SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(MARK ONE)

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

           For the quarterly period ended October 31, 2000

[  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

           FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                             COMMISSION FILE NUMBER:
                                     0-10238

                            U.S. ENERGY SYSTEMS, INC.


         Delaware                                               52-1216347
 (State or Jurisdiction of                                    (I.R.S. Employer
 Incorporation or Organization)                           Identification Number)


                              515 N. Flagler Drive
                                    Suite 702
                            West Palm Beach, FL 33401
                    (Address of Principal Executive Offices)

                                 (561) 820-9779
                (Issuer's Telephone Number, Including Area Code)

                                       N/A
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

    Check whether the issuer:  (1) has filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.
                                            Yes  [X]          No  [  ]

    Check whether the registrant  filed all documents and reports required to be
filed by  Section  12, 13 or 15(d) of the  Exchange  Act after  distribution  of
securities under a plan confirmed by a court.
                                            Yes  [X]          No  [  ]

    State the number of shares outstanding of each of issuer's classes of common
equity, as of December 11, 2000:


            Title of Class                                Number of Shares
            --------------                                ----------------
                Common                                       7,687,958

    Transitional Small Business Disclosure Format (check one): Yes  [  ] No  [X]


<PAGE>

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
<S>
                                                                                      <C>           <C>
                                                                                      October 31,   January 31,
                                                                                         2000          2000
                                                                                     ------------  --------
                                                                                     (unaudited)    (audited)
                   ASSETS
                   Current assets:
                      Cash.......................................................    $  5,564,000  $    301,000
                      Accounts receivable (less allowance for doubtful accounts
                      $15,000)...................................................       1,112,000       532,000
                      Notes receivable - current portion.........................          20,000        20,000
                      Other current assets.......................................         664,000       352,000
                      Life insurance claims receivable...........................               -     1,001,000
                                                                                     ------------  ------------
                        Total current assets.....................................       7,360,000     2,206,000

                   Property, plant and equipment, net............................       5,986,000     5,881,000
                   Notes receivable, less current portion........................       1,754,000     1,752,000
                   Accrued interest receivable...................................         459,000       459,000
                   Investments in joint ventures:
                      Lehi Independent Power Associates, L.C.....................         847,000       886,000
                      Plymouth Cogeneration Limited Partnership..................         429,000       470,000
                      Marathon Capital, LLC......................................       1,013,000             -
                      Castlebridge Partners, LLC.................................       3,097,000             -
                   Project development costs.....................................         342,000             -
                   Deferred acquisition costs....................................         627,000       397,000
                   Deferred financing costs......................................         557,000       480,000
                   Goodwill, net.................................................       1,702,000     1,796,000
                   Other assets..................................................          93,000        27,000
                                                                                     ------------  ------------
                                                                                     $ 24,266,000  $ 14,354,000
                                                                                     ============  ============
                   LIABILITIES
                   Current liabilities:
                      Current portion of long-term debt..........................    $    188,000  $    169,000
                      Notes payable - bank.......................................         282,000       300,000
                      Accounts payable and accrued expenses......................       1,040,000       717,000
                      Payable to estate of former officer........................         119,000       375,000
                      Litigation settlement payable..............................               -       900,000
                                                                                     ------------  ------------
                        Total current liabilities................................       1,629,000     2,461,000

                   Long-term debt, less current portion..........................         519,000       384,000
                   Convertible subordinated secured debentures...................         366,000       366,000
                   Advances from joint ventures..................................         102,000        90,000
                                                                                     ------------  ------------
                        Total liabilities........................................       2,616,000     3,301,000
                   Minority interests............................................         559,000       559,000

                   Commitments and contingencies

                   STOCKHOLDERS'   EQUITY
                   Preferred stock, $.01 par value, authorized 10,000,000
                   shares:
                      Series A, cumulative, convertible, issued and outstanding
                      1,138,888 shares (liquidation value of $10,249,990)........          11,000         3,000
                      Series B, cumulative, convertible, issued and outstanding
                      398 shares.................................................               -             -
                   Common stock, $.01 par value, authorized 50,000,000 shares;
                   issued
                      7,689,309 shares and 5,364,124 shares, respectively........          77,000        54,000
                   Treasury stock, 7,600 shares of common stock at cost..........         (15,000)      (15,000)
                   Stock subscription receivable.................................      (7,741,000)            -
                   Additional paid-in capital....................................      45,628,000    18,425,000
                   Accumulated deficit...........................................     (16,869,000)   (7,973,000)
                                                                                     ------------  ------------
                        Total stockholders' equity...............................      21,091,000    10,494,000
                                                                                     ------------  ------------
                                                                                     $ 24,266,000  $ 14,354,000
                                                                                     ============  ============
</TABLE>
                                  See notes to consolidated financial statements

                                        2
<PAGE>




                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>
                                                              <C>               <C>                    <C>              <C>
                                                              Three Months Ended October 31,           Nine Months Ended October 31,
                                                                  2000          1999                       2000             1999
                                                                 -------       -------                  ----------        ----------

Revenues...................................................    $2,115,000       $1,378,000             $5,377,000       $3,241,000
                                                                ---------       ----------             ----------       ----------
Costs and expenses:
    Operating expenses.....................................     1,006,000          868,000              2,794,000        2,121,000
    General and administrative expenses....................       453,000          452,000              1,662,000        1,377,000
    Depreciation...........................................       174,000          151,000                512,000          429,000
    Loss(gain)from joint ventures..........................     (173,000)          27,000               (129,000)          69,000
                                                                ---------      -----------             ----------       ----------
         Total costs and expenses                               1,460,000        1,498,000              4,839,000        3,996,000
                                                                ---------       ----------             ----------       ----------
Income (loss) from operations                                     655,000         (120,000)               538,000         (755,000)

Interest income............................................       246,000           66,000                301,000           204,000
Interest expense...........................................       (26,000)         (42,000)               (89,000)        (100,000)
Minority interest..........................................             -           (5,000)                     -          (16,000)
                                                                 --------       -----------            ----------        ----------
Income (loss) before non-recurring items and
    extraordinary item.....................................    $  875,000       $ (101,000)            $  750,000       $ (667,000)
                                                                =========       ==========            ===========       ===========

Compensation arising from issuance of options to
    new management.........................................             -                -              1,313,000                -
Provision for severance and repositioning of the Company...             -                -                581,000                -
Litigation settlement costs................................             -                -                  2,000        1,138,000
                                                                ---------       ----------              ---------       ----------
Income (loss) before extraordinary item....................       875,000         (101,000)            (1,146,000)      (1,805,000)

Extraordinary gain on exchange of
    debentures to preferred stock..........................             -                -                      -           69,000
                                                                ---------       ----------             ----------       ----------
Net income (loss)..........................................     $ 875,000       $ (101,000)           $(1,146,000)     $(1,736,000)
                                                                 ========       ==========            ===========      ===========

Dividends on preferred stock...............................      (242,000)         (60,000)              (377,000)        (179,000)
Dividends on beneficial conversion of preferred stock......             -                -             (7,750,000)               -
                                                                 --------       ----------             ----------       ----------

Net income (loss) applicable to common stock...............      $633,000       $ (161,000)          $ (9,273,000)     $(1,915,000)
                                                                 ========       ==========             ===========      ===========

Gain (loss) per share of common stock - basic:
    Gain (loss) applicable to common stock before
       extraordinary item..................................     $    0.09      $     (0.03)           $     (1.46)      $    (0.37)
                                                                 ========      ===========            ===========       ===========
    Net gain (loss) applicable to common stock.............     $    0.09      $     (0.03)           $     (1.46)      $    (0.37)
                                                                 ========      ===========            ===========       ===========

Gain (loss) per share of common stock - diluted:
    Gain (loss) applicable to common stock before
       extraordinary item..................................     $    0.05      $     (0.03)           $     (1.46)      $    (0.37)
                                                                 ========      ===========            ===========       ===========
    Net gain (loss) applicable to common stock.............     $    0.05      $     (0.03)           $     (1.46)      $    (0.37)
                                                                 ========      ===========            ===========       ===========

Weighted average number of common shares outstanding - basic    7,082,039        5,153,005              6,360,615        5,154,141
                                                                 ========       ==========             ==========        ==========
Weighted average number of common shares outstanding -
   diluted.................................................    14,809,249        5,153,005             11,799,913        5,154,141
                                                                 ========       ==========             ==========        =========

</TABLE>
                                       3

                 See notes to consolidated financial statements
<PAGE>


                      U.S. ENERGY SYSTEMS AND SUBSIDIARIES
                  CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
                       Nine Months Ended October 31, 2000
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>
                                           <C>        <C>        <C>       <C>    <C>        <C>       <C>
                                             Preferred Stock     Preferred Stock  Treasury Stock
                                               Series A              Series B      Number of
                                               Number of             Number
                                                                                                       Subscription
                                           Shares     Amount    Shares    Amount   Shares    Amount      Receivable
                                           ------   ---------   ------    ------   ------    ------    -------------

BALANCE, JANUARY 31, 2000..............    277,778    $3,000     509       (*)     (7,600)  $(15,000)  $         -

Cash paid for fractional shares........                                            (5,000)   (12,000)

Shares issued pursuant to anti-dilution
   provision of agreement with Energy
   Systems Investors, LLC and Lawrence
   Schneider...........................

Shares issued for investment in
   Marathon Capital, LLC...............

Shares issued in connection with
   investment in Castlebridge Partners,
   LLC.................................

Shares issued to Cinergy Solutions, Inc.

Shares issued to estate of former
   officer.............................

Shares issued for conversion of
   Preferred Stock Series B............                          (32)      (*)

Shares issued for exercised warrants...

Shares issued for exercised options....               8,000(**)

Shares issued for the exercise of
   options on preferred stock..........    861,110

Compensation arising form issuance of
   options to new management team......

Net loss for the nine months ended
   October 31, 2000....................

Dividends on Preferred Stock:
   Series A............................
   Series B............................

Dividends on beneficial conversion of
   Preferred Stock Series A..........


Stock subscription receivable on option
   exercise............................                                                               (7,741,000)
                                          --------  -------   ------    ------    -------  --------   -----------


BALANCE, OCTOBER 31, 2000..............   1,138,888 $11,000       398   $   (*)   (7,600)  $(15,000)  $(7,741,000)
                                          ========= =======   =======   =======   ======   ========   ===========

</TABLE>

(*)   Less than $1,000
(**)  Cash received for exercise of options on preferred stock.

                 See notes to consolidated financial statements

                                        4

<PAGE>

                      U.S. ENERGY SYSTEMS AND SUBSIDIARIES
                  CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
                       Nine Months Ended October 31, 2000
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>
                                            <C>                <C>              <C>            <C>
                                            Common Stock
                                            Number             Additional
                                            of                 Paid-in          Accumulated
                                            Shares   Amount    Capital            Deficit      Total
                                            ------   ------    -----------      ------------   -----

BALANCE, JANUARY 31, 2000..............    5,364,124 $54,000    $18,425,000     $(7,973,000)  $10,494,000
Cash paid for fractional shares........           (4)                                                   -

Shares issued pursuant to anti-dilution
   provision of agreement with Energy
   Systems Investors, LLC and Lawrence
   Schneider...........................       24,069      (*)           (*)                             -

Shares issued for investment in
   Marathon Capital, LLC...............      200,000   2,000        960,000                       962,000

Shares issued in connection with
   investment in Castlebridge Partners,
   LLC.................................      597,917   6,000      2,910,000                     2,916,000

Shares issued to Cinergy Solutions.....      583,333   6,000      3,494,000                     3,500,000

Shares issued to estate of former
   officer.............................       25,000      (*)       125,000                       125,000

Shares issued for conversion of
   Preferred Stock Series B............       30,720      (*)                                          -

Shares issued for exercised warrants...      689,448   7,000      2,751,000                     2,758,000

Shares issued for exercised options....      174,500   2,000        536,000                       546,000

Shares issued for the exercise of
   options on preferred stock..........                                           7,741,000     7,741,000

Compensation arising form issuance of
   options to new management team......                           1,313,000                     1,313,000

Net loss for the nine months ended
   October 31, 2000....................                                          (1,146,000)   (1,146,000)

Dividends on Preferred Stock:
   Series A............................                            (345,000)                     (345,000)
   Series B............................                             (32,000)                      (32,000)

Dividends on beneficial conversion of                             7,750,000      (7,750,000)            -
   Preferred Stock Series A..........


Stock subscription receivable on option

   exercise............................                                                        (7,741,000)
                                             -------- -------   -----------      ----------    -----------


BALANCE, OCTOBER 31, 2000..............    7,689,309 $774,000   $45,628,000    $(16,869,000)  $21,091,000
                                           ========= ========   ===========      ==========   ===========

</TABLE>

(*)   Less than $1,000
(**) Cash received on preferred stock exercise

                                  See notes to consolidated financial statements

                                       4


<PAGE>

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

<TABLE>
<CAPTION>
<S>
                                                                                       <C>               <C>
                                                                                       Nine Months Ended October 31,
                                                                                          2000            1999
                                                                                      ------------    -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss..........................................................                (1,146,000)      (1,736,000)
     Adjustments to reconcile net loss to net cash provided by (used
      in) operating activities:
        Depreciation and amortization..................................                   512,000          429,000
        Equity in loss of joint ventures..................................                105,000           64,000
        Minority interest..............................................                         -           16,000
        Gain from exchange of debentures for preferred stock..............                      -          (69,000)
        Write-down of assets..............................................                 56,000                -
        Shares issued to estate of former officer.........................                125,000                -
        Compensation recognized for granting of stock options.............              1,313,000                -
        Changes in:
           Accounts  and notes receivable, trade..........................               (580,000)         (69,000)
           Other current assets...........................................               (312,000)          64,000
           Other assets...................................................               (485,000)        (142,000)
           Accounts payable and accrued expenses..........................                198,000          109,000
           Litigation settlement payable..................................               (900,000)       1,123,000
           Life insurance proceeds, net of costs and expenses.............                870,000                -
                                                                                   --------------        ---------
        Net cash used in operating activities.............................               (244,000)        (211,000)
                                                                                   --------------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Loans to Reno Energy, LLC............................................                 (2,000)        (109,000)
     Repayments of loan by Reno Energy, LLC...............................                      -          158,000
     Investment in Marathon Capital, LLC..................................                (76,000)               -
     Investment in Castlebridge Partners, LLC.............................               (181,000)               -
     Acquisition of equipment and leasehold improvements..................               (579,000)        (348,000)
     Deferred acquisition costs...........................................               (230,000)        (162,000)
                                                                                   --------------          --------
        Net cash used in investing activities.............................             (1,068,000)        (461,000)
                                                                                   --------------          --------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments of notes payable............................................                (18,000)               -
     Payments of long-term debt...........................................               (155,000)         (99,000)
     Proceeds from long-term debt.........................................                309,000          130,000
     Proceeds from sale of common stock...................................              3,500,000                -
     Proceeds from sale of preferred stock................................                      -          234,000
     Proceeds from exercise of options and warrants.......................              3,304,000                -
     Purchase of treasury shares..........................................                      -          (12,000)
     Dividends on preferred stock.........................................               (377,000)        (179,000)
     Advances from joint ventures.........................................                 12,000           17,000
                                                                                   --------------          --------
        Net cash provided by financing activities.........................              6,575,000           91,000
                                                                                   --------------          --------

NET INCREASE (DECREASE) IN CASH                                                         5,263,000         (581,000)
Cash - beginning of period................................................                301,000          776,000
                                                                                   --------------         ---------

     CASH - END OF PERIOD.................................................         $    5,564,000         $195,000
                                                                                   ==============          =======

Supplemental disclosure of cash flow information:
     Cash paid for interest                                                              $ 94,000          $67,000

Supplemental schedule of non-cash operating, investing and financing activities
     Stock subscription receivable on option exercised....................         $    7,741,000             NONE
     Conversion of Series B Preferred Stock...............................                    (*)
     Issuance of Common Stock for investment interest in Marathon Capital, LLC.   $      962,000
     Issuance of Common Stock for investment interest in Castlebridge
       Partners, LLC......................................................         $    2,916,000
     Issuance of Common Stock pursuant to anti-dilution provision.........                    (*)
     Issuance of Common Stock to estate of former officer.................                125,000
     Compensation arising from issuance of options to new management team.         $    1,313,000

</TABLE>
          *Less than $1,000

                 See notes to consolidated financial statements

                                       5
<PAGE>

                   U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
                                   (UNAUDITED)


Note 1 - Basis of Presentation

    The  accompanying  unaudited  consolidated  financial  statements  have been
prepared in accordance with instructions to Form 10-QSB and, accordingly, do not
include all of the  information  and  footnotes  required by generally  accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management, all adjustments (consisting of normal accruals) considered necessary
for a fair presentation have been included. The results for the three months and
nine months are not necessarily indicative of results for the full year.

    For further information see "Management's Discussion and Analysis or Plan of
Operations",  and refer to the consolidated  financial statements (including the
notes thereto) in the Company's Annual Report on Form 10-KSB for the fiscal year
ended January 31, 2000.


Note 2 - Net Income (Loss) Per Share

    Net Income  (Loss) per share has been  computed on the basis of the weighted
average  number of shares  outstanding  during the  periods.  In case of (loss),
common stock  equivalents have not been included in the computation  since their
inclusion would be anti-dilutive.


Note 3 - Additional Capital

    Between  February 1, 2000 and October 31, 2000 we received  $2,758,000  from
the exercise of 689,650 public warrants. During the same period we also received
a total of $538,000 as a result of the  exercise of 174,500  stock  options.  We
also received $8,000 of cash and a one-year limited recourse  promissory note in
principal amount of approximately  $7,741,000 in connection with the exercise of
the option to acquire 861,110 shares of Series A Convertible Preferred Stock.

    On  October 12, 2000, Cinergy  Solutions,  Inc. invested $3,500,000 in  the
Company, for which we issued 583,333 shares of Common Stock. Further details may
be found in Part II, Item 2.

Note 4 - Additional Investments

   Acquisition of 30% Interest in Marathon Capital, LLC

    In June 2000, we acquired an interest of approximately  30% in the equity of
Marathon  Capital,  LLC in consideration for which we issued to Marathon 200,000
shares of our common stock. The value of this stock, plus other costs related to
the  investment,  totaled  approximately  $1.0  million.  Marathon is engaged in
origination, development and financing of energy projects.

   Acquisition of 25% Interest in Castlebridge Partners, LLC

    On August 23,  2000,  our  wholly  owned  subsidiary,  U.S.  Energy  Systems
Castlebridge  LLC acquired a 25% membership  interest in Castlebridge  Partners,
LLC in  consideration  for the issuance of 568,750 shares of our common stock to
Castlebridge and 29,167 shares to SPARK Energy.com  Corporation for facilitating
this transaction.  The value of this investment based on market price at closing
date  together  with  the  costs  associated  with  the   acquisition,   totaled

                                       6
<PAGE>

approximately  $3.1  million.  Castlebridge,  which  operates  from  offices  in
Chicago,  Illinois,  is a risk mitigation consulting firm that focuses on energy
and similar markets.

Note 5 - Subsequent Events

    On  November 28, 2000, our subsidiary USE  Acquisition Corp. entered  into a
merger agreement with Zahren Alternative Energy  Power Corp. ("Zapco"), pursuant
to which  Zapco  and  USE  Acquisition Corp. will merge. Further details  may be
found in Part II, Item 5.

Item 2 - Management's Discussion and Analysis or Plan of Operation

Results of Operations

         Three Months and Nine Months Ended October 31, 2000 Compared to
               Three Months and Nine Months Ended October 31, 1999

    Revenues for the three and nine month periods were as follows:


<TABLE>
<CAPTION>
<S>
                                        <C>                              <C>

                                            Three Months Ended              Nine Months Ended
                                               October 31,                     October 31,
                                        ---------------------------     --------------------------
                                           2000          1999               2000          1999
                                         ----------    ----------        ----------    ----------
    Energy Division...................  $1,241,000    $   357,000       $ 2,583,000   $   899,000
    Environmental Division............     874,000      1,021,000         2,794,000     2,342,000
                                        ----------    -----------       -----------   -----------
                                        $2,115,000    $ 1,378,000       $ 5,377,000   $ 3,241,000
                                        ==========    ===========       ===========   ===========
</TABLE>

    Total revenues  increased by $737,000 or 53% in the three month period ended
October 31, 2000 ("Third  Quarter  2000"),  and  $2,136,000  or 66% for the nine
months ended October 31, 2000 ("Nine Months  2000").  Energy  Division  revenues
increased by $884,000 or 248% during Third  Quarter 2000 and  $1,684,000 or 187%
for Nine  Months  2000 from the  corresponding  periods in the prior year due to
high electricity  prices during the current periods.  The prices are anticipated
to remain high during the balance of the year,  but no assurance can be given as
to how long such high  prices will  continue  thereafter.  In the  Environmental
Division the timing of the periods in which specific environmental projects fall
can differ from year to year. As a result, revenues decreased by $147,000 or 14%
during Third Quarter 2000 but expanded  operations  still  resulted in increased
revenues of  $452,000  or 19% during  Nine  Months  2000 from the  corresponding
periods in the prior year.

    Operating  expenses  (i.e.  costs  and  royalties  directly  related  to the
production of revenues)  increased 16%, or approximately  $138,000 to $1,006,000
in Third Quarter 2000 and 32% or  approximately  $673,000 to $2,794,000 for Nine
Months  2000 from the  corresponding  periods in the prior year.  The  following
table provides a breakdown of the Company's operating expenses.

<TABLE>
<CAPTION>
<S>
                                            <C>                             <C>
                                            Three Months Ended              Nine Months Ended
                                               October 31,                     October 31,
                                        ---------------------------     --------------------------
                                            2000          1999              2000          1999
                                         ----------    ----------        ----------    ----------
    Energy Division...................  $  412,000    $   218,000       $   926,000   $   595,000
    Environmental Division............     594,000        650,000         1,868,000     1,526,000
                                        ----------    -----------       -----------   -----------
                                        $1,006,000    $   868,000       $ 2,794,000   $ 2,121,000
                                        ==========    ===========       ===========   ===========
</TABLE>

    Operating expenses for the Energy Division,  including royalties,  increased
$196,000 or  approximately  90% in Third Quarter 2000,  and for Nine Months 2000
the increase was $331,000 or approximately  56% higher than in the corresponding
periods in the previous year. The increases are  attributable  to higher royalty
payments on the  increased  revenue this year,  and to extra  equipment  repairs
required in the 2000 periods.  The lower revenues of the Environmental  Division
in Third Quarter 2000 were  accompanied  by a decrease in operating  expenses of
$56,000 or 9% when  compared  with the same periods in 1999.  The same  division
showed an increase of $342,000 or 22% in operating expenses for Nine Months 2000
as compared to Nine Months 1999, which generally  corresponds to the increase in
revenues for the same period.

                                       7
<PAGE>

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

<TABLE>
<CAPTION>
<S>
                                        <C>                             <C>
                                            Three Months Ended              Nine Months Ended
                                               October 31,                     October 31,
                                        ---------------------------     --------------------------
                                            2000          1999              2000          1999
                                         ----------    ----------        ----------    ----------
    Salaries and consulting...........  $  208,000    $   190,000       $   728,000   $   589,000
    Legal and professional fees.......     100,000         57,000           319,000       197,000
    Insurance.........................      62,000         35,000           140,000       123,000
    Corporate expenses................      57,000         60,000           156,000       138,000
    Other.............................      26,000        110,000           319,000       330,000
                                        ----------    -----------       -----------   -----------
       Total..........................  $  453,000    $   452,000       $ 1,662,000   $ 1,377,000
                                        ==========    ===========       ===========   ===========

</TABLE>

    Salaries and  consulting  costs for Third  Quarter 2000 and Nine Months 2000
increased  from  the  corresponding  periods  in  the  prior  year  due  to  the
installation  of the new  management and  development  team in the periods ended
October  31,  2000.  Increases  in legal  and  professional  fees and  corporate
expenses were due to higher costs  associated with  repositioning of the Company
and new management. The decrease in other general and administrative expenses is
due to the  institution of procedures  for the  allocation of certain  corporate
overhead to specific projects.

    During the nine months  ended  October 31,  2000,  already  reflected in our
financial  reports  for  the  quarter  ended  July  31,  2000,  as  part  of the
installation  of a new  management and  development  team,  non-qualified  stock
options were issued to certain  employees of the Company.  As of issue date, the
market price of certain of such  options  granted  exceeded the exercise  price,
resulting  in a non-cash  charge of  $1,313,000  which is shown as  compensation
recognized from issuance of options. In the same period we also provided a total
of  $581,000  for  estimated  severance  and  other  costs  associated  with the
repositioning of the Company.

    Depreciation expense, which includes amortization of goodwill,  increased to
$174,000 and $512,000 for the three and nine month  periods  ending  October 31,
2000, respectively,  compared to $151,000 and $429,000 respectively, in the same
periods of 1999, due to increased investment in depreciable assets, primarily in
the Environmental Division.

    Losses (gains) from Joint Ventures are detailed as follows:

<TABLE>
<CAPTION>
<S>
                                                      <C>                                <C>           <C>
                                                      Three Months Ended                 Nine Months Ended
                                                         October 31,                        October 31,
                                                  ---------------------------         -------------------------
                                                     2000            1999                2000           1999
                                                  -----------      ----------         ----------      ---------

    Lehi Independent Power Associates, L.C.....   $ (158,000)     $   13,000          $ (144,000)    $   44,000
    Plymouth Cogeneration Limited Partnership..      (38,000)         14,000              (8,000)        25,000
    Castlebridge Partners, LLC.................       23,000              --              23,000             --
                                                  ----------      ----------          ----------     ----------
                                                  $ (173,000)     $   27,000          $ (129,000)    $   69,000
                                                  ===========     ==========          ===========    ==========

</TABLE>

    The  increase  in Interest  income of  $180,000  in the three  months and of
$97,000 in the nine months ending  October 31, 2000 is primarily due to interest
on the stock subscription note receivable.

      Our income for the three months ending October 31 was $875,000,  and  the
loss for the nine month period ending  October 31, 2000 was  ($1,146,000), after
the one-time charges totaling  $1,894,000 described above (including $1,313,000
of  non-cash  charges), which  were  reflected in our  financial reports for the
period  ending July 31, 2000. Results of operations  can be  evaluated  by
comparing  earnings before  interest, taxes, depreciation and amortization
(EBITDA) and exclusive of non-recurring charges and  dividends.  The following
table is presented to show the actual improvement in earnings from operations in
the current reporting periods.

                                       8
<PAGE>

<TABLE>
<CAPTION>
<S>
                                              <C>                                  <C>
                                              Three Months Ended October 31,       Nine Months Ended October
                                                                                                31,
                                             -------------------------------------- -----------------------------
                                                    2000               1999             2000           1999
                                             ------------------- ------------------ -------------- --------------
     Net income (loss) reported.............      $875,000          $ (101,000)    $ (1,146,000) $  (1,805,000)
     Compensation arising from issuance of
       options to new management team.......            --                 --         1,313,000            --
     Provision for severance and
       repositioning of the Company.........            --                 --           581,000            --
     Litigation settlement costs............            --                 --             2,000      1,138,000
     Extraordinary gain on exchange of
       debentures to preferred stock........            --                 --              --          (69,000)
                                             ------------------  ---------------   -------------  --------------

     Operating income (loss) exclusive of
       non-recurring items..................       875,000            (101,000)         750,000       (736,000)

     Depreciation...........................       174,000             151,000          512,000        429,000
     Interest income, net...................      (220,000)            (24,000)        (212,000)      (104,000)
                                             -------------------  --------------  -------------  --------------
     EBITDA (loss) exclusive of
       non-recurring and extraordinary
       items and before dividends...........      $829,000           $  26,000      $ 1,050,000  $    (411,000)
                                                  ========             ========    =============  =============

</TABLE>

    Dividends  paid on  preferred  stock for the three  and nine  months  ending
October  31, 2000  totaled  $242,000  and  $377,000,  respectively,  compared to
$60,000 and $179,000 in the like periods of the previous  year. The increase was
due  primarily  to the  additional  investment  in Series A  Preferred  Stock of
$250,000 in June 1999 and the  exercise,  in July 2000,  of an option to acquire
additional shares of Series A Convertible Preferred Stock for $7,750,000.  Under
the  requirements  of Emerging  Issues Task Force Memo No. 98.5,  the difference
between the conversion  price of the Preferred Stock and the market price of the
Common Stock at the day of exercise is treated as a non-cash dividend,  which is
shown on the  Consolidated  Statements of Operations as a dividend on beneficial
conversion  of Preferred  Stock.  There is an  immediate  offset in other equity
accounts,  so that  there is no net  effect on  Stockholders'  Equity  from this
required non-cash and non-recurring adjustment.


Liquidity and Capital Resources

    At October 31, 2000, cash and equivalents totaled approximately  $5,564,000,
as compared to $301,000 at January 31, 2000, an increase of  $5,263,000.  During
the nine months ended October 31, 2000,  cash flow from financing  activities of
$6,575,000,  primarily  from the  private  sale of our  common  stock to Cinergy
Solutions,  Inc. and the proceeds of exercise of warrants and options,  was used
to fund $244,000 in operating activities and $1,068,000 of investing activities,
and provided the increase in cash and in working capital.

    During the first nine months of Fiscal 2000,  the Company  used  $244,000 of
cash in operating  activities  compared  with $211,000 of cash used in operating
activities in the corresponding  period in the prior year.  Non-recurring  items
involving cash included the receipt of life insurance  proceeds from a policy on
our former President, which, net of expenses paid during the period, amounted to
$870,000.  We also paid the $900,000  litigation  settlement  note that had been
issued in the previous year.

    The  $1,068,000  used in  investing  activities  during  Nine  Months  2000,
compared to $461,000 used in the corresponding  period the prior year,  included
$230,000  of deferred  costs  expended  on pending  acquisitions  as compared to
$162,000 in the earlier year.  Cash applied to acquisition of equipment,  mainly
due to the expansion of the Environmental Division,  including its new Tennessee
location,  amounted to  $579,000 in the current  year as compared to $348,000 in
the earlier  year.  Cash used in  connection  with the  investments  in Marathon
Capital,  LLC, and  Castlebridge  Partners,  LLC, in the  respective  amounts of
$76,000 and $181,000, are also reflected in the three months and the nine months
ended October 31, 2000.

    Cash  provided by  financing  activities  in the Nine  Months  2000  totaled
$6,575,000  primarily as a result of the  investment of $3,500,000 in our common
stock by Cinergy Solutions,  Inc., and the $3,304,000 proceeds from the exercise
of  warrants  and  options.  In the same  period  in 1999  financing  activities
provided  cash of  $91,000.  This  included  proceeds  from the sale of Series A
Preferred Stock amounting to $234,000.

                                       9
<PAGE>

    Our working  capital  increased to  $5,731,000  at October 31, 2000,  from a
deficit  of  $255,000  at  January  31,  2000.  This  was due  primarily  to the
$3,500,000  investment  in our common stock by Cinergy  Solutions,  Inc. and the
receipt of net proceeds of $2,758,000 from the exercise of warrants and $546,000
from the exercise of options.  Our cash  position and  projected  cash flow from
operations are sufficient to satisfy our  commitments for the next twelve months
and  beyond.  Cash  requirements  for the Zapco  merger,  shown  below,  will be
provided primarily by Cinergy's investment. It is anticipated that Zapco will be
self-sustaining, but there is no assurance of this.

Cautionary Statement Relating to Forward Looking Statements

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


                           PART II - OTHER INFORMATION

Item 2 - Changes in Securities


   Issuance of Common Stock to Cinergy Solutions, Inc.

    On October 12, 2000, we, together with Cinergy Solutions, Inc., entered into
a joint venture to provide cogeneration and energy services.  Cinergy Solutions,
Inc. is  an affiliate of Cincinnati-based  Cinergy Corp. (NYSE: CIN), one of the
nation's leading  diversified  energy  companies. As  part  of the  transaction,
Cinergy Solutions Inc. invested $3,500,000 in our company in return  for 583,333
shares of  common  stock.  M.  Stephen Harkness, President and  Chief Operating
Officer  of  Cinergy Solutions, Inc., has  joined  our  Board of Directors. This
transaction was exempt from the registration requirements  of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereunder.

Item 5 - Other Events

   Merger Agreement

    On  November 28, 2000, U. S. Energy Systems, Inc. ("US  Energy"), USE
Acquisition Corp. ("US Energy  Sub"), which is  currently a  wholly  owned
subsidiary of US Energy, and Zahren Alternative Energy Power Corp. ("Zapco")
entered into a merger agreement, amended as  of  December 11, 2000, pursuant to
which Zapco and US Energy Sub will merge, with  Zapco  being  the surviving
corporation, and becoming owned by  US  Energy Sub's shareholders.  As noted
below, the shareholders of US Energy Sub immediately before the merger  will be
US Energy and Cinergy Energy Solutions, Inc. ("Cinergy Energy"), an indirect,
wholly owned subsidiary of Cinergy Corp. ("Cinergy").

    In this merger,  we will pay Zapco's  shareholders  the following  aggregate
merger consideration for their Zapco shares:

*       $12 million in cash,

                                       10
<PAGE>

*       a  contingent cash  payment  of  $800,000 payable eighteen (18) months
        after the merger,

*       1,666,667 shares of US Energy Common Stock, subject to increase so that
        the Zapco  stockholders receive $10  million of our common stock if the
        average  closing price of the US Energy Common Stock is less than $5.75
        for the 20 consecutive trading days ending two day prior to the merger,

*       100,000 shares of USE's Series C Convertible  Preferred Stock - the
        Series C Stock:

                  is entitled to an aggregate of $3 million upon a liquidation
                  or other similar event,

                  provides for annual cash dividends in the aggregate  amount of
                  $270,000  (subject to  reduction  to an  aggregate of $180,000
                  annually under specified circumstances),

                  is  convertible  into an  aggregate  of 500,000  shares of our
                  common stock (600,000 shares if 900 days after the merger, the
                  average  closing price of our common stock is less than $4.80)
                  subject to anti-dilution adjustments,

*             five-year  warrants to purchase 500,000 shares of our common stock
              at an exercise price of $6.00 per share.  If additional  shares of
              our common stock are required to be delivered  because the average
              closing  price of our common stock is less than $5.75,  the number
              of our shares of common  stock  issuable  upon  exercise  of these
              warrants will be correspondingly reduced.

    The merger  agreement  also  provides  for a  post-closing  reduction to the
merger consideration in specified circumstances.

    Also on  November  28,  2000,  Cinergy  Energy,  US Energy Sub and US Energy
entered into a subscription  agreement whereby Cinergy Energy agreed to buy from
US Energy Sub  immediately  prior to the  merger  all 4,574  shares of US Energy
Sub's Class B Common Stock for $11,500,000 in cash.  These shares will represent
45.74% of US Energy  Sub's  common  stock.  US Energy  holds all 5,426 shares of
Class A Stock  which will  represent  the  remaining  54.26% of US Energy  Sub's
common stock. (As a result,  following the merger,  US Energy and Cinergy Energy
will be the sole shareholders of the surviving  corporation.) The Class A Common
Stock and  Class B Common  Stock are  identical  except  that the Class A Common
Stock has superior voting rights with the result that US Energy can appoint four
of US Energy Sub's five  directors and  generally  holds 80% of the voting power
(with exceptions for, among other things, matters outside of the ordinary course
of business).  US Energy has granted Cinergy Energy an option exercisable within
two years after the merger to convert its Class B Common Stock into an aggregate
of 1,967,000  shares of US Energy  Common Stock and during that period US Energy
Sub  is  entitled  to  redeem  the  Class  B  Common  Stock  for   approximately
$14,600,000.

    Completion of the merger (and the closing of the  transactions  contemplated
by the  subscription  agreement)  is subject  to the  satisfaction  of  numerous
conditions,   including  stockholder  approval,   the  consummation  of  various
transactions  by  Zapco,  the  payment  of a note  issued  to US  Energy  in the
aggregate  principal  amount of  approximately  $7.75 million and the consent of
Zapco's  principal bank. No assurance can be given that such transactions or the
merger will be completed.

    Zapco,   which  is  based  in  Avon,   Connecticut,   operates  24  landfill
gas-to-energy projects, and a natural gas-fired cogeneration plant. Cogeneration
plants provide both power and heat to their customers.

    The foregoing  summary of the terms of the merger  agreement is qualified in
its entirety by reference to the merger agreement and related documents,  copies
of which are annexed hereto and incorporated  herein by this reference.  We urge
you to read these documents in their entirety.

   Change in Fiscal Year

    The fiscal year of our company has been  changed from January 31 to December
31. This change will be  effective  as of December  31,  2000.  A report on Form
10-KSB covering the transition  period (i.e.,  the eleven months ending December
31, 2000) will be filed with the SEC by April 2, 2001.

                                       11

<PAGE>

Item 6 - Exhibits

(a)      Exhibits


                  2.1      Agreement and Plan of Reorganization and Merger dated
                           as  of  November  28, 2000, by  and among U.S. Energy
                           Systems,  Inc. ("US Energy"), USE  Acquisition  Corp.
                           ("US Energy Sub"), and Zahren Alternative Power Corp.
                           ("Zapco"), excluding the exhibits and schedules
                           thereto other than Schedule 2.01 and  those  exhibits
                           filed separately herewith (the "Merger Agreement").

                  2.2      Amendment No 1 dated December 11, 2000  to the Merger
                           Agreement.

                  3.1      Amended and Restated By-Laws of US Energy.

                  3.2      Form of  Certificate of  Designation for  US Energy's
                           Series C Preferred Stock.

                  4.1      Form  of  Series  C Redeemable  Common Stock Purchase
                           Warrant of US Energy.

                  10.1     Stockholders'   and  Voting  Agreement  dated  as  of
                           November   28,  2000  by  and  among  AJG   Financial
                           Services,   Inc.,   Bernard   Zahren,   Environmental
                           Opportunities   Fund,   Environmental   Opportunities
                           Fund/Cayman, Finova Mezzanine Capital Corp., Frederic
                           Rose, M & R Associates,  Martin F. Laughlin,  Michael
                           J.  Carolan and Richard J.  Augustine  (collectively,
                           the  "Zapco   Stockholders"),   US  Energy,   Cinergy
                           Solutions,  Inc.  ("Cinergy  Solutions")  and certain
                           stockholders of US Energy.

                  10.2     Termination  Fee  Agreement  dated as of November 28,
                           2000 by and among US Energy, Zapco and Cinergy Energy
                           Solutions, Inc. ("Cinergy Energy").

                  10.3     Indemnification  Agreement  dated as of November  28,
                           2000 by and among the Zapco  Stockholders,  Zapco, US
                           Energy, US Energy Sub and Cinergy Energy.

                  10.4     Escrow Agreement dated November 28, 2000 by and among
                           the Zapco  Stockholders,  Zapco, US Energy, US Energy
                           Sub, Cinergy Energy and Tannenbaum Helpern Syracuse &
                           Hirschtritt LLP as Escrow Agent.

                  10.5     Registration Rights Agreement dated November 28, 2000
                           by and among US Energy and the Zapco Stockholders.

                  10.6     Employment  Agreement dated November 28, 2000 by  and
                           between US Energy and Bernard Zahren.

                  10.7     Form of Stock Option Agreement to be entered into  by
                           and between US Energy and Bernard Zahren.

                  10.8     Performance Guaranty dated as November 28, 2000 of US
                           Energy.

                  10.9     Performance  Guaranty  of  Cinergy Solutions  Holding
                           Company, Inc. dated as of November 28, 2000.

                  10.10    Subscription Agreement dated as of  November 28, 2000
                           by and among US Energy, US Energy Sub  and  Cinergy
                           Energy.

                  10.11    Stockholders Agreement dated as of November 28,  2000
                           by  and  among US Energy, US Energy Sub  and  Cinergy
                           Energy.

                  10.12    Indemnification Agreement dated as of November 28,
                           2000  by  and  among US  Energy, US  Energy Sub and
                           Cinergy Energy.

                  27.      Financial Data Schedule

                                     12

<PAGE>

                  99.1  Press  Release  of US Energy,  Zapco and  Cinergy  dated
                  November 28, 2000.


         (b)      Reports on Form 8-K.

                  We filed a  Current  Report on Form 8-K (a  "Current  Report")
         dated  August  7,  2000,  disclosing  under  Item 2 the  change  in our
         independent auditor.

                  We filed a Current  Report dated  August 23, 2000,  disclosing
         under Item 2 the  acquisition  by a subsidiary  of ours of a membership
         interest in Castlebridge  Partners,  LLC. This report was amended on or
         about September 5, 2000 and amended again on or about November 6, 2000.

                  We filed a Current Report dated  September 22, 2000 disclosing
         under Item 8 the change in our fiscal year.

                                       13

<PAGE>


                                   SIGNATURES


    Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has caused this  quarterly  report on Form 10-QSB to be signed on its
behalf by the undersigned duly authorized

Dated: December 14, 2000

U. S. Energy Systems, Inc.


By:      /s/ LAWRENCE I. SCHNEIDER
         -------------------------
         Lawrence I. Schneider
         Chief Executive Officer


By:      /s/ ROBERT C. BENSON
         --------------------
         Robert C. Benson
         Chief Financial and Accounting Officer