation of the
net proceeds of the Offering based upon the current state of its business
operations, its current business plan and the current economic and industry
conditions. Future events, including changes in the Company's planned business
operations, may result in changes in the allocation of funds. See "Business."

Until the net proceeds of the Offering are fully utilized, the Company
intends to invest such proceeds in short-term investment grade interest-
bearing obligations.

STEAMBOAT ACQUISITION

A limited liability company, Steamboat LLC, will be formed to acquire two
existing, income producing geothermal power projects known as the Steamboat
Facilities, located in Steamboat Hills, Nevada. Steamboat LLC will acquire the
Steamboat Facilities from Far West Electric Energy Fund L.P. and 1-A
Enterprises subject to a mortgage (the "Mortgage") held by an institutional
lender and certain net revenue or royalty interests in steam extraction
rights. The Company will obtain a 50% interest in Steamboat LLC by
contributing to Steamboat LLC the $1,575,000 cash purchase price (less $50,000
down payment previously paid by the Company) for the

17
<PAGE>

Steamboat Facilities. The Mortgage, on which the last quarterly principal
payment was made on July 20, 1996, will have a face value of $4,196,000 at
September 15, 1996 net of an escrowed reserve, and will be acquired by the
Company for $2,407,000 and contributed to Steamboat LLC. An additional
$1,000,000 in cash will be contributed by the Company to Steamboat LLC to
allow the Company to acquire certain of the royalty interests (leaving
outstanding a royalty to Sierra of 10% of power revenues of the Steamboat
Facilities and such other royalty interests as the Company is unsuccessful in
purchasing) and to fund certain improvements to the Steamboat Facilities.
Before sharing net income from Steamboat LLC with its 50% partner, the Company
will have a priority distribution from the projects of $1,800,000 per year,
with income above this priority amount to be divided equally between the
Company and its partner, Far West Capital, Inc., a Utah corporation ("Far West
Capital"). The Company and Far West Capital will co-manage the project. See
"Business--Current Operations and On-Going Projects."

REPAYMENT OF DEBT

An aggregate of $2,626,000 of the net proceeds of the Offering and the
Private Placement will be used to retire the following obligations of the
Company (including all interest through September 15, 1996):

Plymouth Loan. $1,209,000 will be used to repay a secured loan of $1,000,000
(plus accrued interest of $209,000) made to the Company in October 1994 by
certain directors, officers and other affiliates of the Company to provide
funds for the Company's purchase of its 50% equity interest in the owner of
the Plymouth State College Cogeneration Facility in Plymouth, New Hampshire
(the "Plymouth Loan"). The Plymouth Loan bears interest at a rate 2.5% per
annum above the prime rate and is repayable upon the first to occur of (i) the
consummation of an offering by the Company of equity securities providing net
proceeds of at least $1,000,000 or of debt securities providing net proceeds
of at least $4,000,000 or (ii) October 31, 1997. In consideration for making
the Plymouth Loan, the lenders (other than two of the Company's officers)
received warrants to purchase an aggregate of 114,000 shares of Common Stock
at the rate of 120 warrants per $1,000 loaned, which are exercisable until
October 31, 1999 at $5.00 per share. See "Business--Current Operations and On-
Going Company Projects--Plymouth State College, New Hampshire" and "Certain
Transactions."

Anchor Bridge Loan. $756,000 will be used to repay a loan of $600,000 (plus
accrued interest of $156,000) made to the Company in June 1995 by Anchor to
provide funds for the expenses of this Offering and working capital (the
"Anchor Loan"). The Anchor Loan bears interest at the rate of 18% per annum
and is repayable upon the first to occur of the consummation of this Offering
or September 15, 1996. The Company is negotiating with Anchor and anticipates
that it will successfully extend the term of the Anchor Loan beyond September
15, 1996 without triggering a default. In consideration for making the Anchor
Loan, the lender received 57,500 shares of Series One Preferred Stock, which
will be exchanged for 205,000 shares of Common Stock upon the consummation of
this Offering. The Anchor Loan is cross-collateralized (together with the
Solvation Loan described below) by a first lien on all of the assets of the
Company and 97,250 shares of Common Stock owned by officers of the Company.
See "Certain Transactions."

Solvation Bridge Loan. $263,000 will be used to repay a loan of $250,000
(plus $13,000 accrued interest) made to the Company commencing December 1995
by Solvation to provide funds for expenses of this Offering and working
capital (the "Solvation Loan"). The Solvation Loan bears interest at the rate
of 10% per annum and is repayable upon the first to occur of the consummation
of this Offering or September 15, 1996. The Company is negotiating with
Solvation and anticipates that it will successfully extend the term of the
Solvation Loan beyond September 15, 1996 without triggering a default. The
Solvation Loan is cross-collateralized with the Anchor Loan by a first lien on
all of the assets of the Company and 97,250 shares of Common Stock owned by
officers of the Company. EMC is a subsidiary of Solvation. Solvation and
Enviro are indirectly owned by different members of the same family. See
"Certain Transactions."

Other Bridge Loan. $62,000 will be used to repay a loan of $50,000 (plus
accrued interest of $12,000) made to the Company in May 1995 by a non-
affiliated individual to provide funds for a down payment on the Steamboat
Facilities acquisition. This loan bears interest at the rate of 18% per annum
and is repayable upon the consummation of this Offering.

18
<PAGE>

Accrued Interest on Debentures. $336,000 will be used to pay interest on the
Company's Convertible Debentures including $99,200 to certain directors and
principal stockholders. In December 1994 the holders of the Convertible
Debentures agreed to accept interest payments at a rate one-half of the stated
18% rate and to defer and accrue the remaining one-half until the consummation
of an underwritten offering of the Company's securities. Thereafter, the
interest rate on the outstanding Convertible Debentures will be 9% per annum.
Pursuant to the Debenture Conversion, an aggregate principal amount of
$500,000 of Convertible Debentures will be converted into 125,000 shares of
Common Stock and 125,000 Private Warrants. The holders who have agreed to the
Conversion will participate on a pro rata basis. As of September 11, 1996,
three of the 26 holders of Convertible Debentures, representing $150,000 in
principal amount, have not agreed to the interest rate reduction from 18% to
9% per annum. Accordingly, the Company's annual interest expense will be
$13,500 greater than the Pro Forma amounts shown in this Prospectus. See
"Description of Securities--Convertible Debentures" and "Certain
Transactions."

PRICE RANGE OF COMMON STOCK

The Common Stock has traded on the NASD OTC Bulletin Board under the symbol
USEN since the second quarter of the 1995 fiscal year. The following table
sets forth, for the periods indicated, the high and low closing bid quotations
for the Common Stock, as reported by the NASD OTC Bulletin Board. The
following quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
BID
-------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended January 31, 1995:
Second Quarter............................................ $ 4.40 $ 3.60
Third Quarter............................................. $10.00 $ 8.40
Fourth Quarter............................................ $10.00 $10.00
Fiscal Year Ended January 31, 1996:
First Quarter............................................. $10.00 $10.00
Second Quarter............................................ $10.00 $10.00
Third Quarter............................................. $ 8.40 $ 6.00
Fourth Quarter............................................ $ 4.00 $ 2.40
Fiscal Year Ending January 31, 1997:
First Quarter............................................. $ 2.92 $ 2.48
Second Quarter............................................ $ 2.00 $ 1.50
Third Quarter (to Sept. 4, 1996).......................... $ 3.00 $ 1.50
</TABLE>

As of September 4, 1996, there were 592 record holders of the Company's
Common Stock and approximately 900 beneficial holders of the Company's Common
Stock.

On September 4, 1996, the high bid price was $3.00 and low bid price was
$3.00.

DIVIDEND POLICY

The Company has not paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The 1,600,000
shares of 11% Preferred Stock to be issued to Enviro have an aggregate
liquidation preference of $3,100,000 and will carry a preferential annual
cumulative dividend rate of 11% of the liquidation preference ($341,000 per
year). During the first two years after issuance, the 11% Preferred Stock
dividend will be payable in additional shares of 11% Preferred Stock (valued
at $1.9375 per share). Thereafter the 11% Preferred Stock dividend will be
payable in either shares of 11% Preferred Stock or cash, at the option of the
Company. No dividends may be paid on the Common Stock so long as the Company
is not current on payment of dividends on the 11% Preferred Stock. See
"Description of Securities--11% Preferred Stock."

19
<PAGE>

DILUTION

The difference between the public offering price per share of Common Stock
included in the Offering and the pro forma net tangible book value per share
of Common Stock after this Offering and the Closing Transactions is referred
to herein as the dilution to investors in this Offering. Net tangible book
value per share of Common Stock is determined by dividing the net tangible
book value (total assets less intangible assets and less total liabilities and
preferred stock equity) by the number of outstanding shares of Common Stock.

As of July 31, 1996, the Company had a negative net tangible book value of
($4,353,000) or ($9.90) per share of Common Stock. After giving effect to the
application of the net proceeds from the sale of the Securities offered hereby
and the Closing Transactions including payment of accrued interest and
additional bridge loan borrowing to September 15, 1996, the pro forma net
tangible book value at that date would be $2,447,000 or $1.02 per share of
Common Stock ($3,260,750 ($1.24 per share) if the Underwriters' over-allotment
option is exercised). This represents an immediate increase in net tangible
book value of $10.92 per share to existing stockholders, and an immediate
dilution of $2.98 (75%) per share to new investors ($2.76 (69%) per share if
the Underwriters' over-allotment option is exercised).

The following table illustrates the dilution per share of Common Stock:

<TABLE>
<S> <C> <C>
Public offering price per share of the Common Stock included
in the Offering.............................................. $4.00
Negative net tangible book value per share before the Offering
(1).......................................................... $(9.90)
======
Increase to existing common stockholders in net tangible book
value due to the Offering and the Closing Transactions
(2)(3)....................................................... 10.92
======
Pro forma net tangible book value after the Offering.......... $1.02
=====
Pro forma dilution to new investors........................... $2.98
=====
</TABLE>
- --------
(1) Based on 439,650 shares of Common stock issued and outstanding. Net
tangible book value is adjusted to provide for the $575,000 liquidation
value of the Series One Preferred Stock.
(2) Gives effect to the Preferred Stock Exchange, the Debenture Conversion and
the issuance of 1,625,000 shares of Common Stock in this Offering.
(3) Net tangible book value is adjusted to provide for the $3,100,000
liquidation value of the 11% Preferred Stock.

20
<PAGE>

CAPITALIZATION

The following table sets forth the historical capitalization of the Company
at July 31, 1996 and as adjusted to reflect (i) the sale of the Securities in
this Offering, (ii) the consummation by the Company of the Private Placement,
the Debenture Conversion and the Preferred Stock Exchange, and (iii) the
application of the net proceeds from the foregoing, including the completion
of the Steamboat Acquisition and the repayment of debt including accrual of
interest and additional bridge loan borrowing to September 15, 1996. See "Use
of Proceeds." This table should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the Pro Forma
Financial Statements included in this Prospectus.

<TABLE>
<CAPTION>
JULY 31, 1996
------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt, net of unamortized discount of
$30,000............................................. $ 2,818,000 $ 1,343,000
Loans payable........................................ 960,000
Pre-reorganization income taxes payable, current..... 192,000 192,000
----------- -----------
3,970,000 1,535,000
----------- -----------
11% cumulative redeemable convertible preferred
stock............................................... 3,100,000
-----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; issued and outstanding, 57,500 shares. 1,000
Common stock, $0.01 par value, 35,000,000 shares
authorized; issued and outstanding, 439,650
shares; to be issued and outstanding 2,394,650
shares(1)(2)...................................... 4,000 23,000
Additional paid-in capital......................... 112,000 6,198,000
Accumulated (deficit)(3)........................... (3,674,000) (3,774,000)
----------- -----------
Total stockholders' equity (deficit)................. 3,557,000) 2,447,000
----------- -----------
Total capitalization................................. $ 413,000 $ 7,082,000
=========== ===========
</TABLE>
- --------

(1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the
Offering, (ii) 1,625,000 shares of Common Stock being issued pursuant to
the Offering, (iii) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued
in the Preferred Stock Exchange.
(2) Does not include an aggregate of 4,594,975 shares of Common Stock reserved
and to be reserved for issuance following completion of the Offering
including (i) 291,850 shares issuable on exercise of currently outstanding
options and warrants, (ii) 2,575,000 shares issuable on exercise of the
Warrants, the Representative's Purchase Option and the Warrants issuable
on exercise of the Representative's Purchase Option and the Private
Warrants being issued in the Private Placement and the Debenture
Conversion, (iii) 1,600,000 shares issuable upon conversion of 11%
Preferred Stock to be issued to Enviro, and (iv) 128,125 shares issuable
upon conversion of Convertible Debentures which will remain outstanding
after the Offering.

(3) Change in accumulated (deficit) reflects the write off of unamortized debt
discount of $25,000 in connection with repayment of certain debt and the
accrual of interest to September 15, 1996.

21
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JULY 31, 1996

The following Pro Forma Condensed Balance Sheet gives effect to the
following transactions as if they had occurred on July 31, 1996: (a) sale of
1,600,000 shares of Preferred Stock and 500,000 Private Warrants for an
aggregate of $3,500,000, (b) sale of 1,625,000 shares of Common Stock and
1,625,000 Warrants offered by this Prospectus for net proceeds of $5,425,000,
(c) acquisition of a 50% interest in two geothermal power plants (the
Steamboat Facilities) for an aggregate of $4,982,000 (including $50,000 as a
downpayment which was previously paid by the Company), (d) repayment of notes
payable and other liabilities in the aggregate amount of $2,626,000 adjusting
for accrual of interest and additional bridge loan financing to September 15,
1996, (e) conversion of 57,500 shares of Series One Preferred Stock into
205,000 shares of Common Stock, and (f) conversion of $500,000 principal
amount of the existing Convertible Debentures to 125,000 shares of Common
Stock and 125,000 Private Warrants. The Pro Forma Condensed Balance Sheet
should be read in conjunction with Pro Forma Statement of Operations and the
historical financial statements of the Company, Lehi Independent Power
Associates, L.C. ("LIPA") and Plymouth Cogeneration included in this
Prospectus.

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
HISTORICAL DEBIT CREDIT PRO FORMA
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
A S S E T S
Current assets:
Cash........................................................... $ 1,000 $ 3,500,000(a) $ 4,932,000(c) $1,368,000
5,425,000(b) 2,626,000(d2)
Inventory...................................................... 19,000 19,000
Other current assets........................................... 1,000 1,000
----------- ----------- ----------- ----------
Total current assets........................................... 21,000 8,925,000 7,558,000 1,388,000
Investments in Joint Ventures--at equity:
Lehi Independent Power Associates, L.C......................... 1,112,000 1,112,000
Plymouth Cogeneration Limited Partnership...................... 669,000 669,000
Steamboat Envirosystems, L.C................................... 53,000 4,932,000(c) 4,985,000
Deferred costs of registration.................................. 221,000 221,000(b) --
----------- ----------- ----------- ----------
TOTAL.......................................................... $ 2,076,000 13,857,000 7,779,000 $8,154,000
=========== ----------- ----------- ==========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
(CAPITAL DEFICIENCY)
Liabilities:
Loans payable.................................................. $ 960,000 960,000(d2) $ --
Pre-reorganization income taxes payable........................ 192,000 192,000
Other current liabilities (including due to related parties of
$797,000 and $525,000 Pro Forma)............................... 1,663,000 666,000(d2) 75,000(d1) 1,072,000
----------- ----------- ----------- ----------
Total current liabilities...................................... 2,815,000 1,626,000 75,000 1,264,000
Convertible subordinated secured debentures (including due to
related parties of $425,000 and $286,000 (Pro Forma).......... 1,525,000 500,000(f) 1,025,000
Notes payable (including due to related parties of $775,000)... 975,000 1,000,000(d2) 25,000(g) --
Other liabilities (including due to related parties of 318,000 318,000
$12,000)......................................................
----------- ----------- ----------- ----------
Total liabilities.............................................. 5,633,000 3,126,000 100,000 2,607,000
----------- ----------- ----------- ----------
11% cumulative redeemable convertible preferred stock, $.01 par
value (issued and outstanding, none; to be issued and out- 3,100,000(a) 3,100,000
standing, 1,600,000 shares)................................... ----------- ----------
Stockholders' Equity (Capital Deficiency):
Preferred stock, $.01 par value (issued and outstanding, 57,500
shares; to be issued and outstanding, none)................... 1,000 1,000(e) --
Common stock, $.01 par value (issued and outstanding, 439,650
shares; to be issued and outstanding, 2,394,650 shares)....... 4,000 16,000(b) 23,000
2,000(e)
1,000(f)
Additional paid-in capital..................................... 112,000 221,000(b) 400,000(a) 6,198,000
1,000(e) 5,409,000(b)
499,000(f)
25,000(g)
Accumulated deficit............................................ (3,674,000) 75,000(d1) (3,774,000)
----------- ----------- ----------- ----------
Total stockholders' equity (capital deficiency)................ (3,557,000) 323,000 6,327,000 2,447,000
----------- ----------- ----------- ----------
TOTAL.......................................................... $ 2,076,000 $17,306,000 $17,306,000 $8,154,000
=========== =========== =========== ==========
</TABLE>

22
<PAGE>

Notes to Pro Forma Condensed Consolidated Balance Sheet
- --------

(a) To reflect sale of 1,600,000 shares of 11% Preferred Stock for $3,100,000
and 500,000 Private Warrants for $400,000.
(b) To reflect sale of 1,625,000 shares of Common Stock and 1,625,000 Warrants
for net proceeds of $5,425,000.
(c) To reflect purchase of a 50% interest in Steamboat LLC, which is acquiring
the Steamboat Facilities.
<TABLE>
<S> <C>
(d1)To reflect accrual of interest from August 1 to September 15,
1996............................................................... $75,000
(d2)To reflect assumed repayment of debt:
Note payable.................................................... $1,000,000
Bridge loans.................................................... 960,000
Accrued interest................................................ 666,000
----------
$2,626,000
==========
</TABLE>
(e) To reflect conversion of existing Series One Preferred Stock into 205,000
shares of Common Stock.

(f) To reflect conversion of $500,000 principal amount of the existing
Convertible Debentures to 125,000 shares of Common Stock and 125,000
Private Warrants. No value has been assigned to these warrants.
(g) To eliminate unamortized debt discount on debt repaid. This charge will be
treated as an extraordinary loss in the statement of operations during the
period this Offering is consummated.

23
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The following Pro Forma Condensed Consolidated Statement of Operations
combines the results of operations of the Company for the year ended January
31, 1996 and the six months ended July 31, 1996 with the Company's share of
the pro forma results of operations of the Steamboat Facilities for the year
ended December 31, 1995 and the six months ending June 30, 1996 as if the
proposed Steamboat Acquisition has taken place at the beginning of the periods
in a transaction accounted for as a purchase. The Pro Forma Condensed
Consolidated Statement of Operations also gives effect to the following: (a)
sale of Common Stock and Warrants and sale of Preferred Stock and Private
Warrants to the extent necessary to fund the acquisition of a 50% interest in
the Steamboat Facilities and repay debt, (b) conversion of 57,500 shares of
Series One Preferred Stock into 205,000 shares of Common Stock, (c)
restructure of existing Convertible Debentures by converting $500,000
principal amount to 125,000 shares of Common Stock and 125,000 Private
Warrants and reducing the interest rate from 18% to 9% on the remaining
balance. This statement should be read in conjunction with the Steamboat
Envirosystems, L.C. Pro Forma Condensed Balance Sheet as of June 30, 1996, the
Steamboat Envirosystems Power Plants Pro Forma Condensed Combined Statement of
Operations and the historical financial statements of the Company, LIPA and
Plymouth Cogeneration, Far West Electric Energy Fund, L.P. and 1-A
Enterprises, included in this Prospectus. LIPA, Plymouth, Far West Electric
Energy Fund, L.P. and 1-A Enterprises each have a fiscal year end of December
31 which differs to the fiscal year end of the Company. No material adjustment
is necessary to reconcile the December 31 year end to the Company's January 31
year end. The pro forma results of operations are not necessarily indicative
of future results of operations or what the results would have been if the
acquisition had taken place at the beginning of the periods.

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1996 SIX MONTHS ENDED JULY 31, 1996
-------------------------------------------- ------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ---------- ---------- ----------- ----------
DR./(CR.) DR./(CR.)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from joint
venture................ $ (17,000) $(1,707,000)(1) $1,690,000 $ (92,000) $(923,000)(1) $ 831,000
=========== =========== ========== ========= ========= ==========
Operating expenses...... (853,000) (853,000) (408,000) (408,000)
Interest expense(5)..... (604,000) (488,000)(2) (116,000) (328,000) (374,000)(2) (46,000)
----------- ----------- ---------- --------- --------- ----------
Income (loss) before in-
come taxes............. (1,474,000) 721,000 (828,000) 377,000
Income taxes............ 238,000 (3) 238,000 125,000 (3) (125,000)
----------- ----------- ---------- --------- --------- ----------
Income (loss) before ex-
traordinary item....... (1,474,000) 483,000 (828,000) 252,000
Dividends on preferred
stock.................. 21,000 (4a) 341,000 (4b) 341,000 29,000 (4a) 171,000 (4b) 171,000
(21,000)(4a) (29,000)(4a)
----------- ----------- ---------- --------- --------- ----------
Income (loss) available
for common
stockholders(6)........ $(1,495,000) $ 142,000 $(857,000) $ 81,000
----------- ---------- --------- ----------
Net income per share(7). $ (3.41) $0.08 $ (1.95) $ 0.04
----------- ---------- --------- ----------
Shares used in computing
net income
per share(7)........... 438,773 1,813,851 439,650 2,013,936
=========== ========== ========= ==========
</TABLE>
- --------

(1) Reflects the Company's allocated pro forma income of Steamboat LLC,
including an 18% preferred return to the Company based on gross capital
raised (either publicly or privately) by the Company up to $10 million.
Allocation and payment of the preferred return is subject to available
cash flow of Steamboat LLC, and is non-cumulative.

(2) To reflect the reduction in interest expenses as a result of repayment of
Notes Payable and Loans Payable, conversion of $500,000 Convertible
Subordinated Secured Debentures to 125,000 shares of Common Stock and
125,000 Private Warrants, and reduction of interest rate from 18% to 9% of
the remaining balance of the Convertible Debentures. The reduction of the
interest rate to 9% will be accounted for prospectively. As of September
11, 1996, three of the 26 holders of Convertible Debentures, representing
$150,000 in principal amount, have not agreed to the interest rate
reduction from 18% to 9% per annum. Accordingly, the Company's annual
interest expense will be $13,500 greater than the Pro Forma amounts shown
in this Prospectus.
(Footnotes continued on next page)

24
<PAGE>

(Footnotes continued from preceding page)

(3) To reflect provision for federal and state taxes at 38%, while providing
for a limit on the net operating loss deduction assuming an ownership
change had taken place at the beginning of the fiscal year and the
beginning of the six month period ended July 31, 1996. A deferred tax
benefit was not provided in the historical financial statements since the
likelihood of realization of such benefit cannot be determined.

(4a) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(4b) Provision for dividends on 11% Preferred Stock to be sold to Enviro
Partners for $3,100,000. Dividends are payable in 11% Preferred Stock.

(5) The historical amounts during the year ended January 31, 1996 and the six
months ended July 31, 1996 include approximately $185,000 and $93,00,
respectively, of interest on debts owed to related parties.
(6) The net income (loss) available to common stockholders during the period
the 57,500 shares of Series One Preferred Stock are converted into 205,000
shares of Common Stock will be reduced by a nonrecurring amount of
approximately $791,000 representing the excess of fair value of the Common
Stock transferred to the holders of the Preferred Stock over the carrying
amount of the Preferred Stock in the Company's balance sheet.

(7) Pro forma net income per share is based on the weighted average number of
shares outstanding, the shares issued in the Debenture Conversion and the
Preferred Stock Exchange, the dividend on the 11% Preferred Stock and
shares issued in the Offering to obtain funds required for the acquisition
of the Steamboat Facilities and the retirement of debt (1,119,461 shares
at January 31, 1996 and 1,244,286 shares at July 31, 1996). Assumed
exercise of options, warrants and the conversion of the 11% Preferred
Stock have not been reflected as they would be anti-dilutive.

25
<PAGE>

STEAMBOAT ENVIROSYSTEMS, L.C.

PRO FORMA CONDENSED BALANCE SHEET

AS OF JUNE 30, 1996

The following Pro Forma Condensed Balance Sheet gives effect to the
acquisition of two geothermal plants (the "Steamboat Facilities") accounted
for as a purchase by the Company (50% ownership interest) and Far West Capital
(50% ownership interest) for an aggregate of $5,256,000 as if such acquisition
had taken place on June 30, 1996. The total is made up of $4,982,000
contributed by the Company and $274,000 contributed by Far West Capital, Inc.
The Company's contribution will consist of (1) $1,575,000 to be distributed to
the limited partners and owners of the predecessor entities (other than Far
West Capital, Inc.) to obtain a 50% interest in Steamboat Envirosystems, L.C.,
(2) $2,407,000 to be used to pay all outstanding mortgages on the Steamboat
Facilities and (3) $1,000,000 in cash to be contributed to the Partnership to
allow the purchase and cancellation of certain royalty interests and to fund
certain improvements to the Steamboat Facilities. Far West Capital is
contributing its limited partnership interest in Steamboat 1, valued at
$274,000 to Steamboat LLC. Far West Capital has a 5.14% ownership interest in
Steamboat 1 and is not participating in the distributions of the purchase
price paid by the Company. The Pro Forma Condensed Balance Sheet should be
read in conjunction with the Pro Forma Condensed Combined Operations of
Steamboat Envirosystems, L.C. and the historical financial statements of the
Company, Far West Electric Energy Fund, L.P. and 1-A Enterprises included in
this Prospectus.

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------
DEBIT CREDIT PRO FORMA
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash................................. $ 4,982,000(a) $1,575,000(c)
1,000,000(d)
2,407,000(f)
Other Assets......................... 3,000(a) $ 3,000
Property, Plant and Equipment........ 274,000(b)
1,575,000(c)
1,000,000(d)
2,407,000(e) 5,256,000
----------- ---------- ----------
Total.............................. $10,241,000 $4,982,000 $5,259,000
=========== ========== ==========
LIABILITIES
Notes payable........................ $ 2,407,000(f) $2,407,000(e)
MEMBERS' EQUITY
U.S. Energy Systems, Inc............. 4,985,000(a) $4,985,000
Far West Capital, Inc................ 274,000(b) 274,000
----------- ---------- ----------
Total.............................. $ 2,407,000 $7,666,000 $5,259,000
=========== ========== ==========
</TABLE>
- --------
(a) To reflect cash contribution of U.S. Energy Systems, Inc. including
$50,000 deposit previously paid.
(b) To reflect contribution of Far West Capital Inc. of its 5.14% limited
partnership interest in Far West Electric Energy Fund, L.P.
(c) To reflect distributions to limited partners of Far West Electric Energy
Fund, L.P. and owners of 1-A Enterprises.

(d) To reflect the investment to purchase and cancel certain royalty interests
and to fund certain improvements to the Steamboat Facilities.
(e) To reflect assumption of the Mortgage.
(f) To reflect payment of the Mortgage.

26
<PAGE>

STEAMBOAT FACILITIES

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

The following Pro Forma Condensed Combined Statement of Operations of the
Steamboat Facilities reflects the combined results of operations of the
Steamboat Facilities for the year ended December 31, 1995 and the six months
ended June 30, 1996, adjusted to eliminate those costs which will no longer
exist as a result of the purchase of interests by the Company and Far West
Capital. Steamboat LLC will acquire the Steamboat Facilities from Far West
Electric Energy Fund L.P. and 1-A Enterprises subject to a mortgage in favor
of an institutional lender and certain net revenue or royalty interests in
steam extraction rights. The $4,982,000 contributed by the Company to
Steamboat LLC will be applied as follows: (1) $1,575,000 cash purchase price
(less $50,000 down payment previously paid by the Company) will be used to
obtain a 50% interest in Steamboat LLC, (2) a mortgage on the Steamboat
Facilities, on which the last quarterly principal payment was made on July 20,
1996, which had a face value of $4,196,000 as at September 15, 1996 net of an
escrowed reserve, and will be acquired by the Company for $2,407,000 and
contributed to Steamboat LLC, and (3) $1,000,000 in cash will be contributed
by the Company to Steamboat LLC to allow it to purchase and cancel certain of
the royalty interests and to fund certain improvements to the Steamboat
Facilities. This statement is not necessarily indicative of what results of
operations would have been had the Company acquired its interest in the
Steamboat Facilities at the beginning of the periods or of what future results
of operations may be. This statement should be read in conjunction with the
historical financial statements of Far West Electric Energy Fund, L.P. (of
which Steamboat 1 is a part) and 1-A Enterprises (Steamboat 1-A) included in
this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY 1 AND 1-A
FUND, 1-A PRO FORMA
L.P.(1) ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $2,529,000 $875,000 $3,404,000 $ $3,404,000
Other............. 145,000 145,000 (87,000) (3a,b)
(58,000) (4)
---------- -------- ---------- ----------- ----------
Total revenues.. 2,674,000 875,000 3,549,000 (145,000) 3,404,000
---------- -------- ---------- ----------- ----------
Expenses:
Operations:
Depreciation..... 631,000 104,000 735,000 (569,000)(2) 166,000
Royalty.......... 405,000 210,000 615,000 (87,000)(3a,b) 528,000
Other............ 824,000 237,000 1,061,000 (58,000)(4) 1,003,000
Interest........... 655,000 161,000 816,000 (816,000)(5)
---------- -------- ---------- ----------- ----------
Total expenses.... 2,515,000 712,000 3,227,000 $(1,530,000) 1,697,000
---------- -------- ---------- ----------- ----------
Net income........ $ 159,000 $163,000 $ 322,000 $1,707,000
========== ======== ========== ==========
Resulting income to
U.S.
Energy Systems,
Inc.:(6)
Preferred 18%.... $1,707,000
50% of balance...
----------
Total........... $1,707,000
==========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY PRO FORMA
FUND, A 1 AND 1-A
L.P. ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $1,509,000 $410,000 $1,919,000 $ $1,919,000
Other............. 68,000 68,000 (43,000)(3)
(25,000)(4)
---------- ----------- ---------- ----------------- ----------
Total revenues.. 1,577,000 410,000 1,987,000 (68,000) 1,919,000
---------- ----------- ---------- ----------------- ----------
Expenses:
Operations:
Depreciation..... 329,000 52,000 381,000 (298,000)(2) 83,000
Royalty.......... 237,000 92,000 329,000 (43,000)(3a,b) 372,000
Other............ 439,000 105,000 544,000 (25,000)(4) 519,000
Interest........... 330,000 71,000 401,000 (401,000)(5)
---------- ----------- ---------- ----------------- ----------
Total expenses.... 1,335,000 320,000 1,655,000 $(681,000) 974,000
---------- ----------- ---------- ----------------- ----------
Net income........ $ 242,000 $ 90,000 $ 332,000 $ 945,000
========== =========== ========== ==========
Resulting income to
U.S.
Energy Systems,
Inc.:(6)
Preferred 18%.... $ 900,000
50% of balance... 23,000
----------
Total........... $ 923,000
==========
</TABLE>
- ----

(1) Does not include the operations of Crystal Springs Project or the gain on
sale of Crystal Springs Project. Crystal Springs Project was sold by Far
West Electric Energy Fund, L.P. in February, 1995.

(2) To record estimated reduction of depreciation for new basis of assets
acquired, based on $4,982,000 total cost, assuming a 30-year depreciation
period, from date of acquisition.

(3)(a) To eliminate certain royalties paid by 1-A Enterprises to Far West
Electric Energy Fund, L.P., which amount to $87,000 in the year ended
December 31, 1995 and $43,000 in the six months ended June 30, 1996.

(b) Does not include additional savings to be made if negotiations with
certain royalty owners, already under way, are successful.

(4) To eliminate intercompany charges paid by 1-A Enterprises to Far West
Electric Energy Fund, L.P.

(5) To eliminate interest expense due to elimination of debt.

(6) Reflects the Company's allocated pro forma income of Steamboat LLC which
includes an 18% Preferred Return to the Company based on gross capital
raised (either publicly or privately) by the Company up to $10 million.
Allocation and payment of the Preferred Return is subject to available
cash flow of Steamboat LLC and is non-cumulative.

27
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND PLAN OF
OPERATION

RESULTS OF OPERATIONS

Year ended January 31, 1996 compared to year ended January 31, 1995

The Company had no revenues during the two fiscal years because (i) the Lehi
project acquired during that period was dormant, (ii) in the Plymouth project,
depreciation offset all earnings and (iii) efforts to arrange financing were
just beginning. In the fiscal year ended January 31, 1996, the Company had a
loss from operations of $1,474,000. This was reduced by an extraordinary gain
of $83,000 arising from the restructuring of a liability, resulting in a net
loss for the fiscal year of $1,391,000. In the earlier fiscal year the loss
from operations was $1,401,000 and the net loss was $1,316,000.

The elements making up the losses in the two fiscal years were:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Operating expenses.................................... $ 27,000 $ 109,000
Selling and administrative expenses................... 826,000 897,000
Interest expense...................................... 604,000 319,000
Loss from Joint Ventures.............................. 17,000 76,000
---------- ----------
Totals.............................................. $1,474,000 $1,401,000
========== ==========
</TABLE>

Operating expenses of $27,000 and $109,000 in the fiscal years ended January
31, 1996 and 1995 resulted from the adjudication of legal action on a project
which had been completed and reported in an earlier year. There will be no
further costs associated with this project.

Major items in the selling and administrative expenses were:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Salaries and consulting fees.............................. $431,000 $407,000
Corporate expenses........................................ 70,000 85,000
Legal and professional costs.............................. 148,000 202,000
</TABLE>

While there was no revenue during the two years, it was nevertheless
necessary to expend funds for salaries and consulting fees to evaluate new
proposals and structure joint ventures and new projects for planned growth.
The Company estimates that $75,000 of the salaries and consulting costs are
non-recurring or applicable to specific projects which will absorb future
costs.

Included in corporate expenses in the fiscal year ended January 31, 1996 is
a non-recurring cost of $25,000 for a previously planned public offering that
was never consummated.

Legal and professional costs were lower in the 1996 fiscal year due to the
fact that there were no start-up costs for the Company in this year. Costs
already incurred in connection with this Prospectus, approximately $50,000 as
of January 31, 1996, have been deferred.

Interest expense increased in the 1996 fiscal year due to the additional
borrowings in notes payable and bridge loans. The bulk of the increase is
accounted for as follows: The $1,000,000 in notes payable were in existence
only part of the 1995 fiscal year and the interest on them accrued in that
year totaled $28,000, whereas for the full 1996 fiscal year the interest was
$137,000. The bridge loans came into being in June, 1995, so did not affect
the 1995 fiscal year. The interest expense in the 1996 fiscal year was
$169,000.

Losses from joint ventures of $17,000 in the 1996 fiscal year and $76,000 in
the 1995 fiscal year include $59,000 and $55,000 respectively for amortization
of purchase price over net equities in the net assets of LIPA

28
<PAGE>

and Plymouth Cogeneration. For the period ended January 31, 1996, the
Company's allocated share of income or loss from joint ventures equalled
$86,000 gain from LIPA, and $44,000 loss from Plymouth Cogeneration. The
Company's gain from LIPA includes $118,000 gain from sale of unused plant
equipment.

Six months Ended July 31, 1996 Compared to 1995

The Company had no revenues for either of these periods. The losses shown
were made up of the following major elements:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(Loss) from joint ventures................................... $ 92,000 $ 62,000
======== ========
Operating expenses........................................... -- $ 26,000
======== ========
Selling and administrative expenses:
Salaries and consulting fees............................... $239,000 $190,000
Legal and professional fees................................ 77,000 63,000
Corporate expenses......................................... 15,000 48,000
All other.................................................. 77,000 94,000
-------- --------
Total selling and administrative expenses.................... $408,000 $395,000
======== ========
Interest expenses............................................ $328,000 $223,000
======== ========
The six-month joint venture losses break down as follows:
Lehi Independent Power Associates, L.C. ("Lehi")............. $ 58,000 $ 40,000
Plymouth Cogeneration Limited Partnership ("Plymouth")....... 34,000 22,000
-------- --------
Total (loss) from joint ventures............................. $ 92,000 $ 62,000
======== ========
</TABLE>

Operating expenses in the 1995 period resulted from the adjudication of
legal action on a project which had been completed and reported on earlier.
There will be no further costs associated with this project.

Consulting agreements which began during 1995 and were not in existence
during the 1995 period accounted for the increase in salaries and consulting
fees. The Company has entered into a consulting agreement with Indus Inc. for
assistance in developing both projects and joint development agreements in
Asia, with specific emphasis on India. To date, Indus Inc. has been
instrumental in bringing in the potential project for the Rajinder Steel Mill
in Raijpur, India and for developing the potential for a consortium with
Raunaq Industries in New Delhi, India. The Company has also entered into a
consulting agreement with Knoll Capital Management relating to specific work
being done for the Company to develop projects in Israel and the Middle East.
Knoll Capital Management was instrumental in arranging the kibbutz project in
Israel which the Company is currently pursuing. See "Certain Transactions."

Legal and professional fees were higher in the current quarter due to the
additional costs related to the additional bridge loans, amortized over the
terms of the loans. Costs incurred in connection with the public and private
financing have been deferred. As of July 31, 1996, these amounted to $221,000.

The corporate expenses in 1995 included a non-recurring cost of $25,000 for
a previously planned public offering that was never consummated. Interest
expense increased in the 1996 period due to higher levels of borrowing,
including bridge loans which began in June, 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company has no contractual commitment for capital expenditures at this
time. The Company has employment agreements with two of its officers which
expire five years from the date of this Prospectus. The agreements provide for
minimum annual payments totaling $210,000. Payments under these agreements
will not be made until the working capital of the Company permits.

29
<PAGE>

As a result of accumulated losses, the Company had a negative working
capital of $1,910,000, and a capital deficiency of $2,729,000 at January 31,
1996, and $2,794,000 and $3,557,000, respectively, at July 31, 1996. The
independent auditors' report for the fiscal year ended January 31, 1996 states
that these factors raise substantial doubt about the Company's ability to
continue as a going concern. As a result of this Offering, the Company's pro
forma working capital at July 31, 1996 would be a positive $124,000.

During the fiscal year ended January 31, 1996, net cash used in operating
activities was $641,000. Cash used in investing activities was $29,000, with
$53,000 having been used in connection with the Steamboat Acquisition, offset
in part by collections of a loan receivable from an officer of the Company.

During the 1996 fiscal year, $34,000 was received from the sale of Common
Stock and $785,000 was received as proceeds from notes and loans payable.
Other adjustments brought the total cash flow provided by financing activities
to $664,000.

During the fiscal year ended January 31, 1995, net cash used in operating
activities was $874,000. Cash used in investing activities totaled $694,000,
of which $647,000 was for investment in and advances to joint ventures. Cash
provided by financing activities totaled $1,396,000 with $139,000 derived from
sale of Common Stock and $1,375,000 from borrowings.

During the six months ended July 31, 1996, cash flow was carefully
conserved. Salaries were deferred and additional bridge loan borrowings
amounting to $125,000 were received. Fifty percent of interest payments to
holders of the Convertible Debentures continued to be deferred until paid out
of the proceeds of this Offering, by agreement of the holders of the
Convertible Debentures.

PLAN OF OPERATION

The net proceeds of the Offering will be approximately $5,425,000 and the
Private Placement of 11% Preferred Stock and Private Warrants will provide
$3,500,000 for a total net proceeds of $8,925,000. Of this total, the
Company's acquisition of 50% of Steamboat LLC will use $4,932,000 (plus
$50,000 that had already been paid as a deposit.) Other liabilities required
to be paid have been adjusted to include additional bridge loan borrowings and
interest accruals through September 15, 1996. The bridge loans, including
interest, total $1,081,000, secured notes payable, including interest, total
$1,209,000, and accrued interest on the Convertible Debentures required to be
paid as part of the restructuring of these instruments, total $336,000. It is
Management's belief that the funds remaining as working capital, together with
the income from the projects including the Steamboat Facilities, will be
sufficient to meet the requirements of the Company for the next 12 months of
operation without having to raise additional funds except on a project finance
basis for new projects.

The steps taken to reduce the Company's interest costs include (i) the
capitalization of $500,000 of the Convertible Debentures and the reduction of
the interest rate on the balance after consummation of this Offering from 18%
to 9%, (ii) the payment of secured notes in the principal amount of $1,000,000
and interest thereon, and (iii) repayment of all bridge loans. As of September
11, 1996, three of the 26 holders of Convertible Debentures, representing
$150,000 in principal amount, have not agreed to the interest rate reduction
from 18% to 9% per annum. Accordingly, the Company's annual interest expense
will be $13,500 greater than the Pro Forma amounts shown in this Prospectus.

In addition, the Steamboat Acquisition is expected to give the Company a
positive cash flow from all joint ventures in the current fiscal year. This
will not be impacted by payment of dividends since the 11% Preferred Stock
will not require cash payment of dividends. The shares issued to Anchor for
the initial bridge loan are being converted to 205,000 shares of common stock,
and the dividends on the preferred stock issued to Enviro Partners, L.P., will
be paid in additional preferred stock during the first two years after they
are issued, and thereafter in cash or preferred stock at the Company's option.

30
<PAGE>

mutual release of the contract. If the price adjustments were to be made now,
the new prices based on the contract formula would be substantially less than
the existing contract rates. Although Management believes that revenues
generated will still be in excess of the costs of production, there is no
assurance that future prices at which the electricity generated by the
Steamboat Facilities may be sold will exceed the cost of production, or that
Steamboat LLC will generate adequate cash flow from operations to meet its
investing and financing requirements. Although the prices are variable and
fluctuate, if, as expected, a substantial reduction in power prices for
Steamboat 1 takes place in December 1996, the result would mean a decrease in
the Company's share of the net earnings of Steamboat LLC, which, depending on
the extent of the price reduction, could result in the Company reflecting a
net loss. If rates offered by Sierra are not satisfactory, the Company and its
partners may seek to negotiate termination of the existing contracts. The
Company believes that under new regulations it will be able to sell output of
electricity to other electric utility grids at more favorable prices.

The Company will contribute $1,000,000 to Steamboat LLC for the purpose of
buying out certain royalty interests and to fund certain improvements to the
Steamboat Facilities which are expected to result in higher electricity
output. While negotiations with certain royalty owners have already begun, and
the Company and its partners believe that these interests can be bought out,
no agreements have yet been concluded and potential savings from royalty
reductions are not reflected in the pro forma financial statements presented
herein. Additional royalty agreements, applying only to Steamboat 1, call for
payment of a total of 30% of the net revenue of Steamboat 1 after certain
deductions, starting March 1, 1997. The resulting effect on the net income of
Steamboat LLC and on the Company's after tax income will depend on the other
elements of power sales revenues outlined above. Assuming the reduction in
income from power sales illustrated above, and the buyout of no royalty
interests, the cost of these net revenue royalties could be in the range of
$50,000 to $100,000 annually. Negotiations with these interests have also
already begun, and Management believes they will be successfully purchased
although no assurance can be given. See "U.S. Energy Systems, Inc. and
Subsidiaries Pro Forma Condensed Consolidated Statements of Operations,"
"Steamboat Facilities Pro Forma Condensed Combined Statement of Operations,"
and "Business--Current Operations and On-Going Projects."

In 1995, the Company and its partners concluded a sale of non-essential
engines and parts of the Lehi, Utah plant for a gain of approximately
$236,000, with 50% or $118,000 as the Company's share. The partnership is
using a portion of the funds from this sale to upgrade the remaining two
engines and place them in service. Currently there are no contracts for the
sale of the power output of the Lehi Plant. However, negotiations for such
contracts will begin as soon as the plant is in operational status, and it is
anticipated that cash flow will be generated during the third quarter of the
fiscal year. Alternatively, the Company may decide to sell two of its engines
and to replace them with a larger and more efficient gas turbine. If such sale
is made, the Company would benefit through its 50% share of the revenue from
the sale; however, operations would be delayed until the second quarter of the
next fiscal year. The cost of the new engine is expected to be fully financed
directly through the manufacturer without additional investment by the
Company.

The Plymouth, NH plant has been operating since January 1995 and
historically has not provided revenues or cash flow to the Company because of
costs related to equipment adjustments and operational reserves required by
the terms of the financing. However, the plant has begun to provide cash flow
to the Company. The Company received its first distribution amounting to
$20,000 in August 1996. In addition, switching the plant's fuel supply to less
expensive waste oil, as is presently being contemplated, could add to cash
flow starting during the next fiscal year, as the Partnership has an agreement
with the university to share equally in any fuel savings. There are also plans
being studied to expand the size of the project to serve other New Hampshire
college system campuses through wheeling, as described in "Business," which
would take place during fiscal year 1998.

The Company also expects revenues from other projects, currently being
negotiated, that will be under way during the next twelve months but are not
yet under contract. There are five such projects, not including Steamboat, at
least four of which the Company believes will be secured and from which
revenues are anticipated to commence within the next twelve months. These
include two projects for two separate shopping malls in El Paso, TX, a large
resort and commercial center in St. Thomas, USVI, a residential and commercial
center at a kibbutz in Haifa, Israel, and in the long term a steel mill in
Raipur, India. With regard to the shopping malls and

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the St. Thomas resort, the Company and its joint development partners in each
case will own and operate the cogeneration facilities. The Company has signed
a letter of intent with the owners of Bluebeard's Castle, a large resort and
commercial complex in St. Thomas, USVI, to build and operate a 3 megawatt
Cogeneration plant and a 120,000 gallon per day water recovery system in the
resort's property. The Company, the resort manager and the resort owners will
own the cogeneration plant and water system and share revenues based on
capital investment in the project. The resort owners have committed to pay
approximately $41,000 for the installation of the first of six engine
generators during September 1996, of which $26,000 has been received. While
the Company anticipates realizing additional revenues for its engineering and
equipment sales to the project immediately upon the start of construction, and
anticipates that the main stream of revenue will be the sale of energy to the
host facilities over the fifteen year term of the contract, there can be no
assurance that this will occur. In the case of the Israeli kibbutz project,
the Company would be selling the hardware and providing engineering services
for installation to the kibbutz, and the Company's revenues will be derived
from these sales. In the case of the Raipur steel mill, the Company will
provide consulting services to the steel mill for the acquisition, shipping
and installation of the hardware. The consulting fee will be a percentage of
total cost.

These other projects should not require capital outlays, as they will be
self-financed. The working capital remaining after the closing of this
Offering, together with the regular income from Steamboat LLC, will be
adequate for operational needs during the next twelve months.

While the Company does not conduct research and development per se, it will
expend funds to investigate and develop new projects. It is anticipated that a
total of approximately $100,000 will be spent over the next twelve months on
such endeavors, which will come from working capital as available. Although
each project which comes on stream has its own project staff which becomes a
cost of the specific project, the Company does plan to add at least three more
employees to headquarters staff to assist management. Expenses for such staff
increase, as well as expenses for outside consultants, have been taken into
account in planning for the Company's budget over the coming year.

RESTRUCTURING OF DEBT

ACCOUNTING STANDARDS

During the fiscal year ending January 31, 1997, the Company will be required
to adopt Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets," and SFAS 123,
"Accounting for Stock-Based Compensation," neither of which is expected to
have a material effect in the Company's financial statements.

IMPACT OF INFLATION

The Company's contracts include adjustments for changes in inflation
indices. The impact of inflation on Company earnings and cash flows is
expected to be minimal.

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BUSINESS

THE COMPANY

The Company, formerly called Cogenic Energy Systems, Inc. and U.S.
Envirosystems, Inc., was incorporated under the laws of the State of Delaware
in 1981 in order to engage in the design, assembly, turn-key sale and
installation of factory built cogeneration systems powered by diesel oil
and/or natural gas. Richard H. Nelson, President of the Company, is one of the
two founders of the Company and acted as its Chief Executive Officer until
1989. In late 1986, the Company was impaired by a $2,100,000 judgment
resulting from a contractual dispute in California. Although ultimately
settled, the protracted court case caused serious delays in planned expansion
and in sales. Despite extensive restructuring, the increasingly recessionary
economic climate during that period led to a serious cash shortage. By mid-
1989, the Company filed for protection under Chapter 11 of the Bankruptcy
Code.

Utility Systems Florida, Inc. ("USF") was formed by Mr. Nelson in late 1991
with the objective of entering into the alternative energy industry. USF
proposed a Plan of Reorganization for the Company with the intent of merging
USF with the reorganized company. The Plan of Reorganization was approved by
the creditors and stockholders of the Company, and the U.S. Bankruptcy Court,
Southern District New York, confirmed the Plan in March 1993. Pursuant to the
Plan, USF was merged into the Company and the Company was renamed U.S.
Envirosystems, Inc. Mr. Nelson resumed the positions of President and Chief
Executive Officer of the Company when it emerged from bankruptcy. On May 17,
1996, the Company changed its name from U.S. Envirosystems, Inc. to U.S.
Energy Systems, Inc.

BUSINESS OF THE COMPANY

Since its reorganization, the Company has been engaged in the independent
power plant ("IPP") industry as a project developer, owner and operator. IPP's
produce electricity for sale to either direct end users or to regulated public
electric utility companies. Regulated public electric utility companies have
historically produced electricity and have held the exclusive distribution
rights of the electricity thus produced to end users in specific geographic
territories. The exclusive right to the distribution of electric power within
a specific territory is a right granted to the regulated public utility
company by the various state public utility commissions where such regulated
public utility companies are located. Because the exclusive franchise right is
in effect a monopoly, the rates charged for electric power and other services,
as well as overall operations, are regulated by the state public utility
commissions.

In recent years, however, federal and state laws have been promulgated to
reduce and/or eliminate the regulated public electric utility industry's
monopoly over the production and sale of electric power in order to enhance
competition among electricity providers, hence, the emergence of IPP's. In
addition to conserving natural resources and reducing atmospheric pollution by
encouraging more efficient production of electric power, competition should
result in lower consumer costs for energy. "Independent power plants" and
"cogeneration plants" are frequently used interchangeably to describe the
power industry which is an alternative to the regulated power industry. IPP's
generally, but not always, produce power utilizing a process known as
"cogeneration." Cogeneration is defined as the production of two or more
energy forms (typically electricity and heat) simultaneously from the same
fuel source. While producing electricity, otherwise wasted heat is recovered
from the exhaust and/or engine cooling water. This recovered heat can be used
to replace heat which would otherwise be made from conventional furnaces and
boilers. Other IPP's may not technically be "cogenerators" but rather utilize
renewable fuel sources such as geothermal, wind, solar, hydro, and waste
products such as waste oil, waste wood and other bio-mass waste, or landfill
gas. The favorable economics of cogeneration or innovative and inexpensive
renewable fuel sources allow IPP's to compete with the longer established
regulated power industry.

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the structuring, design, management and operation of the projects. Often, at
the time of the Company's initial involvement, such projects will have
advanced beyond the conceptualization stage to a point where the engineering,
management and project coordination skills the Company offers are required to
proceed. Although the Company has only begun to develop new projects since USF
merged with the reorganized Cogenic Energy Systems, Inc. in November 1993, the
president and key consultants of the Company have been involved in the power
generation industry for over twenty years and the alternative energy business
for over fifteen years and have been involved in the building of over 200
power projects in the United States and abroad ranging in size from 100
kilowatts to 50 megawatts. Innovative power projects developed by the
principal executive include cogeneration systems for ocean-going U.S. Coast
Guard and Navy vessels.

In furtherance of its strategy, the Company is opportunistically pursuing:
(i) existing IPPs and cogeneration facilities which can be bought at favorable
prices; (ii) independent power and cogeneration projects not yet built but for
which another developer has successfully negotiated the basic requirements for
a plant including power purchase agreements, environmental permits, etc., and
(iii) special market opportunities for cogeneration and energy savings
projects (such as large shopping malls, resorts, etc.) where such energy
applications are not presently in common use and where the Company can enter
into joint development agreements with the property owners to own and operate
such facilities. With regard to the latter, the Company possesses designs for,
and will continue to seek out or develop, special energy-efficient products
such as natural gas powered air conditioning with emphasis on the health care,
food processing, shopping mall and hotel markets where large quantities of
electricity, air conditioning and hot water are required on a continuous and
simultaneous basis.

The Company believes the greatest future potential for the Company in the
independent power plant/cogeneration market within the United States is in
facilities in the 3 to 50 megawatt size range. Additionally, the Company
believes that the largest potential for "inside-the-fence" facilities (where
all the energy forms produced are consumed at the power plant location) falls
into this size category. This range is advantageous because, within this
range, and depending on geographic location, these plants usually fall below
thresholds requiring prolonged environmental and air quality permit procedure
and may achieve more favorable pricing for its electricity from either the
utility grids or local customers. The reasons for more favorable pricing are
that plants of this size can be located in specific areas of power capacity
shortages. Regulated utility companies purchasing such power to assist in
meeting shortages are frequently willing to pay more than "avoided cost"
(i.e., their cost to produce an incremental kilowatt), and local end users are
frequently willing to pay full retail prices which is more cost effective than
interruptions of service due to shortage induced brown-outs.

Also, the air quality permitting process for the size range contemplated by
the Company is generally faster, easier and more assured than in the larger
projects. The basis for granting air quality permits varies from location to
location, but permits are always required before commencement of operations.
In applying for such permits, the facility developers present a computer model
of emissions of carbon monoxide and nitrous oxides which would be expected to
issue from the facility over a one year period. This model is based on the
fuel used, the anticipated annual hours of operation, the engine
manufacturer's specifications for emissions, and the reduction of such
emissions from application of catalytic converters or other devices. The
emissions are then expressed in weight, e.g., "100 tons per year." The local
air quality authority will then determine if this is acceptable for the area.
The board may or may not require continuous emissions monitoring to insure
that the level of emissions granted in the permit are not exceeded.

If the facility is recovering waste heat and utilizing that heat to displace
heat which would otherwise be made from burning fuels in conventional furnaces
or boilers, and if the emissions from the facility are actually less than the
emissions which would be forthcoming from the conventional furnaces or boilers
so displaced, there is said to be a "net reduction" in emissions for the area,
and the permitting authorities will normally act promptly and favorably to
grant the permit. If the facility is not using recovered waste heat to
displace other heat source emissions, e.g., a large, stand-alone generating
plant with no cogeneration, there would be a "net increase" in emissions in
that geographic area. Under such circumstances, the permitting process could
be

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prolonged and made difficult by public hearings, public interventions, and the
considerably more careful determinations which the air board must make in
order to decide whether or not such net increase in emissions can be allowed.

In the smaller size range, so-called "inside-the-fence" projects, nearly all
of the electrical and thermal output can be utilized by the host site. The
thermal output of the cogeneration system replaces conventional thermal output
from the host's boilers and furnaces with substantially less atmospheric
emissions of nitrous oxide (NOX) and carbon monoxide (CO) because of the
emission control technology available to cogeneration engines which is not
available to boilers and furnaces. Since the cogeneration system results in a
net reduction in emissions for the specific site, air quality permitting
authorities will generally respond quickly and favorably. In contrast, while
the larger projects (over 50 megawatts) usually have no problems in placing
the electrical output, there is a problem in finding suitable thermal hosts
who can use the vast quantities of heat produced. Under such circumstances,
even if all of the host's thermal requirements are offset, there is still an
increase in net emissions in the area of the power plant. A prolonged and
difficult permitting process is frequently the result.

The Company has begun to develop several projects in the 3 to 50 megawatt
size range with emphasis on "inside the fence" applications. Although natural
gas has proven to be a superior and economical fuel choice for many sites, the
Company also intends to emphasize projects which can utilize alternative
and/or renewable fuels, since such projects not only serve the interests of
the public from an environmental and ecological standpoint but also have the
greatest potential for earnings because of the low fuel costs. In addition to
potential within the United States, there are substantial opportunities
overseas for such projects, especially in Latin America and Asia. The Company
believes that energy shortages, combined with national policies to privatize
power production in many developing countries, are creating an increasing
potential for U.S. companies in the independent power industry. In addition to
international agencies such as the World Bank and the Inter-American
Development Bank, there are a growing number of private institutional lenders
who provide project financing for such developments. The Company has commenced
an effort to create consortiums with both foreign companies and other U.S.
companies to pursue this market since the Company does not presently have the
financial resources or personnel to pursue such projects by itself. For
example, the Company has entered into a memorandum of understanding with
Raunaq Industries in India to pursue the creation of a consortium to build one
or more large coal fired power plants. In Panama, while no definitive
consortium agreement has been signed, the Company and its Panamanian partners
have created a Panamanian corporation (Panavisa), which has applied to the
Panamanian government for pre-qualification to bid on several projects.

COGENERATION AND INDEPENDENT POWER PRODUCTION

Cogeneration is the process of producing two or more energy forms (typically
electricity and heat) simultaneously from the same fuel source. In order to
encourage the conservation of natural resources such as fossil fuels and to
foster development of non-fossil fuel energy sources, the federal government
enacted PURPA, which mandated that all state public utility commissions
require public electric utility companies to cooperate with privately owned
cogeneration facilities, both by purchasing electricity from such facilities
at the utility company's "avoided cost" (i.e., the utility company's
incremental cost for generating such electricity itself) and by providing
standby power to such privately owned facilities.

When electricity is produced, whether in a small cogeneration facility or in
a large central utility power plant, the energy efficiency of the fuel used
(the electrical output expressed in BTUs divided by the amount of BTU input to
the engines) does not exceed 35%. The remaining 65% of available energy
efficiency from the fuel is waste heat, either expelled from the exhaust or
removed from the engine's jacket water by radiators. By recovering substantial
portions of this otherwise wasted heat, and by converting this heat into
useful thermal purposes, the fuel efficiency of a cogeneration facility can
approach 75%. This converted waste heat replaces heat that would otherwise
have to be made using yet another fuel. Central utility power plants have the
ability to recover such heat, but the long distances of such plants from
customers who could utilize thermal energy makes recovery and transport
impractical.

In April 1996 the Federal Energy Regulatory Commission ("FERC") promulgated
a regulation which orders all electric utility companies to open their
transmission lines to independent power producers thus allowing wholesale
purchase of power by the utilities from distant independent producers. While
the federal regulation does not mandate that the transmission lines be opened
for direct sale of power by independent producers to retail end users, the
states are expected to phase in such regulations in the future. See
"Business--Government Regulation."

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CURRENT OPERATIONS AND ON-GOING PROJECTS

Steamboat Geothermal Power Plants. The Company has signed an agreement to
form Steamboat LLC, a limited liability company which will acquire two
geothermal power plants, referred to as the Steamboat Facilities, in Steamboat
Hills, Nevada. Electricity is produced in these geothermal plants through the
use of heat in the form of hot water from the earth. The electricity is
produced through a "binary system" in which geothermal hot water is circulated
in one closed loop and, in another closed loop, inert gas is compressed and
heated. The compressed inert gas drives turbines to generate the electricity.
The geothermal water is reinjected into the earth to be re-heated again
through the earth's sub strata magma formation. Because there are virtually no
atmospheric emissions or pollutants in the process, because the natural
resource (water) is constantly returned to the earth to avoid depletion of the
underground aquifer water table, and because the heat source is the earth's
natural magma layer, geothermal power is considered one of the most
environmentally sound methods of producing electricity. However, it can only
be produced in locations where specific geological formations exist.

Steamboat LLC will acquire the Steamboat Facilities from Far West Electric
Energy Fund L.P. ("FWEEF") and I-A Enterprises subject to a mortgage (the
"Mortgage") in favor of an institutional lender and certain net revenue or
royalty interests in steam extraction rights. Far West Capital is the general
partner and a limited partner in FWEEF. The Company will obtain a 50% interest
in Steamboat LLC by contributing to Steamboat LLC the $1,575,000 cash purchase
price (less $50,000 down payment previously paid by the Company) for the
Steamboat Facilities. Far West Capital will own the other 50%. The Mortgage,
on which the last quarterly principal payment was made on July 20, 1996, will
have a face value of $4,196,000 at September 15, 1996 net of an escrowed
reserve, and will be acquired by the Company for $2,407,000 and contributed to
Steamboat LLC. While the Mortgage is in technical default, the holder of the
Mortgage has waived its rights and has negotiated with the Company the payment
for the Mortgage. An additional $1,000,000 in cash will be contributed by the
Company to Steamboat LLC to allow it to acquire certain of the royalty
interests and to fund certain improvements to the Steamboat Facilities. While
negotiations with certain royalty owners have already begun, and the Company
and its partners believe that these interests can be bought out, no agreements
have yet been concluded and no potential savings from royalty reductions are
reflected in the pro forma financial statements presented herein. Additional
royalty agreements, applying only to Steamboat 1, call for payment of a total
of 30% of the net revenue of Steamboat 1 after certain deductions, starting
March 1, 1997. The resulting effect on the net income of Steamboat LLC and on
the Company's after tax income will depend on the other elements of power
sales revenues outlined above. Assuming the reduction in income from power
sales illustrated above, and the buyout of no royalty interests, the cost of
these net revenue royalties could be in the range of $50,000 to $100,000
annually. Negotiations with these interests have also already begun, and
Management believes they will be successfully purchased, although no assurance
can be given. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma
Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro
Forma Condensed Combined Statement of Operations" and "Management's Discussion
and Analysis of Financial Condition and Plan of Operation--Plan of Operation."

Far West Capital has a 5.14% ownership interest in FWEEF and is contributing
to Steamboat LLC the debt owed to it by FWEEF. Far West Capital will not
receive any portion of the purchase price paid by the Company. Before sharing
net income from Steamboat LLC with Far West Capital, the Company will have a
priority income distribution from the project of $1,800,000 per year, with
income above this priority amount to be divided equally between the Company
and Far West Capital. The Company and Far West Capital will co-manage the
project. Far West Capital was established in 1983 and has been a developer and
operator of cogeneration and independent power projects, principally
hydroelectric and geothermal, in the western United States and is the
Company's current partner in LIPA. The two Steamboat geothermal plants were
built in 1986 and 1988, respectively, by Far West Capital. A substantial
portion of the net proceeds of this Offering and the Private Placement will be
used for this acquisition, which will generate immediate cash flow for the
Company, thereby allowing it to pursue and launch additional projects, none of
which is the subject of a binding or definite agreement.

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The Steamboat Facilities are currently managed by the professional
operations staff of SB Geo, Inc. The principals of Far West Capital own the
majority interest in SB Geo, Inc. After the Company has purchased its equity
interest in Steamboat LLC, SB Geo, Inc. will continue to manage the day-to-day
operations of the Steamboat Facilities and a joint management committee,
composed of representatives of the Company and Far West Capital, will
determine and resolve the significant management issues. Charges by SB Geo,
Inc. for services rendered will be negotiated at arms length, and may not
exceed charges for similar services which could be obtained from other
sources.

The two geothermal plants produce 15 megawatts of electric power which is
sold under two power purchase agreements to Sierra. The plants have operated
at 99% capacity since inception. The current power purchase agreements have
price adjustments in December 1996 for Steamboat 1 and in December 1998 for
Steamboat 1-A, which require Sierra to purchase and Steamboat LLC to provide
electricity at Sierra's then-prevailing short-term avoided cost. If the price
adjustments were to be made now, the new prices based on the contract formula
would be substantially less than the existing contract rates. Although
Management believes that revenues generated will still be in excess of the
costs of production, there is no assurance that future prices at which the
electricity generated by the Steamboat Facilities may be sold will exceed the
cost of production, or that Steamboat LLC will generate adequate cash flow
from operations to meet its investing and financing requirements. Although the
prices are variable and fluctuate, if, as expected, a substantial reduction in
power prices for Steamboat 1 takes place in December 1996, the result would
mean a decrease in the Company's share of the net earnings of Steamboat LLC,
which, depending on the extent of the price reduction, could result in the
Company reflecting a net after tax loss. However, Management believes that a
more satisfactory price is likely to be obtained for the electricity generated
in the Steamboat Facilities through negotiations with Sierra or otherwise,
although no assurance can be given that such efforts will be successful. In
addition, if Sierra were to consent to releasing the Company from the existing
power purchase agreements, the Company would be free to sell the power to
other utilities. While under the power purchase agreements, Sierra has an
obligation to buy the electricity generated and the plants have an obligation
to sell the same to Sierra, negotiations relating to the price adjustments may
result in a mutual cancellation of the agreement if such is favorable to both
sides. Sierra has indicated it would be willing to negotiate a mutual
cancellation.

There are currently five geothermal power projects operating in Steamboat
Hills, Nevada, totalling approximately 62 megawatts of output. In addition to
the 15 megawatt Steamboat 1 and 1-A projects which came on line in 1986 and
1988, respectively, the 35 megawatt Steamboat 2 and 3 projects were developed
and built by Far West Capital in 1992 and remain owned by Far West Capital. In
addition, Caithness Power, Inc. brought a 12 megawatt project on line in 1995.
There is currently a total of approximately 170 megawatts of geothermal power
being produced in Nevada with production from the Steamboat Hills area
accounting for approximately 35%.

Plymouth State College, New Hampshire. In 1994 the Company, through its
subsidiary, Plymouth Envirosystems, Inc., acquired a 50% interest in Plymouth
Cogeneration which owns and operates a cogeneration plant which produces 2.5
megawatts of electricity and 25 million BTUs for heat at Plymouth State
College, in Plymouth, New Hampshire. The facility provides 100% of the
electrical and heating requirements for the campus, which is a part of the
University of New Hampshire system, under a twenty year contract. The project,
which cost $5.9 million to construct, is comprised of a combination of diesel
engine-generators, heat recovery and supplemental boilers, and the complete
civil works tying all campus buildings into a single heating loop. The project
was financed prior to the Company's acquisition of a 50% interest through
$5,110,000 in State of New Hampshire tax exempt revenue bonds and $700,000 in
equity. The Company paid a total of $636,000 in cash and 11,400 shares of
Common Stock for its 50% interest.

The Company's partners in Plymouth Cogeneration are Central Hudson
Cogeneration, Inc., a wholly owned subsidiary of Central Hudson Gas & Electric
Corporation of New York, and Independent Energy Finance Corporation of
Connecticut ("IEFC"). The project was completed in November 1994 and put into
full commercial service in January 1995. IEC Plymouth, Inc. ("IEC Plymouth"),
a wholly-owned subsidiary of IEFC, runs the day-to-day operations of the plant
and the management decisions are resolved by a management committee which is
composed of representatives of the Company, IEFC and Central Hudson
Cogeneration, Inc.

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The State of New Hampshire has initiated a study to determine the
feasibility of expanding the existing facility to 10 megawatts to wheel
electric power to two other state college campuses. Additionally, Plymouth
Cogeneration is bidding to sell 5 megawatts of power to the local electric
cooperative. Under New Hampshire law, retail wheeling is permitted to three
customers from a single "inside-the-fence" cogeneration plant. Also, plans are
currently being developed by Plymouth Cogeneration to install special fuel
treatment equipment which will allow the existing engines to burn less costly
and more efficient fuels. Fuel cost savings would be shared equally between
the college and the partnership. There can be no assurance that such fuel
treatment equipment will be installed or that such fuel cost savings will be
realized.

Lehi Cogeneration Project. In January 1994, the Company, through its
subsidiary, Lehi Envirosystems, Inc. ("LEI"), purchased a 50% equity interest
in LIPA, which owns a 17 megawatt cogeneration facility in Lehi, Utah and the
underlying real estate, hardware and permits to operate. Although the facility
has been dormant since 1990, work is underway to commence operations at the
facility and the Company believes it is capable of future operations. The
Company estimates that it will cost $30,000 to commence operations. The
successful operation of the plant also requires the negotiation of an
agreement with a utility company to purchase the electrical output. LIPA has
been negotiating with the municipal authority and the town of Lehi. No
agreements are yet in place and there can be no assurance that the Company
will be able to successfully negotiate any contracts. The Company and its
partners, who own the remaining 50% of LIPA, share on a pro-rata basis the
ownership, retrofitting costs, annual expenses, and revenues associated with
the project. The Company financed its acquisition cost of $1,225,000 for this
interest through the issuance of Convertible Debentures. In addition to
payment of interest, the Company is obligated to pay the holders of the
Convertible Debentures a pro rata portion of 50% of LIPA's share of the net
revenue (net of funds required for the payment of interest) resulting from
LIPA's energy sales. See "Description of Securities--Convertible Debentures"
and "Certain Transactions." The Company's partners in the Lehi project are Far
West Capital and ReComp, Inc. ("ReComp"), a Utah company with interests in
waste-to-energy projects. The Lehi facility is managed by a management
committee which is composed of representatives of Far West Capital, ReComp and
the Company.

Lehi originally had three engine generators totaling 17 megawatts. One unit
which would have required extensive and costly repairs was sold in December
1995, resulting in a gain of approximately $236,000. The two remaining units
totaling 10 megawatts are currently being prepared to start commissioning in
order to allow them to be put in operation during the third quarter.
Concurrently with readying these engines for operational status, the LIPA
partnership has received an offer to purchase these engines and is evaluating
this option. If a satisfactory sales price is obtained, LIPA would thereafter
begin plans to acquire and install a 35 megawatt gas turbine, which would have
substantially greater efficiency. If the engines were sold, commencement of
operations would be delayed from the third quarter of the current fiscal year
until the second quarter of the next fiscal year. The proceeds from the sale
of these engines would provide sufficient operating capital for the
partnership until the larger gas turbine was operational. Financing for the
gas turbine, if this option is selected, would be provided by the engine
manufacturer.

Shortly after the Company's interest in the project was purchased, Micron
Technologies, Inc. ("Micron") announced it intended to build a $1.5 billion
manufacturing facility in the town of Lehi on property one mile from the Lehi
Cogeneration Facility. The town announced that it would supply power to Micron
through its municipal power authority. The town does not have a power
generation capability, but acquires power through the Utah Association of
Municipal Power Systems ("UAMPS"). Over one year was spent in discussions with
Micron, the town of Lehi, and UAMPS as to the feasibility of increasing the
capacity from the facility to serve the 35 megawatt requirements of Micron. As
a result of these discussions, the Company and its partners decided to sell
one seven megawatt engine which was non-functional in order to make room in
the plant for a larger and more efficient engine. It was also decided during
this period that it was premature to put the plant in operation before its
full intended utilization was determined. Management had been negotiating with
Micron to provide direct sale of 35 megawatts from the Lehi facility. During
these prolonged negotiations, and up until Micron's decision in April 1995 to
suspend construction of their new plant, Management was constrained by local
political sensitivity from seeking sale of electricity from the Lehi facility
to other potential purchasers. Management

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<PAGE>

believes, however, that the substantial population and industrial growth being
experienced in the area is creating a large, future market for power.
Management further believes that it should plan to increase the Lehi
facility's size to 35 megawatts using high efficiency gas turbines since a
market is rapidly developing. Even in the absence of Micron, 35 megawatts is
the size under discussion because the plant's air quality permit allows for
300 tons of emissions annually, which fits the profile of a 35 megawatt
combined cycle gas turbine.

The Lehi cogeneration plant was originally built in 1987 at a cost in excess
of $20,000,000. The plant operated successfully as a small power production
facility under "qualifying facility" status granted by FERC from date of
commissioning until 1990, selling its electric output to Utah Power and Light
and its recovered heat to a large adjacent greenhouse operation. In 1990 the
original developer, which suffered financial problems not associated with this
project, filed for protection under the bankruptcy laws. The Lehi plant, along
with a number of other assets, were sold by the bankruptcy court in April
1993. The Lehi plant was purchased by a Salt Lake City group, Lehi Co-Gen
Associates, L.C., with the intention of either reselling the component
equipment contained within the plant or re-establishing the cogeneration
operation in partnership with interested parties. Extensive engineering and
economic due diligence studies were conducted on the project by Southern
Electric International, a subsidiary of the Southern Company, one of the
largest electric utility companies in the United States, in conjunction with
the Company, resulting in a decision to restore the plant to full operational
status. The studies estimated that the salvage value of the hardware and parts
alone should be in excess of $3,000,000. LIPA purchased the facility from Lehi
Co-Gen Associates, L.C. in early 1994 for approximately $292,000.

The Lehi plant uses dual fuel configuration reciprocating engines. These
engines can run on either diesel fuel or natural gas, or a combination
thereof. The plant can be operated on 5% diesel fuel and 95% natural gas, for
optimum environmental and economic efficiency. The plant is totally self-
contained, with state-of-the-art switchgear and computerized electronic
controls. Full environmental assessments have been conducted which indicate
that no environmental hazards are present or likely to occur. One of the most
important features of the plant is its extant air quality permit, allowing the
plant to operate with emissions of up to 300 tons of nitrous oxide ("NOX")
annually. With expanded and upgraded hardware, this permit will allow the
plant to increase operational output substantially.

Shopping Malls. The Company has entered into a joint development agreement
with the Cowen Investment Group to develop, build and operate cogeneration
plants in the United States. Cowen is a financier of real estate projects.
Under the joint development agreement, Cowen will provide the customers and
the cogeneration project financing. Cowen will retain 60% of the profit
interests in the projects and the Company will retain 40%. The Company's
responsibility is to provide the technical expertise, design, equipment
selection and installation services. The joint venture is negotiating with a
major real estate company which owns and operates approximately 200 shopping
malls throughout the United States. Three of the malls have been considered
for initial test sites and engineering has begun for the first site. The
Company is carrying the cost of preliminary engineering which will be
reimbursed from the project if it is undertaken. The Company and Cowen have
also begun discussions with a second major owner and operator of over 40 malls
and has begun feasibility studies to determine the best initial sites. The
targeted shopping malls are all enclosed structures with an average interior
space of 500,000 square feet. Such malls have substantial electric demand,
with 18 hours of daily power plant operation, seven days per week, and with
almost year-round air conditioning requirements without regard to geographic
location. The average cogeneration system configuration for such malls would
consist of 4 megawatts in electric generation, with recovered heat utilized
for absorption air conditioning (in which the recovered heat causes inert
gases to expand and compress to produce chilled air, as opposed to
conventional compression powered by electric motors.) The systems would also
require up to 1000 tons of supplemental non-electric air conditioning. The
supplemental non-electric air conditioning, in most cases, would be provided
by engine driven chillers ("EDC"). An EDC produces chilled water by utilizing
conventional compressors, but powering the compressors with natural gas fueled
engines as opposed to electric motors. The EDC units would be manufactured by
sub-contractors from designs developed and owned by the Company. While initial
plans have been drawn and reviewed with the mall owners, there can be no
assurance that the joint effort with Cowen will lead to any contracts being
signed with mall owners or cogeneration systems being installed.

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<PAGE>

Under the plan discussed with the mall owners, the joint development company
would engineer, build and operate the cogeneration facilities, with financing
arranged by Cowen. The joint development company and the mall owner would
share energy savings for a fifteen year period, after which time the
cogeneration plant ownership would revert to the mall owners. A proposed
agreement with one of the mall owners calls for at least ten such
installations. The mall owners have indicated, however, that installations of
cogeneration systems would be contemplated at all malls where certain basic
economic criteria for cogeneration exists. The Company and Cowen believe that
approximately one-third of the malls can meet the economic criteria of a
minimum of twenty-five percent annual energy savings. Since all of the malls
are of similar configuration and have similar energy patterns, there would be
an economy of scale: project design could be replicated at multiple locations
with only modest configuration changes. A contract for the first mall is
expected to be signed in the third fiscal quarter of 1996 with construction
commencing shortly thereafter, although there can be no assurance that this
will occur.

U.S. Virgin Islands. The Company has signed a letter of intent and is
currently in final contract preparation with Bluebeard Holding Company to
build a 3 megawatt cogeneration project for Bluebeard's Castle, a major resort
in St. Thomas, U.S. Virgin Islands. Utility services for the Islands, like
many other areas of the Caribbean, were severely impacted during the 1995
hurricane season, and the Company believes that many public and private
buildings are presently considering "inside-the-fence" cogeneration facilities
in order to assure reliability of electric and hot water services as well as
to reduce present high costs of utility-provided services.

It is contemplated that the Company, the resort manager and the resort owner
will form a limited liability entity, which will own and operate the
cogeneration facility, selling discounted power to the hotel and adjacent
commercial buildings. The profits and cash shall be distributed pro rata on
the basis of the capital contributions of the parties to the contract. The
Company will be credited for its capital contributions as a result of the
services it will provide to the joint venture. It is also contemplated that
the cogeneration facility will include a 120 thousand gallon per day reverse
osmosis water purification system to convert sea water to potable water.
Supplies of fresh water, which are always in short supply in the Islands, were
even further reduced as a result of the storms. It is contemplated that the
resort's holding company will arrange twenty-percent equity for the project,
with the balance being financed through local banks. The Company will provide
design, equipment selection and installation services for the project. The
holding company is also in the planning stage for a large, new resort,
apartment and shopping complex on the eastern end of St. Thomas for which a
cogeneration facility is planned. It is contemplated that the limited
liability entity to be formed by the Company and Bluebeard Holding Company
will own and operate this future facility and will seek additional resort
facilities for cogeneration throughout the Virgin Islands and other islands in
the Caribbean. While final contracts are in preparation, the project has
already begun with the receipt of initial funding from Bluebeard and the
scheduled installation of the first of six engine generators to be used in the
project.

Waste Motor Oil Project. In November 1992, the Company was engaged to design
and build a three megawatt cogeneration plant in Virginia for a private energy
investment fund under a turn-key contract for $1,600,000. The plant was built
and put into commercial service in July 1993, eight months after commencement
of the project. The private energy fund had signed a long term contract with
Virginia Electric Power Company ("VEPCO") to provide 3 megawatts of demand
capacity to the VEPCO grid, and contracted with the Company to provide an
operational system both rapidly and cost effectively. The Company created a
distinct design utilizing rebuilt, very low RPM internal combustion engines,
which have the capability of utilizing waste motor oil as fuel. The use of
waste motor oil not only reduces the fuel costs for the project, but also
solves a local environmental problem of disposing of over 800,000 gallons
annually. The Company will employ the techniques developed on this job in
future projects. The Company has no ongoing equity interest in this project.

40
<PAGE>

OTHER POTENTIAL PROJECTS FOR THE COMPANY

ALTHOUGH PRELIMINARY EFFORTS HAVE BEEN UNDERTAKEN IN CONNECTION WITH THE
FOLLOWING PROJECTS, THERE IS NO ASSURANCE THAT ANY OF THEM WILL BE DEVELOPED.

India. The Company, through its 50% owned subsidiary, USE International,
LLC, has proposed a 52 megawatt combined cycle cogeneration project for a
major steel mill in Raipur, M.P., India. The project would utilize naphtha as
a fuel source to power a General Electric 40 megawatt gas turbine which will
also provide sufficient steam recovery to power a 12 megawatt steam turbine.
The use of recovered heat in the form of steam to power a second form of
electric production is known as a "combined cycle system." The steel mill
intends to purchase the system on a turnkey basis, and the Company would act
as project manager and coordinator being compensated on a percentage-of-cost
basis. The steel mill is presently awaiting funding from its financial
institutions in order to proceed. Inside-the-fence projects of this size are
growing in popularity in India because no central or local government
permissions are required and financing is easier since it is based entirely on
the credit-worthiness of the customer. The remaining 50% of USE International,
LLC is owned by Indus, Inc. Ravi Singh, a consultant to the Company, is the
President and principal shareholder of Indus, Inc.

Panama. The Company has formed a company, Panavisa Envirosystems, S.A.
("Panavisa"), in order to qualify and bid on several potential power projects
in Panama. Panavisa, a wholly-owned subsidiary of the Company, is the
corporate vehicle which would be the joint venture partner with others when
specific projects are developed. While there is no definitive agreement in
place, the Company is working with a Panamanian financial group to form a
consortium to design, build, and operate barge-mounted power plants for
Institucion de Recursos Hidraulicos y Electrificacion, the Panamanian national
electric company, which would purchase electricity from the consortium under a
negotiated long-term contract. If such project is ultimately undertaken, it is
likely that the Panamanian financial group involved in such project would
become a partner in Panavisa. The Company's role would be to act as consortium
manager. Percentages of ownership among the various potential consortium
partners have not yet been negotiated. The barge-mounted power plant design
would utilize very low speed diesel engines capable of burning Orimulsion, an
emulsified tar recovered from reserves under the Orinoco River in Venezuela.
The Company would be working with Bitor USA, a wholly owned subsidiary of
Petrolanos Venezuela, which holds the patents on the Orimulsion process.
Specific opportunities for such power plants presently exist in Panama as well
as other Central American countries, which are facing severe power shortages
as a result of aging thermal power plants and reductions in available
hydroelectricity. Advantages of barge mounted systems are quick delivery and
total fabrication in the United States.

Israel. The Company submitted bids to a kibbutz to provide a three megawatt
cogeneration facility with 800 tons of absorption cooling using Israeli
technology for the absorbers. The Company was advised that it was low bidder.
The next procedure requires the kibbutz authority to authorize a purchase
contract and to arrange financing. If the contract is ultimately awarded, as
management believes it will be, the Company will do final design work, acquire
all hardware, have the system fabricated in the United States by qualified
sub-contractors, ship the entire system in four containers to Israel, and send
engineers to oversee installation by local mechanical and electrical
contractors. The Company is working in association with Coolingtec Ltd., of
Israel, which is the patent holder and manufacturer of a new design absorption
chilling unit, which is capable of delivering substantially lower temperatures
than other absorbers currently on the market. Absorption chillers utilize
recovered heat from the cogeneration engines as their power source.

Native American Reservation. The Company is in discussions with an East
Coast Native American nation to assist it in developing an infrastructure
industry on its reservation involving independent power production. The
Company has recommended, and the Tribal Council has preliminarily approved, a
plan whereby the Company and the Native American nation would form a joint
development company to build, own and operate an independent power plant of
from 50 to 100 megawatts on the reservation. Output from the plant would be
sold to the grid and to neighboring municipalities.

U.S. Plastics Manufacturer. The Company has been asked to evaluate the
potential for an inside-the-fence cogeneration project of approximately 5
megawatts for a large U.S. manufacturer of plastic products in Illinois.

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<PAGE>

Recovered heat from the engine generators would be used in the plastics
extrusion operation. If the project proves economically feasible, the Company
would design and build the facility on a turn-key basis for the plastics
manufacturer.

Locating New Projects. The President and consultants of the Company
communicate frequently with numerous individuals and companies in the
industry. Most of the projects in which the Company is now involved have come
from these contacts. The Company has established several informal and non-
exclusive relationships with other cogeneration developers and with non-
regulated subsidiaries of utility companies to pursue other business
opportunities in areas of interest to the Company. In certain special markets
that the Company seeks to develop, the Company identifies specific potential
customers and makes direct approaches to those customers.

COMPETITION

There are approximately 150 companies nationwide currently involved with
independent power plants. The Company currently occupies a relatively minor
position in the industry. The independent power plant industry is basically
divided into three areas: (1) very large power plants (over 50 megawatts); (2)
standard power plants (under 50 megawatts); and (3) "inside-the-fence" plants,
which can be of varying sizes, and so called because they are built especially
to serve the electrical and thermal needs of a specific building or group of
buildings rather than to sell the power to the utility grid and are located
literally "inside-the-fence" of the end user's property. The very large plants
are generally owned and operated by non-regulated subsidiaries of public
utility companies, which have been established by the utility companies to
participate in the IPP industry. Presently, there are about thirty such
companies operating. Because the staffing and corporate philosophy of these
companies emanates from the parent public utilities, these operations are
generally geared to the largest sized plants. While some of these non-
regulated utility subsidiaries have been highly successful in the development
of larger plants, they are limited by federal law to 50% of project ownership.
In many instances, they make ideal partners for projects and the Company
intends to work with many of these companies when it locates specific projects
fitting the non-regulated subsidiaries' parameters.

In the category of standard sized independent power plants (under 50
megawatts), the vast majority of the developers so involved are either
subsidiaries of other non-utility industrial companies, small privately owned
partnerships, or energy funds established to invest in such projects. "Inside-
the-fence" plants are generally owned and operated by the end user, although a
number of such plants are built, owned and operated for the end user by third
parties.

EMPLOYEES

At present the Company has three full time employees and five contract staff
members. The Company will retain outside contract staff as required for
engineering, fabrication, construction and maintenance services. Management
believes present staffing is adequate, although it expects that the number of
full time employees will expand over the next year as new projects come on
stream. Partnership projects such as Lehi, Plymouth, and the Steamboat
Facilities have their own professional staffs. These staffs report to a
Management Group in each of the individual partnerships, and a senior Company
officer is an active member of each of the Management Groups.

DESCRIPTION OF PROPERTY

The Lehi project is owned by LIPA, a Utah limited liability company. The
Company owns 50% of LIPA. The property includes two acres of land in Lehi,
Utah and all buildings, engine/generators, ancillary generating equipment,
heat recovery equipment, switchgear and controls, storage tanks, spare parts,
tools, and permits to operate a cogeneration facility with emissions of up to
300 tons of NOX annually. All costs associated with LIPA and the operation of
the plants, and all income derived therefrom, are divided pro-rata among the
Company and the owners of the remaining 50% of LIPA. Other than the Company's
obligations to its debenture holders and bridge lenders, there are no other
encumbrances or debt associated with LIPA or the Lehi cogeneration project.
Management believes the plant is adequately covered by insurance.

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<PAGE>

The Plymouth State College Cogeneration project is owned by Plymouth
Cogeneration, a Delaware partnership. The Company owns 50% of Plymouth
Cogeneration, which, in turn, owns all the plant and equipment associated with
the cogeneration project including the diesel engines, generators, three
auxiliary boilers, switchgear, controls and piping. The state university
system has two contracts with Plymouth Cogeneration: (1) a 20 year lease on
the above equipment, and (2) a 20 year management contract. Both contracts
have escalation clauses. Management believes the equipment is adequately
covered by insurance.

The Company leases, on a year to year basis, 1,100 square feet of office
space in a commercial office building in West Palm Beach, Florida where its
executive offices are located. Contract employees work out of their own
offices. Management believes that the current space will remain adequate
through the current lease period, which expires in September 1997.

GOVERNMENT REGULATION

Under present federal law, the Company is not and will not be subject to
regulation as a holding company under PUHCA as long as each power plant in
which it has an interest is a QF under PURPA or is subject to another
exemption. In order to be a QF, a facility must be not more than 50% owned by
an electric utility or electric utility holding company. A QF that is a
cogeneration facility must produce not only electricity but also useful
thermal energy for use in an industrial or commercial process or heating or
cooling applications in certain proportions to the facility's total energy
output and must meet certain energy efficiency standards. Therefore, loss of a
thermal energy customer could jeopardize a cogeneration facility's QF status.
If one of the power plants in which the Company has an interest were to lose
its QF status and not receive another PUHCA exemption, the project subsidiary
or partnership in which the Company has an interest that owns or leases that
plant could become a public utility company, which could subject the Company
to various federal, state and local laws, including rate regulation. In
addition, loss of QF status could allow the power purchaser to cease taking
and paying for electricity or to seek refunds of past amounts paid and thus
could cause the loss of some or all contract revenues or otherwise impair the
value of a project and could trigger defaults under provisions of the
applicable project contracts and financing agreements. There can be no
assurance that if a power purchaser ceased taking and paying for electricity
or sought to obtain refunds of past amounts paid the costs incurred in
connection with the project could be recovered through sales to other
purchasers. A geothermal plant will be a QF if it meets PURPA's ownership
requirements and certain other standards. Each of Steamboat 1 and Steamboat 1-
A meet such ownership requirements and standards and is therefore a QF. Also,
IPP's which are fossil fuel driven, and which do not sell electricity to a
regulated public electric utility, but rather sell electricity to private
customers, do not have the same risk if QF status is lost for any reason. A
regulated public electric company purchases electricity from an IPP with QF
status only because of that QF status. Other commercial customers of an IPP
purchase electricity for a variety of other reasons unrelated to QF status.
Additionally, under new rules proposed by FERC in order to achieve
deregulation of the power industry, requirements for attaining and maintaining
QF status are being relaxed and the requirement of QF status to achieve
certain benefits will ultimately be withdrawn completely as a requirement. The
ultimate effect will be to allow IPP's greater flexibility in choosing
location and a larger potential customer base. Presently, IPP's who sell to
municipal power authorities or to a power pool are considered "Exempted
Wholesale Generators" and do not require QF status.

The construction and operation of power generation facilities require
numerous permits, approvals and certificates from appropriate federal, state
and local governmental agencies, as well as compliance with environmental
protection legislation and other regulations. While the Company believes that
it is in substantial compliance with all applicable rules and regulations and
that the projects in which it is involved have the requisite approvals for
existing operations and are operated in accordance with applicable laws, the
operations of the Company and its projects remain subject to a varied and
complex body of laws and regulations that both public officials and private
individuals may seek to enforce. There can be no assurance that new or
existing laws and regulations which would have a materially adverse affect
would not be adopted or revised, nor can there be any assurance that the
Company will be able to obtain all necessary licenses, permits, approvals and
certificates for proposed projects or that completed facilities will comply
with all applicable permit conditions, statutes or regulations. In addition,
regulatory compliance for the construction of new facilities is a costly and
time

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consuming process, and intricate and changing environmental and other
regulatory requirements may necessitate substantial expenditures for
permitting and may create a significant risk of expensive delays or
significant loss of value in a project if the project is unable to function as
planned due to changing requirements or local opposition.

LEGAL PROCEEDINGS

There are no legal proceedings currently pending or threatened against the
Company.

The owner of a farm adjacent to the LIPA facility in Lehi, Utah, has sued
LIPA for "nuisance, trespass, and negligence" alleging that in May 1995 diesel
fuel from the power plant invaded the drainage ditch dividing the two
properties. The drainage ditch feeds a watering hole on the farmer's property.
The plaintiff's suit alleges that one bull died and five calves were aborted
as a result of petroleum toxosis from ingestion of the fuel in the ditch and
the watering hole. The suit, filed in Utah state court on January 25, 1996,
seeks damages "in excess of $20,000." Depositions of both sides have been
completed. Although there was a spill of several hundred gallons of fuel on
the LIPA property in 1991, prior to ownership by either the Company or its
partners, the 1991 spill was remediated. Prior to the Company's purchase of
its interest in the power plant in 1994, Phase I and Phase II Environmental
Assessments were conducted which did not identify any environmental problems.
There is no pathology evidence that the bull died of petroleum toxosis, or
that the calves were aborted as a result of petroleum toxosis in the mother
cows. No other cattle drinking from the same water hole appeared to be
affected. While neither the Company nor its partners believe the plaintiff has
a strong case, LIPA is exploring settlement options with the plaintiff which
would be less costly than the further extensive testing, expert analyses and
litigation.

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MANAGEMENT

The directors and executive officers of the Company are presently as
follows:

<TABLE>
<CAPTION>
AGE POSITION(S)
--- -----------
<S> <C> <C>
Theodore Rosen.............. 71 Chairman of the Board of Directors
Richard H. Nelson........... 56 President, Chief Executive Officer and Director
Fred Knoll.................. 40 Director
Ronald Moody................ 62 Director
Evan Evans.................. 71 Director
Seymour J. Beder............ 69 Treasurer and Chief Financial Officer
</TABLE>

At the conclusion of this Offering, in accordance with the terms of the
Private Placement, Messrs. Knoll and Moody will resign and two new directors,
who will be designated by Enviro as the holder of the 11% Preferred Stock (the
"Designated Directors"), will be elected by the remaining directors to fill
the vacancies. Pursuant to the terms of the 11% Preferred Stock, no action may
be taken by the Board of Directors without the approval of at least one of the
Designated Directors.

Theodore Rosen. Mr. Rosen has been a Director of the Company and Chairman of
the Board of Directors since November 1993. Since June 1993, Mr. Rosen has
been Managing Director of Burnham Securities. He was Senior Vice President of
Oppenheimer & Co. from January 1991 to June 1993, and was Vice President of
Smith Barney & Co. from 1989 to 1991. Mr. Rosen also currently serves as a
director of Waterhouse Investors Cash Management Co., an investment management
company engaged in management of money market mutual funds. Mr. Rosen holds a
BA degree from St. Lawrence University and did graduate work at both Albany
Law School and Columbia University School of Business.

Richard H. Nelson. Mr. Nelson has been President, Chief Executive Officer
and Director of the Company since November 1993. Mr. Nelson has been engaged
in the power plant industry for more than twenty years and has been involved
with over 200 power projects throughout the world, 125 of which have been
cogeneration projects. In 1973, Mr. Nelson formed Sartex Corp., which was
merged into the Company, then called Cogenic Energy Systems, Inc. ("Cogenic"),
in 1981. Mr. Nelson served as president of Cogenic until 1989. Cogenic filed
for reorganization under Chapter 11 of the Bankruptcy Code in 1989. From
January 1989 until January 1991, Mr. Nelson was president of Utility Systems
Corp., a subsidiary of Cogenic which was not party to the Chapter 11 filing.
In January 1991 Mr. Nelson formed USF where he served as president until
November 1993. A Plan of Reorganization was confirmed for Cogenic in March
1993, after which USF and Cogenic merged, with Cogenic being the surviving
corporation and changing its name to U.S. Envirosystems, Inc. Mr. Nelson was
Special Assistant to the Director of the Peace Corps from 1961 to 1962;
thereafter he served as Military Aide to the Vice President of the United
States from 1962 to 1963 and Assistant to the President of the United States
from 1963 to 1967. From 1967 to 1969, Mr. Nelson was Vice President of
American International Bank, and from 1969 to 1973 he was Vice President of
Studebaker-Worthington Corp. Mr. Nelson received his BA degree from Princeton
University.

Ronald Moody. Mr. Moody has been a Director of the Company since January
1994. Mr. Moody entered the investment community in 1967 as a senior partner
of a Canadian investment house until 1976, and since that time has been a
private investor for his own account. After several years with the Royal Bank
of Canada, Mr. Moody joined the Montreal Trust Company in 1962 as a manager of
pension fund and individual trust accounts. Mr. Moody received his BA from the
University of Western Ontario.

Fred Knoll. Mr. Knoll has been a Director of the Company since August 1994.
During the last five years, Mr. Knoll has been chairman and CEO of Knoll
Capital Management, an investment and cash management firm, in New York. Mr.
Knoll is the Chairman of the Board of Thinking Tools and of Lamar Signal
Processing and a Director of Spradling Holdings, Raphael Glass and the
Columbus Fund. From 1989 until 1993, Mr. Knoll was Chairman of the Board of
Directors of C3/Telos Corporation, a computer systems company. Mr. Knoll
received

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<PAGE>

his B.S. degree in Computer Sciences from M.I.T. and also a B.S. degree in
Management from the Sloan School at M.I.T. He received his MBA from Columbia
University.

Evan Evans. Mr. Evans has been a Director of the Company since August 1995.
Since 1983 he has been chairman of Holvan Properties, Inc. ("Holvan"), a real
estate developer, and was managing director of Easco Marine, Ltd. from 1983 to
1988. Also, from 1985 to 1986 Mr. Evans was general manager of Belgian
Refining Corporation ("BRC"), pursuant to a contract between BRC and Holvan.
From 1981 to 1983 he was vice president of Getty Trading and Transportation
Company and president of its subsidiary, Getty Trading International, Inc.
From 1970 to 1981 Mr. Evans was vice president and member of the board of
directors of United Refining Corp. He is currently on the board of directors
of Holvan and BRC. Mr. Evans received his BS degree in Mathematics from St.
Lawrence University and his BS in Civil Engineering from M.I.T.

Seymour J. Beder has been Secretary, Treasurer, Controller and Chief
Financial Officer of the Company since November 1993. From 1970 through 1980
he was Chief Financial Officer for Lynnwear Corporation, a textile company,
and from 1980 to September 1993, Mr. Beder was president of Executive
Timeshare, Inc., a provider of executive consulting talent. Mr. Beder is a
Certified Public Accountant, and a member of the New York State Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants. Mr. Beder received his BA degree from City College of New York.

In addition, the following persons, who are not officers or directors, are
affiliated with the operations of the Company as consultants:

Donald A. Warner. Mr. Warner has acted as director of development and a
consultant to the Company since 1993. For over 20 years, Mr. Warner has been
closely involved with the energy and environmental industries, and has been
consultant and attorney to numerous environmental and energy project
developments in both the public and private sector. The Company expects Mr.
Warner to work for the Company full-time after the completion of this
Offering. Mr. Warner holds his BA degree from Rochester University and his JD
degree from Syracuse University. He also holds an LLM degree from Washington
University.

Patrick McGovern. Mr. McGovern has been a consultant to the Company since
1993. From 1973 to 1981, Mr. McGovern was Engine Sales Manager for Virginia
Tractor Company (Caterpillar). From 1981 to 1984, he was Vice President
Engineering for the Company. From 1984 to present, he has been president of
Power Management Corp. Mr. McGovern holds both his BSEE and MBA degrees from
Louisiana State University.

Ravi Singh. Mr. Singh has been President of USE International, LLC, 50% of
which is owned by the Company, since 1995. Mr. Singh is president of Indus
LLC, a company he formed in 1994 to develop new investment opportunities
throughout southeast Asia and Oceania regions. From 1988 until 1994 he was a
partner and Managing Director for International Investment Banking at Cowen &
Company. Prior to his time at Cowen & Company, Mr. Singh had been affiliated
with Coopers & Lybrand LLP with advisory responsibilities for cross-border
mergers and acquisitions, notably in Japan. Mr. Singh was also affiliated with
Komatsu Ltd. of Japan where he was responsible for business development in
India. Mr. Singh received his BS in Engineering from the University of Delhi
and his MBA from Columbia University.

Nils A. Kindwall. Mr. Kindwall was Vice Chairman of Freeport McMoran, Inc.
from 1975 until his retirement in 1993. At Freeport McMoran, he was
principally responsible for developing and financing major natural resource
projects throughout the world. He has served on the National Advisory Board of
Chemical Bank, and is on the board of John Wiley & Sons, Inc. and Metall
Mining Corporation. Mr. Kindwall received his BA degree in Economics from
Princeton University and his MBA from Columbia University.

LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation includes provisions which limit
the liability of its Directors. As permitted by applicable provisions of the
Delaware General Corporation Law (the "Delaware Law"), Directors

46
<PAGE>

will not be liable to the Company for monetary damages arising from a breach
of their fiduciary duty as Directors in certain circumstances. This limitation
does not affect liability for any breach of a Director's duty to the Company
or its stockholders (i) with respect to approval by the Director of any
transaction from which he or she derives an improper personal benefit, (ii)
with respect to acts or omissions involving an absence of good faith, that the
Director believes to be contrary to the best interests of the Company or its
stockholders, that involve intentional misconduct or a knowing and culpable
violation of law, that constitute an unexpected pattern or inattention that
amounts to an abdication of his or her duty to the Company or its
stockholders, or that show a reckless disregard for duty to the Company or its
stockholders in circumstances in which he or she was, or should have been
aware, in the ordinary course of performing his or her duties, of a risk of a
serious injury to the Company or its stockholders, or (iii) based on
transactions between the Company and its Directors or another corporation with
interrelated Directors or on improper distributions, loans or guarantees under
applicable sections of Delaware Law. This limitation of Directors' liability
also does not affect the availability of equitable remedies, such as
injunctive relief or rescission.

The Company's Bylaws obligate the Company to indemnify its directors and
officers to the full extent permitted by Delaware Law, including circumstances
in which indemnification is otherwise discretionary under Delaware Law.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Company, pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.

EXECUTIVE COMPENSATION

The following table shows the total compensation paid by the Company during
the fiscal years ended January 31, 1996, 1995 and 1994, and during the six
months ended July 31, 1996 to Mr. Richard H. Nelson, the Company's President
and Chief Executive Officer. There were no other executives of the Company who
received total compensation in excess of $100,000 during any of such years.

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS LONG TERM COMPENSATION
- --------------------------- ------------------ -------- ----- ----------------------
<S> <C> <C> <C> <C>
Richard H. Nelson, 1997 $ 37,500(1)
President and Chief (to July 31, 1996) 150,000(2) -- --
Executive Officer..... 1996 $149,850 -- --
1995 $24,500 -- --
1994
</TABLE>
- --------
(1) This entire amount has been deferred and will be paid by the Company when
working capital is adequate, which shall be determined by the Board of
Directors.
(2)Includes $125,500 at January 31, 1996, which has been deferred and will be
paid by the Company when working capital is adequate, which shall be
determined by the Board of Directors.
- --------

For a period of three years from the date of this Prospectus, all
compensation and other arrangements between the Company and its officers,
directors and affiliates is to be approved by a Compensation Committee of the
Board of Directors, a majority of whom are to have no affiliation or other
relationship with the Company other than as directors.

Compensation of Directors. Directors are not compensated for attendance at
meetings of the Board, although certain travel expenses relating to attending
meetings are reimbursed.

Employment Contracts. Mr. Nelson has an employment contract with the Company
to serve as its Chief Executive Officer for a term of five years from the date
of this Prospectus. Mr. Nelson's contract provides for an annual salary of
$150,000 plus normal benefits. Mr. Nelson has volunteered to defer 50% of this
salary until the Company's cash flow is, in the opinion of the Board of
Directors, sufficient. Under the terms of Mr. Nelson's employment agreement,
he may not compete with the Company during the term of his employment with the
Company or for two years thereafter, or, at any time, disclose any
confidential information pertaining to the Company. Mr. Nelson works for the
Company full-time. As of September 15, 1996, the amount of deferred
compensation owed to Mr. Nelson will be $219,250.

47
<PAGE>

Mr. Rosen has an employment contract with the Company to serve as its
Chairman of the Board for a term of five years from the date of this
Prospectus. Mr. Rosen's contract commenced December 1, 1993 and allows an
annual salary of $60,000 which is being deferred until the Company's cash flow
is, in the opinion of the Board of Directors, sufficient. Mr. Rosen devotes a
minimum of 40 hours per week to the Company. Under the terms of Mr. Rosen's
employment agreement, he may not compete with the Company during the term of
his employment with the Company or for two years thereafter, or, at any time,
disclose any confidential information pertaining to the Company. As of
September 15, 1996, the amount of deferred compensation owed to Mr. Rosen will
be $162,500.

Stock Options. The Board of Directors has reserved 400,000 shares of the
Company's Common Stock for the issuance of non-qualified options to existing
and future directors, executives and employees of the Company.

CERTAIN TRANSACTIONS

The Plan of Reorganization of Cogenic Energy Systems, Inc. (the "Plan") was
originally filed and financed by Richard Nelson, who was then the sole
shareholder and sole director of USF. The Plan was confirmed by the bankruptcy
court in March 1993. Under the Plan, 100,000 shares of the reorganized debtor
were issued to Richard Nelson as the proponent and financier of the Plan. An
additional 125,000 shares (the "merger shares") were issued to USF upon
consummation of the Plan and upon the merger of the reorganized debtor with
USF. These merger shares were distributed to individuals and companies who
purchased shares of USF for purposes of providing USF with the financing to
acquire the Company and to allow the Company to continue as the surviving
corporation.

Messrs. Nelson, the President, Theodore Rosen, the Chairman, Ronald Moody, a
director, Fred Knoll, a director, and S. Marcus Finkle, a principal
stockholder of the Company, are participants in the Plymouth Loan (having
loaned $25,000, $25,000, $75,000, $650,000 and $150,000 respectively), which
bears interest at the rate of 2.5% per annum above the prime rate, and in
which the lenders, other than Messrs. Nelson and Rosen, received five-year
warrants to purchase 120 shares of the Company's Common Stock for each $1,000
loaned, which warrants are exercisable at $5.00 per share. Messrs. Nelson,
Rosen, Moody, Knoll and Finkle will benefit by the payment to them from the
net proceeds of the Offering and the Private Placement of $30,400, $30,300,
$90,800, $786,500 and $181,900, respectively (including accrued interest to
September 15, 1996) in connection with the repayment of the Plymouth Loan. Mr.
Rosen, Mr. Knoll and Mr. Finkle and Guernroy Ltd. a principal Stockholder, are
also holders of the Company's Convertible Debentures in the amounts of
$125,000, $200,000, $50,000 and $50,000 respectively. Accrued interest,
adjusted to September 15, 1996, which will be repaid from the proceeds of the
Offering, amount to $26,900, $50,000, $11,500 and $10,800 respectively. As
part of the Debenture Conversion, the conversion rate of the Convertible
Debentures, which remain outstanding after the Debenture Conversion, will be
reduced to $8.00 per share from the present $16.00 per share and the interest
rate thereon will be reduced to 9% from the present 18%. In addition to
payment of interest, the Company is obligated to pay the holders of the
Convertible Debentures a pro rata portion of 50% of LIPA's share of the net
revenue (net of funds required for the payment of interest) resulting from
LIPA's energy sales. As of September 11, 1996, three of the 26 holders of
Convertible Debentures, representing $150,000 in principal amount, have not
agreed to the interest rate reduction from 18% to 9% per annum. Accordingly,
the Company's annual interest expense will be $13,500 greater than the Pro
Forma amounts shown in this Prospectus. See "Use of Proceeds" and "Description
of Securities--Convertible Debentures."

In June 1995, the Company issued 57,500 shares of Series One Preferred Stock
to Anchor under the terms of the Anchor Loan by which Anchor loaned the
Company the sum of $600,000 bearing interest at the rate of 18% per annum. The
Anchor Loan is cross-collateralized (together with the Solvation Loan
described below) by a first lien on all of the assets of the Company and
97,250 shares of Common Stock owned by Messrs. Nelson and Rosen. The purpose
of the Anchor Loan was to finance the costs and expenses of the proposed
public offering and provide other funding to the Company for various costs and
expenses. The maturity of the Anchor Loan has been extended from March 11,
1996 to September 15, 1996. The Company is negotiating with Anchor

48
<PAGE>

and anticipates that it will successfully extend the term of the Anchor Loan
beyond September 15, 1996 without triggering a default. The Anchor Loan is to
be repaid at the date of closing of the Offering or at the date of closing of
any public or private offering of debt or equity securities in the gross
amount of $5,000,000 or more and/or the sale of any of the Company's assets or
any part thereof. $600,000 of the proceeds of the Offering and the Private
Placement will be used to repay the Anchor Loan and $156,000 of accrued
interest on such loan. The 57,500 shares of Series One Preferred Stock will be
exchanged for 205,000 shares of Common Stock in the Preferred Stock Exchange.
See "Use of Proceeds--Anchor Bridge Loan" and "Description of Securities--
Preferred Stock--Series One Preferred Stock."

The Company and its partners, who each own 50% of LIPA, share on a pro-rata
basis the ownership, retrofitting costs, annual expenses, and revenues
associated with the Lehi Cogeneration Project. The Company financed its
acquisition cost of $1,225,000 for this interest through the issuance of
Convertible Debentures. In addition to payment of interest, the Company is
obligated to pay the holders of the Convertible Debentures a pro rata portion
of 50% of LIPA's share of the net revenue (net of funds required for the
payment of interest) resulting from LIPA's energy sales. See "Business--
Current Operations and On-Going Projects."

The Company has also entered into a consulting agreement with Knoll Capital
Management relating to specific work being done for the Company to develop
projects in Israel and the Middle East. The contract is for a term of one
year, expiring in October 1996, and provides for a consulting fee of $5,000
per month. Fred Knoll, a director and principal stockholder of the Company is
the Chairman and Chief Executive Officer of Knoll Capital Management. Knoll
Capital Management was instrumental in arranging the kibbutz project in Israel
which the Company is currently pursuing and continues to be instrumental in
assisting the Company in negotiations in other parts of the world, including
Panama. See "Management's Discussion and Analysis of Financial Condition and
Plan of Operations--Results of Operations."

Private Placement. In December 1995, Solvation loaned the Company $200,000,
which carries an interest rate of 10% per annum and which is due when the
Offering is closed, but no later than September 15, 1996. The Company is
negotiating with Solvation and anticipates that it will successfully extend
the term of the Solvation Loan beyond September 15, 1996 without trigger a
default. A further $50,000 was loaned to the Company in May 1996 on the same
terms and conditions. The Solvation Loan is cross-collateralized with the
Anchor Loan by a first lien on all of the assets of the Company and 97,250
shares of Common Stock owned by Messrs. Nelson and Rosen. See "Use of
Proceeds--Solvation Loan." Concurrently with the closing of the Offering, the
Company will issue to Enviro for $3,100,000, 1,600,000 shares of 11% Preferred
Stock convertible into 1,600,000 shares of Common Stock of the Company. See
"Description of Securities--Preferred Stock--11% Preferred Stock." The Company
will also issue 500,000 Private Warrants to EMC for $400,000. See "Description
of Securities--Warrants--Private Warrants." EMC is a subsidiary of Solvation.
Solvation and Enviro are indirectly owned by different members of the same
family. The terms for the Private Placement were negotiated at arms-length.

In connection with the Anchor Loan, Richard Nelson and Theodore Rosen, the
Company's President and Chairman of the Board, respectively, pledged an
aggregate of 97,250 shares of the Company's Common Stock to Anchor. (The
pledge was later extended to secure the Solvation Loan.) These shares will be
released from such pledge upon repayment of the Anchor Loan and the Solvation
Loan. See "Use of Proceeds."

49
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table lists the number of shares of Common Stock owned as of
August 31, 1996 by (i) persons known to hold more than five percent of the
shares of outstanding Common Stock, (ii) each director of the Company, (iii)
any executive officers named in the Summary Compensation Table, (iv) all
officers and directors of the Company as a group. Each person named in the
table has sole investment power and sole voting power with respect to the
shares of the Common Stock set forth opposite his or its name, except as
otherwise indicated.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
------------------------------ ---------------------------
NAME AND ADDRESS OF
BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE
------------------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Richard Nelson.......... 82,446 18.7% 82,446 3.4%
Theodore Rosen.......... 88,333(2) 17.4% 100,833(2a) 4.1%
Ronald Moody............ 21,500(3) 4.8% 21,500(3) 0.9%
Fred Knoll.............. 171,333(4) 28.6% 191,334(4a) 7.5%
Evan Evans.............. 2,500(5) 0.6% 2,500(5) 0.1%
S. Marcus Finkle........
117 AABC
Aspen, CO 63,833(6) 13.9% 68,833(6a) 2.9%
Guernroy, Ltd...........
c/o Royal Bank of Can-
ada
Channel Isles, UK 38,158(7) 8.6% 43,158(7a) 1.8%
Enviro Partners, L.P....
885 Third Avenue, 34th
Floor
New York, NY 10022 0 0.0% 1,600,000(8) 40.1%
Anchor Capital Company,
LLC....................
1140 Avenue of the
Americas
New York, NY 10036 205,000(9) 31.8% 205,000(9) 7.9%
All officers and direc-
tors as a group (6 per-
sons).................. 381,113(2) 55.2% 413,613(2)(2a) 15.6%
(3)(4) (3)(4)
(5) (4a)(5)
</TABLE>
- --------
(1) The tabular information gives effect to the exercise of warrants or
options exercisable within 60 days of the date of this table owned in each
case by the person or group whose percentage ownership is set forth
opposite the respective percentage and is based on the assumption that no
other person or group exercises its option. The address of each of the
officers and directors is 515 North Flagler Drive, Suite 202, West Palm
Beach, Florida 33401.
(2) Includes 8,333 shares issuable upon conversion of Convertible Debentures,
and 60,250 shares issuable upon exercise of non-qualified options at an
exercise price of $8 per share which became exercisable on December 1,
1995.
(2a) Includes 10,417 shares issuable upon conversion of Convertible
Debentures, and 60,250 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable on
December 1, 1995. Excludes 10,417 shares issuable upon exercise of
Private Warrants which are not exercisable until one year after the
closing of the Debenture Conversion. Also excludes 500,000 shares of
Common Stock underlying 500,000 Private Warrants held by EMC which are
subject to Mr. Rosen's right of first refusal for nine months from the
date of this Prospectus.
(3) Includes 9,000 shares issuable on exercise of warrants at an exercise
price of $5 per share which became exercisable on October 31, 1994.
(4) Includes (i) 67,500 shares issuable upon exercise of non-qualified options
at an exercise price of $8 per share which became exercisable on December
1, 1995 and (ii) 91,333 shares owned by Europa International Inc.
("Europa"), including 13,333 shares issuable to Europa upon conversion of
Convertible Debentures

50
<PAGE>

and 78,000 shares issuable to Europa on exercise of warrants at an exercise
price of $5 per share which became exercisable on October 31, 1994. Knoll
Capital Management has the sole voting power of the shares owned by Europa.
Mr. Knoll is the President and sole shareholder of Knoll Capital
Management.
(4a) Includes Europa holdings of 16,667 shares issuable upon conversion of
Convertible Debentures and 78,000 shares issuable on exercise of warrants
at an exercise price of $5 per share which became exercisable on October
31, 1994. Knoll Capital Management has the sole voting power of the
shares owned by Europa. Mr. Knoll is the President and sole shareholder
of Knoll Capital Management. Excludes 16,667 shares issuable upon
exercise of Private Warrants which are not exercisable until one year
after the closing of the Debenture Conversion.
(5) Includes 1,250 shares issuable upon exercise of non-qualified options at
an exercise price of $4 per share which became exercisable on January 25,
1995.
(6) Includes 3,333 shares issuable upon conversion of Convertible Debentures
and 18,000 shares issuable on exercise of warrants at an exercise price of
$5 per share which became exercisable on October 31, 1994.
(6a) Includes 4,167 shares issuable upon conversion of Convertible Debentures
and 18,000 shares issuable on exercise of warrants at an exercise price
of $5 per share which became exercisable on October 31, 1994. Excludes
4,167 shares issuable upon exercise of Private Warrants which are not
exercisable until one year after the Debenture Conversion.
(7) Includes 3,333 shares issuable upon conversion of Convertible Debentures.
(7a) Includes 4,167 shares issuable upon conversion of Convertible Debentures.
Excludes 4,167 shares issuable upon exercise of warrants which are not
exercisable until one year after the Debenture Conversion.
(8) Represents shares issuable upon conversion of 11% Preferred Stock.
Excludes 500,000 shares issuable to EMC upon exercise of Private Warrants
which are not exercisable until one year after the Private Placement.
Enviro and EMC are indirectly owned by different members of the same
family.
(9) Represents shares issuable upon conversion of 57,500 shares of Series One
Preferred Stock.

51
<PAGE>

DESCRIPTION OF SECURITIES

The Company's authorized capital stock consists of 35,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), and 5,000,000
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock").
The following summary of certain terms of the Common Stock and Preferred Stock
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Certificate of Incorporation and
By-laws, which are included as exhibits to the Registration Statement of which
this Prospectus is a part.

COMMON STOCK

The Company has 439,650 shares of Common Stock issued and outstanding. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares entitled to
vote in any election of Directors may elect all of the Directors standing for
election. Subject to preferences that may be applicable to any then
outstanding Preferred Stock, the holders of the Common Stock are entitled to
receive such dividends, if any, as may be declared by the Board of Directors
from time to time out of legally available funds. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities
and subject to the prior rights of holders of the Preferred Stock then
outstanding. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of Common Stock are subject to the rights of the holders of shares of
any series of Preferred Stock that the Company will issue in the future.

WARRANTS

Each Warrant entitles the registered holder to purchase one share of Common
Stock at a price of $4.00 per share, subject to adjustments in certain
circumstances, during the period commencing one year and ending five years
from the date of this Prospectus.

The Warrants are redeemable by the Company, at the option of the Company,
with the prior consent of the Representative, at a price of $.01 per Warrant
at any time after the Warrants become exercisable, upon not less than 30
business days' written notice, provided that the last sales price of the
Common Stock equals or exceeds 150% (initially $6.00) of the then-exercise
price of the Warrants (the "Redemption Threshold") for the 20 consecutive
trading days ending on the third day prior to the notice of redemption to
warrantholders. The warrantholders shall have the right to exercise the
Warrants until the close of business on the date fixed for redemption. The
Company is required to maintain the effectiveness of a current registration
statement relating to the exercise of the Warrants and, accordingly, the
Company will be unable to redeem the Warrants unless there is a currently
effective prospectus and registration statement under the Securities Act
covering the issuance of underlying securities. Also, lack of qualification or
registration under applicable state securities laws may mean that the Company
would be unable to issue securities upon exercise of the Warrants to holders
in certain states, including at the time when the Warrants are called for
redemption.

The Warrants will be issued in registered form under a Warrant Agreement
between the Company and American Stock Transfer & Trust Company as Warrant
Agent. Reference is made to such Warrant Agreement (which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part) for
a complete description of the terms and conditions applicable to the Warrants
(the description herein contained being qualified in its entirety by reference
to such Warrant Agreement).

The exercise price, number of shares of Common Stock issuable on exercise of
the Warrants and Redemption Threshold are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at a price below
their exercise price.

52
<PAGE>

The Company has the right, in its sole discretion, to decrease the exercise
price of the Warrants for a period of not less than 30 days on not less than
30 days' prior written notice to the warrantholders. In addition, the Company
has the right, in its sole discretion, to extend the expiration date of the
Warrants on five business days' prior written notice to the warrantholders.
The Company will comply with all applicable tender offer rules, including Rule
13e-4, in the event the Company reduces the exercise price for a limited
period of time.

The Warrants may be exercised upon surrender of the Warrant Certificate
representing the Warrants on or prior to the expiration date at the offices of
the Warrant Agent, with the exercise form on the reverse side of the Warrant
Certificate completed and executed as indicated, accompanied by full payment
of the exercise price (by certified check, payable to the Company) for the
number of Warrants being exercised. The warrantholders do not have the rights
or privileges of holders of Common Stock.

No Warrants will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering the shares of
Common Stock issuable upon exercise of such Warrants and such shares have been
registered or qualified or are exempt under the securities laws of the state
of residence of the holder of such Warrants.

No fractional shares will be issued upon exercise of the Warrants. The
Company will pay to such warrantholder, in lieu of the issuance of any
fractional share which is otherwise issuable to such warrantholder, an amount
in cash based on the market value of the Common Stock on the last trading day
prior to the exercise date.

Private Warrants. On May 3, 1996 EMC entered into an agreement with the
Company whereby EMC agreed to purchase for $400,000, concurrently with
consummation of this Offering, Private Warrants to purchase 500,000 shares of
Common Stock of the Company. Terms of the agreement were negotiated by the two
parties. The Private Warrants are to have the same terms and conditions as the
Warrants. The Company has agreed to keep a shelf registration statement in
effect, covering the Private Warrants to be received by EMC and the shares
into which such Private Warrants are convertible. EMC has given Theodore
Rosen, the Company's Chairman of the Board, a right of first refusal to
purchase such Private Warrants if at any time during the nine-month period
following the date of this Prospectus EMC decides to sell such Private
Warrants. Mr. Rosen has agreed with the Representative that he will exercise
such right of first refusal in the event EMC decides to sell the Private
Warrants during such nine-month period and that any Private Warrants purchased
by Mr. Rosen will not be sold by him until at least 13 months from the date of
this Prospectus. 125,000 Private Warrants are also being issued in connection
with the Debenture Conversion. The terms of the Private Warrants were
negotiated at arms-length.

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of Preferred Stock, par
value $0.01 per share, in one or more series. The Board of Directors, without
further approval of the stockholders, is authorized to fix the rights and
terms relating to dividends, conversion, voting, redemption, liquidation
preferences, sinking funds and any other rights, preferences, privileges and
restrictions applicable to each such series of Preferred Stock. The issuance
of Preferred Stock, while providing flexibility in connection with possible
financing, acquisitions and other corporate purposes, could, among other
things, adversely affect the voting power of the holders of Common Stock and,
under certain circumstances, be used as a means of discouraging, delaying or
preventing a change in control of the Company. Other than its agreement to
issue the shares of the 11% Preferred Stock and the Series One Preferred
Stock, the Company has no shares of Preferred Stock outstanding and has no
plans to issue any shares.

Series One Preferred Stock. In June 1995, the Board of Directors designated
100,000 of the Company's Preferred Stock as "Series One Exchangeable and
Convertible Preferred Stock" (the "Series One Preferred Stock"). The Company
issued 57,500 shares of the Series One Preferred Stock to Anchor under the
terms of the Anchor Loan. See "Certain Transactions." Under the terms of the
Anchor Loan, upon the consummation of this Offering and the other Closing
Transactions, the 57,500 shares of Series One Preferred Stock will be
exchanged

53
<PAGE>

for 205,000 shares of Common Stock. The holders are also entitled to receive
cumulative dividends equal to $1.00 per share and have a liquidation
preference of $10.00 per share plus any dividends accrued and unpaid. The
holders of Series One Preferred Stock have no voting rights except for certain
corporate actions. The Series One Preferred Stock is redeemable at the option
of the Company at a price of $10.00 per share, plus accrued and unpaid
dividends, under certain conditions, commencing January 1, 1999.

11% Preferred Stock. On May 3, 1996 Enviro entered into an agreement with
the Company whereby Enviro agreed to purchase for $3,100,000, concurrently
with the consummation of this Offering, 1,600,000 shares of 11% Preferred
Stock, which may be converted into 1,600,000 shares of Common Stock of the
Company. Such conversion may take place at any time, and from time to time.
The 11% Preferred Stock has an aggregate liquidation preference of $3,100,000
plus accrued dividends and will carry a preferential annual cumulative
dividend rate of 11% of the liquidation preference. During the first two years
after issuance, dividends on the 11% Preferred Stock will be payable in
additional shares of 11% Preferred Stock (valued at $1.8375 per share).
Thereafter dividends on the 11% Preferred Stock will be payable in either
shares of 11% Preferred Stock or cash, at the option of the Company. The
Company has agreed to keep a shelf registration statement in effect covering
the shares into which the 11% Preferred Stock is convertible. Enviro has
agreed that it will not sell the shares received upon conversion for a period
of nine months from the closing of the Offering without the Representative's
consent. The 11% Preferred Stock will vote with the Common Stock on a one vote
per share basis on all matters other than the election of directors.

The 11% Preferred Stock, as a class, will have the right to designate two
directors (the "Designated Directors") out of the five members of the Board of
Directors, and no action may be taken by the Board of Directors without the
approval of at least one of the Designated Directors.

The 11% Preferred Stock is redeemable at the option of the Company at any
time after four years from issuance, at a redemption price equal to the
liquidation preference and it is mandatorily redeemable ten years after
issuance.

The terms of the 11% Preferred Stock were negotiated at arms-length.

CONVERTIBLE DEBENTURES

Concurrently with the consummation of this Offering and the other Closing
Transactions, the Convertible Debentures, of which an aggregate principal
amount of $1,525,000 is outstanding, will be restructured by converting
$500,000 principal amount into 125,000 shares of Common Stock and 125,000
Private Warrants and reducing the conversion rate of the remainder to $8.00
per share from the present $16 per share, making the remainder convertible
into 128,125 shares of Common Stock. From and after the consummation of the
Offering, the interest rate will be 9% instead of the present 18%. As of
September 11, 1996, three of the 26 holders of Convertible Debentures,
representing $150,000 in principal amount, have not agreed to the conversion.
If such individuals do not agree to the conversion, the Company's annual
interest expense will increase by $13,500. These changes were negotiated with
the holders of the Convertible Debentures. The Convertible Debentures were
issued in June 1994 and mature on January 25, 2004. In addition to payment of
interest, the Company shall pay the holders of the Convertible Debentures a
pro rata portion of 50% of LIPA's share of the net revenue (net of funds
required for the payment of interest) resulting from LIPA's energy sales (the
"Supplemental Participation"). See "Business--Current Operations and On-Going
Projects--Lehi Cogeneration Project."

Pursuant to the terms and conditions of a pledge agreement between the
Company and Richard Nelson and Theodore Rosen, acting jointly as pledge agent
for all of the holders of the Convertible Debentures, payment of principal and
interest on the Convertible Debentures and, if applicable, any Supplemental
Participation due is secured by a security interest in all of the issued and
outstanding shares of common stock of LEI, all of which issued and outstanding
shares are owned by the Company. Until such time as the Company's obligations
for the payment of the principal and interest on the Convertible Debentures
and, if applicable, any Supplemental Participation due are paid in full, the
Company shall not cause LEI to issue any additional shares of common stock
unless the security interest granted in LEI shall be extended to such
additional shares.

54
<PAGE>

The Convertible Debentures are subordinate and subject in right of payment
to the prior payment of all "Senior Indebtedness" of the Company. "Senior
Indebtedness" is the principal of, premium, if any, and interest (including
any interest accruing after the filing of a petition in bankruptcy) on and
other amounts due or in connection with any indebtedness of the Company
including, without limitation, the liabilities as defined in and arising under
any loan or security agreement with a bank, insurance company, or other
financial institution or affiliate of any thereof whether outstanding on the
date of the Convertible Debentures, or any indebtedness thereafter created,
incurred, assumed or guaranteed by the Company, and, in each case, all
renewals, extensions, and refundings thereof, except indebtedness which by the
terms of the instrument creating or evidencing such indebtedness created,
incurred, assumed, or guaranteed after the date of the Convertible Debentures
is expressly made equal to or subordinate and subject in right of payment to,
the payment of principal of an interest on the Convertible Debentures.
Notwithstanding anything herein to the contrary, Senior Indebtedness shall not
include (i) indebtedness representing the repurchase price of any preferred
stock or other capital stock of the Company or any dividend or distribution
with respect thereto; (ii) indebtedness of the Company owed directly to any
employee, officer or director thereof; and (iii) indebtedness which, by its
terms, is subordinate in right of payment to the indebtedness of the Company
evidenced by the Convertible Debentures.

To the extent the Company shall have funds legally available for such
payment, commencing January 25, 1998, the Company may redeem at its option the
Convertible Debentures, in whole or in part, at a redemption price equal to
102% of the principal amount of each Convertible Debenture, plus any unpaid
and accrued interest of the Supplemental Participation. Upon any such
redemption, the Company must issue each holder whose Convertible Debenture(s)
have been redeemed a warrant to purchase a number of shares of the Company's
Common Stock equal to the number of shares into which the principal amount
being redeemed is then convertible. The exercise price of these warrants would
be the same as the conversion price at the time of redemption (currently $8.00
per share).

ANTI-TAKEOVER PROVISIONS

The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law. In general, this statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the Company's
voting stock.

The Delaware Statute may discourage certain types of transactions involving
an actual or potential change in control of the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock and warrant agent for
the Warrants is American Stock Transfer & Trust Company.

55
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Possible Rule 144 Sales. Upon completion of the Offering by the Company
described in this Prospectus, the Company will have outstanding 2,394,650
shares of Common Stock. All of the 1,625,000 shares sold in the Offering
(assuming no exercise of the Underwriters' over-allotment option) will be
freely transferable by persons other than affiliates (as defined in
regulations under the Securities Act) without restriction or further
registration under the Securities Act.

Of the 439,650 shares of Common Stock outstanding prior to the Offering,
64,650 shares of Common Stock outstanding are "restricted securities" within
the meaning of Rule 144 under the Securities Act and may not be sold in the
absence of registration under the Securities Act, unless an exemption from
registration is available, including the exemption provided by Rule 144. Under
Rule 144 as currently in effect, of such 64,650 shares, 43,250 shares are
currently eligible for sale (none of which are subject to the agreements
described below restricting their sale), and the remaining 21,400 shares will
be eligible for such sale in or after November 1996, subject in each instance
to the volume limitations of the Rule. The holders of record of 130,946 of
these shares have agreed with the Representative not to sell their shares
until thirteen months from the date of this Prospectus without the prior
written approval of the Representative. The 205,000 shares of Common Stock to
be issued in the Preferred Stock Exchange and the 125,000 shares of Common
Stock to be issued upon the Debenture Conversion will be restricted
securities. Although registered pursuant to the Shelf Registration, Anchor has
agreed not to sell the 205,000 shares of Common Stock it will receive in the
Preferred Stock Exchange without the Representative's prior written approval,
for a period of nine months following the consummation of the Offering. The
foregoing does not give effect to any shares issuable on exercise of
outstanding options and warrants. The effect of the offer and sale of such
shares may be to depress the market price for the Company's Common Stock.

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
Restricted Securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from
an affiliate of the Company, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock of the Company, or (ii) the average
weekly trading volume in Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions and notice requirements, and to the availability of current public
information about the Company. A person who is not an affiliate, has not been
an affiliate within 90 days' prior to sale and who beneficially owns
Restricted Securities with respect to which at least three years have elapsed
since the later of the date the shares were acquired from the Company or from
an affiliate of the Company, is entitled to sell such shares under Rule 144(k)
without regard to any of the volume limitations or other requirements
described above.

Registration Rights. This Registration Statement includes a shelf
registration (the "Shelf Registration") to enable Enviro to sell to the public
the 1,600,000 shares of Common Stock into which the shares of 11% Preferred
Stock are convertible. Enviro has agreed that it will not sell such shares for
a period of nine months from the closing of the Offering without the
Representative's consent. The Shelf Registration also covers the 500,000
Private Warrants being acquired by EMC and the underlying shares of Common
Stock issuable on the conversion of the 11% Preferred Stock and the exercise
of such Private Warrants. These Private Warrants are not subject to any
agreement restricting resale. However, EMC has given Theodore Rosen, the
Company's Chairman of the Board, a right of first refusal to purchase such
Private Warrants if at any time during the nine month period following the
date of this Prospectus EMC decides to sell such Private Warrants. Mr. Rosen
has agreed with the Representative that he will exercise such right of first
refusal in the event EMC decides to sell the Private Warrants during such nine
month period and that any Private Warrants purchased by Mr. Rosen will not be
sold by him until at least 13 months from the date of this Prospectus. The
Shelf Registration also enables the holders of the 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange to sell their shares. The
125,000 shares of Common Stock to be issued in the Debenture Conversion and
the 11,400 shares of Common Stock previously issued in the acquisition of
Plymouth Cogeneration are not included in the Shelf Registration, however they
are available for sale in accordance with Rule 144. The Common Stock to be
issued in the Preferred Stock Conversion is subject to a nine month
restriction on resale subject to earlier waiver of such restriction by the
Representative in its sole discretion.

56
<PAGE>

UNDERWRITING

The Underwriters named herein, for whom Gaines, Berland Inc. is acting as
representative ("Representative"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase a total of 1,625,000
shares of Common Stock and 1,625,000 Warrants. The number of shares of Common
Stock and Warrants which each Underwriter has agreed to purchase is set forth
opposite its name:

<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
UNDERWRITER OF COMMON STOCK WARRANTS
----------- ---------------- ---------
<S> <C> <C>
Gaines, Berland Inc..................................
--------- ---------
Total.............................................. 1,625,000 1,625,000
========= =========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to approval of certain legal matters by counsel to the
Underwriters, the consummation of the Closing Transactions and various other
conditions precedent, and that the Underwriters are obligated to purchase all
the Securities offered hereby (other than the Securities covered by the over-
allotment option described below) if any are purchased.

The Representative has advised that the Underwriters propose to offer the
Securities to the public at the initial public offering prices set forth on
the cover page of this Prospectus and that they may allow to certain dealers a
concession not in excess of $ per share of Common Stock and $ per
Warrant, of which amount a sum not in excess of $ per share of Common Stock
and $ per Warrant may, in turn, be reallowed by such dealers to other
dealers.

The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price set forth on the cover page of this Prospectus,
less underwriting discounts and commissions, up to 243,750 additional shares
of Common Stock and/or an additional 243,750 Warrants for the sole purpose of
covering over-allotments, if any.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company also
has agreed to pay the Representative an expense allowance on a non-accountable
basis equal to 3% of the gross proceeds derived from the sale of the
Securities underwritten (including the sale of any Securities subject to the
Underwriters' over-allotment option), $50,000 of which has been paid to date.
The Company also has agreed to pay all expenses in connection with qualifying
the shares offered hereby for sale under the laws of such states as the
Representative may designate and filing this Offering with the NASD, including
fees and expenses of counsel retained for such purposes by the Underwriters,
and the costs of investigatory searches of the Company's executive officers.

In connection with the Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 162,500 shares of Common Stock and/or an aggregate of 162,500
Warrants (the "Representative's Purchase Option"). The Representative's
Purchase Option is exercisable at a price of $5.96 per share of Common Stock
and $.149 per Warrant for a period of four years commencing one year from the
date of this Prospectus. The Securities purchasable upon the exercise of the
Representative's Purchase Option are identical to those offered hereby. The
Representative's Purchase Option grants to the holders thereof certain
"piggyback" rights and one demand right for a period of seven and five years,
respectively, from the date of this Prospectus with respect to the
registration under the Securities Act of the securities directly and
indirectly issuable upon exercise of the Representative's Purchase Option. The

57
<PAGE>

Representative's Purchase Option cannot be transferred, sold, assigned or
hypothecated during the one year period following the date of this Prospectus,
except to officers of the Representative and to the Underwriters and selected
dealers and their officers or partners.

Prior to this Offering, there has been only a limited public market for the
Company's Common Stock, and no public market for the Warrants. Accordingly,
the offering price of the Securities and the terms of the Warrants included
therein have been arbitrarily determined by negotiation between the Company
and the Representative, and do not necessarily bear any relation to
established valuation criteria. Factors considered in determining such prices
and terms, in addition to prevailing market conditions and the market price of
the Common Stock immediately prior to the date of this Prospectus, include an
assessment of the prospects for the industry in which the Company competes,
the Company's management and the Company's capital structure.

Pursuant to the Underwriting Agreement, all of the Company's present
officers and directors and certain other stockholders of the Company, who own
of record in the aggregate 130,946 shares of Common Stock ("Principals"), have
entered into agreements with the Company and the Representative not to sell
such shares of Common Stock without the prior written consent of the
Representative other than in a private sale in which the transferee agrees to
be bound by the provisions of such agreement until thirteen months. Anchor has
agreed not to sell the 205,000 shares of Common Stock to be acquired by it in
the Preferred Stock Exchange without the consent of the Representative for a
period of 9 months following the date of this Prospectus, although such shares
are registered pursuant to the Shelf Registration. Similarly, Enviro has
agreed not to sell any of the 11% Preferred Stock or any of the 1,600,000
shares of Common Stock into which such Preferred Stock may be converted
without the consent of the Representative for a period of 9 months following
the date of the consummation of the Offering, although such shares are also
registered pursuant to the Shelf Registration. In addition, during the five
years following the date of the consummation of the Offering, the
Representative has the right to purchase for its account or sell for the
account of the Principals any securities sold by them pursuant to Rule 144
under the Act.

The Underwriting Agreement provides that, for a period of five years from
the date of this Prospectus, the Company will permit the Representative to
designate a nominee for election to the Board of Directors or to send an
individual to observe meetings of the Board of Directors. Such observer will
not be a member of the Board of Directors and will not be entitled to vote on
any matters before the Board but will be entitled to the same notices and
communications sent by the Company to its Directors and to be reimbursed for
his expenses in attending the meetings. No designation has been made as of the
date hereof.

The Company has engaged the Representative, on a non-exclusive basis, as its
agent for the solicitation of the exercise of the Warrants. Other NASD members
may be engaged by the Representative in its solicitation efforts. To the
extent not inconsistent with the guidelines of the NASD and the rules and
regulations of the Commission, the Company has agreed to pay the
Representative for bona fide services rendered a commission equal to 5% of the
exercise price for each Warrant exercised more than one year from the date of
this Prospectus if the exercise was solicited by the Representative. In
addition to soliciting, either orally or in writing, the exercise of the
Warrants, such services may also include disseminating information, either
orally or in writing, to warrantholders about the Company in the market for
the Company's securities, and assisting in the processing of the exercise of
the Warrants. No compensation will be paid to the Representative in connection
with the exercise of the Warrants if the market price of the underlying shares
of Common Stock is lower than the exercise price, the holder of the Warrants
has not confirmed in writing that the Representative solicited such exercise,
the Warrants are held in a discretionary account, the Warrants are exercised
in an unsolicited transaction or the arrangement to pay the commission is not
disclosed in the prospectus provided to warrantholders in connection with such
exercise. In addition, unless granted an exemption by the Commission from Rule
10b-6 under the Exchange Act, while it is soliciting exercise of Warrants, the
Representative will be prohibited from engaging in any market-making
activities or solicited brokerage activities with regard to the Company's
securities unless the Representative has waived its right to receive a fee for
the exercise of the Warrants.

58
<PAGE>

LEGAL MATTERS

The legality of the securities offered hereby will be passed upon for the
Company by the firm of Reid & Priest LLP, New York, New York. Graubard Mollen
& Miller, New York, New York, has served as counsel to the Underwriters in
connection with this Offering.

EXPERTS

The financial statements of the Company as at January 31, 1996 and for each
of the years in the two-year period then ended, appearing in the Prospectus,
have been audited by Richard A. Eisner & Company, LLP, independent auditors,
to the extent and for the years indicated in their report appearing elsewhere
herein and in the Registration Statement. Such financial statements have been
included in reliance upon such report and upon the authority of that firm as
experts in accounting and auditing.

The financial statements of Lehi Independent Power Associates, L.C. as of
December 31, 1995 and 1994 for the year then ended and the period January 24,
1994 (date of inception) through December 31, 1994, appearing in this
Prospectus, have been audited by Traveller Winn & Mower, PC, independent
auditors, to the extent and for the years indicated in their report appearing
elsewhere herein and in the Registration Statement. Such financial statements
have been included in reliance upon such report and upon the authority of that
firm as experts in accounting and auditing.

The financial statements of Far West Electric Energy Fund, L.P. as of
December 31, 1994 and 1995 and for the years then ended, appearing in this
Prospectus, have been audited by Robison, Hill & Co., PC, independent
auditors, to the extent and for the years indicated in their report appearing
elsewhere herein and in the Registration Statement. Such financial statements
have been included in reliance upon such report and upon the authority of that
firm as experts in accounting and auditing.

The financial statements of 1-A Enterprises as of December 31, 1994 and 1995
and for the two-year period then ended, appearing in this Prospectus, have
been audited by Robison, Hill & Co., PC, independent auditors, to the extent
and for the years indicated in their report appearing elsewhere herein and in
the Registration Statement. Such financial statements have been included in
reliance upon such report and upon the authority of that firm as experts in
accounting and auditing.

The financial statements of Plymouth Cogeneration Limited Partnership as of
December 31, 1994 and 1995 and for the year ended December 31, 1995, appearing
in this Prospectus, have been audited by Price Waterhouse LLP, independent
auditors, to the extent and for the years indicated in their report appearing
elsewhere herein and in the Registration Statement. Such financial statements
have been included in reliance upon such report and upon the authority of that
firm as experts in accounting and auditing.

59
<PAGE>

U.S. ENVIROSYSTEMS, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. ENERGY SYSTEMS, INC.
Report of Independent Auditor............................................. F-2
Consolidated Balance Sheet as at January 31, 1996 and July 31, 1996 (Unau-
dited)................................................................... F-3
Consolidated Statements of Operations for the years ended January 31, 1996
and January 31, 1995
and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-4
Consolidated Statements of Changes in Capital Deficiency for the years
ended January 31, 1996
and January 31, 1995 and for the Six Months ended July 31, 1996 and July
31, 1995 (Unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1996
and January 31, 1995
and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-6
Notes to Financial Statements............................................. F-7
FAR WEST ELECTRIC ENERGY FUND, L.P.
Independent Auditors' Report.............................................. F-16
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-17
Statements of Income, for the years ended December 31, 1995, 1994, and
1993
and the Six Months ended June 30, 1996................................... F-18
Statements of Partners' Capital, for the years ended December 31, 1995,
and 1994, and 1993
and the Six Months ended June 30, 1996................................... F-19
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and
1993
and the Six Months ended June 30, 1996................................... F-20
Notes to Financial Statements............................................. F-21
1-A ENTERPRISES
Independent Auditor's Report.............................................. F-29
Balance Sheet, December 31, 1995 and 1994 and June 30, 1996............... F-30
Statements of Income, for the years ended December 31, 1995 and 1994...... F-31
Statements of Partners' Capital, for the years ended December 31, 1995 and
1994
and the Six Months ended June 30, 1996................................... F-32
Statements of Cash Flows, for the years ended December 31, 1995 and 1994
and the Six Months ended June 30, 1996................................... F-33
Notes to Financial Statements December 31, 1995 and 1994 and the Six
Months ended June 30, 1996............................................... F-34
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
Report of Independent Auditors............................................ F-38
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-39
Statements of Operations for the year ended December 31, 1995, the Period
ended December 31, 1994 and the Six Months ended June 30, 1996........... F-40
Statement of Changes in Members' Equity for the year ended December 31,
1995,
the Period ended December 31, 1994 and the Six Months ended June 30,
1996..................................................................... F-41
Statements of Cash Flows for the year ended December 31, 1995, the Period
ended December 31, 1994 and the Six Months ended June 30, 1996........... F-42
Notes to Financial Statements............................................. F-43
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
Report of Independent Auditors............................................ F-45
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-46
Statement of Operations for the year ended December 31, 1995
and the Six Months ended June 30, 1996................................... F-47
Statement of Changes in Partners' Capital for the year ended December 31,
1995
and the Six Months ended June 30, 1996................................... F-48
Statement of Cash Flows for the year ended December 31, 1995
and the Six Months ended June 30, 1996................................... F-49
Notes to Financial Statements............................................. F-50
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
U.S. Energy Systems, Inc.
(formerly U.S. Envirosystems, Inc.)

We have audited the accompanying consolidated balance sheet of U.S. Energy
Systems, Inc. (formerly U.S. Envirosystems, Inc.) and subsidiaries as at
January 31, 1996 and the related consolidated statements of operations,
changes in capital deficiency and cash flows for each of the years in the two-
year period then ended. These statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of U.S.
Energy Systems, Inc. and subsidiaries at January 31, 1996, and the results of
its operations and its cash flows for each of the years in the two-year period
then ended in accordance with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has incurred significant losses and as at
January 31, 1996, has a working capital deficiency of approximately $1,910,000
and a capital deficiency of $2,729,000 which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note A. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Richard A. Eisner & Company, LLP

New York, New York
March 1, 1996

With respect to Note J[4]
May 6, 1996

With respect to Note A (change of name to U.S. Energy Systems, Inc.)
May 17, 1996

F-2
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
ASSETS 1996 1996
(NOTE G) ----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash.................................................. $ 2,000 $ 1,000
Other current assets.................................. 16,000 20,000
---------- ----------
Total current assets................................. 18,000 21,000
Investments in Joint Ventures--at equity:
Lehi Independent Power Associates, L.C. (Note C[1])... 1,170,000 1,112,000
Plymouth Cogeneration Limited Partnership (Note C[2]). 703,000 669,000
Other assets........................................... 103,000 274,000
---------- ----------
TOTAL................................................ $1,994,000 $2,076,000
========== ==========
LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities (in-
cluding due to related parties of $196,000 and
$707,000, respectively) (Notes D and L).............. $ 990,000 $1,663,000
Pre-reorganization income taxes payable and accrued
interest--
current (Note E)..................................... 172,000 192,000
Loans payable (Note G)................................ 766,000 960,000
---------- ----------
Total current liabilities............................ 1,928,000 2,815,000
Convertible subordinated secured debentures (including
due to related parties of $325,000) (Notes H and L)... 1,525,000 1,525,000
Notes payable (including due to related parties of
$775,000) (Notes I and L)............................. 965,000 975,000
Deferred interest (including due to related parties of
$12,000) (Notes H and L).............................. 114,000 114,000
Pre-reorganization income taxes payable and accrued in-
terest (Note E)....................................... 176,000 180,000
Advances from Joint Ventures (Note C[2])............... 15,000 24,000
---------- ----------
Total liabilities.................................... 4,723,000 5,633,000
---------- ----------
Commitments and contingencies (Note K)
CAPITAL DEFICIENCY
(NOTES A AND J)
Preferred stock, $.01 par value, authorized
5,000,000 shares; issued and outstanding 57,500
(liquidating preference $575,000)..................... 1,000 1,000
Common stock, $.01 par value, authorized
35,000,000 shares; issued and outstanding 439,650..... 4,000 4,000
Additional paid-in capital............................. 112,000 112,000
Accumulated deficit.................................... (2,846,000) (3,674,000)
---------- ----------
Total capital deficiency............................. (2,729,000) (3,557,000)
---------- ----------
TOTAL................................................ $1,994,000 $2,076,000
========== ==========
</TABLE>

The accompanying notes to financial statements are an integral part hereof.

F-3
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cost and expenses:
Operating expenses.......... $ 27,000 $ 109,000 $ $ 26,000
Administrative expenses..... 826,000 897,000 408,000 395,000
Interest expense............ 604,000 319,000 328,000 223,000
Loss from Joint Ventures.... 17,000 76,000 92,000 62,000
----------- ----------- --------- ---------
Total cost and expenses.... 1,474,000 1,401,000 828,000 706,000
----------- ----------- --------- ---------
(Loss) before extraordinary
item....................... (1,474,000) (1,401,000) (828,000) (706,000)
Extraordinary gain from re-
structuring of liabilities.. 83,000 85,000 83,000
----------- ----------- --------- ---------
Net (Loss)................... (1,391,000) $(1,316,000) (828,000) $(623,000)
=========== =========
Dividends on preferred stock. (21,000) (29,000)
----------- ---------
(Loss) applicable to common
stock....................... $(1,412,000) $(857,000)
=========== =========
(Loss) per share before ex-
traordinary item............ $ (3.41) $ (3.38) $ (1.95) $ (1.61)
=========== =========== ========= =========
Net (loss) per share......... $ (3.22) $ (3.17) $ (1.95) $ (1.42)
=========== =========== ========= =========
Weighted average shares out-
standing.................... 438,773 415,022 439,650 438,296
=========== =========== ========= =========
</TABLE>

The accompanying notes to financial statements are an integral part hereof.

F-4
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(NOTES A AND J)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- -------------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--January 31,
1994................... 391,250 $4,000 $(306,000) $ (139,000) $ (441,000)
Sale of common stock.... 32,000 139,000 139,000
Compensation
attributable to options
and warrants........... 48,000 48,000
Shares issued for inter-
est in Joint Ventures.. 11,400 114,000 114,000
Value assigned to
warrants issued in
connection with notes
payable................ 46,000 46,000
Net (loss) for the year
ended
January 31, 1995....... (1,316,000) (1,316,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--January 31,
1995................... 434,650 4,000 41,000 (1,455,000) (1,410,000)
Sale of common stock.... 5,000 34,000 34,000
Value assigned to
preferred stock issued
in connection with
loans payable.......... 57,500 $ 1,000 28,000 29,000
Value assigned to
additional warrants
issued in connection
with notes payable..... 9,000 9,000
Net (loss) for the year
ended
January 31, 1996....... (1,391,000) (1,391,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--January 31,
1996................... 57,500 1,000 439,650 4,000 112,000 (2,846,000) (2,729,000)
Net (loss) for the six
months ended
July 31, 1996.......... (828,000) (828,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--July 31, 1996
(Unaudited)............ 57,500 $ 1,000 439,650 $4,000 $ 112,000 $(3,674,000) $(3,557,000)
======= ======= ======= ====== ========= =========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part hereof.

F-5
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating ac-
tivities:
Net (loss).................. $(1,391,000) $(1,316,000) $(828,000) $(623,000)
Adjustments to reconcile net
(loss) to net cash (used
in) operating activities:
Amortization of debt dis-
count...................... 42,000 3,000 10,000 7,000
Amortization of purchase
price in excess of equity
in Joint Ventures.......... 59,000 55,000 26,000 28,000
Amortization of deferred fi-
nancing and registration
costs...................... 72,000 39,000 14,000
Value assigned to options
and warrants............... 48,000
Gain from restructuring of
liabilities................ (83,000) (85,000) (83,000)
Equity in (income)/loss of
Joint Ventures, net of dis-
tributions................. (13,000) 21,000 66,000 34,000
Loss from legal proceedings. 102,000
Deferred interest........... 114,000 61,000
Accrued interest on pre-re-
organization income taxes
payable.................... 39,000 24,000
Changes in operating assets
and liabilities:
(Increase) decrease in
other assets.............. 2,000 (1,000) (19,000) (11,000)
Increase in accounts pay-
able and accrued expenses. 671,000 146,000 673,000 134,000
----------- ----------- --------- ---------
Net cash (used in) operat-
ing activities............ (641,000) (874,000) (9,000) (439,000)
----------- ----------- --------- ---------
Cash flows from investing ac-
tivities:
Security deposit on proposed
acquisition................ (50,000)
Cost incurred in connection
with the Proposed Acquisi-
tions...................... (3,000)
Investment in Joint Ven-
tures...................... (636,000)
Advances to Joint Ventures.. (9,000) (11,000)
Loans (to) from officers.... (47,000)
Collections of loans receiv-
able--officer.............. 33,000 59,000
----------- ----------- --------- ---------
Net cash provided by (used
in) investing activities.. (29,000) (694,000) 59,000
----------- ----------- --------- ---------
Cash flows from financing ac-
tivities:
Proceeds from issuance of
convertible subordinated
debt....................... 400,000 25,000
Proceeds from issuance of
common stock............... 34,000 139,000 63,000
Proceeds from issuance of
notes payable.............. 25,000 975,000
Proceeds from loans payable
and preferred stocks....... 785,000 175,000 570,000
Payment of deferred financ-
ing costs.................. (102,000) (85,000)
Payment of pre-reorganiza-
tion payroll taxes payable. (34,000) (105,000) (109,000)
Payment of pre-reorganiza-
tion income taxes payable.. (9,000) (13,000) (11,000)
Advances from Joint Ven-
tures...................... 15,000 9,000 3,000
Deferred registration costs. (50,000) (176,000)
----------- ----------- --------- ---------
Net cash provided by fi-
nancing activities........ 664,000 1,396,000 8,000 456,000
----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN
CASH........................ (6,000) (172,000) (1,000) 76,000
Cash--beginning of the peri-
od.......................... 8,000 180,000 2,000 8,000
----------- ----------- --------- ---------
CASH--END OF THE PERIOD...... $ 2,000 $ 8,000 $ 1,000 $ 84,000
=========== =========== ========= =========
Supplemental disclosure of
cash flow information:
Cash paid for interest...... $ 93,000 $ 163,000 $ 154,000 $ 60,000
Supplemental schedule of
noncash investing activity:
Fair market value of common
stock issued and contrib-
uted to investment in Joint
Ventures................... $ 114,000
Supplemental schedule of
noncash financing activity:
Valuation of preferred stock
in connection with bridge
loan....................... $ 29,000
</TABLE>

The accompanying notes to financial statements are an integral part hereof.

F-6
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)

(NOTE A)--THE COMPANY:

U.S. Energy Systems, Inc. ("USE") and subsidiaries (collectively, the
"Company") are the successors to Cogenic Energy Systems, Inc. ("Cogenic").
Cogenic emerged from Chapter 11 Bankruptcy Proceedings on March 22, 1993. The
Plan of Reorganization, as amended, provided that Cogenic merge with Utilities
Systems Florida, Inc. ("USF") and change the name of the reorganized Cogenic
to U.S. Envirosystems, Inc.

On May 17, 1996, the Company amended its Certificate of Incorporation to
change the name of the Company to U.S. Energy Systems, Inc.

The Company is in the business of owning, developing and operating
cogeneration and independent power plants through Joint Ventures.

The Company has incurred significant losses since its reorganization in 1993
and, as at January 31, 1996 has a working capital deficiency of approximately
$1,910,000 and a capital deficiency of approximately $2,729,000. These factors
raise substantial doubt about its ability to continue as a going concern.
Management's plans for which it has letters of intent or agreements include
the following:

a) Obtain $3,500,000 through the sale of convertible preferred stock and
warrants.

b) Obtain net proceeds of approximately $5,425,000 through the sale of
1,625,000 shares of common stock and warrants in a public offering (the
"Proposed Public Offering").

c) Convert the existing preferred stock into 205,000 shares of common
stock.

d) Convert $500,000 of the existing Debentures into 125,000 shares of
common stock and warrants.

e) Acquire 50% interest in two operating geothermal power plants
("Steamboat 1 and 1A") for an aggregate of $5,400,000 in cash
consideration (the "Proposed Acquisitions").

f) Repay notes payable and other liabilities of approximately $2,139,000.

All of the above are dependent upon the successful completion of the
proposed public offering referred to in (b) above and to certain other
conditions including the completion of all of the above. There is no assurance
that the above plans can be accomplished. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.

The financial information presented as of July 31, 1996 and for the six-
month periods ended July 31, 1996 and July 31, 1995 is unaudited, but in the
opinion of management contains all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of such financial
information. Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.

(NOTE B)--SIGNIFICANT ACCOUNTING POLICIES:

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

[1]Consolidation:

The consolidated financial statements of the Company include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidated balance
sheet.

F-7
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)

[2]Investments in Joint Ventures:

Investments in Joint Ventures are accounted for under the equity method.
LIPA and Plymouth each have a fiscal year end December 31 which differs to the
fiscal year end of the Company. No material adjustment is necessary to
reconcile the December 31 year end to the Company's January 31 year end.

[3]Net (loss) per share:

Net (loss) per share is computed using the weighted average number of common
shares outstanding during the period and, when dilutive, common stock
equivalents.

[4]Recent pronouncements:

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company will adopt the disclosure requirements of SFAS 123 during
the Company's fiscal year ending January 31, 1997 but will continue to account
for its stock option plans under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" as permitted under FAS 123.

In addition, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 121 is also effective for the Company's fiscal year ending January 31,
1997. The Company believes adoption of SFAS No. 121 will not have a material
impact on its financial statements.

[5]Use of estimates:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

(NOTE C)--INVESTMENT IN JOINT VENTURES:

[1]Lehi Independent Power Associates, L.C.:

In January 1994, Lehi Envirosystems, Inc. ("LEHI"), a subsidiary of the
Company, purchased a 50% equity interest in a limited liability company called
Lehi Independent Power Associates, L.C. ("LIPA"), which wholly owns a
cogeneration project (the "Project") located in Lehi, Utah.

The operating agreement of LIPA provides for, among other matters, the
allocation of the net profits and net losses to the owners in proportion to
their ownership interest. The agreement also provides for additional
contributions totalling $875,000 to be shared by the owners in the event that
any modification, as defined, is required to bring the Project back to full
operational condition. LIPA terminates in January 2024, unless sooner
dissolved by certain conditions as set forth in the operating agreement.

During the two-year period ended January 31, 1996 and the six-month period
ended July 31, 1996, the Project was not in operation.

In the Proposed Acquisitions, Far West Capital Inc., the other 50% owner of
LIPA, will own 50% of Steamboats in the event the Proposed Acquisitions are
consummated.

F-8
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)

[2]Plymouth Cogeneration Limited Partnership ("PCLP"):

In November 1994, Plymouth Envirosystems, Inc. ("Plymouth"), a subsidiary of
the Company, acquired a 5% general partner interest and a 35% limited partner
interest in PCLP for cash contributions of $636,000.

The amended and restated agreement of limited partnership (the "Agreement")
provides for, among other matters, the allocation of net profits and net
losses in accordance with the respective ownership interests of the partners.
The terms, conditions and provisions of the Agreement expire in November 2024
or until its termination or dissolution in accordance with the provisions of
the Agreement.

The partnership is engaged in the business of owning and operating a
cogeneration facility designed, developed, and constructed for the production
of electricity and steam (the "Plymouth Project"). The management, supervision
and control of, and the determination of all matters relating to the ownership
and operation of the Plymouth Project and the operations of PCLP are delegated
to PSC, the managing partner.

In December 1994, Plymouth acquired a 36.4% limited partner ownership
interest in PSC, the managing partner of PCLP, for a contribution of 11,400
shares of the Company's common stock with a fair market value of approximately
$114,000. With this transaction, the Company's combined ownership interest in
PCLP is effectively 50%.

In November 1994, the Company entered into an agreement with IEC, a general
partner of PSC. The agreement provides for advances by IEC to the Company
equal to 50% of the development commissions, as defined, received by IEC from
PSC for a period of five years commencing in 1995. During the fiscal year
ended January 31, 1996, the Company received advances from IEC of $15,000. The
advances will be repaid by the Company from the proceeds of capital
distributions received from PSC. The Company is required to repay the advances
in five equal annual installments commencing July 1, 2004.

[3]At acquisition, LEHI's equity in the net assets of LIPA was approximately
$146,000 and Plymouth's equity in the net assets of PCLP was approximately
$668,000. The excess of purchase price over the underlying equities of LEHI
and Plymouth have been allocated to the plants of LIPA and PCLP, respectively,
and is being amortized over the remaining life of such assets. At January 31,
1996, the estimated remaining life of the plants is as follows:

<TABLE>
<S> <C>
LIPA--Buildings.......................... 28 years
Machinery and equipment............... 6 years
Plymouth--Plant.......................... 19 years
</TABLE>

F-9
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)

[4]The following is summarized financial information of LIPA and PCLP:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ----------------------
LIPA PCLP LIPA PCLP
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current Assets................. $ 158,000 $ 158,000 $ 122,000 $ 188,000
Property, plant and equipment
at cost (net)................. 257,000 5,593,000 251,000 5,450,000
Other assets................... 828,000 876,000
---------- ---------- ---------- ----------
Total assets................. 415,000 6,579,000 373,000 6,514,000
Current liabilities............ (9,000) (343,000) (35,000) (339,000)
Long-term debt................. (4,987,000) (4,990,000)
---------- ---------- ---------- ----------
Equity......................... $ 406,000 $1,249,000 $ 338,000 $1,185,000
========== ========== ========== ==========
Equity in Joint Ventures....... $ 203,000 $ 625,000 $ 169,000 $ 593,000
Investments in Joint Ventures
in excess of equity........... 967,000 78,000 943,000 76,000
---------- ---------- ---------- ----------
Total investments in Joint
Ventures.................... $1,170,000 $ 703,000 $1,112,000 $ 669,000
========== ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------------
LIPA PCLP LIPA PCLP
------------------ ---------- ------------------ ------------------
1995 1994 1995 1996 1995 1996 1995
-------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $1,150,000 $596,000 $570,000
========== ======== ========
Gain on sale of fixed
assets................. $236,000
========
Net income (loss)....... $172,000 $(41,000) $ (87,000) $(68,000) $(24,000) $(64,000) $(44,000)
======== ======== ========== ======== ======== ======== ========
Equity in net income
(loss)................. $ 86,000 $(21,000) $ (44,000) $(34,000) $(12,000) $(32,000) $(22,000)
Amortization of purchase
price over equity...... (55,000) (55,000) (4,000) (24,000) (28,000) (2,000)
-------- -------- ---------- -------- -------- -------- --------
Net income (loss) from
Joint Ventures......... $ 31,000 $(76,000) $ (48,000) $(58,000) $(40,000) $(34,000) $(22,000)
======== ======== ========== ======== ======== ======== ========
</TABLE>

Plymouth Project commenced operations on January 1, 1995.

(NOTE D)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accrued expenses and other current liabilities are comprised of the
following:

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- ----------
<S> <C> <C>
Professional fees.................................... $293,000 $ 501,000
Accrued interest..................................... 417,000 591,000
Accrued payroll and related taxes.................... 238,000 411,000
Other................................................ 42,000 160,000
-------- ----------
Total.............................................. $990,000 $1,663,000
======== ==========
</TABLE>

F-10
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(NOTE E)--PRE-REORGANIZATION INCOME TAXES PAYABLE:

Pursuant to the Plan of Reorganization of Cogenic, the pre-reorganization
income taxes payable were to be paid in full, plus interest at the rate set by
applicable statute, by making a payment of $110,000 upon the merger with USF
and by making equal monthly installments, commencing one year after the
merger, over a period not exceeding six years after the date of assessment of
such pre-reorganization income taxes payable. The $110,000 payment has not
been made since the effective date of the merger.

The remaining payments of pre-reorganization income taxes and accrued
interest are as follows:

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
1997.................................................... $172,000 $192,000
1998.................................................... 41,000 46,000
1999.................................................... 43,000 44,000
2000.................................................... 46,000 47,000
2001.................................................... 46,000 43,000
-------- --------
Total................................................. $348,000 $372,000
======== ========
</TABLE>

During the two-year period ended January 31, 1996, the Company reached
settlements with the tax authorities resulting in extraordinary gains from
restructuring of liabilities of $83,000 and $85,000 during the years ended
January 31, 1996 and January 31, 1995, respectively.

(NOTE F)--INCOME TAXES:

The deferred tax asset is as follows:

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- ----------
<S> <C> <C>
Benefit of post-reorganization operating loss
carryforward....................................... $801,000 $1,022,000
Expenses for financial reporting, not yet deductible
for taxes.......................................... 132,000 110,000
Valuation allowance................................. (933,000) (1,132,000)
-------- ----------
$-- 0 -- $ -- 0 --
======== ==========
</TABLE>

The Company has fully reserved against the deferred tax asset since the
likelihood of realization cannot be determined.

During the years ended January 31, 1996 and 1995, and the six-month period
ended July 31, 1996, the difference between the statutory tax rate of 34% and
the Company's effective tax rate of 0% is due to an increase in the valuation
allowance of $410,000, $503,000 and $199,000, respectively.

Prior to the reorganization, Cogenic had available a net operating loss
carryforward, which expires through 2008, of approximately $19,000,000 for tax
purposes and tax credit carryforwards of $216,000 expiring from 1997 to 2000.
Utilization of the acquired net operating loss and tax credit carryforwards
may be subject to limitations as a result of the reorganization, or in the
event of other significant changes in ownership. Accordingly, the Company has
not recognized the deferred tax asset attributable to the acquired net
operating loss and tax credit carryforwards.

F-11
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)

(NOTE G)--LOANS PAYABLE (THE "LOANS"):

Loans payable consist of the following:

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
18% loan, payable on the earlier of May 31, 1996 or
closing of the proposed
public offering, net of debt discount of $19,000 at
January 31, 1996
(effective rate 39.68%) (a)........................... $616,000 $660,000
10% loan, payable on the earlier of May 31, 1996 or
closing of the
proposed public offering (b).......................... 100,000 250,000
18% unsecured loan payable upon closing of the proposed
public offering....................................... 50,000 50,000
-------- --------
$766,000 $960,000
======== ========
</TABLE>

(a) Collateralized by first lien on all the assets of the Company and by
97,250 shares of the Company's common stock owned by officers.

(b) Collateralized by the Company's interest in LIPA and PCLP Joint
Ventures, subject to prior lien.

(NOTE H)--CONVERTIBLE SUBORDINATED SECURED DEBENTURES:

The Company's Convertible Subordinated Debentures (the "Debentures") bear
interest at 18% and are due on January 25, 2004. In addition to the interest
payments, the Debenture holders are entitled to 50% of the Company's share of
net profits (net of provision for the 18% interest on the Debentures) of LIPA
("Supplemental Participation"). The Debentures are collateralized by a
security interest in the outstanding shares of Lehi and are subject to
subordination to senior indebtedness. Commencing January 25, 1998, the Company
has the option to redeem the Debentures at 102, plus unpaid and accrued
interest and Supplemental Participation. Commencing January 25, 1996, each
Debenture may be converted at any time, at the option of the Debenture
holders, into the Company's common stock. Subject to certain adjustments, each
$1,000 principal amount of Debentures is initially convertible into 62 shares
of the Company's common stock. Commencing January 25, 1997, the Company will
have the right to convert all the then outstanding Debentures into common
stock at the then current conversion number if the market price, as defined,
of the common stock equals or exceeds $40.00 for more than twenty (20)
consecutive days prior to the date fixed for conversion by the Company.

In December 1994, the Company requested from its Debenture holders that one-
half of the 18% interest be deferred commencing with the December 25, 1994
interest payment until the earlier to occur of completion of new financing or
commencement of cash flow from LIPA (see Note C[1]). In the event of default,
the Debenture holders have the right to demand immediate payment of all or any
portion of the outstanding principal amount and any unpaid interest, if the
default is not remedied within 120 days after it has occurred. As of May 15,
1995, the Debenture holders have agreed to the terms of the partial deferment.
In connection with the 9% deferment, the Company increased the number of
shares that each Debenture can be converted into from 62 shares for each
$1,000 principal amount to 66 shares for each $1,000 principal amount.

At January 31, 1996 and July 31, 1996, the 9% interest deferred, included in
accrued expenses and other current liabilities, was $160,000 and $229,000,
respectively.

F-12
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)

(NOTE I)--NOTES PAYABLE:

In connection with the acquisition of PCLP (see Note C[2]), the Company
borrowed $1,000,000 from a group comprised principally of officers, directors
and affiliates of the Company. The interest on the Secured Promissory Notes
(the "Notes") is the prime rate plus 2.5% (11% at January 31, 1996 and 10.75%
at July 31, 1996) adjusted quarterly during the term of the Notes. The
interest on the Notes is payable quarterly but only to the extent that the net
after tax cash flow of Plymouth is sufficient to make such interest payment.
The Company has not paid interest on these Notes since the inception of the
Notes. At January 31, 1996 and July 31, 1996, the unpaid interest on these
Notes was $141,000 and $209,000, respectively, included in accrued expenses
and other current liabilities. The Notes are collateralized by the shares of
common stock of Plymouth. The Notes and unpaid interest, are to be paid on the
earlier of: (1) USE's receipt of not less than $1,000,000 in net proceeds from
the Company's next public offering of equity securities, or (2) USE's receipt
of an aggregate of not less than $4,000,000 in net proceeds from a private
debt financing of USE, or (3) October 31, 1997.

In conjunction with the issuance of these Notes, the Company granted to the
investors warrants to purchase 95,000 shares of the Company's common stock at
$16.00 per share before October 31, 1999. The Company, based on an independent
appraisal, valued the warrants issued at $46,000, which is being accounted for
as debt discount. In connection with the Company's Loans (Note G), the Company
was required to grant certain security interests in the Company's assets
including its ownership interest in Plymouth. In June 1995, in return for
granting the security interests, the Company granted the noteholders
additional warrants to purchase 19,000 shares of the Company's common stock
(the "Additional Warrants"). The Additional Warrants have the same terms as
those warrants initially granted to the noteholders. The Company, based on the
appraisal referred to above, valued the Additional Warrants issued at $9,500,
which is being accounted for as additional debt discount. In March 1996, as a
result of continuing negotiations between the parties that commenced when the
additional warrants were issued, the Company reduced the exercise price of the
warrants, including the additional warrants, from $16.00 per share to $5.00
per share. At that time, the market price of the Common Stock was $2.50 per
share. The effective interest rates at January 31, 1996 and January 31, 1995
are 13.60% and 10.72%, respectively.

(NOTE J)--STOCKHOLDERS' EQUITY:

[1]Preferred stock:

In June 1995, the Board of Directors designated 100,000 shares of preferred
stock as Series One Exchangeable and Convertible Preferred Stock ("Series One
Preferred Stock"). The holders of Series One Preferred Stock are entitled to
(i) convert to common stock equal to $10.00 per share of Series One Preferred
Stock divided by the conversion price, as defined, and subject to adjustments
for changes in capital stock, (ii) no voting rights except for certain
corporate actions, (iii) receive cumulative dividends equal to $1.00 per
share, (iv) liquidation preference of $10.00 per share plus any dividends
accrued and unpaid.

The Series One Preferred Stock is redeemable at the option of the Company at
a price of $10.00 per share, plus accrued and unpaid dividends, under certain
conditions, commencing the earlier of: (i) 3 years after the effective date of
the Proposed Public Offering or (ii) January 1, 1999. The Series One Preferred
Stock rank senior to all other equity securities of the Company including any
other series or classes of preferred stock with respect to dividend rights and
rights upon liquidation, winding up and dissolution.

In connection with the Company's Loans, the Company issued 57,500 shares of
Series One Preferred Stock which are convertible into 205,000 shares of common
stock. The Company estimated the fair value of these shares of Series One
Preferred Stock at approximately $29,000 and this amount is treated as a loan
discount which is being amortized over the life of the loan.

F-13
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)

In calculating the net income per share, the net income (loss) available for
common stockholders during the period the 57,500 shares of Series One
Preferred Stock are converted into 205,000 shares of common stock will be
reduced by a nonrecurring amount of approximately $791,000 which represents
the excess of the fair value of the common stock transferred to the holders of
the preferred stock over the carrying amount of the preferred stock.

[2]Stock options:

Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE EXPIRATION DATE
------- -------------- ---------------
(PER SHARE)
<S> <C> <C> <C>
Granted--year ended January 31, 1995. 20,100 $4.00 - $10.00 April 1999 -
January 2000
Granted--year ended January 31, 1996. 154,000 $4.00 - $ 8.00 January 2000 -
------- December 2000
Balance at January 31, 1996 and July
31, 1996
(174,100 exercisable at option
prices $4.00 to $10.00)............. 174,100
</TABLE>

During the year ended January 31, 1995 the Company recorded a compensation
charge of $46,000 in connection with the issuance of certain options in that
year.

[3]Common stock reserved:

The Company has reserved shares of common stock for issuance upon conversion
of the Debentures and exercise of warrants and options as follows:

(i) Convertible subordinated secured debentures (Note H)............ 100,000

(ii) Warrants issued in conjunction with notes payable (Note I)..... 114,000

(iii) Warrants issued in connection with consulting services.
Exercisable at $16.00 per share, expires October 31, 1999. In
connection therewith, the Company recorded a noncash charge
of $2,000, in 1995.............................................. 3,750

(iv) Stock options outstanding (Note J[2]).......................... 174,100

(v) Series One Preferred Stock (Note J[1]).......................... 205,000

In connection with the proposed transactions referred to in Note A, the
Company anticipates issuing warrants to purchase approximately 2,125,000
shares of common stock.

[4]Reorganization:

In February 1996, the shareholders approved a 1 for 40 reverse stock split,
effective May 6, 1996, which has been given retroactive effect in the
accompanying financial statements. All reference to shares and per share
amounts in the notes to financial statements have been adjusted to reflect the
reverse split.

(NOTE K)--COMMITMENTS AND CONTINGENCIES:

[1]The Company has employment agreements which expire through November 30,
1998 with two of its officers. The agreements provide for minimum annual
payments of $210,000 subject to upward adjustment at the discretion of the
Board of Directors.

F-14
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[2]In October 1995, the Company entered into a consulting agreement with one
of the members of its Board of Directors for an unspecified period. The
consulting agreement provides for a $5,000 monthly consulting fee. The term of
the consulting agreement is subject to the approval of the Board of Directors.

[3]USE International, L.L.C. ("USE International"):

In May 1995, the Company entered into a Joint Venture agreement to form a
limited liability company, USE International, L.L.C. ("USE International").
USE International is owned 50% by the Company and 50% by Indus, LLC ("Indus").
USE International is managed by Indus. In connection with the agreement, the
Company sold 2,500 shares of its common stock, at market price, to Indus and
issued options to purchase 16,250 shares of the Company's common stock with an
exercise price of $8.00 per share and expiring five years after date of
issuance. At the time of issuance, the options granted to Indus were deemed
immaterial. The agreement also provides for the issuance of options to
purchase up to an additional 25,000 shares of the Company's common stock at a
price per share of $8.00. These options will be granted to Indus upon the
signing of an initial transaction, as defined, by USE International.

The Company has agreed to pay Indus a consulting fee of $6,000 per month.
The consulting arrangement has an initial term of one year and expires in May
1996. The Company has also agreed to indemnify, defend and hold Indus harmless
from all claims, losses, causes of action, liabilities, costs and expenses
(including attorney's fees) which may arise in connection with the business of
USE International.

The Company accounts for the investment in USE International under the
equity method. USE International was inactive during the year ended January
31, 1996 and the six-month period ended July 31, 1996.

(NOTE L)--RELATED PARTY TRANSACTIONS:

The Company borrowed from officers and an affiliate of a director
(collectively, the "Related Parties") $325,000 under the Debentures and
$775,000 under the Notes. In connection with the Notes, an affiliate of a
director was granted warrants to purchase 78,000 shares of the Company's
common stock at $16.00 per share before October 31, 1999. Included in deferred
interest at January 31, 1996 and July 31, 1996 is $12,000 due to the Related
Parties. In addition, at January 31, 1996 and July 31, 1996, $196,000 and
$707,000, respectively, of accrued expenses and other current liabilities is
due to the Related Parties.

During the year ended January 31, 1996 and 1995 and the six months ended
July 31, 1996 and 1995, the Company paid interest of $15,000, $22,000, $13,000
and $17,000, respectively, to the Related Parties.

F-15
<PAGE>

INDEPENDENT AUDITOR'S REPORT

General Partner
Far West Electric Energy Fund, L.P.
Salt Lake City, Utah

We have audited the balance sheet of Far West Electric Energy Fund, L.P. as
of December 31, 1995 and 1994, and the related statements of income, partners'
capital and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Far West Electric Energy
Fund, L.P. as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.

Respectfully submitted,

/s/ Robison, Hill & Co.
------------------------------
Certified Public Accountants

Salt Lake City, Utah
February 29, 1996

F-16
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
JUNE 30,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Utility Plant:
Plant in Service....................... $15,999,000 $18,716,000 $15,999,000
Equipment.............................. 588,000 335,000 616,000
Construction in Progress............... 118,000 118,000 118,000
Accumulated Depreciation............... (5,377,000) (6,010,000) (5,697,000)
----------- ----------- -----------
Net Utility Plant..................... 11,328,000 13,159,000 11,036,000
Restricted Cash......................... 1,026,000 1,145,000 1,054,000
Other Assets............................ 106,000 124,000 97,000
Current Assets:
Cash and Cash Equivalents.............. 263,000 278,000 245,000
Receivables--Trade..................... 399,000 437,000 317,000
Receivables--Other..................... 6,000 6,000 0
Receivable--Related Party.............. 238,000 159,000 0
Prepaid Expenses....................... 4,000 12,000 27,000
----------- ----------- -----------
Total Current Assets.................. 910,000 892,000 589,000
----------- ----------- -----------
Total Assets.......................... $13,370,000 $15,320,000 $12,776,000
=========== =========== ===========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital:
Limited Partners--10,306 units......... $ 5,148,000 $ 4,868,000 $ 5,388,000
General Partner--1 Percent............. (8,000) (11,000) (6,000)
----------- ----------- -----------
Total Partners' Capital............... 5,140,000 4,857,000 $ 5,382,000
Other Liabilities....................... -- 150,000
Long-term Debt:
Notes Payable--Related Party........... 188,000 230,000 163,000
Notes Payable.......................... 537,000 -- 537,000
----------- ----------- -----------
Partners' Capital and Long-Term Liabili-
ties................................... 5,865,000 5,237,000 6,082,000
Current Liabilities:
Current Portion--Long-term Debt........ 4,563,000 7,140,000 4,139,000
Note Payable--Related Party............ 1,159,000 1,043,000 1,201,000
Payable-Related Party.................. 671,000 573,000 275,000
Accrued Liabilities
Operations............................. 402,000 495,000 317,000
Royalties.............................. 96,000 220,000 84,000
Interest............................... 614,000 612,000 678,000
----------- ----------- -----------
Total Current Liabilities............. 7,505,000 10,083,000 6,694,000
----------- ----------- -----------
Total Partners' Capital and Liabili-
ties................................. $13,370,000 $15,320,000 $12,776,000
=========== =========== ===========
</TABLE>

See accompanying notes to the financial statements.

F-17
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ------------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Electric Power Reve-
nues.................. $2,529,000 $2,728,000 $3,162,000 $1,509,000 $1,300,000
Other Revenues......... 145,000 151,000 622,000 68,000 66,000
---------- ---------- ---------- ---------- ----------
Total Revenues....... 2,674,000 2,879,000 3,784,000 1,577,000 1,366,000
---------- ---------- ---------- ---------- ----------
Expenses:
Operations............. 1,755,000 1,779,000 2,163,000 881,000 838,000
Bad Debt Expense....... -- -- 31,000 -- --
General and Administra-
tive:
Professional Services. 55,000 54,000 72,000 70,000 41,000
General Partners--Re-
lated Party.......... 98,000 123,000 223,000 54,000 82,000
---------- ---------- ---------- ---------- ----------
Total General and Ad-
ministrative........ 153,000 177,000 295,000 124,000 123,000
---------- ---------- ---------- ---------- ----------
Total Expenses....... 1,908,000 1,956,000 2,489,000 1,005,000 961,000
---------- ---------- ---------- ---------- ----------
Income From Opera-
tions............... 766,000 923,000 1,295,000 572,000 405,000
Other Income (Expense):
Interest Income........ 73,000 52,000 38,000 26,000 32,000
Interest Expense....... (744,000) (902,000) (806,000) (356,000) (781,000)
Loss on Sale of Proper-
ty.................... (170,000) -- -- -- (170,000)
---------- ---------- ---------- ---------- ----------
Net Other Expense.... (841,000) (850,000) (768,000) (330,000) (919,000)
---------- ---------- ---------- ---------- ----------
Net Income (Loss)
Before Extraordinary
Item............... (75,000) 73,000 527,000 242,000 (514,000)
Extraordinary Item--
Early Extinguishment
of Debt................ 358,000 -- 175,000 -- 358,000
---------- ---------- ---------- ---------- ----------
Net Income........... $ 283,000 $ 73,000 $ 702,000 $ 242,000 $ (156,000)
========== ========== ========== ========== ==========
Net Income Per Lim-
ited Partnership
Unit:
Income Before Ex-
traordinary Item... $ (7.28) $ 7.08 $ 51.14 $ 23.48 $ (49.87)
Extraordinary Item.. 34.74 -- 16.98 -- 34.74
---------- ---------- ---------- ---------- ----------
Net Income........... $ 27.46 $ 7.08 $ 68.12 $ 23.48 $ (15.14)
========== ========== ========== ========== ==========
</TABLE>

See accompanying notes to the financial statements.

F-18
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
GENERAL PARTNER LIMITED PARTNERS
------------------- -------------------
% INCOME NUMBER TOTAL
ALLOCATION AMOUNT OF UNITS AMOUNT AMOUNT
---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1992................... 1 $(18,573) 10,306 $4,100,573 $4,082,000
Net Income.............. -- 7,020 -- 694,980 702,000
--- -------- ------ ---------- ----------
Balances at December 31,
1993................... 1 (11,553) 10,306 4,795,553 4,784,000
Net Income.............. -- 730 -- 72,270 73,000
--- -------- ------ ---------- ----------
Balances at December 31,
1994................... 1 $(10,823) 10,306 4,867,823 4,857,000
Net Income.............. -- 2,830 -- 280,170 283,000
--- -------- ------ ---------- ----------
Balances at December 31,
1995................... 1 $ (7,993) 10,306 $5,147,993 $5,140,000
Net Income (Unaudited).. -- 2,420 -- 239,580 242,000
--- -------- ------ ---------- ----------
Balances at June 30,
1996 (Unaudited)....... 1 $ (5,573) 10,306 $5,387,573 $5,382,000
=== ======== ====== ========== ==========
</TABLE>

See accompanying notes to the financial statements.

F-19
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
1995 1994 1993 1996 1995
-------- -------- ---------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net Income (Loss)...... $283,000 $ 73,000 $ 702,000 $ 242,000 $ (156,000)
Adjustments to Net In-
come (Loss):
Depreciation and Amor-
tization.............. 613,000 661,000 716,000 329,000 313,000
Loss on Sale of Proper-
ty.................... 170,000 -- -- -- 170,000
Extraordinary Item--
Early Extinguishment
of Debt............... (358,000) -- (175,000) -- (358,000)
(Increase) Decrease in
Receivables........... (41,000) (124,000) (59,000) 87,000 95,000
(Increase) Decrease in
Prepaid Insurance..... (1,000) -- (9,000) (23,000) (16,000)
(Increase) Decrease in
Other Assets.......... 18,000 18,000 18,000 (28,000) 11,000
Accrued Income Re-
stricted Cash......... (63,000) (43,000) (31,000) -- (34,000)
Increase (Decrease) in
Accrued Liabilities... 41,000 120,000 (234,000) (33,000) 144,000
Increase (Decrease) in
Amount Due to
General Partner....... 98,000 100,000 214,000 (140,000) 216,000
-------- -------- ---------- ------------ -------------
Total Adjustments..... 477,000 732,000 440,000 192,000 541,000
-------- -------- ---------- ------------ -------------
Net Cash Provided by
Operating Activities.. 760,000 805,000 1,142,000 434,000 385,000
-------- -------- ---------- ------------ -------------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Cash Draws Restricted
Cash.................. 181,000 -- 207,000 -- 102,000
Transfers to Restricted
Cash.................. -- -- (205,000) -- --
Capital Expenditures... (253,000) (139,000) (222,000) (28,000) (174,000)
Disposal of Plant and
Equipment............. -- -- -- -- --
-------- -------- ---------- ------------ -------------
Net Cash Provided by
(Used) in Investing
Activities............. (72,000) (139,000) (220,000) (28,000) (72,000)
-------- -------- ---------- ------------ -------------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Principal Payments on
Long-Term Debt........ (815,000) (751,000) (1,109,000) (424,000) (345,000)
Proceeds From the Issu-
ance of Debt.......... 112,000 83,000 171,000 -- --
-------- -------- ---------- ------------ -------------
Net Cash Provided by
(Used) in Financing
Activities............ (703,000) (668,000) (938,000) (424,000) (345,000)
-------- -------- ---------- ------------ -------------
Increase (Decrease) in
Cash and Cash
Equivalents............ (15,000) (2,000) (16,000) (18,000) (32,000)
Cash and Cash Equiva-
lents at Beginning of
Period................. 278,000 280,000 296,000 263,000 278,000
-------- -------- ---------- ------------ -------------
Cash and Cash Equiva-
lents at End of Period. $263,000 $278,000 $ 280,000 $ 245,000 $ 246,000
======== ======== ========== ============ =============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash Paid During the
Period for Interest... $743,000 $727,000 $ 755,000 $ 79,000 $ 188,000
======== ======== ========== ============ =============
</TABLE>

NON-CASH ACTIVITIES:

The Partnership reduced a contract payable for the year ended December 31,
1993 by $13,000, and recognized income relating to option payments not made.

An extraordinary gain of $175,000 for the year ended December 31, 1993, was
recognized relating to the extinguishment and restructuring of debt and
accrued interest; see Note 4.

Notes payable and accrued interest were reduced and other income recognized
for the year ended December 31, 1993 in the amount of $424,000, relating to
offsets allowed under the performance guaranty on the Steamboat Springs
project; see Note 7.

The Partnership sold the Crystal Springs Project for $1,100,000 which was
paid directly to First Security Bank to pay down the note secured by the
Crystal Springs Project in accordance with the sales agreement dated February
28, 1995. In addition, the note referred to above was restructured as
described in Note 13. A net loss on the sale of $170,000 has been reported in
net income for December 31, 1995 as other income, and gain on early
extinguishment of debt of $358,000 has been reported as an extraordinary item
for December 31, 1995.

See accompanying notes to the financial statements.

F-20
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies are followed by Far West
Electric Energy Fund, L.P. in preparing and presenting the financial
statements, and are to assist the users in understanding the financial
statements.

ORGANIZATION

Far West electric Energy Fund L.P., a Delaware limited partnership (the
"Partnership"), was originally organized in September 1984 under the Uniform
Limited Partnership Act of Utah as Far West Hydroelectric Fund, Ltd. On
December 20, 1988, the Partnership changed its name to Far West Electric
Energy Fund, L.P. and changed its domicile to Delaware.

The Partnership owns a geothermal power plant, (the "Steamboat Springs
Plant") located in Nevada, and until March 16, 1995, owned a hydroelectric
plant located in Idaho (the "Crystal Springs Plant") which was sold to Crystal
Springs Hydroelectric, L.P., a Washington limited partnership pursuant to a
Purchase and Sale Agreement dated February 28, 1995.

UTILITY PLANT AND EQUIPMENT

Utility plants and equipment are carried at cost or adjusted cost (see Note
2). Fixed assets are depreciated over their estimated useful life (utility
plants--thirty years, equipment--five to ten years).

CASH EQUIVALENTS

For purposes of the statement of cash flows, the Partnership's policy is
that all investments with maturities of three months or less are considered
cash equivalents.

INCOME TAXES

No provision for income taxes has been made since the Partnership files
partnership return under provisions for federal and state tax laws. The assets
and liabilities of the Partnership for tax purposes are lower than the
financial statements for 1995 by $8,066,000 and $552,000; and for 1994 by
$11,154,000 and $2,208,000, respectively.

INCOME PER LIMITED PARTNERSHIP UNIT

The income per partnership unit on income before extraordinary item and on
net income is calculated on the weighted average units outstanding during the
year. The weighted average of units outstanding during 1995, 1994, and 1993
were 10,306.

RECLASSIFICATIONS

Certain amounts in 1994 and 1993 have been reclassified to conform with
financial statement presentations adopted in 1995.

UNAUDITED INTERIM PERIODS

The financial information presented as of June 30, 1996 and for the six-
month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of
Management contains all adjustments (consisting only of normal recurring
adjustments) necessary for a fair representation of such financial
information. Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.

F-21
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2--UTILITY PLANT

Plant in service consists of the following at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
ESTIMATED
1995 1994 USEFUL LIVES
----------- ----------- ------------
<S> <C> <C> <C>
Steamboat Springs Thermal Hydroelec-
tric Power Plant.................... $15,599,000 $15,599,000 30 Years
Expansion Pipeline................... 400,000 400,000 5 to 7 Years
Crystal Springs Hydroelectric Power
Plant............................... -- 4,738,000 30 Years
Valuation Allowance.................. -- (2,021,000)
----------- -----------
$15,999,000 $18,716,000
=========== ===========
</TABLE>

The valuation allowance relates to the Crystal Springs Hydroelectric Power
Project. The valuation allowance is a result of the rights to a purchase
option being waived and a decline in the value of the project.

NOTE 3--OTHER ASSETS

Other assets consist of the following at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Loan Origination Fees.................................... $183,000 $183,000
Organization Costs....................................... 65,000 65,000
Other Assets............................................. 35,000 35,000
Accumulated Amortization................................. (177,000) (159,000)
-------- --------
Total Other Assets..................................... $106,000 $124,000
======== ========
</TABLE>

The loan origination fees are being amortized on a straight-line basis over
the respective lives of the loans. Organization costs are amortized over a
five year period on a straight-line basis. Amortization was $18,000, $18,000,
$18,000 for the years ended December 31, 1995, 1994, and 1993, respectively.

NOTE 4--LONG-TERM DEBT--NOTES PAYABLE

Long-term debt as of December 31, 1995 and 1994 consists of the following:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Note Payable to Westinghouse Credit Corp. is in
default as of 10/23/92 and is immediately due and
payable. Note is secured by the Steamboat Springs
Project and all associated rights. Interest rate is
11.5%............................................... $4,563,000 $5,340,000
Note Payable to a bank was due and payable in full
originally on December 1, 1993, extended to
September 30, 1994 and has been modified due to the
sale of the Crystal Springs Project. The principal
amount owing after the modification is $537,000.
Interest is due in semiannual installments. With all
remaining principal and interest due 3/2/2000.
Interest rate is prime which was 8.75% at year end
(See Note 13--Sale of Crystal Springs Project)...... 537,000 1,800,000
---------- ----------
5,100,000 7,140,000
Less Current Installments Due........................ 4,563,000 7,140,000
---------- ----------
$ 537,000 $ --
========== ==========
</TABLE>

F-22
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER
31,
-----------
<S> <C>
1996......................................................... $ 4,563,000
1997......................................................... --
1998......................................................... --
1999......................................................... --
2000......................................................... 537,000
Thereafter................................................... --
-----------
$ 5,100,000
===========
</TABLE>

A note payable to Ormat, Inc. was extinguished in the amount of $175,000 in
December 1993. The extinguishment was a result of negotiations to settle
litigation on the performance guaranty. The principal note amount and related
accrued interest are shown as an extraordinary item in the statement of
operations for the year ended December 31, 1993.

During December 1992, a note payable to a bank was restructured resulting in
a reduction of principal amount, accrued interest, and a renegotiation of
terms. Interest payments relating to the reduced note were offset to accrued
interest payable. The total amount offset against accrued interest payable in
1994 was $26,000.

NOTE 5--RESTRICTED CASH

The Partnership is required to maintain an escrowed bank account as security
under the terms of the note payable to Westinghouse Credit Corp. with the note
payable balance as of December 31, 1995 of $4,563,000. The reserve account was
drawn down to $1,026,000 due to insufficient operating funds needed for plant
repairs of $188,000. The note is in default due to the reserve account being
drawn below required amounts. The reserve includes the initial deposit of
$1,000,000 and requires an additional $70,000 annually for the first seven
years, interest income is also retained in the reserve account. Disbursements
from the reserve account for principal and interest payments on the note are
allowed to the extent that there are insufficient funds in the Partnership's
operating accounts.

NOTE 6--NOTE PAYABLE-RELATED PARTY

The Partnership had notes payable to related parties for the years ended
December 31, 1995, and 1994 as follows:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Notes Payable to General Partner payable on demand,
unsecured. Interest rate is 13%...................... $1,117,000 $1,005,000
Note Payable to 1-A Enterprises, a partnership, due in
quarterly installments, including interest;
commencing April 16, 1990, remaining principal due
January 16, 2000; unsecured. Interest rate is 11%.... 230,000 268,000
---------- ----------
1,347,000 1,273,000
Less Current Installments Due......................... 1,159,000 1,043,000
---------- ----------
$ 188,000 $ 230,000
========== ==========
</TABLE>

F-23
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--PURCHASE AND OPERATING AGREEMENTS

Steamboat Springs Thermal Hydroelectric Power Plant (Steamboat Springs)

Under the terms of the Steamboat Springs purchase agreement (the Agreement),
the Partnership is required to pay royalties to non-affiliated parties
aggregating 14.05 percent of annual gross revenues for the life of the project
plus an annual lump sum of $50,000 for the first ten years. As of December 31,
1995 all royalty obligations were current. For the years ended December 31,
1995, 1994, and 1993, royalty expense related to these commitments is as
follows:

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Sierra Pacific Power Company (10%)................ $253,000 $257,000 $263,000
Benson Schwarzhoff & Helzel (3.888%).............. 98,000 99,000 102,000
Geothermal Development Associates ($50,000)....... 50,000 50,000 50,000
G. Martin Booth (.081%)........................... 2,000 2,000 2,000
Richard W. Harris (.081%)......................... 2,000 2,000 2,000
-------- -------- --------
Total............................................ $405,000 $410,000 $419,000
======== ======== ========
</TABLE>

As part of the Agreement, the original developer of Steamboat Springs (the
Developer) guaranteed annual net operating revenues, as defined (Net Operating
Revenues) of $2,000,000 for a period of ten years following the date of
commissioning, March 31, 1987 (the Guarantee). In 1993, the debt and related
performance guarantee with the original developer was extinguished. Pursuant
to the Guarantee and included in other revenues in the statements of income
for the years ended December 31, 1993, and 1992 are $424,000, and $387,000,
respectively. Pursuant to the contract and in accordance with FIN-39, amounts
due to the Partnership under the Guarantee are offset annually against a note
payable to the Developer, and the Bonneville corporation which subsequently
sold the project to the Partnership. The note payable to the developer and
Bonneville have been fully offset as of December 31, 1993. The following Table
summarizes these transactions:

<TABLE>
<CAPTION>
1993
----------
<S> <C>
Guaranteed Net Operating Revenues............................ $2,000,000
Net Operating Revenues....................................... 1,288,000
----------
Offset Available............................................. 712,000
Gross Debt Subject to Offset................................. 424,000
----------
Debt to be Offset in Future.................................. $ --
==========
</TABLE>

The Partnership is also required to pay the Developer annual royalties equal
to 50 percent of the first $100,000 over the guaranteed Net Operating Revenues
and 75 percent of amounts in excess of the $100,000 each year for the first
ten years following the date of commissioning. For years 11 through 20 after
commissioning, the royalty equals 30 percent of Net Operating Revenues;
principal debt service payments incurred to finance construction or operations
are not deducted in determining the revised net operating revenues (Revised
Net Operating Revenues). For years 21 inclusive and thereafter, the royalty is
equal to 50 percent of Revised Net Operating Revenues. As revenues have not
exceeded the guaranteed net operating revenues, no royalties have been earned
and no royalties have been paid pursuant with this commitment.

NOTE 8--RELATED PARTY TRANSACTIONS

Under the terms of the Partnership agreement, the general partner (Far West
Capital, Inc.) is allowed various fees and reimbursements of expenses incurred
to manage the Partnership. For each of the years in the three-year

F-24
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
period ended December 31, 1995, the Partnership expensed the following amounts
as cost reimbursements to the general partner:

<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
General and Administrative Expenses............... $98,000 $123,000 $223,000
</TABLE>

In addition, during the year ended December 31, 1993, the Partnership paid
$3,300 to a Utah partnership for private air transportation, in the ordinary
course of business, in lieu of commercial airfare. The general partners are
partners of the Utah Partnership.

As a term of the amended and restated Partnership agreement, the General
Partner is entitled to 5 percent of the limited partnership units (Units) as
compensation. Limited Partnership units for each of the three-year period
ended December 31, 1995 are as follows:

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
General Partner......................................... 530 530 530
Limited Partners........................................ 9,776 9,776 9,776
------ ------ ------
Total................................................. 10,306 10,306 10,306
====== ====== ======
</TABLE>

During 1988, the Partnership assigned its rights to build an expansion unit
to Steamboat Springs to a Nevada general partnership owned mostly by Alan O.
Melchior and Thomas A. Quinn, officers and owners of the General Partner of
the Partnership. As consideration for the rights, the Nevada general
partnership deeded the Partnership rights and title to piping and valves
installed from Steamboat Springs to the expansion unit and agreed to pay the
Partnership royalties equaling 10 percent of net operating income from the
expansion for the years ended December 31, 1988 through 1992, 15 percent for
1993 through 1998, 40 percent for 1999 through 2010, 45 percent thereafter,
and an annual pumping charge. Included in other revenues in the statement of
operations for the years ended December 31, 1995, 1994 and 1993, are $145,000,
$144,000 and $135,000, respectively related to this agreement. As of December
31, 1994 and 1993, two of the general partners held a 75 percent ownership in
the Nevada general partnership.

During 1991, the Partnership assigned its 77% ownership in SB Geo, Inc. a
Utah Corporation, to Alan O. Melchior and Thomas A. Quinn, two of the officers
and owners of the General Partner of the Partnership. SB Geo, Inc. operates
the Partnership's Steamboat Springs Thermal Hydroelectric Power Plant and a
related expansion unit. At the time of the transfer, SB Geo, Inc. had no
assets and operated on a cost reimbursement basis. No gain or loss was
recognized as a result of the assignment.

NOTE 9--MAJOR CUSTOMER

The Partnership has contracted with Sierra Pacific Power Company to sell
electric energy from Steamboat Springs for a term of 20 years. The contract
entitles the Partnership to a rate of 71.7 mills per kilowatt hour for the
first 10 years and a variable amount related to the short-term cost of power
to Sierra Pacific Power Company for the second 10 years. Sales to Sierra
Pacific Power Company account for 100 percent of electric power sales. The
Partnership is dependent upon this customer for the purchase of all
electricity generated from this power plant.

F-25
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--LITIGATION

ORMAT ARBITRATION

The arbitrators during 1993 made their award regarding the lawsuit against
Ormat alleging breach of contract on the Steamboat Springs project and Ormat's
counter-suit regarding the cancellation of the operating agreement. The
Partnership was awarded $188,000 in damages including a portion of previously
restricted cash. Ormat was awarded $255,000 for past fixed operating fees of
which the majority had been held in an escrow account.

Subsequent to the arbitrators award the Partnership and Ormat reached an
additional agreement which cancels the note payable to Ormat which was
previously offset by the performance guaranty.

BONNEVILLE PACIFIC CORPORATION BANKRUPTCY

The Partnership has filed a claim in the Chapter 11 filing of Bonneville
Pacific Corporation. The claim relates to fraud claims and other transactions
on the Crystal Springs project.

This claim is a general unsecured claim; it is unliquidated and contingent,
meaning that the amount of the claim has yet to be fixed in the bankruptcy
forum. It is estimated that the claim is no more than $100,000.00. There is no
economy for the partnership in attempting to resolve the amount of the claim
at this juncture, without certainty that Bonneville Pacific Corporation will
succeed in confirming a plan of reorganization, since general unsecured claims
cannot receive payment absent confirmation of a plan of reorganization. If and
when a plan of reorganization is confirmed, it is expected that, post-
confirmation, there will be a claims liquidation and resolution process,
during which the claim of the partnership will be fixed by the bankruptcy
court. The Chapter 11 reorganization proceeding of the Bonneville Pacific
Corporation has been ongoing for some years. It is a large and complex
proceeding. The success of the reorganization effort will turn in major part
upon complex litigation which the trustee in the case, Roger Segal, has
commenced against various parties in interest. Counsel for Mr. Segal, Vernon
Hopkinson, estimates at the present time that this litigation may be concluded
and a plan of reorganization proposed no earlier than year-end, 1997. As noted
above, payment on account of general unsecured claims cannot occur unless and
until a plan of reorganization is confirmed by the bankruptcy court. Mr.
Hopkinson estimates at the present time that the size of the dividend to
general unsecured creditors could be anywhere from 20 percent to payment in
full, depending upon the outcome of the aforementioned litigation.

NEVADA DEPARTMENT OF TRANSPORTATION

The Department of Transportation of the State of Nevada ("NDOT") commenced
action on 12/10/93 in the Second Judicial District Court of the State of
nevada in and for the County of Washoe against the Partnership and others to
obtain, for highway purposes, ownership of approximately 2.79 acres of the
property owned by Sierra Pacific Power Company ("SPPC") at the extreme north
of the land upon which the Steamboat Springs Plant is located pursuant to the
SPPC lease. The Court entered an Order for occupancy of the condemned property
on 12/29/93. The NDOT deposited the sum of $273,500 on 12/29/93; which remains
on deposit as of 12/31/95. The Partnership is defending the action insofar as
is necessary to protect a stand-by injection well located on the lease in the
proximity of the land being taken and a monitoring well in an adjacent area
which is being taken. It is presently negotiating a settlement which will
leave the stand-by injection well and the Partnership's rights in and use
thereof intact and available. The Partnership has constructed a new monitoring
well and is attempting to recover the cost thereof from the State. The
Partnership has an agreement in principle with the State relative to this
reimbursement, the cost of which is approximately $5,000. That sum will likely
be disbursed in May or June of 1996. The Partnership is also attempting to
obtain a portion of the $273,500

F-26
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
offered and deposited into Court by NDOT on 12/29/93 as compensation for the
taking. SPPC is claiming all of such funds as the owner of the land. The Court
has granted NDOT the right to possess and occupy the property while the amount
of compensation to be finally awarded is being contested. WCC, the
Partnership's principal creditor, has claimed that under the financing
agreements with respect to the Steamboat Springs and 1-A Plants, all funds
recovered from NDOT must be applied to reduce the principal balance of the
loans outstanding. The funds will not likely be disbursed until the fourth
quarter of 1996 or the first quarter of 1997, unless the Partnership, SPPC,
and WCC reach some settlement before that time.

NOTE 11--NOTE DEFAULTS

Due to insufficient funds being in restricted cash, the Partnership received
a notice of default as of 10/23/92 on a note to Westinghouse Credit Corp. The
balance as of December 31, 1995 and 1994 was $4,563,000 and $5,340,000,
respectively. Under the terms of the note all principal and interest is
immediately due and payable. The note is secured by the Steamboat Springs
project and related revenues and other assets.

The Partnership was in default on a note payable to a bank as of 9/30/94.
The balance as of December 31, 1994 and 1993 was $1,800,000. Due to the sale
of the Crystal Springs Project subsequent to December 31, 1994, this note has
been reduced to $537,000 (see Note 13) and is no longer in default.

NOTE 12--LIQUIDITY

As shown in the accompanying financial statements for the year ended
December 31, 1995, current liabilities exceeded current assets by $6,595,000.
Of this amount $4,563,000 relates to the note defaults described in Note 11.

NOTE 13--SALE OF CRYSTAL SPRINGS PROJECT

The Partnership signed an agreement dated February 28, 1995 to sell the
Crystal Springs project. The sale included all the assets and liabilities
associated with the Crystal Springs Project except the note payable to First
Security Bank which has been modified as follows:

Upon receipt of First Security (Lender) of a principal payment on the loan
in the amount of $1,100,000, the note was modified to provide that the
remaining principal balance owed shall be $537,000 and interest and costs
on the loan shall be deemed current.

If the note is paid in full within two years after the payment of
$1,100,000, the Lender will discount the principal amount owing by $100,000
(requiring a principal payment of only $437,000), and if paid within three
years, the Lender will discount the amount of the principal due by $50,000
(requiring a principal payment of only $487,000). There will be no discount
if paid after the third anniversary.

The modification has resulted in a gain on early extinguishment of debt of
$358,000.

The net loss on sale of the Crystal Springs Project of $170,000 has been
reported on the Statement of Income for the year ended December 31, 1995 as
Other Income.

At February 28, 1995, no amount was due on the $50,000 line of credit
acquired in 1992 for use in repair of certain items of equipment for the
Crystal springs Plant for start up operations in 1993.

F-27
<PAGE>

FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following pro forma statement of operations give effect to the above
events as if they had occurred on January 1, 1995:

PRO FORMA STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PRO FORMA
AS REPORTED IN ADJUSTMENTS PRO FORMA
ACCOMPANYING FOR STATEMENT
FINANCIAL SUBSEQUENT OF
STATEMENTS EVENTS OPERATIONS
-------------- ----------- ----------
<S> <C> <C> <C>
REVENUES
Electric Power Sales................. $2,529,000 $ -- $2,529,000
Other Revenues....................... 145,000 -- 145,000
---------- ------- ----------
Total Revenues...................... 2,674,000 -- 2,674,000
---------- ------- ----------
EXPENSES
Interest, Net........................ 671,000 (16,000) (A) 655,000
Depreciation......................... 613,000 -- 613,000
Royalty.............................. 405,000 -- 405,000
Professional Services................ 54,000 (4,000) (A) 50,000
Administrative Services--General
Partner............................. 98,000 (38,000) (A) 60,000
Amortization......................... 18,000 -- 18,000
Insurance............................ 47,000 -- 47,000
Maintenance.......................... 583,000 (5,000) (A) 578,000
Taxes................................ 31,000 -- 31,000
Other................................ 59,000 (1,000) (A) 58,000
---------- ------- ----------
Total Expenses...................... 2,579,000 (64,000) 2,515,000
---------- ------- ----------
Net Income (Loss)................... $ 95,000 $64,000 $ 159,000
---------- ------- ----------
Net Income (Loss) Per Limited Part-
nership Unit....................... $ 9.22 $ 6.21 $ 15.43
========== ======= ==========
</TABLE>

A--Operating expenses attributable to Crystal Springs Project.

B--Accrued interest and expenses from January 1, 1995 through date of sale of
Crystal Springs Project.

NONRECURRING TRANSACTIONS

The same of the Crystal Springs Project has resulted in a loss of $170,000
and a gain on early extinguishment of debt of $358,000. These amounts are
reported in the statement of Income for December 31, 1995.

NOTE 14--SUBSEQUENT EVENTS

STEAMBOAT SPRINGS PROJECT

The Fund has received a cash offer to sell substantially all of the assets
of the Fund to U.S. Envirosystems, Inc. for $1,250,000. The sale would result
in the termination of the Fund and distribution of the proceeds to limited
partners of approximately $33 per limited partnership unit.

F-28
<PAGE>

INDEPENDENT AUDITOR'S REPORT

Partners
1-A Enterprises
Salt Lake City, Utah

We have audited the balance sheet of 1-A Enterprises as of December 31, 1995
and 1994, and the related statements of income, partners' capital and cash
flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 1-A Enterprises as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

Respectfully submitted,

/s/ Robison, Hill & Co.
------------------------------
Certified Public Accountants

Salt Lake City, Utah
March 5, 1996

F-29
<PAGE>

1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
JUNE 30,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Utility Plant:
Plant..................................... $2,431,222 $2,431,222 $2,431,222
Development Costs......................... 450,000 450,000 450,000
Accumulated Depreciation.................. (676,289) (580,248) (724,310)
---------- ---------- ----------
Net Utility Plant....................... 2,204,933 2,300,974 2,156,912
Restricted Assets:
Cash...................................... 80,626 76,157 82,781
Certificate of Deposit.................... 73,189 70,000 76,159
---------- ---------- ----------
Total Restricted Assets................. 153,815 146,157 158,940
Other Assets:.............................. 32,145 40,181 28,127
Current Assets:
Cash and Cash Equivalents................. 80,428 98,642 79,190
Receivables--Trade........................ 98,539 98,600 130,620
Receivables--Other........................ 7,139 6,358 4,904
Receivable--Related Party................. 229,810 267,705 209,226
Prepaid Expenses.......................... 1,679 1,348 6,661
---------- ---------- ----------
Total Current Assets.................... 417,595 472,653 430,601
---------- ---------- ----------
Total Assets............................ $2,808,488 $2,959,965 $2,774,580
========== ========== ==========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital.......................... $ (293,083) $ (464,613) $ 22,105
Current Liabilities:
Note Payable--See Note 4.................. 1,670,995 1,960,732 1,513,617
Note Payable--Related Party............... 728,970 728,970 503,970
Payable--Related Party.................... 358,574 435,193 381,153
Accrued Liabilities:
Operations............................... 3,120 5,767 7,348
Royalties................................ 302,315 249,799 313,277
Interest................................. 37,597 44,117 33,110
---------- ---------- ----------
Total Current Liabilities............... 3,101,571 3,424,578 2,752,475
---------- ---------- ----------
Total Partners' Capital and Liabilities. $2,808,488 $2,959,965 $2,774,580
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-30
<PAGE>

1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS,
DECEMBER 31, ENDED JUNE 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Electric Power Revenues............ $875,356 $798,722 $410,427 $404,800
-------- -------- -------- --------
EXPENSES:
Operations......................... 536,756 545,336 249,908 252,875
General and Administrative:
Professional Services............. -- 1,481 -- --
Related party..................... 14,500 14,500 -- --
-------- -------- -------- --------
Total Expenses................... 551,256 561,317 249,908 252,875
-------- -------- -------- --------
Income From Operations........... 324,100 237,405 160,519 151,925
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Income.................... 41,037 38,315 17,047 7,017
Interest Expense................... (202,477) (233,513) (87,554) (94,469)
-------- -------- -------- --------
Net other Expense................. (161,440) (195,198) (70,507) (87,452)
-------- -------- -------- --------
Net Income........................ $162,660 $ 42,207 $ 90,012 $ 64,473
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-31
<PAGE>

1-A ENTERPRISES

A NEVADA GENERAL PARTNERSHIP

STATEMENT OF PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994

AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)

<TABLE>
<S> <C>
Balances at December 31, 1993....................................... $(510,835)
Contributions....................................................... 4,015
Net Income.......................................................... 42,207
---------
Balances at December 31, 1994....................................... (464,613)
Contributions....................................................... 8,870
Net Income.......................................................... 162,660
---------
Balances at December 31, 1995....................................... (293,083)
Contributions (Unaudited)........................................... 225,176
Net Income (Unaudited).............................................. 90,012
---------
Balances at June 30, 1996 (Unaudited)............................... $ 22,105
=========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-32
<PAGE>

1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP

STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net Income (Loss).................. $162,660 $ 42,207 $ 90,012 $ 64,473
-------- -------- -------- --------
Adjustments to Net Income (Loss):
Depreciation and Amortization..... 104,078 104,078 52,039 52,039
(Increase) Decrease in Receiv-
ables............................ (721) (18,339) (29,846) (17,586)
(Increase) Decrease in Prepaid In-
surance.......................... (331) (678) (4,982) (5,368)
Accrued Interest Income Restricted
Assets........................... (7,658) (2,859) (5,125) (2,193)
Increase (Decrease) in Accrued Li-
abilities........................ 43,349 48,764 10,703 (1,658)
Increase (Decrease) in Amount Due
to Related Party................. (76,619) 147,519 (202,421) 10,997
-------- -------- -------- --------
Total Adjustments................ 62,098 278,486 (179,632) 36,231
-------- -------- -------- --------
Net Cash Provided by Operating Ac-
tivities......................... 224,758 320,693 (89,620) 100,704
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Principle Payments From Note Re-
ceivable Related Party........... 37,895 33,916 20,584 18,422
Investment in Certificate of De-
posit--Restricted................ -- (70,000) -- --
-------- -------- -------- --------
Net Cash Provided by (Used) in In-
vesting Activities............... 37,895 (36,084) 20,584 18,422
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Principal payments on Long-term
Debt.............................. (289,737) (259,310) (157,378) (140,851)
Proceeds from Partner Contribu-
tions............................. 8,870 4,015 225,176 4,191
-------- -------- -------- --------
Net Cash Provided by (Used) in Fi-
nancing Activities................ (280,867) (255,295) 67,798 (136,660)
-------- -------- -------- --------
Increase (Decrease) in Cash and
Cash Equivalents.................. (18,214) 29,314 (1,238) (17,534)
Cash and Cash Equivalents at Begin-
ning of Year...................... 98,642 69,328 80,428 98,642
-------- -------- -------- --------
Cash and Cash Equivalents at End of
Year.............................. $ 80,428 $ 98,642 $ 79,190 $ 81,108
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During the Year for In-
terest............................ $208,997 $239,346 $ 92,041 $ 64,469
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-33
<PAGE>

1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies are followed by 1-A
Enterprises in preparing and presenting the financial statements, and are to
assist the users in understanding the financial statements.

ORGANIZATION

1-A Enterprises, a Nevada General partnership (the Partnership) was
organized in 1988 to acquire and operate electric generating plants.

UTILITY PLANT AND DEVELOPMENT COSTS

Utility plant and Development costs are carried at cost. Fixed assets are
depreciated over their estimated useful life (thirty years).

CASH EQUIVALENTS

For purposes of the statement of cash flows, the Partnership's policy is
that all investments with maturities of three months or less are considered
cash equivalents.

INCOME TAXES

No provision for income taxes has been made since the Partnership files
partnership return under provisions for federal and state tax laws. The assets
of the Partnership for tax purposes are lower than the financial statements
for 1995 and 1994 by $2,204,933 and $2,300,974 respectively.

UNAUDITED INTERIM PERIODS

NOTE 2--RECEIVABLE RELATED PARTY

The Partnership had a note receivable from a related party for the year
ended December 31, 1995 and 1994 as follows:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Note Receivable From Far West Electric Energy Fund, L.P.,
a Delaware Limited partnership, due in quarterly
installments, including interest; commencing April 16,
1990, remaining principle due January 16, 2000;
unsecured. Interest rate is 11%......................... $229,810 $267,705
======== ========
</TABLE>

NOTE 3--OTHER ASSETS

Other assets consist of the following at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Loan Origination Fees.................................... $ 80,363 $ 80,363
Accumulated Amortization................................. (48,218) (40,182)
-------- --------
Total Other Assets....................................... $ 32,145 $ 40,181
======== ========
</TABLE>

The loan origination fees are being amortized on a straight-line basis over
the life of the loan (ten years). Amortization was $8,036 and $8,036 for the
years ended December 31, 1995 and 1994, respectively.

F-34
<PAGE>

1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994

NOTE 4--LONG-TERM DEBT

Long-term debt as of December 31, 1995 and 1994 consists of the following:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Note Payable to a corporation is payable in quar-
terly installments, including interest, beginning
January 20, 1990. Note is secured by the Steamboat
1-A Project and all associated rights. Interest
rate is 11.25%..................................... $1,670,995 $1,960,732
Less Current Installments Due....................... 1,670,995 1,960,732
---------- ----------
$ -- $ --
========== ==========
</TABLE>

The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996........................................................ $1,670,995
1997........................................................ --
1998........................................................ --
1999........................................................ --
2000........................................................ --
Thereafter.................................................. --
----------
$1,670,995
==========
</TABLE>

NOTE 5--NOTE PAYABLE-RELATED PARTY

The Partnership had notes payable to related parties for the years ended
December 31, 1995 and 1994, as follows:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Notes Payable to Far West Capital* payable on demand,
unsecured.
No interest accrued to date.............................. $728,970 $728,970
Less Current Installments Due............................. 728,970 728,970
-------- --------
$ -- $ --
======== ========
</TABLE>

*Two of the general partners of the Company are majority owners of Far West
Capital, Inc.

F-35
<PAGE>

1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994

NOTE 6--PURCHASE AND OPERATING AGREEMENTS

Under the terms of the amended purchase agreement (the Agreement), the
Partnership is required to pay royalties aggregating 29.05 percent of annual
gross revenues. For the years ended December 31, 1995, and 1994, royalty
expense related to these commitments is as follows:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Sierra Pacific Power Company (10%)........................ $ 87,536 $ 79,872
Benson Schwarzhoff & Helzel (3.888%)...................... 34,034 31,054
Far West Electrical Energy Fund, L.P.(15%)................ 86,904 86,654
G. Martin Booth (.081%)................................... 709 647
Richard W. Harris (.081%)................................. 709 647
-------- --------
Total.................................................... $209,892 $198,874
======== ========
</TABLE>

NOTE 7--RESTRICTED ASSETS

The Partnership is required to maintain an escrowed bank account as security
under the terms of the note payable to a corporation with the notepayable
balance as of December 31, 1995 and 1994 of $1,670,995 and $1,960,732
respectively. The reserve required an initial deposit of $150,000 plus
interest income to be maintained in the account. The reserve was drawn down
due to insufficient operating funds to meet obligations. The balance in the
reserve as of December 31, 1995 and 1994 is $80,626 and $76,157 respectively.
Disbursements from the reserve account for obligations are allowed to the
extent that there are insufficient funds in the Partnership's operating
accounts. Funds are to be deposited into the reserve account as necessary to
replenish any disbursements for obligations as provided above. The note is in
default due to the reserve account being drawn down below required amounts.

The Company is required to pay a 10% royalty to Sierra Pacific Power Company
(SPPC). Under the agreement with SPPC, 4% is paid and 6% is accrued during the
first 6 years of operation. The date of initial operation was 10/29/88. During
the seventh and eighth years, the amount paid increases to 6% and 8% while the
amount accrued decreases to 4% and 2%, respectively. Beginning in years nine
through thirty, the full 10% is paid with no accrual. The accumulation of
accrued royalties pursuant to this agreement shall be paid in the eleventh
year of operation plus interest accrued monthly at an annual rate of 11.9%.
The Partnership is required to maintain an irrevocable letter of credit for
the benefit of SPPC in the amount of $70,000. The provisions of the letter of
credit provide that in the event of default by the Company, SPPC shall have
the right to draw upon the letter of credit to satisfy any amounts or portions
os such amounts owed to SPPC for the eleventh year payment amount and interest
accrued as of the date of default. The $70,000 has been invested by the
company in a certificate of deposit which had a balance of $73,189 and $70,000
as of December 31, 1995 and 1994, respectively.

NOTE 8--RELATED PARTY TRANSACTIONS

Amounts have been accrued for various fees and reimbursements of expenses
incurred by an affiliated company to manage the Partnership. For each of the
years in the two-year period ended December 31, 1995, the Partnership expensed
the following amounts as cost reimbursements to the affiliated company:

<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
General and Administrative Expenses......................... $14,500 $14,500
</TABLE>

F-36
<PAGE>

1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994

During 1988, Far West Electric Energy Fund, L.P. assigned their rights to
build an expansion unit to Steamboat Springs to 1-A Enterprises. As
consideration for the rights, 1-A Enterprises deeded Far West Electric Energy
Fund, L.P., rights and title to piping and valves installed from Steamboat
Springs to the expansion unit and agreed to pay Far West Electric EnergyFund,
L.P. royalties equaling 10 percent of net operating income from the expansion
for the years ended December 31, 1988 through 1992, 15 percent for 1993
through 1998, 40 percent for 1999 through 2010, 45 percent thereafter, and an
annual pumping charge. Included in Operations Expense in the statement of
operations for the years ended December 31, 1995 and 1994, are $145,096, and
$144,000, respectively related to this agreement. As of December 31, 1995 and
1994, two of the general partners of Far West Electric Energy Fund, L.P. held
a 74 percent (1995) and 75 percent (1994) ownership in 1-A Enterprises.

The Partnership has entered into an Operating and Maintenance Agreement with
a related corporation to act as the operator of the project. This agreement
provides for operator to perform the duties of the operator including
operating and regular maintenance of the plant for a monthly fee and
additional fees for variable maintenance. The Partnership paid $142,745 for
the year ended December 31, 1995 and $169,120 for the year ended December 31,
1994.

NOTE 9--MAJOR CUSTOMER

NOTE 10--NOTE DEFAULTS

The Partnership is in default on a note payable to a corporation as of
October 1990 for reasons described in Note 4. The balance as of December 31,
1995 and 1994 is $1,670,995 and $1,960,732 respectively. Under the terms of
the note all principal and interest is immediately due and payable upon
request of the Lender. The note is secured by the 1-A project and related
revenued and other assets.

NOTE 11--LIQUIDITY

As shown in the accompanying financial statements for the year ended
December 31, 1995, current liabilities exceeded current assets by $2,683,976.
Of this amount $1,670,995 relates to the note defaults described in Note 9.

F-37
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Lehi Independent Power Associates, L.C.

We have audited the accompanying balance sheets of Lehi Independent Power
Associates, L.C. as of December 31, 1995 and 1994 and the related statements
of operations, changes in members' equity and cash flows for the year ended
December 31, 1995 and the period January 24, 1994 (date of inception) through
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lehi Independent Power
Associates, L.C., as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994 in conformity
with generally accepted accounting principles.

March 19, 1996 /s/ Traveller Winn & Mower, P.C.
Salt Lake City, Utah

F-38
<PAGE>

LEHI INDEPENDENT POWER ASSOCIATES, L.C.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
JUNE 30,
1995 1994 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 41,460 $ 2,113 $ 7,305
Due from member................................. -- 3,335 --
Note receivable................................. 115,750 -- 113,750
Prepaid insurance............................... 853 -- 1,117
-------- -------- --------
Total current assets........................... 158,063 5,448 122,172
Property, plant and equipment, net............... 257,125 278,921 250,464
-------- -------- --------
Total assets................................... $415,188 $284,369 $372,636
======== ======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable................................ $ 4,873 $ 951 $ 34,329
Accrued expenses................................ 4,373 -- 373
Related party note payable...................... -- 3,440 --
-------- -------- --------
Total current liabilities...................... 9,246 4,391 34,702
Members' equity:
Member contributions............................ 292,662 292,662 292,662
Additional capital contributions................ 42,104 28,149 42,105
Retained earnings (deficit)..................... 71,176 (40,833) 3,167
-------- -------- --------
Total members' equity.......................... 405,942 279,978 337,934
-------- -------- --------
Total liabilities and members' equity............ $415,188 $284,369 $372,636
======== ======== ========
</TABLE>

See accompanying notes to financial statements.

F-39
<PAGE>

LEHI INDEPENDENT POWER ASSOCIATES, L.C.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 24 FOR THE SIX MONTHS
YEAR ENDED THROUGH ENDED JUNE 30
DECEMBER 31, DECEMBER 31, -----------------------
1995 1994 1996 1995
------------ -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME:
Gain on sale of fixed
asset................. $236,194 $ -- $ -- $ --
EXPENSES:
General and administra-
tive.................. 49,195 27,092 61,347 16,925
Write-down of property,
plant and equipment... 14,990 13,741 6,661 7,495
-------- -------- -------- --------
Total expenses........ 64,185 40,833 68,008 24,420
-------- -------- -------- --------
Net income (loss)....... $172,009 $(40,833) $(68,008) $(24,420)
======== ======== ======== ========
</TABLE>

See accompanying notes to financial statements.

F-40
<PAGE>

LEHI INDEPENDENT POWER ASSOCIATES, L.C.

STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
JANUARY 24, 1994 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1994

<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
MEMBER CAPITAL EARNINGS MEMBERS'
CONTRIBUTIONS CONTRIBUTIONS (DEFICIT) EQUITY
------------- ------------- --------- --------
<S> <C> <C> <C> <C>
Balance January 24, 1995....... $ -- $ -- $ -- $ --
Members contributions.......... 292,662 28,149 -- 320,811
Net loss....................... -- -- (40,833) (40,833)
-------- ------- ------- --------
Balance December 31, 1994...... 292,662 28,149 (40,833) 279,978
Members contributions--Suma,
Corp.......................... -- 3,489 -- 3,489
Members contributions--Far West
Capital, Inc.................. -- 3,489 -- 3,489
Members contributions--Lehi
Envirosystems, Inc............ -- 6,977 -- 6,977
Members distribution--Suma
Corp.......................... -- -- (15,000) (15,000)
Members distribution--Far West
Capital, Inc.................. -- -- (15,000) (15,000)
Members distribution--Lehi
Envirosystems, Inc............ -- -- (30,000) (30,000)
Net income..................... -- -- 172,009 172,009
-------- ------- ------- --------
Balance December 31, 1995...... 292,662 42,104 71,176 405,942
-------- -------
Net (Loss) (Unaudited)......... (68,008) (68,008)
------- --------
Balance June 30, 1996 (Unau-
dited)........................ $292,662 $42,104 $ 3,168 $337,934
======== ======= ======= ========
</TABLE>

See accompanying notes to financial statements.

F-41
<PAGE>

LEHI INDEPENDENT POWER ASSOCIATES, L.C.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FOR THE SIX MONTHS
ENDED ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1994 1996 1995
------------ -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)......... $172,009 $(40,833) $(68,008) $(24,240)
Adjustment to reconcile
net income to net cash
provided by operating
activities:
Write-down of property,
plant and equipment...... 14,990 13,741 6,661 7,495
Gain on sale of equipment. (236,194) -- -- --
Changes in assets and lia-
bilities................. -- -- -- --
Prepaid insurance......... (853) -- (264) 1,036
Note Receivable........... -- -- 2,000 --
Accounts payable.......... 3,922 951 29,456 9,943
Accrued expenses.......... 4,373 -- (4,000) --
-------- -------- -------- --------
Net cash (used) by operat-
ing activities........... (41,753) (26,141) (34,155) (8,018)
Cash flows from investing
activities:
Proceeds from sale of
equipment................ 127,250 -- -- --
Cash flows from financing
activities:
Net payment and proceeds
from collection of due
from member............. 3,335 (3,335) -- 1,245
Net payment and proceeds
of related party note
payable................. (3,440) 3,440 -- (3,440)
Additional capital con-
tributions.............. 13,955 28,149 -- 10,705
Members' distribution.... (60,000) -- -- --
-------- -------- -------- --------
Net cash provided (used)
by financing activities.. (46,150) 28,254 -- 8,510
-------- -------- -------- --------
Net increase in cash and
cash equivalents......... 39,347 2,113 (34,155) 492
Cash and cash equivalents
at beginning of period... 2,113 -- 41,460 2,113
-------- -------- -------- --------
Cash and cash equivalents
at end of period......... $ 41,460 $ 2,113 $ 7,305 $ 2,605
======== ======== ======== ========
</TABLE>

SUPPLEMENTAL CASH FLOW INFORMATION

Interest paid by the Company during 1995 was $415.

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the period ended December 31, 1994, the members of the Company
contributed property and equipment with a cost of $292,662.

During the year ended December 31, 1995, the Company sold equipment for
$243,000. The Company received $127,250 in proceeds and a note receivable for
$115,750.

See accompanying notes to financial statements.

F-42
<PAGE>

LEHI INDEPENDENT POWER ASSOCIATES, L.C.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994

NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Lehi Independent Power Associates, L.C.(the Company) is a Utah based company
organized on January 24, 1994. The Company's principal business is to
purchase, develop, own, operate and/or sell all or a portion of a power
generation facility which produces electrical energy located in Lehi, Utah.
The members and their respective ownership percentages are as follows: Lehi
Envirosystems, Inc., 50 %; Far West Capital, Inc., 25%; and Suma Corp., 25%.
All revenues and expenses are shared in the same proportion as each members'
ownership percentage.

CASH AND CASH EQUIVALENTS

The Company considers all cash on deposit and short-term liquid investments
with original maturities of three months or less to be cash equivalents.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of land, a power generation plant and
plant equipment and is recorded at cost. The plant is currently not in
operation. The plant and plant equipment are depreciated on the straight-line
method over useful lives of 29 and 6 years, respectively.

INCOME TAXES

No provision for federal income tax is made since the Company is treated as
a partnership for tax purposes and as such is not a taxable entity under the
federal income tax provisions. The individual members are taxed on their
proportionate share of members' income or loss.

NOTE 2--DUE FROM MEMBER

At December 31, 1994, the Company had capital contributions receivable from
Lehi Envirosystems, Inc., for $3,335. This represents required contributions
to maintain the proportionate sharing of expenses as stipulated in the
operating agreement. This amount was received in 1995.

NOTE 3--PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost and consisted of the
following at December 31:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Land..................................................... $ 13,000 $ 13,000
Building................................................. 239,216 239,216
Plant equipment.......................................... 30,446 40,446
-------- --------
282,662 292,662
Write-down of property, plant and equipment............. (25,537) (13,741)
-------- --------
$257,125 $278,921
======== ========
</TABLE>

F-43
<PAGE>

LEHI INDEPENDENT POWER ASSOCIATES, L.C.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994

During the periods in which the property, plant and equipment is not in
operation, management has reviewed the assets to determine their realization.
Based on this review, management has written-down the property, plant and
equipment for the year and period ended December 31, 1995 and 1994, $14,990
and $13,741, respectively.

NOTE 4--RELATED PARTY TRANSACTIONS

The Company receives accounting services from a related company's accounting
department. The services provided are billed at $40 an hour and average
approximately $160 a month.

The related party note payable is due on demand and carries no interest
rate.

NOTE 5--COMMITMENTS AND CONTINGENCIES

The Company is in communication with the Utah State Department of Water
Quality with respect to traces of petroleum products found in a ground water
discharge ditch which exits the plant property. Based on those communications,
the State is reviewing what, if any, additional action may be required. Also,
the United States Environmental Protection Agency (EPA) has reviewed the data
on the discharge and has concluded that no violation of EPA Rules and Laws
have occurred. In Management's opinion, the potential impact to the financial
statements would not exceed $45,000.

NOTE 6--GOING CONCERN

The Company's primary asset consists of a power generation facility that is
currently idle. Consistent with its preference to operate the facility, the
Company has thus far declined to accept several offers to liquidate the
facility for amounts significantly in excess of the facility's recorded net
book value. The Company continues to pursue a financially feasible power
purchase contract which when executed would result in the commencement of
operations.

The members of the Company have committed to continue to fund necessary
costs associated with holding and maintaining the power plant through December
31, 1996 in the event that the power plant does not begin operations or is
otherwise unable to generate revenues sufficient to fund operating and holding
costs.

F-44
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of Plymouth Cogeneration Limited Partnership

In our opinion, the accompanying balance sheets and the related statements
of operations, changes in partners' capital and cash flows present fairly, in
all material respects, the financial position of Plymouth Cogeneration Limited
Partnership at December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

February 27, 1996

F-45
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
JUNE 30,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 15,944 $ 8,233 $ 65,481
Accounts receivable......................... 90,865 76,881 89,394
Prepaid expenses............................ 18,087 14,198 47
Restricted cash............................. 33,773 619,820 33,707
---------- ---------- ----------
Total current assets....................... 158,669 719,132 188,629
---------- ---------- ----------
Plant, at cost............................... 5,888,172 5,882,464 5,893,333
Less: accumulated depreciation............... 295,411 -- 443,289
---------- ---------- ----------
5,592,761 5,882,464 5,450,044
---------- ---------- ----------
Debt service reserve......................... 497,085 500,020 496,717
Deferred financing costs, less accumulated
amortization of
$8,141 in 1995.............................. 154,683 162,824 150,613
Rent receivable.............................. 176,184 -- 228,468
---------- ---------- ----------
Total assets............................... $6,579,382 $7,264,440 $6,514,471
========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Note payable--general contractor (Note 2)... $ -- $ 586,000 $ --
Accounts payable and accrued expenses....... 262,013 286,917 257,600
Deferred revenue............................ 81,127 74,806 81,127
---------- ---------- ----------
Total current liabilities.................. 343,140 947,723 338,727
---------- ---------- ----------
Long-term debt, net of discount (Note 3)..... 4,987,181 4,980,717 4,990,413
Partners' capital............................ 1,249,061 1,336,000 1,185,331
---------- ---------- ----------
Total liabilities and partners' capital.... $6,579,382 $7,264,440 $6,514,471
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-46
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX
ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Facility lease........................................ $ 598,968 $ 299,484
Management services................................... 551,461 278,642
---------- ---------
Total revenues...................................... 1,150,429 578,126
---------- ---------
OPERATING EXPENSES
Operating and maintenance............................. 426,948 222,310
Depreciation and amortization......................... 303,552 151,948
General and administrative............................ 149,830 85,111
---------- ---------
Total operating expenses............................ 880,330 459,369
---------- ---------
Income before interest income and expense........... 270,099 118,757
---------- ---------
INTEREST INCOME AND EXPENSE
Interest expense...................................... (403,736) (201,919)
Interest income....................................... 46,698 19,432
---------- ---------
(357,038) (182,487)
---------- ---------
Net loss............................................ $ (86,939) $ (63,730)
========== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-47
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' CAPITAL

<TABLE>
<CAPTION>
PARTNERS' CAPITAL PARTNERS' CAPITAL PARTNERS' CAPITAL
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 NET LOSS 1995 NET LOSS 1996
----------------- -------- ----------------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
General Partners........ $ 193,639 $(13,040) $ 180,599 $ (9,560) $ 171,039
Limited Partners........ 1,142,361 (73,899) 1,068,462 (54,170) 1,014,292
---------- -------- ---------- -------- ----------
$1,336,000 $(86,939) $1,249,061 $(63,730) $1,185,331
========== ======== ========== ======== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-48
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR FOR THE
ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1995 1996
------------ --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................... $(86,939) $(63,730)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization.................... 303,552 151,948
Bond discount amortization....................... 6,464 3,232
Changes in assets and liabilities:
Accounts receivable.............................. (13,984) 1,471
Prepaid expenses................................. (3,889) 18,040
Transfer from restricted cash.................... 47 66
Rent receivable.................................. (176,184) (52,284)
Accounts payable and accrued expenses............ (24,904) (4,413)
Deferred revenue................................. 6,321 --
-------- --------
Net cash provided by operating activities....... 10,484 54,330
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for plant............................ (5,708) (5,161)
Use of restricted cash............................ 586,000 --
-------- --------
Net cash provided by investing activities......... 580,292 (5,161)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment out of debt service reserve............... 2,935 368
Payment of note payable........................... (586,000) --
-------- --------
Net cash provided by financing activities....... (583,065) 368
-------- --------
Net increase in cash and cash equivalents....... 7,711 49,537
Cash and cash equivalents, beginning............... 8,233 15,944
-------- --------
Cash and cash equivalents, ending.................. $ 15,944 $ 65,481
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid..................................... $421,305 $198,012
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-49
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

On June 25, 1992, IEC Plymouth, Inc. ("IEC" or "General Partner"), a
Connecticut Corporation, and Central Hudson Cogeneration Incorporated, a New
York Corporation ("Cencogen"), a wholly-owned subsidiary of Central Hudson Gas
& Electric Corporation, a New York Corporation, formed a limited partnership
under the State of New Hampshire Statutes, Plymouth Cogeneration Limited
Partnership (the "Partnership"), to construct, own and operate a 1.25 MW
cogeneration facility (the "Facility") and provide electricity and steam to
Plymouth State College (the "Site") in Plymouth, New Hampshire. On May 11,
1993, IEC and Cencogen agreed to admit PSC Cogeneration Limited Partnership
("PSC" or "General Partner"), a Connecticut limited partnership and IEC
affiliate, replacing IEC. On November 1, 1994, PSC and Cencogen agreed to
admit Plymouth Envirosystems, Inc. ("Envirosystems" or "General Partner"), a
Delaware corporation, a wholly-owned subsidiary of U.S. Envirosystems, Inc., a
Delaware corporation. The Limited Partnership Agreement, as amended, expires
November 2024.

The Limited Partnership Agreement provides that profits, losses and
distributable cash for financial reporting and income tax purposes are
allocated in accordance with the ownership interests of the partners.
At December 31, 1995 and 1994, PSC's ownership consisted of a 10% managing
general partner and 17.5% limited partner interest, Cencogen's ownership
consisted of a 32.5% limited partner interest and Envirosystems ownership
consisted of a 5% general partner and 35% limited partner interest.

On June 1, 1993, the Partnership entered into an Agreement of Site Lease
("Site Lease") with the University System of New Hampshire (the "University
System"). The Site Lease provides that the University System will lease to the
Partnership a parcel of land at the Site on which to construct the Facility.
The Site Lease expires upon expiration of the Management Services Agreement
(2015).

REVENUES

On June 1, 1993, the Partnership entered into an Agreement of Facility Lease
("Facility Lease") with the University System. The Facility Lease provides
that the Partnership will lease the Facility to the University System for the
supply of thermal and electric energy to the Site for a defined rental stream
which escalates over the life of the lease, or 20 years. Upon expiration of
the Facility Lease (2015), the Partnership must convey title and all personal
property at the Facility to the University System, free and clear of
encumbrances. The Facility Lease includes an escape clause which provides for
the University System to terminate the agreement without penalty in the event
that the State of New Hampshire does not appropriate funds for the payment of
the Facility Lease.

On June 1, 1993, the Partnership entered into a Management Services
Agreement ("MSA") with the University System. The MSA provides that the
Partnership will operate and maintain the Facility for the benefit of the
University System during the term of the MSA for a defined monthly management
service fee, and a 1.1 cent per kwh operation and maintenance fee over the
life of the MSA (20 years). The MSA commenced on the in-service date of the
Facility and expires in the year 2015. The Facility was deemed in-service
January 1, 1995.

Under the terms of Facility Lease and MSA, the Partnership is required to
provide significant services through-out the life of the agreements. As a
result, the Facility Lease is being accounted for as an operating lease. Lease
revenues are recognized in accordance with Financial Accounting Standards
Board Technical Bulletin No. 85-3, which requires that operating lease
revenues be recognized on the straight-line basis over the life of the lease.
Accordingly, while annual rent receipts escalate each year, approximately
598,968 of facility

F-50
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
lease revenue will be recognized by the Partnership annually. Management
service fees and operation and maintenance fees are recognized as earned over
the life of the MSA.

Since Facility Lease revenues are being recognized on a straight-line basis,
the Partnership has recognized as a long-term asset, Rent receivable, at
December 31, 1995, which represents the excess of revenues recognized over
cash payments received.

At December 31, 1995 and 1994, the Partnership had deferred revenues of
$81,127 and $74,806 which represents management service fees and lease
revenues billed in advance.

RESULTS OF OPERATIONS AND MANAGEMENT PLANS

While the Partnership incurred a net loss in 1995, management believes that
its cash flows, including scheduled escalating rent receipts under the
Facility Lease, will be sufficient to meet both its future operating expenses
and debt service requirements, including sinking fund installments.

PLANT

Plant represents cost of the Facility which is being leased to the
University System under the Facility Lease. The Partnership placed the
Facility in-service January 1, 1995. During 1994, the University System's
operating permits necessary to operate its existing boilerhouse expired, at
which time the Partnership agreed to operate the Facility, while still under
construction. As of December 31, 1994, lease revenues of $210,636, management
service fees of $217,939, and operation and maintenance fees of $40,945 were
earned during the construction period; as a result of Facility start-up prior
to substantial completion and in-service date. The above revenues earned
during construction and related operating and start-up expenses ($417,743)
were netted against Plant ($51,777). In accordance with the facility lease,
the Partnership is responsible for all maintenance and equipment repair.

DEPRECIATION

Depreciation is provided on a straight-line basis. The useful life of the
plant is estimated to be twenty years.

INCOME TAXES

The Partnership is not subject to federal or state income taxes. Each
partner is required to report on its federal and, as required, state income
tax return its distributive share of the Partnership's income, gains, losses,
deductions and credits for the taxable year of the Partnership ending within
or with its taxable year. Accordingly, there is no provision for income taxes
in the accompanying financial statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reflected in the balance sheet for cash and cash
equivalents, accounts receivable, restricted cash, debt service reserve,
accounts payable and accrued expenses approximate their respective fair values
because of the short maturity of these items.

It was not practicable to estimate the fair value of the $5.11 million,
7.75% State of New Hampshire Electric Facility Revenue Bonds without the
Partnership incurring excessive costs. The note is secured by a first mortgage
in the Facility with a maturity date of June 1, 2014.

F-51
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS

For purposes of the Statement of Cash Flows, the Partnership considers
highly liquid investments with an original maturity of three months or less to
be cash equivalents.

Restricted cash consists of cash held in trust for payment of semi-annual
long-term interest payments of the Partnership. Debt service reserve consists
of cash held in trust until maturity of the Partnership's long-term debt.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NOTE 2--NOTE PAYABLE--GENERAL CONTRACTOR

During May 1994, the Partnership entered into an amendment to the Turnkey
Construction Contract ("Construction Contract") with the general contractor of
the Facility. The amendment provided for an additional payment in the amount
of $636,000 from the Partnership to the general contractor for additional
construction costs. In connection with the amendment, the Partnership executed
a $636,000 promissory note for payment of these costs. The note bears interest
at Citibank's prime lending rate plus 2%. Interest and principal were payable
on maturity of the note in November 1994. During November 1994, the
Partnership funded an escrow, the funds of which were available under the
terms of the escrow agreement to settle the Partnership's obligations to the
general contractor. At December 31, 1994, the balance due to the general
contractor on the note and the funds escrowed for payment amounted to
$586,000. Accrued interest on the note at December 31, 1994 amounted to
$25,142. The escrowed funds were included in restricted cash. During 1995, the
Partnership settled all obligations with the general contractor.

NOTE 3--LONG-TERM DEBT

On June 30, 1993, the Partnership obtained $5,110,000 of financing from the
Business Finance Authority of the State of New Hampshire to construct the
Facility. The financing was obtained through issuance of 7.75% State of New
Hampshire Electric Facility Revenue Bonds (the "Bonds"), a tax-exempt
financing, which matures on June 1, 2014. The Bonds were issued at a discount
of $129,283, which is being amortized over the life of the bonds using the
bonds outstanding method. This Leasehold Mortgage and Trust Agreement
(the "Agreement") contains certain business covenants including, among other
items, that the Partnership provides timely financial and business
information.

In connection with the financing, the Partnership paid $162,824 of financing
related costs. These deferred financing costs will be amortized on the bonds
outstanding method over the life of the bonds.

The Bondholder has a first mortgage security interest in the Facility, pledge
of the Partnership interests, and a collateral assignment of all facility
operating agreements. Interest is payable semi-annually on June 1 and December
1. The Bonds are subject to redemption from sinking fund installments, without
premium, plus accrued interest on June 1, 1997 and each June 1 thereafter at
their principal amounts, through maturity of June 1, 2014. The Bonds are also
subject to redemption at the option of the Partnership on or after: June 1,
2003 at

F-52
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
102%; June 1, 2004 at 101%; and June 1, 2005 at 100%. Aggregate annual sinking
fund installments for the next five years and thereafter are as follows:

<TABLE>
<S> <C>
1996.......................... $ --
1997.......................... 70,000
1998.......................... 100,000
1999.......................... 125,000
2000.......................... 175,000
Thereafter.................... 4,640,000
----------
$5,110,000
==========
</TABLE>

NOTE 4--RELATED PARTY TRANSACTIONS

DEVELOPMENT EXPENSES

The managing general partner and affiliates were reimbursed for development
expenses during the development and construction phases. In 1994, total
reimbursements of $275,000 were incurred and capitalized to Plant during the
development and construction phases.

ADMINISTRATION SERVICE FEES

On January 13, 1994, the Partnership entered into and Administrative
Services Agreement with an affiliate of PSC. The agreement provides that
commencing on January 1, 1995, the Partnership will pay a fee in the amount of
$40,000, annually, adjusted for CPI, for administrative services to be
provided by the affiliate on behalf of the Partnership. The Partnership
incurred an administrative fee of $42,000 during 1995, which is included in
general and administrative expenses.

DEVELOPMENT COMMISSIONS

Development Commissions are payable to PSC and Cencogen commencing on the
in-service date of the Facility (January 1, 1995). Development commissions are
fixed annual amounts, payable quarterly which escalate over the life of the
agreement, or 20 years, and are subordinate to the payment of debt service and
general partners fees. The Partnership incurred development commissions of
$44,388 during 1995, which are included in general and administrative
expenses.

GENERAL PARTNER'S FEE

General Partner's Fee is payable to PSC commencing on the in-service date of
the Facility (January 1, 1995). The general partner's fee is a fixed annual
amount payable quarterly which escalates over the life of the agreement, or 20
years, and is subordinate to the payment of debt service. The Partnership
incurred $14,796 during 1995, which is included in general and administrative
expenses.

OTHER

The Partnership incurred the following expenses with affiliates of the
General Partner for the years ended December 31, 1995 and 1994. The 1994 costs
were capitalized into Plant during the development and construction phases.

<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Employee group health insurance and office related........... $ -- $37,703
Interest expense on advances................................. 1,108
</TABLE>

F-53
<PAGE>

PLYMOUTH COGENERATION LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Amounts due to affiliates of the General Partner included in accounts
payable and accrued expenses of the Partnership at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
------- ----
<S> <C> <C>
Interest bearing advances at prime.............................. $28,520 $--
Accrued interest on advances.................................... 1,108 --
</TABLE>

The Partnership has elected for its employees to participate in a 401(k)
plan sponsored by an affiliate of the General Partner. The 401(k) plan calls
for employee only contributions.

F-54
<PAGE>

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

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURI-
TIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO,
OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SO-
LICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 2
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 9
USE OF PROCEEDS........................................................... 17
PRICE RANGE OF COMMON STOCK............................................... 19
DIVIDEND POLICY .......................................................... 19
DILUTION ................................................................. 20
CAPITALIZATION ........................................................... 21
PRO FORMA FINANCIAL INFORMATION........................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION ............................................................... 28
BUSINESS ................................................................. 33
MANAGEMENT ............................................................... 45
CERTAIN TRANSACTIONS ..................................................... 48
PRINCIPAL STOCKHOLDERS ................................................... 50
DESCRIPTION OF SECURITIES ................................................ 52
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 56
UNDERWRITING ............................................................. 57
LEGAL MATTERS ............................................................ 59
EXPERTS .................................................................. 59
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>

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

U.S. ENERGY SYSTEMS, INC.

1,625,000 SHARES OF COMMON STOCK
AND
1,625,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

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

PROSPECTUS

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

GAINES, BERLAND INC.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PRELIMINARY PROSPECTUS DATED SEPTEMBER 12, 1996
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
1,805,000 SHARES OF COMMON STOCK AND
500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

-----------

This Prospectus relates to the offering ("Secondary Offering") by (a) Enviro
Partners, L.P. ("Enviro") of 1,600,000 shares of Common Stock of U.S. Energy
Systems, Inc. (the "Company"), (b) Anchor Capital Company LLC ("Anchor") of
205,000 shares of Common Stock of the Company, and (c) Energy Management
Corporation ("EMC") of 500,000 Redeemable Common Stock Purchase Warrants of the
Company (the "Warrants"), such shares of Common Stock and Warrants
(collectively, the "Securities") to be sold from time to time by Enviro, Anchor
and EMC (collectively the "Selling Securityholders") following completion of
the Primary Offering (as defined below). Each Warrant entitles the holder to
purchase one share of Common Stock for $4.00 during the four-year period
beginning one year from the date of this Prospectus. The Warrants are
redeemable at a price of $.01 per Warrant, at any time after they become
exercisable, upon not less than 30 business days' prior written notice, if the
last sale price of the Common Stock has been at least $150% (initially $6.00)
of the exercise price of the Warrants for the 20 consecutive trading dates
ending on the third day prior to the date on which the notice of redemption is
given. See "Description of Securities." Concurrently with this Secondary
Offering, the Company is offering for sale to the public, by means of a
separate prospectus, 1,625,000 shares of Common Stock and 1,625,000 Warrants
(the "Primary Offering").

Enviro has agreed that it will not sell its 1,600,000 shares of Common Stock
and Anchor has agreed that it will not sell its 205,000 shares of Common Stock
in each instance without the consent of Gaines, Berland Inc. (the
"Representative") for a period of nine months from the date of consummation of
the Primary Offering. EMC has given Theodore Rosen, the Chairman of the Board
of the Company, a right of first refusal to purchase its Warrants if at any
time during the nine month period following the date of this Prospectus EMC
decides to sell such Warrants. Mr. Rosen has agreed with the Representative
that he will exercise such right of first refusal in the event EMC decides to
sell its Warrants during such nine-month period and that he will not sell any
Warrants so purchased by him until at least 13 months from the date of this
Prospectus.

The Company's Common Stock is sporadically traded on the NASD OTC Bulletin
Board. Prior to this Secondary Offering, there has been no public market for
the Warrants nor has there been an established trading market for the Common
Stock. There can be no assurance that such a market will develop for the
Securities as a result of this Secondary Offering. The Company has applied for
inclusion of the Common Stock and the Warrants on the Nasdaq SmallCap Market
under the proposed symbols USEE and USEEW, respectively.

-----------

THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>

AVAILABLE INFORMATION

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

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. At or prior to the consummation of the Primary
Offering, the Company will consummate the following transactions (the "Closing
Transactions"): (i) a private placement to two investors of 1,600,000 shares of
the Company's 11% cumulative redeemable convertible preferred stock (the "11%
Preferred Stock") and 500,000 warrants ("Private Warrants") having the same
terms and conditions as the Warrants for an aggregate consideration of
$3,500,000 (the "Private Placement"), (ii) the acquisition of a 50% interest in
two geothermal plants known as Steamboat 1 and 1A for $4,982,000 (including
$50,000 as a downpayment which was previously paid by the Company) (the
"Steamboat Acquisition"), (iii) the conversion of $500,000 of convertible
subordinated debentures (the "Convertible Debentures") into 125,000 shares of
Common Stock and 125,000 Private Warrants (the "Debenture Conversion") and (iv)
the exchange of the 57,500 currently outstanding shares of the Company's Series
One Preferred Stock for 205,000 shares of Common Stock (the "Preferred Stock
Exchange"). The consummation of the Primary Offering is a condition to the
consummation of the Closing Transactions and the consummation of the Closing
Transactions is a condition to the consummation of each of the Primary Offering
and this Secondary Offering. Accordingly, if any of the Closing Transactions is
not consummated, each of the Primary Offering and this Secondary Offering will
be terminated. Except as otherwise indicated, all information in this
Prospectus assumes no exercise of the Warrants offered hereby or any of the
Company's other outstanding options and warrants to purchase Common Stock.
Although this Prospectus is written as though the Secondary Offering is
concurrent with the Primary Offering, the Secondary Offering will not commence
until the Primary Offering has been consummated. All numbers and amounts
specified herein reflect a one for forty reverse stock split effective May 6,
1996, unless otherwise indicated.

THE COMPANY

3
<PAGE>

The Company has a history of losses substantially throughout its existence
and, except for the distribution of $20,000 from the Plymouth State College
project (described below) in August 1996, has not received any cash
distributions from its investments since emerging from bankruptcy in 1993. To
provide the Company with a source of revenues to enable it to expand its
business, concurrently with the Primary Offering, the Company will acquire, for
a total investment of $4,982,000 (including $50,000 as a downpayment which was
previously paid by the Company), a 50% interest in two geothermal power plants,
known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the "Steamboat
Facilities"), which it will operate under a co-management agreement with its
partner. Electricity is produced in geothermal plants by extracting ^ heat from
the earth to drive turbines, thereby generating the electricity. Geothermal
power is considered a highly environmentally sound method of producing
electricity, but it can only be produced in areas where specific geological
formations exist. A substantial portion of the net proceeds of the Primary
Offering and the Private Placement will be used for the Steamboat Acquisition.
The Company regards the Steamboat Acquisition as a key element toward achieving
its objectives in the independent power plant industry.

4
<PAGE>

CLOSING TRANSACTIONS

Concurrently with the closing of the Primary Offering, the Company will
consummate the Private Placement pursuant to which it will sell (i) 1,600,000
shares of the 11% Preferred Stock to Enviro Partners, L.P. ("Enviro") for
$3,100,000 and (ii) 500,000 Private Warrants to Energy Management Corporation
("EMC") for $400,000. The 11% Preferred Stock will be convertible on a share-
for-share basis into Common Stock, will vote on a share-for-share basis with
the Common Stock, will have a preferential dividend of 11% (payable in
additional shares of 11% Preferred Stock during the first two years and
thereafter in cash or in shares of 11% Preferred Stock at the option of the
Company) and a liquidation preference of $3,100,000 plus accrued dividends. The
11% Preferred Stock is redeemable at the option of the Company at any time
after four years from issuance and is mandatorily redeemable ten years after
issuance, at a redemption price equal to the liquidation preference. The terms
and conditions of the Private Warrants are identical to those of the Warrants,
and entitle the holder to purchase one share of Common Stock for $4.00, subject
to adjustments in certain circumstances, during the period commencing one year
and ending five years from the date of this Prospectus. Both the Warrants and
the Private Warrants are redeemable by the Company, at a price of $.01 per
warrant, at any time after they become exercisable, upon not less than 30
business days' prior written notice, if the last sale price of the Common Stock
has been at least 150% (initially $6.00) of the exercise price of the Warrants
for the 20 consecutive trading days ending on the third day prior to the date
on which the notice of redemption is given. See "Description of Securities."

The terms for the Private Placement were initially negotiated prior to
December 1995. The investors in the Private Placement agreed to invest $3.5
million in return for a specific percentage of the Company, subject to the
Company being able to raise at least another $6 million through either another
private placement or a public offering. The specific percentage would be
reduced proportionally to the size of the additional financing over $6 million.
A specific sales price was not set, but only a percentage of ownership. The
price attributed to the shares to be issued to the Private Placement investors
has been determined by the ultimate capitalization after a public offering,
accounting for the number of common shares for which the preferred shares could
be converted to attain the specific ownership percentage, and then dividing the
numerical shares by the dollar amount invested. The specific advantages for the
Company of this arrangement would be that there would be no discounts or costs
(other than the investors' legal fees) attached to the amount to be invested in
the Private Placement. In addition, the Private Placement investors would
contribute substantial financial and management skills which the Company would
need as it achieved growth objectives. Based on the terms of the agreement and
the Primary Offering, following the Primary Offering and the Private Placement,
Enviro will hold approximately 40.1% of the voting power of the Company, and,
if the Private Warrants held by EMC are exercised, the Private Placement
investors together would hold approximately 46.7% of the voting power of the
Company. See "Risk Factors--Concentration of Voting Power."

Also concurrently with the closing of the Primary Offering, the Company will
acquire a 50% interest in Steamboat Envirosystems, L.C. ("Steamboat LLC"),
which will purchase the Steamboat Facilities from Far West Electric Energy
Fund, L.P. (the current owner of Steamboat 1) and 1-A Enterprises (the current
owner of Steamboat 1-A). The Company will contribute a total of $4,982,000
(including $50,000 as a downpayment which was previously paid by the Company)
to Steamboat LLC from the proceeds of the Primary Offering and the Private
Placement to enable Steamboat LLC to complete the acquisition and retire a
mortgage and certain of the royalty interests to which the Steamboat Facilities
are subject. See "Business--Current Operation and On-Going Projects--Steamboat
Geothermal Power Plants."

The Debenture Conversion and the Preferred Stock Exchange will also occur
concurrently with the Closing of the Primary Offering. These transactions,
combined with the repayment of debt to be made with a portion of the proceeds
of the Primary Offering and the Private Placement, will result in a substantial
reduction of the Company's indebtedness. In December 1994 the holders of the
Convertible Debentures agreed to accept interest payments at a rate one-half of
the stated 18% rate and to defer and accrue the remaining one-half until the

5
<PAGE>

consummation of an underwritten offering of the Company's securities.
Thereafter, the interest rate on the outstanding Convertible Debentures will be
9% per annum. Pursuant to the Debenture Conversion, an aggregate principal
amount of $500,000 of Convertible Debentures will be converted into 125,000
shares of Common Stock and 125,000 Private Warrants. The holders who have
agreed to the conversion will participate on a pro rata basis. The information
in this Prospectus assumes that all holders of the Convertible Debentures have
agreed to participate in the Debenture Conversion. As of September 11, 1996,
three of the 26 holders of Convertible Debentures, representing $150,000 in
principal amount, have not agreed to the interest rate reduction from 18% to 9%
per annum. Accordingly, the Company's annual interest expense will be $13,500
greater than the Pro Forma amounts shown in this Prospectus. See "Description
of Securities--Convertible Debentures," "Certain Transaction" and Pro Forma
Financial Statements.

6
<PAGE>

THE OFFERING

Securities offered..... 1,805,000 shares of Common Stock and 500,000
Warrants. Each Warrant entitles the holder to
purchase one share of Common Stock for $4.00
during the four-year period commencing one year
from the date of this Prospectus. Each Warrant is
redeemable at a price of $.01 per Warrant at any
time after the Warrants become exercisable, upon
not less than 30 business days' prior written
notice, if the last sale price of the Common
Stock on Nasdaq has been at least 150% (initially
$6.00) of the then-exercise price of the Warrants
for the 20 consecutive trading days ending on the
third day prior to the date on which the notice
of redemption is given. See "Description of
Securities."

Common Stock outstanding 439,650 shares
prior to the Primary
Offering..............

Common Stock to be 2,394,650 shares(1)(2)
outstanding after the
Primary Offering......

Use of proceeds........ The Company will receive no proceeds from the
sale of the Securities offered hereby.

Proposed Nasdaq SmallCap
Market Symbols............. Common Stock: USEE
Warrants: USEEW

RISK FACTORS

(1) Includes (i) 439,650 shares of Common Stock outstanding prior to the
Primary Offering, (ii) 1,625,000 shares of Common Stock being issued
pursuant to the Primary Offering, (iii) 125,000 shares of Common Stock to
be issued in the Debenture Conversion and (iv) 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange.

(2) Does not include an aggregate of 4,594,975 shares of Common Stock reserved
and to be reserved for issuance following completion of the Primary
Offering including (i) 291,850 shares issuable on exercise of currently
outstanding options and warrants, (ii) 2,575,000 shares issuable on
exercise of the Warrants, the Representative's Purchase Option and the
Warrants issuable on exercise of the Representative's Purchase Option and
the Private Warrants being issued in the Private Placement and the
Debenture Conversion, (iii) 1,600,000 shares issuable upon conversion of
11% Preferred Stock to be issued to Enviro, and (iv) 128,125 shares
issuable upon conversion of Convertible Debentures which will remain
outstanding after the Primary Offering.

7
<PAGE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The Summary Financial Information set forth below is derived from the
historical financial statements appearing elsewhere in this Prospectus and
should be read in conjunction with such financial statements, including the
notes thereto. The Pro Forma Statements of Operations data for the year ended
January 31, 1996 and the six months ended July 31, 1996 give effect to the
Closing Transactions and to the acquisition of a 50% interest in Steamboat LLC
as if they had occurred at the beginning of the periods. The Pro Forma Balance
sheet data as at July 31, 1996 give effect to the Primary Offering and to the
Closing Transactions as if such transactions had occurred on such date. See Pro
Forma Financial Statements and historical financial statements.

STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
JANUARY 31, 1996 1995 JULY 31, 1996 1995
------------------------------ ----------- ------------------------- ----------
HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE USE USE/SB (1) USE
---------- --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from
joint ventures......... $ (17) $ 1,690 $ (76) $ (92) $ 831 $ (62)
Operating and adminis-
trative
expenses............... (853) (853) (1,006) (408) (408) (421)
Interest expense (2).... (604) (116) (319) (328) (46) (223)
------- --------- ------- ------- --------- -------
Income (loss) before in-
come taxes............. (1,474) 721 (1,401) (828) 377 (706)
Income taxes (3)........ -- (238) -- -- (125) --
------- --------- ------- ------- --------- -------
Income (loss) before ex-
traordinary items...... (1,474) 483 (1,401) (828) 252 (706)
Preferred dividends..... (21)(4a) (341)(4b) (29)(4a) (171)(4b)
------- --------- ------- ------- --------- -------
Income (loss) available
for common stockhold-
ers*................... $(1,495) $ 142 $(1,401) $ (857) $ 81 (706)
======= ========= ======= ======= ========= =======
(Loss) per share of Com-
mon Stock*............. $ (3.41) $ (3.38) $ (1.95) $ (1.61)
======= ======= ======= =======
(Loss) per share of Com-
mon Stock--Supplemental
(5) *.................. $ (1.28) $ (0.65)
======= =======
Pro forma net income per
share of Common Stock
(6)*.................. $ 0.08 $ 0.04
========= =========
Shares used in computing
net income per share of
Common Stock (6)....... 438,773 1,813,851 415,022 439,650 2,013,936 438,296
======= ========= ======= ======= ========= =======

BALANCE SHEET DATA:
<CAPTION>
JULY 31, 1996
------------------------------
HISTORICAL PRO FORMA (7)
---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Current assets.......... $ 21 $1,388
Investment in joint ven-
tures.................. 1,834 6,766
Total assets............ 2,076 8,154
Current liabilities..... 2,815 1,264
Long-term liabilities... 2,818 1,343
11% Preferred Stock..... 3,100
Working capital......... (2,794) 124
Stockholders' equity
(deficit).............. (3,557) 2,447
</TABLE>

8
<PAGE>

- --------
* Before extraordinary item.

(1) Includes (a) adjusted operating results of the Steamboat Facilities for the
year ended December 31, 1995, and the six months ended June 30, 1996, (b)
elimination of deferred note payable discount, elimination of interest
payments on notes payable and bridge loans to be repaid from the proceeds
of the Primary Offering, and (c) elimination of interest on $500,000
principal amount of Convertible Debentures converted into Common Stock and
Private Warrants, with substantially all the remainder paying interest at
9% per annum.

(2) Adjusted for reduction of Convertible Debenture interest to 9%, and
elimination of interest costs on $500,000 principal amount of Convertible
Debentures converted into Common Stock and Private Warrants and on bridge
loans and notes payable which will have been paid from the proceeds of the
Primary Offering. Also adjusts for the elimination of certain unamortized
deferred costs of these notes and loans. As of September 11, 1996, three of
the 26 holders of Convertible Debentures, representing $150,000 in
principal amount, have not agreed to the interest rate reduction from 18%
to 9% per annum. Accordingly, the Company's annual interest expense will be
$13,500 greater than the Pro Forma amounts shown in this Prospectus.

(6) Pro forma net income per share is based on the weighted average number of
shares outstanding, the shares issued in the Debenture Conversion and the
Preferred Stock Exchange, the dividend on the 11% Preferred Stock, and
shares issued in the Primary Offering to obtain funds required for the
acquisition of the Steamboat Facilities and the retirement of debt
(1,119,461 shares at January 31, 1996 and 1,244,286 shares at July 31,
1996). Assumed exercise of options and warrants and the conversion of the
11% Preferred Stock have not been reflected as they would be anti-dilutive.

9
<PAGE>

RISK FACTORS

Prospective purchasers of the securities offered hereby should carefully
consider the following factors, as well as the information contained elsewhere
in this Prospectus.

NO SIGNIFICANT REVENUES; HISTORY OF LOSSES/UNCERTAIN PROFITABILITY; WORKING
CAPITAL, CASH FLOW AND SECURITYHOLDERS' EQUITY DEFICITS; AUDITORS' OPINION
WITH EXPLANATORY PARAGRAPH

LIMITED AVAILABLE CAPITAL; POSSIBLE NEED FOR ADDITIONAL FINANCING

While the Company believes that the proceeds from the Primary Offering and
the Private Placement, together with anticipated cash flow from operations,
will be sufficient to meet its anticipated cash requirements for the next
twelve months, there is no assurance in this regard. The Company's continued
existence will be dependent upon its ability to generate cash flows from its
operations sufficient to meet its obligations as they become due. Unless the
Company can generate cash flows from operations to fund its working capital
needs, the Company will be required to obtain additional equity or debt
financing to continue to operate its business. If the Company should require
additional capital, there can be no assurance that such capital will be
available to the Company, or if available, it would be on terms acceptable to
the Company. If additional funds are raised by issuing equity securities,
significant dilution to existing stockholders may result. Any inability by the
Company to obtain additional financing, if required, will have a material
adverse effect on the operations of the Company, including the possible
cessation of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

PRIOR BANKRUPTCY; DEFERRED TAXES

10
<PAGE>

which it is amortizing on a monthly basis over a six year period. The Company
does not intend to pay this deferred $110,000 amount out of the proceeds of
the Primary Offering but to continue the deferral until either the Internal
Revenue Service requires payment or the Board of Directors deems cash flow to
be satisfactory.

EMERGING INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE

PROJECT DEVELOPMENT AND ACQUISITION RISKS

POTENTIAL REDUCTION IN REVENUE FROM STEAMBOAT GEOTHERMAL PROJECTS

11
<PAGE>

RELIANCE ON PRESIDENT

The Company will be dependent upon its executive officers and key employees,
particularly its President, Richard Nelson. The unexpected loss of the
services of Mr. Nelson could have a detrimental effect on the Company.
Although the Company plans to add additional full-time employees after the
Primary Offering, the Company presently has only three current full-time
employees and contracts with independent contractors for the conduct of
certain engineering, accounting, administrative and legal functions.

GENERAL OPERATING RISKS

GOVERNMENT REGULATION

12
<PAGE>

ENVIRONMENTAL RISKS

UNCERTAINTY OF COMPETITIVE ENVIRONMENT

INSURANCE

SUBSTANTIAL PORTION OF PROCEEDS TO PAY DEBTS; POTENTIAL CONFLICTS OF INTEREST
BETWEEN THE COMPANY AND CERTAIN OF ITS OFFICERS

A substantial amount of the net proceeds of the Primary Offering and the
Private Placement will be used to repay the Company's current indebtedness. A
portion of such repayment will benefit directly or indirectly several of the
Company's officers, directors and stockholders. In order to induce all holders
of Convertible Debentures

13
<PAGE>

to convert at least one-third of their Convertible Debentures, the Company
agreed to reduce the conversion rate from $16 per share to the same price as
that being offered to the public, $4.00 per share. There are 26 holders of
Convertible Debentures, all of whom have been afforded the opportunity to
obtain the same more favorable conversion rate. The Chairman of the Board, a
director, and two principal stockholders of the Company are holders of an
aggregate amount of $425,000 of the Company's Convertible Debentures. Accrued
interest on such indebtedness, adjusted to September 15, 1996, which will be
repaid from the proceeds of the Primary Offering, amounts to $99,200. As part
of the Debenture Conversion the conversion rate of the Convertible Debentures
held by those holders consenting to participate, which remain outstanding
after the Debenture Conversion, will be reduced to $8.00 per share from the
present $16.00 per share and the interest rate will be reduced to 9% from the
present 18%. As of September 11, 1996, three of the 26 holders of Convertible
Debentures, representing $150,000 in principal amount, have not agreed to the
interest rate reduction from 18% to 9% per annum. Accordingly, the Company's
annual interest expense will be $13,500 greater than the Pro Forma amounts
shown in this Prospectus. See "Closing Transactions" and "Description of
Securities--Convertible Debentures." The President, the Chairman, two
directors and two principal stockholders will also benefit by the payment to
them of an aggregate of $1,119,900 (including accrued interest to September
15, 1996) for a loan made by them to enable the Company to obtain its interest
in the co-generation facility at Plymouth State College in New Hampshire.
Additionally, Messrs. Nelson and Rosen have each deferred portions of their
salaries and $219,250 and $162,500, respectively, will be owed to them as of
September 15, 1996. The deferred salaries will not be paid from net proceeds
of the Primary Offering, but from cash flow, if and when, in the opinion of
the Board of Directors, cash flow is sufficient. Messrs. Nelson and Rosen will
also benefit from the release of their pledges of an aggregate of 97,250
shares of the Company's Common Stock owned by them in connection with certain
bridge loans made to the Company by Anchor Capital Company, LLC ("Anchor") and
Solvation, Inc. ("Solvation"), which loans are being repaid with a portion of
the proceeds. See "Certain Transactions."

CONCENTRATION OF VOTING POWER

Following the Primary Offering and the Private Placement, Enviro will own
1,600,000 shares of 11% Preferred Stock, which votes with and is convertible
into, on a share-for-share basis, the Common Stock. Accordingly, Enviro will
hold approximately 40.1% of the combined voting power of the 11% Preferred
Stock and Common Stock immediately after the Primary Offering. The 11%
Preferred Stock, as a class, will have the right to designate two directors
(the "Designated Directors") out of the five members of the Board of
Directors, and no action may be taken by the Board of Directors without the
approval of at least one of the Designated Directors. Therefore, Enviro will
have the ability to influence or control most of the Company's actions. This
concentration of voting power may also have the effect of delaying or
preventing any change of control of the Company not approved by Enviro. If the
500,000 Private Warrants held by EMC were exercised, the combined voting power
of Enviro and EMC--entities that are indirectly owned by different members of
the same family--would represent 46.7% of total voting power, assuming no
other issuances of Common Stock prior to such exercise.

LIMITED MARKET FOR THE COMMON STOCK; OFFERING PRICES DETERMINED BY NEGOTIATION

Prior to the Primary Offering, there has been a limited trading market for
the Common Stock and no trading market for the Warrants. Although the Common
Stock has been sporadically traded on the OTC Bulletin Board, and the Common
Stock and Warrants will trade on the Nasdaq SmallCap Market upon conclusion of
the Primary Offering, there can be no assurance that an active public trading
market for the Common Stock or Warrants will develop and continue after the
Primary Offering. The initial offering prices of the Securities in the Primary
Offering were determined by negotiations between the Company and the
Representative and may bear no relation to the market prices of the Common
Stock and Warrants after the Primary Offering.

EFFECT OF WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES OUTSTANDING AFTER
OFFERING

The Company has outstanding options and warrants which provide for the
purchase of an aggregate of 291,850 shares of Common Stock at prices ranging
from $4.00 to $10.00 per share. The Warrants, if exercised, would result in
the issuance of 1,625,000 shares of Common Stock. In the Primary Offering, the
Underwriters' over-allotment option, if fully exercised, including the related
Warrants, would result in the issuance of 487,500 shares of Common Stock. The
Representative's Purchase Option, if fully exercised, including the related

14
<PAGE>

Warrants, would result in the issuance of 325,000 shares of Common Stock. The
11% Preferred Stock to be issued will be convertible into 1,600,000 shares of
Common Stock. See "Description of Securities--11% Preferred Stock." The
Private Warrants to be issued, if exercised, would result in the issuance of
625,000 shares of Common Stock. See "Description of Securities--Warrants." An
additional 128,125 shares of Common Stock are issuable upon conversion of
remaining Convertible Debentures. These issuances of Common Stock, totalling
5,082,475 shares, would have a dilutive effect on the Company's stockholders
by decreasing their percentage ownership in the Company. Moreover, the holders
of such securities would be most likely to exercise or convert such securities
at a time when the Company could obtain capital by a new offering of
securities on terms more favorable than those provided by such securities.
Consequently, the terms on which the Company could obtain additional capital
may be adversely affected. See "Capitalization."

IMMEDIATE AND SUBSTANTIAL DILUTION

The Primary Offering involves an immediate dilution of approximately $2.98
per share of Common Stock, (approximately 75% of the offering price of the
Common Stock) between the offering price per share of the Common Stock and the
pro forma net tangible book value per share of the Common Stock immediately
after the completion of the Primary Offering and the Closing Transactions.

POSSIBLE RULE 144 SALES

Upon consummation of the Primary Offering, the Company will have outstanding
2,394,650 shares of Common Stock. All of the 1,625,000 shares sold in the
Primary Offering (assuming no exercise of the Underwriters' over-allotment
option in the Primary Offering), will be freely transferable by persons other
than affiliates (as defined in regulations under the Securities Act) without
restriction or further registration under the Securities Act.

Of the 439,650 shares of Common Stock outstanding prior to the Primary
Offering, 64,650 are "restricted securities" within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act, unless an exemption from registration is available,
including the exemption provided by Rule 144. Under Rule 144 as currently in
effect, of such 64,650 shares, ^ 43,250 shares are currently eligible for
sale, and the remaining 21,400 shares will be eligible for such sale in or
after November 1996, subject in each instance to the volume limitations of the
Rule. The 205,000 shares of Common Stock to be issued in the Preferred Stock
Exchange and the 125,000 shares of Common Stock to be issued upon the
Debenture Conversion will be restricted securities. Although registered
pursuant to the ^Shelf Registration, Anchor will not sell the 205,000 shares
of Common Stock it will receive in the Preferred Stock Exchange without the
Representative's prior written approval for a period of 9 months from the date
of this Prospectus. The foregoing does not give effect to any shares issuable
on exercise of outstanding options and warrants. The effect of the offer and
sale of such shares may be to depress the market price for the Company's
Common Stock. See "Shares Eligible for Future Sale--Possible Rule 144 Sales."

POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION

15
<PAGE>

Also, lack of qualification or registration under applicable state securities
laws may mean that the Company would be unable to issue securities upon
exercise of the Warrants to holders in certain states, including at the time
when the Warrants are called for redemption. See "Description of Securities--
Warrants."

AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS

QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISKS OF LOW-PRICED
SECURITIES

16
<PAGE>

subject to Commission rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors. For transactions covered by these rules,
the broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. The broker-dealer also must provide the customer with current
bid and offer quotations for the securities, the compensation of the broker-
dealer and its salesperson in the transaction, and monthly account statements
showing the market value of each such security held in the customer's account.
In addition, prior to effecting a transaction in such a security the broker-
dealer must deliver a standardized risk disclosure document prepared by the
Commission that provides information about low-priced securities and the
nature and level of risks in the market for such securities. Consequently, if
the Company's securities were no longer quoted on Nasdaq, these rules may
affect the ability of broker-dealers to sell the Company's securities and the
ability of purchasers in each of the Primary and Secondary Offering to sell
their securities in the secondary market.

LIMITATIONS ON REPRESENTATIVE'S MARKET MAKING ACTIVITIES

DIVIDENDS UNLIKELY

LIMITED LIABILITY OF DIRECTORS

17
<PAGE>

USE OF PROCEEDS

The Company will receive no proceeds from the sale of Securities offered
hereby.

PRICE RANGE OF COMMON STOCK

As of September 4, 1996, there were 592 record holders of the Company's
Common Stock and approximately 900 beneficial holders of the Company's Common
Stock.

On September 4, 1996, the high bid price was $3.00 and low bid price was
$3.00.

DIVIDEND POLICY

18
<PAGE>

CAPITALIZATION

The following table sets forth the historical capitalization of the Company
at July 31, 1996 and as adjusted to reflect (i) the sale of the Securities in
the Primary Offering, (ii) the consummation by the Company of the Private
Placement, the Debenture Conversion and the Preferred Stock Exchange, and
(iii) the application of the net proceeds from the foregoing, including the
completion of the Steamboat Acquisition and the repayment of debt including
accrual of interest and additional bridge loan borrowing to September 15,
1996. See "Closing Transactions" and "Certain Transactions." This table should
be read in conjunction with the Company's Consolidated Financial Statements
and Notes thereto and the Pro Forma Financial Statements included in this
Prospectus.

<TABLE>
<CAPTION>
JULY 31, 1996
------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt, net of unamortized discount of
$30,000............................................. $ 2,818,000 $ 1,343,000
Loans payable........................................ 960,000
Pre-reorganization income taxes payable, current..... 192,000 192,000
----------- -----------
3,970,000 1,535,000
----------- -----------
11% cumulative redeemable convertible preferred
stock............................................... 3,100,000
-----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; issued and outstanding, 57,500 shares. 1,000
Common stock, $0.01 par value, 35,000,000 shares
authorized; issued and outstanding, 439,650
shares; to be issued and outstanding 2,394,650
shares(1)(2)...................................... 4,000 23,000
Additional paid-in capital......................... 112,000 6,198,000
Accumulated (deficit)^(3).......................... (3,674,000) (3,774,000)
----------- -----------
Total ^ stockholders' equity (deficit)............... 3,557,000) 2,447,000
----------- -----------
Total capitalization................................. $ 413,000 $ 7,082,000
=========== ===========
</TABLE>
- --------

(1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the
Primary Offering, (ii) 1,625,000 shares of Common Stock being issued
pursuant to the Primary Offering, (iii) 125,000 shares of Common Stock to
be issued in the Debenture Conversion and (iv) 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange.

(3) Change in accumulated (deficit) reflects the write off of unamortized debt
discount of $25,000 in connection with repayment of certain debt and the
accrual of interest to September 15, 1996.

19
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JULY 31, 1996

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
HISTORICAL DEBIT CREDIT PRO FORMA
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
A S S E T S
Current assets:
Cash........................................................... $ 1,000 $ 3,500,000(a) $ 4,932,000(c) $1,368,000
5,425,000(b) 2,626,000(d2)
Inventory...................................................... 19,000 19,000
Other current assets........................................... 1,000 1,000
----------- ----------- ----------- ----------
Total current assets........................................... 21,000 8,925,000 7,558,000 1,388,000
Investments in Joint Ventures--at equity:
Lehi Independent Power Associates, L.C......................... 1,112,000 1,112,000
Plymouth Cogeneration Limited Partnership...................... 669,000 669,000
Steamboat Envirosystems, L.C................................... 53,000 4,932,000(c) 4,985,000
Deferred costs of registration.................................. 221,000 221,000(b) --
----------- ----------- ----------- ----------
TOTAL.......................................................... $ 2,076,000 13,857,000 7,779,000 $8,154,000
=========== ----------- ----------- ==========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
(CAPITAL DEFICIENCY)
Liabilities:
Loans payable.................................................. $ 960,000 960,000(d2) $ --
Pre-reorganization income taxes payable........................ 192,000 192,000
Other current liabilities (including due to related parties of
^ $797,000 and ^ $525,000 Pro Forma).......................... 1,663,000 666,000(d2) 75,000(d1) 1,072,000
----------- ----------- ----------- ----------
Total current liabilities...................................... 2,815,000 1,626,000 75,000 1,264,000
Convertible subordinated secured debentures (including due to
related parties of ^ $425,000 and ^ $286,000 (Pro Forma)...... 1,525,000 500,000(f) 1,025,000
Notes payable (including due to related parties of $775,000)... 975,000 1,000,000(d2) 25,000(g) --
Other liabilities (including due to related parties of 318,000 318,000
$12,000)......................................................
----------- ----------- ----------- ----------
Total liabilities.............................................. 5,633,000 3,126,000 100,000 2,607,000
----------- ----------- ----------- ----------
11% cumulative redeemable convertible preferred stock, $.01 par
value (issued and outstanding, none; to be issued and out- 3,100,000(a) 3,100,000
standing, 1,600,000 shares)................................... ----------- ----------
Stockholders' Equity (Capital Deficiency):
Preferred stock, $.01 par value (issued and outstanding, 57,500
shares; to be issued and outstanding, none)................... 1,000 1,000(e) --
Common stock, $.01 par value (issued and outstanding, 439,650
shares; to be issued and outstanding, 2,394,650 shares)....... 4,000 16,000(b) 23,000
2,000(e)
1,000(f)
Additional paid-in capital..................................... 112,000 221,000(b) 400,000(a) 6,198,000
1,000(e) 5,409,000(b)
499,000(f)
25,000(g)
Accumulated deficit............................................ (3,674,000) 75,000(d1) (3,774,000)
----------- ----------- ----------- ----------
Total stockholders' equity (capital deficiency)................ (3,557,000) 323,000 6,327,000 2,447,000
----------- ----------- ----------- ----------
TOTAL.......................................................... $ 2,076,000 $17,306,000 $17,306,000 $8,154,000
=========== =========== =========== ==========
</TABLE>

20
<PAGE>

Notes to Pro Forma Condensed Consolidated Balance Sheet
- --------

(g) To eliminate unamortized debt discount on debt repaid. This charge will be
treated as an extraordinary loss in the statement of operations during the
period in which the Primary Offering is consummated.

21
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

22
<PAGE>

(Footnotes continued from preceding page)

(4a) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(4b) Provision for dividends on 11% Preferred Stock to be sold to Enviro
Partners for $3,100,000. Dividends are payable in 11% Preferred Stock.

(7) Pro forma net income per share is based on the weighted average number of
shares outstanding, the shares issued in the Debenture Conversion and the
Preferred Stock Exchange, the dividend on the 11% Preferred Stock and
shares issued in the Primary Offering to obtain funds required for the
acquisition of the Steamboat Facilities and the retirement of debt
(1,119,461 shares at January 31, 1996 and 1,244,286 shares at July 31,
1996). Assumed exercise of options, warrants and the conversion of the 11%
Preferred Stock have not been reflected as they would be anti-dilutive.

23
<PAGE>

STEAMBOAT ENVIROSYSTEMS, L.C.

PRO FORMA CONDENSED BALANCE SHEET

AS OF JUNE 30, 1996

(d) To reflect the investment to purchase and cancel certain royalty interests
and to fund certain improvements to the Steamboat Facilities.

(e) To reflect assumption of the mortgage to acquire the Steamboat Facilities
from Far West Electric Energy Fund, L.P. and 1-A Enterprises (the
"Mortgage").
(f) To reflect payment of the Mortgage.

24
<PAGE>

STEAMBOAT FACILITIES

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY 1 AND 1-A
FUND, 1-A PRO FORMA
L.P.(1) ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $2,529,000 $875,000 $3,404,000 $ $3,404,000
Other............. 145,000 145,000 (87,000) (3a,b)
(58,000) (4)
---------- -------- ---------- ----------- ----------
Total revenues.. 2,674,000 875,000 3,549,000 (145,000) 3,404,000
---------- -------- ---------- ----------- ----------
Expenses:
Operations:
Depreciation..... 631,000 104,000 735,000 (569,000)(2) 166,000
Royalty.......... 405,000 210,000 615,000 (87,000)(3a,b) 528,000
Other............ 824,000 237,000 1,061,000 (58,000)(4) 1,003,000
Interest........... 655,000 161,000 816,000 (816,000)(5)
---------- -------- ---------- ----------- ----------
Total expenses.... 2,515,000 712,000 3,227,000 $(1,530,000) 1,697,000
---------- -------- ---------- ----------- ----------
Net income........ $ 159,000 $163,000 $ 322,000 $1,707,000
========== ======== ========== ==========
Resulting income to
U.S.
Energy Systems,
Inc.:(6)
Preferred 18%.... $1,707,000
50% of balance...
----------
Total........... $1,707,000
==========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY PRO FORMA
FUND, A 1 AND 1-A
L.P. ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $1,509,000 $410,000 $1,919,000 $ $1,919,000
Other............. 68,000 68,000 (43,000)(3)
(25,000)(4)
---------- ----------- ---------- ----------------- ----------
Total revenues.. 1,577,000 410,000 1,987,000 (68,000) 1,919,000
---------- ----------- ---------- ----------------- ----------
Expenses:
Operations:
Depreciation..... 329,000 52,000 381,000 (298,000)(2) 83,000
Royalty.......... 237,000 92,000 329,000 (43,000)(3a,b) 372,000
Other............ 439,000 105,000 544,000 (25,000)(4) 519,000
Interest........... 330,000 71,000 401,000 (401,000)(5)
---------- ----------- ---------- ----------------- ----------
Total expenses.... 1,335,000 320,000 1,655,000 $(681,000) 974,000
---------- ----------- ---------- ----------------- ----------
Net income........ $ 242,000 $ 90,000 $ 332,000 $ 945,000
========== =========== ========== ==========
Resulting income to
U.S.
Energy Systems,
Inc.:(6)
Preferred 18%.... $ 900,000
50% of balance... 23,000
----------
Total........... $ 923,000
==========
</TABLE>
- ----

(2) To record estimated reduction of depreciation for new basis of assets
acquired, based on $4,982,000 total cost, assuming a 30-year depreciation
period, from date of acquisition.

(b) Does not include additional savings to be made if negotiations with
certain royalty owners, already under way, are successful.

(4) To eliminate intercompany charges paid by 1-A Enterprises to Far West
Electric Energy Fund, L.P.

(5) To eliminate interest expense due to elimination of debt.

25
<PAGE>

U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND PLAN OF
OPERATION

RESULTS OF OPERATIONS

Year ended January 31, 1996 compared to year ended January 31, 1995

The elements making up the losses in the two fiscal years were:

Major items in the selling and administrative expenses were:

Included in corporate expenses in the fiscal year ended January 31, 1996 is
a non-recurring cost of $25,000 for a previously planned public offering that
was never consummated.

26
<PAGE>

Six months Ended July 31, 1996 Compared to 1995

The Company had no revenues for either of these periods. The losses shown
were made up of the following major elements:

LIQUIDITY AND CAPITAL RESOURCES

27
<PAGE>

As a result of accumulated losses, the Company had a negative working
capital of $1,910,000, and a capital deficiency of $2,729,000 at January 31,
1996, and $2,794,000 and $3,557,000, respectively, at July 31, 1996. The
independent auditors' report for the fiscal year ended January 31, 1996 states
that these factors raise substantial doubt about the Company's ability to
continue as a going concern. As a result of the Primary Offering, the
Company's pro forma working capital at July 31, 1996 would be a positive
$124,000.

During the six months ended July 31, 1996, cash flow was carefully
conserved. Salaries were deferred and additional bridge loan borrowings
amounting to $125,000 were received. Fifty percent of interest payments to
holders of the Convertible Debentures continued to be deferred until paid out
of the proceeds of the Primary Offering, by agreement of the holders of the
Convertible Debentures.

PLAN OF OPERATION

The net proceeds of the Primary Offering will be approximately $5,425,000
and the Private Placement of 11% Preferred Stock and Private Warrants will
provide $3,500,000 for a total net proceeds of $8,925,000. Of this total, the
Company's acquisition of 50% of Steamboat LLC will use $4,932,000 (plus
$50,000 that had already been paid as a deposit.) Other liabilities required
to be paid have been adjusted to include additional bridge loan borrowings and
interest accruals through September 15, 1996. The bridge loans, including
interest, total $1,081,000, secured notes payable, including interest, total
$1,209,000, and accrued interest on the Convertible Debentures required to be
paid as part of the restructuring of these instruments, total $336,000. It is
Management's belief that the funds remaining as working capital, together with
the income from the projects including the Steamboat Facilities, will be
sufficient to meet the requirements of the Company for the next 12 months of
operation without having to raise additional funds except on a project finance
basis for new projects.

The steps taken to reduce the Company's interest costs include (i) the
capitalization of $500,000 of the Convertible Debentures and the reduction of
the interest rate on the balance after consummation of the Primary Offering
from 18% to 9%, (ii) the payment of secured notes in the principal amount of
$1,000,000 and interest thereon, and (iii) repayment of all bridge loans. As
of September 11, 1996, three of the 26 holders of Convertible Debentures,
representing $150,000 in principal amount, have not agreed to the interest
rate reduction from 18% to 9% per annum. Accordingly, the Company's annual
interest expense will be $13,500 greater than the Pro Forma amounts shown in
this Prospectus.

28
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29
<PAGE>

These other projects should not require capital outlays, as they will be
self-financed. The working capital remaining after the closing of the Primary
Offering, together with the regular income from Steamboat LLC, will be
adequate for operational needs during the next twelve months.

RESTRUCTURING OF DEBT

Concurrently with the consummation the Primary Offering and the other
Closing Transactions, the Convertible Debentures, of which an aggregate
principal amount of $1,525,000 is outstanding, will be restructured by
converting $500,000 principal amount into 125,000 shares of Common Stock and
125,000 Private Warrants and reducing the conversion rate of the remainder to
$8.00 per share from the present $16 per share, making the remainder
convertible into 128,125 shares of Common Stock. From and after the
consummation of the Primary Offering, the interest rate will be 9% instead of
the present 18%. As of September 11, 1996, three of the 26 holders of
Convertible Debentures, representing $150,000 in principal amount, have not
agreed to the interest rate reduction from 9% to 18% per annum. Accordingly,
the Company's annual interest expense will be $13,500 greater than the Pro
Forma amounts in this Prospectus.

ACCOUNTING STANDARDS

IMPACT OF INFLATION

The Company's contracts include adjustments for changes in inflation
indices. The impact of inflation on Company earnings and cash flows is
expected to be minimal.

30
<PAGE>

BUSINESS

THE COMPANY

BUSINESS OF THE COMPANY

31
<PAGE>

32
<PAGE>

COGENERATION AND INDEPENDENT POWER PRODUCTION

33
<PAGE>

CURRENT OPERATIONS AND ON-GOING PROJECTS

Far West Capital has a 5.14% ownership interest in FWEEF and is contributing
to Steamboat LLC the debt owed to it by FWEEF. Far West Capital will not
receive any portion of the purchase price paid by the Company. Before sharing
net income from Steamboat LLC with Far West Capital, the Company will have a
priority income distribution from the project of $1,800,000 per year, with
income above this priority amount to be divided equally between the Company
and Far West Capital. The Company and Far West Capital will co-manage the
project. Far West Capital was established in 1983 and has been a developer and
operator of cogeneration and independent power projects, principally
hydroelectric and geothermal, in the western United States and is the
Company's current partner in LIPA. The two Steamboat geothermal plants were
built in 1986 and 1988, respectively, by Far West Capital. A substantial
portion of the net proceeds of the Primary Offering and the Private Placement
will be used for this acquisition, which will generate immediate cash flow for
the Company, thereby allowing it to pursue and launch additional projects,
none of which is the subject of a binding or definite agreement.

34
<PAGE>

35
<PAGE>

36
<PAGE>

37
<PAGE>

38
<PAGE>

OTHER POTENTIAL PROJECTS FOR THE COMPANY

ALTHOUGH PRELIMINARY EFFORTS HAVE BEEN UNDERTAKEN IN CONNECTION WITH THE
FOLLOWING PROJECTS, THERE IS NO ASSURANCE THAT ANY OF THEM WILL BE DEVELOPED.

39
<PAGE>

COMPETITION

EMPLOYEES

DESCRIPTION OF PROPERTY

40
<PAGE>

GOVERNMENT REGULATION

41
<PAGE>

LEGAL PROCEEDINGS

There are no legal proceedings currently pending or threatened against the
Company.

42
<PAGE>

MANAGEMENT

The directors and executive officers of the Company are presently as
follows:

At the conclusion of the Primary Offering, in accordance with the terms of
the Private Placement, Messrs. Knoll and Moody will resign and two new
directors, who will be designated by Enviro as the holder of the 11% Preferred
Stock (the "Designated Directors"), will be elected by the remaining directors
to fill the vacancies. Pursuant to the terms of the 11% Preferred Stock, no
action may be taken by the Board of Directors without the approval of at least
one of the Designated Directors.

43
<PAGE>

his B.S. degree in Computer Sciences from M.I.T. and also a B.S. degree in
Management from the Sloan School at M.I.T. He received his MBA from Columbia
University.

In addition, the following persons, who are not officers or directors, are
affiliated with the operations of the Company as consultants:

Donald A. Warner. Mr. Warner has acted as director of development and a
consultant to the Company since 1993. For over 20 years, Mr. Warner has been
closely involved with the energy and environmental industries, and has been
consultant and attorney to numerous environmental and energy project
developments in both the public and private sector. The Company expects Mr.
Warner to work for the Company full-time after the completion of the Primary
Offering. Mr. Warner holds his BA degree from Rochester University and his JD
degree from Syracuse University. He also holds an LLM degree from Washington
University.

LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS

44
<PAGE>

EXECUTIVE COMPENSATION

Compensation of Directors. Directors are not compensated for attendance at
meetings of the Board, although certain travel expenses relating to attending
meetings are reimbursed.

45
<PAGE>

Company or for two years thereafter, or, at any time, disclose any
confidential information pertaining to the Company. Mr. Nelson works for the
Company full-time. As of September 15, 1996, the amount of deferred
compensation owed to Mr. Nelson will be $219,250.

CERTAIN TRANSACTIONS

Messrs. Nelson, the President, Theodore Rosen, the Chairman, Ronald Moody, a
director, Fred Knoll, a director, and S. Marcus Finkle, a principal
stockholder of the Company, are participants in the Plymouth Loan (having
loaned $25,000, $25,000, $75,000, $650,000 and $150,000 respectively), which
bears interest at the rate of 2.5% per annum above the prime rate, and in
which the lenders, other than Messrs. Nelson and Rosen, received five-year
warrants to purchase 120 shares of the Company's Common Stock for each $1,000
loaned, which warrants are exercisable at $5.00 per share. Messrs. Nelson,
Rosen, Moody, Knoll and Finkle will benefit by the payment to them from the
net proceeds of the Primary Offering and the Private Placement of $30,400,
$30,300, $90,800, $786,500 and $181,900, respectively (including accrued
interest to September 15, 1996) in connection with the repayment of the
Plymouth Loan. Mr. Rosen, Mr. Knoll and Mr. Finkle and Guernroy Ltd. a
principal Stockholder, are also holders of the Company's Convertible
Debentures in the amounts of $125,000, $200,000, $50,000 and $50,000
respectively. Accrued interest, adjusted to September 15, 1996, which will be
repaid from the proceeds of the Primary Offering, amount to $26,900, $50,000,
$11,500 and $10,800 respectively. As part of the Debenture Conversion, the
conversion rate of the Convertible Debentures, which remain outstanding after
the Debenture Conversion, will be reduced to $8.00 per share from the present
$16.00 per share and the interest rate thereon will be reduced to 9% from the
present 18%. In addition to payment of interest, the Company is obligated to
pay the holders of the Convertible Debentures a pro rata portion of 50% of
LIPA's share of the net revenue (net of funds required for the payment of
interest) resulting from LIPA's energy sales. As of September 11, 1996, three
of the 26 holders of Convertible Debentures, representing $150,000 in
principal amount, have not agreed to the interest rate reduction from 18% to
9% per annum. Accordingly, the Company's annual interest expense will be
$13,500 greater than the Pro Forma amounts shown in this Prospectus. See
"Closing Transactions," and "Description of Securities--Convertible
Debentures."

46
<PAGE>

and Rosen. The purpose of the Anchor Loan was to finance the costs and
expenses of the proposed public offering and provide other funding to the
Company for various costs and expenses. The maturity of the Anchor Loan has
been extended from March 11, 1996 to September 15, 1996. The Company is
negotiating with Anchor and anticipates that it will successfully extend the
term of the Anchor Loan beyond September 15, 1996 without triggering a
default. The Anchor Loan is to be repaid at the date of closing of the Primary
Offering or at the date of closing of any public or private offering of debt
or equity securities in the gross amount of $5,000,000 or more and/or the sale
of any of the Company's assets or any part thereof. $600,000 of the proceeds
of the Primary Offering and the Private Placement will be used to repay the
Anchor Loan and $156,000 of accrued interest on such loan. The 57,500 shares
of Series One Preferred Stock will be exchanged for 205,000 shares of Common
Stock in the Preferred Stock Exchange. See "Description of Securities--
Preferred Stock--Series One Preferred Stock."

Private Placement. In December 1995, Solvation loaned the Company $200,000,
which carries an interest rate of 10% per annum and which is due when the
Offering is closed, but no later than September 15, 1996. The Company is
negotiating with Solvation and anticipates that it will successfully extend
the term of the Solvation Loan beyond September 15, 1996 without trigger a
default. A further $50,000 was loaned to the Company in May 1996 on the same
terms and conditions. The Solvation Loan is cross-collateralized with the
Anchor Loan by a first lien on all of the assets of the Company and 97,250
shares of Common Stock owned by Messrs. Nelson and Rosen. Concurrently with
the closing of the Primary Offering, the Company will issue to Enviro for
$3,100,000, 1,600,000 shares of 11% Preferred Stock convertible into 1,600,000
shares of Common Stock of the Company. See "Description of Securities--
Preferred Stock--11% Preferred Stock." The Company will also issue 500,000
Private Warrants to EMC for $400,000. See "Description of Securities--
Warrants--Private Warrants." EMC is a subsidiary of Solvation. Solvation and
Enviro are indirectly owned by different members of the same family. The terms
for the Private Placement were negotiated at arms-length.

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<PAGE>

PRINCIPAL AND SELLING SECURITYHOLDERS

The following table lists the number of shares of Common Stock owned as of ^
August 31, 1996 by (i) persons known to hold more than five percent of the
shares of outstanding Common Stock, (ii) each director of the Company, (iii)
any executive officers named in the Summary Compensation Table, (iv) all
officers and directors of the Company as a group. The following table also
includes relevant information regarding the securityholders for whose account
securities are being offered pursuant to this Prospectus. Each person named in
the table has sole investment power and sole voting power with respect to the
shares of the Common Stock set forth opposite his or its name, except as
otherwise indicated.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP SHARES TO WARRANTS BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) BE SOLD TO BE SOLD AFTER OFFERING(1)
-------------------- --------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard Nelson.......... 82,446 18.7% 0 82,446 3.4%
Theodore Rosen.......... 88,333(2) 17.4% 0 100,833(2a) 4.1%
Ronald Moody............ 21,500(3) 4.8% 0 21,500(3) 0.9%
334(4a) 7.5%
Evan Evans.............. 2,500(5) 0.6% 0 2,500(5) 0.1%
S. Marcus Finkle........ 63,833(6) 13.9% 0 68,833(6a) 2.9%
117 AABC
Aspen, CO
Guernroy, Ltd........... 38,158(7) 8.6% 0 43,158(7a) 1.8%
c/o Royal Bank of
Canada
Channel Isles, UK
Enviro Partners, L.P.... 1,600,000(8) 78.4% 1,600,000(8) 0 0%
885 Third Avenue, 34th
Floor
New York, NY 10022
Anchor Capital Company, 205,000(9) 31.8% 205,000(9) 0 0%
LLC....................
1140 Avenue of the
Americas
New York, NY 10036
Energy Management 0 0% 0 500,000(10) 0 0%
Corporation............
885 Third Avenue, 34th
Floor
New York, NY 10022
All officers and 381,113(2)(2a) 55.2% 413,613(2)(2a) 15.6%
directors..............
as a group (6 persons) (3)(4) (3)(4)
(5) (4a)(5)
</TABLE>
- --------

(1) The tabular information gives effect to the exercise of warrants or
options exercisable within 60 days of the date of this table owned in each
case by the person or group whose percentage ownership is set forth
opposite the respective percentage and is based on the assumption that no
other person or group exercises its option. The address of each of the
officers and directors is 515 North Flagler Drive, Suite 202, West Palm
Beach, Florida 33401.

(2) Includes 8,333 shares issuable upon conversion of Convertible Debentures,
and 60,250 shares issuable upon exercise of non-qualified options at an
exercise price of $8 per share which became exercisable on December 1,
1995.

(2a) Includes 10,417 shares issuable upon conversion of Convertible
Debentures, and 60,250 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable on
December 1, 1995. Excludes 10,417 shares issuable upon exercise of
Private Warrants which are not exercisable until one year after the
closing of the Debenture Conversion. Also excludes 500,000 shares of
Common Stock underlying 500,000 Private Warrants held by EMC which are
subject to Mr. Rosen's right of first refusal for nine months from the
date of this Prospectus.

(3) Includes 9,000 shares issuable on exercise of warrants at an exercise
price of $5 per share which became exercisable on October 31, 1994.

48
<PAGE>

(4) Includes (i) 67,500 shares issuable upon exercise of non-qualified options
at an exercise price of $8 per share which became exercisable on December
1, 1995 and (ii) 91,333 shares owned by Europa International Inc.
("Europa"), including 13,333 shares issuable to Europa upon conversion of
Convertible Debentures and 78,000 shares issuable to Europa on exercise of
warrants at an exercise price of $5 per share which became exercisable on
October 31, 1994. Knoll Capital Management has the sole voting power of
the shares owned by Europa. Mr. Knoll is the President and sole
shareholder of Knoll Capital an^ Management.

(4a) Includes Europa holdings of 16,667 shares issuable upon conversion of
Convertible Debentures and 78,000 shares issuable on exercise of warrants
at an exercise price of $5 per share which became exercisable on October
31, 1994. Knoll Capital Management has the sole voting power of the
shares owned by Europa. Mr. Knoll is the President and sole shareholder
of Knoll Capital Management. Excludes 16,667 shares issuable upon
exercise of Private Warrants which are not exercisable until one year
after the closing of the Debenture Conversion.

(5) Includes 1,250 shares issuable upon exercise of non-qualified options at
an exercise price of $4 per share which became exercisable on January 25,
1995.

(6) Includes 3,333 shares issuable upon conversion of Convertible Debentures
and 18,000 shares issuable on exercise of warrants at an exercise price of
$5 per share which became exercisable on October 31, 1994.

(6a) Includes 4,167 shares issuable upon conversion of Convertible Debentures
and 18,000 shares issuable on exercise of warrants at an exercise price
of $5 per share which became exercisable on October 31, 1994. Excludes
4,167 shares issuable upon exercise of Private Warrants which are not
exercisable until one year after the Debenture Conversion.

(7) Includes 3,333 shares issuable upon conversion of Convertible Debentures.

(7a) Includes 4,167 shares issuable upon conversion of Convertible Debentures.
Excludes 4,167 shares issuable upon exercise of warrants which are not
exercisable until one year after the Debenture Conversion.

(8) Represents shares issuable upon conversion of 11% Preferred Stock.
Excludes 500,000 shares issuable to EMC upon exercise of Private Warrants
which are not exercisable until one year after the Private Placement.
Enviro and EMC are indirectly owned by different members of the same
family.

(9) Represents shares issuable upon conversion of 57,500 shares of Series One
Preferred Stock.

(10) Represents warrants issued to EMC which are not exercisable until one
year after the Private Placement and which do not represent beneficial
ownership of the Common Stock as of the date of this table. EMC currently
owns all of the Private Warrants, which represent 21.7% of the warrants
outstanding.

49
<PAGE>

DESCRIPTION OF SECURITIES

COMMON STOCK

WARRANTS

50
<PAGE>

Private Warrants. On May 3, 1996 EMC entered into an agreement with the
Company whereby EMC agreed to purchase for $400,000, concurrently with
consummation of the Primary Offering, Private Warrants to purchase 500,000
shares of Common Stock of the Company. Terms of the agreement were negotiated
by the two parties. The Private Warrants are to have the same terms and
conditions as the Warrants. The Company has agreed to keep a shelf
registration statement in effect, covering the Private Warrants to be received
by EMC and the shares into which such Private Warrants are convertible. EMC
has given Theodore Rosen, the Company's Chairman of the Board, a right of
first refusal to purchase such Private Warrants if at any time during the
nine-month period following the date of this Prospectus EMC decides to sell
such Private Warrants. Mr. Rosen has agreed with the Representative that he
will exercise such right of first refusal in the event EMC decides to sell the
Private Warrants during such nine-month period and that any Private Warrants
purchased by Mr. Rosen will not be sold by him until at least 13 months from
the date of this Prospectus. 125,000 Private Warrants are also being issued in
connection with the Debenture Conversion. The terms of the Private Warrants
were negotiated at arms-length.

PREFERRED STOCK

Series One Preferred Stock. In June 1995, the Board of Directors designated
100,000 of the Company's Preferred Stock as "Series One Exchangeable and
Convertible Preferred Stock" (the "Series One Preferred Stock"). The Company
issued 57,500 shares of the Series One Preferred Stock to Anchor under the
terms of the Anchor Loan. See "Certain Transactions." Under the terms of the
Anchor Loan, upon the consummation of the Primary Offering and the other
Closing Transactions, the 57,500 shares of Series One Preferred Stock will be

51
<PAGE>

exchanged for 205,000 shares of Common Stock. The holders are also entitled to
receive cumulative dividends equal to $1.00 per share and have a liquidation
preference of $10.00 per share plus any dividends accrued and unpaid. The
holders of Series One Preferred Stock have no voting rights except for certain
corporate actions. The Series One Preferred Stock is redeemable at the option
of the Company at a price of $10.00 per share, plus accrued and unpaid
dividends, under certain conditions, commencing January 1, 1999.

11% Preferred Stock. On May 3, 1996 Enviro entered into an agreement with
the Company whereby Enviro agreed to purchase for $3,100,000, concurrently
with the consummation of the Primary Offering, 1,600,000 shares of 11%
Preferred Stock, which may be converted into 1,600,000 shares of Common Stock
of the Company. Such conversion may take place at any time, and from time to
time. The 11% Preferred Stock has an aggregate liquidation preference of
$3,100,000 plus accrued dividends and will carry a preferential annual
cumulative dividend rate of 11% of the liquidation preference. During the
first two years after issuance, dividends on the 11% Preferred Stock will be
payable in additional shares of 11% Preferred Stock (valued at $1.8375 per
share). Thereafter dividends on the 11% Preferred Stock will be payable in
either shares of 11% Preferred Stock or cash, at the option of the Company.
The Company has agreed to keep a shelf registration statement in effect
covering the shares into which the 11% Preferred Stock is convertible. Enviro
has agreed that it will not sell the shares received upon conversion for a
period of nine months from the closing of the Primary Offering without the
Representative's consent. The 11% Preferred Stock will vote with the Common
Stock on a one vote per share basis on all matters other than the election of
directors.

The terms of the 11% Preferred Stock were negotiated at arms-length.

CONVERTIBLE DEBENTURES

Concurrently with the consummation of the Primary Offering and the other
Closing Transactions, the Convertible Debentures, of which an aggregate
principal amount of $1,525,000 is outstanding, will be restructured by
converting $500,000 principal amount into 125,000 shares of Common Stock and
125,000 Private Warrants and reducing the conversion rate of the remainder to
$8.00 per share from the present $16 per share, making the remainder
convertible into 128,125 shares of Common Stock. From and after the
consummation of the Primary Offering, the interest rate will be 9% instead of
the present 18%. As of September 11, 1996, three of the 26 holders of
Convertible Debentures, representing $150,000 in principal amount, have not
agreed to the conversion. If such individuals do not agree to the conversion,
the Company's annual interest expense will increase by $13,500. These changes
were negotiated with the holders of the Convertible Debentures. The
Convertible Debentures were issued in June 1994 and mature on January 25,
2004. In addition to payment of interest, the Company shall pay the holders of
the Convertible Debentures a pro rata portion of 50% of LIPA's share of the
net revenue (net of funds required for the payment of interest) resulting from
LIPA's energy sales (the "Supplemental Participation"). See "Business--Current
Operations and On-Going Projects--Lehi Cogeneration Project."

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<PAGE>

ANTI-TAKEOVER PROVISIONS

The Delaware Statute may discourage certain types of transactions involving
an actual or potential change in control of the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock and warrant agent for
the Warrants is American Stock Transfer & Trust Company.

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<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Possible Rule 144 Sales. Upon completion of the Primary Offering by the
Company described in this Prospectus, the Company will have outstanding
2,394,650 shares of Common Stock. All of the 1,625,000 shares sold in the
Primary Offering (assuming no exercise of the Underwriters' over-allotment
option in the Primary Offering) will be freely transferable by persons other
than affiliates (as defined in regulations under the Securities Act) without
restriction or further registration under the Securities Act.

Of the 439,650 shares of Common Stock outstanding prior to the Primary
Offering, 64,650 shares of Common Stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act and may
not be sold in the absence of registration under the Securities Act, unless an
exemption from registration is available, including the exemption provided by
Rule 144. Under Rule 144 as currently in effect, of such 64,650 shares, 43,250
shares are currently eligible for sale (none of which are subject to the
agreements described below restricting their sale), and the remaining 21,400
shares will be eligible for such sale in or after November 1996, subject in
each instance to the volume limitations of the Rule. The holders of record of
130,946 of these shares have agreed with the Representative not to sell their
shares until thirteen months from the date of this Prospectus without the
prior written approval of the Representative. The 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange and the 125,000 shares of
Common Stock to be issued upon the Debenture Conversion will be restricted
securities. Although registered pursuant to the Shelf Registration, Anchor has
agreed not to sell the 205,000 shares of Common Stock it will receive in the
Preferred Stock Exchange without the Representative's prior written approval,
for a period of nine months following the consummation of the Offering. The
foregoing does not give effect to any shares issuable on exercise of
outstanding options and warrants. The effect of the offer and sale of such
shares may be to depress the market price for the Company's Common Stock.

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<PAGE>

PLAN OF DISTRIBUTION

The Securities are being registered to permit public secondary trading of
the 1,805,000 shares of Common Stock and the 500,000 Redeemable Common Stock
Purchase Warrants by the holders thereof from time to time after the date of
this Prospectus. The Company has agreed, among other things, to bear all
expenses other than underwriting discounts and selling commissions and fees in
connection with the registration and sale of the Securities covered by this
Prospectus.

The Company will not receive any of the proceeds from this Secondary
Offering by the Selling Securityholders. The Company has been advised by the
Selling Securityholders that the Selling Securityholders may sell all or a
portion of the Securities beneficially owned by them and offered hereby from
time to time on the Nasdaq SmallCap Market, the NASD OTC Bulletin Board or any
exchange on which the Securities may trade on terms to be determined at the
times of such sales. The Selling Securityholders may also make private sales
of the Securities directly or through a broker or brokers. Alternatively, any
of the Selling Securityholders may from time to time offer any of the
Securities beneficially owned by them through underwriters, dealers or agents,
who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Securityholders and from the
purchasers of the Securities for whom they may act as agent. Any sales
pursuant to this Prospectus by holders of any of the Securities offered hereby
will require the delivery of a current Prospectus to the purchaser.

The Securities may be sold from time to time in one or more transactions at
fixed offering prices, which may be changed, or at varying prices determined
at the time of sale or at negotiated prices. Such prices will be determined by
the holders of such Securities or by agreement between such holders and
underwriters or dealers who may receive fees or commissions in connection
therewith. The aggregate proceeds to the Selling Securityholders from the sale
of the Securities offered hereby will be the purchase price of such Securities
less discounts and commissions, if any. No underwriting arrangements exist as
of the date of this Prospectus for sales by any Selling Securityholders. Upon
being advised of any underwriting arrangements, the Company will supplement
this Prospectus to disclose such arrangements.

The Company may suspend the use of this Prospectus at any time under certain
circumstances relating to pending corporate developments, public filings with
the Commission and similar events.

In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.

The Selling Securityholders and any broker-dealers, agents or underwriters
that participate with the Selling Securityholders in the distribution of the
Securities may be deemed to be "underwriters" within the meaning of the
Securities Act, in which event any commissions received by such broker-
dealers, agents or underwriters and any profit on the resale of the Securities
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.

LEGAL MATTERS

The legality of the Securities offered hereby will be passed upon for the
Company by the firm of Reid & Priest LLP, New York, New York.