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U.S. Energy Biogas Corp. Files to Restructure Flawed Loan Agreement under Chapter 11 and Unlock Shareholder Value.

- All U.S. Energy Biogas Facilities Open and Operating as Usual -

- Parent U.S. Energy Systems and Parent's UK Subsidiary Not Part of Chapter 11 Filing -

- U.S. Energy Systems Increases Ownership of U.S. Energy Biogas to 100%, Names Adam D. Greene as U.S. Energy Biogas CEO -

NEW YORK -- U.S. Energy Biogas Corp. ("USEB" or "the Subsidiary"), a U.S.-based renewable energy business, today reported that it has filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. USEB said that its business is operationally healthy with attractive growth opportunities, it is current in its payment of all principal and interest, no monetary defaults exist or are alleged by any creditors, and it has honored every material reporting requirement under its loans. However, USEB said that its current capital structure is impaired by a flawed and unjustifiably onerous loan agreement negotiated by its former management with Countryside Power Income Fund ("Countryside") that, absent a restructuring, would cause USEB to become insolvent. Having failed in good faith efforts to renegotiate the Countryside loan, including offering to repay the loan in full, USEB's board of directors determined that Chapter 11 is the best venue for pursuing and establishing an appropriate capital structure to support the continued operation and growth of USEB's business. USEB believes that it will be able to achieve a Plan of Reorganization that will honor 100% of all valid pre-petition claims.

Continuing Operations Unaffected

USEB said that all of its facilities are open and operating as usual, and that its ongoing operations will be funded by USEB's substantial continuing cash flow. USEB intends to continue normal business relationships and functions with utility customers during the Chapter 11 process.

USEB has filed a motion for cash collateral that, if granted by the Court, will provide ample liquidity to pay all vendors and suppliers in full and under normal terms for goods and services received by USEB after today's Chapter 11 filing. USEB also has filed First Day Motions that, if granted by the Court, will ensure that employees will continue to be paid as usual, and health care plans and other benefits for employees and retirees will continue. USEB's qualified retirement plans for retirees and vested employees are fully funded and protected by federal law.

USEB's Parent and Parent's UK Subsidiary Not Included in Filing

USEB and its parent company, U.S. Energy Systems, Inc. (Nasdaq: USEY or "the Company"), said that USEB's Chapter 11 filing did not include USEY or USEY's other subsidiary, a UK-based natural gas exploration and development business, UK Energy Systems (UKEY). Moreover, neither USEY's nor UKEY's operations are affected by USEB's Chapter 11 filing.

USEY is a "clean and green" energy company that owns and operates renewable energy, clean energy and power generation businesses in the U.S. and UK.

The Best Strategic Alternative for USEY Shareholders

"USEB is an operationally healthy business with exciting growth potential, and it should also be a valuable business, but instead its value has been nullified by its capital structure and it has been on a collision course with insolvency," said Asher E. Fogel, Chairman of USEB and Chief Executive Officer of USEY. "Without meaningful progress in our discussions with Countryside, and with our opportunity costs continuing to rise, we decided that it is in the best interests of USEB, and therefore USEY's shareholders, to move our efforts to recapitalize USEB into the Chapter 11 venue at this juncture."

"The Countryside loan traps approximately $33 million in cash that could fund growth investments and help to meaningfully contain our cost of funds. Our efforts to improve USEB's capital structure and enable it to take advantage of its growth opportunities are consistent with our fundamental business strategy," Mr. Fogel said.

"USEY's strategy is to identify and acquire high potential clean and green energy businesses whose values are depressed due to financial or operating constraints," Mr. Fogel said. "Our experienced executive and operating management team work together to develop and execute focused plans for unlocking trapped value and building strong and successful businesses for the benefit of customers, business partners and the USEY's shareholders."

"USEB's U.S. landfill gas business currently generates strong profit margins and has attractive growth potential. We believe that resolving the flawed and unjustifiably onerous Countryside loan arrangement will unlock significant value for USEY shareholders. Moreover, we are moving forward with our highly experienced renewable energy leadership team to execute business development plans that we believe can double the level of USEB's current free cash flow over the next four years," Mr. Fogel concluded.

In connection with USEB's Chapter 11 filing, USEY stated that it has agreed to grant a reduced number of warrants to a Secured Term Loan lender and that it has no further obligation to deliver additional warrants under a previous warrant purchase agreement. As announced by USEY on August 10, 2006, a Secured Term Loan lender required from USEY by December 31, 2006 either an unsecured guaranty of the USEB business in support of its loan to a USEY affiliate, or warrants for approximately 4.0 million shares of USEY common stock exercisable at $0.01 and with a term of 7.5 years. With USEB's Chapter 11 filing, USEY is unable to obtain the necessary waiver from Countryside in order to provide the unsecured guaranty to the Secured Term Loan lender, and USEY has agreed to grant the Secured Term Loan lender warrants for approximately 1.1 million (instead of approximately 4.0 million) shares of common stock at the same term and conditions. USEY also has agreed to extend the exclusive agreement with the Secured Term Loan lender to arrange financing for the Company for an additional 12 months.

USEY Completes Transaction to Consolidate Ownership of USEB

Reflecting USEY's confidence in USEB's operational performance, intrinsic value and growth potential, USEY today also reported that it has completed the acquisition of the approximately 46% of USEB's stock it previously did not own. In consideration for the USEB stock, USEY agreed to assume a promissory note with remaining payments aggregating $430,000; a contingent obligation based on the value of Section 29 tax credits, with a face amount of $4.3 million; and other capital and operating expense obligations not to exceed $1 million. Management currently anticipates that the total assumed payments and obligations in the USEB stock transaction will not exceed an aggregate of $1.43 million. As part of the transaction, USEY also agreed to enter into a defined commercial relationship with the selling stockholder. Further information about USEY's acquisition of the USEB stock is contained in a Form 8-K filed by USEY today.

In connection with USEY's consolidation of ownership in USEB, it also appointed USEY Senior Vice President Adam D. Greene as USEB's Chief Executive Officer. Richard J. Augustine will remain USEB President and continue to oversee day-to-day operations.

The Countryside Loan

USEB believes the Countryside loan is flawed and unjustifiably onerous because, among other factors:

-- The Countryside loan was the result of a self-dealing transaction by members of Countryside's management who, at the time, were also serving as USEB's management;

-- The Countryside loan includes an unduly burdensome 15-year "make-whole" provision that in effect constitutes a penalty, preventing pre-payment, regardless of current market rates; and

- The Countryside loan includes covenants that require USEB to set aside significant amounts from cash flow in reserve accounts, needlessly trapping cash that might otherwise help grow the enterprise.

Further Information

USEB reported in its Chapter 11 filings that, as of September 30, 2006, it had total assets of approximately $161 million and total liabilities of approximately $155 million.

USEB's legal advisor in the Chapter 11 filing is Hunton & Williams LLP.

Additional information about USEY is available on the Company's Web site at: http://www.useyinc.com.

About U.S. Energy Systems, Inc.

U.S. Energy Systems, Inc. is an owner of green power and clean energy and resources. USEY owns and operates energy projects in the United States and United Kingdom that generate electricity, thermal energy and gas production.

Certain matters discussed in this press release are forward-looking statements, and certain important factors may affect the Company's actual results and could cause actual results to differ materially from any forward-looking statements made in this release, or which are otherwise made by or on behalf of the Company. Such factors include, but are not limited to, our ability to continue as a going concern, access to needed financing or refinancing on acceptable terms, revisions in the initial estimates in the fair market value of the acquired assets, failure to realize the estimated savings or operating results of the acquisition, and other risks associated with acquisitions generally, changes in market conditions, the inability to commence planned projects in a timely manner, the impact of competition, and the ability to complete acquisitions, as well as other risks detailed from time to time in U.S. Energy's Securities and Exchange Commission filings, including its Annual Report on Form 10-K for the year ended December 31, 2005 as well as the 10-Q for the period ended September 30, 2006. We do not undertake to update any of the information set forth in this press release.
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