UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   Form 10-KSB
(Mark One)
|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the fiscal year ended June 30, 1999.

|_|  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               (IRS Employer Identification No.)
 incorporation or organization)

  701 Palomar Airport Road, Suite 200
        Carlsbad, California                                  92009
 (Address of principal executive offices)                  (Zip Code)

         (Issuer's telephone number) (760) 931-2400

   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                             N/A

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 past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing  requirements  for the past 90 days.
Yes |X| No |_|

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not 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. |_|

State issuer's revenues for its most recent fiscal year............$43,557,902

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......$1,117,682 as of September 27, 1999.

The number of shares of Common Stock  outstanding  as of  September  27, 1999 is
18,641,302.

                       DOCUMENTS INCORPORATED BY REFERENCE

Document Incorporated by Reference     10-K Part and Item Where Incorporated
----------------------------------     -----------------------------------------
Definitive Proxy Statement for            Part III: Items 9, 10, 11 and 12
Annual Meeting of Stockholders of
the Registrant to be held
December 1, 1999


<PAGE>2

                                     PART I

Item 1.  Description of Business

Introduction. Onsite Energy Corporation, a Delaware corporation dba ONSITE SYCOM
Energy   Corporation  (the  "Company"),   was  formed  pursuant  to  a  business
reorganization effective February 15, 1994.

Business of Issuer.  The Company is an energy  services  company  ("ESCO")  that
assists  energy   customers  in  lowering  their  energy  costs  by  developing,
engineering,  installing, owning and operating efficient,  environmentally sound
energy  efficiency  and power supply  projects,  and  advising  customers on the
purchasing of energy in  deregulating  energy  markets.  The Company  offers its
services to industrial, commercial,  institutional and residential customers. By
combining  development,   engineering,   analysis,  and  project  and  financial
management skills, the Company provides a complete package of services,  ranging
from  feasibility  assessment  through  construction  and operation for projects
incorporating  energy efficient lighting,  energy management  systems,  heating,
ventilation  and air  conditioning  ("HVAC")  upgrades,  cogeneration  and other
energy  efficiency  measures.  In addition,  the Company  offers bill  auditing,
tariff  analysis,   transmission  and  distribution  analysis  and  upgrade  and
aggregation services. The Company also provides professional consulting services
in the areas of direct access planning, market assessment,  business strategies,
public policy  analysis,  and  environmental  impact  feasibility  studies.  The
Company  has been  accredited  by the  National  Association  of Energy  Service
Companies  ("NAESCO").  It is the Company's  mission to save its customers money
and improve the quality of the environment through independent energy solutions.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995. With the exception of historical facts
stated herein, the matters discussed in this annual report are "forward looking"
statements that involve risks and uncertainties  that could cause actual results
to differ materially from projected results.  Such "forward looking"  statements
include,  but are not necessarily limited to, statements  regarding  anticipated
levels of future revenue and earnings from operations of the Company,  projected
costs and expenses related to the Company's energy services agreements,  and the
availability of future debt and equity capital on commercially reasonable terms.
Factors  that could  cause  actual  results  to differ  materially  include,  in
addition to the other  factors  identified  in this  report,  the  cyclical  and
volatile price of energy,  the inability to continue to contract with sufficient
customers to replace contracts as they become completed, unanticipated delays in
the approval of proposed energy efficiency measures by the Company's  customers,
delays in the  receipt  of, or  failure  to receive  necessary  governmental  or
utility permits or approvals,  or the renewals thereof,  risks and uncertainties
relating to general  economic and political  conditions,  both  domestically and
internationally,  changes in the law and  regulations  governing  the  Company's
activities  as an energy  services  company and the  activities  of the nation's
regulators and public  utilities  seeking energy  efficiency as a cost effective
alternative to constructing new power generation facilities,  results of project
specific  and  company  working   capital  and  financing   efforts  and  market
conditions,  and other risk factors  detailed in this annual report.  Readers of
this  report  are  cautioned  not to put undue  reliance  on  "forward  looking"
statements  which are, by their  nature,  uncertain  as reliable  indicators  of
future  performance.  The Company disclaims any intent or obligation to publicly
update  these  "forward  looking"  statements,   whether  as  a  result  of  new
information, future events or otherwise.

Subsidiaries/Partnerships.  Substantially  all of  the  Company's  revenues  are
generated  through  energy  services  and  consulting  services.  The  Company's
subsidiaries are as follows:

<PAGE>3


         SYCOM ONSITE Corporation. Effective June 30, 1998, the Company, through
its  newly-formed   wholly-owned   subsidiary  SYCOM  ONSITE   Corporation  ("SO
Corporation"),   acquired  all  of  the  assets  and  specific   liabilities  of
privately-held  SYCOM Enterprises,  L.L.C.  ("SYCOM,  LLC"), an independent ESCO
whose affiliate, SYCOM Corporation,  is, like the Company, accredited by NAESCO.
SO Corporation  acquired the project  assets and specific  liabilities of SYCOM,
LLC in exchange for 1,750,000  shares of the Company's  Class A Common Stock. In
addition, under a Sale and Noncompetition Agreement, SO Corporation acquired the
right to the services and expertise of all of the employees of SYCOM Corporation
and SYCOM  Enterprises,  L.P.  ("SYCOM LP"),  in exchange for 157,500  shares of
non-voting,  non-dividend  Series D Convertible  Preferred  Stock of the Company
("Series D Stock") that may be converted in the aggregate into 15,750,000 shares
of the  Company's  Class A Common  Stock.  The  Series D Stock is held in escrow
under an Escrow  Agreement,  and will be  released  when the  Company's  Class A
Common Stock reaches $2.00 per share and  annualized  after-tax  earnings  total
$0.15 per share  (including  the  shares of Class A Common  Stock into which the
Series D Stock is convertible are outstanding)  over four consecutive  quarters,
and  certain  specified  debts  of SYCOM  Corporation  and  SYCOM  LP have  been
satisfied. These share values and earnings thresholds increase by 10 percent per
year  after  December  31,  1999.  Pursuant  to the terms of a Share  Repurchase
Agreement, the Company may repurchase the escrowed Series D Stock for $0.001 per
share if: (i) the Sale and  Noncompetition  Agreement  is  terminated;  and (ii)
after June 30, 2000,  such  repurchase is  justifiable  based on the  reasonable
business judgment of the Company's Board of Directors  considering the following
factors: (a) the key employees of SYCOM Corporation no longer are being retained
by SO Corporation;  and (b) there is no reasonably  foreseeable  likelihood that
all of the following  conditions  shall be satisfied:  specific debts to a third
party and the Company will be satisfied,  and both share performance  benchmarks
described  in the  Escrow  Agreement  will be  achieved.  The  Company  also may
repurchase  the  escrowed  Series D Stock  during the 30 day period prior to the
scheduled  release date (June 30, 2006) if any one of the  specified  conditions
for  release of the Series D Stock has not been  satisfied.  At such time as the
Series D Stock is  released  from the escrow to SYCOM  Corporation,  up to three
additional  members of the  Company's  Board of Directors  may be  designated by
SYCOM  Corporation.  Two members designated by SYCOM, LLC have been added to the
Company's Board of Directors.  The  acquisition  added offices in New Jersey and
Washington  D.C.,  and added another  office in  California,  giving the Company
national coverage.

         Lighting  Technology  Services,  Inc.  On June 13,  1998,  the  Company
completed the acquisition of Lighting Technology Services, Inc. ("LTS"), a Costa
Mesa,  California based lighting  services  company.  In exchange for all of the
outstanding  shares of LTS,  the  Company  initially  issued a total of  690,000
shares of the  Company's  Class A Common  Stock and paid  $500,000 to the former
stockholders of LTS.  As a wholly-owned subsidiary of the Company, LTS continues
to pursue independent lighting services opportunities in commercial,  industrial
and educational markets while also providing lighting  subcontractor services to
the Company and other ESCOs. Subsequent to its fiscal year end, the Company made
a decision to explore the sale or disposition of its lighting subsidiaries.

         Onsite  Energy  Services,  Inc. In October 1997,  the Company  acquired
Westar Business Services,  Inc. ("WBS"), an indirect wholly-owned  subsidiary of
Western  Resources,  Inc.  ("Western  Resources")  (NYSE:WR).  As  part  of  the
transaction, WBS was renamed Onsite Business Services, Inc. Subsequently, Onsite
Business  Services,  Inc.  changed  its name to  Onsite  Energy  Services,  Inc.
("OES"). The purchase price was 1,700,000 shares of the Company's Class A Common
Stock  issued  upon  closing  to Westar  Capital,  Inc.  ("Westar  Capital"),  a
wholly-owned subsidiary of Western Resources,  with an additional 800,000 shares
of Class A Common Stock being released to Westar Capital from an escrow in March
1998  when  certain  conditions  set  forth in the  acquisition  documents  were
satisfied.  With its primary  office in Topeka,  Kansas,  OES  provides  utility
services  and  industrial  water  services  primarily  in the  states of Kansas,
Missouri and Oklahoma.

<PAGE>4


         Onsite/Mid-States,  Inc. In February  1998,  OES, via its  newly-formed
wholly-owned subsidiary Onsite/Mid-States,  Inc. ("OMS"), acquired the operating
assets of Mid-States Armature Works, Inc. ("Mid-States Armature"), for $290,000.
Mid-States  Armature  has been in business  for 45 years  providing  specialized
medium and high voltage electrical  fabrication,  installation,  maintenance and
repair  services to  municipal  utility  customers  and others  primarily in the
states of  Kansas,  Nebraska,  Missouri,  Iowa and  Oklahoma.  OMS is located in
Salina, Kansas.

         REEP  Onsite,  Inc.  and ERSI Onsite,  Inc.  Effective  April 1, 1999,
the Company formed REEP Onsite,  Inc. ("REEP"),  and ERSI Onsite, Inc. ("ERSI"),
for the purpose of acquiring  substantially  all of the assets of REEP,  Inc. in
exchange for  assumption  of specific  liabilities.  REEP  provides  residential
energy services while ERSI is a commercial lighting contractor. REEP, Inc. is an
affiliate of SYCOM Corporation and has been in business for 16 years. Subsequent
to its fiscal  year end,  the  Company  made a decision  to explore  the sale or
disposition of its lighting subsidiaries.

         Onsite  Energy de Panama,  S.A. On April 8, 1998,  the  Company  formed
Onsite Energy de Panama, S.A. This Panamanian corporation was formed in order to
facilitate the development and  implementation  of potential  projects in Panama
and Latin America.

         Western Energy Management,  Inc. The Company was formed via a merger in
February  1994,  in which  Western  Energy  Management,  Inc.  ("WEM")  became a
wholly-owned   subsidiary.   WEM  was  engaged  in  the  business  of  providing
comprehensive energy management services designed to reduce the utility costs of
its customers. Its current sole function is to monitor its remaining commitments
under contracts with customers that were entered into prior to February 1994.

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

Risk Factors. In addition to other information  presented in this annual report,
the  following  risk factors  should be considered  carefully in evaluating  the
Company and its business. This annual report contains forward-looking statements
that involve risks and  uncertainties.  The Company's  actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might  cause such a  difference  include,  but are not  limited  to,  those
discussed in this section and elsewhere in this annual report.

        Revenue Recognition.  The Company has previously been corresponding with
the SEC  regarding its Form 10-KSB for the year ended June 30, 1998. In response
to  information  submitted by the Company,  on October 13, 1999,  the SEC sent a
comment  letter  questioning  the  appropriateness  of  certain  aspects  of the
Company's revenue recognition accounting policies. The Company believes that its
revenue  recognition  accounting policies are appropriate and intends to respond
to and  continue  to work with the SEC to  resolve  the  comments.  However,  no
assurance can be given that the SEC will not require  adjustments  to be made to
the Company's  previously issued financial  statements and financial  statements
contained in this annual report.

         Loss from Operations,  Possible Need for Additional Working Capital and
Potential  Dilution to Existing  Shareholders.  The Company has suffered  losses
from  operations  for the past two fiscal  years.  For the years  ended June 30,
1999,  and 1998,  the  Company  had net  losses of  $6,909,011  and  $2,218,482,
respectively,  negative working capital of $6,357,699 and an accumulated deficit
of $26,528,421 as of June 30, 1999. Management believes that the Company will be
able to generate  additional  revenues and  operating  efficiencies  through its
acquisitions as well as by other means to achieve profitable operations.  During
the year ended June 30, 1999,  the Company took steps to mitigate the losses and
enhance its future viability. In addition,  during the fiscal year end 1999, the
Company  exercised  its right under a stock  subscription  agreement  to require
Westar Capital to purchase an additional  400,000 shares of Series C Convertible
Preferred Stock for  $2,000,000.  Subsequent to its most recent fiscal year end,
the Company also  privately  placed shares of newly created Series E Convertible
Preferred  Stock  ("Series E Stock") to existing  shareholders  for  $1,000,000.
Concurrent  with this private  placement,  members of senior  management  of the
Company have agreed to receive  shares of the Company's  Class A Common Stock in
lieu of a portion of their salary in an effort to reduce cash  outflows  related
to compensation. Subsequent to June 30, 1999, a decision was made to explore the
sale or disposition of the Company's lighting subsidiaries,  which could provide

<PAGE>5


capital,  reduce  operating  losses and will allow management to better focus on
its core ESCO  business  activities.  In  addition,  the  Company  is  exploring
strategic  relationships  with companies that could involve an investment in the
Company.  The Company  may also raise cash  through the sale of long term future
revenue  streams  that it  currently  owns or has rights to. The Company is also
examining ways to further  reduce  overhead  including,  but not limited to, the
possibility  of targeted staff  reductions.  Further,  the Company,  through the
acquisition  of other  energy  service  companies,  expects to  continue to gain
economies of scale  through the use of a  consolidated  management  team and the
synergies of marketing efforts of the different  entities.  Management  believes
that all of the above  actions  will allow the  Company to  continue  as a going
concern.  Future cash requirements  depend on the Company's  profitability,  its
ability  to  manage  working  capital  requirements  and  its  rate  of  growth.
Additional  financing  through  the sale of  securities  may  have an  ownership
dilution effect on existing shareholders.

         Risks Associated with Expansion.  As previously  discussed,  during the
years ended June 30, 1998 and 1999, the Company made a series of acquisitions of
businesses  including SO Corporation,  LTS, OES, OMS, REEP and ERSI. The Company
believes that the acquisitions of these businesses will offer  opportunities for
long-term  efficiencies  and  certain  economies  of  scale  in  operations  and
expansion of customers that should help future operating results of the Company.
As  a  result  of  these   acquisitions,   the  Company's  number  of  personnel
substantially  increased, and the Company's primary operations on the West Coast
expanded to the East Coast and Midwest. There are inherent risks associated with
expansion including integrating each business under one system,  difficulties in
staffing and managing a national operation, and developing an infrastructure and
philosophy to support a national  operation.  The operations of the Company will
be more complex than the individual businesses acquired, and the combination and
continued  operation of their business  operations  will present  challenges for
management.  Accordingly,  no  assurances  can be  given  that  the  process  of
effecting the business  combination  can be  effectively  managed to realize the
operational efficiencies and increased customer base. No assurances can be given
that one or more of such factors will not have a material  adverse effect on the
Company's future national operation and consequently, on the Company's business,
financial condition and operating results.

         Control of the Company.  The directors,  officers and shareholders that
own more than 5 percent of the Company's Class A Common Stock  beneficially  own
approximately 78.2 percent of the Company in the aggregate. As a result of their
ownership,  such  shareholders  will have  substantial  control  of all  matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions.  Such concentration of ownership also may
have the effect of delaying or preventing a change in control of the Company. In
addition, as discussed in Subsidiaries/Partnership  section above, in connection
with the  acquisition of the assets and certain  liabilities  of SYCOM,  LLC the
Company  issued  157,500  shares of Series D Stock to SYCOM  Corporation.  Under
certain  conditions,  the Series D Stock may be converted into 15,750,000 shares
of the  Company's  Class A Common  Stock and  currently  is held in escrow.  The
Series D Stock may be released to SYCOM  Corporation  provided  that the Company
achieves  certain net income  thresholds and the Company's  Class A Common Stock
trades above $2.00.  If the Company's net income and price of its Class A Common
Stock meets these  thresholds  and other  applicable  conditions  are met, SYCOM
Corporation would  beneficially own  approximately  48.42 percent of the Company
(based upon current ownership).

         Dependence on Limited Key and New Customers. For the fiscal years ended
June 30,  1999,  and  1998,  three  customers  in the  aggregate  accounted  for
approximately  34 percent and 31 percent,  respectively,  of the Company's total
revenues. Historically, large contracts account for a significant portion of the
Company's  total  revenues.  Although  the  Company  usually  receives  revenues
pursuant  to  long-term   energy  services  and  maintenance   agreements  after
completion  of the project,  the majority of the revenues are from projects that
are not recurring. Therefore, the Company is dependent on finding, financing and
entering into contracts with new customers.

<PAGE>6


         Revenues  Dependent upon Phased Approvals from Government  Agencies and
Customers.  Pursuant to its energy efficiency  services  agreements,  a material
portion  of the  gross  revenues  for the  Company  are  dependent  upon  phased
approvals by customers of projects and budgets. In addition, because many of the
Company's contracts are with local, public agencies, the Company's contracts are
subject to public hearings and local government approval. Therefore, even though
the  Company  has  entered  into  energy  efficiency  projects  that may provide
significant  revenues to the Company,  the realization of the Company's budgeted
revenue is dependent  upon the outcome of energy audits and the approval of each
phase of the work to be performed.  Further, many proposed contracts are subject
to approval by local government agencies that may meet only periodically and may
delay  approval of the  construction  contracts  due to other  agenda  items.  A
significant  delay in the  realization of revenue could have a material  adverse
impact on the business of the Company, its cash flow and its operating results.

         Dependence  on Key  Personnel.  The Company is highly  dependent on its
officers  and other key  personnel.  The future  success of the  business of the
Company  will  depend  upon the  ability to  attract,  retain and  motivate  key
employees.  Specifically, the loss of Richard T. Sperberg and S. Lynn Sutcliffe,
among others may materially adversely affect the Company's business.

         Limited Market for Class A Common Stock. Although the Company's Class A
Common Stock is quoted on the Over-the-Counter  (OTC) Bulletin Board, because of
the Company's small  capitalization and public float, there is limited liquidity
for its Class A Common Stock. Therefore,  shareholders may have a difficult time
selling their Class A Common Stock without adversely affecting the price of such
stock.

         Penny Stock  Regulations.  The Securities and Exchange  Commission (the
"SEC") has adopted  regulations  that  generally  define "penny stock" to be any
equity  security  that has a market price (as defined) less than $5.00 per share
subject to certain  exceptions.  The Company's  securities may be covered by the
penny stock rules,  which  impose  additional  sales  practice  requirements  on
broker-dealers  who  sell  to  persons  other  than  established  customers  and
accredited  investors   (generally,   institutions  with  assets  in  excess  of
$5,000,000  or  individuals  with net worth in excess  of  $1,000,000  or annual
income  exceeding   $200,000  or  $300,000  jointly  with  their  spouse).   For
transactions  covered  by this  rule,  the  broker-dealers  must  make a special
suitability  determination for the purchase and receive the purchaser's  written
agreement  of the  transaction  prior to the  sale.  Consequently,  the rule may
affect the ability of broker-dealers  to sell the Company's  securities and also
affect the ability of purchasers to sell their shares in the secondary market.

         Competition.  The energy efficiency business is highly competitive.  As
discussed in  Competition  to the Company  below,  the Company will compete with
other  firms,  including  utility  affiliates,  for a  limited  number  of large
contracts.  Competitors generally have substantially greater financial resources
than the  Company  and may expend  considerably  larger sums than the Company on
marketing. The successful operation of the Company will depend on its ability to
meet future competition.

         Governmental     Regulation.     As    discussed    in     Governmental
Regulations/Environmental  Laws below,  the Company will be subject to rates and
regulations of the Environmental  Protection Agency, the Occupational Safety and
Health  Administration and other state, county,  municipal and federal agencies.
While the  business  of the Company  will not entail any unusual or  significant
environmental  risks,  the  projects  of  the  Company  may  involve  "indirect"
environmental  risks from its  subcontractors  handling or removal of  hazardous
waste  materials  as defined  under  federal and state law. The Company does not
foresee  having  to  incur  material   capital   expenditures   to  comply  with
environmental laws and regulations.

<PAGE>7


         Environmental      Risks.      As     discussed     in     Governmental
Regulations/Environmental  Laws  below,  the energy  efficiency  projects of the
Company may involve the handling and/or removal of hazardous  substances such as
polychlorinated  biphenals  (PCB),  asbestos  or  asbestos-containing  materials
(ACMs),  urea-formaldehyde  paneling,  fluorescent  lamps or HID lamps,  and the
emissions from on-site generation projects.  The Company intends to contract, or
have their customers and/or  subcontractors  contract,  with certified hazardous
waste  removal  companies  whenever  hazardous  waste must be  handled,  stored,
transported or disposed of, and to obtain indemnification from both the customer
and the  subcontractors  for any liability the Company may incur if there is not
full and strict compliance with all applicable federal, state and local laws and
ordinances,  and regulations  thereunder,  for the protection of health, safety,
welfare and the environment. Because the Company intends to engage a third party
to handle and remove  hazardous  waste,  the  Company  believes  that  potential
liability for environmental risks is not material.

         Ongoing  Maintenance for Water Treatment Plants.  OES has two contracts
with Western  Resources  whereby OES  constructed  and  maintains  equipment for
supplying  demineralized water for boiler makeup water at Lawrence Energy Center
and  Tecumseh  Energy  Center.  Both  contracts  terminate on December 31, 2001,
unless  renewed at the end of the term as agreed  upon by both  parties.  OES is
responsible for producing the quality of  demineralized  water as specified.  If
damage  occurs due to the  specified  quality of  demineralized  water not being
produced,  OES is liable for the cost of the repairs to the equipment limited to
a maximum of $300,000 per incident.  There have been no damage occurrences since
the inception of both  contracts.  The  occurrence  of an incident,  or multiple
incidents,  although considered remote,  could have a material adverse impact on
the financial  condition and the results of operations of the Company.  The loss
of either of the two contracts  would not have a material  adverse effect on the
financial condition or the results of operations of the Company.

         No Dividends on Class A Common Stock.  It is  anticipated  that no cash
dividends  will be declared  by the  Company on its Class A Common  Stock in the
near  future.  Shares of Series C  Preferred  Stock  are  entitled  to an annual
dividend at the rate of 9.75 percent of the  "liquidation  preference"  of $5.00
per  share per annum out of any funds  legally  available  for  payment  of such
dividends.  During the first two years,  the dividends on the Series C Stock may
be paid through the issuance of shares of the Company's Series C Stock.

Major Events, Contracts and Customers. In addition to the acquisitions mentioned
above,  the following is a list of major events and  contracts  that occurred in
the fiscal year ended June 30, 1999,  and how they are  significant  to the last
two fiscal years' revenues.

         Westar Capital  Additional  $2,000,000  Private  Placement.  In October
1997, the Company  completed a private placement of $2,000,000 of its securities
to Westar Capital, a wholly-owned  subsidiary of Western Resources.  The private
placement consisted of 2,000,000 shares of the Company's Class A Common Stock at
$0.50 per share and 200,000 shares of the Company's  Series C Preferred Stock at
$5.00 per  share.  Each  share of the  Series C Stock is  convertible  into five
shares of the  Company's  Class A Common  Stock,  and earns a  dividend  of 9.75
percent per annum, payable quarterly. Dividends are payable in additional shares
of Series C Preferred  Stock or cash at the option of the Company for two years.
Thereafter,  dividends are payable in cash. In addition,  the Company  exercised
its  rights  under the  agreement  to require  Westar  Capital  to  purchase  an
additional 400,000 shares of Series C Stock for $2,000,000. As of June 30, 1999,
Westar Capital owns 4,500,000  shares of Class A Common Stock and 649,120 shares
of Series C Convertible Preferred Stock.

<PAGE>8


         $1,000,000  Private  Placement.  Subsequent  to its fiscal year end, in
August 1999, the Company  completed a private placement with its Chairman of the
Board and other related  investors.  Terms of the placement include the issuance
of 50,000 shares of Series E Stock  convertible into 5,000,000 shares of Class A
Common Stock, warrants to purchase 1,250,000 shares Class A Common Stock at $.50
per share and warrants to purchase  1,250,000  shares of Class A Common Stock at
$.75 per share. The Series E Stock is immediately convertible to common stock at
a rate which was below market on the date of issuance, resulting in a beneficial
conversion  element  of  approximately  $763,000  which  will be  recorded  as a
preferred stock dividend in the first fiscal quarter ended September 30, 1999. A
portion of the  securities  was sold to a director.  The intrinsic  value of the
convertible  preferred  shares issued to the director was $47,000 on the date of
issuance  and will result in a charge  against  earnings in the first fiscal
quarter ended September 30, 1999.

         Atlantic  County.  In November 1998, the Company was awarded a contract
with Atlantic  County,  New Jersey.  The project  involves the  installation  of
energy efficient  lighting,  HVAC improvements,  installation of control systems
and elevator  motor  improvements.  Annual energy cost savings of  approximately
$836,000 is projected  to pay for the total  project  cost of  approximately  $7
million over a ten year period.

         Revenues to the Company were  approximately $6.9 million for the fiscal
year ended June 30,  1999.  There were no  revenues to the Company in the fiscal
year ended June 30, 1998.

         Jersey  Gardens Mall,  Elizabeth,  New Jersey.  In November,  1998, the
Company  entered  into a $3.8  million  contract  (reduced to $3.3  million with
change  orders) with an affiliate of Glimcher  Development  Corporation to build
and operate an  electrical  distribution  system for the Jersey  Gardens Mall in
Elizabeth,  New Jersey.  The Company is constructing a distribution and electric
supply  system that will provide  energy to light,  heat and air  condition  the
Jersey  Gardens  Mall's  more  than  1,600,000  square  feet of  planned  space.
Construction of both the Mall and the  distribution  system are underway and are
scheduled  to be  completed  by calendar  year end 1999.  The Company  also will
arrange   purchases  of  electricity   for  the  Mall  under  New  Jersey's  new
deregulation law.

         Revenues to the Company were  approximately $3.3 million for the fiscal
year ended June 30,  1999.  There were no  revenues to the Company in the fiscal
year ended June 30, 1998.

         Arden Realty, Incorporated. In March 1999, LTS and the Company executed
two  contracts  with  Arden  Realty  Inc.  ("Arden"),  the  first of which is to
administer  and  obtain   incentives  for  31  properties   under  the  Standard
Performance Contract ("SPC") program,  which provides payments authorized by the
California Public Utilities Commission for energy efficiency  projects.  Through
this contract,  LTS and the Company will receive  approximately  $250,000,  paid
over a  two-year  period.  Under the second  Arden  contract,  LTS will  procure
equipment and install lighting  retrofits,  occupancy sensors and new exit signs
at 11 properties.  Total revenue to LTS,  including utility incentive  payments,
from  this  contract  is  approximately   $1.5  million.   These  retrofits  are
anticipated to be complete by the end of calendar year 1999.

         Revenues  to the  Company  were $1.2  million for the fiscal year ended
June 30, 1999. There were no revenues in the fiscal year ended June 30, 1998.

         Middletown Board of Education. The Company has signed contracts for the
third, fourth and fifth phases under a master energy services agreement with the
Middletown  Board of Education  ("MBOE") in Middletown,  New Jersey,  with total
additional  project costs of approximately  $13 million.  The Company's  overall
contracts  now total  approximately  $22.8  million (of which the  Company  will
recognize  approximately  $6.2  million  in revenue  and the MBOE will  contract

<PAGE>9


directly with other  subcontractors for the remainder in costs) in project costs
and is expected to save MBOE  approximately  $9 million in energy  costs over 10
years and will receive substantial  benefits from incentives paid from the local
utility. The project enables the MBOE to make significant energy-related capital
improvements  to its  facilities and to fund these  improvements  mostly through
energy cost  savings and  incentives  provided  by the local host  utility.  The
Company is accomplishing the overall project at MBOE through the installation of
geothermal heat pumps and the retrofit of facility lighting.  The implementation
of the project is expected to be completed  over a period of  approximately  two
years.

         Revenues to the Company were approximately  $500,000 in the fiscal year
ended June 30, 1999. There were no revenues attributable to the Company for this
project in the fiscal year ended June 30, 1998.

         National Railroad  Passenger  Corporation  ("Amtrak").  The Company has
implemented a project for Amtrak to reduce energy losses from the existing steam
distribution   system  and  to  generate  process  and  heat  energy  with  more
cost-efficient  equipment.  The existing steam distribution  system was replaced
with oil-fired and electric boilers at the points of use. For heating  purposes,
oil fired boilers and electric resistance heat will serve each building's needs.
This project is expected to generate $1.2 million in revenues for the Company.

         Revenues to the Company were approximately  $300,000 in the fiscal year
ended June 30, 1999. There were no revenues  attributable to this project in the
fiscal year ended June 30, 1998.

         Newark Public  Schools.  In December 1998, the Company  entered into an
agreement to perform work on  state-operated  facilities  in the City of Newark,
New Jersey to total $7.6  million in  revenues  for the  Company.  This  project
requires the Company, as a subcontractor to John Controls,  Inc., to procure and
install  certain  lighting  equipment that is designed to improve the efficiency
with which the Newark Schools use various forms of energy  (electricity and gas)
and to reduce  expenditures for that energy.  The Company also arranged for, and
sponsored  participation of the facilities in the Standard Offer Program offered
by Public  Service  Electric  and Gas  Company  ("PSE&G"),  through  which PSE&G
purchases energy savings generated by the project.

         Revenues to the Company were  approximately $3.9 million for the fiscal
year ended June 30,  1999.  There were no  revenues to the Company in the fiscal
year ended June 30, 1998.

         Board of Education of the Hudson County Schools of Technology. In April
1999,  the Company  entered into an energy  services  agreement  with the Hudson
County Schools of Technology  Board of Education (the "Hudson BOE").  Under this
agreement,   the  Company  is  responsible  for  the  design,   procurement  and
installation of all equipment and the execution of an energy services  agreement
with  PSE&G in order for Hudson BOE to  benefit  from  payments  under the PSE&G
Standard  Offer Program for energy saved by the project  equipment.  The Company
will also install  certain  measurement and  verification  equipment in order to
monitor the energy saved.  The total revenues  generated from this project total
$1.9 million.

         Revenues to the Company were  approximately $1.4 million for the fiscal
year ended June 30,  1999.  There were no  revenues to the Company in the fiscal
year ended June 30, 1998.

         Passaic Valley Sewerage  Commission,  Newark,  New Jersey.  In December
1996, the Company entered into a master energy efficiency agreement with Passaic
Valley  Sewerage  Commission  (the  "Commission").  The second  amendment to the
agreement  involves a fee to the Company of  approximately  $1.3 million for the
interface between the Commission and the host utility.  This interface  involves

<PAGE>10


the  application for utility  incentive  payments as well as the development and
installation  of a  measurement  and savings  verification  plan and the related
equipment on a project that involves installation of equipment that improves the
process of producing sludge.  The  implementation of this project is expected to
take approximately two years. Utility incentive payments,  all of which are paid
to the Commission, are expected to be approximately $19 million over 10 years.

         Revenues to the Company were $900,000 in the fiscal year ended June 30,
1999.  There were no revenues to the Company  related to this  project in fiscal
1998.

         Unified School District No. 500,  Wyandotte  County,  Kansas.  In March
1998, the Company entered into an energy services  agreement with Unified School
District No. 500 (the  "District") in Wyandotte  County,  Kansas.  Total project
construction  revenues  will  be  approximately  $6,000,000.   Construction  was
substantially completed by the fiscal year end 1999. OES initially developed the
project, which includes the installation of multiple energy efficiency measures,
including lighting  retrofits,  energy management  systems,  chiller and furnace
replacements,  and variable speed motor controllers.  The Company estimates that
the project should result in savings to the District of approximately $7,775,000
in  energy  and  operating  costs  over the 10 year term of the  agreement.  The
Company also will provide  training,  post-installation  measurement and savings
verification  services,  and steam trap maintenance repair services for the term
of the agreement  following the completion of construction  of the project.  The
Company's  future revenues  associated with these ongoing services are estimated
at approximately $818,000 over the 10 year contract period.

          Revenues  for  fiscal  year  ended  June 30,  1999 and 1998  were $4.6
million and $1.4 million, respectively.

         Pacific Gas and Electric Company.  In December 1995, the Company signed
a demand side  management  ("DSM") power savings  partner  agreement  (the "PG&E
Agreement")  with Pacific Gas and Electric  Company ("PG&E") for the development
and  implementation  of demand side  resources for customers in the PG&E service
territory.  Under the terms of the PG&E  Agreement,  the Company will  identify,
design,  contract for and complete energy efficiency projects that are estimated
to supply  energy  savings of  approximately  30,000,000  kWh per year for up to
seven years. In general,  the price paid by PG&E to the Company for savings will
be  approximately  $0.02 per kWh for  energy  savings  and $20 per kW for demand
savings.  Each host  customer  project is subject  to  approval  by PG&E and the
Company.  The PG&E  Agreement was approved by the  California  Public  Utilities
Commission effective August 1, 1996. The Company has signed contracts for energy
services with California State University,  Fresno ("CSUF"),  a shopping mall in
Northern  California,  and a central  California  newspaper  a portion  of which
projects  are  eligible  for funds under the PG&E  Agreement.  No  revenues  are
recorded for this contract,  but are attributed to individual  customer projects
that benefit from payments pursuant to the PG&E Agreement.

         Revenues from customers under this  arrangement  were $760,000 and
$1.2 million for the fiscal years ended June 30, 1999 and 1998, respectively.

         Southern  California  Edison Demand Side Management  Energy  Efficiency
Agreements.  In April 1994,  the Company  executed a DSM contract  with Southern
California  Edison  Company  ("SCE")  after  being  selected  as a  result  of a
competitive  bid  solicitation  (the  "Onsite  SCE  Agreement").  The Onsite SCE
Agreement  required the  installation of energy  efficiency  measures to provide
consistent,  innovative  and verifiable  energy savings in selected  commercial,
industrial  and/or  institutional  host  customer  facilities  within a specific
eligible SCE service area market region.  In July 1995, the Company  acquired an
additional,  similar DSM contract  with SCE via an  assignment to the Company by
KENETECH Energy  Management,  Inc. ("KEM"),  of all of KEMs interest in the same

<PAGE>11


(the "KEM SCE Agreement").  This acquisition augmented the Onsite SCE Agreement.
Both the Onsite SCE Agreement and the KEM SCE Agreement (collectively,  the "SCE
Agreements")  were approved by the  California  Public  Utilities  Commission in
October  1994.  The SCE  Agreements  provided for the  implementation  of energy
efficiency  projects for host customers within SCEs service territory to provide
up to approximately 53 million kWh per year in measured energy savings.

         The  Company  completed  several  projects in fiscal year 1997 and 1998
under the SCE  Agreements,  including  projects with Raytheon  Corporation  (fka
Hughes Aircraft  Company) (El Segundo,  CA); West Covina Unified School District
(West Covina,  CA);  McDonnell  Douglas  Corporation  (Long Beach, CA); Foothill
Presbyterian  Hospital  (Glendora,  CA); Mobil Oil Corporation  (Torrance,  CA),
Tecstar,  Inc.  (City of Industry,  CA),  TRW,  Inc.  (Redondo  Beach,  CA); The
Aerospace  Corporation (El Segundo, CA); Southern California Health Care Systems
(Pasadena,  CA);  and  Marshall  Industries  (El Monte,  CA). As a result of the
executed contracts,  the Company implemented projects producing approximately 44
million of the 53 million  kWh in annual  energy  savings  available  in the SCE
Agreements.

         No  revenues  are  recorded  for  the SCE  Agreements  but  rather  are
attributed to individual  projects that benefited from payments  pursuant to the
SCE Agreements, which earned approximately $1.4 million and $1.2 million for the
fiscal years ended June 30, 1999, and 1998, respectively.

         City of Anthony, Kansas. In March 1998, OES contracted with the City of
Anthony,  Kansas (the "City"),  to construct a voltage  regulator station and to
upgrade a portion of the City's 4.16kV electric distribution system to 12kV. The
City, which operates its own municipal  electric utility system in south central
Kansas,  expects to realize increased reliability and improved system efficiency
from this upgrade.  Construction is expected to be complete by calendar year-end
1999.  Total  revenue to the  Company  from this  project is  estimated  at $2.0
million.

         Revenues  for the fiscal year ended June 30,  1999,  and June 30, 1998,
were approximately $1.5 million and $300,000, respectively.

         California Energy Commission.  The California Energy Commission ("CEC")
selected the Company,  through its  International  Energy Fund, for  development
support of seven  energy  efficiency  projects  in the  Republic of Panama via a
grant for $325,000 from the CEC.  Additionally,  the Company sponsored the First
Regional Symposium for Energy Efficiency and Distributed Generation,  which took
place in Panama in May 1997.  The Company  organized the symposium with separate
financial support of the CEC.

         Santa Ana Unified  School  District.  In May 1998,  LTS entered into an
approximately  $2,500,000  subcontract  with Sempra Energy  Solutions to provide
lighting retrofit and FEMA (Federal  Emergency  Management  Agency) lighting and
ceiling  upgrades  for the Santa Ana Unified  School  District.  LTS's  contract
encompassed  upgrading over 1,000,000  square feet of ceilings,  installing over
2,000 new fixtures,  retrofitting nearly 15,000 other fixtures with T8 lamps and
electronic ballasts,  and installing 600 occupancy sensors for energy efficiency
in 24 schools. This project was completed in fiscal year 1999.

         Revenues to the Company were  approximately  $2.4 million in the fiscal
year ended June 30, 1999. There were no revenues associated with this project in
the fiscal year ended June 30, 1998.

         R.E.  Thomason General  Hospital.  In 1996, the Company entered into an
agreement with R.E. Thomason General Hospital ("Thomason") for the operation and
maintenance ("O&M") of its central utility plant. The original agreement ran for

<PAGE>12


a 27 month period,  commencing February 1996, with additional  extensions at the
option of Thomason.  In April 1999,  Thomason  renewed the O&M  agreement for an
additional 12 months.  In connection  with this O&M  agreement,  the Company has
staffed the central plant facility with eight  full-time  positions  including a
supervisor, mechanic and plant operators.

         Revenues  for  fiscal  year  ended  June 30,  1999  were  approximately
$850,000.

         Consulting.  In addition to energy  efficiency  retrofit  projects  and
services,  the Company also provides  professional energy efficiency  consulting
services  for a variety  of  clients,  including  energy  customers,  utilities,
product suppliers and government.  These consulting services include engineering
design,  project  feasibility and development,  direct access planning services,
market assessments,  business strategy, public policy analysis and environmental
impact/feasibility studies. The Company currently provides consulting support to
customers,  manufacturers,  utilities,  state and federal governments including,
but not limited to, the Gas Research  Institute  (Chicago,  IL);  Solar Turbines
(San Diego,  CA);  R.E.  Thomason  General  Hospital (El Paso,  TX);  Industrial
Center, Inc. (Arlington,  VA); California Energy Commission (Sacramento,  CA); a
major amusement theme park; a major multi-branch national financial institution;
Caterpillar  Inc.  (Lafayette,  IN); Deere Power Systems Group  (Waterloo,  IA);
Lockheed Martin (Oak Ridge, TN); the American Gas Association (Washington,  DC);
the Interstate Natural Gas Association of America (Washington, DC); the Electric
Power  Research  Institute  (Palo Alto,  CA) and the U.S.  Department  of Energy
(Washington, D.C.).

         Consulting  revenues to the Company were  approximately  $1.5 million
and $1 million for the fiscal years ended June 30, 1999, and 1998, respectively.

         Other Services.  As a result of deregulation in the State of New
Jersey,  the Company now  markets  services  for the  efficient  and  economical
purchase of energy,  primarily  through  aggregation.  In addition to the Jersey
Garden Mall project  discussed above, the Company has entered into the following
relationships:

         Sussex County,  New Jersey.  In June 1999,  the Company  entered into a
contract with the Sussex County Board of Chosen  Freeholders to aggregate energy
and provide energy services for the County and five other  government  entities.
Sussex  County is the  first  county  in the  state of New  Jersey  to  formally
announce  aggregation  plans.  The Company will  aggregate 50 buildings;  Sussex
County   College,   Sussex  County   Municipal   Utilities   Authority  and  the
municipalities of Sparta, Hardyston, Franklin and Vernon, which represent annual
electric bills of more than $1 million.

         Middlesex County, New Jersey.  Middlesex County  Improvement  Authority
has  retained  the Company to aggregate  electric  energy for all  participating
county and municipal  facilities.  Middlesex County is the second such county in
the state of New Jersey to formally announce  aggregation  plans.  Sussex County
was  the  first  county  to  announce  its  association  with  the  Company  for
aggregation.  This project will help position the  Middlesex  County to maximize
cost savings associated with the initiation of energy  deregulation.  By pooling
together  energy  needs,  Middlesex  County will  benefit  from a  reduction  in
electric rates.

         No revenues were recognized by the Company for either fiscal year ended
June 30, 1999 or 1998.

Industry of Issuer.  Following is a description of the ESCO industry and the
business of the Company.

         Traditional ESCOs.  Energy service companies (ESCOs) have traditionally
provided energy  efficiency and related services to customers.  These ESCOs have
provided  services  through  performance  contracting  that  usually  involved a
guarantee of savings and financing of the energy efficiency  measures  installed

<PAGE>13


that was paid for out of  savings.  NAESCO  defines  an ESCO as a  full-service,
vertically   integrated  company  that  provides  a  complete  range  of  energy
efficiency and power management  services to its customers.  In order to qualify
as an  accredited  ESCO,  a company  must be able to offer a method of financing
projects  and  guaranteeing  savings as  services  offered to  customers.  These
elements  generally are what  differentiate an ESCO from contractors,  equipment
suppliers and other providers. The Company provides traditional ESCO services to
many of its customers. The services are described in greater detail below.

         Comprehensive  Energy Services.  The Company  provides the customer
with  comprehensive  energy services.  Such services include:

o    An initial energy audit
o    Evaluation of purchase  options for electricity and fuel,  including tariff
     analysis
o    Detailed economic and feasibility analysis
o    Engineering and construction services
o    Management of project implementation
o    Verification of savings
o    Monitoring of performance and maintenance during the service term
o    Guaranteed savings and/or shared savings programs
o    Performance contracting with utilities, customers
o    Financing,  including direct loans and equipment leases (on and off balance
     sheet)

         A more detailed discussion of these services follows.

         Audit/Feasibility  Analysis:  The Company  and a customer  enter into a
Letter of Agreement providing for an  audit/feasibility  analysis at no up-front
cost. The customer only pays if the Company identifies a cost-effective  project
that the  Customer  does not agree to pursue.  Upon  execution  of the Letter of
Agreement  by a customer,  the  Company's  technical  staff  conducts an on-site
analysis in sufficient detail to establish the potential  savings,  capital cost
estimates  and scope of the project.  The Company's  engineers  and  technicians
often will monitor energy use with data logger equipment.  This data is analyzed
to determine savings  opportunities and energy efficiency  measures  appropriate
for a particular  facility.  This  information  also provides  empirical data on
which  to base  the  incentive  application  that  will  be made to the  utility
company, if applicable. These findings are presented to the customer in the form
of a technical proposal/audit report for the project.

         Detailed Engineering:  Upon the execution by a customer and the Company
of an Energy  Efficiency  Services  Agreement or similar  agreement  (an "ESA"),
licensed  mechanical and specialty  engineers  design the  installation  of each
element of the approved proposal. The process of obtaining required permits from
regulatory agencies also begins at this point.

         Financing:  Once  the ESA  has  been  executed,  the  Company  arranges
financing for the project in cooperation  with the customer if the customer does
not desire to finance the project  itself.  Financing can take many forms,  from
energy  savings-based  agreements to equipment  capital and operating  leases to
traditional and non-recourse  project financed loans. The Company has experience
in arranging such financing for projects based upon anticipated  annual savings.
Financing  packages are  negotiated for the customer in most cases such that the
customer is not required to invest its own funds.

         Procurement and Construction: This phase involves equipment purchasing,
subcontractor selection and construction management to final project completion.

<PAGE>14


Construction  management consists of an experienced project execution team under
the overall direction of one of the Company's experienced project managers.

         Start  Up:  This  step  integrates  the  initial  operation  of the
project,  including  system start-up and  programming,  commissioning  and final
acceptance.

         O&M Services:  This final phase  assures a smooth  handoff to operating
personnel of the customer, and includes training and documentation.  Maintenance
contracts,  where the Company supplies maintenance  services,  are available and
incorporated  into many  projects.  Guarantees  of annual and total  savings are
coupled with ongoing maintenance of the installed energy efficiency equipment.

         M&V Services:  The Company provides  verification of continuing  energy
savings,  both  initially  upon  project  completion  and  on an  ongoing  basis
throughout the term of the ESA. This verification is based upon protocols agreed
upon between the customer, the Company and the utility, if applicable.

         Performance  Contracting.  Performance  contracting is the term used to
describe the terms and conditions  under which an ESCO delivers energy services,
typically  under a  guarantee  of energy  savings  to the  customer.  The ESCO's
payment is based upon  delivery of actual energy  savings to the  customer.  The
values of these energy savings are used to service the project  financing  costs
if the project is financed or to provide positive cash flow to the customer.  In
short, the performance  contracting process requires payment for actual results,
not for projections.

         Providing  Utility  Incentives for Customers.  In some utility  markets
that  have  not yet  deregulated  and in some  markets  that  have  deregulated,
utilities are providing  performance  incentives for customers that save energy.
In some cases these  incentives are available only through ESCOs; in other cases
either the ESCO or a customer may obtain the incentives.

         Over the past  several  years,  the  Company  has  been  successful  in
maximizing the incentives  for its projects.  These  incentives may be delivered
through Standard Performance Contract programs or through utility DSM contracts,
whereby the  incentive  payments are  provided  based on actual  energy  savings
achieved from the implemented project. These incentives can offset a substantial
portion of the investment necessary to implement the energy efficiency measures.
The  incentive  payments  historically  have been  based upon the  resource  and
environmental  value of the energy savings (as compared to the incremental  cost
of building  new power  plants due to  increased  consumption).  This  incentive
toward the costs of the  project  enhances  the  feasibility  of the  individual
projects,   thereby   allowing   more  and  larger   projects   to  qualify  for
implementation.  Before undertaking a project,  the Company's  engineers analyze
the customer's  energy  consumption  and propose a  comprehensive  solution that
maximizes  energy  savings to the  customer  through the  implementation  of the
energy  efficiency  projects.  The costs and  margin  of the  retrofit  programs
implemented by the Company within the customer's  facilities are recouped by the
savings in energy  and  maintenance  costs of the  project,  generally  with net
positive cash flow to the customer generated throughout the life of the project.

         During the last six  years,  the  Company  has  successfully  completed
several utility DSM competitive  bidding programs with PacifiCorp  (April 1993);
Southern  California  Edison Company (May 1994, and July 1995, by  acquisition);
Puget Sound Power & Light Company (June 1994);  Pacific Gas and Electric Company
("PG&E")  (August  1996);  Jersey Central Power & Light (by SYCOM LP in 1990 and
1993);  Public Service  Electric and Gas Company (by SYCOM LP in 1990,  1993 and
1996);  and Potomac  Electric  Power Company (by SYCOM LP in 1992).  The Company
also has been a leading ESCO sponsor for Standard

<PAGE>15


Performance Contracting programs in New Jersey and California.

         National  Accreditation.  As previously discussed,  the Company has
been  accredited  NAESCO  which has been  supported  by the U.S.  Department  of
Transportation. Only 21 ESCOs in the country have obtained such accreditation.

         The Changing  Environment  for Energy  Services.  The electric  utility
industry  currently  is going  through  fundamental  changes  that largely are a
result  of the  more  competitive  environment  for  electric  power  generation
developed  over the last  decade.  The  restructuring  of the  electric  utility
industry will have significant  impacts on the method by which electric power is
delivered  to  customers  in the  future,  and also will  affect  the way energy
services are valued and provided.  In the restructured  electric  industry,  the
competition  of the new marketers in the industry is anticipated to facilitate a
rapid evolution of energy value added services in the  competitive  marketplace.
New energy supply  marketers are moving to diversify  their  electricity  supply
services with other services, which will include energy efficiency services.

         Deregulation of the electric utility industry is expanding the scope of
services offered by ESCOs in the competitive  marketplace.  To purchase electric
power in the  deregulated  market,  large  consumers  will need to  collect  and
analyze their past, present and future electrical  consumption data and profiles
in order to identify  their  demand,  and procure  cost-effective  and  reliable
electric  power.  The Company  currently is performing  and marketing  these new
energy  services  for  large  electricity   consumers  in  preparation  for  the
competitive market.

         The Company has expanded its services and  organized  them to serve the
deregulating  marketplace.  In addition to the  traditional  ESCO services,  the
Company is providing the  following  services  directly to end-use  customers or
through  utility and new energy  service  companies  that are  concentrating  on
marketing the energy  commodity and using the Company as an alliance  partner to
provide the other value-added services:

         Services to Prepare Customers for Deregulation

          (a) Bill Auditing, tariff analyses, and distribution upgrade

         The Company audits bills,  develops load profiles useful for its energy
buying group efforts,  and analyzes and optimizes  tariffs for  customers.  Bill
auditing  has become  even more  important  as the number of pricing  points for
customers  increase and as unbundled bills are late in arriving and have charges
from several  sources.  Tariff analysis can also be important in the transition.
Customers may be on incorrect tariffs or may not have taken advantage of special
riders or negotiated tariffs that utilities are offering in an attempt to retain
customers,  especially during the early years of deregulation.  The Company also
looks for opportunities to upgrade customers to higher, less expensive levels of
transmission  and  distribution  service.  This is becoming  more  important  as
utilities expand their investment  (and,  therefore,  increase the costs) in the
continuing regulated sector of transmission and distribution.

          b) Energy efficiency and load management

         Energy efficiency is still a cornerstone of the service offering by the
Company  in a  deregulating  world.  Decreasing  the use of energy  while  still
performing the same amount of services is often the most cost-effective strategy
for the  end-user.  In a  deregulating  world,  load  management  takes  on more
importance because peak-pricing may be much more expensive than it once was in a
bundled, regulated rate environment. The ability to move a customer's energy use
from on-peak to off-peak  times  becomes  more  cost-effective  in  deregulating

<PAGE>16


markets  where  more  of the  energy  bill  is  subject  to  market  forces  and
time-of-use pricing.

          c) On-site and Distributed Generation/Combined Heat & Power

           The Company has experience as a distributed generation and a combined
heat and power ("CHP")  developer and implementer for systems ranging from 60 kW
to  20,000  kW  at  facilities   such  as  industrial   facilities,   hospitals,
multi-family  housing,  nursing homes,  recreational  centers,  health clubs and
hotels.  Development  activities may be related to on-site  generation where the
electricity  generation is only used on-site and not  transmitted to the grid or
it can be  locally  distributed  to the grid.  In either  case,  it may  combine
generation  of  electricity  with  heat  recovery  -CHP.  CHP is the  sequential
production of electricity and thermal energy utilizing a single fuel source. The
by-product  thermal  energy from the  production of  electricity  is utilized to
provide  steam  heating,  domestic  hot  water  and/or  chilled  water  (through
absorption chilling) to the host facility. As a result, 60 percent to 90 percent
of the  input  fuel's  energy  content  can be  utilized  to  produce  heat  and
electricity  compared  to only 25 percent  to 40  percent  of the fuel's  energy
content to make electricity alone in a utility or independent  generating plant.
The thermal  energy  produced by the CHP system is used by the host  facility to
reduce fuel  consumption  that  otherwise  would be needed to supply the thermal
energy  produced by boilers or other fuel burning  equipment.  A typical  system
consists of a reciprocating  engine or gas turbine  generally  fueled by natural
gas, which drives an electrical  generator.  A heat recovery system reclaims the
heat produced by the engine  generator  set,  yielding  steam or hot water to be
used in the host facility for domestic,  process or space heating/cooling needs.
Electrical  control  relays and switch gear protect the equipment from overload,
ensure proper voltage and frequency,  and interconnect  with the local utility's
power grid.  Since completing its first CHP system in 1984, the Company has been
associated  with  over  35 CHP  projects.  Electric  industry  restructuring  in
California,  New  Jersey  and  Illinois  as well as other  parts of the U.S.  is
creating a renewed interest in on-site (distributed) generation by customers and
utilities.  Furthermore, CHP is getting increased attention by state and federal
environmental agencies as a generation source that can provide net environmental
quality benefits to help mitigate global climate change.

          d) Energy system outsourcing

         The  Company  can  take  over  the  entire  operation  and  maintenance
responsibility  of the  heating,  cooling and  lighting  systems in a customer's
facility and provide the customer an agreed upon long-term, fixed price contract
to provide the customer the heat, cooling and electricty it needs. This approach
is referred to as "energy system outsourcing" and offers substantial  advantages
to  those  customers  who  want to be  relieved  of the  costs  associated  with
operating and maintaining their energy systems.

          e) Commodity purchasing, aggregation, buying groups

         The  Company  advises  its  customers  on  energy  purchasing   choices
(electricity,  natural gas and other fuels) and assists them in exercising their
choices by preparing individual requests for proposals or creating energy buying
groups. Buying groups are created for customers with multiple facilities,  trade
association  members,  and municipal and county  governments.  For example,  the
Company represents four national trade associations in providing energy services
for  their  members,   including  forming  buying  groups  in  states  that  are
deregulating.  It also  represents  regional  trade  associations.  Finally,  as
previously  discussed in Other  Services,  the Company has been  selected by two
counties in New Jersey to aggregate all of their purchases of energy.

<PAGE>17


          f) Energy Consulting

         The Company offers consulting  services for customers,  suppliers,  and
other  stakeholders on regulatory  policies,  market  developments and new power
technology  applications.  The Company has contracts with energy  industry trade
associations,  state and federal  governments,  manufacturers,  and end-users of
energy.

         Non-exclusive  Alliances with energy  commodity ESCOs. The deregulating
energy world  consists of many new entrants that call  themselves  ESCOs but are
not nationally  accredited by NAESCO. Some of these entities hold themselves out
to provide all  services to the  customer  under the  auspices of "total  energy
solution".  Others have tried the "total energy solution" approach and abandoned
it, or they have  concluded  they do not have the  experience  to succeed in the
retail market beyond the sale of the  commodity.  In order to compete with those
offering,  but  not  necessarily   delivering  total  energy  solutions,   these
commodity-focused   ESCOs  are  allying   themselves  with  those  who  do  have
traditional  ESCO experience and ESCO experience in deregulating  markets beyond
the  commodity  sale.  The Company  has allied with  several of these ESCOs on a
regional basis or on specific national account competitions.

         Acquisition of Service Companies Previously  Subcontracted.  Changes in
the  electricity  marketplace,  customer  interest  in reducing  costs,  and the
Company's  focus on its core  business  have led to  several  new  projects  and
acquisitions  that have more than  tripled  its size and makes the  Company  the
largest  NAESCO-accredited  independent  ESCO in the country.  In the past,  the
Company generally did not supply actual  construction  labor or materials in the
implementation  of  projects.  Because of recent  acquisitions,  the Company can
provide some of these services  (including  high efficiency  lighting,  lighting
installation  and maintenance  services) while obtaining more control on overall
cost and level of service.  The source of subcontractors  varies by project, but
generally the Company selects  subcontractors based upon experience,  quality of
work,  price  and  other  factors,  including  previous  relationship  with  the
customer.  In general,  subcontractors  are solicited from the customer's  local
geographic area. The Company's standard agreements with subcontractors  (usually
in the form of an Engineering,  Procurement and Construction  Agreement) contain
general provisions  standard for the construction  industry for the installation
of energy efficiency measures.

         For  many  projects,   the  Company  also  provides   ongoing  O&M  and
measurement and  verification  ("M&V") services for the installed  systems.  The
Company  offers the benefits of energy  efficient  systems  through  third party
ownership or project  financing repaid through savings generated by the project,
requiring little or no capital investment by the energy services customer.

         The Company's infrastructure services are designed to approach areas of
facility  operations that may not be addressed in traditional  energy efficiency
projects,  and include  electric and natural gas  facilities,  power quality and
water treatment  facilities.  From electrical  switchgear design to high voltage
power line  construction,  the Company can provide  customized utility services.
The  Company  can design  the  project,  procure  the  materials  and manage the
installation  of  equipment.   The  Company  also  provides  management  of  its
customers' utility equipment to reduce the chance of failures, minimize duration
of outages and protect assets. The Company's  engineers audit electrical service
from local utilities using state-of-the-art  technology to isolate, identify and
remedy problems before they cost the customer more money.  The Company  provides
harmonic  investigations  and  remediation,  wiring and grounding  studies,  and
transients and over-voltage  analysis.  The Company also meets the process water
needs of some of its customers through design, construction,  operation and even
ownership of high purity water systems. Specializing in reverse osmosis systems,
the Company  utilizes cost effective  membrane  technologies to filter dissolved
salts as well as inorganic  molecules.  The Company  evaluates  water  treatment
processes  best  suited for the  customers'  needs,  then  design and  install a
site-specific water treatment system.

<PAGE>18


         Markets  Served and Results of Service.  The Company  provides  various
customer   services  that  focus  on  saving  energy  dollars  in   residential,
commercial,  institutional  and industrial  facilities.  Using multiple,  proven
energy  technologies  prescribed  by the Company,  today's  building  owners and
operators can receive both cash flow savings and  environmental  benefits  while
optimizing energy efficiency, load management or alternative generation, in most
cases  without any up front capital  required  from the customer.  The Company's
integrated energy measures work together to:

                  Reduce energy consumption
                  Reduce the price of  purchased  electricity  and fuel
                  Promote efficient  use of energy
                  Shift loads to periods of lower cost energy
                  Improve the environment
                  Increase business profitability

         By  providing a complete  package of services,  including  providing or
arranging  financing of projects,  the Company  becomes the energy  partner with
each of its customers.

         Competition to the Company. In general,  the Company's  competitors are
other ESCOs,  particularly the other 20 ESCOs accredited by NAESCO, that provide
similar comprehensive services to customers. Some of these competitors are large
companies,  affiliated  with  utilities  or equipment  manufacturers,  with more
assets  and a larger  manpower  and  resource  base  than the  Company.  Utility
companies and their affiliates can function as both competitors and partners for
the Company as discussed in  Non-exclusive  Alliances.  Many  utilities  now are
entering the energy efficiency services market through wholly-owned subsidiaries
of holding  companies in direct  competition with ESCOs,  including the Company.
However,  the Company sometimes teams with utility service  subsidiaries whereby
the utility subsidiary  functions as a source of financing for energy efficiency
services projects developed and implemented by the Company.

         An  important  competitive  advantage  for any ESCO is its  ability  to
provide financing and performance  guarantees to the customer.  This is the area
in which many small,  independent  ESCOs may be at a disadvantage  when compared
with the larger companies and utilities.  However,  the Company has successfully
used  financing  sources such as Academic  Capital,  L.L.C.  ("Academic"),  Dana
Commercial Credit, Koch Financial ("Koch") and ABN AMRO Chicago Corporation (fka
ChiCorp Financial  Services,  Inc.) ("ABN"),  among others, to provide financing
for qualified energy projects, thus maintaining this important advantage for the
Company.  Over  the last  four  years,  Academic,  ABN and  Koch  have  provided
financing  on most of the  Company's  projects  that  have been  financed.  More
recently,  though, the Company has obtained financing from other sources and has
identified  other potential  sources of financing,  thereby reducing its overall
dependence  on a limited  number of sources of project  financing.  In addition,
many of the Company's  customers  have the ability to obtain their own financing
or to pay for the cost of the project themselves.

         The  Company's   competitive   advantage   historically  has  been  its
independence from affiliation with commodity suppliers (utilities) and equipment
vendors, and its ability to offer a broader range of services and equipment than
other  ESCOs  can  offer.  In  addition,  the  Company  has  been in the  energy
efficiency  business for a longer  period of time with a  significantly  greater
number of successful projects, than most other ESCO competitors.

         In summary, there are several factors that distinguish the Company from
most other ESCOs. These include:

<PAGE>19


o    Independence:  The Company is not affiliated with any provider of energy or
     with any equipment  manufacturer.  It makes unbiased choices with regard to
     sources  of energy  commodity  or a specific  piece of  equipment  (e.g.  a
     control  system)  sold by an  affiliate.  The  Company  promote  one energy
     specific  technology (e.g. an electric  technology) when another technology
     (e.g., a gas technology) could better serve the customer.

o    Projects  Experience:  Since 1982 the Company and its  acquired  affiliates
     have provided energy efficiency and related services in over 750 facilities
     and has saved  customers  well over $150 million.  These services have been
     performed in all types of facilities, including industrial complexes, large
     and small commercial buildings,  schools, government buildings, waste water
     treatment plants, hospitals and homes.

o    Personnel:   The  Company  has  an  experienced  staff  of  energy  service
     professionals  whose senior  managers are recognized  leaders in the energy
     services  industry.  The CEO of the  Company is the  current  President  of
     NAESCO and the President was a previous NAESCO President.

o    Access to Financing:  As discussed  above in  Competition,  the Company has
     utilized a number of  different  financing  entities  and  alternatives  to
     provide financing alternatives to its customers.

o    Emission  Reduction  Credits:  The  Company  is  the  only  ESCO  that  has
     successfully created emission reduction credits from energy efficiency that
     have been used by customers to meet pollution reduction obligations .

o    Open Book Pricing: The Company also provides many of its customers with the
     option of open book pricing and set forth the various cost  components of a
     project.

o    Accreditation: As discussed in National Accreditation above, the Company is
     accredited NAESCO,  making it the largest  independent  accredited  energy
     services company in the United States. It is also on the U.S.  Department
     of Defense and Department of Energy approved lists of energy services
     companies.

         Raw Materials.  The Company  obtains most of its material and equipment
from several suppliers.  The items it purchases generally are available "off the
shelf" and from  several  vendors.  Those items that the Company may have custom
built also typically are available from several sources.

         Government  Regulation/Environmental  Laws.  Some  government  laws and
regulations promote the Company's business.  For example, in New Jersey, the new
deregulation law provides economic incentives for on-site generation by allowing
on-site  generation on contiguous  properties,  by exempting the generation from
being  considered  a public  utility,  and by not  imposing  stranded  costs and
societal  benefit charges on on-site  generation (at least until revenue erosion
reaches  7.5  percent of the 1999 base).  Similar  incentives  exist for on-site
generation  in  Illinois.  The U.S.  Environmental  Administration  has endorsed
energy efficiency as a pollution control strategy and promoted energy efficiency
that is measured  and  monitored  in the manner  which the Company  measures and
monitors by making the  pollution  avoidance  eligible  for  emission  reduction
credits and  allowances.  Some  states  such as New Jersey  have passed  similar
regulations.

         However,  some government laws and regulations impose requirements upon
the  Company.   The  Company  is  subject  to  rules  and   regulations  of  the
Environmental   Protection   Agency,   the   Occupational   Safety   and  Health

<PAGE>20


Administration  and other federal,  state,  county and municipal  agencies.  The
Company's   business   entails   "indirect"   environmental   risks   from   its
subcontractors'  handling  and  removal  of  polychlorinated   biphenals  (PCBs)
ballasts,  asbestos or asbestos-containing  materials (ACMs),  urea-formaldehyde
paneling,  fluorescent  lamps  or HID  lamps,  and air  quality  compliance  for
emissions  from  its  CHP  facilities.  The  Company  contracts  with  certified
hazardous waste removal  companies or require its customers or subcontractors to
contract with certified  hazardous waste removal companies.  The Company obtains
indemnification from applicable customers and subcontractors as to liability the
Company  might incur in connection  with  hazardous  materials or  environmental
concerns. The Company may also be subject to certain lighting level requirements
in certain  public  facilities  when it undertakes  lighting  retrofits.  It has
substantial  experience in meeting such  standards at both the Federal and State
level.

Employees.  As of September 27, 1999,  the Company  employed  approximately  150
persons, either directly or through contract with SYCOM Corporation,  in regular
or temporary full-time or part-time positions.

Item 2.  Description of Property

         The   Company's   corporate   headquarters   is  located  in  Carlsbad,
California.  The  property  is held on a three year lease  expiring  in July 31,
2001, and covering  approximately 13,000 square feet. The Company also leases on
a month by month basis a 250 square  foot  storage  facility.  The Company has a
regional office in San Ramon,  California  (lease of 2,000 square feet of office
space on a three year lease expiring March 2001).

         The  Company's  subsidiaries  are located in  Somerset,  New Jersey (SO
Corporation);  Topeka,  Kansas  (OES);  Salina,  Kansas  (OMS);  and Costa Mesa,
California  (LTS).  OES leases  2,000  square feet of office space on a one year
lease  with an  option  to  renew,  expiring  November  1999.  OMS owns the main
building  (9,698 square feet) that includes  office space and storage in Salina,
Kansas.  OMS also owns two annexes in Salina,  Kansas (one  consisting  of 1,225
square  feet and one  consisting  of 2,400  square  feet).  OMS  leased a fourth
building  from  former  management  on a month by month  basis to store  testing
equipment.  This lease was  terminated  in July 1999.  LTS leases  approximately
5,476 square feet in Costa Mesa,  California.  This lease is a three-year  lease
with an option to renew, expiring August, 2002. Additionally, under an agreement
with SYCOM  Corporation,  the Company is required to reimburse SYCOM Corporation
for the  applicable  continuing  operating  expenses  (including  rent)  for the
offices and a small warehouse in Somerset, New Jersey and Washington, D.C.

         No other office or  warehouse  space is leased or owned by the Company.
Management  believes  that  the  current  properties  will be  suitable  for the
Company's operations.

Item 3.  Legal Proceedings

         In October 1998, Energy  Conservation  Consultants,  Inc.  ("ECCI"),  a
Louisiana-based  company,  filed a suit (United States District  Court,  Eastern
District of Louisiana, Case No. 98-2914) against OES alleging breach of contract
in connection with one of the Company's  projects.  The suit seeks reimbursement
for expenses  allegedly incurred by ECCI in the preparation of an audit and lost
profits.  Discovery  is ongoing and  management  is  continuing  its attempts to
settle the matter,  including through mediation;  however, no agreement has been
reached. A continuance has been granted and trial now is set for February 2000.

         Additionally,  in June 1999,  a former officer of the Company  (July
1998  through  October  1998)  filed a suit  (Superior  Court  of the  State  of
California, County of San Diego, North County Branch, Case No. N081711) alleging
fraud,   negligence   and  wrongful  discharge   in   connection   with   his

<PAGE>21


employment  termination in October 1998. The action seeks  compensatory  damages
and punitive damages in excess of $25,000.  The parties have agreed to mediation
in an effort to settle this matter;  however,  no settlement  agreement has been
reached.


Item 4.  Submission of Matters to Vote of Security Holders

         No matters  have been  submitted  during the fiscal year ended June 30,
1999, to a vote of securities holders.


                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters

         Since  August 2,  1995,  the  Company's  Class A Common  Stock has been
quoted on the Over-the-Counter  (OTC) Electronic Bulletin Board under the symbol
"ONSE." The following  table sets forth the high and low prices per share of the
Company's Class A Common Stock for the prior two fiscal years by quarters.


         Quarter Ended                         High                    Low
         ---------------------                 -------                -----
         September 30, 1997                    $0.34                  $0.18
         December 31, 1997                     $0.9375                $0.26
         March 31, 1998                        $0.6875                $0.50
         June 30, 1998                         $1.4375                $0.5625
         September 30, 1998                    $1.2500                $0.7812
         December 31, 1998                     $0.7810                $0.4687
         March 31, 1999                        $0.9062                $0.5000
         June 30, 1999                         $0.6250                $0.3125

         The high and low market quotations reflect inter-dealer prices, without
retail  mark-up,   mark-down  or  commission,   and  may  not  represent  actual
transactions.

         As of  September  27,  1999,  there were  approximately  228 holders of
record of the Common Stock.

         The Company has not paid  dividends  on its Class A Common  Stock,  nor
does the Company anticipate paying cash dividends on the Class A Common Stock in
the  foreseeable  future.  The Company has paid stock  dividends on the Series C
Stock.  The Series C Stock earns a dividend of 9.75  percent per annum,  payable
quarterly.  Dividends  have been paid in the form of 40,915 and 8,205  shares of
Series  C Stock  in the  years  ended  June 30,  1999  and  1998,  respectively.
Dividends  are  payable  in  additional  shares of Series C Stock or cash at the
option of the Company through November 1999.  Thereafter,  dividends are payable
in cash.


Item 6.  Management's Discussion and Analysis

         When used in this discussion and the financial  statements that follow,
the words "expect(s),"  "feel(s),"  "believe(s)," "will," "may," "anticipate(s)"

<PAGE>22


and similar  expressions  are intended to identify  forward-looking  statements.
Such statements are subject to certain risks and uncertainties  that could cause
actual results to differ materially from those projected.  Readers are cautioned
not to place undue  reliance on these  forward-looking  statements,  which speak
only as of the date hereof.  The Company  undertakes  no obligation to republish
revised forward-looking  statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated  events.  Readers also
are urged to carefully  review and consider the various  disclosures made by the
Company that attempt to advise interested parties of the factors that affect the
Company's  business,  including  the  discussion  under Item 1.  Description  of
Business,  as well as the Company's periodic reports on Forms 10-KSB, 10-QSB and
8-K filed with the SEC.

        The Company has previously been corresponding with the SEC regarding its
Form 10- KSB for the year  ended  June 30,  1998.  In  response  to  information
submitted by the Company,  on October 13,  1999,  the SEC sent a comment  letter
questioning  the  appropriateness  of certain  aspects of the Company's  revenue
recognition   accounting  policies.   The  Company  believes  that  its  revenue
recognition  accounting  policies are  appropriate and intends to respond to and
continue to work with the SEC to resolve the comments. However, no assurance can
be given that the SEC will not require  adjustments  to be made to the Company's
previously  issued financial  statements and financial  statements  contained in
this annual report.

         As discussed in Item 1.  Description of Business,  the Company acquired
OES, OMS, LTS and SO Corporation  during the fiscal year 1998, and REEP and ERSI
during the fiscal  year 1999.  To  accurately  depict the change in  operations,
liquidity  and  capital   resources,   the  Company  has  given  a  consolidated
comparative and also a comparative that removes the impact of its newly acquired
subsidiaries.

Results of Operations.

         Revenues. Revenues increased in the fiscal year ended June 30, 1999, by
$31,290,754 or 255.08  percent.  This increase is primarily  attributable to the
activity  from  newly  acquired  subsidiaries.  After  elimination  of  revenues
attributable  to  newly  acquired   subsidiaries  and  prorated   revenues  from
subsidiaries acquired mid-fiscal year 1998, revenues increased by $2,852,707, or
23.25  percent  from  fiscal  year ended  June 30,  1998 to June 30,  1999.  The
increase  in  revenues  occurred  as a result of the  completion  of projects in
process as of the  beginning  of the fiscal year as well as the start of several
new long term  construction  projects  in the fiscal  year ended June 30,  1999.
Consulting  revenues  increased  by 57.50  percent  due to  consulting  services
provided to three major customers.

         Gross Margin.  Gross margin for the fiscal year ended June 30, 1999 was
19.38 percent of revenues  compared to 18.01 percent in fiscal year 1998.  After
elimination  of  revenues  and cost of  sales  attributable  to  newly  acquired
subsidiaries,  gross margin was 19.72  percent for the fiscal year 1999 compared
to 18.01 percent in fiscal year 1998. The Company  typically  engages in several
different types of business with  substantially  different  margin results.  The
project  types are as follows:  general  construction  projects  that  produce a
typical  margin in the 10 to 35 percent  range;  fee based  projects,  where the
major  construction  subcontractors  are hired by the customer and, as such, the
costs and related  revenues  do not flow  through the Company and the margin can
range from 30 to 80 percent;  consulting contracts where the typical margins are
50 to 70 percent;  and lighting projects,  through LTS, REEP and ERSI, where the
margins  typically  are lower,  usually in the range of 10 to 25  percent.  As a
result  of the mix in  margins,  the  gross  margin  for any  given  period  can
fluctuate significantly and is not necessarily indicative of a trend.

         Selling,  General  &  Administrative  Expenses.  Selling,  general  and
administrative  ("SG&A")  expenses were $11,193,561 or 25.70 percent of revenues
in the fiscal year ended June 30, 1999,  compared to $3,879,237 or 31.62 percent
of revenues in fiscal year 1998. After elimination of revenues and SG&A expenses
attributable  to newly acquired  subsidiaries,  SG&A as a percentage of revenues
was 28.93  percent  for fiscal year end 1999  compared to 31.62  percent for the
fiscal year 1998.  The decrease was primarily due to the 23.25 percent  increase
in revenue  without  corresponding  increases  to SG&A.  Without SG&A from newly
acquired subsidiaries,  SG&A increased by 12.75 percent from fiscal year 1998 to
fiscal year 1999.  However,  there were several significant changes from 1998 to
1999. Bad debt expense increased by $93,000,  or 310 percent  from   fiscal year
1998 to 1999. The closing of two regional offices decreased  facilities expenses
by $237,000,  or 67.47  percent in fiscal year 1999 compared to fiscal year 1998

<PAGE>23


and one time  professional  service and office set up charges that were incurred
in fiscal year end 1998 were not repeated, which caused other office expenses to
decrease by 55.67 percent.

         Depreciation  expense  was  $572,465  as of June 30,  1999  compared to
$258,572 as of June 30, 1998. The increase of 121.39 percent was attributable to
the activity related to the newly acquired  subsidiaries.

         Goodwill (excess purchase price over net assets acquired)  amortization
included in SG&A in the fiscal year ended June 30, 1999 was $502,390 compared to
$280,927 in the fiscal year ended June 30, 1998,  an increase of 78.83  percent.
Goodwill  amortization  for fiscal  year 1999 has  increased  as a result of the
acquisitions  made by the  Company in the last  quarter of fiscal  year 1998 and
April 1999.  After  elimination of goodwill  amortization  attributable to newly
acquired  subsidiaries,  there was no goodwill  amortization for fiscal year end
1999 compared to $266,667 for the fiscal year end 1998. Goodwill amortization in
fiscal year 1998 arises  primarily out of the acquisition of Onsite-Cal in 1994,
which  resulted in goodwill of $1,600,000  that was  amortized  over a four year
period, which ended in February 1998.

         Loss from Operations. Loss from operations increased in the fiscal year
ended June 30, 1999 by  $4,548,795 or 205.93  percent.  This increase was mainly
attributable  to the  loss   recognized   related  to the  decision  to sell or
dispose  of the  Company's  lighting  subsidiaries  and the  write off of excess
purchase price over net assets acquired for SO  Corporation.  As a result of the
operating  losses of SO  Corporation,  management  determined  that the carrying
value of excess of purchase price over net assets  acquired had been impaired as
of June 30,  1999.  The  effect  of this  determination  was to  charge  against
operating earnings  (additional loss) of $1,918,851,  the unamortized balance as
of June 30, 1999.  After  elimination of revenues and expenses  attributable  to
newly acquired  subsidiaries,  loss from  operations  decreased by $614,961,  or
27.84 percent.

         Other  Income/Expense.  Other expense increased $143,734 for the fiscal
year ended June 30, 1999. The change was attributable to an increase in interest
income of $121,153  offset by an increase of interest  expense of $264,887.  The
interest income arises from notes  receivable from newly acquired  subsidiaries.
The  interest  expense  is  related  to  notes  payable  on  certain  long  term
construction  projects  added  with the  acquisition  of SO  Corporation.  After
elimination  of activity  attributable  to newly  acquired  subsidiaries,  other
income was  $163,672  for fiscal  year ended June 30,  1999,  compared  to other
expense of $2,117 for the same period in 1998. The change was due to an increase
of interest income of $168,453 with little change in interest expense.

         Net  Loss.  Net loss for the year  ended  June 30,  1999  increased  by
$4,690,529,  or 211.43 percent from the loss for fiscal year 1998. This resulted
in a loss per share of $0.39,  compared  to the loss per share for  fiscal  year
1998  of  $0.16.   The  increase  in  preferred  stock  dividends  of  $155,421,
accompanied with the reserve taken related to the decision to sell or dispose of
the lighting  subsidiaries  and the  write-off  of goodwill for SO  Corporation,
caused the  increase in the loss per share.  After  elimination  of revenues and
expenses attributable to newly acquired  subsidiaries,  the increase in net loss
was $227,195, or 10.24 percent. This increase was attributable to the $1,010,000
reserve  recognized  related to the  decision to sell or dispose of the lighting
subsidiaries.


Liquidity and Capital Resources.

         The Company's  cash decreased by $1,192,598 in fiscal year end June 30,
1999, a decrease of 56.98 percent.  Working capital was a negative $6,357,699 as

<PAGE>24


of June 30, 1999,  compared to a negative  $2,693,367  as of June 30,  1998,  an
increase in negative  working  capital of $3,664,332.  The increased  deficit in
working capital was largely  attributable to the increase in the current portion
of notes payable acquired from  acquisitions and an increase in accounts payable
of approximately $6.8 million,  offset by an increase in accounts  receivable of
approximately $3.7 million.

         Cash flows  used in  operating  activities  for the year ended June 30,
1999 were $771,923,  compared to $814,280  provided by operating  activities for
the year ended June 30, 1998. Increases in receivables and decreases in billings
in excess of costs and estimated earnings on uncompleted contracts increased the
cash used in operations.  This increase was partially  offset by the increase in
accounts payable.

         Cash flows used in investing  activities for the fiscal year ended June
30, 1999, were $2,840,421  compared to $1,330,791 for the fiscal year ended June
30, 1998,  an increase of  $1,509,630.  This  increase was  primarily due to the
increase in loans to shareholders acquired with the new subsidiaries. Cash flows
provided by financing  activities were $2,419,746 for the fiscal year ended June
30, 1999, compared to $2,082,623 for the same period in fiscal 1998, an increase
of 16.19 percent.  The principal reason for the change from year-to-year was due
to the  proceeds  in July 1998 and  February  1999 from the  additional  private
placement of securities to Westar Capital.


         The Company has suffered losses from operations for the past two fiscal
years.  For the years ended June 30, 1999,  and 1998, the Company had net losses
of  $6,909,011  and  $2,218,482,   respectively,  negative  working  capital  of
$6,357,699  and an  accumulated  deficit  of  $26,528,421  as of June 30,  1999.
Management  believes  that  the  Company  will be able  to  generate  additional
revenues and operating efficiencies through its acquisitions as well as by other
means to achieve profitable operations. During the year ended June 30, 1999, the
Company took steps to mitigate the losses and enhance its future  viability.  In
addition, during the fiscal year end 1999, the Company exercised its right under
a stock  subscription  agreement  to  require  Westar  Capital  to  purchase  an
additional   400,000  shares  of  Series  C  Convertible   Preferred  Stock  for
$2,000,000.  Subsequent  to its most recent  fiscal year end,  the Company  also
privately  placed shares of newly created Series E Convertible  Preferred  Stock
("Series E Stock") to existing shareholders for $1,000,000. Concurrent with this
private  placement,  members of senior  management of the Company have agreed to
receive  shares of the  Company's  Class A Common  Stock in lieu of a portion of
their  salary in an effort to reduce  cash  outflows  related  to  compensation.
Subsequent  to June  30,  1999,  a  decision  was  made to  explore  the sale or
disposition of the Company's lighting subsidiaries, which could provide capital,
reduce  operating  losses and will allow  management to better focus on its core
ESCO  business  activities.  In  addition,  the Company is  exploring  strategic
relationships  with  companies  that could involve an investment in the Company.
The  Company may also raise cash  through  the sale of long term future  revenue
streams that it currently  owns or has rights to. The Company is also  examining
ways to further reduce overhead  including,  but not limited to, the possibility
of targeted staff reductions.  Further, the Company,  through the acquisition of
other energy service  companies,  expects to continue to gain economies of scale
through the use of a consolidated management team and the synergies of marketing
efforts of the  different  entities.  Management  believes that all of the above
actions  will allow the  Company to  continue  as a going  concern.  Future cash
requirements  depend  on the  Company's  profitability,  its  ability  to manage
working  capital  requirements  and its  rate of  growth.  Additional  financing
through the sale of securities may have an ownership dilution effect on existing
shareholders.

Seasonality and Inflation.  The Company's business is not significantly affected
by seasonality or inflation.

Industry.  As  described  in  detail in Item 1.  Description  of  Business,  the
deregulation of the electric  utility  industry in California and throughout the
U.S. has created a more  competitive  environment for electric power  generation
and energy services. This has and will continue to provide opportunities for the

<PAGE>25


Company to expand the scope of  services.  The Company  continues  to market new
energy services for larger consumers in preparation for the emerging competitive
marketplace created by deregulation.

Foreign  Operations.  On April 8, 1998,  the  Company  formed  Onsite  Energy de
Panama,  S.A. This Panamanian  corporation was formed in order to facilitate the
acquisition and development of potential projects in Panama and Latin America.
There was no operating activity through the fiscal year ended June 30, 1999.

Tax  Legislation.  New tax legislation is not expected to have a material effect
on liquidity,  financial  condition and operations of the Company.  The deferred
tax asset  includes  the future  benefit of the LTS  pre-acquisition  deductible
temporary  differences and net operating losses of $184,100.  The deferred asset
has been fully reserved  through a valuation  allowance.  Any future tax benefit
realized  for these items will first  reduce any  goodwill  remaining  from this
acquisition and then income tax expense.

         At June 30, 1999, the Company has net operating loss  carryforwards  of
approximately  $22,686,000,  which  expire in the years 2006 through  2019.  The
Company has  California  net operating  loss  carryforwards  at June 30, 1999 of
$1,722,000,  which  expire in years 2000  through  2004.  The benefit of the net
operating  losses to offset  future  taxable  income is subject to  reduction or
limitation of use as a result of certain  consolidated return filing regulations
and additional  limitations  relating to a 50 percent change in ownership due to
various stock transactions.

Year 2000. The Year 2000 issue is the result of computer  programs being written
using two digits  rather  than four to define the  applicable  year.  Any of the
Company's or its  suppliers'  and  customers'  computer  programs that have date
sensitive  software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or  miscalculations  causing
disruptions of operations  including,  among other things, a temporary inability
to process  transactions,  send invoices,  or engage in similar normal  business
activities.  The Company believes that  substantially all software  applications
currently being used for the financial and  operational  systems have adequately
addressed  any year 2000  issues.  All hardware  systems have been  assessed and
plans have been  developed to address  systems  modification  requirements.  The
costs  incurred  to date  related  to its  Year  2000  activities  have not been
material to the Company, and based upon current estimates,  the Company does not
believe  that the total  cost of its Year 2000  readiness  programs  will have a
material  adverse  impact on the  Company's  results of  operations or financial
position.  Any risks the  Company  faces are  expected to be external to ongoing
operations.  The Company has numerous alternative vendors for critical supplies,
materials  and  components.  Current  vendors  and  subcontractors  who have not
adequately  prepared for the year 2000 can be substituted in favor of those that
have prepared.


Item 7.  Financial Statements.

         The Company's  consolidated  financial statements are attached as pages
          F-1 through F-28.

Item 8.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure.

         None.




                  [Remainder of page intentionally left blank]


<PAGE>26


                                   SIGNATURES

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



Date: October 8, 1999             By: /s/  RICHARD T. SPERBERG
                                           ------------------------------------
                                           Richard T. Sperberg
                                           Chief Executive Officer (Principal
                                           Executive Officer), Director

Date: October 8, 1999             By: /s/  J. BRADFORD HANSON, CPA
                                           ------------------------------------
                                           J. Bradford Hanson, CPA
                                           Chief Financial Officer, Principal
                                           Financial and Accounting Officer




<PAGE>27


                                   SIGNATURES

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

ONSITE ENERGY CORPORATION


Date: October 8, 1999              By: /s/  CHARLES C. MCGETTIGAN
                                            -----------------------------------
                                            Charles C. McGettigan
                                            Chairman of the Board and
                                            Outside Director


Date: October 8, 1999             By:  /s/  RICHARD T. SPERBERG
                                            -----------------------------------
                                            Richard T. Sperberg
                                            Chief Executive Officer
                                            and Director


Date: October 8, 1999             By:  /s/  S. LYNN SUTCLIFFE
                                            -----------------------------------
                                            S. Lynn Sutcliffe
                                            President and Director


Date: October 8, 1999             By:  /s/  RICHARD L. WRIGHT
                                            -----------------------------------
                                            Richard L. Wright
                                            Senior Vice President and Director


Date: October 8, 1999             By:  /s/  TIMOTHY G. CLARK
                                            -----------------------------------
                                            Timothy G. Clark
                                            Outside Director


Date: October 8, 1999             By: /s/  H. TATE HOLT
                                           -----------------------------------
                                           H. Tate Holt
                                           Outside Director



<PAGE>F-1



                                      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
       <S>                                                                                                <C>

         Independent Auditor's Report ....................................................................F-2

         Consolidated Balance Sheet - June 30, 1999.......................................................F-3

         Consolidated Statements of Operations - For the Years ended
              June 30, 1999 and 1998......................................................................F-4

         Consolidated Statement of Shareholders' Equity (Deficit) - For the Years ended
              June 30, 1999 and 1998......................................................................F-5

         Consolidated Statements of Cash Flows - For the Years ended
              June 30, 1999 and 1998......................................................................F-6

         Notes to Consolidated Financial Statements.......................................................F-7

</TABLE>

<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, 1999 and the related
consolidated statements of operations,  shareholders' equity (deficit), and cash
flows for the years ended June 30, 1999 and 1998. 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 audits 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,  1999  and  the  results  of  their
operations  and their cash flows for the years  ended June 30,  1999 and 1998 in
conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations, has a working capital deficit of $6,357,699, and an accumulated
deficit of  $26,528,421.  These  conditions  raise  substantial  doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these  matters  are also  described  in Note 3.  The  consolidated  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of reported asset amounts or the amounts and  classification  of
liabilities that might result from the outcome of this uncertainty.

/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
September 3, 1999



<PAGE>F-3



                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  June 30, 1999
                                     ASSETS
<TABLE>
     <S>                                                                                            <C>

       Current Assets:
           Cash                                                                                     $          900,408
           Accounts receivable, net of allowance for doubtful accounts of $35,000                            6,071,729
           Inventory                                                                                           185,562
           Capitalized project costs                                                                           147,022
           Costs and estimated earnings in excess of billings on uncompleted contracts                       1,109,315
           Other current assets                                                                                 50,634
                                                                                                     -----------------

              TOTAL CURRENT ASSETS                                                                           8,464,670

           Cash-restricted                                                                                     147,838
           Property and equipment, net of accumulated depreciation and amortization of $1,258,000            1,413,918
           Other assets                                                                                        101,483
                                                                                                     -----------------

              TOTAL ASSETS                                                                          $       10,127,909
                                                                                                     =================

                                        LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

       Current liabilities:
           Note payable - related party                                                           $            211,914
           Notes payable                                                                                     2,499,455
           Accounts payable                                                                                  9,035,325
           Billings in excess of costs and estimated earnings on uncompleted contracts                       1,445,790
           Accrued expenses and other liabilities                                                            1,394,024
           Liabilities in excess of assets held for sale                                                       235,861
                                                                                                     ------------------

              TOTAL CURRENT LIABILITIES                                                                     14,822,369

       Long-Term Liabilities:
           Accrued future operation and maintenance costs associated with energy services
           agreements                                                                                          324,010
                                                                                                     -------------------
              TOTAL LIABILITIES                                                                             15,146,379
                                                                                                     -------------------

       Commitments and contingencies (Notes 2, 3, 4, 8, 11, 12, 14, 15, 20)

       Shareholders' Equity (Deficit):
           Preferred Stock, Series C, 842,500 shares authorized, 649,120 issued and
            outstanding (Aggregate $3,245,600 liquidation preference)                                              649
           Preferred Stock, Series D, 157,500 shares authorized, issued and outstanding and held
            in escrow                                                                                                -
           Common Stock, $.001 par value, 24,000,000 shares authorized:
           Class A common stock, 23,999,000 shares authorized, 18,584,853 issued and
            outstanding                                                                                         18,585
           Class B common stock, 1,000 shares authorized, none issued and outstanding                                -
           Additional paid-in capital                                                                       25,583,816
           Notes receivable - shareholders                                                                  (4,093,099)
           Accumulated deficit                                                                             (26,528,421)
                                                                                                     ------------------
              TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                                          (5,018,470)
                                                                                                     ------------------
       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                                         $       10,127,909
                                                                                                     ==================
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

</TABLE>

<PAGE>F-4




                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   For the Years Ended June 30, 1999 and 1998
<TABLE>
     <S>                                                         <C>                   <C>

                                                                        1999                   1998
                                                                  -----------------     -------------------

       Revenues                                                       $ 43,557,902            $ 12,267,148

       Cost of sales                                                    35,118,295              10,057,277
                                                                  -----------------     -------------------

           Gross margin                                                  8,439,607               2,209,871

       Selling, general, and administrative expenses                    11,193,561               3,879,237
       Depreciation and amortization expense                             1,074,855                 539,499
       Reserve on sale or disposal of subsidiary                         1,010,000                       -
       Impairment of excess of purchase price
           over net assets acquired                                      1,918,851                       -
                                                                  -----------------     -------------------

            Operating loss                                              (6,757,660)             (2,208,865)
                                                                  -----------------     -------------------

       Other income (expense):
          Interest expense                                                (292,287)                (27,400)
          Interest income                                                  146,436                  25,283
                                                                  -----------------     -------------------

            Total other expense                                           (145,851)                 (2,117)
                                                                  -----------------     -------------------

       Loss before provision for income taxes                           (6,903,511)             (2,210,982)

       Provision for income taxes                                            5,500                   7,500
                                                                  -----------------     -------------------

       Net loss                                                       $ (6,909,011)           $ (2,218,482)
                                                                  =================     ===================

       Net loss allocated to common shareholders                      $ (7,113,579)           $ (2,267,629)
                                                                  =================     ===================

       Basic and diluted loss per common share:                         $    (0.39)             $    (0.16)
                                                                  =================     ===================

       Weighted average number of shares
          used in per common share calculation:                                                 13,790,185
                                                                        18,469,094
                                                                  =================     ===================

</TABLE>

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



<PAGE>F-5




                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                   For the Years Ended June 30, 1999 and 1998

<TABLE>
<S>                            <C>       <C>      <C>    <C>       <C>   <C>       <C>        <C>           <C>       <C>
                               Common Stock                    Preferred Stock
                               ------------------------------------ --------------------------------------------------------------
                               Class A               Series C         Series D
                               ------------------------------------ -------------------------------- -----------------------------
                                                                                                                          Total
                                                                               Additional     Notes         Accum-     Shareholders
                                                                                 Paid-In    Receivable-     ulated        Equity
                               Shares    Amount   Shares  Amount Shares Amount   Capital    Shareholders   Deficit      (Deficit)
                               -------- -------- -------- ------ ------ ------ ----------- -------------- ------------ ------------
Balances July 1, 1997        10,944,172 $ 10,944        - $  -     -    $ -    $17,052,961 $          -   $(17,147,213) $   (83,308)

Issued to Onsite 401k Plan       49,912       50        -    -     -      -         17,399            -              -       17,449

Issued pursuant to private
 offering net of expenses     2,000,000    2,000        -    -     -      -        951,542            -              -      953,542

Stock issued for acquisitions 4,940,000    4,940        -    -     -      -      4,031,923            -              -    4,036,863

Exercise of stock options       309,104      309        -    -     -      -         86,854            -              -       87,163

Sale of Series C preferred
 stock                                -        -  200,000  200     -      -        999,800            -              -    1,000,000
Series C preferred stock
 dividend                             -        -    8,205    8     -      -         49,139            -        (49,147)           -

Compensation recognized upon
 issuance of warrants                 -        -        -    -     -      -         18,980            -              -       18,980
Notes receivable from
 shareholders acquired in
 acquisitions                         -        -        -    -     -      -              -   (1,335,217)             -   (1,335,217)
Net Loss                              -        -        -    -     -      -              -            -     (2,218,482)  (2,218,482)
                            ------------ --------- ------- ----  ---- -----    -----------  -----------    ------------ ------------

Balances June 30, 1998     $ 18,243,188   18,243  208,205 $208     -  $   -    $23,208,598  $(1,335,217)  $(19,414,842)  $2,476,990


Exercise of stock options        75,334       75        -    -     -      -         23,404            -              -       23,479

Issued to Onsite 401k Plan      266,331      267        -    -     -      -        147,687            -              -      147,954

Series C preferred stock
 dividend                             -        -   40,915   41     -      -        204,527            -       (204,568)           -
Sale of Series C preferred
 stock                                -        -  400,000  400     -      -      1,999,600            -              -    2,000,000
Notes receivable from
 shareholders acquired in
 acquisitions                         -        -        -    -     -      -              -   (2,757,882)             -   (2,757,882)

Net Loss                              -        -        -    -     -      -              -            -     (6,909,011)  (6,909,011)
                            ----------- -------- -------- ----  ----   -----   -----------  -----------   ------------  ------------
Balances June 30, 1999       18,584,853  $18,585  649,120 $649     -   $  -    $25,583,816  $(4,093,099)  $(26,528,421) $(5,018,470)

</TABLE>

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



<PAGE>F-6




                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   For the Years Ended June 30, 1999 and 1998

<TABLE>
     <S>                                                              <C>                       <C>
                                                                               1999                     1998
                                                                       ---------------------    ---------------------
    Cash flows from operating activities:

      Net loss                                                         $        (6,909,011)     $       (2,218,482)
      Adjustments to reconcile net loss to net cash provided by
       (used in) operating activities:
           Amortization of excess purchase price over net assets
            acquired                                                               502,390                 280,927
           Adjustment resulting from impairment in estimated carrying
            value of excess purchase price over net assets acquired              1,918,851

           Amortization of acquired contract costs                                  50,196
                                                                                                                 -
           Estimated loss on disposal of subsidiary                              1,010,000
                                                                                                                 -
           Accrued future operation and maintenance costs                          (39,174)                 43,927
           Provision for bad debts                                                  35,000                  30,192
           Depreciation                                                            572,465                 258,572
           Compensation recognized upon issuance of stock warrants                       -                  18,980


           Accounts receivable                                                  (3,780,739)               (781,792)
           Increase in costs and estimated earnings
             in excess of billings on uncompleted contracts                       (252,419)               (225,324)
           Inventory                                                                (7,347)                 (5,758)
           Other assets                                                             44,100                (435,120)
           Cash-restricted                                                           9,998                 115,331
           Accounts payable                                                      6,847,535               1,351,806
           Increase (decrease) in billings in excess of costs
             and estimated earnings on uncompleted contracts                    (1,124,173)              1,739,390
           Accrued expenses and other liabilities                                  164,117                 641,631
           Deferred income                                                         186,288                       -
                                                                       ---------------------    ---------------------

                 Net cash provided by (used in) operating activities              (771,923)                814,280
                                                                       --------------------    ---------------------

    Cash flows from investing activities:
           Purchases of property and equipment                                     (82,539)               (119,075)
           Loan to shareholders                                                 (2,757,882)                 (7,911)
           Acquisition of businesses, net of cash acquired                               -              (1,203,805)
                                                                       ---------------------    ---------------------

                 Net cash used in investing activities                          (2,840,421)             (1,330,791)
                                                                       ---------------------    ---------------------
    Cash flows from financing activities:
           Proceeds from notes payable                                           1,178,108                 290,000
           Proceeds from issuance of common stock                                        -                 953,542
           Proceeds from issuance of preferred stock                             2,000,000               1,000,000
           Proceeds from exercise of stock options                                  23,479                  87,163
           Repayment of notes payable - related party                             (256,415)                (46,804)
           Repayment of notes payable                                             (525,426)               (201,278)
                                                                       ---------------------    ---------------------

                 Net cash provided by financing activities                       2,419,746               2,082,623
                                                                       ---------------------    ---------------------
    Net increase (decrease) in cash                                             (1,192,598)              1,566,112
    Cash, beginning of year                                                      2,093,006                 526,894
                                                                       ---------------------    ---------------------
    Cash, end of year                                                  $           900,408      $        2,093,006
                                                                       =====================    =====================
    Supplemental disclosures of non-cash transactions:
           Payment of Series C Preferred Stock dividends
            with Series C Preferred stock                              $           204,568      $           49,147
                                                                       =====================    =====================
           Payment of accrued liabilities with common stock            $           147,954      $           17,449
                                                                       =====================    ====================
           Liabilities accrued for acquisition costs                   $                 -      $          285,594
                                                                       =====================    ===================
           Fair market value of assets, less liabilities of
            businesses acquired with common stock                      $                 -      $        4,036,863
                                                                       =====================    =====================

    Supplemental disclosures of cash transactions:
           Interest paid                                               $           312,110      $           33,385
                                                                       =====================    =====================
           Income taxes paid                                           $             5,500      $           36,175
                                                                       =====================    =====================
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


<PAGE>F-7



                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Organization and Nature of Operations:

     Onsite  Energy  Corporation,  which does  business as ONSITE  SYCOM  Energy
     Corporation  (the  "Company"),  is an energy  efficiency  services  company
     ("ESCO")   that   develops,   designs,   constructs,   owns  and   operates
     comprehensive energy efficiency and on-site generation projects and assists
     customers  in reducing  the cost of  purchased  electricity  and fuel.  The
     Company  also offers  bill  auditing,  tariff  analysis,  transmission  and
     distribution  analysis and upgrade and aggregation  services.  In addition,
     the Company offers professional  consulting services in the areas of market
     assessment,  business  strategies,  public policy  analysis,  environmental
     studies and utility  deregulation.  It is the Company's mission to save its
     customers  money  and  improve  the  quality  of  the  environment  through
     independent energy solutions.

     The Company was formed pursuant to a reorganization  between Western Energy
     Management,  Inc., a Delaware  corporation  ("WEM"),  and Onsite Energy,  a
     California corporation, which was effective February 15, 1994.

     In October  1997,  the Company  acquired  Westar  Business  Services,  Inc.
     ("WBS"),  which was renamed OBS and subsequently changed its name to Onsite
     Energy  Services,  Inc. ("OES") (see Note 4). OES provides utility services
     and industrial water services  primarily in the states of Kansas,  Missouri
     and Oklahoma.

     In February 1998, OES acquired the operating assets of Mid-States  Armature
     Works,  Inc.  ("Mid-States  Armature")  through a newly  formed  subsidiary
     Onsite/Mid-States,  Inc.  ("OMS")  (see Note 4). OMS  provides  specialized
     medium and high voltage electrical fabrication,  installation,  maintenance
     and repair services to municipal utility customers and others, primarily in
     the states of Kansas, Nebraska, Missouri, Iowa, and Oklahoma.

     On April 8, 1998,  the Company  formed  Onsite  Energy de Panama,  S.A.,  a
     Panamanian  corporation to facilitate the acquisition of potential projects
     in  Panama  and  Latin  America.  As of June 30,  1999,  there  has been no
     operating activity in this subsidiary.

     In June 1998,  the Company  acquired  Lighting  Technology  Services,  Inc.
     ("LTS")  (see Note 4). LTS  provides  energy  efficiency  projects  through
     retrofits  of  lighting  and  controls   either   independently   or  as  a
     subcontractor  to  the  Company  and  other  ESCOs  primarily  in  Southern
     California.

     On June 30, 1998, the Company  acquired the assets and certain  liabilities
     of SYCOM  Enterprises,  LLC through a newly-formed  subsidiary SYCOM ONSITE
     Corporation ("SO Corporation") (See Note 4). SO Corporation is also an ESCO
     with customers primarily on the east coast of the United States.

     Effective April 1, 1999, the Company formed REEP Onsite,  Inc. ("REEP") and
     ERSI Onsite, Inc. ("ERSI") for the  purpose  of  acquiring  substantially
     all of the  assets of REEP,  Inc.  for  assumption  of certain liabilities
     (see Note 4). The aquired assets were allocated between REEP and ERSI. REEP
     provides  residential  energy services while ERSI is a commercial lighting
     contractor.

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

<PAGE>F-8



                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



2.   Summary of Significant Accounting Policies

     Principles of Consolidation

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

     Revenue Recognition

     Revenues on development and construction of energy efficiency  projects 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.  The implementation
     period for a typical  project is  approximately  three to six  months.  The
     implementation  period for larger  projects (those in excess of $2,000,000)
     can range from six to twenty four months.

     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.

     In addition to the  installation  of energy savings  measures at a customer
     site,  the  Company  is  generally  engaged  to  provide   measurement  and
     verification ("M&V") services of actual savings as compared to expected, or
     estimated  savings  identified in the  engineering,  or  pre-implementation
     stages of the contract. This service is typically performed for the purpose
     of billing the local host utility for incentive  payments due to either the
     customer  and/or the  Company  based upon  achieved  savings.  The  Company
     generally  performs M&V as a separate service to the construction  contract
     for which it is  compensated as services are rendered.  Revenue  related to
     the M&V services are  recognized  as the  services are  performed.  Revenue
     arising  from  the  Company's  share  of  utility  incentive   payments  is
     recognized in the period that actual savings are achieved.

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

     Operation and Maintenance Agreements

     Commencing  July 1, 1993, the Company,  on a limited basis,  began entering
into long term operation and maintenance ("O&M") M&V agreements with some of its
customers.   These   agreements,   where  they  exist,  are  components  of  the
construction  contracts that provide for ongoing service on the installed energy
efficiency  projects.  These  agreements  are entered into as a condition of the
implementation  contract  and are not a primary  service of the  Company and are
accounted for as a component cost on the installed energy efficiency project. In
the  instances  where  estimated  costs exceed  estimated  revenue,  the Company
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   during  the  construction   period.  In  instances  where  revenues
associated  with the operation  and  maintenance  exceed  estimated  costs,  the
revenues   are    recognized    as    services    are

<PAGE>F-9


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


     performed.  Estimated  costs  associated with these revenues are accrued at
     the time the  revenues  are  recognized.  As of June 30,  1999,  the  total
     liability for deferred  operations and  maintenance  costs is $426,185,  of
     which $102,175 is expected to be incurred in the next fiscal year.

     Cash and Cash Equivalents

     The Company  considers all short-term,  highly liquid  investments  with an
     original  maturity of three  months or less to be cash  equivalents.  As of
     June 30, 1999 and 1998, there were no cash equivalents outstanding.

     Restricted Cash

     Restricted cash consists of amounts on deposit with financial  institutions
     for  the  purpose  of  securing  performance  milestones  under  one of the
     Company's  demand  side  management   ("DSM")  contracts  and  for  project
     implementation  commitments.  Under the DSM deposit, funds become available
     to the Company over a period of 12 to 36 months following completion of the
     last contract  provided  certain  conditions  and  milestones  are achieved
     (December  1999).  In the  event  that  conditions  or  milestones  are not
     achieved,  the  Company may be required to forfeit its right to some or all
     of the funds on  deposit.  As of June 30,  1999,  the  Company  has $43,000
     reserved for funds that have a low probability of return.  Of the remaining
     balance  of  $147,838,   the  Company  believes  that  all  conditions  and
     milestones  will be  achieved  and that no  additional  funds  under  these
     projects will be subject to forfeiture.

     Inventory

     Inventory consists of materials for use in installation and maintenance of
     energy  efficiency projects and are stated at the lower of cost, determined
     by the first-in, first-out method, or market.

     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
     straight-line  method over the assets  estimated  useful lives ranging from
     five to  31.5  years.  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.

     Excess of Purchase Price Over Net Assets Acquired

     Excess of purchase price over net assets acquired  ("Goodwill")  represents
     the  purchase  price in  excess  of the fair  value  of the net  assets  of
     acquired  businesses and is being amortized using the straight-line  method
     over its estimated  useful life.  The carrying  value is evaluated at least
     annually. The Company considers current facts and circumstances,  including


<PAGE>F-10


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     expected future operating income and cash flows to determine  whether it is
     probable that impairment has occurred.  As a result of the operating losses
     of SO Corporation,  management determined that the carrying value of excess
     of purchase price over net assets acquired had been impaired as of June 30,
     1999.  The  effect  of this  determination  was a charge  against  earnings
     (additional  loss) of $1,918,851,  the  unamortized  balance as of June 30,
     1999.

     Income Taxes

     The Company  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
     basis of assets and  liabilities  using enacted tax rates in effect for the
     year in which the differences are expected to reverse.

     Earnings Per Common and Common Equivalent Share

     Basic  earnings per share  excludes  dilution and is calculated by dividing
     income  (loss)  available to common  shareholders  by the  weighted-average
     number of common  shares  outstanding  for the period.  Loss  applicable to
     common  shareholders  was  calculated  by adding  $204,568  and  $49,147 of
     preferred stock dividends to net loss for the years ended June 30, 1999 and
     1998,  respectively.  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.
     Options,  warrants  and  preferred  stock  convertible  to an  aggregate of
     23,692,958  and  20,827,116  for the years  ending  June 30, 1999 and 1998,
     respectively  were excluded in the earnings per share  computation  because
     their effect was anti-dilutive.

     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.

     Stock-Based Compensation

     The Company has elected to follow  Accounting  Principles Board Opinion No.
     25, "Accounting for Stock Issued to Employees" and related  interpretations
     in accounting  for its employee  stock  options.  In  accordance  with FASB
     Statement No. 123 "Accounting for  Stock-Based  Compensation" ("FASB 123"),
     the Company will disclose the impact of adopting the fair value  accounting
     of  employee  stock  options.   Transactions  in  equity  instruments  with
     non-employees  for goods or services have been accounted for using the fair

<PAGE>F-11


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     value method as prescribed by FASB 123.

     Impact of Recently Issued Standards

     FASB Statement No. 133, "Accounting for Derivative  Instruments and Hedging
     Activities,"   ("FASB133")   was  issued  in  June  1998.   This  statement
     establishes  accounting and reporting standards for derivative  instruments
     and for hedging  activities.  This  statement  was amended by FASB No. 137,
     issued in June 1999, such that it is effective for the Company's  financial
     statements  for the year ended June 30, 2002. The adoption of this standard
     is not  expected  to have a  material  effect  on the  Company's  financial
     statements.

     FASB Statement No. 134,  "Accounting for  Mortgage-Backed  Securities
     Retained after the Securitization of  Mortgage  Loans Held for Sale by a
     Mortgage  Banking  Enterprise"  was issued in 1998.  FASB Statement No.
     135,  "Rescission  of FASB  Statement  No. 75 and  Technical  Corrections"
     and FASB  Statement  No.  136, "Transfers  of  Assets  to a  Not-for-Profit
     Organization  or  Charitable  Trust  That  Raises  or  Holds Contributions
     for  Others"  were  issued in 1999.  These  pronouncements  are not
     expected to impact the Company regarding future financial statement
     disclosures, results of operations or financial position.

     Use of Estimates

     The  preparation  of the  Company's  consolidated  financial  statements in
     conformity  with  generally  accepted  accounting  principles  requires the
     Company'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.

     The Company's  financial  statements are based upon a number of significant
     estimates,  including the allowance  for doubtful  accounts,  percentage of
     completion on long term 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 FASB Statement
     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 fair value of cash is its demand value which is equal to its
     carrying  value.  The fair value of notes payable are based upon  borrowing
     rates that are  available  to the  Company  for loans with  similar  terms,
     collateral and maturity.  As of June 30, 1999, the estimated fair values of
     notes payable approximate their carrying values.


<PAGE>F-12

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


     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 FASB 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 in Note 18 do
     not take into account the value of any collateral or security.

     Reclassification

     Certain  reclassifications  have  been made to the  consolidated  financial
     statements  for the year ended June 30,  1998 to conform  with the  current
     year presentation.

3.       Basis of Presentation

     As shown in the accompanying financial statements, the Company has suffered
     losses from  operations for the past two fiscal years.  For the years ended
     June 30,  1999,  and 1998,  the  Company had net losses of  $6,909,011  and
     $2,218,482,  respectively,  negative  working  capital of $6,357,699 and an
     accumulated deficit of $26,528,421 as of June 30, 1999. Management believes
     that the Company will be able to generate additional revenues and operating
     efficiencies  through its acquisitions as well as by other means to achieve
     profitable  operations.  During the year ended June 30,  1999,  the Company
     took steps to  mitigate  the losses and enhance  its future  viability.  In
     addition,  during the fiscal year end 1999, the Company exercised its right
     under a stock subscription  agreement to require Westar Capital to purchase
     an additional  400,000 shares of Series C Convertible  Preferred  Stock for
     $2,000,000. Subsequent to its most recent fiscal year end, the Company also
     privately  placed  shares of newly created  Series E Convertible  Preferred
     Stock  ("Series  E  Stock")  to  existing   shareholders   for  $1,000,000.
     Concurrent with this private placement, members of senior management of the
     Company have agreed to receive shares of the Company's Class A Common Stock
     in lieu of a portion of their  salary in an effort to reduce cash  outflows
     related to  compensation.  Subsequent to June 30, 1999, a decision was made
     to explore the sale or disposition of the Company's lighting  subsidiaries,
     which  could  provide  capital,  reduce  operating  losses  and will  allow
     management  to  better  focus  on its core  ESCO  business  activities.  In
     addition,  the Company is exploring strategic  relationships with companies
     that could involve an investment in the Company. The Company may also raise
     cash through the sale of long term future revenue streams that it currently
     owns or has rights to. The Company is also examining ways to further reduce
     overhead  including,  but not limited to, the possibility of targeted staff
     reductions.  Further, the Company,  through the acquisition of other energy
     service  companies,  expects to continue to gain economies of scale through
     the use of a  consolidated  management  team and the synergies of marketing
     efforts of the  different  entities.  Management  believes  that all of the
     above actions will allow the Company to continue as a going concern. Future
     cash  requirements  depend on the Company's  profitability,  its ability to
     manage  working  capital  requirements  and its rate of growth.  Additional
     financing  through the sale of  securities  may have an ownership  dilution
     effect on existing shareholders.

<PAGE>F-13

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     The Company's ability to continue as a going conern is dependent on its
     ability to obtain necessary working capital and ultimately achieve
     profitable operations, none of which can be assured.   The accompanying
     consolidated financial statements do not include any adjustments relating
     to the recoerability and classification of recorded asset amounts or the
     amount and classification of liabilities or any other adjustment that might
     be necessary should the Company be unable to continue as a going concern.

4.       Acquisitions

     On October 28,  1997,  the Company  entered  into a Plan and  Agreement  of
     Reorganization with Westar Capital to acquire Westar Capital's wholly-owned
     subsidiary  WBS (now OES).  The Company  acquired  all of WBS's  issued and
     outstanding stock in exchange for 1,700,000 shares of the Company's Class A
     Common Stock.  This stock issuance was valued at the average of the closing
     bid and ask  prices for three days  before  and after the  acquisition  was
     agreed to by the Company and Westar Capital. On March 31, 1998, the Company
     released  an  additional  800,000  shares of Class A Common  Stock  from an
     escrow established pursuant to the Plan and Agreement. The subsequent stock
     issuance  was valued at the average of the bid and ask stock  prices on the
     date of  issuance.  The  transaction  was  accounted  for as a purchase and
     accordingly  the  inclusion of the  operations  of OES in the  consolidated
     operations  commenced on the acquisition date. The resulting purchase price
     including  acquisition  costs was  $1,498,716  which resulted in no amounts
     being allocated to excess of purchase price over assets acquired.

     In February 1998, OES acquired the operating assets of Mid-States  Armature
     for $290,000 through its newly created subsidiary, OMS. The transaction was
     accounted  for  as  a  purchase  and  accordingly,  the  inclusion  of  the
     operations  of  OMS  in  the  consolidated   operations  commenced  on  the
     acquisition date.

     Effective June 13, 1998, the Company acquired all of the outstanding common
     shares of LTS, in  exchange  for 690,000  shares of the  Company's  Class A
     Common Stock plus  $500,000.  This stock issuance was valued at the average
     of the  closing  bid and ask  prices  for three  days  before and after the
     acquisition  was agreed to by the  Company  and LTS.  The  transaction  was
     accounted  for  as  a  purchase  and  accordingly,  the  inclusion  of  the
     operations  of  LTS  in  the  consolidated   operations  commenced  on  the
     acquisition date. The resulting purchase price including  acquisition costs
     was $995,788  which  resulted in  $1,445,922  being  allocated to excess of
     purchase price over net assets acquired. The excess of purchase price over
     net assets acquired was being amortized over a period of 60 months
     beginning July 1998.  Subsequent to its fiscal year end, the  Company  made
     a decision  to explore  the sale or  disposition  of its lighting
     subsidiaries.  A  reserve  for  the  sale or  disposition  of the lighting
     subsidiaries  was  recorded  at June 30,  1999 in the  amount  of
     $1,010,000.

     On June  30,  1998,  the  Company  acquired  all the  assets  and  specific
     liabilities   of  SYCOM   Enterprises,   LLC  ("SYCOM,   LLC")   through  a
     newly-created  subsidiary (SO Corporation) in exchange for 1,750,000 shares
     of the Company's  Class A Common Stock.  This stock  issuance was valued at
     the  average of the  closing  bid and ask prices for three days  before and
     after the  acquisition  was agreed to by the  Company  and SYCOM,  LLC.  In
     addition, under a Sale and Noncompetition Agreement SO Corporation acquired
     the right to the  services and  expertise of all of the  employees of SYCOM
     Corporation  and SYCOM  Enterprises,  L.P.,  affiliates  of SYCOM,  LLC, in
     exchange for the right to receive  157,500  shares of Series D  Convertible
     Preferred  Stock  ("Series D Stock") that is  convertible  into  15,750,000
     shares of the Company's Class A Common Stock. The Series D Stock (including
     the shares of the  Company's  Class A Common  Stock into which the Series D
     Stock is  convertible)  will be held in escrow and will be  released if and
     when:  (i) the market value of the  Company's  Class A Common Stock reaches
     $2.00 per share; (ii) annualized  after-tax  earnings total $0.15 per share
     (including  the Class A Common  Shares  into  which  the  Series D Stock is
     convertible)  over four  consecutive  quarters;  and (iii) certain debts of

<PAGE>F-14


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


     SYCOM  Corporation  and SYCOM  Enterprises,  L.P.  (including  those to the
     Company and its  affiliates)  have been  satisfied.  These share values and
     earnings  thresholds  increase  by 10 percent per year after  December  31,
     1999.  Pursuant to the terms of a Share Repurchase  Agreement,  the Company
     may repurchase the escrowed Series D Stock (including the Company's Class A
     Common Stock into which the Series D Stock is  convertible)  for $0.001 per
     share if: (i) the Sale and Noncompetition Agreement is terminated; and (ii)
     after June 30, 2000, such repurchase is justifiable based on the reasonable
     business  judgment of the  Company's  Board of  Directors  considering  the
     following factors: (a) the key employees of SYCOM Corporation no longer are
     being  retained  by  SO  Corporation;   and  (b)  there  is  no  reasonably
     foreseeable  likelihood  that  all of the  following  conditions  shall  be
     satisfied:  specific  debts  to a  third  party  and  the  Company  will be
     satisfied,  and both share performance  benchmarks  described in the Escrow
     Agreement  shall be achieved.  The Company also may repurchase the escrowed
     Series D Stock  (and the  Company's  Class A Common  Stock  into  which the
     Series  D Stock  is  convertible)  during  the 30 day  period  prior to the
     scheduled release date (that is, June 30, 2006) if any one of the specified
     conditions for release of the Series D Stock has not been satisfied. Due to
     the uncertainty of the ultimate  issuance of the preferred shares, no value
     will be  attributed to such  preferred  shares until they are released from
     escrow.

     The  Company  has  agreed  to make  loans to SYCOM  Corporation  and  SYCOM
     Enterprises,   L.P.   from  time  to  time  equal  to  their   general  and
     administrative  expenses and debt service to third parties with interest at
     9.75 percent per annum.  (See Note 11).  The Company may require  immediate
     repayment of such loans if certain earnings  thresholds are not met. If the
     Company requires immediate  repayment,  then certain third party debt owing
     by SYCOM  Corporation  and/or SYCOM  Enterprises,  L.P. must be repaid by a
     like amount.  The debt  repayment to the Company can be in the form of cash
     or a reduction in the number of the  escrowed  shares of the Series D Stock
     (or Class A Common  Stock into which the Series D Stock can be  converted).
     The debt  repayment to the third party lender can be in the form of cash or
     a  distribution  of the  escrowed  shares of the Series D Stock (or Class A
     Common Stock into which the Series D Stock can be converted).

     In  addition,  the Company  agreed to pay  $50,000  and issued  warrants to
     purchase  160,000  shares  of  Class A Common  Stock  which  are  currently
     exercisable  at $0.4185  per share,  through  June 30,  2003,  to  entities
     affiliated  with a director of the Company as  consideration  for  services
     rendered in connection with the acquisition. The Company recognized $92,016
     related to these  warrants  which was accounted for as additional  purchase
     price. The transaction was accounted for as a purchase and accordingly, the
     inclusion  of  the  operations  of  SO  Corporation  in  the   consolidated
     operations  commenced on the acquisition date. The resulting purchase price
     including  acquisition costs was $2,060,439 with $2,132,056 being allocated

<PAGE>F-15

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     to excess of purchase  price over net assets  acquired.  As a result of the
     operating  losses of SO Corporation,  a further  evaluation of the carrying
     value of excess purchase price over net assets acquired as of June 30, 1999
     resulted in the write-off of $1,918,851 through a charge to earnings.

     Effective  April 1, 1999,  the Company,  through two newly  formed
     entities,  REEP Onsite,  Inc. and ERSI Onsite,  Inc.,  acquired
     substantially  all of the  assets  of  REEP,  Inc.  for  assumption  of
     certain liabilities.


     The following  presents pro forma information as if the April 1, 1999
     acquisitions described immediately above occurred on July 1, 1997:

<TABLE>
  <S>                                                        <C>                     <C>
                                                                  Year Ended                 Year Ended
                                                                 June 30, 1999              June 30, 1998
                                                                 -------------              -------------

   Revenue                                                    $     45,391,000          $     41,212,000
                                                              =================          ================

   Operating Income (Loss)                                    $     (6,942,000)         $    (10,310,000)
                                                              =================         ==================

   Net Loss                                                   $     (7,205,000)         $    (12,751,000)
                                                              =================         ==================

   Basic and Diluted loss per common share                    $          (0.39)          $         (0.79)
                                                              =================          =================

</TABLE>

5.   Accounts Receivable

     Accounts Receivable consisted of the following as of June 30, 1999:

           Contracts Receivable:
                      Completed Contracts                         $     705,561
                      Contracts in Progress                           4,077,057

            Trade receivables                                         1,324,111

            Less:  Allowance for doubtful accounts                      (35,000)
                                                                   -------------

            Total                                                 $   6,071,729
                                                                   ============

6.   Costs and Estimated Earnings on Uncompleted Contracts

     Costs and estimated earnings on contracts as of June 30, 1999, consisted of
the following:

           Costs incurred                                        $   28,496,874
           Estimated earnings                                         7,477,447
                                                                   -------------
                                                                     35,974,321
           Less:  Billings to date                                  (36,310,796)
                                                                   ------------

                                                                  $    (336,475)
                                                                   =============

<PAGE>F-16


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


           Included in the accompanying Balance Sheet
              under the following captions:
              Costs and estimated earnings in excess of billings
                 on uncompleted contracts                        $    1,109,315
              Billings in excess of costs and earnings on
                 uncompleted contracts                               (1,445,790)
                                                                  --------------

                                                                 $     (336,475)
                                                                  ==============


Property and Equipment

     Property and equipment at June 30, 1999 consisted of:

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


                                                                                   Estimated Useful Lives
                                                                                 ---------------------------
            Office  furniture and equipment                  $        1,287,071           5-7 years
            Land                                                         44,000              -
            Building                                                     80,000          31.5 years
            Water treatment plants                                      993,517    Contract life (50 to 56
                                                                                          months)
            Equipment and tools                                         201,832          7-10 years
            Vehicles                                                     23,674            5 years
            Leasehold improvements                                       41,824          5-20 years
                                                         ------------------------

                                                             $        2,671,918
            Less:  Accumulated Depreciation                          (1,258,000)
                                                         ------------------------
                                                             $        1,413,918
                                                         ========================
</TABLE>


Depreciation  expense amounted to $572,465 and $258,572 for the years ended June
30, 1999 and 1998, respectively.

<PAGE>F-17


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


<TABLE>
<S>                                                                                   <C>

8.   Notes Payable

     Notes payable at June 30, 1999, consisted of the following:

           Note payable with payments due upon completion of certain contractual
             milestones with interest at 18.0%, past due, collateralized
             by accounts receivable and other assets                                     $         69,049

           Notes  payable  with   payments  due  upon   completion   of  certain
             contractual milestones with interest at 12.5% to 18%, collateralized
             by accounts receivable and other assets                                            2,430,406
                                                                                         ----------------

                                                                                         $      2,499,455
                                                                                         ================


9.   Note Payable - related party

     Note payable - related party at June 30, 1999 consisted of the following:

           Note payable due on demand to related party, interest at
              12.0% per annum                                                                     211,914
                                                                                         ----------------

                                                                                         $        211,914
                                                                                         =================

10.  Accrued expenses and other liabilities

     At June 30, 1999,  accrued expenses and other liabilities  consisted of the
following:

           Payroll and related payroll taxes                                              $       266,798
           Accrued job costs                                                                      305,912
           Accrued utility commitments                                                            448,497
           Accrued interest                                                                        49,054
           Deferred income                                                                        216,136
           Accrued operation and maintenance costs associated with energy
           services agreements                                                                    102,175
           Other accrued liabilities                                                                5,452
                                                                                           ---------------

                                                                                          $     1394,024
                                                                                           ===============
</TABLE>


11.  Shareholders' Equity

     Stock Subscription Agreement

     On  October  28,  1997,  the  Company  entered  into a  Stock  Subscription
     Agreement  (the "Stock  Agreement")  with Westar  Capital.  Pursuant to the
     Stock  Agreement,  the Company  completed a private  placement of 2,000,000
     shares of the Company's Class A Common Stock at $0.50 per share and 200,000
     shares of the Company's  newly-created Series C Convertible Preferred Stock
     at $5.00 per share.  Each share of Series C Convertible  Preferred Stock is
     convertible  into five (5) shares of the  Company's  Class A Common  Stock.

<PAGE>F-18


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


     Conversion  can take place by the holder at any time.  The  Company has the
     right to require  conversion if the average  closing price of the Company's
     Class A Common Stock equals or exceeds $2.00 per share.

     On July 14, 1998 and  February 12, 1999,  the Company  exercised  its right
     under the  Stock  Subscription  Agreement  to  require  Westar  Capital  to
     purchase an additional  400,000  shares of Series C  Convertible  Preferred
     Stock for $2 million.

     Class A and Class B 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 of Class B Common Stock shall not be
     entitled to vote but are entitled to receive dividends ratably with Class A
     Common Stock when and as declared by the Board of Directors. As of June 30,
     1999, there were no shares of Class B Common Stock issued and outstanding.

     Warrants

     On September  11, 1997,  the Company  issued  warrants to purchase  525,988
     shares  of Class A Common  Stock at  $0.1875  per  share,  which  expire on
     September  11,  2002,  to an  officer  and to an entity  affiliated  with a
     director  as   consideration   for  posting   collateral  and  guaranteeing
     performance  bonds.  The Company  recognized  $18,980 in expense related to
     these warrants.

     On June 30, 1998, the Company agreed to pay $50,000 and issued  warrants to
     purchase  160,000  shares of Class A Common Stock which are  exercisable at
     $0.4185 per share,  through June 30, 2003,  to entities  affiliated  with a
     director as consideration  for services  rendered in the acquisition of the
     assets of SYCOM,  LLC.  The  Company  recognized  $92,016  related to these
     warrants  which  was  accounted  for as  additional  purchase  price  of SO
     Corporation.

     As of June 30,  1999,  the  Company has issued and  outstanding  a total of
     685,998  warrants  to  purchase  shares  of its Class A Common  Stock.  The
     exercise  prices  range from  $0.1875 to $0.4185 per share with  expiration
     dates ranging from September 2002 through June 2004.



<PAGE>F-19


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

     Preferred Stock

     On October 23, 1997, the Company amended its  Certificate of  Incorporation
     to eliminate the Series A and B Convertible Preferred Stock.

     Each holder of a share of Series C Convertible Preferred Stock ("Series C")
     is  entitled  to one vote per share for each share of Class A Common  Stock
     that Series C is convertible  into and to an annual dividend at the rate of
     9.75  percent  of the  Series C  liquidation  preference  ($5.00 per share)
     payable  quarterly.  Dividends  are  cumulative.  Each share of Series C is
     convertible  at the option of the holder into five shares of Class A Common
     Stock.  Dividends  in the amount of $204,568  and $49,147  were paid in the
     form of 40,915 and 8,205 shares, respectively, of Series C during the years
     ended June 30, 1999 and 1998, respectively.

     Holders  of  Series D  Convertible  Preferred  Stock  ("Series  D") are not
     entitled to dividends or to vote. Each share of Series D is convertible, at
     the  option of the  holder,  into 100 shares of Class A Common  Stock.  All
     shares of Series D are held in escrow (see Note 4).

     Notes Receivable - Shareholders

     As of June 30, 1999, Notes Receivable - Shareholders - includes receivables
     with the previous owners of LTS, who are current employees and directors of
     LTS, in the amount of $305,626.  Such loans  accrue  interest at 10 percent
     per annum and are due in March 2003.

     Also included are amounts due from  affiliates of SYCOM,  LLC in the amount
     of  $3,787,473.  Some of the amounts  accrue  interest at 9.75  percent per
     annum, are due on or before June 30, 2006 and are collateralized by certain
     assets of an affiliate of SYCOM, LLC. (Additionally, see Note 4.)

12.  Stock Option Plans:

     WEM 1991 Non-Statutory Stock Option Plan

     Effective  February 15,  1994,  Onsite  adopted the WEM 1991  Non-Statutory
     Stock  Option  Plan  (the  "1991  Plan").  The 1991 Plan  provides  for the
     granting of options to  non-employee  directors,  officers,  employees  and
     consultants  to  purchase  up to 160,000  shares of the  Company's  Class A
     Common  Stock.  The maximum term for grants under the 1991 Plan is 10 years
     with a maximum vesting period of three years. The 1991 Plan is administered
     by a committee of outside directors appointed by the Board of Directors.

     There was no option  activity  under the 1991 plan for the years ended June
     30, 1999 or 1998. As of June 30, 1999, all 85,000 options outstanding under
     the plan were exercisable at $5.3125 through January 15, 2003.

<PAGE>F-20


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


     The Onsite 1993 Stock Option Plan

     During fiscal year 1994,  the Company  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 3,300,000 shares of Class A Common Stock and is administered
     by a committee of outside  directors  appointed by the Board of  Directors.
     The maximum  term for grants under the 1993 Plan is 10 years with a maximum
     vesting  period of three years for options  granted prior to June 10, 1998.
     Any grants  subsequent  to June 10, 1998 have a maximum  vesting  period of
     four years.

     As of June 30, 1999, the status of the 1993 Plan was as follows:

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

                                           Outstanding              Exercise Price          Exercisable
                                              Options                 Per Share               Options
                                        --------------------------------------------------------------------
         July 1, 1997                         2,456,725         $0.24   -  $5.3125            1,729,593
                                        =====================                           ====================

              Options granted                   880,954         $0.23   -  $0.9063
              Options exercised                (206,004)        $0.25   -  $0.5000
              Options cancelled                (133,417)        $0.25   -  $0.2956
                                        ---------------------

          June 30, 1998                       2,998,258         $0.23   -  $5.3125            1,596,651
                                        =====================                           ====================

              Options granted                   394,000          $0.36  -  $1.2180
              Options exercised                 (75,334)         $0.25  -  $0.5000
              Options cancelled                (326,691)         $0.25  -  $1.1250
                                        ---------------------

          June 30, 1999                       2,990,233          $0.23  -  $5.3125            1,588,626
                                        =====================                           ====================
</TABLE>

At June 30, 1999, no additional  options were available for granting to purchase
shares of Class A Common Stock.

<PAGE>F-21

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


A summary of option transactions under the 1993 plan during the years ended
June 30, 1999, and 1998, is as follows:

                                                           Weighted-Average
          Fixed Options              Shares                 Exercise Price
      -----------------------  ---------------------     ----------------------

          July 1, 1997              2,456,725                $     0.5789
                                  ==============

              Granted                 880,954                $     0.6224
              Exercised              (206,004)               $     0.2752
              Cancelled              (133,417)               $     0.2797
                                  --------------
         June 30, 199               2,998,258                $     0.6259
                                  ==============

              Granted                 394,000                $     0.5364
              Exercised               (75,334)               $     0.3302
              Cancelled              (326,691)               $     0.5289
                                  -------------
           June 30, 1999            2,990,233                $     0.6326
                                  =============

     The weighted average  contractual life for all options as of June 30, 1999,
     was  approximately  six years,  with exercise  prices ranging from $0.23 to
     $5.31.

     Proforma Information

     As stated in Note 2, the Company has not adopted the fair value  accounting
     prescribed  by FASB 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 1999 and 1998  consistent  with the  provisions of
     FASB 123,  the  Company's  net loss and net loss per share  would have been
     adjusted to the proforma amounts indicated below:

                                            Year Ended June 30,
                                             1999              1998
                                      ------------------ -----------------

              Net Loss                 $ (7,524,941)       $ (2,480,017)
                                      ================== =================
              Basic and Diluted Loss
                 Per Common Share      $      (0.41)       $      (0.18)
                                      ==================  ================

     The fair value of each option is  estimated  on the date of grant using the
     Black-Scholes   option-pricing   model.   The  following   weighted-average
     assumptions:  expected  volatility  of 117.83  percent,  116.8  percent for
     grants during the year ended June 30, 1998, 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  U.S.
     Treasury T-Strip Rate at the option grant date for fiscal years ended 1999,
     and 1998, respectively.

     The  weighted-average  fair value of stock  options  granted  to  employees
     during  the  years  ended  June 30,  1999 and 1998,  was  $0.38 and  $0.36,
     respectively.

<PAGE>F-22


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     SYCOM Non Plan Options

     During  fiscal year 1999,  the Company  issued stock  options that were not
     part of the 1993  Plan  (the  "Non-Plan  Options").  The  maximum  term for
     Non-Plan  Option grants is five years with a maximum vesting period of four
     years.

     As of June 30, 1999, the status of the Non-Plan Options was as follows:

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


                                              Outstanding         Exercise Price       Exercisable
                                                 Options              Per Share          Options
                                        --------------------- --------------------  -----------------

          June 30, 1998                           -                                          -
                                        =====================                         ===============

              Options granted                  899,126          $0.3850 - $0.8125      765,126
              Options exercised                      -                                       -
              Options cancelled                (11,000)         $0.4185 - $0.8125            -
                                        ---------------------

          June 30, 1999                        888,126          $0.3850 - $0.5465      765,126
                                        =====================                         ===============


13.  Income Taxes

     Income tax expense for the years ended June 30, 1999 and 1998, is comprised
of the following:

       Year ended June 30, 1999             Current                Deferred                  Total
                                       -----------------     ---------------------    --------------------
             Federal                   $         -            $        -               $        -
             State                           5,500                     -                    5,500
                                       -----------------     ---------------------    --------------------
                                       $     5,500            $        -               $    5,500
                                       =================     =====================    ====================

       Year ended June 30, 1998             Current                 Deferred                 Total
                                       -----------------     ---------------------    --------------------
             Federal                   $         -            $        -               $        -
             State                           7,500                     -                    7,500
                                       -----------------     ---------------------    --------------------
                                       $     7,500            $                 -      $    7,500
                                       =================     =====================    ====================


</TABLE>

<PAGE>F-23

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     The actual  income tax expense  differs from the  "expected"  tax (benefit)
     (computed  by applying  the U.S.  Federal  corporate  income tax rate of 34
     percent for each period) as follows:

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

                                                                       1999                   1998
                                                                -------------------    -------------------
          Amount of expected tax (benefit)                       $  (2,347,100)          $ (751,800)
          Non-deductible expenses                                      450,000               13,900
          State taxes, net                                               3,600                4,900
          Effect of change in state tax rate                                 -               27,600
          Change in valuation allowance for deferred
             tax assets                                              1,899,000              712,900
                                                                ===================    ===================
                Total                                             $      5,500              $ 7,500
                                                                ===================    ===================

     The components of the net deferred tax asset recognized as of June 30, 1999
and 1998, are as follows:

                                                                        1999                   1998
                                                                -------------------    -------------------
          Current deferred tax assets (liabilities):
                Litigation settlement accrual                    $       6,800          $    16,000
                Deferred operation and maintenance
                    reserve                                            169,800              185,400
                Vacation accrual                                        70,100               44,400
                Inventory reserve                                       26,200                6,000
                Book compensation on issuance of
                    stock options                                            -                7,600
                Allowance for doubtful accounts                         14,400                6,000
                Other                                                      800                  600
                                                                -------------------    -------------------
                                                                       288,100              266,000
                Valuation allowance                                   (288,100)            (266,000)
                                                                -------------------    -------------------
                    Net current deferred tax asset               $           -           $        -
                                                                ===================    ===================


                                                                       1999                   1998
                                                                -------------------    -------------------
          Long-Term deferred tax assets (liabilities):
                Net operating loss carryforwards                  $  7,865,500           $6,943,200
                Goodwill due to difference in
                    amortization                                     1,202,100              453,300
                Depreciation                                               700             (137,100)
                Alternative minimum tax credit                          11,200               11,200
                Other                                                      900                  800
                                                                -------------------    -------------------
                                                                     9,080,400            7,271,400
                Valuation allowance                                 (9,080,400)          (7,271,400)
                                                                ===================    ===================
                    Net current deferred tax asset                $          -           $        -
                                                                ===================    ===================

</TABLE>


     The   deferred  tax  asset   includes   the  future   benefit  of  the  LTS
     pre-acquisition  deductible temporary  differences and net operating losses
     of  $184,100.  The  deferred  asset has been  fully  reserved  through  the
     valuation  allowance.  Any future tax benefit realized for these items will
     first reduce any goodwill  remaining from this  acquisition and then reduce
     income tax expense.

<PAGE>F-24

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     The  deferred  tax  asset  also  includes  the  future  benefit  of the tax
     deduction for the exercise of stock options of $33,000.  The deferred asset
     is fully reserved through the valuation  allowance.  Any future tax benefit
     realized for this item will be a credited to paid-in capital.

     At June 30,  1999,  the Company has net  operating  loss  carryforwards  of
     approximately $22,686,000, which expire in the years 2006 through 2019. The
     Company has California net operating loss carryforwards at June 30, 1999 of
     $1,722,000, which expire in years 2000 through 2004.

     The benefit of the net operating  losses to offset future taxable income is
     subject  to  reduction  or  limitation  of  use  as  a  result  of  certain
     consolidated return filing regulations and additional  limitations relating
     to a 50 percent change in ownership due to various stock transactions.

14.  Related Parties


     During the fiscal year ended June 30,  1999,  the Company paid one director
     of the Company professional fees in the amount of $14,535.


     As of June 30, 1999, OES has outstanding  accounts  receivable with Western
     Resources, Inc., the parent company of a shareholder of the Company, in the
     amount of $47,415 in relation to water treatment plants in Lawrence, Kansas
     and Tecumseh,  Kansas.  OES has recognized  $471,336 in revenue  related to
     these water treatment facilities.


     Westar  Capital has  guaranteed  any  shortfalls  of energy  savings on the
     Company's  contract  with one  customer.  Such  guaranty  is  backed  by an
     insurance  police  purchased  by the  Company  for a short  fall of  energy
     savings.  In addition,  Westar Capital and an affiliate have  indemnified a
     bonding company for bid and performance bonds obtained by the Company.


     Also see Notes 9 and 11.


15.  Commitments and Contingencies

     Leases

     The  Company  leases its  administrative  facility  under a  noncancellable
     operating lease expiring in 2001 with a three-year  renewal  option.  As of
     August 1, 1998,  the Company  increased  its office  space that is included
     under the current  lease.  The Company  expanded  its  regional  offices to
     include San Ramon, California, where office space is rented on a three year
     lease that expires March 2001. The Company also leases on a month by month
     basis a 250 square foot storage facility in Carlsbad, California.   OES
     leases office space that has a one year lease with an option to renew,
     expiring  November 1999. OMS leased a small building from the former owner
     on a  month-by-month  basis to store testing equipment.  This  lease
     terminated  in  July  1999.  LTS  currently  has a three-year lease that
     expires August 2002.

<PAGE>F-25


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)



     Future minimum lease payments under operating leases (including equipment)
     is as follows:

    Year ending June 30,
         2000                                                         454,000
         2001                                                         436,000
         2002                                                          70,000
         2003                                                          21,000
         2004                                                           9,000
                                                         --------------------
Total minimum lease payments                                $         990,000
                                                         ====================

     Total rent expense,  including  month-to-month  equipment rentals,  was
     $467,000 and $202,000 in 1999, and 1998, respectively.

     Employment Agreements

     Effective  April 1, 1998, the Company  entered into  employment  agreements
     with the President and Chief Operating Officer, and with the Vice President
     and  Responsible  Managing  Officer of LTS which  expire on March 31, 2000.
     Such  agreements  provide for minimum salary levels  totaling  $235,000 per
     year excluding  bonuses,  as well as severance payments upon termination of
     employment without cause. (See also Note 20).

     Ongoing Maintenance for Water Treatment Plants

     OES has two contracts with Western  Resources  whereby OES  constructed and
     maintains  equipment  for supplying  demineralized  water for boiler makeup
     water at Lawrence Energy Center and Tecumseh Energy Center.  Both contracts
     terminate on December 31,  2001,  unless  renewed at the end of the term as
     agreed upon by both parties.  OES is responsible  for producing the quality
     of demineralized water as specified.  If damage occurs due to the specified
     quality of  demineralized  water not being produced,  OES is liable for the
     cost of the repairs to the  equipment  limited to a maximum of $300,000 per
     incident. There have been no damage occurrences since the inception of both
     contracts and management believes any future loss to be remote.

     Environmental Costs

     The Company 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  has 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.


     Guaranteed Savings

     The Company is  contingently  liable to some of its  customers  pursuant to
     contractual terms in the event annual  guaranteed  savings are not achieved
     by the customer. These guarantees are derived from conservative engineering
     estimates and generally are  guaranteed at a level of less than 100 percent
     of the  total  estimated  savings.  As of  June  30,  1999,  projects  with
     associated   savings   guarantees  had  an  aggregate   annual  savings  of
     approximately $5.4 million of which the Company has guaranteed an aggregate
     of  approximately  $4.2  million  annually.  To date,  the  Company has not

<PAGE>F-26


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


     incurred any losses associated with these guarantees and any risk of future
     losses  attributable to these  guarantees is considered by management to be
     remote.

     Litigation

     In  October  1998,  Energy  Conservation  Consultants,   Inc.  ("ECCI"),  a
     Louisiana-based  company,  filed  a suit  (United  States  District  Court,
     Eastern  District of  Louisiana,  Case No.  98-2914)  against OES  alleging
     breach of contract in connection  with one of the Company's  projects.  The
     suit seeks  reimbursement  for expenses  allegedly  incurred by ECCI in the
     preparation  of an  audit  and  lost  profits.  Discovery  is  ongoing  and
     management  is  continuing  its  attempts to settle the  matter,  including
     through  mediation;  however,  no agreement has been reached. A continuance
     has been granted and trial now is set for February 2000.

     Additionally, in June 1999, a former officer of the Company (July 1998
     through  October 1998) filed a suit (Superior Court of the State of
     California,  County of San Diego, North County Branch, Case No. N081711)
     alleging  fraud,  negligence and wrongful  discharge in connection with his
     employment  termination  in October  1998.  The action  seeks  compensatory
     damages and punitive damages in excess of $25,000.  The parties have agreed
     to  mediation in an effort to settle this matter;  however,  no  settlement
     agreement has been reached.


16.  Defined Contribution Plan

     The Company  sponsors a 401(k)  defined  contribution  plan,  which  covers
     substantially all employees.  Company matching contributions are determined
     annually at the discretion of management and vest at the rate of 20 percent
     per year of  employment.  For the current  year,  the company  match was 75
     percent  of the  employee  contribution  up to 6  percent  of their  annual
     salary.  During  the years  ended  June 30,  1999 and 1998,  the  Company's
     matching  contribution expense was $83,046 and $53,480,  respectively.  The
     Company  match was in the form of Class A Common Stock issued to the plan's
     fiduciary. Shares issued in matching were 266,331 and 49,912 for the fiscal
     years 1999 and 1998, respectively.

17.  Significant Customers

     Revenues  from  the  three  largest   customers   accounted for  34 percent
     (16 percent, 11 percent and 9 percent each) of total revenues in fiscal
     1999, and revenues from three other customers accounted for 31 percent (11
     percent, 10 percent, 10 percent each) of total revenues in fiscal 1998.

18.  Concentration of Credit Risk

     The Company operates in one industry segment,  energy consulting  services.
     The  Company's  customers  generally  are  located  in the  United  States.
     Financial  instruments  that  subject the  Company to credit  risk  consist
     principally of accounts receivable.

     At June 30, 1999, accounts  receivable totaled $6,071,729,  and the Company
     has provided an allowance for doubtful accounts of $35,000.

<PAGE>F-27


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


     For the years ended June 30, 1999, and 1998, bad debts totaled $123,000 and
     $30,000  respectively.  The Company performs periodic credit evaluations on
     its  customers'  financial  condition  and believes  that the allowance for
     doubtful accounts is adequate.

     At June 30, 1999,  the Company  maintained  cash balances with a commercial
     bank, which were approximately $387,000 in excess of FDIC insurance limits.

19.  Year 2000

     The Year 2000 issue is the result of computer  programs being written using
     two digits  rather  than four to define  the  applicable  year.  Any of the
     Company's or its suppliers' and customers' computer programs that have date
     sensitive  software may recognize a date using "00" as the year 1900 rather
     than the year 2000. This could result in system failures or miscalculations
     causing  disruptions  of  operations  including,   among  other  things,  a
     temporary inability to process  transactions,  send invoices,  or engage in
     similar normal business activities. The Company believes that substantially
     all  software  applications  currently  being  used for the  financial  and
     operational  systems have  adequately  addressed any year 2000 issues.  All
     hardware  systems  have been  assessed  and plans  have been  developed  to
     address  systems  modification  requirements.  The costs  incurred  to date
     related to its Year 2000  activities have not been material to the Company,
     and based upon  current  estimates,  the Company  does not believe that the
     total cost of its Year 2000 readiness programs will have a material adverse
     impact on the Company's  results of operations or financial  position.  Any
     risks the Company faces are expected to be external to ongoing  operations.
     The  Company  has  numerous  alternative  vendors  for  critical  supplies,
     materials and components.  Current vendors and  subcontractors who have not
     adequately  prepared for the year 2000 can be substituted in favor of those
     that have prepared.

20.  Subsequent Events

     Private Placement of Securities

     In  August  1999,  the  Company  completed  a private  placement  of equity
     securities  with its  Chairman  of the Board and other  related  investors.
     Terms of the  placement  include the issuance of 50,000  shares of Series E
     Convertible  Preferred Stock that is convertible  into 5,000,000  shares of
     Class A Common  Stock,  warrants  to purchase  1,250,000  shares of Class A
     Common Stock at $.50 per share and warrants to purchase 1,250,000 shares of
     Class  A  Common  Stock  at  $.75  per  share.  The  preferred  shares  are
     convertible  at a rate  which is  below  market  on the  date of  issuance,
     resulting in a beneficial  conversion  element.  The shares are immediately
     convertible and the beneficial conversion element of approximately $763,000
     will be recorded as a preferred  stock dividend in the first quarter ending
     September 30, 1999. A portion of the securities was sold to a director. The
     intrinsic value of preferred  shares sold to the director was $47,000,  and
     will  result  in a charge  against  earnings  in the first  quarter  ending
     September 30,1999.

     Sale or Disposal of Subsidiaries

     On  September  28,  1999,  the  Company  decided  to  explore  the  sale or
     disposition  of its  interests  in the lighting  contracting  subsidiaries,
     namely,  LTS,  REEP and ERSI.  As a result of this  decision,  the  Company

<PAGE>F-28

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

     recorded  a  reserve  on  the  disposition  of  the  combined  entities  of
     $1,010,000 at June 30, 1999.  Further,  the assets and liabilities of these
     entities have been  reclassified  to the category  liabilities in excess of
     assets held for sale.

     The  amounts  included  in the  financial  statements  as of June 30,  1999
consisted of the following:

ASSETS:
   Accounts receivable                                              $ 1,192,880
   Cost and estimated earnings in excess of billings
    on uncompleted contracts                                             87,924
   Property and equipment, net                                           54,335
   Other assets                                                         467,066
                                                              ------------------
      Total assets                                                    1,802,205
                                                              ------------------

LIABILITIES:
   Accounts payable                                                 $ 1,192,481
   Billings in excess of costs and estimated
    earnings on uncompleted contracts                                   318,696
   Accrued expenses and other liabilities                               526,889
                                                             ------------------
     Total liabilities                                                2,038,066
                                                             ------------------

   Liabilities in excess of assets held for sale                     $  235,861
                                                             ==================


     Total revenues generated by these subsidiaries were $7,704,000 and $233,000
     for the years ended June 30,  1999 and 1998,  respectively.  Income  (loss)
     before taxes for these  subsidiaries  was  ($1,392,000) and $19,000 for the
     years ended June 30, 1999 and 1998, respectively.