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, 1998.

|_|  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)

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

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

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

     Title of each class             Name of each exchange on which registered

    Class A Common Stock                                  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 |_| No |X|

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..............$12,267,148

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........$1,726,887 as of November 2, 1998.

The  number of shares of Common  Stock  outstanding  as of  November  2, 1998 is
18,457,253.

DOCUMENTS INCORPORATED BY REFERENCE                                        None


<PAGE>2


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 (the  "Reorganization"),  between
Western Energy Management,  Inc., a Delaware corporation formed in 1991 ("WEM"),
and  Onsite  Energy  Corporation,   a  California  corporation  formed  in  1982
("Onsite-Cal").  Under the  Reorganization,  Onsite-Cal merged with and into the
Company, and a newly-formed  subsidiary of the Company merged with and into WEM,
which survived and became a wholly-owned  subsidiary of the Company. The Company
accounted for this transaction as a purchase of Onsite-Cal.

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  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.

Business of Issuer.  The Company is an energy services  company (an "ESCO") that
assists  energy   customers  in  lowering  their  energy  bills  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.  The Company has been  accredited  by the National
Association of Energy Service  Companies  ("NAESCO").  In addition,  the Company
offers professional  consulting services in the areas of direct access planning,
market   assessment,   business   strategies,   public  policy   analysis,   and
environmental  impact feasibility  studies.  It is the Company's mission to save
its  customers  money  and  improve  the  quality  of  the  environment  through
independent energy solutions.

Subsidiaries/Partnerships.  Substantially  all of  the  Company's  revenues  are
generated  through  energy  services  and  consulting  services.  The  Company's
subsidiaries and partnerships 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"),  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 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 (assuming that the shares of Class A Common Stock into which the
Series D Stock is convertible is outstanding)  over four  consecutive  quarters,
and  certain  specified  debts  of SYCOM  Corporation  and  SYCOM  LP have  been
satisfied.  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.  These share values and earnings thresholds increase
by 10 percent per year after  December 31, 1999. 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 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 Santa
Ana,  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  plus  $500,000  to the  former
stockholders  of LTS.  The former LTS  stockholders  also may receive a one-time
earn-out payment in 1999,  payable in either cash, or, at the Company's  option,
Class A Common Stock. The earn-out payment will be based on LTS's actual pre-tax
earnings  contribution  for a 12  month  period  ending  March  31,  1999.  As a
wholly-owned  subsidiary of the Company, LTS will continue to pursue independent
lighting  services  opportunities  in  commercial,  industrial  and  educational
markets while also providing lighting  subcontractor services to the Company and
other ESCOs.

        Onsite  Business  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.  ("OBS").  The
purchase price was 1,700,000 shares of the Company's Class A Common Stock issued
upon closing to Westar  Capital,  Inc.,  a  wholly-owned  subsidiary  of Western
Resources  ("Westar  Capital"),  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,  OBS  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,  OBS,  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.

        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.  As  discussed   above,   via  the
Reorganization, WEM became the wholly-owned subsidiary of the Company. While WEM
was  engaged  in the  business  of  providing  comprehensive  energy  management
services  designed to reduce the utility costs of its  customers,  WEM's current
primary function is to monitor its remaining contracts with customers.

        Television  City Cogen,  L.P.  Prior to February 1997, the Company owned
the entire general and limited  partnership  interests in Television City Cogen,
L.P.,  a  California  limited  partnership  ("TCC").  TCC's  major  asset  was a
1415-kilowatt  (kW)  cogeneration  system (the "System") located at CBS Studios,
Television City in Los Angeles,  California.  The Company completed construction
of the  System in 1988,  and  through  TCC was  responsible  for the  ownership,
operation,  maintenance,  savings verification and billing for the System, which
provides  electricity,  chilled  water and  thermal  energy for the CBS  Studios
complex.  CBS receives  discounted rates on electric and thermal energy provided
by the System  based on the  utility  electricity  natural gas rates over the 20
year  term of the  Energy  Services  Agreement  between  TCC and  CBS.  For more
information on cogeneration,  see Distributed  Generation/Combined  Heat & Power
below. The Company sold all of its interest in TCC effective February 17, 1997.

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.

        Loss from  Operations.  The Company has suffered  losses from operations
for the past two fiscal years.  For the years ended June 30, 1998, and 1997, the
Company  had net  losses of  $2,218,482  and  $1,388,598,  respectively,  and an
accumulated  deficit of $19,414,842  as of June 30, 1998.  During the year ended
June 30, 1998, the Company took steps to mitigate  losses and enhance its future
viability.  Management  believes  that  the  Company  will be  able to  generate
additional  revenues and operating  efficiencies  through its  acquisitions.  No
assurance,  however,  can be given that losses and  negative  cash flow will not
continue in the future.

        Risks  Associated with Expansion.  As previously  discussed,  during the
year  ended  June 30,  1998,  the  Company  made a  series  of  acquisitions  of
businesses including SO Corporation, LTS, OBS and OMS. 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 positively affect future operating results of the Company.
As  a  result  of  these   acquisitions,   the  Company's

<PAGE>5


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  81.29  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 above, in connection with the
acquisition of the assets and certain  liabilities of SYCOM,  the Company issued
157,500 shares of Series D Stock to SYCOM Corporation. 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 46.04 percent of the Company (based upon current ownership).

     Dependence  on Key and New  Customers.  For the fiscal years ended June 30,
1998, and 1997, three customers in the aggregate accounted for 31 percent and 32
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.

        Revenues  Dependent upon Phased  Approvals from Government  Agencies and
Customers. Pursuant to its energy efficiency services agreements, 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 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 which
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 and its
operating results.

        Possible Need for Additional  Working Capital and Potential  Dilution to
Existing  Shareholders.  As a result of existing and  potential  contracts,  and
cost-cutting  measures,  the Company  believes  that it will be able to generate
future cash flow sufficient to fund future operations.  However, in the event it
is unable to generate  cash flow from  operations  or its contracts are delayed,
the  Company  may need to secure  additional  financing  to further  develop and
provide working capital for its business. In addition,  the expanding

<PAGE>6

market  for energy  services  may  require  the need for  additional  capital to
finance the  Company's  growth.  As discussed in Major Events,  Contractors  and
Customers below, pursuant to a stock subscription  agreement entered into by the
Company,  the  Company  has the right to require  Westar  Capital to purchase an
additional 200,000 shares of the Company's Series C Convertible  Preferred Stock
("Series C Stock") for  $1,000,000.  Each share of Series C Stock is convertible
into five shares of the Company's Class A Common Stock. Therefore,  although the
Company believes that additional financing will be available, if necessary,  the
exercise of the right to obtain the  financing  will have an ownership  dilution
effect on the existing shareholders of the Company.

     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,  S. Lynn  Sutcliffe,
Frank J. Mazanec, Keith G. Davidson,  Richard L. Wright,  Dominick Aiello, Glenn
O. Steiger or Roger Dower may 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 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  which 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  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.

        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  (PCBs),  asbestos or  asbestos-containing  materials
(ACMs),  urea-formaldehyde  paneling,  fluorescent  lamps or HID lamps,  and the
emissions  from  cogeneration.  The Company  intends to contract,  or have their
customers and/or subcontractors contract, with certified hazardous 

<PAGE>7


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.

        No  Dividends  on  Class  A  Common  Stock.  It is  anticipated  that no
dividends  will be declared  by the  Company on its Class A Common  Stock in the
near future.  Shares of Series C 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, 1998 and how they are significant to the last two
fiscal years' revenues.

        Westar  Capital  $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 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 Stock
or cash at the option of the Company for two years.  Thereafter,  dividends  are
payable in cash.  Westar  Capital also has the right to purchase up to 2,000,000
additional shares of the Company's Class A Common Stock at market price, but not
below $1.00 or above $2.00 per share, by the end of calendar 1998. Further,  the
Company may require  Westar Capital to purchase up to 400,000 shares of Series C
Stock for  $2,000,000  before  December 31, 1998.  Subsequent to its fiscal year
end, on July 14, 1998, the Company exercised its right to require Westar Capital
to purchase 200,000 of these additional shares of Series C Stock for $1,000,000.

        Sedro Woolley, Washington.  In July and August 1997, the Company entered
into an energy  services  agreement with the State of Washington,  Department of
General  Administration,  Division of Engineering and Architecture (the "State")
to provide energy efficiency equipment at the State's multi-purpose  facility at
Sedro Woolley,  Washington.  The Company's agreement with the State provided for
gross  contract  revenue of  approximately  $500,000  on the first  phase of the
project,  which was the  replacement  of two boilers  expected to save the State
approximately  $166,000 per year in operation and maintenance costs. In addition
to the  installation  of  equipment,  the  Company  provided  commissioning  and
training  services  to the  facility's  staff.  The second  phase of the project
provided for approximately  $800,000 in gross contract revenues for the Company,
and consisted of the high  efficiency  lighting  retrofit of 21  buildings,  the
installation of energy  efficiency  electric motors,  HVAC  improvements and the
installation of an energy  management  system.  The agreement also calls for the
Company to provide  monitoring  and  verification  services for a 10 year period
after the project is complete.  The revenues for fiscal year ended 1997 and 1998
were $60,902 and $1,165,000 respectively.

        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 is expected
to be  substantially  complete by December  1998.  OBS  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 

<PAGE>8


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, 1998 were $1,376,000.

        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"), and a shopping mall
in Northern California, 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.

        Southern  California  Edison Demand Side  Management  Energy  Efficiency
Agreements.  In April 1994,  the Company  executed a DSM contract  with Southern
California  Edison ("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 KEM's  interest in the same (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 SCE's 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 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  $1,200,000 and $4,000,000 for the fiscal years ended
June 30, 1998, and 1997, respectively.

        California  State  University,   Fresno.  The  Company's  first  project
implemented  under the PG&E  Agreement was with CSUF.  The Company has completed
both a first phase  lighting  retrofit of the project for  $600,000 and a second
phase  lighting  retrofit  and free  cooling  implementation  for  approximately

<PAGE>9


$1,000,000.  The benefits to CSUF are  anticipated to include over 1,600,000 kWh
per year  reduction  in energy  consumption,  as well as fixture  upgrades,  and
improved  lighting  and cooling  equipment.  CSUF should  realize  approximately
$120,000 per year in energy cost savings and a total of  approximately  $160,000
in incentive payments from the Company related to the PG&E Agreement.

        California  State  University,   Fresno-University  Student  Union.  The
Company  entered into an agreement with  California  State  University,  Fresno,
Association Incorporated, University Student Union (the "Student Union"), for an
energy  efficiency  project at the Student  Union's  facilities on the campus of
CSUF.  Under the agreement,  the Company  upgraded the Student Union's  existing
lighting systems and will be replacing the central chiller with a more efficient
model. Both the Student Union building and a satellite  building will experience
significant lighting quality improvements and enhanced air conditioning, as well
as reduced energy costs. The  approximately  $400,000 project was prompted by an
aggressive  campus-wide  drive by CSUF to reduce  energy  costs on  campus.  The
project is expected to benefit from approximately $100,000 in utility incentives
payable over  approximately six years under the PG&E Agreement and approximately
three years under the California Public Utilities  Commission-approved  standard
performance  contract  program  (the  "SPC  Program").  Annual  electricity cost
reduction is estimated to exceed $73,000.

        California  State  Polytechnic  University.   The  Company  completed  a
lighting   retrofit   project  for  seven  buildings  at  the  California  State
Polytechnic  University  ("Cal  Poly")  in  Pomona,   California.   The  Company
retrofitted over 4,000 fixtures and replaced many outdated incandescent fixtures
with new high efficiency compact fluorescent  fixtures.  The project contributed
approximately  $250,000 to the  Company's  revenues.  The project is expected to
save in excess of  $43,000 in energy  costs for Cal Poly each  year,  as well as
result in up to $48,000 in incentive  payments under the SCE  Agreements  over a
three year period.

        Southern California College. In March 1998, the Company signed an energy
efficiency  agreement  to supply  services  related to 19  buildings at Southern
California College ("SoCal College") in Costa Mesa, California.  The project was
one of the  first  to be  implemented  under  the  SPC  Program.  The  financial
incentives  from the SPC Program for this project are estimated to be as much as
$78,000   distributed  over  a  two  year  period.  The  multi-measure   project
contributed   approximately  $390,000  to  the  Company's  current  fiscal  year
revenues,  and will include a fee for  providing  measurement  and  verification
services for two years.  The project  consists of  retrofitting  3,500  lighting
fixtures  and  installing  125  occupancy  sensors  as well  as  HVAC  equipment
modification, the repair and replacement of heat pumps and chilled water piping,
and the  installation  of an energy  management  system.  The energy  efficiency
retrofit is estimated to result in  electricity  energy savings of up to 800,000
kWh per year for SoCal College.

        City of Anthony,  Kansas. In March 1998, OBS 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
1998.  Total  project  revenue to the Company  from this project is estimated at
$2,000,000  in fiscal  years 1998 and 1999.  Revenues  for the fiscal year ended
June 30, 1998 were approximately $325,000.

        California Energy Commission.  The California Energy Commission  ("CEC")
selected the Company,  through its  International  Energy Fund, for  development
support of four energy efficiency projects in the Republic of Panama via a grant
for $75,000 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.

<PAGE>10


        USL  Parallel  Products of  California,  Inc. In June 1998,  the Company
signed  an  energy  efficiency  services  agreement  for an  industrial  process
improvement  at the  facilities  of USL Parallel  Products of  California,  Inc.
("Parallel Products"), a subsidiary of US Liquids, Inc. (AMEX: USL). The project
will include  installation of a variable speed drive on a compressor utilized in
Parallel Products'  evaporation  process.  The energy savings are anticipated to
exceed  $75,000 per year,  and the  economics  of the project  will benefit from
approximately  $145,000  in  incentives  payable  under  the  SPC  Program  over
approximately  a two year  period.  The project  will  contribute  approximately
$325,000 in revenues to the Company during the fiscal year 1999.

        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
encompasses  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 is expected to be completed in fiscal year 1999.

        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
a 27 month period,  commencing February 1996, with additional  extensions at the
option of Thomason.  In April 1998,  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, 1998, were approximately $850,000.

        General Motors  Corporation. In July 1996,  the Company  entered into an
agreement with General Motors  Corporation  ("GM") to provide turnkey  technical
services for the installation of a strategic energy  management system at one of
GM's plants.  The Company  provided  control  technology  for the North American
Truck Group Assembly Plant located in Wentzville,  Missouri. Revenues for fiscal
year  ended  June  30,  1997,  for this  project  were  approximately  $520,000.
Additionally,  in December  1995,  the Company  signed an  agreement  with GM to
provide energy efficiency  equipment  purchases and services at GM's Linden, New
Jersey  Assembly  Plant.  The Company  completed the Linden  project by June 30,
1996.  The  project was  sponsored  by the  Company  through the Public  Service
Electric and Gas Company ("PSE&G")  Standard Offer DSM program and includes a 10
year commitment for the measurement and verification  ("M&V") of energy savings.
M&V  revenue  for  this  project  for  fiscal  year  ended  June 30,  1998,  was
approximately $90,000.

        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);  American Gas
Cooling Center (Arlington, VA); California Energy Commission (Sacramento, CA); a
major amusement theme park; a major multi-branch national financial institution;
and Caterpillar Inc. (Lafayette, IN).

Consulting revenues to the Company were approximately  $1,000,000 and $1,400,000
for the fiscal years ended June 30, 1998, and 1997, respectively.

<PAGE>11

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

        Energy  Efficiency   Services   Company.   Pursuant  to  an  independent
evaluation, the Company has been accredited as an ESCO by NAESCO. 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 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 the
customer with "one-stop shopping" for 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)
o    Professional  consulting  services in the areas of direct  access
     planning,  market assessment,  business  strategy,  public policy
     analysis and environmental impact/feasibility studies

Through its systems integration  program,  the Company provides various services
to the  customer  that  focus on  energy  savings  in  residential,  commercial,
institutional  and  industrial   facilities.   Using  multiple,   proven  energy
efficiency  technologies  provided by the Company,  today's  building owners and
operators can receive both cash flow savings and  environmental  benefits  while
optimizing  energy  efficiency,  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  financing of projects,
the Company becomes the energy partner with each of its customers.

        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 new  marketplace.  New
energy supply marketers will move to diversify their electricity supply services
with other services, which will include energy efficiency services.

<PAGE>12


Deregulation of the electric  utility  industry is likely to expand the scope of
services offered by ESCOs in the new 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 emerging competitive market.

The Company is actively  involved in monitoring the  regulatory and  legislative
process that will determine the rules for the restructured  electricity  market,
and firmly believes that the benefits and value of energy efficiency will expand
through the evolution of a more competitive market for electricity.

        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.

        Distributed Generation/Combined Heat & Power. The Company has experience
as a distributed  generation and a combined heat and power ("CHP")  developer in
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.  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  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
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  switchgear  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  and  throughout  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 environment
agencies as a generation  source that can provide net quality  benefits and help
mitigate global climate change.

Business Approach.  As an  ESCO,  the  Company  provides  its  customers  with a
comprehensive  approach to improve the energy  efficiency and/or reduce the cost
of energy for the  customers'  facilities.  The services  offered by the Company
include direct access  planning,  energy audits,  bill audits,  tariff analyses,
transmission  and  distribution  analyses and  upgrades,  feasibility  analyses,
engineering and construction services,  project implementation,  verification of
savings,  performance  monitoring,  O&M services,  guaranteed savings and shared
savings programs, financing, direct loans and equipment leases. In addition, the
Company  offers  professional   consulting  services  in  the  areas  of  market
assessments,  business  strategies,  public policy analysis  (including  utility
restructuring)  and  environmental  impact/feasibility  studies.  The Company is
unique  in the ESCO  marketplace  in that it is able to offer  customers  a full
range  of  energy  services  for  both  supply  side and  demand  side  resource
requirements.

<PAGE>13


The Company's approach to marketing its energy efficiency services is to provide
a comprehensive  energy efficiency  project with financing  alternatives for the
customer.  Over the past  several  years,  the  Company has been  successful  in
maximizing the incentives  from public  utilities in the form of SPC programs or
through utility DSM contracts, whereby the incentive payments are provided based
on  actual  energy  savings,  which  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 cost of building  power plants).  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 projects. The cost and profit 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,  with  net  positive  cash  flow to the
customer generated throughout the life of the project.

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

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 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  its  customers  through  design,  construction,  operation  and  even
ownership of high purity water systems. Specializing in reverse 

<PAGE>14

osmosis systems,  the Company utilizes cost effective  membrane  technologies to
filter dissolved salts as well as inorganic molecules. The Company will evaluate
water treatment  processes best suited for the customers needs,  then design and
install a site-specific water treatment system.

A summary of the general process utilized by the Company for  implementation  of
an energy project includes the following:

        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  rebate or DSM  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.
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.

Competition. In general, the Company's competitors are other ESCOs, particularly
the other 18 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 that have a
larger manpower and resource base than the Company.  Utility companies and their
affiliates can 

<PAGE>15


function as both  competitors  and partners for the Company.  Many utilities now
are  entering  the DSM  market  through  wholly-owned  subsidiaries  of  holding
companies in direct competition with ESCOs, including the Company.  However, the
Company  sometimes  teams with  utility  DSM  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 significant  number of  successful  projects,  more
than most other ESCO competitors.

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.  The Company is subject to rules and
regulations of the Environmental  Protection Agency, the Occupational Safety and
Health  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.

In February 1998, the Company received a notice from the South Coast Air Quality
Management  District for alleged  reporting  violations in calendar year 1996 on
the  facility  previously  owned by TCC. No remedial  action is required and the
Company may be subject to certain  penalties,  but  management  does not believe
this  matter  will  have a  material  impact  on  the  Company's  operations  or
liquidity.

Employees.  As of  November  2, 1998,  the Company  employed  approximately  160
persons in regular or temporary full-time or part-time positions.


<PAGE>16


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 10,000 square feet. As of August 1, 1998, the Company expanded its
office  space by an  additional  3000 square feet,  which is included  under the
current lease.  The Company expanded its regional offices to include Kansas City
(Lenexa),  Kansas  (lease  of 1,400  square  feet of  office  space for one year
expiring  May 1999),  and 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 (OBS); Salina, Kansas (OMS); and Santa Ana, California (LTS). OBS
leases  2,000  square feet of office space on a one year lease with an option to
renew,  expiring  November 1998.  OMS owns the main building  (9,698 square fee)
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 leases a fourth  building  from former
management on a month by month basis to store testing equipment. This lease will
continue indefinitely.  LTS leases approximately 4,200 square feet in Santa Ana,
California.  This lease  currently  is  one-year  lease and  expires  July 1999.
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.

No other office or warehouse space is leased or owned by the Company. Management
believes that the current properties, including the additions made in 1998, will
be suitable for the Company's operations.


Item 3.  Legal Proceedings

In January 1998, the Oregon Bureau of Labor and  Industries  (the "BLI") filed a
suit against LTS and two other parties for alleged unpaid wages in the amount of
$509,205 for 32 employees who worked on a lighting retrofit project in the state
of Oregon.  A trial date of April 13,  1999,  has been set,  but the parties are
attempting  to obtain the approval of  mediation  rules in order to mediate this
matter.  Management also has had discussions with the BLI to resolve this issue;
however, no agreement has been reached.  Management  believes,  based on current
information,  that any  settlement  would  not  have a  material  impact  on the
Company.

Additionally, in October 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based  company,  filed a suit (United States District County,  Eastern
District of Louisiana, Case No. 98-2914) against OBS 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 in the aggregate amount of $748,000.  Management is attempting to settle
the matter; however, no agreement has been reached.  Management believes,  based
on current information,  that any settlement would not have a material impact on
the Company.


Item 4.  Submission of Matters to Vote of Security Holders

No matters have been  submitted  during the fourth  quarter of fiscal year ended
June 30, 1998, to a vote of securities holders.


<PAGE>17



                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters

Since  August 2,  1995,  the  Company's  Class A Common  Stock has traded on the
National  Association  of  Securities  Dealers  (NASD)   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, 1996                  $1.625                   $1.4375
    December 31, 1996                   $0.50                    $0.50
    March 31, 1997                      $0.25                    $0.25
    June 30, 1997                       $0.50                    $0.25
    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

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 November 2, 1998,  there were  approximately  225 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  dividends  on  the  Class  A  Common  Stock  in the
foreseeable  future.  The Company has paid 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  23,354  shares  of  Series C Stock.
Dividends  are  payable  in  additional  shares of Series C Stock or cash at the
option of the Company for two years. 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)" 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,  Industry of Issuer  section in this report,  as well as the Company's
periodic  reports on Forms 10-KSB,  10-QSB and 8-K filed with the Securities and
Exchange Commission.

<PAGE>18


As discussed in Item 1. Description of Business,  the Company acquired OBS, OMS,
LTS and SO  Corporation  during  the fiscal  year 1998,  and sold TCC during the
fiscal year 1997. 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 subsidiaries.

Results of Operations.

        Revenues.  Revenues increased in the fiscal year ended June 30, 1998, by
$2,705,773 or 28.30  percent.  This increase  primarily is due to  acquisitions.
After  elimination of revenues  attributable to newly acquired  subsidiaries and
the divestiture of TCC,  revenues  decreased by $42,066,  or 0.47 percent.  This
decrease is attributable to a $408,792,  or 29.95 percent decrease in consulting
revenues,  offset by an  increase  of  $348,242,  or 4.53  percent  in  contract
revenues.  Consulting revenues were lower in fiscal year 1998 due in part to the
conversion  of one large  consulting  agreement  into a long  term  construction
contracts.  Also, one large design project  contributed  significant  consulting
revenues in fiscal year 1997. Long-term  construction  contracts were relatively
flat due to one large  contract  starting  in the last half of fiscal year ended
June 30, 1998.

        Gross  Margin.  Gross margin for the fiscal year ended June 30, 1998 was
18.01 percent compared to 30 percent in fiscal year 1997.  After  elimination of
revenues and cost of sales  attributable to newly acquired  subsidiaries and the
divestiture  of TCC, gross margin was 13.60 percent and 28.51 percent for fiscal
year  end 1998  and  1997  respectively.  The  decrease  in  gross  margin  as a
percentage  of sales  is  attributable  to  lower  gross  margins  on long  term
contracts  entered into in the fiscal year 1998. The  unburdened  budgeted gross
margin  percentage on long term construction  projects was  approximately  12.28
percent.  Fully  burdened  gross margin on these  contracts was 9.61 percent for
fiscal year 1998.  Revenues under these contracts  represented  62.37 percent of
total revenues.

        Selling,  General  &  Administrative  Expenses.   Selling,  general  and
administrative ("SG&A") expenses were $4,418,736 or 36.02 percent of revenues in
fiscal year end June 30, 1998, compared to $3,726,095 or 38.97 percent in fiscal
year 1997. After elimination of revenues and SG&A expenses attributable to newly
acquired  subsidiaries  and the  divestiture  of TCC,  SG&A as a  percentage  of
revenues was 39.24  percent and 32.09 percent for fiscal year end 1998 and 1997,
respectively. The percentage of expenses to revenues increased primarily because
of the  effect of an  increase  in  overall  SG&A  related  to growth  without a
corresponding increase of overall revenues in the fiscal year end June 30, 1998.
Additionally,  employee  related expenses  increased by approximately  $400,000.
This  staffing  increase  was made at the Company  headquarters  location and to
establish an office in Northern California.

Goodwill  amortization  included  in SG&A in the fiscal year ended June 30, 1998
was $280,927  compared to $400,000 in the fiscal year ended June 30, 1997. After
elimination  of  revenues  and SG&A  expenses  attributable  to  newly  acquired
subsidiaries  and the divestiture of TCC,  goodwill  amortization  was $266,667.
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.  With the
recent acquisitions made by the Company in the last quarter of fiscal year 1998,
goodwill amortization for fiscal year 1999 is expected to increase.

        Loss from Operations.  Loss from operations increased in the fiscal year
ended June 30, 1998 by $944,393 or 74.69 percent.  After elimination of revenues
attributable  to newly acquired  subsidiaries  and the  divestiture of TCC, loss
from operations  increased by $1,852,208,  or 407.51  percent.  This increase is
attributable  to an  increase  in cost of  sales  of  20.31  percent,  which  is
reflected  in the  decrease in gross  margin.  The  additional  loss also can be
attributable to the increase of SG&A expenses of 21.72 percent.  The majority of
this  increase was due to the addition of new  development  offices and staff to
prepare for


<PAGE>19


expected new business opportunities  resulting from acquisitions and deregulated
markets incentives with standard performance contracts.

        Other  Income/Expense.  Other income (expense)  decreased by $113,509 or
98.17  percent  for the  fiscal  year  ended  June  30,  1998.  The  change  was
attributable to a decrease in interest expense of $131,628. After elimination of
revenues attributable to newly acquired subsidiaries and the divestiture of TCC,
other income  (expense)  decreased by $57,500 or 90.72 percent.  The majority of
the change was a decrease in interest expense of $78,248. During the fiscal year
end June 30, 1997,  the Company had paid off  substantially  all of its interest
bearing debt.

        Net  Loss.  Net loss for the year  ended  June 30,  1998,  increased  by
$829,884,  or 59.76 percent. This resulted in a basic and diluted loss per share
of $0.16,  an  increase  in the loss per share from  fiscal  year 1997 of $0.03.
After  elimination of revenues and cost of sales  attributable to newly acquired
subsidiaries  and the  divestiture  of TCC,  increase  in net  loss  was  347.39
percent.  This increase was  attributable to some long-term  projects that had a
lower gross margin than  expected.  The increase in SG&A  expenses also effected
the net loss due to the addition of staff and office set up expenses.

Liquidity  and  Capital  Resources.  The  Company's  cash and  cash  equivalents
increased by  $1,566,112 in fiscal year end June 30, 1998, an increase of 297.23
percent. Working capital was a negative $2,693,367 as of June 30, 1998, compared
to a negative  $30,333 as of June 30,  1997,  an increase  in  negative  working
capital of  $2,663,034.  The  increased  deficit in working  capital was largely
attributable  to the increase in the current  portion of notes payable  acquired
from  acquisitions  (such notes are expected to be repaid from project proceeds)
and the billings in excess of costs related to one major project.  The shortfall
in working  capital is  expected  to be resolved  from  positive  cash flow from
operations and the  availability of up to an additional  $1,000,000 of cash from
an existing stock subscription agreement.

Cash flows  provided by  operating  activities  for the year ended June 30, 1998
were  $814,280,  compared  to  $41,297  for the  year  ended  June 30,  1997.  A
substantial  portion of the cash,  approximately  $2,000,000,  was provided from
advance  billings  under one  contract in  progress  at the end of the year.  An
increase in accounts  payable plus  increased  volume  relating to new contracts
increased the cash flow from operations by $772,983.

Cash flows used by investing activities for the fiscal year ended June 30, 1998,
were  $1,330,791  compared to cash flows  provided by  investing  activities  of
$535,608 for the fiscal year ended June 30, 1997, an increase of $1,866,399. The
primary reason for the increase in investing activities was the cash used in the
acquisition of four businesses  (OMS, OBS, LTS and SO  Corporation).  Cash flows
from  financing  activities  were  $2,082,623 for the fiscal year ended June 30,
1998,  compared to a negative  $1,026,481 for the same period in fiscal 1997, an
increase  of  302.89  percent.   The  principal   reason  for  the  change  from
year-to-year  was due to the  proceeds  from the  private  placement  to  Westar
Capital.

As shown in the  accompanying  financial  statements,  the Company has  reported
significant  net losses for the years ended June 30,  1998 and 1997,  and has an
accumulated  deficit of $19,414,842  as of June 30, 1998.  During the year ended
June 30,  1998,  the Company  took steps to mitigate  the losses and enhance its
future viability.  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.  In addition,  subsequent to
year  end,  the  Company  has  exercised  its right  under a stock  subscription
agreement to require Westar Capital to purchase an additional  200,000 shares of
Series C Stock for  $1,000,000  (see Note 20).  The Company  may require  Westar
Capital  to  purchase  an  additional  200,000  shares  of  Series  C Stock  for
$1,000,000.  Management  believes  that all of the above  actions will allow the
Company to continue as a going concern. Cash requirements for periods beyond the
next 12 months  depend on the  Company's  profitability,  its  ability to manage
working capital requirements and its rate of growth.

<PAGE>20


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
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.
For fiscal year ended June 30, 1998, there was no operating activity.

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 the valuation allowance.  Any future tax benefit
realized  for these items will first  reduce any  goodwill  remaining  from this
acquisition  and then income tax expense.  The deferred tax asset also  includes
the future  benefit of the tax  deduction  for the exercise of stock  options of
$13,000.  The deferred asset is fully reserved through the valuation  allowance.
Any future tax benefit  realized  for this item will be a  component  of paid in
capital.

At  June  30,  1998,  the  Company  has  net  operating  loss  carryforwards  of
approximately  $19,116,000,  which  expire in the years 2006 through  2017.  The
Company has  California  net operating  loss  carryforwards  at June 30, 1998 of
$5,018,000,  which  expire in years 1999  through  2003.  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.

Environmental  Issues.  In February 1998, the Company received a notice from the
South Coast Air Quality Management District for alleged reporting  violations in
calendar year 1996 on the facility  previously  owned by TCC.  While no remedial
action is  required,  the  Company  may be  subject  to  certain  penalties  but
management  does not  believe  this  matter  will have a material  impact on the
Company's operations or liquidity.

Year 2000.  The Company is  developing  plans to address  issues  related to the
impact on its  computer  systems of the year 2000.  The  Company  believes  that
substantially all software  applications  currently being used for the financial
and  operational  systems have adequately  addressed any year 2000 issues.  Most
hardware  systems have been  assessed  and plans are being  developed to address
systems modification  requirements.  The financial impact of making any required
systems  changes is not  expected to be material to the  Company's  consolidated
financial  position,  liquidity or results of operations.  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 and
thus 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-27.



<PAGE>21



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

None.


                  [Remainder of page intentionally left blank]




<PAGE>22


                                    PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act.

The following table sets forth the persons currently serving as directors of the
Company, and certain information with respect to those persons.


     Director                      Age                      Director Since


Charles C. McGettigan              53                             1993

Richard T. Sperberg                47                             1982(1)

H. Tate Holt                       47                             1994

Timothy G. Clark                   59                             1994

Leroy P. Wages                     49                             1998

William M. Gary III                47                             1982 (1)

S. Lynn Sutcliffe                  55                             1998

Richard L. Wright                  55                             1998

      (1)     Includes time of service with Onsite-Cal.

Background of Current Directors.

Charles C. McGettigan.  Mr.  McGettigan has been a director of the Company since
its  inception  in 1993,  and  began  serving  as the  Chairman  of the Board in
December  1994.  Mr.  McGettigan  became a director of WEM in May 1992. He was a
founding  partner  in 1991 and is a  general  partner  of  Proactive  Investment
Managers,  L.P.,  which is the general  partner of Proactive  Partners,  L.P., a
merchant banking fund. Mr. McGettigan co-founded  McGettigan,  Wick & Co., Inc.,
an  investment  banking  firm,  in 1988.  From 1984 to 1988, he was a Principal,
Corporate Finance,  of Hambrecht & Quist, Inc. He currently serves on the Boards
of  Directors  of Cuisine  Solutions,  Modtech,  Inc.,  PMR  Corporation,  Sonex
Research,  Inc.,  Tanknology  -  NDE  Environmental  Corporation  and  Wray-Tech
Instruments,  Inc. Mr.  McGettigan is a graduate of Georgetown  University,  and
received  his  Master of  Business  Administration  from The  Wharton  School of
Business of the University of Pennsylvania.

Richard T. Sperberg.  Mr. Sperberg has been a director,  and the Chief Executive
Officer, of the Company since its inception in 1993, and currently serves as the
Company's  Interim Chief  Financial  Officer.  He served as the President of the
Company until October 1998,  has been the Chief  Executive  Officer of WEM since
January 1993,  and began serving as a director of WEM in February 1994. In 1982,
Mr. Sperberg  co-founded  Onsite-Cal,  and served as President,  Chief Executive
Officer and a director until February 1994,  when Onsite-Cal and WEM reorganized
into the Company. Mr. Sperberg has been involved in project management of 

<PAGE>23


energy  efficiency,   advanced  energy  technologies,   alternative  energy  and
cogeneration  projects for 23 years,  with specific  management  experience with
Onsite-Cal,  the Gas Research  Institute,  and the U.S. Department of Energy. He
holds a Masters  of  Science  in  Nuclear  Engineering  from the  University  of
California,  Los Angeles,  and a Bachelor of Science in Nuclear Engineering from
the University of California,  Santa Barbara.  Mr. Sperberg previously served on
the Boards of  Directors of the American  Cogeneration  Association  and the San
Diego Cogeneration Association, and currently serves as the President of NAESCO,
and as a member of its Board of Directors.

H. Tate Holt.  Mr. Holt has been a director of the Company  since May 1994.  Mr.
Holt  currently  is the  President  of Holt &  Associates,  a  corporate  growth
management  consulting  firm,  and has  held  that  position  since  July  1990.
Previously,  from 1987 to 1990,  Mr. Holt was Senior Vice President of Automatic
Data Processing,  Inc. ("ADP"),  in Santa Clara,  California.  Mr. Holt has over
twenty (20) years of experience in various senior sales and marketing  positions
with Fortune 50 and Inc. 500 companies, including IBM, Triad Systems and ADP. He
has  participated  in major  restructuring  and  strategic  planning  in several
divisions of each of these companies. Since 1990, Holt & Associates has assisted
its small and medium-sized clients in developing and achieving aggressive growth
targets.  Mr. Holt currently serves on the Board of Directors of DBS Industries,
Inc.,  and is the  author  of the book "The  Business  Doc -  Prescriptions  for
Growth." Mr. Holt holds an A.B. from Indiana University.

Timothy G.  Clark.  Mr.  Clark  began  serving as a director  of the  Company in
October 1994. The former President and Chief Executive Officer of KA Industries,
Inc., a  privately-owned  corporation  that  manufactures and sells premium gift
baked goods,  Mr. Clark currently serves as a consultant to a variety of clients
through his own firm, T.G. Clark & Associates.  From 1991 to 1994, Mr. Clark was
a managing  partner at Hankin & Co., a consulting  company  focusing on business
and financial planning,  including turnarounds. Mr. Clark holds an A.B. from the
University of Southern  California and a Master of Business  Administration from
the Harvard University Graduate School of Business.

Leroy P. Wages.  Mr.  Wages has more than 20 years  experience  in the  electric
utility  industry.  He currently  is Director of Corporate  Strategy for Western
Resources,  the parent company of Westar Energy,  Inc.  ("Westar  Energy"),  and
Westar  Capital.  Western  Resources  is a full  service  provider of  monitored
security,  energy and related services,  and is headquartered in Topeka, Kansas.
Mr. Wages' utility  industry  experience  includes rate design,  internal audit,
customer  service and  accounting.  Mr. Wages also serves as the Chairman of the
Board and President of both Westar Capital and Westar Energy.  Mr. Wages holds a
Bachelor of Business Administration in Accounting from Washburn University.

William M. Gary III. Mr. Gary served as the Company's  Executive  Vice President
and  Secretary  through  December 31, 1997,  and has served as a director of the
Company since its inception in 1993. Mr. Gary co-founded Onsite-Cal in 1982, and
served  as the  Chairman  of the  Board  and the  Executive  Vice  President  of
Onsite-Cal  until February 1994, when  Onsite-Cal and WEM  reorganized  into the
Company. Mr. Gary has been involved in energy efficiency, alternative energy and
cogeneration  projects for 20 years. Prior to co-founding  Onsite-Cal,  Mr. Gary
was a consultant with Arco Solar and held numerous management positions with San
Diego Gas & Electric  in the  alternative  energy and  conservation  fields.  He
currently  serves  as a  member  of the  Board  of  Directors  of the San  Diego
Cogeneration  Association.  Mr. Gary holds a Bachelor  of Science in  Mechanical
Engineering   from  California   Polytechnic   University.   He  is  a  licensed
professional engineer in California and a Certified Energy Manager.

S. Lynn  Sutcliffe.  Since 1990,  Mr.  Sutcliffe has served as the President and
Chief Executive  Officer of SYCOM  Corporation,  which is the general partner of
SYCOM LP. From 1968 through 1977, Mr.  Sutcliffe was General Counsel of the U.S.
Senate  Commerce  Committee,  which had  jurisdiction  over all electric and gas
utility issues.  Mr. Sutcliffe left the Commerce  Committee to become one of the
founding  partners of Van Ness,  Feldman,  Sutcliffe & Curtis,  P.C., a law firm
nationally  recognized for its expertise in energy law and

<PAGE>24


policy. Mr. Sutcliffe  participated in this law firm until 1990. Mr. Sutcliffe's
expertise  includes  a  wide  range  of  legislative,  regulatory,  contractual,
financial and  developmental  issues  associated with the energy industry.  From
1994 through 1996, Mr.  Sutcliffe  served as the President of NAESCO,  and was a
member of the Energy and Transportation Task Force of the President's Council on
Sustainability  in 1996.  Mr.  Sutcliffe  brings to the Company's  Board over 23
years of  experience  in the energy  services  industry.  He holds an A.B.  from
Princeton University, and a Juris Doctorate from the University of Washington.

Richard L. Wright.  Mr. Wright has been Treasurer of SYCOM Corporation and SYCOM
LP since  1995,  during  which time he has  performed  project  development  and
strategic  planning  functions at the  executive  level.  Mr. Wright has over 11
years of experience in developing  and financing  energy  related  companies and
projects.  He has  extensive  knowledge  of the  federal  and state  legislative
processes  as  well  as of  the  decision-making  processes  at the  county  and
municipal level. In 1977, Mr. Wright served on the White House Energy Task Force
and later as the  Assistant  Secretary  at the  Department  of Energy.  Prior to
joining SYCOM, Mr. Wright served as the Chief of Staff of the former Governor of
New Jersey from 1993 through 1994,  and as the Associate  Treasurer of the State
of New Jersey from 1990 through  1993.  Mr.  Wright earned a Bachelor of Arts in
Religion from Princeton University, and a Juris Doctorate from the University of
California Boalt Hall School of Law.


                  [Remainder of page intentionally left blank]



<PAGE>25


Executive  Officers.  The following  table sets forth certain  information  with
respect to the current executive officers of the Company.


     Name                   Positions with the             Age      Office Held
                                 Company                               Since

Charles C. McGettigan      Chairman of the Board           53         1994

Richard T. Sperberg        Chief Executive Officer         47         1982 (1)
                           and Interim Chief 
                           Financial Officer

S. Lynn Sutcliffe          President                       55         1998

Frank J. Mazanec           Senior Vice President           50         1992 (1)

Keith G. Davidson          Senior Vice President           48         1994

Richard L. Wright          Senior Vice President           55         1998

Hector A. Esquer           Vice President                  40         1991 (1)

J. Derek Shockley          Vice President                  38         1997

David X. Kolk              Vice President                  47         1997

Elizabeth T. Lowe          Vice President                  35         1997

Bruce A. Hedman            Vice President                  48         1998

Dominick Aiello            Vice President                  39         1998

Roger Dower                Vice President                  48         1998

Glenn O. Steiger           Vice President                  50         1998

Christian J. Bitters       Vice President                  41         1998

Russell Wm. Royal          President/Chief Operating       46         1992 (2)
                           Officer - LTS

Audrey Nelson Stubenberg   Secretary/General Counsel       35         1998

(1) Includes time of service with Onsite-Cal.

(2) Includes time of service with LTS.

Executive officers are elected periodically (but at least annually) by the Board
of  Directors  and serve at the  pleasure of the Board.  No family  relationship
exists between any of the officers or directors.

<PAGE>26



Background  of  Executive  Officers.  For the  business  backgrounds  of Messrs.
McGettigan,  Sperberg, Sutcliffe and Wright, see Background of Current Directors
above.

Frank J. Mazanec.  Since 1992,  Mr. Mazanec has been employed by the Company and
its predecessor,  Onsite-Cal. Mr. Mazanec is a licensed professional engineer in
Colorado. Over the past 20 years, he has developed and managed over $100,000,000
in energy  generation,  waste management and  environmental  projects.  Prior to
joining  Onsite-Cal in 1992, Mr. Mazanec served as West Coast Regional  Director
for Wheelabrator Technologies, which included responsibility for the Spokane and
Pierce County, Washington and Baltimore,  Maryland,  Waste-to-Energy facilities.
In 1990, he formed Integrated Waste Management, Inc., through which he served as
a consultant to  Onsite-Cal  until joining  Onsite-Cal in 1992.  Mr.  Mazanec is
responsible  for managing one of the  Company's  internal  business  units,  and
currently  serves as a Senior Vice  President of the Company.  Mr. Mazanec has a
Bachelor of Science in Civil  Engineering  from the  University  of  Vermont,  a
Bachelor  of  Science  in  Economics  and  Finance  from   Fairleigh   Dickinson
University,  and a Master of  Business  Administration  from the  University  of
Southern California.

Keith G. Davidson.  Mr.  Davidson has been a Vice President of the Company since
1994, and recently was promoted to Senior Vice President.  Mr. Davidson has over
20 years of  diversified  management  experience  in  energy  and  environmental
technology,  product  commercialization and market development.  Mr. Davidson is
responsible for one of the Company's  internal business units.  Prior to joining
the Company in 1994, Mr.  Davidson was a Director at the Gas Research  Institute
in Chicago,  Illinois, where he led the gas industry's collaborative development
programs  directed at natural gas growth markets of electric  power  generation,
cogeneration  and natural gas vehicles.  Mr.  Davidson was past President of the
American  Cogeneration  Association,  and a member of the  American  Society  of
Heating,  Refrigerating and Air Conditioning Engineers, and previously served as
the  co-Chairman  of CADER.  He is the  recipient  of several  industry  honors,
including the Association of Energy Engineers' Cogeneration  Professional of the
Year in 1989,  and was inducted into the American Gas  Association's  Industrial
and  Commercial  Hall of Flame.  Mr.  Davidson  earned a Bachelor  of Science in
Mechanical  Engineering  from the University of Missouri and a Master of Science
in Mechanical Engineering from Stanford University.

Hector A. Esquer.  Mr. Esquer is a professional  engineer licensed in the states
of California and New Mexico.  Mr. Esquer joined Onsite-Cal in 1986, and as Vice
President is responsible for the overall  management of project  implementation.
Over the past 10 years,  Mr.  Esquer  has  managed  the  implementation  of over
$30,000,000 of energy efficiency projects for the Company. Mr. Esquer previously
was a Project  Engineer for San Diego Gas & Electric and Fluor  Corporation.  He
holds a Bachelor  of  Science in  Electrical  Engineering  from San Diego  State
University and is a Certified Energy Manager.

J. Derek  Shockley.  Mr. Shockley is responsible for managing OBS and OMS. These
subsidiary  companies provide medium and high voltage  electrical  services,  as
well as industrial  water  treatment  services to municipal,  industrial,  large
commercial  and  institutional  customers.  Mr.  Shockley  has  over 13 years of
diversified  experience in the energy  industry that includes  planning,  sales,
marketing,  and project development work in the areas of demand side management,
electrotechnologies  and  applied  research.  He was a member of EPRI's  Water &
Wastewater Research Project steering committee,  and a past member of the Kansas
Energy & Natural Resources advisory committee.  Mr. Shockley is the recipient of
several national awards, including the EEI Common Goals Environmental Award, and
the EPRI Technology Innovators Award. Prior to joining the Company, Mr. Shockley
held a number  of  positions  with  Western  Resources,  including  Director  of
Business  Development,  Manager of National and Institutional  Accounts,  and an
energy  use  consultant.  Mr.  Shockley  holds a  Bachelor  of Arts in  Business
Administration (with an emphasis on Finance) from Washburn University.

Dr. David X. Kolk.  In his capacity as Vice  President of the Company,  Dr. Kolk
specializes in integrated  resource  planning  (IRP),  regulatory  affairs,  and
transmission planning and economic and financial analysis. 

<PAGE>27


He joined  the  Company  in  December  1997 after  working  with Power  Resource
Manager,  LLC  ("PRM").  Prior to joining  PRM, Dr. Kolk spent 12 years with the
City of Anaheim,  where as the System  Planning  Manager he was  responsible for
preparing,  defending  before  regulatory  agencies and  implementing the City's
integrated  resource plan. He represented the City and other municipal  entities
in various forums dealing with  transmission  deregulation and electric services
industry  deregulation.  Dr. Kolk also was responsible for overseeing the City's
negotiations  with SCE and  managing  the  City's  outside  attorneys  and legal
efforts before the Federal Energy Regulatory Commission. Prior to that, Dr. Kolk
was in charge of the City's energy services group,  providing  conservation  and
demand side  management  services to  commercial  and  industrial  customers and
served on the City's  business  retention  and  attraction  team.  Dr.  Kolk was
responsible for planning Anaheim's distribution facilities for several years and
was Project  Manager on behalf of 11  municipal  entities  and the Western  Area
transmission facility located near Adelanto, California. Dr. Kolk also serves as
a vice-president of the Riverside County Asset Leasing  Corporation,  the entity
responsible for overseeing and managing all Riverside  County debt. Dr. Kolk has
written extensively on energy policy including two books, one on the natural gas
industry and the other on the  structure of the U.S.  economy.  Dr. Kolk holds a
Bachelor of Science and Ph.D. in Economics  from the  University of  California,
Riverside,  and a  Master  of  Science  in  Economics  from  the  University  of
California, San Diego.

Elizabeth T. Lowe. As Vice President,  Ms. Lowe heads up the Company's  Northern
California office.  She is responsible for marketing,  operations and regulatory
representation  in  Northern  California.  Ms.  Lowe also adds to the  Company's
consulting  capabilities in the areas of natural gas and  electricity  purchases
and overall  customer  strategies to reduce  energy  costs.  Ms. Lowe joined the
Company in 1997. Prior to joining the Company, Ms. Lowe served as Vice President
of Western Operations for DukeSolutions,  Inc.  (formerly  Duke/Louis  Dreyfus),
heading up the Western region  operations for this Duke Energy  subsidiary.  The
Western  region group worked with retail and wholesale  customers to develop and
implement overall energy purchasing  strategies through  negotiations  training,
strategic  alliances,  and engineering and pricing  solutions.  Prior to joining
DukeSolutions,  Ms. Lowe spent 10 years in energy and environmental  consulting,
and most recently developed and directed Barakat & Chamberlin's Corporate Energy
Management  practice.  In this capacity,  she assisted large energy consumers in
the  development of energy cost reduction  strategies  through  procurement  and
management of fuels, tariff and contract  negotiations,  aggregation  strategies
and demand side  management  planning.  Ms. Lowe earned a Master of  Environment
Management  in Resource  Economics  and Policy from Duke  University's  Nicholas
School of Environment  and a Bachelor of Arts in Public Policy Studies from Duke
University's  School  of Policy  Studies  and  Public  Affairs.  Ms.  Lowe is an
associate  member of the California  Manufacturers  Association,  the California
League of Food  Processors,  and President of the Power  Association of Northern
California.

Dr. Bruce A. Hedman.  Dr. Hedman joined the Company in 1998, as Vice  President,
Consulting  Services,  and together  with Mr.  Davidson is  responsible  for the
Company's  consulting  services  business.  Dr.  Hedman  has  over 20  years  of
experience  in energy and  environmental  technology  development,  new  product
commercialization,  and market  research  and  development.  Before  joining the
Company,  Dr. Hedman was  Executive  Director of the  Industrial  Center Inc. in
Arlington,  Virginia,  a natural gas  industry  technology  transfer  and market
development  organization that supports  commercial  introduction of new natural
gas technologies in the industrial market.  Prior to this, he was Senior Program
Manager at  Battelle  Pacific  Northwest  Laboratory's  Washington,  DC offices,
providing  strategic  planning and policy analysis support on natural gas issues
and end-use research, development and commercialization.  Dr. Hedman started his
career at the Gas Research  Institute  ("GRI") in Chicago,  holding a variety of
research management  positions in power generation,  alternative fueled vehicles
and industrial end-use.  When he left GRI in 1994, Dr. Hedman was Group Manager,
Industrial and Power Generation Products and responsible for the development and
commercialization  of new natural gas technologies  for these priority  markets.
Dr. Hedman has a Bachelor of Science,  Master of Science and Ph.D. in Mechanical
Engineering from Drexel University in Philadelphia, Pennsylvania.

<PAGE>28


Dominick Aiello. Mr. Aiello, an employee of SYCOM Corporation,  currently serves
as the Company's Vice President,  and is directly responsible for overseeing the
Company's Project  Development  efforts primarily in the Eastern U.S. Mr. Aiello
has more than five years experience in developing energy efficiency  projects in
both the public and private  sectors.  He is responsible for managing a national
sales force of 12 project developers. Mr. Aiello also has been a key contributor
in implementing a sales training  curriculum for both the current sales team and
new hires.  Prior to joining  SYCOM  Corporation,  Mr.  Aiello served as a Sales
Manager for IBM.

Glenn O. Steiger. In his capacity as the Company's Vice President,  Governmental
Aggregation   Services,   Mr.   Steiger  is   responsible   for  developing  and
administering  all energy  aggregation  and related  service  activities for the
Company's governmental  accounts. An employee of SYCOM Corporation,  Mr. Steiger
joined  SYCOM  Corporation  and the Company  with 28 years of energy  experience
including a distinguished 15 year career with GPU Energy, where he served in the
following leadership capacities:  Vice President of Corporate Affairs,  Director
of Competitive Strategies & Initiatives,  Skylands Division Director, Manager of
Cogeneration  and  Marketing,   and  Load  Management  Manager.   Mr.  Steiger's
accomplishments at GPU include the successful creation of both the Coalition for
Customer  Choice and the  Coalition for  Competitive  Issues.  In addition,  Mr.
Steiger led the  campaigns to defeat  municipalization  efforts in both Aberdeen
and Monroe,  New Jersey. In Monroe, he created and negotiated New Jersey's first
successful  municipal  electric  aggregation  program.  Working  with a team  of
township officials,  residents and the township attorney,  Mr. Steiger developed
the conceptual,  technical and customer framework necessary to move this cutting
edge competitive  initiative to a fully operational  customer choice program. He
was also  responsible  for the  negotiation  and  acquisition of over 1000 MW of
cogeneration  related  power for GPU and helped to create  GPU's  first  "shared
savings" energy  management  program.  He served on the New Jersey Energy Master
Plan negotiating  committee and Governor Whitman's  Economic  Development Master
Plan Commission.  Mr. Steiger also headed the Energy/Utility Division at the MWW
Group  where he  specialized  in  providing  the  energy  industry  with  public
relations,   governmental  advocacy,   marketing   communications,   and  energy
aggregation program development  expertise.  His energy-related  background also
includes  leadership  roles with Public Service  Electric & Gas Company,  Sussex
Rural  Electric  Cooperative  and  Bailey  Controls.  Mr.  Steiger is a licensed
Professional  Engineer  with a Bachelor  of Science in Civil  Engineering  and a
Masters in  Management of Public and  Regulated  Enterprises,  both from the New
Jersey Institute of Technology. A graduate of Leadership New Jersey and the Duke
University  Executive  School of  Business,  he is also a member of the National
Society of Professional  Engineers and a Member of the U.S.  Chamber of Commerce
and the Edison Electric Institute's Grass Roots Advisory Boards.

Roger Dower.  Mr. Dower,  the Company's  Vice  President,  manages the Company's
Washington,  D.C. business unit, where he oversees the development  activity for
trade  associations  and federal projects as well as regional  development.  Mr.
Dower,  an  employee  of  SYCOM  Corporation,   also  provides  legislative  and
regulatory  support for the Company and the energy service industry's energy and
environmental  agenda.  Mr.  Dower is an  expert  in  energy  and  environmental
economics,   policy,   regulation  and  legislation.   Prior  to  joining  SYCOM
Corporation and the Company,  Mr. Dower was Director of the Climate,  Energy and
Pollution  Program at the World Resources  Institute from 1990 to 1996. Prior to
that,  Mr.  Dower  was  the  head  of the  Energy  and  Environment  Unit at the
Congressional  Budget  Office from 1985 to 1990.  Mr. Dower has also served as a
consultant  to the  Executive  Office of the President of the United States from
1979  to  1980  and  was  the  Research  Director  and a  Board  Member  of  the
Environmental  Law  Institute  from  1976  to  1985.  He has  authored  numerous
publications  on carbon  dioxide (CO2) policy,  renewable  energy and tax policy
relative to energy and the environment.  With over 18 years of experience in the
energy business,  Mr. Dower has an in-depth understanding of energy markets, the
role of energy  efficiency and the  environmental  effects of energy.  Mr. Dower
received a Masters of Science and Bachelor of Science in Resource Economics from
the University of Maryland.

<PAGE>29


Christian J. Bitters. Mr. Bitters serves as Vice President of Operations for the
Company.  In this  capacity,  Mr.  Bitters  oversees the project  management and
engineering  teams  responsible  for  implementation  of all  of  the  Company's
projects  primarily in the Eastern U.S.,  and has over seven years of experience
in managing the  implementation  of energy  efficiency  projects in  commercial,
industrial,   governmental  and   institutional   facilities.   Mr.  Bitters  is
responsible  for  recruiting  and  training  new team  members  and  developed a
sophisticated    Project    Management    Manual   that   defines   the   roles,
responsibilities,  methods,  procedures and  specifications for implementing the
Company's  projects.  Mr. Bitters'  experience  includes  project  management of
commercial  office space and recruiting,  training and managing project managers
and engineers. Prior to joining SYCOM Corporation, he served as a Senior Project
Manager for OMNI Construction,  Inc., in Washington, D.C. for 10 years, where he
managed construction and renovation projects with a total value of $205,000,000.
Mr.  Bitters  holds a  Master  of  Science  and  Bachelor  of  Science  in Civil
Engineering from the University of Maryland.

Russell Wm. Royal. Mr. Royal serves as the President and Chief Operating Officer
of LTS, the Southern  California  lighting contractor acquired by the Company in
June  1998.  Mr.  Royal  has 20  years  experience  in all  phases  of  building
automation,   light  retrofit  and  lighting  controls.   His  specific  project
experience  includes:  numerous  high-rise office building  retrofit and control
projects through-out California,  district-wide multi-facility lighting retrofit
and lighting  controls  projects for the Santa Ana Unified  School  District and
several  comprehensive  campus wide  lighting  retrofit  and  lighting  controls
projects at several  California  community  colleges and school  districts.  Mr.
Royal has a Bachelor of Science in Psychology from California State  University,
San Bernardino.

Audrey Nelson Stubenberg,  Esq. Ms. Nelson Stubenberg has 10 years experience as
a  practicing  transactional  attorney  and  currently  serves as the  Company's
Secretary and General Counsel.  She joined the Company in 1994. Prior to joining
the Company,  Ms. Nelson Stubenberg was an associate with the San Diego law firm
of  Procopio,   Cory,   Hargreaves  and  Savitch,   a  business  and  commercial
transactions  firm.  A member of the  California  State Bar and the American Bar
Association, Ms. Nelson Stubenberg earned a Bachelor of Arts from the University
of Redlands and a Juris  Doctorate  from the  University  of San Diego School of
Law.

Compliance  with Section 16(a) of the Securities  Exchange Act of 1934.  Section
16(a) of the Securities  Exchange Act of 1934, as amended,  requires the Company
directors,  executive  officers  and persons who own more than 10 percent of the
Company's  Class A Common  Stock to file  reports of  ownership  and  changes in
ownership with the SEC.  Directors,  officers and  stockholders  of more than 10
percent  of the  Company's  Class  A  Common  Stock  are  required  by  the  SEC
regulations  to furnish the Company with copies of all Section  16(a) forms they
file.

Based solely on review of the copies of such forms furnished to the Company,  or
written  representations  that  such  filings  were not  required,  the  Company
believes  that since July 1, 1997,  through  the end of its most  recent  fiscal
year,  all  Section  16(a)  filing  requirements  applicable  to its  directors,
officers  and  stockholders  of more than 10  percent of the  Company's  Class A
Common  Stock were  complied  with  except as follows:  (i) one report  (Form 3)
covering one  transaction  inadvertently  was filed late by Mr.  Kolk;  (ii) one
report (Form 3) covering  one  transaction  inadvertently  was filed late by Ms.
Lowe; (iii) one report (Form 3) covering one transaction inadvertently was filed
late by Mr.  Shockley;  (iv)  one  report  (Form  3)  covering  one  transaction
inadvertently  was filed late by Mr. Royal; (v) one report (Form 4) covering one
transaction  inadvertently  were filed late by Mr.  Holt;  and (vi) two  reports
(Form 4 and Form 5) covering two transactions  inadvertently  were filed late by
Mr. Clark.  Additionally,  the Company has not received  copies of a Form 5 from
two former officers of the Company.


<PAGE>30


Item 10.  Executive Compensation.

The following table sets forth the aggregate cash compensation paid for the past
three  fiscal  years by the Company  and its  predecessors  for  services of Mr.
Sperberg  (President),  and the three most highly compensated executive officers
whose  compensation  exceeds $100,000 per year:  Messrs.  Gary (former Executive
Vice  President and  Secretary),  Mazanec  (Senior Vice  President) and Davidson
(Senior Vice President).


                                             SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>


                                                                   Long Term Compensation
                                                                   ----------------------
                                                                   ---------------------- ---------

                                      Annual Compensation                 Awards          Payouts
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------

                                                                   Restricted
                                                                   Stock     Securities             All Other
Name and                                             Other Annual  Award(s)  Underlying   LTIP      Compensation
Principal Position      Fiscal Salary       Bonus    Compensation  ($)       Options      Payouts    ($)
                        Year   ($)          ($)       ($)                     (#)          ($)
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------

<S>                     <C>    <C>          <C>       <C>           <C>    <C>             <C>    <C>  
Richard T. Sperberg     1998   $149,125(2)  $32,500   $17,889 (3)     -0-     126,954 (5)    -0-     $ -0-
CEO and President       1997   $136,000     $  -0-    $15,781 (3)     -0-     318,616 (6)    -0-     $ -0-
                        1996   $130,000     $13,473   $15,953 (3)     -0-     375,205 (7)    -0-     $ -0-
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------

William M. Gary III(1)  1998   $132,660(2)  $  -0-     $12,371 (3)    -0-      25,000 (8)    -0-     $43,776 (17)
EVP and Secretary       1997   $120,000     $  -0-     $ 7,953 (3)    -0-         -0- (9)    -0-     $ -0-
                        1996   $115,000     $ 4,504    $12,945 (3)    -0-      30,691 (10)   -0-     $ -0-
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------

Frank J. Mazanec        1998   $137,154(2)  $22,083    $10,923 (3)(4) -0-      75,000 (11)   -0-     $ -0-
Senior Vice             1997   $127,000     $  -0-     $64,471 (3)(4) -0-     272,352 (12)   -0-     $ -0-
President               1996   $120,000     $ 8,815    $49,663 (3)(4) -0-      72,904 (13)   -0-     $ -0-
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------

Keith G. Davidson       1998   $121,342(2)  $23,333    $ 7,702 (3)(4) -0-     140,000 (14)   -0-     $ -0-
Senior Vice             1997   $102,000     $  -0-     $20,838 (3)(4) -0-     119,118 (15)   -0-     $ -0-
President               1996   $105,000     $ 1,426    $43,860 (3)(4) -0-     137,597 (16)   -0-     $ -0-
----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------

</TABLE>

 (1)    Mr. Gary served as the Company's  Executive Vice President and Secretary
        through December 31, 1997.  Effective  January 1, 1998, Mr. Gary and the
        Company  executed a Severance  Agreement  pursuant to which, in exchange
        for Mr. Gary's  agreement to continue to serve in a limited  capacity to
        the Company,  the Company  agreed to pay Mr. Gary his annual salary plus
        certain benefits  (including  health care) through June 30, 1998, unless
        Mr. Gary had not secured  full-time  employment  with an employer  other
        than the Company as of such date,  in which case Mr.  Gary's  employment
        with the Company would continue until December 31, 1998, unless Mr. Gary
        obtains full-time employment prior to that date. As of November 5, 1998,
        Mr.  Gary  has  represented  to the  Company  that he has  not  obtained
        full-time employment.

(2)     In fiscal year 1997,  certain executive officers agreed to defer certain
        portions of their base salary and other  compensation from approximately
        December 1, 1996 through June 30, 1997. This deferred  compensation  was
        repaid on December  31,  1997,  with  simple  interest at the rate of 15
        percent per annum.

<PAGE>31


(3)     Includes a company car or car expense allowance and  premiums  for life
        insurance.

(4)     Includes  commissions  paid or advanced in  connection  with  negotiated
        customer contracts pursuant to the commission policy of the Company.

(5)     Includes a five year option to purchase 126,954 shares of Class A Common
        Stock at $0.704 per share  granted on April 1, 1998,  subject to vesting
        as follows:  42,318  shares vest on April 1 in each of fiscal year 1999,
        2000 and 2001.

(6)     Includes  (i) a five year option to purchase  250,000  shares of Class A
        Common Stock at $0.3251 per share granted on March 13, 1997,  subject to
        vesting as follows:  83,334 shares vested on March 13, 1998;  and 83,333
        shares vest on March 13 in each of fiscal year 1999 and 2000; and (ii) a
        five year option to  purchase  4,000  shares of Class A Common  Stock at
        $0.2956 per share,  as repriced on March 13, 1997,  and a 10 year option
        to purchase  64,616 shares of Class A Common Stock at $0.2956 per share,
        as  repriced on March 13, 1997  (which  options are fully  vested).  Mr.
        Sperberg  previously  reported  a five year  option to  purchase  38,100
        shares of Class A Common  Stock at $0.2956  per share,  as  repriced  on
        March 13, 1997, which options were exercised in January 1998.

(7)     Includes  (i) a five year option to purchase  150,000  shares of Class A
        Common  Stock at $0.28 per share,  as  repriced on August 9, 1995 (which
        options are fully  vested);  and (ii) 10 year  options to  purchase  (a)
        52,808  shares of Class A Common  Stock at $0.50 per  share  granted  on
        November 20, 1995;  (b) 107,781  shares of Class A Common Stock at $0.50
        per share granted on January 25, 1996;  and (c) 64,616 shares of Class A
        Common  Stock at  $0.2956  per share  granted  on May 22,  1996,  and as
        repriced on March 13, 1997 (which options are fully vested).

(8)     Includes a five year option to purchase  25,000 shares of Class A Common
        Stock at $0.5625 per share,  issued to Mr.  Gary on January 1, 1998,  in
        accordance  with the Company's 1993 Stock Option Plan for his service as
        a non-employee director.

(9)     Mr. Gary  previously  reported (i) a five year option to purchase 25,000
        shares of Class A Common Stock at $0.3251 per share granted on March 13,
        1997, which subsequently were relinquished under the terms of Mr. Gary's
        Severance  Agreement;  and (ii) five year  options  to  purchase  39,200
        shares of Class A Common  Stock at $0.2956  per share,  as  repriced  on
        March 13, 1997, and a 10 year option to purchase  14,670 shares of Class
        A Common  Stock at $0.2956 per share,  as  repriced  on March 13,  1997,
        which  options  were  exercised  in December  1997 (500),  January  1998
        (35,700 and 3,000) and April 1998 (14,670).

(10)    Mr. Gary  previously  reported a five year  option to  purchase  100,000
        shares of Class A Common Stock at $0.28 per share, as repriced on August
        9, 1995 (which options were  exercised in April 1998),  13,608 shares of
        Class A Common  Stock at $0.50 per share  granted on November  20, 1995,
        17,083  shares of Class A Common  Stock at $0.50 per  share  granted  on
        January 25, 1996,  and 14,670  shares of Class A Common Stock at $0.2956
        per share  granted on May 22,  1996,  and as  repriced on March 13, 1997
        (which options were exercised in April 1998).

(11)    Includes a five year option to purchase  75,000 shares of Class A Common
        Stock at $0.64 per share granted on April 1, 1998, subject to vesting as
        follows: 25,000 shares vest on April 1 in each of fiscal year 1999, 2000
        and 2001.

(12)    Includes  (i) a 10 year  option to  purchase  250,000  shares of Class A
        Common Stock at $0.2956 per share granted on March 13, 1997,  subject to
        vesting as follows:  83,334 shares vested on March 13, 1998;  and 83,333
        shares vest on March 13 in each of fiscal  year 1999 and 2000;  and (ii)
        five year  options to purchase  4,000  shares of Class A Common Stock at
        $0.2956 per share,  as repriced on March 13, 1997,  and a 10 year option
        to  purchase  18,352 of Class A Common  Stock at $0.2956  per share,  as
        repriced on March 13, 1997 (which options are fully vested). Mr. Mazanec
        previously reported a five year option to purchase 9,300 shares of Class
        A Common  Stock at $0.2956 per share,  as  repriced  on March 13,  1997,
        which  options were  exercised  in December  1997 (500) and January 1998
        (8,800).

<PAGE>32

(13)    Includes 10 year  options to purchase (i) 7,736 shares of Class A Common
        Stock at $0.50 per share  granted on  November  20,  1995;  (ii)  46,816
        shares of Class A Common Stock at $0.50 per share granted on January 25,
        1996;  and (iii)  18,352  shares of Class A Common  Stock at $0.2956 per
        share granted on May 22, 1996, and as repriced on March 13, 1997 (all of
        which options are fully vested).  Mr. Mazanec  previously  reported a 10
        year option to purchase  70,000  shares of Class A Common Stock at $0.25
        per share,  as repriced on August 9, 1995,  which options were exercised
        in June 1998.

(14)    Includes 10 year options to purchase (i) 40,000 shares of Class A Common
        Stock at $0.53 per share granted on October 27, 1997, subject to vesting
        as follows:  13,334  shares vest on October 27, 1998;  and 13,333 shares
        vest on  October  27 in each of  fiscal  year  1999 and  2000;  and (ii)
        100,000  shares of Class A Common  Stock at $0.64 per share  granted  on
        April 1, 1998,  subject to vesting as  follows:  33,334  shares  vest on
        April 1, 1999;  and 33,333 shares vest on April 1 in each of fiscal year
        2000 and 2001.

(15)    Includes  10 year  options to  purchase  (i)  100,000  shares of Class A
        Common Stock at $0.2956 per share granted on March 13, 1997,  subject to
        vesting as follows:  33,334 shares vested on March 13, 1998;  and 33,333
        shares vest on March 13 in each of fiscal  year 1999 and 2000;  and (ii)
        19,118  shares of Class A Common  Stock at $0.2956 per share  granted on
        May 22,  1996,  as repriced  on March 13, 1997 (which  options are fully
        vested).

(16)    Includes 10 year options to purchase (i) 70,000 shares of Class A Common
        Stock at $0.25 per share,  as  repriced  on August 9, 1995;  (ii) 37,072
        shares of Class A Common  Stock at $0.50 per share  granted on  November
        20, 1995; (iii) 11,407 shares of Class A Common Stock at $0.50 per share
        granted on January 25,  1996;  and (iv) 19,118  shares of Class A Common
        Stock at $0.2956 per share granted on May 22, 1996, as repriced on March
        13, 1997 (all of which options are fully vested).

(17)    Includes  $43,776 paid to Mr. Gary under his Severance  Agreement in the
        form of a cash-less  transaction  involving the simultaneous exercise of
        certain options.

The following table sets forth options granted by the Company to the individuals
listed in the Summary Compensation Table.

<TABLE>
<CAPTION>



                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                INDIVIDUAL GRANTS

----------------------- ------------- --------------- ------------- ------------- -------------

                        Number of     Percentage of
                        Securities    Total
                        Underlying    Options/SARs                  Market
                        Options/SARs  Granted to      Exercise or   Price on
                        Granted       Employees       Base Price    Date          Expiration
Name                    (#)           In Fiscal Year  ($/Share)     of Grant      Date
                                                                    
<S>                       <C>             <C>         <C>           <C>           <C>
Richard T. Sperberg       126,954         12.35       $0.704        $0.64         4/1/03
----------------------- ------------- --------------- ------------- ------------- -------------

William M. Gary II         25,000          2.43       $0.5625       $0.5625       1/1/03
----------------------- ------------- --------------- ------------- ------------- -------------

Frank J. Mazanec           75,000          7.29       $0.64         $0.64         4/1/08
----------------------- ------------- --------------- ------------- ------------- -------------

 Keith G. Davidson        100,000          9.72       $0.64         $0.64         4/1/08
                           40,000          3.89       $0.53         $0.53         10/27/07
----------------------- ------------- --------------- ------------- ------------- -------------
</TABLE>



<PAGE>

            AGGREGATED OPTION/SARS EXERCISES IN LAST FISCAL YEAR AND
                       FISCAL YEAR-END OPTION/SARS VALUES

<TABLE>
<CAPTION>



                                                           Number of            Value of
                                                          Securities           Unexercised
                             Shares                       Underlying          In-the-Money
                            Acquired                      Unexercised            Options
                               On          Value      Options/SARs at FY        at FY End
                            Exercise      Realized          End (#)           Exercisable/
          Name                (#)           ($)          Exercisable/        Unexercisable *
                                                         Unexercisable
------------------------- ------------- ------------- -------------------- --------------------
------------------------- ------------- ------------- -------------------- --------------------

<S>                          <C>          <C>           <C>                <C>           
  Richard T. Sperberg        38,100       $11,979       462,539/293,620     $371,493/$199,960
------------------------- ------------- ------------- -------------------- --------------------
------------------------- ------------- ------------- -------------------- --------------------

  William M. Gary III       153,870       $54,027         55,691/-0-          $35,751/$-0-
------------------------- ------------- ------------- -------------------- --------------------
------------------------- ------------- ------------- -------------------- --------------------

    Frank J. Mazanec         79,300       $68,926       160,238/241,666     $128,962/$185,483
------------------------- ------------- ------------- -------------------- --------------------
------------------------- ------------- ------------- -------------------- --------------------

   Keith G. Davidson          -0-           $-0-        170,931/206,666     $142,745/$136,893
------------------------- ------------- ------------- -------------------- --------------------
</TABLE>

        *Based upon the average price of $1.17 as of June 30, 1998.

Employment  Agreements  with  Executive  Officers.  In June  1998,  the  Company
executed  an  Agreement  of  Purchase  and Sale of Stock  (the  "Stock  Purchase
Agreement")  to  acquire  all of the  issued and  outstanding  stock of LTS.  In
connection  with the Stock  Purchase  Agreement,  Russell Wm. Royal  executed an
Employment  Agreement  with the  Company  and LTS  (together  referred to in the
Employment Agreement as the "Company") pursuant to which the Company secured the
full-time  services  of Mr.  Royal on an  exclusive  basis  (upon  the terms and
conditions set forth in the Employment  Agreement)  until March 31, 2000 (unless
terminated earlier in accordance with the Employment Agreement) at a base salary
of $125,000 per year,  subject to increases as determined by the Company's Board
of Directors based upon Mr. Royal's  performance,  LTS's net income contribution
to the Company's  consolidated  financial statements and the compensation of the
Company  executives.  Beginning  in  January  1999,  Mr.  Royal is  eligible  to
participate  in the Company's  Stock Option Plan,  and the Company's  bonus pool
(consistent  with  other  the  Company  executives),  all as  determined  by the
Compensation Committee at its sole discretion. Mr. Royal also receives a monthly
car allowance,  and is entitled to  participate  in employee  benefit and fringe
benefits plans that LTS makes available generally to its employees. Furthermore,
in addition to his other compensation under the Employment Agreement,  Mr. Royal
is  entitled to certain  bonus  and/or  severance  payments  sufficient  to make
certain payments due and owing by Mr. Royal on certain loans from LTS,  provided
that the impact of the bonus payments will be considered in connection  with the
earn-out provisions under the Stock Purchase Agreement. The Employment Agreement
also  provides for a severance  payment  equal to Mr.  Royal's then monthly base
salary  multiplied  by the  number of  months  remaining  under  the  Employment
Agreement if Mr. Royal is terminated  without  cause.  Additionally,  either the
Company or Mr.  Royal may  terminate  the  Employment  Agreement  in the event a
change in  control  in the  Company  occurs  during  the term of the  Employment
Agreement.  Under the terms of the Employment Agreement, Mr. Royal is prohibited
from engaging in any activity  competitive  with the Company  during the term of
the Employment Agreement.



<PAGE>34


Item 11.  Security Ownership of Certain Beneficial Owners and Management..

The following  table sets forth certain  information  about the ownership of the
Company's  Class A Common Stock by (i) those  persons known by the Company to be
the beneficial  owners of more than 5 percent of the total number of outstanding
shares of any class entitled to vote; (ii) each director and highly  compensated
officer;  and (iii) all  directors  and officers of the Company as a group.  The
table  includes  Class A Common Stock  issuable  upon the exercise of Options or
Warrants  that are  exercisable  within  60 days.  Except  as  indicated  in the
footnotes to the table,  the named persons have sole voting and investment power
with  respect  to all  shares of the  Company's  Class A Common  Stock  shown as
beneficially owned by them, subject to community property laws where applicable.
The  ownership  figures  in the table are based on the books and  records of the
Company.




                                                     Class A Common Stock
                                              ----------------------------------

Name and Address                                 Amount of     Percent of Class
of Beneficial Owner                              Ownership

--------------------------------------------- ---------------- -----------------

Timothy G. Clark                                150,000 (1)           *
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

Keith G. Davidson                               218,295 (2)          1.17
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

William M. Gary III                            2,319,478 (3)        12.51
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

Gruber & McBaine Capital Management., LLC      1,182,043 (4)         6.40
50 Osgood Place
San Francisco, CA 94133

Jon D. Gruber                                  3,286,847 (5)        17.85
50 Osgood Place
San Francisco, CA 94133

H. Tate Holt                                    322,882 (6)          1.74
240 Wilson Way
Larkspur, CA 94939


<PAGE>35


Lagunitas Partners, L.P.                        888,572 (7)          4.81
50 Osgood Place
San Francisco, CA 94133

Thomas Lloyd-Butler                            1,190,043 (8)         6.44
50 Osgood Place
San Francisco, CA 94133

Frank J. Mazanec                                655,370 (9)          3.52
Mazanec Family Trust
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

J. Patterson McBaine                          3,278,247 (10)        17.81
50 Osgood Place
San Francisco, CA 94133

Charles C. McGettigan                         2,337,695 (11)        12.26
50 Osgood Place
San Francisco, CA 94133

Proactive Investment Managers, L.P.           1,981,304 (12)        10.95
50 Osgood Place
San Francisco, CA 94133

Proactive Partners, L.P.                      1,906,521 (13)        10.56
50 Osgood Place
San Francisco, CA 94133

Richard T. Sperberg                           3,097,161 (14)        16.05
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

S. Lynn Sutcliffe                             1,750,000 (15)         9.48
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873

<PAGE>36

SYCOM Enterprises, LLC                        1,750,000 (16)         9.48
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873

Westar Capital, Inc.                          8,616,770 (17)        38.17
818 South Kansas Street
Topeka, KS 66601

Myron A. Wick III                             2,141,304 (18)        11.32
50 Osgood Place
San Francisco, CA 94133

All Directors and Officers as a Group         11,864,750 (19)       56.82
(15)


(1)     Includes Options to purchase 50,000,  25,000,  25,000, 25,000 and 25,000
        shares of Class A Common  Stock  exercisable  until  January  25,  2001,
        October 3, 2001,  April 23, 2002,  October 3, 2002,  and October 3, 2003
        respectively.

(2)     In  addition  to 34,030  shares of Class A Common  Stock  over which Mr.
        Davidson has sole voting and  investment  power (which  number  includes
        30,600 shares held by Mr. Davidson's minor children), the table reflects
        184,265 shares of Class A Common Stock that may be immediately  acquired
        upon the exercise of Options  expiring  August 9, 2005 (70,000  shares),
        November 20, 2005 (37,072 shares), January 25, 2006 (11,407 shares), May
        22, 2006 (19,118 shares), March 13, 2007 (33,334 shares) and October 28,
        2007  (13,334).  The table  does not  reflect  66,666  shares of Class A
        Common Stock that may be acquired upon the exercise of Options  expiring
        March  13,  2007,  in the event a change  in  control  is deemed to have
        occurred. In this event, Mr. Davidson's percent of class ownership would
        be 1.52 percent.

(3)     Includes  30,619 shares of Class A Common Stock that may be  immediately
        acquired upon the exercise of Options expiring November 20, 2005 (13,608
        shares) and January 25, 2006 (17,083 shares), and 45,858 shares of Class
        A Common  Stock that may be  immediately  acquired  upon the exercise of
        Warrants expiring June 30, 1999.

        The table also  reflects an  aggregate  of  1,879,782  shares of Class A
        Common Stock (which number  includes  142,856  shares held by Mr. Gary's
        minor  children) that are subject to (i) a Stockholders  Agreement among
        certain  stockholders  of the Company,  including  Mr. Gary,  and Westar
        Capital  (the  "Westar  Stockholders  Agreement");  and  (ii)  a  Voting
        Agreement among certain stockholders of the Company, including Mr. Gary,
        SYCOM and SYCOM  Corporation  (the  "SYCOM  Voting   Agreement").  Under
        the  Westar  Stockholders  Agreement Westar Capital (i) has the right to
        nominate a certain number of directors, and  the  principal stockholders
        of  the  Company that are a party to the Westar Stockholders  Agreement,
        including  Mr.  Gary, have agreed to vote for Westar Capital's nominees;
        and  (ii)  shall  vote  for  the  remaining  nominees  selected  by  the
        Nominating Committee  of the Company. The Westar Stockholders  Agreement
        terminates  the  earlier  of  (i) five  years  after  the  date  of  the
        Agreement; or (ii) the date  upon  which  the  stockholdings  of  Westar
        Capital  and  its  affiliates,  counted  on an as-converted basis, falls
        below 10  percent of  the  outstanding  Common  Stock  of  the  Company,
        calculated  on  a  fully-diluted   basis  as  specified  in  the  Westar
        Stockholders Agreement.

        Under the SYCOM Voting  Agreement (i) SYCOM and SYCOM  Corporation  have

<PAGE>37


        the right to nominate a certain  number of directors,  and the principal
        stockholders  of the  Company  that  are a  party  to the  SYCOM  Voting
        Agreement,  including Mr. Gary,  have agreed to vote for such  nominees;
        (ii) SYCOM and SYCOM  Corporation  have agreed to vote for the remaining
        director nominees selected by the Company;  and (iii) all parties to the
        SYCOM Voting  Agreement,  including Mr. Gary, have agreed to vote at the
        next annual meeting to authorize the issuance of additional common stock
        to permit the conversion of the Series D Convertible  Preferred Stock to
        Class A  Common  Stock  in  accordance  with  the  terms of the Sale and
        Noncompetition  Agreement  among  the  Company,  SYCOM  Corporation  and
        others. The SYCOM Voting Agreement terminates June 30, 2001.

        Additionally  the table reflects the following  securities  that all are
        subject to an Agreement of Stock  Purchase and Sale among Messrs.  Gary,
        Esquer,  Mazanec and Sperberg:  351,892  shares of Class A Common Stock,
        and 11,327  shares of Class A Common Stock that may be acquired upon the
        exercise of Warrants  expiring June 30, 1999.  Messrs.  Gary, Esquer and
        Sperberg  have  entered  into such  Agreement  whereby  they have  sold,
        subject to payment and vesting  schedules,  shares of the  Onsite-Cal to
        Messrs.  Esquer  and  Mazanec.  Until a share is paid for all voting and
        dispositive  rights  remain with the seller.  Upon  vesting and payment,
        each such purchaser of the Onsite-Cal shares became entitled to the same
        number of the  Company's  Class A Common Stock  received by the sellers,
        pursuant to the  Reorganization,  with respect to the shares  sold.  The
        table reflects all adjustments for shares that have vested and been paid
        for in full.

(4)     Gruber & McBaine  Capital  Management,  LLC  ("Gruber &  McBaine"),  the
        successor-in-interest  to Gruber & McBaine Capital  Management,  Inc., a
        California  corporation,  is an investment advisor and a general partner
        of Lagunitas Partners, L.P. Consequently, Gruber & McBaine has or shares
        voting or  dispositive  power  over  1,151,573  shares of Class A Common
        Stock and 30,470 shares of Class A Common Stock that may be  immediately
        acquired upon the exercise of Warrants expiring June 30, 1999.

(5)     Mr.  Gruber is a member of Gruber &  McBaine  Capital  Management,  LLC,
        which is an  investment  advisor  and a  general  partner  of  Lagunitas
        Partners,  L.P.,  and  is a  general  partner  of  Proactive  Investment
        Managers,  L.P., which also is an investment advisor and general partner
        of  Proactive  Partners,  L.P.,  and Fremont  Proactive  Partners,  L.P.
        Consequently, in addition to 123,500 shares of Class A Common Stock over
        which Mr.  Gruber has sole voting and  investment  power  (which  number
        includes shares held by Mr.  Gruber's  family members and  foundations),
        Mr. Gruber also has or shares voting or dispositive power over 2,841,041
        shares  of Class A Common  Stock  and  322,306  shares of Class A Common
        Stock that may be  immediately  acquired  upon the  exercise of Warrants
        expiring  December 17, 1998, March 1, 1999, June 30, 1999, and September
        11, 2002.

(6)     Includes  150,000 shares of Class A Common Stock that may be immediately
        acquired upon the exercise of Options  expiring January 25, 2001 (50,000
        shares),  May 4, 2001 (25,000  shares),  April 23, 2002 (25,000 shares),
        May  4,  2002  (25,000   shares)  and  May  4,  2003  (25,000   shares).
        Additionally  the  table  reflects  30,000  shares  held  by Mr.  Holt's
        children.

        The table also reflects  143,082 shares of Class A Common Stock that are
        subject to the SYCOM Voting Agreement among certain  stockholders of the
        Company, including Mr. Holt as the President of Holt & Associates, SYCOM
        and SYCOM Corporation.  As previously disclosed,  under the SYCOM Voting
        Agreement (i) SYCOM and SYCOM  Corporation  have the right to nominate a
        certain  number of  directors,  and the  principal  stockholders  of the
        Company that are a party to the SYCOM Voting  Agreement,  including  Mr.
        Holt,  have  agreed  to vote for such  nominees;  (ii)  SYCOM  and SYCOM
        Corporation  have  agreed to vote for the  remaining  director  nominees
        selected  by the  Company;  and (iii) all  parties  to the SYCOM  Voting
        Agreement,  including  Mr. Holt,  have agreed to vote at the next annual
        meeting to authorize the issuance of  additional  common stock to permit
        the  conversion of the Series D Convertible  Preferred  Stock to Class A
        Common Stock in accordance with the terms of the Sale and Noncompetition
        Agreement among the Company,  SYCOM  Corporation  and others.  The SYCOM
        Voting Agreement terminates June 30, 2001.

 (7)    Includes  30,470 shares of Class A Common Stock that may be  immediately
        acquired upon the exercise of Warrants  expiring June 30, 1999, and over
        which  Lagunitas  Partners,  L.P.  ("Lagunitas")  has  sole  voting  and
        investment power. The table also reflects an aggregate of 858,102 shares
        of Class A Common Stock that are subject to (i) the Westar  Stockholders
        Agreement  among  certain   stockholders   of  the  Company,   including
        Lagunitas, and Westar Capital; and (ii) the SYCOM Voting Agreement among

<PAGE>38

        certain  stockholders  of the Company,  including  Lagunitas,  SYCOM and
        SYCOM   Corporation.   As   previously   disclosed,   under  the  Westar
        Stockholders  Agreement  Westar  Capital (i) has the right to nominate a
        certain  number of  directors,  and the  principal  stockholders  of the
        Company that are a party to the Westar Stockholders Agreement, including
        Lagunitas,  have agreed to vote for Westar Capital's nominees;  and (ii)
        shall  vote  for  the  remaining  nominees  selected  by the  Nominating
        Committee of the Company.  The Westar Stockholders  Agreement terminates
        the earlier of (i) five years after the date of the  Agreement;  or (ii)
        the  date  upon  which  the  stockholdings  of  Westar  Capital  and its
        affiliates,  counted on an as-converted basis, falls below 10 percent of
        the   outstanding   Common  Stock  of  the  Company,   calculated  on  a
        fully-diluted basis as specified in the Westar Stockholders Agreement.

        As previously disclosed,  under the SYCOM Voting Agreement (i) SYCOM and
        SYCOM  Corporation  have the  right to  nominate  a  certain  number  of
        directors,  and the  principal  stockholders  of the Company  that are a
        party to the SYCOM Voting Agreement, including Lagunitas, have agreed to
        vote for such nominees;  (ii) SYCOM and SYCOM Corporation have agreed to
        vote for the remaining  director nominees  selected by the Company;  and
        (iii) all parties to the SYCOM Voting  Agreement,  including  Lagunitas,
        have agreed to vote at the next annual meeting to authorize the issuance
        of  additional  common  stock to permit the  conversion  of the Series D
        Convertible  Preferred  Stock to Class A Common Stock in accordance with
        the terms of the Sale and  Noncompetition  Agreement  among the Company,
        SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
        30, 2001.

(8)     Mr.  Lloyd-Butler  is a member of Gruber & McBaine  Capital  Management,
        LLC, an investment advisor and a general partner of Lagunitas  Partners,
        L.P.  Consequently,  in addition  to the 8,000  shares of Class A Common
        Stock  over  which  he  has  sole  voting  and  investment   power,  Mr.
        Lloyd-Butler  has or shares voting or  dispositive  power over 1,151,573
        shares of Class A Common Stock and 30,470 shares of Class A Common Stock
        that may be immediately  acquired upon the exercise of Warrants expiring
        June 30, 1999.

(9)     Includes  160,238 shares of Class A Common Stock that may be immediately
        acquired upon the exercise of Options expiring  February 15, 1999 (4,000
        shares),  November  20, 2005 (7,736  shares),  January 25, 2006  (46,816
        shares),  May 22,  2006  (18,352  shares),  and March 13,  2007  (83,334
        shares),  and  2,264  shares  of  Class  A  Common  Stock  that  may  be
        immediately  acquired  upon the exercise of Warrants  expiring  June 30,
        1999. Additionally,  the table reflects 144,850 shares of Class A Common
        Stock over which Mr. Mazanec,  as a trustee of the Mazanec Family Trust,
        has or shares voting or  dispositive  power.  The table does not reflect
        166,666  shares of Class A Common  Stock that may be  acquired  upon the
        exercise of Options  expiring  March 13, 2007,  in the event a change in
        control is deemed to have occurred. In this event, Mr. Mazanec's percent
        of class ownership would be 4.37 percent.

        The table also reflects the following securities that all are subject to
        an Agreement of Stock Purchase and Sale among Messrs.  Mazanec,  Esquer,
        Gary and Sperberg:  336,604  shares of Class A Common Stock,  and 11,414
        shares of Class A Common Stock that may be immediately acquired upon the
        exercise of Warrants  expiring June 30, 1999.  As previously  disclosed,
        Messrs.  Esquer,  Gary and Sperberg  have  entered  into such  Agreement
        whereby they have sold, subject to payment and vesting schedules, shares
        of Onsite-Cal to Messrs.  Esquer and Mazanec.  Until a share is paid for
        all voting and dispositive  rights remain with the seller.  Upon vesting
        and  payment,  each  such  purchaser  of the  Onsite-Cal  shares  became
        entitled  to the same  number  of the  Company's  Class A  Common  Stock
        received by the sellers, pursuant to the Reorganization, with respect to
        the shares sold. The table reflects all adjustments for shares that have
        vested and been paid for in full.

(10)    Mr.  McBaine is a member of Gruber & McBaine  Capital  Management,  LLC,
        an  investment  advisor and a general  partner  of  Lagunitas  Partners,
        L.P.,  and is a general  partner of Proactive Investment Managers, L.P.,
        also an investment advisor and a general partner of Proactive  Partners,
        L.P., and Fremont Proactive Partners, L.P.  Consequently, in addition to
        the 114,900 shares of Class A Common Stock over which he has sole voting
        and investment power (which number includes shares held by Mr. McBaine's
        family  members),  Mr. McBaine has or shares voting or dispositive power
        over 2,841,041 shares of Class A Common  Stock  and  322,306  shares  of
        Class A Common Stock that may be  immediately acquired upon the exercise
        of Warrants expiring  December 17,  1998, March 1, 1999, June 30, 1999, 
        and September 11, 2002.

<PAGE>39


(11)    Includes Options to purchase 75,000,  25,000,  25,000, 25,000 and 25,000
        shares of Class A Common Stock  exercisable until January 25, 2001, July
        13,  2001,   April  23,  2002,   July  13,  2002,  and  July  13,  2003,
        respectively.  In addition to 21,391  shares of Class A Common  Stock in
        which  Mr.   McGettigan  has  sole  voting  and  investment  power,  Mr.
        McGettigan is a general partner of Proactive Investment Managers,  L.P.,
        an investment advisor and a general partner of Proactive Partners, L.P.,
        and  Fremont  Proactive  Partners,  L.P.,  and is a general  partner  of
        McGettigan,  Wick & Co., Inc., and  consequently has or shares voting or
        dispositive  power over  1,689,468  shares of Class A Common Stock,  and
        451,836 shares of Class A Common Stock that may be immediately  acquired
        upon the exercise of Warrants expiring December 17, 1998, March 1, 1999,
        June 30, 1999, September 11, 2002, and June 30, 2003.

(12)    Proactive  Investment  Managers,  L.P. ("PIM"),  is a general partner of
        Proactive  Partners,  L.P., and Fremont  Proactive  Partners,  L.P., and
        consequently  has or shares voting or  dispositive  power over 1,689,468
        shares  of Class A Common  Stock  and  279,558  shares of Class A Common
        Stock that may be  immediately  acquired  upon the  exercise of Warrants
        expiring  December 17, 1998, March 1, 1999, June 30, 1999, and September
        11, 2002. The table also reflects  12,278 shares of Class A Common Stock
        that may be immediately  acquired upon the exercise of Warrants expiring
        December 17, 1998, and June 30, 1999, and over which PIM has sole voting
        and investment power.

(13)    In  addition  to  36,678  shares  of Class A  Common  Stock  over  which
        Proactive  Partners,  L.P.  ("Proactive") has sole voting and investment
        power,  the table  reflects  276,888 shares of Class A Common Stock that
        may be  immediately  acquired  upon the  exercise of  Warrants  expiring
        December 17, 1998, March 1, 1999, June 30, 1999, and September 11, 2002.

        The table also  reflects an  aggregate  of  1,592,955  shares of Class A
        Common Stock that are subject to (i) the Westar  Stockholders  Agreement
        among certain  stockholders  of the Company,  including  Proactive,  and
        Westar  Capital;  and (ii) the  SYCOM  Voting  Agreement  among  certain
        stockholders  of the  Company,  including  Proactive,  SYCOM  and  SYCOM
        Corporation . As  previously  disclosed,  under the Westar  Stockholders
        Agreement  Westar Capital (i) has the right to nominate a certain number
        of directors,  and the principal  stockholders of the Company that are a
        party to the Westar Stockholders  Agreement,  including Proactive,  have
        agreed to vote for Westar  Capital's  nominees;  and (ii) shall vote for
        the  remaining  nominees  selected by the  Nominating  Committee  of the
        Company. The Westar Stockholders Agreement terminates the earlier of (i)
        five years after the date of the Agreement;  or (ii) the date upon which
        the  stockholdings  of Westar Capital and its affiliates,  counted on an
        as-converted  basis,  falls below 10 percent of the  outstanding  Common
        Stock of the Company,  calculated on a fully-diluted  basis as specified
        in the Westar Stockholders Agreement.

        As previously disclosed,  under the SYCOM Voting Agreement (i) SYCOM and
        SYCOM  Corporation  have the  right to  nominate  a  certain  number  of
        directors,  and the  principal  stockholders  of the Company  that are a
        party to the SYCOM Voting Agreement, including Proactive, have agreed to
        vote for such nominees;  (ii) SYCOM and SYCOM Corporation have agreed to
        vote for the remaining  director nominees  selected by the Company;  and
        (iii) all parties to the SYCOM Voting  Agreement,  including  Proactive,
        have agreed to vote at the next annual meeting to authorize the issuance
        of  additional  common  stock to permit the  conversion  of the Series D
        Convertible  Preferred  Stock to Class A Common Stock in accordance with
        the terms of the Sale and  Noncompetition  Agreement  among the Company,
        SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
        30, 2001.

(14)    Includes  462,539 shares of Class A Common Stock that may be immediately
        acquired upon the exercise of Options expiring  February 15, 1999 (4,000
        shares),  August 9, 2005  (150,000  shares),  November 20, 2005 (107,781
        shares), January 25, 2006 (52,808 shares), May 22, 2006 (64,616 shares),
        and March 13, 2002  (83,334  shares),  371,846  shares of Class A Common
        Stock that may be  immediately  acquired  upon the  exercise of Warrants
        expiring June 30, 1999, and September 11, 2002, 90 shares over which Mr.
        Sperberg has sole voting and investment power, and 70,454 shares held by
        Mr.  Sperberg's  minor son. The table does not reflect 166,666 shares of
        Class A Common  Stock that may be acquired  upon the exercise of Options
        expiring  March 13, 2007,  in the event a change in control is deemed to
        have occurred.  In this event, Mr. Sperberg's percent of class ownership
        would be 16.76 percent.

<PAGE>40


        The table also  reflects an  aggregate  of  1,848,922  shares of Class A
        Common Stock that are subject to (i) the Westar  Stockholders  Agreement
        among certain stockholders of the Company,  including Mr. Sperberg,  and
        Westar  Capital;  and (ii) the  SYCOM  Voting  Agreement  among  certain
        stockholders of the Company, including Mr. Sperberg, and SYCOM and SYCOM
        Corporation.  As  previously  disclosed,  under the Westar  Stockholders
        Agreement  Westar Capital (i) has the right to nominate a certain number
        of directors,  and the principal  stockholders of the Company that are a
        party to the Westar Stockholders Agreement, including Mr. Sperberg, have
        agreed to vote for Westar  Capital's  nominees;  and (ii) shall vote for
        the  remaining  nominees  selected by the  Nominating  Committee  of the
        Company. The Westar Stockholders Agreement terminates the earlier of (i)
        five years after the date of the Agreement;  or (ii) the date upon which
        the  stockholdings  of Westar Capital and its affiliates,  counted on an
        as-converted  basis,  falls below 10 percent of the  outstanding  Common
        Stock of the Company,  calculated on a fully-diluted  basis as specified
        in the Westar Stockholders Agreement.

        As previously disclosed,  under the SYCOM Voting Agreement (i) SYCOM and
        SYCOM  Corporation  have the  right to  nominate  a  certain  number  of
        directors,  and the  principal  stockholders  of the Company  that are a
        party to the SYCOM Voting Agreement, including Mr. Sperberg, have agreed
        to vote for such nominees;  (ii) SYCOM and SYCOM Corporation have agreed
        to vote for the remaining director nominees selected by the Company; and
        (iii) all parties to the SYCOM Voting Agreement, including Mr. Sperberg,
        have agreed to vote at the next annual meeting to authorize the issuance
        of  additional  common  stock to permit the  conversion  of the Series D
        Convertible  Preferred  Stock to Class A Common Stock in accordance with
        the terms of the Sale and  Noncompetition  Agreement  among the Company,
        SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
        30, 2001.

        Additionally  the table reflects the following  securities  that all are
        subject  to an  Agreement  of  Stock  Purchase  and Sale  among  Messrs.
        Sperberg,  Esquer,  Gary and Mazanec:  351,892  shares of Class A Common
        Stock,  and 11,327  shares of Class A Common  Stock that may be acquired
        upon the  exercise of Warrants  expiring  June 30, 1999.  As  previously
        disclosed,  Messrs.  Sperberg,  Esquer and Gary have  entered  into such
        Agreement  whereby  they have  sold,  subject  to  payment  and  vesting
        schedules,  shares of Onsite-Cal to Messrs. Esquer and Mazanec.  Until a
        share is paid for all  voting and  dispositive  rights  remain  with the
        seller. Upon vesting and payment,  each such purchaser of the Onsite-Cal
        shares  became  entitled  to the same  number of the  Company's  Class A
        Common Stock  received by the sellers,  pursuant to the  Reorganization,
        with respect to the shares sold. The table reflects all  adjustments for
        shares that have vested and been paid for in full.

(15)    Mr.  Sutcliffe  is the majority  shareholder  of SSBKK,  Inc.,  the sole
        member  of  SYCOM  Enterprises,  LLC,  and  of  SYCOM  Corporation,  and
        consequently  has or shares voting or  dispositive  power over 1,750,000
        shares of Class A Common Stock issued and outstanding.  Additionally, as
        the majority  shareholder  of SYCOM  Corporation,  Mr.  Sutcliffe has or
        shares  voting  or  dispositive  power of  15,750,000  shares of Class A
        Common Stock that are not  reflected in the table but may be issued upon
        the  conversion  of  157,500  shares  of  Series D Stock,  which  shares
        currently  are in escrow  and may be  released  in the  future  upon the
        satisfaction of certain conditions.

(16)    Represents  1,750,000 shares of Class A Common Stock that are subject to
        the SYCOM Voting  Agreement  among certain  stockholders of the Company,
        SYCOM and SYCOM Corporation.  As previously  disclosed,  under the SYCOM
        Voting  Agreement  (i)  SYCOM and  SYCOM  Corporation  have the right to
        nominate a certain number of directors,  and the principal  stockholders
        of the  Company  that are a party to the  SYCOM  Voting  Agreement  have
        agreed to vote for such nominees;  (ii) SYCOM and SYCOM Corporation have
        agreed  to vote for the  remaining  director  nominees  selected  by the
        Company; and (iii) all parties to the SYCOM Voting Agreement have agreed
        to  vote at the  next  annual  meeting  to  authorize  the  issuance  of
        additional  common  stock  to  permit  the  conversion  of the  Series D
        Convertible  Preferred  Stock to Class A Common Stock in accordance with
        the terms of the Sale and  Noncompetition  Agreement  among the Company,
        SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
        30, 2001.

(17)    Includes  the  following  securities  that  are  subject  to the  Westar
        Stockholders  Agreement  among certain  stockholders  of the Company and
        Westar  Capital:  4,500,000  shares of Class A Common  Stock,  2,116,770
        shares of Class A Common  Stock  underlying  423,354  shares of Series C
        Convertible Preferred Stock, and 2,000,000 shares that could be purchase

<PAGE>41


        by Westar  Capital under the Stock  Subscription  Agreement  between the
        Company and Westar Capital.  As previously  disclosed,  under the Westar
        Stockholders  Agreement  Westar  Capital (i) has the right to nominate a
        certain  number of  directors,  and the  principal  stockholders  of the
        Company  that  are a party to the  Westar  Stockholders  Agreement  have
        agreed to vote for Westar  Capital's  nominees;  and (ii) shall vote for
        the  remaining  nominees  selected by the  Nominating  Committee  of the
        Company. The Westar Stockholders Agreement terminates the earlier of (i)
        five years after the date of the Agreement;  or (ii) the date upon which
        the  stockholdings  of Westar Capital and its affiliates,  counted on an
        as-converted  basis,  falls below 10 percent of the  outstanding  Common
        Stock of the Company,  calculated on a fully-diluted  basis as specified
        in the Westar Stockholders Agreement.

(18)    Mr. Wick is a general partner of Proactive Investment Managers, L.P., an
        investment  advisor and a general partner of Proactive  Partners,  L.P.,
        and  Fremont  Proactive  Partners,  L.P.,  and is a general  partner  of
        McGettigan,  Wick & Co., Inc., and  consequently has or shares voting or
        dispositive  power  over  1,689,468  shares of Class A Common  Stock and
        451,836 shares of Class A Common Stock that may be immediately  acquired
        upon the exercise of Warrants expiring December 17, 1998, March 1, 1999,
        June 30, 1999, September 11, 2002, and June 30, 2003.

 (19)   Includes the aggregate of ownership of Messrs.  Clark,  Davidson,  Gary,
        Holt,  Mazanec,  McGettigan,  Sperberg  and  Sutcliffe  as set  forth in
        footnotes (1), (2), (3), (6), (9), (11), (14) and (15), and an aggregate
        of  424,620  shares  of Class A  Common  Stock  held by other  officers,
        196,406  shares of Class A Common Stock that may be acquired  within the
        next  sixty  (60)  days  upon  the  exercise  of  options  held by other
        officers, and 392,843 shares of Class A Common Stock that are subject to
        a Stock Purchase  Agreement  among  Messrs.  Esquer,  Gary,  Mazanec and
        Sperberg.

*       Less than one percent (1%).


Item 12.  Certain Relationships and Related Transactions.

Grant of Warrants.  In January  1997,  the Company  executed an energy  services
agreement (the "ESA") with a customer to perform an energy  analysis and install
energy efficient measures at the customer's  facilities.  A condition of the ESA
was that the Company procure and maintain a payment and performance bond for 100
percent of the construction cost set forth in the ESA.

In accordance with the terms and conditions of the ESA, the Company procured the
requisite bonds. In order to obtain the bonds, however, the Company was required
to post an  irrevocable  letter of credit in the amount of  $150,000 in favor of
the surety company, and Mr. Sperberg was required to execute personal guarantees
and indemnity agreements.  The collateral for the letter of credit consists of a
deposit of funds posted by Proactive Partners, L.P. ("Proactive"), a shareholder
of the Company.  Mr.  McGettigan,  the Chairman of the Board of Directors of the
Company,  is a general  partner  of  Proactive,  and Mr.  Sperberg  is the Chief
Executive Officer of the Company.

In exchange,  and as  consideration,  for the agreement by Proactive to post the
necessary  collateral for the letter of credit,  and by Mr.  Sperberg to execute
the necessary  guarantees  and indemnity  agreements,  the Company agreed (i) to
indemnify each of Proactive and Mr.  Sperberg in the event the Company  defaults
under the ESA  and/or  the bonds,  and as a result of such  default,  the surety
company  seeks to draw on the  letter  of credit  and/or  enforce  the  personal
guarantee and indemnity  agreement of Mr. Sperberg,  which indemnities are to be
secured  by the assets of the  Company;  and (ii) to issue  warrants  to each of
Proactive  and Mr.  Sperberg  to acquire  shares of Class A Common  Stock of the
Company.  The Company  agreed to issue  warrants to Proactive  representing  the
right to acquire  200,000  shares of Class A Common  Stock of the Company at the
exercise  price  of  $0.1875  per  share,  which  was the  current  price of the
Company's Class A Common Stock on the OTC Electronic  Bulletin Board at the time
of the meeting of the Board of Directors  of the Company  held on September  11,
1997, at which meeting this transaction was approved.  The number of shares that
are the subject of the Proactive  warrants represent 25 percent of the amount of

<PAGE>42


the  collateral  posted by  Proactive.  Similarly,  the Company  agreed to issue
warrants to Mr. Sperberg representing the right to acquire 325,988 shares of the
Company's Class A Common Stock at the exercise price of $0.1875 per share, which
represents 6 percent of the aggregate amount of the bonds.

Guaranty of  Performance.  In March 1998,  the  Company  entered  into an energy
services agreement (the "Agreement") with a customer to install energy efficient
equipment in a large number of the customer's facilities.  A condition precedent
to the  customer's  execution  of the  Agreement,  however,  was the  customer's
receipt of a guaranty from Westar Capital,  guaranteeing the payment obligations
of the Company under the Agreement.

Accordingly,  in exchange,  and as consideration for, Westar Capital's execution
of the guaranty, the Company (i) agreed, in essence, to indemnify Westar Capital
in the event Westar  Capital must perform  under its  guaranty;  (ii) executed a
promissory  note to cover any amounts the Company may owe to Westar Capital as a
result of Westar  Capital's  performance  under its guaranty;  and (iii) granted
Westar Capital a security interest in the Company's assets to secure its payment
of the note. The security  agreement includes certain exceptions in the security
interest  granted therein for project  financing or working  capital  financing,
provided  the  Company's  shareholder  equity is above a  specified  amount.  No
amounts  currently  are  outstanding  under the note.  Rita A. Sharpe,  a former
director  of  the  Company,  is  the  former  President  of  Westar  Capital,  a
shareholder  of the Company,  and Mr. Wages,  a director of the Company,  is the
Director of Corporate  Strategy  for Western  Resources,  the parent  company of
Westar Capital, and the Chairman of the Board and President of Westar Capital.

Engagement of Investment Advisor. In connection with the SYCOM transaction,  the
Company  engaged  McGettigan  Wick &  Co.,  Inc.,  an  investment  banking  firm
("McGettigan  Wick"),  to assist the Company in the structure and negotiation of
the  transaction.  Under the terms of the engagement,  the Company agreed to pay
McGettigan Wick $50,000 one year after the closing of the transaction (which was
June 30, 1998),  and issue warrants to McGettigan Wick to acquire 160,000 shares
of the Company's  Class A Common Stock at the exercise price of $1.17 per share,
which was the current  price of the  Company's  Class A Common  Stock on the OTC
Electronic  Bulletin Board on June 30, 1998. Mr. McGettigan is a general partner
of  Proactive   Investment   Managers,   L.P.  and  Proactive  Partners,   L.P.,
shareholders  of the  Company,  and is the Chairman of the Board of Directors of
the Company.

Westar  Transaction.  In February  1998,  OMS acquired the  operating  assets of
Mid-States  Armature in exchange  for $290,000  cash.  In  connection  with this
transaction,  the Company  executed an agreement  with Westar  Energy,  a sister
corporation of Westar Capital and wholly-owned  subsidiary of Western Resources,
pursuant to which Westar Energy agreed to loan to the Company an amount equal to
the amount paid by the Company for the  operating  assets.  In April 1998,  this
loan was made by Westar  Energy to the  Company.  The loan must be repaid by the
first anniversary of the closing of the asset acquisition, and bears interest at
the rate of 12 percent per annum. At the option of Westar Energy the loan may be
repaid in cash or shares of Class A Common  Stock of the Company  calculated  at
the average closing price of such stock over a 20 consecutive trading day period
prior to the repayment  date  (provided,  however,  that such price shall not be
less than $1.00 per share or greater than $2.00 per share). Ms. Sharpe, a former
director of the Company,  is the former  President  of Westar  Energy and Westar
Capital, which is a shareholder of the Company, and Mr. Wages, a director of the
Company, is the Director of Corporate Strategy of Western Resources,  the parent
company of Westar Capital and Westar  Energy,  and the Chairman of the Board and
President of Westar Capital and Westar Energy.

Guaranty of Bonds.  In  connection  with the Company's  acquisition  of OBS, the
Company  entered into a  Transition  Agreement  pursuant to which Westar  Energy
agreed,  for a period of one year after the closing of the OBS  acquisition,  to
maintain an indemnity  agreement  with Westar  Capital at a level  sufficient to
provide  credit  support to OBS for bid and  performance  bonds

<PAGE>43

required to be posted in connection with OBS's business. OBS pays all actual and
out-of-pocket  fees and costs associated with these bonds. OBS  (individually or
with the Company)  currently has bonds in the aggregate  amount of approximately
$8,882,760  outstanding on projects that are in various stages of completion and
for which Westar Energy and/or Westar Capital have provided the requisite credit
support.  Ms. Sharpe, a former director of the Company,  is the former President
of Westar Energy and Westar Capital,  which is a shareholder of the Company, and
Mr. Wages, a director of the Company,  is the Director of Corporate  Strategy of
Western  Resources,  the parent company of Westar Capital and Westar Energy, and
the Chairman of the Board and President of Westar Capital and Westar Energy.

Outstanding Obligations.  Under agreements with Western Resources, OBS maintains
equipment  for  supplying  demineralized  water for boiler makeup water that OBS
installed at Western  Resources'  Lawrence  Energy  Center and  Tecumseh  Energy
Center. As of the fiscal year ended June 30, 1998, OBS had outstanding  accounts
receivable  from Western  Resources in the amount of $69,924.  Additionally,  in
accordance with the terms and conditions of the Transaction  Agreement,  Western
Resources  performs  certain  subcontracting  services for OBS. As of the fiscal
year ended June 30,  1998,  OBS had  outstanding  accounts  payable with Western
Resources  in the amount of  $369,961,  and  accrued  liabilities  with  Western
Resources  in the amount of  $254,409.  Ms.  Sharpe,  a former  director  of the
Company, is the former President of Westar Energy and Westar Capital, which is a
shareholder  of the Company,  and Mr. Wages,  a director of the Company,  is the
Director of  Corporate  Strategy  of Western  Resources,  the parent  company of
Westar Capital and Westar Energy, and the Chairman of the Board and President of
Westar Capital and Westar Energy.


                                     PART IV


Item 13.  Exhibits and Reports on Form 8-K.

a)      Exhibits

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

3.1     Certificate of Incorporation*

3.2     Form of Bylaws*

10.1    1993 Stock Option Plan*

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

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

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

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

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

<PAGE>44


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

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

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

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

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

10.48   Energy Services Agreement between Western Energy Management, Inc., and 
        R. E. Thomason General Hospital*

10.50   Agreement between Onsite Energy and EUA Cogenex Corporation**

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

10.52   Debt Conversion and Preferred Stock Purchase Agreement**

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

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

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

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

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

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

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

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

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

<PAGE>45


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


<PAGE>46



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

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

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

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

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

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

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

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

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

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

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

10.88   Performance Based Energy Savings Agreement dated March 31, 1998, between
        Onsite Energy Corporation and Unified School District No. 500, Wyandotte
        County, Kansas********

10.89   Engineering,  Procurement and  Construction  Agreement  between Onsite
        Energy  Corporation and Lighting Technology Services, Inc., dated as of 
        March 31, 1998********

10.90   Engineering,  Procurement and Construction  Agreement  between Onsite 
        Energy  Corporation and The Fagan Company, dated as of March 31, 
        1998********

10.91   Performance Based Energy Savings Agreement dated March 3, 1998, between
        Onsite Business Services,  Inc. and the City of Anthony, Kansas

21      Subsidiaries of the Registrant

23.1    Consent of Hein + Associates, LLP

<PAGE>47


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

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

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

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

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

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

*******    Previously  filed as exhibits  to Onsite  Energy  Corporation's  Form
           10-KSB, as filed for the year ended June 30, 1997.

********   Previously  filed as exhibits  to Onsite  Energy  Corporation's  Form
           10-QSB, as filed for the quarter ended March 31, 1998.


b)      Reports on Form 8-K

In the fourth  quarter of fiscal year 1998 the Company filed two reports on Form
8-K. One Form 8-K, dated June 12, 1998, and filed on June 24, 1998, reported the
acquisition  by the Company of all of the issued and  outstanding  shares of LTS
under an Agreement of Purchase and Sale of Stock among the Company, LTS, Russell
Wm. Royal and Keith L. Aldrich. Another Form 8-K, dated June 30, 1998, and filed
on July 15, 1998,  reported the  acquisition by SO Corporation of all the assets
and  certain  liabilities  of, and the  execution  of a Sale and  Noncompetition
Agreement with SYCOM Corporation and other related agreements among the parties.

As of the date of this report,  Forms 8-K/A had not been  submitted  relating to
the acquisitions of LTS and SO Corporation. The Company expects these filings to
occur shortly.




<PAGE>48



                                   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: November 12, 1998        By: RICHARD T. SPERBERG            
                                   -------------------------------------
                                   Chief Executive Officer (Principal Executive
                                   Officer), Interim Chief Financial Officer
                                   (Principal Financial and Accounting Officer),
                                   Director




<PAGE>49



                                   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: November 12, 1998       By:  CHARLES C. MCGETTIGAN                      
                                   --------------------------------------------
                                   Charles C. McGettigan
                                   Chairman of the Board and
                                   Outside Director


Date: November 12, 1998       By:  RICHARD T. SPERBERG    
                                   --------------------------------------------
                                   Richard T. Sperberg
                                   Chief Executive Officer, Interim Chief 
                                   Financial Officer and Director


Date: November 12, 1998       By:  S. LYNN SUTCLIFFE         
                                   --------------------------------------------
                                   S. Lynn Sutcliffe
                                   President and Director


Date: November 12, 1998       By:  TIMOTHY G. CLARK        
                                   --------------------------------------------
                                   Timothy G. Clark
                                   Outside Director


Date: November 12, 1998       By: H. TATE HOLT           
                                  ---------------------------------------------
                                   H. Tate Holt
                                   Outside Director


Date: November 12, 1998       By: LEROY P. WAGES                          
                                  ---------------------------------------------
                                   Leroy P. Wages
                                   Outside Director


Date: November 12, 1998       By: WILLIAM M. GARY, III                 
                                  ---------------------------------------------
                                   William M. Gary, III
                                   Former Executive Vice President, Former
                                   Secretary and Director


Date: November 12, 1998      By:  RICHARD L. WRIGHT          
                                  ---------------------------------------------
                                   Richard L. Wright
                                   Senior Vice President and Director

<PAGE>F-1
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




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

Consolidated Balance Sheet - June 30, 1998.................................F-3

Consolidated Statements of Operations - For the Years ended
   June 30, 1998 and 1997..................................................F-4

Consolidated Statement of Stockholders' Equity (Deficit) -
   For the Years ended June 30, 1998 and 1997..............................F-5

Consolidated Statements of Cash Flows - For the Years ended
   June 30, 1998 and 1997..................................................F-7

Notes to Consolidated Financial Statement..................................F-8


<PAGE>F-2




                          INDEPENDENT AUDITOR'S REPORT




To the Board of Directors and Stockholders
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, 1998 and the related
consolidated statements of operations,  stockholders' equity (deficit), and cash
flows for the years ended June 30, 1998 and 1997. These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Onsite  Energy
Corporation  and  subsidiaries  at June  30,  1998  and  the  results  of  their
operations  and their cash flows for the years  ended June 30,  1998 and 1997 in
conformity with generally accepted accounting principles.



/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
September  28,  1998,  except for the last  paragraph  of Note 20 which is as of
October 16, 1998



<PAGE>F-3


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  June 30, 1998

                                     ASSETS

Current Assets:
    Cash                                                          $   2,093,006
    Cash-restricted                                                     157,836
    Accounts receivable, net of allowance for doubtful
      accounts of $15,030                                             3,518,870
    Inventory                                                           178,215
    Costs and estimated earnings in excess of billings 
      on uncompleted contracts                                          944,820
    Other assets                                                        611,195
                                                                  -------------

           TOTAL CURRENT ASSETS                                       7,503,942

Property and equipment, net of accumulated depreciation 
   and amortization                                                   1,958,178
Excess of purchase price over net assets acquired, net 
   of amortization of $14,261                                         3,563,718
Other                                                                   116,830
                                                                  -------------
           TOTAL ASSETS                                           $  13,142,668
                                                                  =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Notes payable - related  parties                              $     468,329
    Current portion of notes payable                                  1,846,870
    Accounts  payable                                                 3,380,271
    Billings in excess of costs and estimated earnings on 
       uncompleted  contracts                                         2,888,659 
    Accrued expenses and other liabilities                            1,613,180
                                                                  -------------
          TOTAL CURRENT LIABILITIES                                  10,197,309

Long-Term Liabilities:
    Accrued future operation and maintenance costs
      associated with energy services agreements                        465,359
    Notes payable, less current portion                                   3,010
                                                                  ------------- 
          TOTAL LIABILITIES                                          10,665,678
                                                                  -------------
Commitments and contingencies 
  (Notes 3, 4, 15, 17, 18, 19 and 20)                                        -

Stockholders' Equity:
    Preferred Stock,  Series C, 842,500 shares 
        authorized,  208,205 issued and outstanding 
        (Aggregate $1,041,025 liquidation preference)                       208
    Preferred Stock, Series D, 157,500 shares authorized,
        issued and outstanding and held in escrow (Note 4)                   -
    Common Stock, $.001 par value, 24,000,000 shares authorized:
       Class A common stock, 23,999,000 shares
           authorized, 18,243,188 issued and outstanding                 18,243
       Class B common stock, 1,000 shares authorized,
             none issued and outstanding                                     -
    Additional paid-in capital                                       23,208,598
    Notes receivable - related parties                               (1,335,217)
    Accumulated deficit                                             (19,414,842)
                                                                  -------------
         TOTAL STOCKHOLDERS' EQUITY                                   2,476,990
                                                                  -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $  13,142,668
                                                                  =============


The accompanying notes are an integral part of these financial statements


<PAGE>F-4


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   For the Years Ended June 30, 1998 and 1997


<TABLE>
<CAPTION>


                                                                 1998                1997
                                                            ----------------   -----------------

<S>                                                           <C>                <C>        
Revenues                                                      $12,267,148        $ 9,561,375

Cost of sales                                                  10,057,277          6,692,198
                                                              -----------        -----------

    Gross margin                                                2,209,871          2,869,177

Selling, general, and administrative expenses                   3,879,237          3,139,018
Depreciation and amortization                                     539,499            587,077
Loss on disposition of partnership interests                       -                 425,240
Gain on sale of assets                                             -                 (17,686)
                                                              -----------        -----------

     Operating loss                                            (2,208,865)        (1,264,472)

Other income (expense):
   Interest (expense)                                             (27,400)          (159,028)
   Interest income                                                 25,283             43,402
                                                              -----------        -----------

     Total other income (expense)                                  (2,117)          (115,626)
                                                              -----------        -----------

Loss before provision for income taxes                         (2,210,982)        (1,380,098)

Provision for income taxes                                          7,500              8,500
                                                              -----------        -----------

Net loss                                                      $(2,218,482)       $(1,388,598)
                                                              ===========        ===========

Net loss allocated to common stockholders                     $(2,267,629)       $(1,388,598)
                                                              ===========        ===========

Basic and diluted loss per common share                       $    (0.16)        $    (0.13)
                                                              ==========         ==========


Weighted average shares outstanding                            13,790,185         10,818,498
                                                              ===========        ===========

</TABLE>

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


<PAGE>F-5


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                   For the Years Ended June 30, 1998 and 1997


<TABLE>
<CAPTION>

                                    Common Stock                                    PREFERRED STOCK
                                ----------------------- -------------------------------------------------------------------------
                                       Class A                 Series A                 Series B                Series C
                                ----------------------- -----------------------   ----------------------- -----------------------
                                                                                                                     
                                                                                                                            
                                  SHARES      AMOUNT      SHARES      Amount        SHARES      Amount      SHARES       Amount     
                                ----------- ----------- ----------- -----------   ----------- -----------  ----------  ----------
<S>                            <C>          <C>        <C>         <C>           <C>        <C>           <C>         <C>        
Balance July 1, 1996             6,263,463     $6,263      3,810    $      4        605,641   $    605           -      $     -     

Issued to Onsite 401k plan          48,562         49          -           -             -           -           -            - 

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

Common shares issued for                                                                       
  Series A and B
  preferred dividends              347,048        347          -           -             -           -           -            -   
  
Conversion of Series A                                                                                                            
  preferred stock                3,571,494      3,572     (3,810)         (4)            -           -           -            -
  
Conversion of Series B                                                                                                            
  preferred stock                  605,641        605          -           -       (605,641)      (605)          -            -

Exercise of stock option            45,887         46          -           -             -           -           -            -  
 
Net Loss                                 -          -          -           -             -           -           -            - 
                                --------------------------------------------------------------------------------------------------

Balance June 30, 1997           10,944,172     10,944          -           -             -           -           -            -

Issued to Onsite 401k plan          49,912         50          -           -             -           -           -            -  

Issued pursuant to private                                                                                                     
  offering, Net of expenses      2,000,000      2,000          -           -             -                       -            -   
                                                               
Stock issued for acquisitions    4,940,000      4,940          -           -             -           -           -            -

Exercise of stock options          309,104        309          -           -             -           -           -            -  

Sale of Series C 
  preferred stock                        -          -          -           -             -           -       200,000        200  
  
Series C preferred
  stock dividends                        -          -          -           -             -           -         8,205          8

Compensation recognized upon                                                                                                    
  issuance of warrants                   -          -          -           -             -           -            -           - 

Notes receivable acquired in                                                                                                  
  acquisitions                           -          -          -           -             -           -            -           - 

Net loss                                 -          -          -           -             -           -            -           -
                                --------------------------------------------------------------------------------------------------

Balance June 30, 1998           18,243,188    $18,243          -       $   -             -      $    -       208,205     $  208 
                                ==================================================================================================

</TABLE>


The accompanying notes are an integral part of these financial statements


<PAGE>F-6


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                   For the Years Ended June 30, 1998 and 1997
                                  (CONTINUED)



<TABLE>
<CAPTION>

                                                                       NOTES
                                     Common        ADDITIONAL       RECEIVABLE
                                     SHARES         PAID-IN           RELATED        ACCUMULATED
                                    ISSUABLE        CAPITAL           PARTIES          DEFICIT         TOTAL
                                  ------------------------------------------------------------------------------

<S>                             <C>             <C>                <C>           <C>                <C>       
Balance July 1, 1996              $  608,439      $16,336,469        $      -      $ (15,758,615)     $1,193,165

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

Conversion of accounts                                                      
  payable to Class A 
  common stock                            -            66,973               -                  -          67,035

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

Conversion of Series A                   
  preferred stock                         -            (3,568)              -                  -               -

Conversion of Series B                                                
  preferred stock                         -                 -               -                  -               -

Exercise of stock option                  -            20,064               -                  -          20,110

Net Loss                                  -                 -               -         (1,388,598)     (1,388,598)
                                  -------------------------------------------------------------------------------

Balance June 30, 1997                     -        17,052,961               -        (17,147,213)        (83,308)

Issued to Onsite 401k plan                -            17,399               -                  -          17,449

Issued pursuant to private                                            
  offering, Net of expenses               -           951,542               -                  -         953,542

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

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

Sale of Series C preferred stock          -           999,800               -                  -       1,000,000

Series C preferred stock dividends        -            49,139               -            (49,147)              -

Compensation recognized upon                                          
  issuance of warrants                    -            18,980               -                  -          18,980

Notes receivable acquired in                                          
  acquisitions                            -                 -      (1,335,217)                 -      (1,335,217)

Net loss                                  -                 -               -         (2,218,482)     (2,218,482)
                                  -------------------------------------------------------------------------------

Balance June 30, 1998             $       -       $23,208,598    $ (1,335,217)      $(19,414,842)    $ 2,476,990
                                  ===============================================================================

</TABLE>


The accompanying notes are an integral part of these financial statements



<PAGE>F-7
         
                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS For
                     the Years Ended June 30, 1998 and 1997


<TABLE>
<CAPTION>


                                                                     1998             1997
                                                                ---------------  ----------------

<S>                                                           <C>                <C>  
Cash flows from operating activities:

Net loss                                                        $ (2,218,482)     $ (1,388,598)
Adjustments to reconcile net loss to net cash provided by
   operating activities:
   Amortization of goodwill                                          280,927           400,000
   Amortization of acquired contract costs                                 -           399,032
   Additions (reductions) to reserve for future operation
     and maintenance costs                                            43,927           (45,925)
   Provision for bad debts                                            30,192            37,093
   Depreciation                                                      258,572           187,077
   Compensation recognized upon issuance of stock warrants            18,980                 -
   Loss on disposition of partnership interests                            -           425,240
   Gain on sale of assets                                                  -           (17,686)
Change in operating assets and liabilities:
   Accounts receivable                                              (781,792)          747,923
   (Increase) decrease in costs and estimated earnings
      in excess of billings on uncompleted contracts                (225,324)        2,051,592
   Inventory                                                          (5,758)                -
   Other assets                                                     (435,120)          260,322
   Cash-restricted                                                   115,331           (50,467)
   Accounts payable                                                1,351,806        (1,464,594)
   Increase (decrease) in billings in excess of costs
     and estimated earnings on uncompleted contracts               1,739,390        (1,130,080)
   Accrued expenses and other liabilities                            641,631          (344,632)
   Deferred income                                                         -           (25,000)
                                                                ------------      ------------

      Net cash provided by operating activities                      814,280            41,297
                                                                ------------      ------------

Cash flows from investing activities:
   Purchases of property and equipment                              (119,075)           (4,473)
   Proceeds from sale of assets                                            -           540,081
   Loan to Shareholders                                               (7,911)                -
   Acquisition of businesses, net of cash acquired                (1,203,805)                -    
                                                                ------------      ------------ 

      Net cash provided by (used in) investing activities         (1,330,791)          535,608
                                                                ------------      ------------

Cash flows from financing activities:
   Proceeds from notes payable - related party                       290,000                 -
   Proceeds from issuance of common stock                            953,542                 -
   Proceeds from issuance of preferred stock                       1,000,000                 -
   Proceeds from exercise of stock options                            87,163            45,090
   Repayment of notes payable - related party                        (46,804)       (1,071,571)
   Repayment of long-term debt                                      (201,278)                -
                                                                ------------      ------------

      Net cash provided by (used in) in financing activites        2,082,623        (1,026,481)
                                                                ------------      ------------

Net increase (decrease) in cash                                    1,566,112          (449,576)

Cash, beginning of year                                              526,894           976,470
                                                                ------------      ------------
Cash, end of year                                               $  2,093,006      $    526,894
                                                                ============      ============

Supplemental disclosures of non-cash transactions:

   Payment of Series A and B Preferred Stock dividends
     with common stock                                          $          -      $        347
                                                                ============      ============
   Payment of Series C Preferred Stock dividends
     with Series C Preferred Stock                              $     49,147      $          -
                                                                ============      ============
   Payment of accrued liabilities with common stock             $     17,449      $     67,035
                                                                ============      ============
   Liabilities accrued for acquisition costs                    $    285,594      $          -
                                                                ============      ============
   Conversion of preferred stock to common stock                $         -       $      4,176
                                                                ============      ============
   Fair market value of assets, less liabilities of                                          
     businesses acquired with common stock                      $  4,036,863      $          -
                                                                ============      ============

Supplemental disclosures of cash transactions:
   Interest paid                                                $     33,385      $    159,028
                                                                ============      ============
   Income taxes paid                                            $     36,175      $     41,290
                                                                ============      ============
</TABLE>


The accompanying notes are an integral part of these financial statements


<PAGE>F-8


                   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  projects  and assists  customers  in reducing  the cost of purchased
electricity and fuel. The Company also 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 Corporation,
a California  corporation  formed in 1982  ("Onsite-Cal"),  which was  effective
February 15, 1994. Under the reorganization, Onsite-Cal merged with and into the
Company and a newly formed  subsidiary of the Company  merged with and into WEM,
which  survived  and  became a wholly  owned  subsidiary  of the  Company.  This
transaction was accounted for as a purchase of Onsite-Cal by the Company.

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

In February  1998,  OBS acquired the  operating  assets of  Mid-States  Armature
Works, Inc. ("Mid-States") 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, 1998, 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 energy services companies 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.

The Company also owned general and limited  partnership  interests in Television
City Cogen, L.P., a California limited partnership  ("TCC").  Effective February
17, 1997, the Company sold its interests in TCC.


<PAGE>F-9


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

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


2.  Summary of Significant Accounting Policies

    Principles of Consolidation

The consolidated  financial  statements  include the accounts of 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 requiring
contract  performance prior to commencement of deliveries are recorded using the
percentage of completion  method.  Under this method,  the revenue recognized is
that portion of the total contract price that the cost expended to date bears to
the  anticipated  final total costs based on current  estimates  of the costs to
complete  the  project.  When the total  estimated  costs to  complete a project
exceed  the  total  contract  amount,  thereby  indicating  a loss,  the  entire
anticipated loss is recognized currently.

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

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

    Operation and Maintenance Agreements

Commencing July 1, 1993, the Company began entering into long term operation and
maintenance  agreements  with its customers.  In 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.  As of June 30,  1998,  the
liability for deferred operations and maintenance costs is $465,359.

    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.



<PAGE>F-10

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


    Restricted Cash

Restricted cash consists of amounts on deposit with financial  institutions  for
the purpose of securing  performance  milestones  under several of the Company's
demand side management ("DSM") contracts.  Funds become available to the Company
over a period  of 24 to 36  months  following  completion  of the last  contract
provided  certain  conditions  and  milestones  are achieved.  In the event that
conditions  or  milestones  are not  achieved,  the Company  will be required to
forfeit its right to some or all of the funds on deposit.  As of June 30,  1998,
the Company  believes that all conditions  and  milestones  will be achieved and
that no funds under these DSM contracts will be subject to forfeiture.

    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 thirty one and one-half
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  expected future
operating  income  and cash  flows to  determine  whether  it is  probable  that
impairment has occurred.

    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 bases 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

In February 1997, the Financial Accounting Standards Board ("FASB") issued a new
statement  titled  "Earnings  per  Share"  ("FASB128").  The  new  statement  is
effective for both interim and annual  periods  ending after  December 15, 1997.
FASB128  replaces the  presentation  of primary and fully  diluted  earnings per
share with the  presentation  of basic and  diluted  earnings  per share.  Basic
earnings  per share  excludes  dilution  and is  calculated  by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding  for  the  period.   Income  available  to  common  stockholders  is
calculated by subtracting  preferred  stock  dividends from net income.  Diluted
earnings  per  share  reflects  the  potential  dilution  that  could  occur  if
securities or other contracts to issue 

<PAGE>F-11

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

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.  Common
stock equivalents for the years ending June 30, 1998 and 1997 were anti-dilutive
and excluded in the earnings per share computation.

    Impairment of Long-Lived Assets

In the event that facts and  circumstances  indicate that the cost of assets may
be  impaired,  an  evaluation  of  recoverability  would  be  performed.  If  an
evaluation  were  required,   the  estimated  future   undiscounted  cash  flows
associated  with the asset would be compared to the asset's  carrying  amount to
determine if a write-down to market value or  discounted  cash flow is required.
There were no impairments of long-lived assets for the years ended June 30, 1998
or 1997.

    Stock-Based Compensation

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB25") and related interpretations
in accounting for its employee stock options.  In accordance with FASB Statement
No. 123 "Accounting for Stock-Based Compensation" ("FASB123"),  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 value method as prescribed by
FASB123.

    Impact of Recently Issued Standards

The FASB has issued Statement of Financial  Accounting Standards 130, "Reporting
Comprehensive   Income"  ("FASB130")  and  Statement  of  Financial   Accounting
Standards  131  "Disclosures   About  Segments  of  an  Enterprise  and  Related
Information"  ("FASB131").  FASB130  establishes  standards  for  reporting  and
display of  comprehensive  income,  its  components  and  accumulated  balances.
Comprehensive  income is defined to include all changes in equity  except  those
resulting from investments by owners and  distributions  to owners.  Among other
disclosures,  FASB130 requires that all components of comprehensive income shall
be  classified  based on their  nature and shall be  reported  in the  financial
statements  in the  period in which  they are  recognized.  A total  amount  for
comprehensive  income shall be displayed in the financial  statements  where the
components  of other  comprehensive  income  are  reported.  FASB131  supersedes
Statement of Financial Accounting Standards 14 "Financial Reporting for Segments
of a Business  Enterprise." FASB131 establishes standards on the way that public
companies  report  financial  information  about  operating  segments  in annual
financial  statements  issued to the public.  It also establishes  standards for
disclosures  regarding  products  and  services,   geographic  areas  and  major
customers.  FASB131 defines operating  segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating  decision maker in deciding how to allocate resources and in
assessing performance.


<PAGE>F-12


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


FASB130 and FASB131 are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated.  Results of operations and financial position will be unaffected by
implementation of these standards.

FASB  Statement  No.  132,  "Employers'  Disclosures  about  Pensions  and Other
Postretirement   Benefits,"  ("FASB132")  was  issued  in  February  1998.  This
statement   revises  the   disclosure   requirement   for   pensions  and  other
postretirement benefits. This statement is effective for the Company's financial
statements for the year ended June 30, 1999 and the adoption of this standard is
not expected to have a material effect on the Company's financial statements.

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.  It requires  that an entity  recognize  all  derivatives  as either
assets or liabilities  in the statement of financial  position and measure those
instruments  at fair  value.  This  statement  is  effective  for the  Company's
financial  statements  for the year ended June 30, 2001 and the adoption of this
standard is not expected to have a material  effect on the  Company's  financial
statements.

    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 estimated
fair values of the Company's  financial  instruments,  which  includes all cash,
accounts  receivables,   accounts  payable,   long-term  debt  and  other  debt,
approximates the carrying value in the consolidated financial statements at June
30, 1998.


<PAGE>F-13

                   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.


3.      Basis of Presentation

As shown in the accompanying financial statements,  the Company has reported net
losses of $2,218,482  and $1,388,598 for the years ended June 30, 1998 and 1997,
respectively,  and has an  accumulated  deficit  of  $19,414,842  and a  working
capital deficit of $2,693,367 as of June 30, 1998.

During the year ended June 30,  1998,  the Company  took steps to  mitigate  the
losses and enhance its future  viability.  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.  In
addition,  subsequent  to year-end,  the Company has exercised its right under a
stock subscription agreement to require Westar Capital, Inc., ("Westar Capital")
to purchase an additional 200,000 shares of Series C Convertible Preferred Stock
for $1,000,000 (see Note 20). The Company can require Westar Capital to purchase
an  additional  200,000  shares  of  Series C  Convertible  Preferred  Stock for
$1,000,000.  Management  believes  that these  actions will allow the Company to
continue as a going concern.


4.  Acquisitions and Dispositions

On  October  28,  1997,  the  Company  entered  into a  Plan  and  Agreement  of
Reorganization  with  Westar  Capital to  acquire  WBS (now  OBS).  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.  On March 31, 1998,  the Company
issued an  additional  800,000  shares of Class A Common  Stock  pursuant to the
agreement.  The stock  issuances  were  valued at the average of the bid and ask
stock prices on the date of issuance.  The  transaction  was  accounted for as a
purchase.   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,  OBS acquired the operating  assets of Mid-States for $290,000
through its newly created subsidiary,  OMS. The transaction was accounted for as
a purchase.

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.  The stock  issuances were valued at the average of the bid
and ask stock prices on the date of issuance. The

<PAGE>F-14

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


former LTS  shareholders  also may receive a one-time  earn-out payment in 1999,
payable in either cash,  or, at the  Company's  option,  the  Company's  Class A
Common Stock. The earn-out payment will be based on LTS' actual pre-tax earnings
contribution  for a 12 month period ending March 31, 1999. The  transaction  was
accounted for as a purchase.  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.

On June 30, 1998, the Company  acquired all the assets and specific  liabilities
of SYCOM Enterprises, LLC through a newly-created subsidiary (SO Corporation) in
exchange for 1,750,000  shares of the Company's Class A Common Stock.  The stock
issuances were valued at the average of the bid and ask stock prices on the date
of  issuance.  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
Enterprises,  LLC. in exchange for the right to receive 157,500 shares of Series
D Convertible  Preferred 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  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 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  recurring  general  and  administrative
expenses  and debt service to third  parties  with  interest at 9.75% 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).  The
Company has also agreed to lend up to $1,000,000 to

<PAGE>F-15

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


SYCOM  Enterprises,  LLC, to allow its  shareholders to pay  anticipated  income
taxes  resulting from the sale. Any amounts loaned will accrue interest at 9.75%
per annum and will be secured by the  Company's  Class A Common  Stock issued in
the acquisition at the rate of 1.75 common shares per $1.00 loaned.

The resulting  purchase price  including  acquisition  costs was $2,060,439 with
$2,132,056 being allocated to excess of purchase price over net assets acquired.

The  following  presents  pro forma  information  as if all of the  acquisitions
described above occurred on July 1, 1996:

                                                       Year Ended
                                            June 30, 1998        June 30, 1997

Revenue                                    $  38,225,107        $   49,725,191
                                           =============        ==============

Operating Income (Loss)                    $  (9,416,694)       $    3,632,789
                                           =============        ==============

Net Loss                                   $ (11,730,057)       $      (69,870)
                                           =============        ==============

Basic and Diluted loss per common share    $       (0.64)       $           **
                                           =============        ==============

     **per share value less than one cent.


5.  Accounts Receivable

    Accounts Receivable consisted of the following as of June 30, 1998:

       Contract receivables                                    
            Completed contracts                                 $    472,590
            Contracts in progress                                  2,432,781
                                                                ------------
                                                                   2,905,371
       Trade receivables                                             628,529
                                                                ------------
                                                                   3,533,900
       Less: Allowance for doubtful accounts                         (15,030)
                                                                ------------
                                                                $  3,518,870
                                                                ============


<PAGE>F-16

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


Costs and Estimated Earnings on Uncompleted Contracts

    Costs and estimated earnings on contracts as of June 30, 1998,  consisted of
the following:

          Costs incurred                                  $  11,796,701
          Estimated earnings                                  2,234,198
                                                          -------------
                                                             14,030,899
          Less: Billings to date                            (15,974,738)
                                                          -------------
                                                          $  (1,943,839)
                                                          =============

          Included in the accompanying Balance Sheet 
             under the following captions:

          Costs and estimated earnings in excess of                      
             billings on uncompleted contracts            $     944,820

          Billings in excess of costs and earnings on
             uncompleted contracts                           (2,888,659)
                                                          ------------- 
                                                          $  (1,943,839)
                                                          =============

7.  Property and Equipment

    Property and equipment at June 30, 1998, consisted of:

                                                                  Estimated
                                                                 Useful Lives
                                                                 ------------

         Office furniture                       $    474,915      5-7 years
         Equipment and Tools                         722,639      7-10 years
         Vehicles                                     39,971       5 years
         Water Treatment Plants                      993,516    Contract life
                                                               (50 to 56 months)
         Land                                         44,000          -
         Building                                     80,000     31.5 years
         Leasehold improvements                       42,135     5-20 years
                                                ------------
                                                   2,397,176
         Less:  Accumulated depreciation
           and amortization                         (438,998)
                                                ------------
                                                $  1,958,178
                                                ============

Depreciation  expense amounted to $258,572 and $187,077 for the years ended June
30, 1998 and 1997, respectively.


<PAGE>F-17

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

8.   Notes Payable

     Notes payable at June 30, 1998, consisted of the following:

Note payable to a third party, interest at 12.00%,
with all unpaid interest and principal due July 31, 1998, 
unsecured                                                          $      7,532

Notes payable with payments upon completion of certain  
milestones with interest at 18.0%,  past due,  secured
by accounts receivable and other assets                               1,132,961

Notes payable with payments upon completion of certain
milestones,  interest at 13.5% due July 1998 through
December 1998,  secured by accounts  receivable and
other assets                                                            669,126

Notes payable with monthly  installments of $1,175 
including interest at 10.75%, maturing August through
September 1998, collateralized by certain automobiles                     8,667
     
Notes payable, non-interest bearing, due in  monthly
installments of $1,000, unsecured                                         6,777

Note payable, due in monthly installments of $200,
including interest at 10.75%,  maturing December 1998, 
collateralized by certain computer equipment                              1,839

Note payable,  due in monthly  installments of $1,631,  
including interest at 9% maturing September 1999, unsecured              22,978
                                                                    -----------

     Total notes payable                                              1,849,880
  
     Less:  Current portion                                           1,846,870
                                                                    -----------
     Total Long Term Notes Payable                                  $     3,010
                                                                    ===========


<PAGE>F-18

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


9.  Notes Payable - related parties

Notes payable - related parties consisted of the following at June 30, 1998:

Note payable to related party, interest at 8.0%, 
  due on demand                                                    $   178,329

Note payable due to related party, interest at 
  12.0% per annum, due April 1999                                      290,000
                                                                   -----------
                                                                   $   468,329
                                                                   ===========
10. Accrued expenses and other liabilities

    At June 30, 1998,  accrued expenses and other  liabilities  consisted of the
following:

Payroll and related payroll taxes                       $    383,910
Accrued Interest                                              68,877
Additional consideration related to acquisition              200,000
Accrued job costs                                            798,476
Other accrued liabilities                                    161,917
                                                        ------------

     Total                                              $  1,613,180
                                                        ============

11. Stockholders' 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.  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.

    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,
1998, there were no shares of Class B Common Stock issued and outstanding.


<PAGE>F-19

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


    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  paid  $50,000  and issued  warrants to purchase
160,000 shares of Class A Common Stock at $1.125 per share, which expire on June
30, 2003, to entities affiliated with a director as  consideration  for services
rendered in the acquisition of the assets of SYCOM Enterprises, LLC. The Company
recognized  compensation  expense  in the  amount of  $92,016  related  to these
warrants which has been accounted for as additional purchase price.

As of June 30, 1998,  the Company has issued and  outstanding a total of 952,833
warrants to purchase  shares of its Class A Common  Stock.  The exercise  prices
range  from  $0.1875  to $4.00 per share  with  expiration  dates  ranging  from
December 1998 through June 2003.

    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% 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
$49,147  were paid in the form of 8,205 shares of Series C during the year ended
June 30, 1998.

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 - Related Parties

As of June 30, 1998,  Notes  Receivable - Related Parties  includes  receivables
with the previous owners of LTS, who are current employees and directors of LTS,
in the amount of $180,027.  Such loans accrue  interest at 10% per annum and are
due in March 2003.

Also included are amounts due from affiliates of SYCOM  Enterprises,  LLC in the
amount of $1,155,190. The loan accrues interest at 9.75% per annum, is due on or
before June 30, 2006 and is  collateralized by certain assets of an affiliate of
SYCOM Enterprises, LLC. Additionally see Note 4.


<PAGE>F-20

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


12. Stock Option Plans:

    WEM 1990 Non-Statutory Stock Option Plan (formerly WEM Stock Option Plan)

Effective  February 15,  1994,  the Company  adopted the WEM 1990  Non-Statutory
Stock Option Plan (the "1990 Plan").  The 1990 Plan provides for the granting of
options to  directors,  officers,  employees and  consultants  to purchase up to
100,000  shares  of the  Company's  Class  A  Common  Stock.  The  1990  Plan is
administered  by a  committee  of outside  directors  appointed  by the Board of
Directors.

    As of June 30, 1998, the status of the 1990 Plan was as follows:

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

     July 1, 1996                     500            $6.10              500
       Options Granted                500            $0.2956           =====
       Options Cancelled             (500)           $6.10
                                   ----------

     June 30, 1997                    500            $0.2956            500
       Options Exercised             (500)           $0.2956           =====
                                   ----------
     June 30, 1998                      0                                 0
                                   ==========                         ======

    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 1991
Plan is administered by a committee of outside directors  appointed by the Board
of Directors.

    As of June 30, 1998, the status of the 1991 Plan was as follows:

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

     July 1, 1996                  90,000       $5.3125 - $29.70       90,000
        Options cancelled          (5,000)           $29.70            ======
                                 ---------
     June 30, 1997 and
        1998                      85,000             $5.3125           85,000
                                 =========                             ====== 

    Non-Plan Options

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

     As of June 30, 1998, the status of the Non-Plan Options was as follows:

<PAGE>F-21

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


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

     July 1, 1996                105,000        $5.3125 - $6.10       105,000
       Options Cancelled          (1,000)            $5.3125          =======
       Options Granted           104,000             $0.2956
       Options Cancelled        (104,000)       $5.3125 - $6.10
                                ----------

     June 30, 1997               104,000             $0.2956          104,000
       Options Exercised        (103,100)            $0.2956          =======
       Options Cancelled            (900)            $0.2956
                                ---------

        June 30, 1998                  0                                    0
                                =========                             =======

    The Onsite 1993 Stock Option Plan

During fiscal 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.

    As of June 30, 1998, the status of the 1993 Plan was as follows:

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

     July 1, 1996              1,807,483        $0.25 - $5.625       1,395,901
       Options granted         1,508,440        $0.25 - $5.3125      =========
       Options cancelled        (816,645)       $0.25 - $0.50
       Options exercised         (42,553)       $0.25 - $0.50
                               ----------

     June 30, 1997             2,456,725        $0.24 - $5.3125      1,729,593
       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
                               =========                             =========

At June 30, 1998, no additional  options were available for granting to purchase
shares of Class A Common Stock.


<PAGE>F-22

                   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, 1998, and 1997, is as follows:

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

               July 1, 1996            1,807,483                $   0.7573
                  Granted              1,508,440                $   0.2909
                  Exercised              (42,553)               $   0.4628
                  Cancelled             (816,645)               $   0.4764
                                       ----------

               June 30, 1997           2,456,725                $   0.5789

                  Granted                880,954                $   0.6224
                  Exercised             (206,004)               $   0.2752
                  Cancelled             (133,417)               $   0.2797 
                                       --------- 

               June 30, 1998           2,998,258                $   0.6259
                                       =========

During the year ended June 30, 1997,  the  Compensation  Committee  and Board of
Directors  approved a repricing  for 400,440  options to $0.2956  with  original
exercise  prices  ranging  between $1.94 and $6.10.  This was accounted for as a
reprice of options to the fair market  value on the date of the  repricing.  The
weighted  average  contractual  life for all  options as of June 30,  1998,  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 FAS 123 for  employees.  Had  compensation  cost for stock options
issued to employees  been  determined  based on the fair value at grant date for
awards in 1998 and 1997 consistent with the provisions of FAS 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,
                                        -----------------------------
                                           1998               1997
                                        -----------         --------

     Net Loss                          $ (2,480,017)     $ (1,471,328)
                                       =============     =============
     Basic and Diluted Loss                                             
        Per Common Share               $      (0.18)     $      (0.14)
                                       =============     =============


<PAGE>F-23


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


The fair  value of each  option  is  estimated  on the date of grant  using  the
Black-Scholes   option-pricing   model  using  the  following   weighted-average
assumptions:  expected volatility of 116.9%, an expected life of three years for
option shares,  no dividends  would be declared  during the expected term of the
options,  and a risk-free  interest  rate using the monthly US Treasury  T-Strip
Rate  at  the  option  grant  date  for  fiscal  years  ended  1998,  and  1997,
respectively.

The weighted-average fair value of stock options granted to employees during the
years ended June 30, 1998 and 1997, was $0.36 and $0.19, respectively.


13. Income Taxes

Income tax expense for the years  ended June 30, 1998 and 1997 is  comprised  of
the following:

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


     Year ended June 30, 1997         Current        Deferred           Total
                                   ------------     ----------       ----------
          Federal                  $          -     $        -       $        -
          State                           8,500              -            8,500
                                   ------------     ----------       ----------
                                   $      8,500     $        -       $    8,500
                                   ============     ==========       ==========



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

                                                        1998           1997
                                                    ------------    ----------
     Amount of expected tax (benefit)               $  (751,800)   $  (469,200)
     Non-deductible expenses                             13,900          4,400
     State taxes, net                                     4,900          5,600
     Effect of change in state tax rate                  27,600              -
     Change in valuation allowance for deferred
       tax assets                                       712,900        467,700
                                                    -----------    -----------
              Total                                 $     7,500    $     8,500
                                                    ===========    ===========


<PAGE>F-24

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


The components of the net deferred tax asset  recognized as of June 30, 1998 and
1997, are as follows:

                                                     1998              1997
                                                 -----------        ---------
Current deferred tax assets (liabilities):
     Litigation settlement accrual               $    16,000        $   6,700
     Deferred operation and maintenance
       reserve                                       185,400          169,200
     Vacation accrual                                 44,400           29,100
     Deferred compensation                                 -           27,300
     Inventory reserve                                 6,000                -
     Book compensation on issuance of
       stock options                                   7,600                -
     Allowance for doubtful accounts                   6,000                -
     Other                                               600           35,000
                                                 -----------        ---------
                                                     266,000          267,300
     Valuation allowance                            (266,000)        (267,300)
                                                 -----------        ---------
       Net current deferred tax asset            $         -        $       -
                                                 ===========        =========


                                                    1998               1997
                                                ------------       ------------
Long-Term deferred tax assets (liabilities):
     Net operating loss carryforwards           $  6,943,200       $  4,504,600
     Goodwill due to difference in
       amortization                                  453,300            392,500
     Depreciation                                   (137,100)                 -
     Capital loss carryforward                             -             66,100
     Alternative minimum tax credit                   11,200             15,200
     Other                                               800                  -
                                                ------------       ------------
                                                   7,271,400       $  4,978,400
     Valuation allowance                          (7,271,400)        (4,978,400)
                                                ------------       ------------
       Net current deferred tax asset           $          -       $          -
                                                ============       ============

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.

The deferred tax asset also includes the future benefit of the tax deduction for
the exercise of stock options of $13,000.  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,  1998,  the  Company  has  net  operating  loss  carryforwards  of
approximately  $19,116,000,  which  expire in the years 2006 through  2013.  The
Company has  California  net operating  loss  carryforwards  at June 30, 1998 of
$5,018,000, which expire in years 1999 through 2003.


<PAGE>F-25

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


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% change in
ownership due to various stock transactions.


14. Related Parties


During the fiscal year ended June 30, 1998,  the Company  paid two  directors of
the Company,  professional  fees for due  diligence in the amount of $48,078 and
$6,451, respectively.


As of the fiscal year end June 30, 1998, OBS has outstanding accounts receivable
with Western Resources, Inc. the parent company of a shareholder of the Company,
in the amount of $69,924 in  relation  to water  treatment  plants in  Lawrence,
Kansas and Tecumseh,  Kansas. OBS has recognized  $323,454 in revenue related to
these water treatment facilities. OBS also has outstanding accounts payable with
Western  Resources  in the amount of  $369,961.  In  addition,  OBS has  accrued
liabilities with Western Resources in the amount of $254,409.


Westar  Capital has guaranteed any shortfalls of energy savings on the Company's
contract  with a  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 Kansas City, Kansas,  where
there is a one year lease  expiring May 1999, and San Ramon,  California,  where
office space is rented on a three year lease that expires March 2001. OBS leases
office  space  that has a one year  lease  with an  option  to  renew,  expiring
November  1998.  OMS leases a small building from the former owner on a month by
month basis to store testing equipment.  This lease will continue  indefinitely.
LTS currently has a one-year lease that expires July 1999.


<PAGE>F-26

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


    Future minimum lease payments under operating leases is as follows:

                Year ending June 30,

                       1999                                   $    448,704
                       2000                                        377,399
                       2001                                        377,399
                       2002                                          1,440
                       2003                                          1,440
                    Thereafter                                       1,440
                                                              ------------

                Total minimum lease payments                  $  1,207,822
                                                              ============

Total rent expense, including month-to-month equipment rentals, was $201,995 and
$272,641 in 1998, and 1997, 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.

    Ongoing Maintenance for Water Treatment Plants

OBS has two  contracts  with  Western  Resources  whereby  OBS  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.  OBS 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,  OBS is liable for the cost of the repairs to the equipment
limited to a maximum of $300,000 per incident.

    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.  In February 1998, the Company received a notice from the South Coast
Air Quality  Management  District for alleged  reporting  violations in calendar
year  1996 on the  facility  previously  owned by TCC.  No  remedial  action  is
required.  The Company may be subject to certain penalties,  but management does
not believe  this matter will have a material  adverse  impact on the  Company's
financial  condition  or results  of  operations.  Although  the level of future
expenditures for  environmental  matters cannot be determined


<PAGE>F-27

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


with any degree of certainty,  it is  management's  opinion that such costs when
determined will not have a material adverse effect on the financial  position or
results of  operations  of the  Company.  

    Guaranteed Savings

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

    Litigation

In January 1998, the Oregon Bureau of Labor and  Industries  (the "BLI") filed a
suit against LTS and two other parties for alleged unpaid wages in the amount of
$509,205 for 32 employees who worked on a lighting retrofit project in the state
of Oregon.  A trial date of April 13,  1999 has been set,  but the  parties  are
attempting  to obtain the approval of  mediation  rules in order to mediate this
matter.  Management also has had discussions with the BLI to resolve this issue;
however, no agreement has been reached.  Management  believes,  based on current
information, that any settlement would not have a material adverse impact on the
Company.

16. Defined Contribution Plan

The  Company  sponsors  a  401(k)  defined   contribution   plan,  which  covers
substantially all employees.  Company  contributions are determined  annually at
the discretion of management and vest at the rate of 20% per year of employment.
During  the  years  ended  June  30,  1998  and  1997,  the  Company's  matching
contribution was $53,480 and $43,088, respectively.

17. Significant Customers

Revenues from the three largest customers accounted for 31% (11%, 10%, 10% each)
of total  revenues in fiscal  1998,  and  revenues  from three  other  customers
accounted for 32% (10%, 9%, 13% each) of total revenues in fiscal 1997.

18. Concentration of Credit Risk

The Company operates in one industry  segment,  energy  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, 1998, accounts  receivable totaled  $4,478,720,  and the Company has
provided an allowance for doubtful accounts of $15,030.

<PAGE>F-28

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

For the years  ended June 30,  1998,  and 1997,  bad debts  totaled  $30,192 and
$37,093  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, 1998, the Company  maintained cash balances with a commercial  bank,
which were approximately $1,552,187 in excess of FDIC insurance limits.

19.     Year 2000

The Company is developing  plans to address  issues related to the impact on its
computer systems of the year 2000. The Company believes that  substantially  all
software  applications  currently  being used for the financial and  operational
systems have adequately  addressed any year 2000 issues.  Most hardware  systems
have been assessed and plans are being developed to address systems modification
requirements. The financial impact of making any required systems changes is not
expected  to be  material  to the  Company's  consolidated  financial  position,
liquidity or results of operations.  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

On July 14, 1998, the Company  exercised its right under the Stock  Subscription
Agreement to require Westar Capital to purchase an additional  200,000 shares of
Series C Preferred Stock for $1,000,000.

On  October  16,  1998,  Energy  Conservation  Consultants,   Inc.  ("ECCI"),  a
Louisiana-based  company,  filed a suit (United States District County,  Eastern
District of Louisiana, Case No. 98-2914) against OBS 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 in the aggregate amount of $748,000.  Management is attempting to settle
the matter; however, no agreement has been reached.  Management believes,  based
on current  information,  that any settlement  would not have a material adverse
impact on the Company.