SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB


            QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934



For the quarter year ended                                Commission File Number
    September 30, 1996                                           1-11065
--------------------------                                ----------------------



                               ENCON SYSTEMS, INC.
                               -------------------
                             (Name of Small Business
                       Issuer As Specified In Its Charter)



            Delaware                                           04-3069270
            --------                                           ----------
(State or Other Jurisdiction of                             (I.R.S. Employer
 Incorporation or Organization)                           Identification Number)

                 86 South Street, Hopkinton, Massachusetts 01748
                 -----------------------------------------------
               (Address of Principal Executive Offices, Zip Code)

                                (508) 435-7700
                                --------------
                (Issuer's Telephone Number, Including Area Code)



         Check whether the issuer: (1) 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  [ ]

         As of November 18, 1996, the Company had outstanding  8,448,245  shares
of Common Stock, $.01 par value per share.






                               ENCON SYSTEMS, INC.

                                      INDEX

PART I.  FINANCIAL INFORMATION                                       PAGE NUMBER
                                                                     -----------
         Item 1.  Financial Statements

                  Consolidated Balance Sheets;
                  September 30, 1996 (Unaudited) and
                  December 31, 1995 (Audited)                            1

                  Consolidated Statements of                             2
                  Operations (Unaudited); Three
                  and Nine months ended September
                  30, 1996 and 1995

                  Consolidated Statements of Cash Flows                  3
                  (Unaudited); Nine months ended
                  September 30, 1996 and 1995

                  Notes to Consolidated Financial                        4
                  Statements (Unaudited)

         Item 2.  Management's Discussion and                            6
                  Analysis of Financial
                  Condition and Results of
                  Operations

PART II.  OTHER INFORMATION

         Item 1.  Legal Proceedings                                     15

         Item 2.  Changes in Securities                                 15

         Item 3.  Defaults Upon Senior Securities                       15

         Item 4.  Submission of Matters to a Vote of Security Holders   15

         Item 5.  Other Information                                     15

         Item 6.  Exhibits and Reports on Form 8-K                      15

         Signatures                                                     16






                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
         --------------------

                      ENCON SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                           September 30,     December 31,
                  Assets                                                       1996             1995
                  ------                                                   ------------      ------------
<S>                                                                        <C>               <C>
Current assets:
     Cash                                                                   $  259,196         $       --
     Accounts receivable - net                                               1,286,229           7,460,777
     Inventories                                                               491,904           1,228,389
     Costs in excess of billings                                                    --              44,883
     Prepaid expenses and other current assets                                  40,147             240,262
     Notes receivable from current and former officers                          29,079             100,967
     Refundable income tax credits                                             265,222             263,383
                                                                            -----------        -----------
         Total current assets                                                 2,371,777          9,338,661
                                                                            -----------        -----------

Property and equipment - net                                                    444,565            614,027
                                                                            -----------        -----------
Long-term accounts receivable - net                                           2,762,536          1,550,189
Long-term lease receivables                                                      44,966             84,682
Organizational costs - net                                                       12,554             39,481
Other assets - net                                                              193,536            449,048
Cost in excess of net assets of businesses acquired - net                     2,474,709          4,784,645
                                                                            -----------        -----------
         Total assets                                                      $  8,304,643       $ 16,860,733
                                                                            ===========        ===========

     Liabilities, Minority Interest and Stockholders' Equity

Current liabilities:
     Cash overdraft                                                        $         --       $    754,680
Notes payable - bank                                                          3,135,757          3,621,647
     Notes payable - utility                                                  2,387,210            626,788
     Current portion of notes payable to stockholders                           303,930            346,785
     Current portion of long-term debt                                           76,213            262,394
     Current portion of GEPP financing                                          113,526            372,694
     Accounts payable                                                         4,304,734          3,281,276
     Accrued expenses                                                           562,306          1,119,124
     Billings in excess of costs                                                    --             424,968
                                                                            -----------        -----------
         Total current liabilities                                           10,883,675         10,810,356
                                                                            -----------        -----------

Long-term GEPP financing                                                        778,839            625,983
Notes payable to stockholders, net of current portion                           229,079            321,323
Long-term debt, net of current portion                                           91,335          1,353,854
Other long-term debt                                                              4,655             32,872
                                                                            -----------        -----------
         Total liabilities                                                   11,987,583         13,144,388
                                                                            -----------        -----------

Minority interest (Note 3)                                                           --            896,980

Stockholders' equity:
     Preferred stock, $.01 par value; 1,000,000 shares authorized,
         none issued                                                                 --                 --
     Common stock, $.01 par value; 20,000,000 shares authorized,
         8,428,245 shares issued and outstanding (4,258,634 at
         December 31, 1995)                                                      84,282             42,587
     Additional paid-in capital                                               9,490,995          7,452,863
     Accumulated deficit                                                   (13,232,135)        (4,693,224)
     Cumulative translation adjustment                                         (26,082)             17,139
                                                                            -----------        -----------
         Total stockholders' equity                                         (3,682,940)          2,819,365
                                                                            -----------        -----------

         Total liabilities, minority interest and stockholders' equity     $ 8,304,643        $ 16,860,733
                                                                           ===========        ============
</TABLE>


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





                      ENCON SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                             Three Months Ended               Nine Months Ended
                                                                September 30,                   September 30,
                                                         ----------------------------    ----------------------------
                                                             1996            1995            1996            1995
                                                         ------------    ------------    -----------     ------------


<S>                                                      <C>             <C>             <C>             <C>         
Net sales and revenues ...............................   $  2,498,729    $  3,131,608    $ 11,548,684    $ 13,036,100

Cost of sales ........................................      1,658,293       1,981,208       8,313,882       8,791,380
                                                         ------------    ------------    ------------    ----------

         Gross profit ................................        840,436       1,150,400       3,234,802       4,244,720

Selling, general and administrative expenses .........      1,495,491       1,561,673       6,347,332       4,464,255
Consolidation of operations (Note 2) .................           --              --         5,199,050            --
                                                         ------------    ------------    ----------      ------------

         Income (loss) from operations ...............       (655,055)       (411,273)     (8,311,580)       (219,535)
                                                         ------------    ------------    ------------    ------------

Other income (expense)
         Interest expense ............................        (47,662)        (96,897)       (305,530)       (248,195)
         Interest income .............................          4,186             604          13,332           1,994
         Other income (expense) ......................           --          (237,870)         25,000        (237,870)
         Foreign currency exchange gain ..............         10,525          75,000          21,726         150,663
                                                          ------------    ------------     ----------     ------------
                                                             (32,951)        (259,163)       (245,472)       (333,408)
                                                          ------------    ------------     ----------     ------------

         Income (loss) before income taxes ...........       (688,006)       (670,436)     (8,557,052)       (552,943)

Income tax expense (benefit) .........................           --              (775)           --            30,278
                                                          ------------    ------------      ----------     -----------

                  Net income (loss) ..................   $   (688,006)   $   (669,661)   $ (8,557,052)   $   (583,221)
                                                          ============    ============    ============      ==========

                  Net income (loss) per share ........   $       (.13)   $       (.26)   $      (1.64)   $       (.22)
                                                          ============    ============    ============      ==========

Weighted average number of shares
         outstanding .................................      5,232,704       2,577,795       5,232,704       2,580,993
                                                          ============    ============     ==========      ===========

</TABLE>


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


                                      -2-



                      ENCON SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                                  Nine Months Ended     
                                                                                     September 30,
                                                                                --------------------
                                                                              1996              1995
                                                                              ----              ----
<S>                                                                       <C>               <C> 
Cash flows from operating activities:                               
  Net income (loss) ..................................................    $(8,557,052)       $  (583,221)
  Adjustments to reconcile net income (loss)
    to net cash used for operating activities:
        Depreciation and amortization ................................        353,876            244,276
        Write-down of costs in excess of net assets of
         businesses acquired - net ...................................      2,136,366               --
        Write-down of organization costs - net .......................         16,670               --
        Write-down of other assets - net .............................        188,171               --
        Write-down of property and equipment - net ...................         76,418               --
        Refundable income tax credits.................................         (1,839)           (21,530)
        Changes in assets and liabilities, net of effects
         of acquisition of businesses:
               Accounts receivable - net .............................      4,855,889         (2,270,564)
               Leases receivable .....................................         39,716             63,935
               Inventories ...........................................        736,485           (731,288)
               Costs in excess of billings ...........................         44,883             (7,008)
               Prepaid expenses and other current assets .............        200,115           (920,840)
               Cash overdraft ........................................       (754,680)              --
               Accounts payable ......................................      1,023,458          1,303,295
               Billings in excess of costs ...........................       (424,968)           693,608
               Accrued expenses ......................................       (556,818)           310,367
               Other assets - net ....................................           --             (117,994)
                                                                          -----------        -----------
                 Net cash used for operating activities ..............       (623,310)        (2,036,964)
                                                                          -----------        -----------

Cash flows from investing activities:
 Additions to property and equipment - net ...........................         (9,664)           (65,783)
                                                                          -----------        -----------
                 Net cash used for investing activities ..............         (9,664)           (65,783)
                                                                          -----------        -----------

Cash flows from financing activities:
   (Issuance) payments of notes receivable from officers .............         71,888            (80,089)
   Proceeds (payments) from notes payable to bank ....................       (485,890)         2,164,989
   Proceeds from issuance of notes payable to utility ................      1,760,422               --
   Payments on notes payable to utility ..............................           --                 --
   Proceeds (payments) on loans from stockholders ....................       (135,099)             7,319
   Proceeds (payments) from long-term debt ...........................     (1,476,917)            46,612
   Issuance of common stock ..........................................      1,182,847               --
                                                                          -----------        -----------
                 Net cash provided by financing activities ...........        917,251          2,138,831
                                                                          -----------        -----------

Effect of exchange rate changes on cash ..............................        (25,081)              --

Net increase in cash .................................................        259,196             36,084

Cash at beginning of period ..........................................           --              253,050
                                                                          -----------        -----------

Cash at end of period ................................................    $   259,196        $   289,134
                                                                          ===========        ===========

Supplemental disclosures of cash flow information:
     Cash paid for:
         Interest ....................................................    $   414,211        $   833,127
                                                                          ===========        ===========
         Income taxes ................................................    $      --          $    25,830
                                                                          ===========        ===========

</TABLE>

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

                                      -3-





                      ENCON SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                               SEPTEMBER 30, 1996

(1)      BASIS OF PRESENTATION

         As permitted  by the rules of the  Securities  and Exchange  Commission
(the "Commission")  applicable to quarterly reports on Form 10-QSB,  these notes
are condensed and do not contain all disclosures  required by generally accepted
accounting  principles.  Reference should be made to the consolidated  financial
statements  and related notes  included in the  Company's  Annual Report on Form
10-KSB, which was filed with the Commission on April 15, 1996.

         In the opinion of management of the Company, the accompanying financial
statements  reflect  all  adjustments  which were of a normal  recurring  nature
necessary for a fair presentation of the Company's results of operations for the
three and nine months ended September 30, 1996 and September 30, 1995.

         The results disclosed in the consolidated  statements of operations are
not necessarily indicative of the results to be expected for the full year.

         The consolidated  financial statements include the financial statements
of ENCON Systems, Inc. and its subsidiaries,  Kemper Management Services,  Inc.,
Enera Inc., BFR Industries  Ltd.,  CLM Lighting  Solutions of Canada,  Inc., EEP
Distribution  Services of Canada,  Inc.,  Elray  Services Inc. and Encon Systems
Canada Inc.  (formerly known as Leader Lighting and Energy Service,  Inc.).  All
significant  intercompany  accounts and  transactions  have been  eliminated  by
consolidation.

(2)      CONSOLIDATION OF OPERATIONS

         In June 1996, the Company  commenced a consolidation of its operations.
The consolidation is intended to eliminate unprofitable operations and to reduce
the  ongoing  selling,  general and  administrative  costs of the  Company.  The
consolidation included a winding down of the Company's Canadian operations,  the
closing of the Company's New Jersey office and an overall  reorganization of the
remaining  operations.  In connection with the consolidation of operations,  the
Company  recorded charges of  approximately  $5,199,000  during the three months
ended June 30, 1996.  These  charges  consisted of the  write-down of intangible
assets of  approximately  $2,417,000,  the  write-down of  receivables  totaling
approximately  $2,010,000 due to the closing of operations and non-completion of
work in progress,  the write-down of inventories in the operations  being closed
down  totaling  approximately  $370,000  and  other  costs  associated  with the
consolidation totaling approximately $402,000.

                                      -4-






(3)      MINORITY INTEREST

         On June 10, 1996,  the Company's  minority  interest was converted into
197,000  shares of the Company's  Common Stock  pursuant to the  provisions of a
Share Exchange Agreement between the Company and G. Morneau Investments Limited.





                                      -5-




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

GENERAL

         During the nine months ended September 30,1996,  the Company engaged in
extensive  discussions with third parties regarding  arrangements for financing.
Such financing was critical for the Company to implement its operating plans. In
late May, when discussions about the Company's  financing options  deteriorated,
the Company commenced a restructuring of its management,  operations and banking
and other  obligations.  In early June 1996,  the Company  engaged The  Recovery
Group in  connection  with the  consolidation  of the Company's  operations  and
appointed  Robert Wexler as interim Chief  Executive  Officer of the Company and
its  subsidiaries.  Since  the  appointment  of  Mr.  Wexler,  the  Company  has
restructured  a  significant  portion of its debt,  closed its  Canadian and New
Jersey operations,  substantially reduced its operating expenses, and reassigned
management  responsibilities.  The Company also  initiated an  aggressive  sales
program that has resulted in  significant  new  contracts  with Texas  Utilities
Electric  Company and PepsiCo Food Services,  a division of PepsiCo,  Inc. which
contracts have contributed to the Company's backlog of approximately $17,000,000
as of November  8, 1996.  The Company  intends to  continue to  restructure  its
management,  operations  and banking and other  obligations,  and in furtherance
thereof is in the process of  scheduling a meeting with its creditors to be held
in the near future.

         The  Company  derives  its  revenue  principally  from the  design  and
implementation  of energy  efficient  systems  for  commercial,  industrial  and
institutional facilities, and to residential customers in the United States and,
historically,  in Canada. The Company sells its systems directly to the end-user
and through  participation in Demand Side Management  ("DSM") programs sponsored
by  various  utilities,   such  as  Florida  Power  and  Light  of  Florida  and
Massachusetts Electric Company of Massachusetts.  However, as a result of recent
changes in DSM  programs,  the Company  has  decreased  its sales and  marketing
efforts on such programs,  and is emphasizing working directly with the end-user
customer.  Accordingly, as a forward-looking statement, management believes that
the  Company  will derive an  increasing  portion of its  revenue  from  non-DSM
projects  in the future.  However,  no  assurance  of such a result can be given
because of numerous factors that may cause such a result to vary,  including but
not  limited to,  changes in the  incentives  provided  under DSM  programs  and
changes in the Company's clientele.

         The Company  periodically  enters into large,  one-time  energy savings
contracts from which it has derived significant  revenues and profits.  Prior to
December 31, 1995, the Company  accounted for revenue and costs for construction
of these contracts on the completed  contract  method of accounting.  Under this
method of  accounting,  revenue  and costs for  contracts  are  recognized  when
contracts are completed. Due to the varying lengths of time required to complete
certain  large  contracts,  the  operating  results  of the  Company  under  the
completed contract method of accounting could vary substantially from quarter to
quarter and from year to year.  Effective December 31, 1995, the Company adopted
the percentage of completion method of accounting for construction projects

                                      -6-





that last for more than  thirty  days.  The  financial  statements  for the nine
months ended  September  30, 1995 have been  restated to apply the newly adopted
method of  accounting  retroactively.  As a result,  the net income for the nine
months ended  September 30, 1995  decreased by  approximately  $145,000 from the
amount previously reported by the Company.

         The results for the quarter and nine months ended September 30,1996 are
not necessarily  indicative of the results of the Company's  operations that may
be expected for the year ending December 31, 1996.

RESULTS OF OPERATIONS

         THREE  MONTHS  ENDED  SEPTEMBER  30, 1996  COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1995

         Net sales and revenues for the three  months ended  September  30, 1996
were   approximately   $2,499,000   compared  to  net  sales  and   revenues  of
approximately   $3,132,000   for  the  same  period  in  1995,   a  decrease  of
approximately  $633,000,  or 20%.  The  decrease  in net sales and  revenues  is
principally a result of reduced sales from the Company's Canadian operations due
to the wind-down of such  operations  (the "Canadian  Wind-down") as well as the
closing of the  Company's  operations  in New  Jersey,  partially  offset by the
increase in sales  realized  from the operation of Kemper  Management  Services,
Inc. ("Kemper"), which the Company acquired in November 1995.

         Net  loss  for  the  three   months  ended   September   30,  1996  was
approximately  $688,000 compared to a net loss of approximately $670,000 for the
three months ended September 30, 1995, a change of  approximately  $18,000.  The
net loss resulted  primarily from reduced sales realized in connection  with the
closing of the Canadian and New Jersey  operations,  lower than  expected  sales
from the  operations of Kemper,  with a small decrease in each of their selling,
general and administrative expenses and an increase of approximately $238,000 in
professional  and legal  expenses  that were  incurred  in  connection  with the
consolidation   of   the   Company's   domestic    operations   (the   "Domestic
Consolidation").

         The Company derives a substantial portion of its revenues from the sale
of energy efficient systems through  participation in DSM programs  sponsored by
various  utilities.  Although,  a large  minority of the Company's  revenues are
currently realized from DSM projects, as a forward-looking statement, management
believes that the percentage of revenues derived from DSM program  participation
will  decrease  in the  future.  No  assurance  of such a result  can be  given,
however,  because  of  numerous  factors  that may cause  such a result to vary,
including  but not  limited to,  changes in the  incentives  provided  under DSM
programs and changes in the Company's clientele.

         Gross profit  margin for the three months ended  September 30, 1996 was
approximately  34%  compared to  approximately  37% for the three  months  ended
September  30,  1995.   The  decrease  in  gross  profit  margin  was  primarily
attributable to the performance by the Company during the 1996

                                      -7-




period of contracts with lower profit  margins.  The gross profit margin for the
three months ended September 30, 1996 is not necessarily indicative of the gross
profit  margin that may be obtained by the Company for the year ending  December
31,  1996 as the  Company's  gross  profit  margin  is  dependent  on the mix of
products sold and the type of DSM,  non-DSM or other energy  savings  program in
which the Company participates.

         Selling, general and administrative expenses decreased by approximately
$67,000,  or 4%,  from  approximately  $1,562,000  for the  three  months  ended
September  30,  1995 to  approximately  $1,495,000  for the three  months  ended
September 30, 1996. Selling, general and administrative expenses include certain
direct costs related to the Company's sales and certain  restructuring  costs in
the approximate amounts of $61,000 and $238,000,  respectively.  The decrease in
such expenses is primarily due to the significant reduction of selling,  general
and  administrative  costs  resulting  from the Domestic  Consolidation  and the
closing  of the  Company's  Canadian  and New  Jersey  operations,  offset  by a
substantial  increase in professional and legal expenses  incurred in connection
with the  Domestic  Consolidation  and  related  matters.  Selling,  general and
administrative  expenses increased as a percentage of revenue from approximately
50% to 60% for the  three  month  periods  ended  September  30,  1995 and 1996,
respectively. This increase is principally due to a significant reduction in the
Company's sales revenue resulting primarily from the closing of the Canadian and
New Jersey operations,  and the additional  selling,  general and administrative
costs incurred in connection with the Domestic  Consolidation and as a result of
the normal operation of Kemper,  which the Company acquired in November 1995 and
which normal operation did not generate a proportionately  equal increase in the
Company's revenues.

         Interest  expense  decreased by  approximately  $49,000,  or 50%,  from
approximately  $97,000  for  the  three  months  ended  September  30,  1995  to
approximately  $48,000 for the same period in 1996. This decrease is principally
due to the  reduction of interest  expense  resulting  from the wind-down of the
Company's Canadian operations.

         Interest income increased from  approximately $600 for the three months
ended  September  30, 1995 to  approximately  $4,200 for the three  months ended
September  30,  1996.  The  increase  of   approximately   $3,600  is  primarily
attributable  to the  increase  in the amount of funds  invested  by the Company
during the three months ended September 30, 1996.

         The Company  realized a gain on foreign  currency  transactions for the
three months ended  September 30, 1996 of  approximately  $11,000  compared to a
gain of  approximately  $75,000 for the three months ended  September  30, 1995.
This change is primarily  attributable to currency exchange  volatility  between
the United  States and Canada  that  resulted  in a decrease in the value of the
Canadian currency held by the Company at September 30, 1996.

         Income tax benefit was  approximately  $800 for the three  months ended
September  30,  1995  compared to no income tax expense or benefit for the three
months ended  September 30, 1996.  This change was primarily due to the decrease
in the Company's  taxable income,  which resulted because of decreased  revenues
and lack of profitability, for the three months ended September 30, 1996.


                                      -8-



         The  decrease  in net loss per share  from  approximately  $.26 for the
third  quarter of 1995 to a net loss per share for the third  quarter of 1996 of
approximately  $.13  reflects a  comparable  aggregate  net loss by the  Company
divided by a greater number of shares of the Company's Common Stock  outstanding
as a result of the Kemper acquisition completed by the Company in November 1995,
the  Company's  two private  placements in December of 1995 and February of 1996
(the "Private  Placements")  and the additional  shares issued by the Company in
July pursuant to the terms of the Private Placements.

         NINE MONTHS ENDED  SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995

         Net sales and  revenues for the nine months  ended  September  30, 1996
were   approximately   $11,549,000   compared  to  net  sales  and  revenues  of
approximately   $13,036,000   for  the  same  period  in  1995,  a  decrease  of
approximately  $1,487,000  or 11%.  The  decrease in net sales and  revenues was
principally  a result  of  reduced  sales  from  the  closing  of the  Company's
operations in Canada and New Jersey,  partially  offset by the increase in sales
realized from the operation of Kemper.

         Net loss for the nine months ended September 30, 1996 was approximately
$8,557,000 compared to a net loss of approximately  $583,000 for the nine months
ended September 30, 1995, a change of approximately  $7,974,000. Of the net loss
of approximately  $8,557,000,  approximately  $7,657,000 was incurred during the
first six months of the year,  of which  approximately  $5,199,000  was incurred
during  the  second  fiscal  quarter  of 1996 and  resulted  primarily  from the
Canadian Wind-down, costs associated with the Domestic Consolidation,  and costs
associated  with  the  negotiation  of  suitable   financing  for  the  Company.
Approximately  $2,147,000 of the balance of the net loss resulted primarily from
reduced sales  realized in connection  with the closing of the New Jersey office
and lower  than  expected  sales  from the  operations  of  Kemper  with a small
corresponding  decrease in selling,  general and  administrative  expenses.  The
Company  elected to  maintain  the level of such  expenses  during  such  period
because of ongoing  negotiations for major transactions  involving such entities
and the belief that a significant  financing would occur.  Since the termination
of financing discussions,  however, the Company has commenced a reduction in its
selling,  general and administrative expenses. The remainder of the net loss for
the nine months  ended  September  30, 1996 was  primarily  attributable  to the
Company's Canadian  operations,  where operating  inefficiencies and the lack of
financial  and other  resources  prevented  the  Company  from  undertaking  and
completing  certain projects and from increased  professional and legal expenses
incurred in connection with the Domestic Consolidation.

         The Company derives a substantial portion of its revenues from the sale
of energy efficient systems through  participation in DSM programs  sponsored by
various  utilities.  Although,  a large  minority of the Company's  revenues are
currently realized from DSM projects, as a forward-looking statement, management
believes that the percentage of revenues derived from DSM program  participation
will  decrease  in the  future.  No  assurance  of such a result  can be  given,
however,  because  of  numerous  factors  that may cause  such a result to vary,
including  but not  limited to,  changes in the  incentives  provided  under DSM
programs and changes in the Company's clientele.


                                      -9-



         Gross profit  margin for the nine months ended  September  30, 1996 and
1995 was approximately 28% and 33%,  respectively.  The decrease in gross profit
margin was primarily  attributable  to significant  costs incurred in connection
with the Canadian  operations,  including costs associated with the satisfaction
of union contracts and significant cost overruns  associated with the operations
of Enera.  The gross profit margin for the nine months ended  September 30, 1996
is not necessarily indicative of the gross profit margin that may be obtained by
the Company for the year ending  December 31, 1996 as the Company's gross profit
margin is dependent on the mix of products sold and the type of DSM,  non-DSM or
other energy savings program in which the Company participates.

         Selling, general and administrative expenses increased by approximately
$1,883,000,  or 42%,  from  approximately  $4,464,000  for the nine months ended
September  30,  1995 to  approximately  $6,347,000  for the  nine  months  ended
September 30, 1996. Selling, general and administrative expenses include certain
direct costs related to the Company's sales and certain  restructuring  costs in
the approximate amounts of $184,000 and $1,159,000,  respectively.  The increase
in such  expenses  is  primarily  due to the  additional  selling,  general  and
administrative  costs  incurred as a result of the normal  operation  of Kemper,
which the Company  acquired in November  1995, an increase in  professional  and
legal  expenses  incurred in  connection  with the  Domestic  Consolidation  and
related matters, and costs of approximately $150,000 incurred in connection with
the  negotiation of suitable  financing for the Company,  partially  offset by a
reduction  in expenses  related to ongoing  operations  because of the  Canadian
Wind-down and the Domestic  Consolidation.  Selling,  general and administrative
expenses  increased as a percentage of revenue from approximately 34% to 55% for
the nine month periods ended  September  30, 1995 and 1996,  respectively.  This
increase is principally  due to a significant  reduction in the Company's  sales
revenue resulting  primarily from the Canadian  Wind-down and the closing of the
New Jersey operations,  and the additional  selling,  general and administrative
costs  incurred  as a result of the normal  operation  of Kemper,  which  normal
operation  did not generate a  proportionately  equal  increase in the Company's
revenues.

         During the nine months ended  September  30, 1996 the Company  incurred
consolidation  costs  of  approximately  $5,437,000,  which  included  costs  of
approximately  $4,325,000  associated with the Canadian Wind-down (including the
write down of the assets of the Company's Canadian subsidiaries),  approximately
$308,000 associated with the closing of the New Jersey office, and approximately
$392,000 associated with the Domestic  Consolidation.  In addition,  the Company
reduced by approximately  $412,000 the value of organization  costs and costs in
excess of net assets of K&S Energy  Products,  Inc.  ("K&S") and Marathon  Power
Services  Corporation  ("Marathon"),  which  businesses the Company  acquired in
March 1994 and July 1993,  respectively.  At  present,  and in the  context of a
forward-looking  statement, the Company does not intend to focus on the areas of
business served by K&S and Marathon. Accordingly, management believes that these
businesses no longer have any value for the Company.

         Interest  expense  increased by  approximately  $58,000,  or 23%,  from
approximately  $248,000  for  the  nine  months  ended  September  30,  1995  to
approximately $306,000 for the same period in 1996. This increase is principally
due to the Company's increased net working capital borrowing requirements during
the nine months ended September 30, 1996 as compared to the same period in 1995,
and,  to  a  lesser  extent,  an  increase  in  the  Company's   long-term  debt
obligations.

                                      -10-




         Interest income increased from approximately $2,000 for the nine months
ended  September  30, 1995 to  approximately  $13,000 for the nine months  ended
September  30,  1996.  The  increase  of  approximately   $11,000  is  primarily
attributable  to an  increase  in the amount of funds  invested  by the  Company
during the nine months ended September 30, 1996.

         The Company  realized a gain on foreign  currency  transactions for the
nine months ended September 30, 1996 of approximately $22,000 compared to a gain
of  approximately  $151,000 for the nine months ended  September 30, 1995.  This
decrease  of  approximately  $129,000  is  primarily  attributable  to  currency
exchange  volatility  between the United  States and Canada that  resulted in an
increase in the value of the Canadian  currency held by the Company at September
30, 1996.

         Income tax expense was approximately  $30,000 for the nine months ended
September  30,  1995  compared  to no income tax expense or benefit for the nine
months ended  September 30, 1996.  This change was primarily due to the decrease
in  the  Company's   taxable  income,   which  resulted   because  of  decreased
profitability, for the nine months ended September 30, 1996.

         The  increase  in the net loss per share  from  approximately  $.22 per
share for the first three quarters of 1995 to a net loss of approximately  $1.64
per share for the first three quarters of 1996 reflects the Company's  decreased
net income,  partially  offset by the greater  number of shares of the Company's
Common Stock outstanding as a result of the Kemper acquisition  completed by the
Company in November  1995,  the Private  Placements  and the  additional  shares
issued by the Company in July pursuant to the terms of the Private Placements.

LIQUIDITY AND CAPITAL RESOURCES

         The Company  currently  finances  its capital  expenditures,  operating
requirements,  growth and portions of its acquisitions,  through bank borrowing,
the private sale of stock to investors,  and financing  arrangements  with major
suppliers.  The Company did not  generate a positive  cash flow from  operations
during the nine month periods ended  September 30, 1996 and 1995. The Company is
currently  developing an operating plan to generate  additional cash and working
capital.

         On June 24, 1996,  the Ontario Court  (General  Division) in Bankruptcy
(the "Court")  issued a Petition for Receiving Order (the  "Petition")  that was
filed by the Canadian  Imperial  Bank of Commerce  ("CIBC")  against  Enera Inc.
("Enera"),  a wholly owned  Canadian  subsidiary  of the  Company.  The Petition
requested  that Enera be adjudged a bankrupt and that a receiving  order be made
with respect to the property of Enera. The Company consented to the Petition and
on June 28, 1996, by order of the Court,  Enera was adjudged bankrupt  effective
as of June 24,  1996 and a receiving  order was made with  respect to all of the
assets and tangible and intangible property of Enera.

         For the nine months ended  September 30, 1996, the Company used cash of
approximately  $623,000 for operating  activities.  The major use of cash was to
finance cost overruns by the Company's Canadian  operations and to finance costs
associated  with  the  Domestic  Consolidation  during  the  nine  months  ended
September 30, 1996. In addition, the

                                      -11-





Company used cash of approximately $10,000 for investing  activities,  which was
used primarily to purchase additions to property and equipment. The Company also
had cash of  approximately  $917,000  provided by  financing  activities,  which
activities included the sale of Common Stock.

         In September  1996,  the Company  established a $350,000 term loan (the
"ProvEnergy  Loan") with Providence  Energy  Corporation  ("ProvEnergy"),  which
terminates on March 11, 1997, unless ProvEnergy elects to acquire the Company in
which case the ProvEnergy Loan would be  automatically  extended until September
11,  1997.  The  ProvEnergy  Loan bears  interest at the prime rate per annum as
designated by Fleet National Bank (8.25% at September 30, 1996). The funds under
the  ProvEnergy  Loan are to be disbursed in accordance  with a schedule that is
based upon the  Company's  performance  under its  contract  with  PepsiCo  Food
Systems, a division of PepsiCo, Inc. (the "PepsiCo Agreement").  As of September
30, 1996, the Company had borrowed approximately $100,000 of the funds available
under the loan, which is secured by the receivables under the PepsiCo Agreement.

         In February  1996, the Company  received net proceeds of  approximately
$1,181,000  from  the  closing  of  a  private   placement  (the  "1996  Private
Placement"),  in which it sold 908,094 shares of Common Stock. In December 1995,
the Company received net proceeds of  approximately  $1,329,000 from the closing
of a private placement (the "1995 Private Placement") in which it sold 1,243,556
shares of its Common Stock.  According to the terms of the 1995 and 1996 Private
Placements,  purchasers  were  entitled to receive  additional  shares of Common
Stock from the  Company  if the  average  price per share of the  Common  Stock,
determined  by an agreed upon  formula,  was less than $1.50 on the day that the
Securities and Exchange Commission  declared effective a registration  statement
covering the shares sold in the Private Placements. In July 1996, the purchasers
in the 1995 and 1996  Private  Placements  received an  aggregate  of  3,064,517
additional shares of Common Stock pursuant to these provisions.

         Kemper  had a  $1,000,000  line of  credit  agreement  with the Bank of
Boston (the "Bank of Boston Line") when the Company  acquired Kemper on November
20, 1995. In January 1996, Kemper refinanced the Bank of Boston Line by entering
into a $2,000,000  revolving loan agreement (the "Revolving Loan") with People's
Bank  ("People's"),  which  terminates  on January 30,  1997 unless  extended by
People's.  The Revolving  Loan bears  interest at People's  prime rate (8.25% at
September 30, 1996) plus .75% per annum.  As of September 30, 1996,  the Company
had borrowed  approximately  $722,000 of the funds available under the Revolving
Loan.  Aggregate  borrowings  under the Revolving Loan are limited to 80% of the
value of Kemper's then existing eligible accounts. The Revolving Loan is secured
by  substantially  all of the  assets of Kemper and has been  guaranteed  by the
Company and the former principals of Kemper.

         In August 1995, the Company  entered into a $1,700,000  working capital
line of credit (the "Line of Credit") with Shawmut Bank, N.A. ("Shawmut"), which
terminates on September 16, 1996,  unless extended by Shawmut (Shawmut has since
been acquired by Fleet Bank,  N.A.  ("Fleet")).  The Line of Credit  replaced an
earlier  $1,200,000 line of credit that the Company entered into with Shawmut in
February 1995. Interest on the Line of Credit currently accrues at Fleet's prime
rate 

                                      -12-





(8.25% at September 30, 1996) plus .5% per annum.  The Company also entered into
a $200,000 term loan (the "Term Loan") with Shawmut in July 1994, which requires
60 monthly payments of principal and interest. Interest on the Term Loan accrues
at a fixed rate of 9.5% per annum.  As of September  30,  1996,  the Company had
reduced  during the third quarter of 1996 by  approximately  $538,000 the amount
outstanding  under  the Line of  Credit  to  approximately  $1,071,000,  and the
balance for the Term Loan was approximately $117,000. Aggregate borrowings under
the Line of  Credit  and Term Loan are  limited  to 80% of  qualifying  accounts
receivables and 30% of qualifying inventories. Encon Systems Canada Inc. ("Encon
Canada") has guaranteed the  indebtedness  to Fleet under the Line of Credit and
the Term Loan.

         The Line of Credit  and Term Loan  contain  the  following  restrictive
financial  covenants:  (i) the Company  must  maintain a ratio of total  current
assets to total current  liabilities of not less than 1:1, (ii) the Company must
maintain a ratio of total  liabilities  to  tangible  net worth of not less than
1.25:1,  and (iii) the Company must maintain a ratio of debt service payments to
unfinanced capital expenditures,  as further described in the loan documents, of
not less  than  1.15:1.  The  Company  has  violated  one or more of these  loan
covenants  and Fleet has  declared  the Company in default.  However,  Fleet has
agreed to forbear  from taking any action  against  the  Company  until at least
March 14, 1997.  The Company has  continued to make  payments to Fleet to reduce
the  outstanding  indebtedness  under  the Line of Credit  to  $1,071,000  as of
November 8, 1996, and, as a forward-looking  statement, the Company expects that
Fleet will  continue to work with it in  connection  with its  consolidation  of
operations.  Such a result may vary materially,  however,  depending upon future
negotiations between the Company and Fleet.

         On July 3, 1996,  the  Company  entered  into a Term  Note,  Pledge and
Security Agreement (the "Term Note") with Public Service Conservation  Resources
Corporation  ("PSCRC") to borrow  $282,500 at an interest rate of 12% per annum.
The Term Note is secured by certain of the Company's assets. Under the Term Note
the principal and accrued  interest were due on July 31, 1996,  but PSCRC agreed
to forbear  from any  collection  action  under the Term Note so long as Fleet's
forbearance  remains effective.  Fleet's  forbearance is currently  scheduled to
continue until at least March 14, 1997.

         The Company also received loans with interest rates ranging from 13% to
15% per  annum  from  PSCRC in  December  1994 and  November  1995,  of which an
aggregate  principal  amount of  approximately  $927,000 was  outstanding  as of
September 30, 1996.  The loans are  primarily  unsecured and PSCRC has agreed to
forbear  from any  collection  action  so long as  Fleet's  forbearance  remains
effective.

         Certain  other  obligations  also exist with  respect to the  Company's
Canadian  operations.  In July 1995, Encon Canada and Enera  (collectively,  the
"Canadian  Subsidiaries")  received  approval  from CIBC for a  $2,000,000  Cdn.
($1,460,000 U.S.) demand working capital line of credit subordinated


                                      -13-



to certain acquisition indebtedness.  Interest accrued at CIBC's prime rate plus
2%. The Canadian  Subsidiaries also had a term loan agreement with CIBC that was
scheduled to mature in August, 1997 and bore interest at a fixed rate of 7%. The
Company and Encon  Canada  guaranteed  the  indebtedness  to CIBC under both the
working  capital  line of  credit  and the term  loan  (collectively,  the "CIBC
Loans") and the  personal  property of Encon  Canada and Enera  secured the CIBC
Loans. On June 30, 1996,  approximately  $1,355,000 (U.S.) was outstanding under
the CIBC Loans.  CIBC has demanded full repayment of the loans from the Canadian
Subsidaries.

         In addition,  since September 1995,  PSCRC has advanced an aggregate of
$1,075,000 to the Canadian  Subsidiaries,  which is evidenced by a $900,000 term
note that  bears  interest  at the rate of 13% per annum and is  secured  by the
Canadian  Subsidiaries'  backlog,  and a  $175,000  demand  term note that bears
interest at 15% per annum. As a result of the Canadian Wind-down, the Company no
longer  considers the obligations of the Canadian  Subsidiaries  under the PSCRC
term notes to be material commitments of the Company.

         In August 1992,  March 1993 and December 1993,  BFR Industries  Ltd., a
Canadian  subsidiary  of the  Company  ("BFR"),  entered  into third party lease
agreements (the "Lease Agreements") with National Trust Company  ("National") to
finance the purchase of certain equipment that was installed pursuant to certain
Guaranteed Energy Performance Program contracts (the "GEPP Contracts"). Payments
under the Lease Agreements are scheduled to continue until 1998. As security for
the payments due under the Lease Agreements, BFR has assigned to National all of
the  payments due to BFR under the GEPP  Contracts.  As a result of the Canadian
Wind-down,  the Company no longer  considers  the  obligations  of BFR under the
Lease Agreements to be material commitments of the Company.

         The Company  currently does not have material  commitments  for capital
expenditures but it bids on large energy savings  contracts in which the Company
obtains  independent  financing to purchase the equipment  needed for such large
contracts.  The Company's success in obtaining large contracts and the financing
for the  equipment  therefore  will  have a  material  effect  on the  Company's
operations.

         The  Company  routinely  explores   potential   acquisitions  that  are
complementary or related to the Company's business. The Company currently has no
material commitments for acquisitions.

         INFLATION

         To date,  inflation  has not had a  material  effect  on the  Company's
business.

                                      -14-




                           PART II - OTHER INFORMATION


ITEM 1. LEGAL  PROCEEDINGS.  On September 11, 1996, United Southeast Corp. d/b/a
Holiday Inn  ("United")  filed a complaint with the Summit Court of Common Pleas
in Akron,  Ohio  alleging  that the Company had  breached the terms of an energy
savings  contract  because the  Company's  estimated  energy  savings  under the
contract  for a sixty  month  period was not  realized  during the first  twelve
months of the contract.  United has requested  actual and future  damages in the
amount of approximately $150,000.

ITEM 2.  CHANGES IN SECURITIES.  None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.  None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.  None.

ITEM 5.  OTHER INFORMATION.

                  (a) On October 23,  1996 and  October  31, 1996 the  Company's
Common  Stock was removed  from  listing and  registration  on the Boston  Stock
Exchange  and the  NASDAQ  SmallCap  Stock  Market,  respectively,  because  the
Company's stockholder equity as set forth in its Quarterly Report on Form 10-QSB
for the six  months  ended  June  30,  1996 was less  than the  minimum  amounts
required for continued listing on each exchange.

                  (b) On October 4, 1996,  Thomas  Beamer,  the Company's  Chief
Financial Officer tendered his resignation, effective October 15, 1996, in order
to pursue an  opportunity in another  industry.  On October 7, 1996, the Company
hired Stephen Gorgol as its  Controller  and principal  financial and accounting
officer.  Mr.  Beamer  has  agreed to serve as a  consultant  to the  Company in
connection with the transition of his duties to Mr. Gorgol.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

                  (A)      EXHIBITS.  The following exhibits are filed herewith:

                   EXHIBIT
                     NO.                    TITLE
                    ---                     -----

                    27              Financial Data Schedule.

                  (B)  REPORTS  ON FORM  8-K.  One  report on Form 8-K was filed
during the quarter for which this report is filed.  On July 2, 1996, the Company
filed a report on Form 8-K  reporting  certain  events  related to the Company's
restructuring and certain changes in the Company's debt obligations.

                                      -15-




                                   SIGNATURES


                  In accordance  with the  requirements of the Exchange Act, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                                     ENCON SYSTEMS, INC.


Date: November 18, 1996                              By: /s/ Robert Wexler
                                                        ------------------
                                                       Robert Wexler
                                                       Chief Executive Officer


Date: November 18, 1996                              By:/s/ Stephen Gorgol
                                                        ------------------
                                                        Stephen Gorgol
                                                        Controller


                                      -16-






                                  EXHIBIT INDEX
                                  -------------


         EXHIBIT
            NO.                     TITLE
         -------                    -----
           27              Financial Data Schedule.