U. S. SECURITIES AND EXCHANGE COMMISSION

                          WASHINGTON, D.C.  20549

                            FORM 10-KSB/A No. 1
  
(Mark One)
<checked-box> ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
              SECURITIES EXCHANGE ACT OF 1934

      For the fiscal year ended June_30,_1997.

<square> TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
         SECURITIES EXCHANGE ACT OF 1934

      FOR THE TRANSITION PERIOD FROM ______________TO______________

      COMMISSION FILE NUMBER 1-12738

                          ONSITE ENERGY CORPORATION
                (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

          Delaware                                     33-0576371
(STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NO.)

    701 Palomar Airport Road, Suite 200                   92009
            Carlsbad, California                        (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                (760) 931-2400
                         (ISSUER'S TELEPHONE NUMBER)

Securities registered under Section 12(b) of the Act:  None

Securities registered under Section 12(g) of the Act:

 TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
 Class A Common Stock                            OTC Bulletin Board

Check  whether  the  issuer  (1)  filed all reports required  to  be  filed  by
Section_13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period  that the registrant was required to file
such reports), and (2) has been subject  to  such  filing  requirements for the
past 90 days.   Yes  <checked-box>   No  <square>

Check if no disclosure of delinquent filers pursuant to Item  405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of  registrant's  knowledge,  in  definitive  proxy  or  information statements
incorporated by reference in Part III of this Form 10-KSB  or  any amendment to
this Form 10-KSB.  <square>

State issuer's revenues for its most recent fiscal year.............$9,561,375

State  the  aggregate  market value of the voting and non-voting common  equity
held by non affiliates computed  by  reference to the price at which the common
equity was sold, or the average bid and  asked  price of such common equity, as
of a specified date within the past 60 days $1,835,946 as of September 22, 1997

The number of shares of Common Stock outstanding  as  of September 22, 1997, is
10,944,172.

                      DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENTS INCORPORATED BY REFERENCE       10-K PART AND ITEM WHERE INCORPORATED

Definitive Proxy Statement for Annual      Part III: Items 9, 10, 11 and 12
Stockholders of the Registrant to be 
held December 5, 1997.

<PAGE>2
                                    PART II

ITEM 7.  FINANCIAL STATEMENTS.

      Onsite's consolidated financial statements are attached as pages F-1
through F-19.

<PAGE>3

                                    PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

a)    Exhibit

NO.

2.1   The  Amended  and  Restated  Agreement  and Plan of Reorganization by and
      between Western Energy Management, Inc. and Onsite Energy, as amended*

3.1   Certificate of Incorporation*

3.2   Form of Bylaws*

10.1  1993 Stock Option Plan*

10.2  Form  of  Employment  Agreement  between Onsite  Energy  Corporation  and
      Richard T. Sperberg*

10.3  Form  of  Employment  Agreement between  Onsite  Energy  Corporation  and
      William M. Gary III*

10.4  Form of Employment Agreement  between Onsite Energy Corporation and Frank
      J. Mazanec*

10.5  Form of Employment Agreement between Onsite Energy Corporation and Hector
      A. Esquer*

10.11 Energy Services Agreement (between  Western  Energy  Management, Inc. and
      Tustin Unified School District dated October 1992)*

10.29 Television  City  Cogen  L.P.  Energy Services Agreement (between  Onsite
      Energy and CBS Operations & Engineering,  a  division  of CBS Inc., dated
      5/20/87)*

10.32 A.    Extension  and  Amendment  to Agreement for $2,000,000  Note  dated
            9/27/93 (between Television  City  Cogen,  L.P.  and  Shawmut  Bank
            N.A.)*

      B.    Amended  and  Restated  Term  Loan  for  $2,000,000  dated  9/27/93
            (between Television City Cogen, L.P. and Shawmut Bank, N.A.)*

10.46 EUA/Onsite, L.P., and Santa Ana Unified School District, as amended*

10.47 EUA/Onsite, L.P., and Chino Unified School District, as amended*

10.48 Energy  Services  Agreement between Western Energy Management, Inc.,  and
      R._E._Thomason General Hospital*

10.50 Agreement between Onsite Energy and EUA Cogenex Corporation**

10.51 Agreement  for the Sale  and  Purchase  of  Stock   (to  acquire  Lanikai
      Lighting, Inc.)**

10.52 Debt Conversion and Preferred Stock Purchase Agreement**

<PAGE>4

10.53 Settlement Agreement  and  Release  with George T. McLaughlin, dated July
      21, 1995***

10.54 Master Energy Efficiency Services Agreement  between  Onsite and Hercules
      Incorporated, predecessor-in-interest to Alliant Techsystems  Inc., dated
      February 8, 1995***

10.55 Master  Energy  Efficiency  Services  Agreement  between  Onsite and  IHC
      Hospitals, Inc., dated February 28, 1995***

10.56 Master  Energy  Efficiency  Services Agreement between Onsite  and  First
      Security Bank of Utah, N.A., dated February 17, 1995***

10.57 Master  Energy Efficiency Services  Agreement  between  Onsite  and  Utah
      National Guard, dated December 30, 1994***

10.58 Master Energy  Efficiency Services Agreement between Onsite and The Boyer
      Company, dated August 18, 1995***

10.59 Southern California  Edison  Company Demand Side Management Bidding Pilot
      Industrial & Large Commercial  Energy Efficiency Agreement between Onsite
      and Southern California Edison Company, dated May 4, 1994***

10.60 Southern California Edison Company  Demand  Side Management Bidding Pilot
      Industrial  &  Large  Commercial  Energy  Efficiency   Agreement  between
      KENETECH Energy Management, Inc., and Southern California Edison Company,
      dated May 4, 1994, acquired by Onsite on June 20, 1995***

10.61 Energy  Service  Agreement  between Onsite and Ford Motor Company,  dated
      August 2, 1995***

10.62 Standard  Energy Savings Agreement  between  Onsite  and  Public  Service
      Electric and Gas Company, dated July 21, 1995***

10.63 Purchase Order  No.  B11  PO95 470871, from Ford Motor Company to Onsite,
      dated August 30, 1995

10.64 Conservation Purchase Agreement  with  Puget Sound Power & Light Company,
      dated June 21, 1994***

10.65 Peak Load Reduction Agreement with Nevada  Power  Company,  dated May 31,
      1994***

10.66 Agreement  to  Accept Proceeds from Sale of Stock for Services  Rendered,
      dated January 30, 1995***

10.67 Purchase Order No. 7-6R0212 to Onsite from Hughes Aircraft Company, dated
      October 20, 1995****

10.68 Purchase Order No. 7-6R0213 to Onsite from Hughes Aircraft Company, dated
      October 20, 1995****

10.69 Engineering, Procurement  and  Construction  Agreement between Onsite and
      Parke Industries, Inc., dated November 21, 1995****

10.70 Engineering, Procurement and Construction Agreement  between  Onsite  and
      General  Motors  Corporation,  Truck  &  Bus Division, dated December 20,
      1995****

10.71 Master  Lease Agreement between Onsite and  General  Motors  Corporation,
      Truck & Bus Division, dated December 20, 1995****

<PAGE>5

10.72 Master Lease  Agreement,  Supplemental  Terms, between Onsite and General
      Motors Corporation, Truck & Bus Division, dated December 20, 1995****

10.73 Equipment Schedule No. 1 to Master Lease  Agreement,  between  Onsite and
      General  Motors  Corporation,  Truck  & Bus Division, dated December  20,
      1995****

10.74 Financing Agreement, Agreement for Purchase  and  Sale  of  Equipment and
      Assignment of Rights between Onsite and ChiCorp Financial Services, Inc.,
      dated December 1995****

10.76 Engineering,  Procurement  and Construction Agreement between Onsite  and
      Geissenberger Manufacturing Corp. dba The Robert Group, dated January 11,
      1996****

10.77 Master Engineering, Procurement and Construction Agreement between Onsite
      and Ram Air Engineering, dated September 30, 1995****

10.78 Acquisition and Release Agreement  for  Lanikai Lighting, Inc. among Joel
      Hemington,  Tom  Halvorsen,  Onsite  and Lanikai  Lighting,  Inc.,  dated
      February 20, 1996*****

10.79 Contract Change Order No. 1 [Amendment No. 1] to Engineering, Procurement
      and Construction Agreement between Onsite and General Motors Corporation,
      Truck & Bus Division, dated March 1, 1996*****

10.80 Amendment  No. 1 dated March 1, 1996, to  Equipment  Schedule  No.  1  to
      Master Lease  Agreement,  between  Onsite and General Motors Corporation,
      Truck & Bus Division, dated March 1, 1996*****

10.81 Pacific Gas & Electric Company Demand  Side  Management Agreement between
      Onsite and Pacific Gas & Electric Company, dated March 5, 1996*****

10.82 Purchase  and  Assignment Agreement between Onsite  and  KENETECH  Energy
      Management, Inc., dated March 20, 1996*****

10.83 Operation and Maintenance  Agreement  between  Onsite  and El Paso County
      Hospital District dated June 1996 (executed March 1, 1996)*****

10.84 Master  Energy  Efficiency  Services  Agreement between Onsite  and  West
      Covina Unified School District, dated June 3, 1996******

10.85 Financing Agreement, Agreement for Purchase  and  Sale  of  Equipment and
      Assignment of Rights between Onsite and ChiCorp Financial Services, Inc.,
      dated June 3, 1996******

10.86 Master Energy Efficiency Services Agreement between Onsite and California
      State University, Fresno, dated June 28, 1996******

10.87 Energy  Services Agreement No. 97-031 A, dated January 27, 1997,  between
      Onsite Energy  Corporation and State of Washington, Department of General
      Administration,    Energy    Conservation    Services,   Northern   State
      Multi-Service Center, Sedro Woolley, Washington

      A. Energy Services Agreement Amendment No. 1 dated July 14, 1997

      B. Energy Services Agreement Amendment No. 2 dated August 4, 1997

<PAGE>6

11      Statement Regarding Computation of Per Share Earnings
 
21      Subsidiaries of the Registrant

23.1    Consent of Independent Auditors

*     Previously  filed  as exhibits to Onsite's Registration  Statement,  Form
      S-4, Registration No.  33-66010,  filed  with the Securities and Exchange
      Commission on December 20, 1993.

**    Previously  filed as exhibits to Onsite's Form  10-KSB,  as  amended  and
      restated on July 19, 1995.

***   Previously filed  as  exhibits  to Onsite's Form 10-KSB, as filed for the
      year ended June 30, 1995.

****  Previously filed as exhibits to Onsite's  Form  10-QSB,  as filed for the
      quarter ended December 31, 1995.

***** Previously  filed as exhibits to Onsite's Form 10-QSB, as filed  for  the
      quarter ended March 31, 1996.

******   Previously filed as exhibits to Onsite's Form 10-KSD, as filed for the
         year ended June 30, 1996

b)    REPORTS ON FORM 8-K

      None.

<PAGE>
                                  SIGNATURES

      Pursuant to the  requirements  of  Section  13 or 15(d) of the Securities
Exchange Act of 1934, Onsite has duly caused this Form  10-KSB  to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                  ONSITE ENERGY CORPORATION

Date:  October 13, 1997           By:   RICHARD T. SPERBERG
                                  Richard T. Sperberg, President


<PAGE>F-1

               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



INDEPENDENT AUDITOR'S REPORT - Hein + Associates LLP.......................F-2

CONSOLIDATED BALANCE SHEET - June 30, 1997.................................F-3

CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years ended
      June 30, 1997 and 1996...............................................F-4

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - For the 
      Years ended June 30, 1997 and 1996...................................F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years ended
      June 30, 1997 and 1996...............................................F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENT..................................F-7

<PAGE>F-2

                         INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders
Onsite Energy Corporation
Carlsbad, California


We  have  audited the accompanying consolidated balance sheet of Onsite  Energy
Corporation  and  subsidiaries  (the  "Company")  as  of  June 30, 1997 and the
related consolidated statements of operations, shareholders'  equity (deficit),
and cash flows for the years ended June 30, 1997 and 1996.  These  consolidated
financial statements are the responsibility of the Company's management.    Our
responsibility  is  to  express  an  opinion on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly,  in  all  material  respects,  the  financial position of Onsite Energy
Corporation  and  subsidiaries  at  June 30, 1997  and  the  results  of  their
operations and their cash flows for the  years  ended June 30, 1997 and 1996 in
conformity with generally accepted accounting principles.




HEIN + ASSOCIATES LLP
Certified Public Accountants


Orange, California
August 28, 1997

<PAGE>F-3

                           ONSITE ENERGY CORPORATION
                          Consolidated Balance Sheet
                                 June 30, 1997
                                    Assets

Current Assets:
    Cash                                                      $        526,894
    Cash-restricted                                                    194,764
    Accounts receivable, net of allowance for doubtful
      accounts of $40,000                                              864,954
    Costs and estimated earnings in excess of billings
      on uncompleted contracts                                         100,738
    Other assets                                                        20,732
                                                              -----------------
           TOTAL CURRENT ASSETS                                      1,708,082

Cash-restricted                                                         78,403
Costs incurred on future projects                                        1,409
Property and equipment, net of accumulated depreciation 
  and amortization                                                      44,627
Goodwill, net of amortization of $933,333                              266,667
Other                                                                   24,155
                                                               ----------------
           TOTAL ASSETS                                        $     2,123,343
                                                               ================

           LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable                                            $      971,396
    Billings in excess of costs and estimated earnings
      on uncompleted contracts                                         149,853
    Current portion of notes payable                                   111,872
    Accrued expenses and other liabilities                             505,294
                                                                --------------- 
          TOTAL CURRENT LIABILITIES                                  1,738,415

Long-Term Liabilities:
    Related party notes payable                                         46,804
    Accrued future operation and maintenance costs
      associated with energy services agreements                       421,432
                                                                 --------------
          TOTAL LIABILITIES                                          2,206,651
                                                                 --------------
Commitments and contingencies (Notes 4, 12 and 13)

Shareholders' Equity (Deficit):
     Preferred Stock, Series A, 4,000 shares authorized,
        none issued and outstanding
     Preferred Stock, Series B, 625,000 shares authorized,
        none issued and outstanding
    Common Stock, $.001 par value, 24,000,000 shares authorized:
       Class A common stock, 23,999,000 shares
           authorized, 10,944,172 issued and outstanding                10,942
        Class B common stock, 1,000 shares authorized,
           none issued and outstanding
    Additional paid-in capital                                      17,052,963
    Accumulated deficit                                            (17,147,213)
                                                               ----------------
        TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                           (83,308)
                                                               ----------------
TOTAL LIABILTIES AND SHAREHOLDERS' EQUITY (DEFICIT)            $     2,123,343
                                                               ================

The accompanying notes are an integral part of the financial statements

<PAGE>F-4
                           ONSITE ENERGY CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  FOR THE YEARS ENDED JUNE 30, 1997 AND 1996

                                                      1997            1996
  
Revenues                                      $    9,561,375    $   22,722,728

Cost of sales                                      6,692,198        17,566,988
                                              ---------------   ---------------
    Gross Margin                                   2,869,177         5,155,740

Selling, General, and Administrative Expenses      3,726,095         3,748,988
Loss on disposition of partnership interests         425,240                 -
Loss on disposition of Lanakai                             -           296,128
Gain on sale of assets                               (17,686)                -
                                              ---------------    --------------
     Operating income (loss)                      (1,264,472)        1,110,624
                                              ---------------    --------------
Other income (expense):
   Interest (expense)                               (159,028)         (270,088)
   Interest income                                    43,402            29,728
                                              ---------------    --------------
     Total other income (expense)                   (115,626)         (240,360)
                                              ---------------    --------------
Income (loss) before provision
   for income taxes                               (1,380,098)          870,264

Provision for income taxes                             8,500            51,000
                                              ---------------    --------------
Net income (loss)                             $   (1,388,598)    $     819,264
                                              ===============    ==============
Net income (loss) per Class A common share    $        (0.13)    $        0.03
                                              ===============    ==============
Weighted average shares outstanding               10,818,498         6,639,837
                                              ===============    ==============


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


<PAGE>F-5

                            ONSITE ENERGY CORPORATION
            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                     FOR THE YEARS ENDED JUNE 30, 1997 AND 1996

<TABLE>
<CAPTION>                              
                                          Common Stock                   Preferred Stock
                                          Class A                Series A           Series B
                                       Shares       Amount      Shares   Amount    Shares   Amount
<S>                                <C>           <C>         <C>       <C>      <C>        <C>
Balance, July 1, 1995                 5,418,995   $   5,418     3,910    $    4    617,436  $  617

Issued to Onsite 401k plan               50,989          51

Conversion of accounts
  payable to Class A common stock       162,796         163

Issued pursuant to legal settlement     158,416         158

Common shares issued for
  Series A and B preferred dividends    283,445         284

Conversion of Series A
  preferred stock                        93,740          94      (100)

Conversion of Series B
  preferred stock                        11,795          12                        (11,795)    (12)

Exercise of stock options                83,287          83

Common shares issuable for Series
  A and B preferred dividends

Net Income
----------------------------------------------------------------------------------------------------
Balance June 30, 1996                 6,263,463       6,263     3,810         4    605,641     605

Issued to Onsite 401k plan               48,562          49

Conversion of accounts payable
 to Class A common stock                62,077           63

Common shares issued for Series
  A and B preferred dividends           347,048         347

Conversion of Series A
  preferred stock                     3,571,494       3,571    (3,810)       (4)

Conversion of Series B
  preferred stock                       605,641         605                       (605,641)    (605)

Exercise of stock options                45,887          44

Net Loss
-----------------------------------------------------------------------------------------------------
Total to June 30, 1997               10,944,172      10,942         -    $    -          -  $     -  
-----------------------------------------------------------------------------------------------------
</TABLE>

                            ONSITE ENERGY CORPORATION
            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                     FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
                                    (CONTINUED)
<TABLE>
<CAPTION>                              
                                                      Additional   
                                      Common Shares    Paid-In     Accumulated  
                                         Issuable      Capital       Deficit      Total
<S>                                  <C>          <C>          <C>               <C>        <C>
Balance, July 1, 1995                $   44,161    $15,388,386  $(15,365,854) $   72,732

Issued to Onsite 401k plan              (44,161)        44,110                         -

Conversion of accounts
  payable to Class A common stock                      146,114                   146,277

Issued pursuant to legal settlement                    124,842                   125,000

Common shares issued for
  Series A and B preferred dividends                   603,302      (603,586)          -  

Conversion of Series A
  preferred stock                                          (94)                        -

Conversion of Series B
  preferred stock                                          -                           -

Exercise of stock options                                29,809                    29,892

Common shares issuable for Series
  A and B preferred dividends            608,439            -      (608,439)           -

Net Income                                                          819,264       819,264
--------------------------------------------------------------------------------------------------------------
Balance June 30, 1996                    608,439     16,336,469   (15,758,615)  1,193,165

Issued to Onsite 401k plan                               24,931                    24,980

Conversion of accounts payable
 to Class A common stock                                 66,972                    67,035

Common shares issued for Series
  A and B preferred dividends           (608,439)       608,092

Conversion of Series A
  preferred stock                                        (3,567)

Conversion of Series B
  preferred stock                                          -                            -

Exercise of stock options                                20,066                    20,110

Net Loss                                                           (1,388,598) (1,388,598)
------------------------------------------------------------------------------------------
Total to June 30, 1997                 $       -   $  17,052,963  $(17,147,213) $ (83,308)
------------------------------------------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS

<PAGE>F-6


                           ONSITE ENERGY CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED JUNE 30, 1997 AND 1996

                      
                                                         1997            1996
Cash flows from operating activities:

Net income (loss)                                   $ (1,388,598)  $   819,264

Adjustments to reconcile net income
  (loss) to net cash provided by (used in) 
  operating activities:
       Amortization of goodwill                          400,000       490,000
       Amortization of acquired contract costs           399,032       205,681
       Additions (reductions) to reserve
         for future operation and
         maintenance costs                               (45,925)      104,652
       Provision for bad debts                            37,093        18,700
       Depreciation and amortization                     187,077       209,570
       Loss on disposition of                         
         partnership interests                           425,240             -
       (Gain) on sale of assets                          (17,686)            -
Change in operating assets and
  liabilities:
       Accounts receivable                               747,923    (1,255,552)
       Increase (decrease) in billings
         related to costs and estimated earnings 
         on uncompleted contracts                        921,512    (1,538,301)
       Other assets                                      260,322        50,769
       Cash-restricted                                   (50,467)      206,366
       Accounts payable                               (1,464,594)    1,914,323
       Accrued expenses and other liabilities           (344,632)      402,527
       Deferred income                                   (25,000)     (325,000)
                                                     --------------------------
       Net cash provided by operating activities          41,297     1,302,999
                                                     --------------------------
Cash flows from investing activities:
       Purchases of property and equipment                (4,473)      (43,907)
       Proceeds from sale of assets                      540,081       214,426
                                                      -------------------------
       Net cash provided by investing activities         535,608       170,519
                                                      -------------------------
Cash flows from financing activities:
       Proceeds from exercise of stock options            45,090        29,892
       Repayment of long-term debt                    (1,071,571)     (535,356)
       Repayment of capital lease obligations                  -        (3,589)
                                                      -------------------------
       Net cash provided by financing activities      (1,026,481)     (509,053)
                                                      -------------------------
       Net increase (decrease) in cash                  (449,576)      964,465

Cash, beginning of year                                  976,470        85,751

Less: Cash in Lanikai and cash included in net 
  assets held for sale                                         -       (73,746)
                                                      -------------------------
Cash, end of year                                     $   526,894   $  976,470
                                                      =========================
Supplemental disclosures of non-cash
  transactions:

       Payment of Series A and Series B
         preferred dividends with common stock        $      347     $ 608,439
       Payment of accounts payable with              
         common stock                                     67,035       146,277
       Payment of legal settlement with                      
         common stock                                          -       125,000
       Conversion of preferred stock to          
         common stock                                      4,176             -

Supplemental disclosures of cash
  transactions:

       Interest paid                                     159,028       258,267
       Income taxes paid                                  41,290         9,100


The accompanying notes are an integral part of the financial statements

<PAGE>F-7

                              ONSITE ENERGY CORPORATION
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     _______


1.    BUSINESS ACTIVITY

BACKGROUND

Onsite  Energy  Corporation ("Onsite") is an energy efficiency services company
(ESCO) that develops,  designs,  constructs,  owns  and  operates comprehensive
energy  efficiency  projects  and  assists customers in reducing  the  cost  of
purchased electricity and fuel.  Onsite  also  offers  professional  consulting
services in the areas of market assessment, business strategies, public  policy
analysis,  environmental  studies  and  utility  deregulation.   It is Onsite's
mission   to   be  a  premier  provider  of  energy  efficiency  solutions  for
institutional, commercial and industrial customers.

Onsite  was  formed   pursuant  to  a  reorganization  between  Western  Energy
Management, Inc., a Delaware  corporation  ("Western"),  and  Onsite  Energy, a
California  corporation  formed  in 1982 ("Onsite Energy"), which was effective
February 15, 1994. Under the reorganization, Onsite Energy merged with and into
Onsite and a newly formed subsidiary  of  Onsite  merged with and into Western,
which  survived  and  became  a  wholly  owned  subsidiary   of  Onsite.   This
transaction was accounted for as a purchase of Onsite Energy by Onsite.

Onsite also owned general and limited partnership interests in  Television City
Cogen,  L.P., a California limited partnership ("TCC").  Onsite owned  all  the
stock of Onsite/TCC Corp., a Delaware Corporation ("Onsite/TCC"), which was the
other partner in TCC.  Thus, directly and indirectly, Onsite owned 100% of TCC.
Effective  February  17, 1997, Onsite sold its interests in TCC and Onsite/TCC.
As a result of the sale, Onsite incurred a loss of $425,240.

Onsite  also  owns  a  general  partnership  interest  in  Onsite  Partners,  a
California general partnership,  and a general partnership interest in American
Private Power II, a California general partnership, both of which are inactive.

Onsite also owned Lanikai Lighting,  Inc.  ("Lanikai").  Effective February 20,
1996, Onsite sold its interests in Lanikai in exchange for a royalty earnout of
up to $400,000 with payments due monthly calculated  as  a  percentage of gross
sales.  Such amount will be recorded as income to Onsite when received.  During
the fiscal year ended June 30, 1997, Onsite did not receive any such payments.

Unless the context indicates otherwise, reference to Onsite shall  include  all
of its wholly owned subsidiaries.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Onsite and all of
its  wholly  owned  subsidiaries.   All  significant  intercompany balances and
transactions have been eliminated.

<PAGE>F-8

                                ONSITE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

REVENUE RECOGNITION

Revenues  on  development  and  construction  of  energy  efficiency   projects
requiring contract performance prior to commencement of deliveries are recorded
using  the  percentage  of  completion  method.  Under this method, the revenue
recognized is that portion of the total contract  price  that the cost expended
to date bears to the anticipated final total costs based on  current  estimates
of  the  costs  to  complete  the  project.  When  the total estimated costs to
complete a project exceed the total contract amount, thereby indicating a loss,
the entire anticipated loss is recognized currently.

GUARANTEED SAVINGS

Ongoing revenues on contracts containing guaranteed  savings  to  customers are
recognized when the guaranteed savings are achieved.  No warranties or reserves
are applicable to these contracts.

SERVICE REVENUE

Revenues  for  development,  management,  marketing  and  similar services  are
recognized as the services are performed.

OPERATION AND MAINTENANCE AGREEMENTS

Commencing  July  1, 1993, Onsite began entering into long term  operation  and
maintenance agreements  with its customers.  In instances where estimated costs
exceed estimated revenue,  Onsite  discounts  the estimated future deficit cash
flows at an appropriate long-term interest rate  and  recognizes  expense and a
related  liability  in its financial statements.  For the year ended  June  30,
1997, the liability for deferred operations and maintenance was $421,432.

RESTRICTED CASH

Restricted cash consists  of amounts on deposit with financial institutions for
the purpose of securing performance milestones under several of Onsite's demand
side management ("DSM") contracts.   Funds  become  available  to Onsite over a
period  of  24 to 36 months following completion of the last contract  provided
certain conditions  and  milestones are achieved.  In the event that conditions
or milestones are not achieved, Onsite will be required to forfeit its right to
some or all of the funds on deposit.  As of June 30, 1997, Onsite believes that
all conditions and milestones  will  be  achieved and that no funds under these
DSM contracts will be subject to forfeiture.

<PAGE>F-9                     

                              ONSITE ENERGY CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


COSTS INCURRED ON FUTURE PROJECTS

Costs  incurred on future projects include  Onsite's  investment  in  contracts
pending  approval,  and its cost to purchase projects from third parties, which
are in the implementation process.  Costs are charged to expense in relation to
the progress towards  completion of the implementation of the various projects.
Some  of  the costs incurred  on  future  projects  are  for  projects  pending
regulatory  approval.   In  the  event  the  regulatory authority rejects those
projects, costs incurred will be charged to expense.  For the fiscal year ended
June 30, 1997, Onsite charged to expense approximately  $486,924  in previously
capitalized acquisition costs for projects that will likely be rejected  by the
governing regulatory authority.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost.  Replacements and improvements are
capitalized,  while repairs and maintenance are charged to expense as incurred.
Depreciation and  amortization  are provided using the straightline method with
estimated useful lives ranging from  five  to  20  years  for office equipment,
equipment, tools and vehicles.  Leasehold improvements and leased equipment are
amortized  over the useful life or term of the respective lease,  whichever  is
less.  When an asset is sold or otherwise disposed of, the cost and accumulated
depreciation  or  amortization  is  removed from the accounts and any resulting
gain or loss is recognized currently.

CASH AND CASH EQUIVALENTS

Onsite considers all short-term, highly  liquid  investments  with  an original
maturity of three months or less to be cash equivalents.

GOODWILL

Goodwill consists of certain intangible assets acquired in connection  with the
purchase  of  Onsite Energy and represents the purchase price in excess of  the
fair value of the  assets  acquired adjusted to net realizable value.  Goodwill
is being amortized over four  years  using the straightline method beginning in
February 1994.  The carrying value of  Goodwill is evaluated at least annually.
Onsite  considers current facts and circumstances,  including  expected  future
operating  income  and  cash  flows  to  determine  whether it is probable that
impairment has occurred.

INCOME TAXES

Onsite  accounts for income taxes under the liability  method,  which  requires
recognition  of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns.   Deferred  tax assets and liabilities are determined based on the
difference between financial  statement and tax bases of assets and liabilities
using enacted tax rates in effect  for  the  year  in which the differences are
expected to reverse.

<PAGE>F-10
    
                           ONSITE ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE

Primary  earnings per share is computed by subtracting  the  applicable  year's
required preferred  dividends  from  the  net  income in order to determine net
income attributable to common shareholders.  In 1996, the required dividend was
subtracted from the net income in order to determine net income attributable to
common shareholders. Earnings (loss) per share and  common equivalent share are
then computed based on the weighted average number of  shares  of  common stock
and,  if  dilutive,  common  equivalent  shares  (preferred stock, options  and
warrants) outstanding during the period. Common stock  equivalents  as  of June
30,   1997,  were  antidilutive  and  excluded  from  the  earnings  per  share
computation.

IMPAIRMENT OF LONG-LIVED ASSETS

In the  event that facts and circumstances indicate that the cost of assets may
be impaired,  an  evaluation  of  recoverability  would  be  performed.   If an
evaluation   were  required,  the  estimated  future  undiscounted  cash  flows
associated with  the  asset would be compared to the asset's carrying amount to
determine if a write-down  to market value or discounted cash flow is required.
There were no impairments of  long-lived  assets  for  the  year ended June 30,
1997.

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued  Statement  of
Financial   Accounting   Standards   No.   123,   ACCOUNTING   FOR  STOCK-BASED
COMPENSATION. Onsite currently accounts for its stock-based compensation  plans
using the accounting prescribed by Accounting Principles Board Opinion No.  25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (See Note 9).  FAS 123 encourages, but
does  not  require,  companies  to recognize compensation expense for grants of
stock, stock options, and other equity  instruments  to employees based on fair
value.   Transactions  in equity instruments with non-employees  for  goods  or
services must be accounted  for  on the fair value method.  Since Onsite is not
required to adopt the fair value based  recognition provisions prescribed under
SFAS No. 123, it has elected only to comply  with  the  disclosure requirements
set forth in the Statement, which includes disclosing pro  forma  net income as
if the fair value based method of accounting had been applied. (See Note 9.)

IMPACT OF RECENTLY ISSUED STANDARDS

In  February  1997,  the  Financial  Accounting  Standards  Board issued a  new
statement  titled  "Earnings  per  Share"  ("FAS  128").  The new statement  is
effective for both interim and annual periods ending  after  December 15, 1997.
FAS  128  replaces the presentation of primary and fully diluted  earnings  per
share with  the  presentation  of  basic and diluted earnings per share.  Basic
earnings per share excludes dilution  and  is  calculated by dividing income by
common shares outstanding for the period.  Diluted  earnings per share reflects
the potential dilution that could occur if securities  or  other  contracts  to
issue common stock were exercised or converted into common stock or resulted in
the  issuance  of  common stock that then shared in the earnings of the entity.
Had this new statement  been  in effect for the periods presented, Onsite would
report basic earnings per share  for  the fiscal years ended June 30, 1997, and
1996, of $(.13) and $.03.  Diluted earnings  per  share  for  the  fiscal years
ended June 30, 1997, and 1996, would be $(.10) and $.08.

<PAGE>F-11 

                          ONSITE ENERGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

USE OF ESTIMATES

The  preparation  of  Onsite's  consolidated financial statements in conformity
with generally accepted accounting  principles  requires Onsite's management to
make  estimates  and  assumptions  that affect the amounts  reported  in  these
financial statements and accompanying  notes.  Actual results could differ from
those estimates.

Onsite's financial statements are based upon a number of significant estimates,
including the allowance for doubtful accounts,  estimates in costs and earnings
in  excess  of billings on uncompleted contracts, the  estimated  useful  lives
selected for  property  and  equipment  and intangible assets, realizability of
deferred  tax  assets,  and  accrued  future operation  and  maintenance  costs
associated with energy services agreements.   Due to the uncertainties inherent
in  the  estimation  process,  it is at least reasonably  possible  that  these
estimates will be further revised  in the near term and such revisions could be
material.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The  estimated  fair  values for financial  instruments  under  SFAS  No.  107,
DISCLOSURES ABOUT FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS,  are  determined  at
discrete  points in time based on relevant market information.  These estimates
involve uncertainties  and  cannot be determined with precision.  The estimated
fair  values  of  Onsite's financial  instruments,  which  includes  all  cash,
accounts  receivables,   accounts  payable,  long-term  debt  and  other  debt,
approximates the carrying  value  in  the  consolidated financial statements at
June 30, 1997.

CONCENTRATIONS OF CREDIT RISK

Credit risk represents the accounting loss that  would  be  recognized  at  the
reporting  date  if  counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or groups of counterparties
when they have similar  economic characteristics that would cause their ability
to meet contractual obligations to be similarly effected by changes in economic
or  other  conditions.   In   accordance  with  SFAS  No.  105,  DISCLOSURE  OF
INFORMATION  ABOUT  FINANCIAL  INSTRUMENTS   WITH  OFF-BALANCE-SHEET  RISK  AND
FINANCIAL  INSTRUMENTS  WITH CONCENTRATIONS OF CREDIT  RISK,  the  credit  risk
amounts shown do not take into account the value of any collateral or security.

<PAGE>F-12

                            ONSITE ENERGY CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

3.    ACCOUNTS RECEIVABLE

      Accounts Receivable consisted of the following as of June 30, 1997:

Contract receivables
      Completed contracts                                           $  281,260
      Contracts in progress                                            148,600
                                                                    ----------
                                                                       429,860
Trade receivables                                                      475,094
                                                                    ----------
                                                                       904,954
Less: Allowance for doubtful accounts                                  (40,000)
                                                                    ----------
                                                                    $  864,954
                                                                    ==========
4.    COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

      Costs  and estimated earnings on contracts as of June 30, 1997, consisted
of the following:

Costs incurred                                                    $  7,646,678
Estimated earnings                                                   1,918,101
                                                                  ------------
                                                                  $  9,564,779

Less: Billings to date                                              (9,613,894)
                                                                  ------------
                                                                  $    (49,115)
                                                                  ============
Included in the accompanying Balance Sheet under 
the following captions:

      Costs and estimated earnings
      in excess of billings on
      uncompleted contracts                                        $   100,738

      Billings in excess of costs
      and earnings on
      uncompleted contracts                                           (149,853)
                                                                    -----------
                                                                    $  (49,115)
                                                                    ===========
<PAGE>F-13

                               ONSITE ENERGY CORPORATION
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.    PROPERTY AND EQUIPMENT

      Property and equipment at June 30, 1997, consisted of:

Office furniture                                                 $      64,305
Equipment and Tools                                                    463,193
Vehicles                                                                 2,450
Cogeneration Systems                                                    65,756
Leasehold improvements                                                  17,778
                                                                  ------------
                                                                       613,482
Less: Accumulated depreciation and amortization                       (568,855)
                                                                  ------------
                                                                  $     44,627
                                                                  ============

6.    NOTES PAYABLE

Notes payable at June 30, 1997, consisted of the following:

Notes payable to a third party, interest at 10.00%, with all
unpaid interest and principal due February 2, 1998.               $    111,872

Unsecured notes payable to related parties consisting of four
separate notes; Interest at prime rate plus 1.00% to 2.00% 
(totaling 11% to 12% at June 30, 1997) due monthly, maturing 
July 1998.                                                              46,804
                                                                  ------------ 
Total:                                                                 158,676
Less: Current portion                                                 (111,872)
                                                                  ------------ 
                                                                  $     46,804
                                                                  ============

Maturities of the longterm debt as of June 30, 1997, 
are as follows:

         Fiscal year ending June 30, 
                   1999                                            $    46,804


7.    ACCRUED EXPENSES AND OTHER LIABILITIES

      At June 30, 1997, accrued expenses and other liabilities consisted of the
following:

      Payroll and Related                                          $   215,698
      Deferred Salary                                                   64,238
      Accrued Interest                                                  13,205
      Accrued Commission                                                31,500
      Accrued Other                                                    180,653
                                                                   -----------
                                                                   $   505,294
                                                                   ===========
<PAGE>F-14

                               ONSITE ENERGY CORPORATION
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.    SHAREHOLDERS' EQUITY (DEFICIT)

Class A Common Stock

Holders  of  Class  A  Common  Stock are entitled to one vote per share for the
election  of  directors and other  corporate  matters  which  shareholders  are
entitled or permitted  to vote.  Holders are entitled to receive dividends when
and as declared by the Board of Directors.

WARRANTS

No warrants were issued  or  exercised  during  the  fiscal year ended June 30,
1997.

As  of  June 30, 1997, Onsite has issued and outstanding  a  total  of  430,311
warrants  to purchase shares of its Class A Common Stock.   The exercise prices
range from  $.88  to  $18.79  per  share  with  expiration  dates  ranging from
September 1997 through June 1999.

9.    STOCK OPTION PLANS:

WESTERN  1990  NONSTATUTORY  STOCK  OPTION PLAN (FORMERLY WESTERN STOCK  OPTION
PLAN)

Effective February 15, 1994, Onsite adopted the Western 1990 NonStatutory Stock
Option Plan (the "1990 Plan").  The 1990  Plan  provides  for  the  granting of
options  to  directors, officers, employees and consultants to purchase  up  to
100,000 shares of Onsite Class A Common Stock. The 1990 Plan is administered by
a committee appointed by the Board of Directors.

As of June 30, 1997, the status of the 1990 Plan was as follows:

                            Outstanding    Exercise Price       Exercisable
                              Options         Per Share           Options

July 1, 1995                    500             $6.10               500
                               ----- 
July 1, 1996                    500             $6.10               500
     Options Granted            500             $0.2956
     Options Canceled          (500)            $6.10
                               -----
June 30, 1997                   500             $0.2956             500
                               =====

      At June 30, 1997, no additional options have been provided for granting.

WESTERN 1991 NONSTATUTORY STOCK OPTION PLAN

Effective February 15, 1994, Onsite adopted the Western 1991 NonStatutory Stock
Option  Plan  (the  "1991  Plan").   The 1991 Plan provides for the granting of
options  to  nonemployee  directors, officers,  employees  and  consultants  to
purchase up to 160,000 shares  of Onsite Class A Common Stock. The 1991 Plan is
administered by a committee appointed by the Board of Directors.

<PAGE>F-15

                             ONSITE ENERGY CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

As of June 30, 1997, the status of the 1991 Plan was as follows:

                         Outstanding       Exercise Price          Exercisable
                           Options            Per Share               Options

July 1, 1995               90,000         $5.3125 - $29.70            90,000
                           ------
July 1, 1996               90,000         $5.3125 - $29.70            90,000
  Options canceled         (5,000)        $29.70
                           ------
June 30, 1997              85,000         $5.3125                     85,000
                           ======

At  June  30,  1997,  no  additional  options  have  been provided for granting.

NONPLAN OPTIONS

During fiscal year 1993, Western issued stock options that were not part of the
1990  Plan or the 1991 Plan (the "Non-Plan Options").  Effective  February  15,
1994, Onsite  adopted the NonPlan Options, and has provided for the granting of
options to various  parties  to purchase up to 113,000 shares of Onsite Class A
Common Stock.

As of June 30, 1997, the status of the NonPlan Options was as follows:

                             Outstanding       Exercise Price      Exercisable
                               Options           Per Share            Options

July 1, 1995                   106,500        $5.3125 - $6.10
      Options canceled          (1,500)       $6.10                   103,142
                               -------
July 1, 1996                   105,000        $5.3125 - $6.10
      Options Canceled          (1,000)       $5.3125                 105,000
      Options Granted          104,000        $0.2956
      Options Canceled        (104,000)       $5.3125 - $6.10
                              --------
June 30, 1997                  104,000        $0.2956                 104,000
                              ========

At June 30, 1997, no additional options have been provided for granting.

THE ONSITE 1993 STOCK OPTION PLAN

During fiscal 1994, Onsite adopted the Onsite 1993 Stock Option Plan (the "1993
Plan").  The  1993  Plan,  as  amended, provides for the granting of options to
directors, officers, employees and  consultants  to  purchase  up  to 2,950,000
shares of Class A Common Stock and is administered by a committee appointed  by
the Board of Directors.

<PAGE>F-16

                           ONSITE ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

As of June 30, 1997, the status of the 1993 Plan was as follows:

                           Outstanding         Exercise Price     Exercisable
                             Options              Per Share         Options

July 1, 1995                1,399,426         $0.8125 - $5.625      233,765
      Options granted       1,754,677         $0.25 - $2.25
      Options canceled     (1,263,333)        $0.25 - $0.875
      Options exercised       (83,287)        $0.25 - $0.875
                           ----------
July 1, 1996                1,807,483         $0.25 - $5.625      1,395,901
      Options granted       1,508,440         $0.24 - $5.3125
      Options canceled       (816,645)        $0.25 - $0.50
      Options exercised       (42,553)        $0.25 - $0.50
                           ----------
June 30, 1997               2,456,725         $0.24 - $5.3125     1,729,593
                           ==========

At  June 30, 1997, additional options may be granted to purchase 493,275 shares
of Class A Common Stock.

A summary  of  option  transactions  during  the years ended June 30, 1996, and
1997, is as follows:

Fixed Options                Shares         Weighted-Average
                                             Exercise Price

July 1, 1995               1,399,426             $2.0544
Granted                    1,754,677             $0.6115
Exercised                    (83,287)            $0.3595
Canceled                  (1,263,333)            $2.0178
                          -----------
June 30, 1996              1,807,483             $0.7573
                          ===========

Fixed Options                Shares         Weighted-Average
                                             Exercise Price

July 1, 1996               1,807,483             $0.7573
Granted                    1,508,440             $0.2909
Exercised                    (42,553)            $0.4628
Canceled                    (816,645)            $0.4764
                           ----------
June 30, 1997              2,456,725             $0.5789
                           ==========

<PAGE>F-17

                          ONSITE ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

During fiscal year ended June 30, 1997, the Compensation Committee and Board of
Directors approved a price reduction for 400,440 options with original exercise
prices ranging between $1.94 and $6.10 to $0.2956.  This was accounted for as a
reprice  of options to the fair market value on the date of the repricing.  The
weighted average  contractual  life  for  all  options as of June 30, 1997, was
approximately 5.5 years, with exercise prices ranging from $0.24 to $5.31.

Proforma Information

As  stated  in  Note  2,  Onsite  has  not adopted the  fair  value  accounting
prescribed by FAS 123 for employees. Had  compensation  cost  for stock options
issued to employees been determined based on the fair value at  grant  date for
awards in 1997 and 1996 consistent with the provisions of FAS 123, Onsite's net
income  (loss) and net income (loss) per share would have been adjusted to  the
proforma amounts indicated below:

                                                           June 30,
                                                 1997                   1996

Net Income (Loss)                           $(1,471,328)             $(170,732)

Per Common Share Income (Loss)                   $(0.14)                $(0.02)


The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model using the following weighted-average
assumptions: expected volatility of 101.93%, an expected life of three years
for option shares, no dividends would be declared during the expected term of
the options, and a risk-free interest rate using the monthly US Treasury
T-Strip Rate at the option grant date for fiscal years ended 1997, and 1996,
respectively.

The weighted-average fair value of stock options granted to employees during
the years ended June 30, 1997, and June 30, 1996, was $0.19 and $0.40,
respectively.

10.   INCOME TAXES

Income tax expense for the years ended June 30, 1997, and 1996, is as follows:

                                               1997            1996
 
Federal                                     $              $     21,000
State                                          8,500             30,000
                                            --------       ------------
                                            $  8,500       $     51,000
                                            ========       ============

<PAGE>F-18

                            ONSITE ENERGY CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Income  tax  expense for the years ended June 30, 1997, and 1996, differed from
the amount computed  by  applying  the  U.S.  Federal income tax rate of 34% to
pretax income as a result of the following:

                                                  1997                 1996

Computed expected tax expense (benefit)       $  (469,200)         $  295,800
Effect of alternative minimum tax                       -              21,000
State taxes, net                                    5,600              13,300
Other                                               4,400               5,600
Change in valuation allowance for
   deferred tax assets                            467,700            (284,700)
                                              -----------          ----------
                                              $     8,500          $   51,000
                                              ===========          ==========
The  components of the deferred tax accounts at June 30, 1997, and 1996, are as
follows:

                                            1997                 1996
Net deferred tax assets:
Litigation settlement accrual           $      6,700         $      49,500
Deferred operation & maintenance
  Reserve                                    169,200               185,100
Net Operating Loss carry forwards          4,504,600             3,983,400
Alternative minimum tax credit                15,200                26,500
Goodwill due to difference in
  amortization                               392,500               271,100
Other                                         35,500                25,900
Capital Loss Carry Forward                    66,100                     -
Vacation Accrual                              29,100                35,200
Deferred Compensation                         27,300                     -
Valuation allowance                       (5,246,200)           (4,576,700)
                                        -------------         -------------
                                        $          -          $          -
                                        =============         =============

At June 30, 1997, Onsite has a net operating loss carryforward of approximately
$12,110,800,  which  would  expire  through 2011.  As a result of various stock
transactions, certain of these net operating loss carry forwards are subject to
annual limitations of approximately $726,000 to be used in future periods.

Also, Onsite has a California net operating  loss  for  the year ended June 30,
1997,   of  $4,160,100,  which  is  also  subject  to  annual  limitations   of
approximately $726,000.

<PAGE>F-19 

                            ONSITE ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

11.   RELATED PARTIES

During the  fiscal  year  ended  June  30,  1997,  Onsite  paid H. Tate Holt, a
Director of Onsite, approximately $23,500 for consulting services rendered.  In
addition,  Onsite  has borrowed funds from two officers and directors.   As  of
June 30, 1997, the balance outstanding on these loans was $46,804.  These notes
bear interest at 1.00%  to  2.00%  above  the  prime rate with interest payable
monthly.  For the year ended June 30, 1997, the  officers  and directors earned
$6,433 in interest, of which $1,421 had been paid.

12.   COMMITMENTS AND CONTINGENCIES

LEASES

Onsite  leases  its  administrative  facility under a noncancellable  operating
lease expiring in 1998 with a five-year renewal option.

Future minimum lease payments under this operating lease is as follows:

       YEAR ENDING JUNE 30,
      1998                                            $  180,680
      1999                                                15,056
                                                      ----------
      Total minimum lease payments                    $  195,736
                                                      ==========

Total rent  expense, including monthtomonth equipment rentals, was $272,641 and
$272,591 in 1997, and 1996, respectively.

ENVIRONMENTAL COSTS

Onsite  is  subject   to  federal,  state  and  local  environmental  laws  and
regulations. Environmental  expenditures  are expensed or capitalized depending
on their future economic benefit.  Expenditures  that  relate  to  an  existing
condition  caused  by past operations and that have no future economic benefits
are  expensed.  Liabilities  for  expenditures  of  a  non-capital  nature  are
recorded  when  environmental  assessments  are  probable, and the costs can be
reasonably estimated.  At June 30, 1997, there is  no  known pending actions or
related notices with respect to environmental matters. Although  the  level  of
future  expenditures  for  environmental  matters cannot be determined with any
degree of certainty, it is management's opinion that such costs when determined
will not have a material adverse effect on the financial position or results of
operations of Onsite.

GUARANTEED SAVINGS

Onsite is contingently liable to its customers pursuant to contractual terms in
the event annual guaranteed savings are not achieved by the customer.

LITIGATION

Onsite is involved in certain legal actions  and claims arising in the ordinary
course  of  business.  Management believes, based  on  discussions  with  legal
counsel, that such litigation  and  claims  will  be  resolved without material
effect on Onsite's consolidated financial position.

<PAGE>F-20 

                         ONSITE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


13.   DEFINED CONTRIBUTION PLAN

Onsite sponsors a 401(k) defined contribution plan, which  covers substantially
all employees. Onsite contributions are determined annually  at  the discretion
of management and vest at the rate of 20% per year of employment.   During  the
years  ended June 30, 1997 and 1996, Onsite's matching contribution was $43,088
and $37,977, respectively.

14.   SIGNIFICANT CUSTOMERS

Revenues  from  three  customers accounted for 32% (10%, 9%, 13% each) of total
revenues in fiscal 1997,  and revenues from three other customers accounted for
53% (22%, 18%, 13%) of total revenues in fiscal 1996.

15.   CONCENTRATION OF CREDIT RISK

Onsite operates in one industry  segment,  energy services.  Onsite's customers
generally are located in the Western United States.  Financial instruments that
subject Onsite to credit risk consist principally  of  accounts  receivable and
costs and estimated earnings in excess of billings.

At  June  30,  1997,  accounts receivable, and costs and estimated earnings  in
excess of billings totaled $1,005,692, and Onsite has provided an allowance for
doubtful accounts of $40,000.

For the years ended June  30,  1997,  and  1996,  bad debts totaled $37,093 and
$18,700 respectively.

Onsite  performs  periodic  credit  evaluations  on  its  customers'  financial
condition and believes that the allowance for doubtful accounts is adequate.

At June 30, 1997, Onsite maintained cash balances with a commercial bank, which
were approximately $405,000 in excess of FDIC insurance limits.

16.   SUBSEQUENT EVENTS

On September 11, 1997, Onsite issued warrants to acquire  common  stock  to  an
officer/director  and another board member in exchange and as consideration for
posting the necessary  collateral  and  personal  guarantees  for a payment and
performance  bond  required  on  a  construction project. The exercise  of  the
warrants will result in the right of  the  related  parties  to acquire 525,988
shares of Onsite's Class A Common Stock.