UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                   Form 10-KSB

(Mark One)

XX   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the fiscal year ended June 30, 2000.

--   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 CORPORTION
                  ---------------------------------------------
                 (Name of small business issuer in its charter)

      Delaware                                                    33-0576371
 (State  or  other  jurisdiction  of  incorporation  or  organization)  (IRS
Employer Identification No.)

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

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

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

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

  Title of each class                 Name of each exchange on which registered
  -------------------                 -----------------------------------------
 Class A Common Stock                                   N/A


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

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB.

State issuer's revenues for its most recent fiscal year.............$18,207,612

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.........$2,158,000 as of October 5, 2000.

The  number of  shares of Common  Stock  outstanding  as of  October  5, 2000 is
18,620,450.

DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<S>                                                                         <C>

                 Documents Incorporated by Reference                      10-K Part and Item Where Incorporated
     -----------------------------------------------------------          --------------------------------------
          Definitive Proxy Statement for Annual Meeting of                 Part III: Items 9, 10, 11 and 12
     Stockholders of the Registrant to be held December 5, 2000

</TABLE>



<PAGE>2

                                     PART 1

Item 1.  Description of Business

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

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

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

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

         SYCOM ONSITE Corporation. Effective June 30, 1998, the Company, through
its  wholly-owned   subsidiary  SYCOM  ONSITE  Corporation  ("SO  Corporation"),
acquired  all of the assets and specific  liabilities  of  privately-held  SYCOM
Enterprises,  L.L.C. ("SYCOM, LLC"), an independent ESCO whose affiliate,  SYCOM
Corporation,  was,  like the  Company,  accredited  by  NAESCO.  SO  Corporation
acquired the project assets and certain  specific  liabilities of SYCOM,  LLC in
exchange  for  1,750,000  shares  of the  Company's  Class A  Common  Stock.  In
addition, under a Sale and Noncompetition Agreement, SO Corporation acquired the
right to the services and expertise of all of the employees of SYCOM Corporation
and SYCOM  Enterprises,  L.P.  ("SYCOM LP"),  in exchange for 157,500  shares of
non-voting,  non-dividend  Series D Convertible  Preferred  Stock of the Company
("Series D Stock")  convertible 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

<PAGE>3


Escrow  Agreement,  and will be released when the Company's Class A Common Stock
reaches $2.00 per share and annualized  after-tax earnings total $0.15 per share
(including  the shares of Class A Common  Stock into which the Series D Stock is
convertible  are  outstanding)  over  four  consecutive  quarters,  and  certain
specified debts of SYCOM  Corporation  and SYCOM LP have been  satisfied.  These
share  values and  earnings  thresholds  increase  by 10 percent  per year after
December 31, 1999.  Pursuant to the terms of a Share Repurchase  Agreement,  the
Company may repurchase the escrowed  Series D Stock for $0.001 per share if: (i)
the Sale and  Noncompetition  Agreement is  terminated;  and (ii) after June 30,
2000, such repurchase is justifiable  based on the reasonable  business judgment
of the Company's Board of Directors  considering the following factors:  (a) the
key  employees  of  SYCOM  Corporation  no  longer  are  being  retained  by  SO
Corporation;  and (b) there is no reasonably  foreseeable likelihood that all of
the following conditions shall be satisfied: specific debts to a third party and
the Company will be satisfied,  and both share performance  benchmarks described
in the Escrow  Agreement  will be achieved.  The Company also may repurchase the
escrowed Series D Stock during the 30 day period prior to the scheduled  release
date (June 30, 2006) if any one of the specified  conditions  for release of the
Series D Stock has not been  satisfied.  At such  time as the  Series D Stock is
released from the escrow to SYCOM Corporation, up to three additional members of
the Company's  Board of Directors may be  designated by SYCOM  Corporation.  Two
members designated by SYCOM, LLC were added to the Company's Board of Directors.
The acquisition  added offices in New Jersey and Washington D.C.  Effective June
30, 2000,  the Company  terminated  the Sale and  Noncompetition  Agreement with
SYCOM Corporation. SO Corporation continues to operate as a subsidiary.

Since  the  close  of the  transaction  in June  1998,  Onsite  has  experienced
significant  losses and as a result has been unable to provide  sufficient loans
to SYCOM Corporation to enable SYCOM Corporation and its affiliate, SYCOM LP, to
make the requisite payments on a previous loan from Public Service  Conservation
Resources  Corporation  ("PSCRC") to SYCOM LP. PSCRC has given a notice to SYCOM
Corporation  and SYCOM LP  alleging a default  by SYCOM LP under its  agreements
with PSCRC.  On June 1, 2000, the Company  announced that it had given notice to
Sycom  Corportion of the  termination of the Sale and  Noncompetetion  Agreement
between the Company and Sycom Corporation,  and will return to doing business as
Onsite Energy  Corporation.  The Company's  notice to SYCOM  Corporation  of the
termination of the Sale and Noncompetition  Agreement,  given in accordance with
the  Company's  rights under that  Agreement,  is a result of the PSCRC  default
notice and the Company's  continuing losses. The Company,  however,  will retain
the  project  assets  purchased  from SYCOM LLC in June 1998 as well as projects
developed since. In connection with the termination,  S. Lynn Sutcliffe resigned
as a Director and as the President of Onsite.

         Lighting  Technology  Services,  Inc.  On June 13,  1998,  the  Company
completed the acquisition of Lighting Technology Services, Inc. ("LTS"), a Costa
Mesa,  California based lighting  services  company.  In exchange for all of the
outstanding  shares of LTS,  the  Company  initially  issued a total of  690,000
shares of the  Company's  class A Common  Stock and paid  $500,000 to the former
stockholders  of LTS. As a wholly-owned  subsidiary of the Company,  LTS pursued
independent  lighting  services  opportunities  in  commercial,  industrial  and
educational markets while also providing lighting  subcontractor services to the
Company and other  ESCOs.  Effective  September  30,  1999,  the Company sold 95
percent of the stock of LTS back to one of the LTS  founders.  Operations of LTS
were not material to the consolidated financial statements.

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

         Onsite/Mid-States,  Inc. In February  1998,  OES, via its  wholly-owned
subsidiary  Onsite/Mid-States,  Inc.  ("OMS"),  acquired the operating assets of

<PAGE>4


Mid-States  Armature  Works,  Inc.   ("Mid-States   Armature"),   for  $290,000.
Mid-States  Armature  had 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 was located in
Salina,  Kansas.  The Company sold the assets of OMS to two former  employees of
OES in February  2000.  Operations of OMS were not material to the  consolidated
financial statements.


         REEP Onsite,  Inc. and ERSI Onsite,  Inc.  Effective April 1, 1999, the
Company formed REEP Onsite, Inc. ("REEP"),  and ERSI Onsite, Inc. ("ERSI"),  for
the  purpose  of  acquiring  substantially  all of the assets of REEP,  Inc.  in
exchange  for  assumption  of  certain  specific   liabilities.   REEP  provided
residential  energy  services  while ERSI is a commercial  lighting  contractor.
REEP, Inc. is an affiliate of SYCOM  Corporation and had been in business for 16
years.  Effective June 30, 2000, in connection  with the termination of the Sale
and Noncompetition Agreement with Sycom Corporation discussed above, the Company
discontinued  the operations of REEP and ERSI.  Operations of REEP and ERSI were
not material to the consolidated financial statements.


         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. This corporation is not active.

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

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

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

As of June 30, 2000, the Company's  auditors issued a qualified  opinion subject
to the  Company's  ability to continue  as a going  concern.  The going  concern
issues are the result of continued  operating  losses,  negative working capital
and a negative  shareholders'  equity.  See the Liquidity and Capital  Resources
discussion  below for  details  of the  Company's  plan for  dealing  with these
issues.

         Loss from Operations,  Possible Need for Additional Working Capital and
Potential   Dilution  to  Existing   Shareholders.   The  Company  has  suffered
significant  losses from operations for the past two fiscal years. For the years
ended June 30,  2000 and 1999,  the  Company  had net losses of  $6,637,046  and
$6,477,458,  respectively,  and had a negative working capital of $7,703,629 and
an accumulated  deficit of $34,978,075 as of June 30, 2000.  Management believes
that the  Company  will be able to  generate  additional  revenues  and  improve
operating efficiencies through a substantial reduction in overhead, the addition
of new  projects  as well as by other  means to achieve  profitable  operations.
During the year ended June 30,  2000,  the Company  took steps to  mitigate  the
losses and enhance its future viability. In addition, during the fiscal year end
2000, the Company  privately placed shares of newly created Series E Convertible
Preferred  Stock  ("Series E Stock") to existing  shareholders  for  $1,000,000.
Concurrent  with this private  placement,  members of senior  management  of the
Company agreed to receive  shares of the Company's  Class A Common Stock in lieu

<PAGE>5


of a portion of their  salary in an effort to reduce  cash  outflows  related to
compensation.  During the current fiscal year, the Company sold its wholly-owned
subsidiaries,  LTS and OMS in an  effort  to  raise  cash and  reduce  operating
losses. In a further step to reduce operating losses, the Company terminated its
Sale and  Noncompetition  agreement with Sycom  Corporation and discontinued the
operations of REEP Onsite, Inc and ERSI Onsite,  Inc.  Management  believes that
all of the above actions will allow the Company to continue as a going  concern,
with reduced revenues and reduced expenses.  Future cash requirements  depend on
the Company's profitability, it's ability to manage working capital requirements
and its rate of growth.  Additional financing through the sale of securities may
have an ownership dilution effect on existing shareholders.

         Divestiture of recently acquired subsidiaries.  As discussed above, the
Company has divested itself of 95 percent of its interest in LTS through a stock
sale, sold all of the assets of OMS, substantially reduced the operations in New
Jersey through a termination of the Sale and Noncompetition Agreement with Sycom
Corporation,  discontinued  the  operations of REEP and ERSI and has reduced the
operation of OES to exclusively providing industrial water services in the state
of Kansas.  The thrust of these  moves is part of an overall  plan to return the
Company to its core  business,  a focused  energy  service  company with primary
emphasis in California markets.

         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 62.7 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.

         Dependence on Limited Key and New Customers. For the fiscal years ended
June 30,  2000,  and  1999,  three  customers  in the  aggregate  accounted  for
approximately  33 percent and 34 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,  a material
portion  of the  gross  revenues  for the  Company  are  dependent  upon  phased
approvals by customers of projects and budgets. In addition, because many of the
Company's contracts are with local, public agencies, the Company's contracts are
subject to public hearings and local government approval. Therefore, even though
the  Company  has  entered  into  energy  efficiency  projects  that may provide
significant  revenues to the Company,  the realization of the Company's budgeted
revenue is dependent  upon the outcome of energy audits and the approval of each
phase of the work to be performed.  Further, many proposed contracts are subject
to approval by local government agencies that may meet only periodically and may
delay  approval of the  construction  contracts  due to other  agenda  items.  A
significant  delay in the  realization of revenue could have a material  adverse
impact on the business of the Company, its cash flow and its operating results.

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

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

<PAGE>6

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

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

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

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

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

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

<PAGE>7


Major  Events,  Contracts and  Customers.  In addition to the  acquisitions  and
divestitures  discussed  above,  the  following  is a list of major  events  and
contracts that occurred in the fiscal year ended June 30, 2000, and how they are
significant to the last two fiscal years' revenues.

         $1,000,000 Private  Placement.  In August 1999, the Company completed a
private  placement  with its Chairman of the Board and other related  investors.
Terms of the  placement  include the issuance of 50,000 shares of Series E Stock
convertible into 5,000,000 shares of Class A Common Stock,  warrants to purchase
1,250,000  shares of Class A Common  Stock at $0.75 per  share and  warrants  to
purchase 1,250,000 shares of Class A Common Stock at $0.50 per share. The Series
E Stock is  immediately  convertible  to common  stock at a rate which was below
market on the date of issuance,  resulting in a beneficial conversion element of
approximately  $763,000 which was recorded as a preferred  stock dividend in the
first fiscal  quarter ended  September 30, 1999. A portion of the securities was
sold to a director.  The intrinsic  value of the  convertible  preferred  shares
issued to the  director  was $47,500 on the date of issuance  and  resulted in a
charge against earnings in the fiscal year ended June 30, 2000.

         City of San Diego.  The Company entered into a master contract with the
City of San Diego, CA for the implementation of energy efficiency projects.  The
first of what is anticipated to be many projects  identified under the agreement
involved  lighting,   controls  and  mechanical   projects  intended  to  reduce
consumption.  This first  project  will  result in  revenues  to the  Company of
approximately $1.7 million.

Revenues  to the Company  were  approximately  $0.1  million for the fiscal year
ended June 30,  2000.  There were no  revenues to the Company in the fiscal year
ended June 30, 1999.

         Sanwa Bank. The Company  entered into a $1.2 million dollar contract to
replace  Sanwa Bank's two 275-ton  centrifugal  chillers,  install a new 325-ton
cooling tower as well as install  adjustable speed drives to supply air, exhaust
fans and hot water pumps,  provide and install a direct  digital  control system
and a high efficiency lighting system retrofit including new lamps and ballasts.

Revenues  to the Company  were  approximately  $1.0  million for the fiscal year
ended June 30,  2000.  There were no  revenues to the Company in the fiscal year
ended June 30, 1999.

         Japanese ESCO  Consulting  Contract.  The 2nd largest  utility in Japan
engaged the Company to provide  consulting  and training  services in a $950,000
contract. The services will focus on providing instruction and support to enable
a subsidiary to a utility in Japan to establish an ESCO there.

Revenues to the Company were approximately $.7 million for the fiscal year ended
June 30,  2000.  There were no  revenues to the Company in the fiscal year ended
June 30, 1999.

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

Revenues to the  Company  were  approximately  $20,000 for the fiscal year ended
June 30, 2000.  Revenues to the Company were  approximately $6.9 million for the
fiscal year ended June 30, 1999

         Jersey  Gardens Mall,  Elizabeth,  New Jersey.  In November,  1998, the
Company  entered  into a $3.8  million  contract  (reduced to $3.3  million with
change  orders) with an affiliate of Glimcher  Development  Corporation to build
and operate an  electrical  distribution  system for the Jersey  Gardens Mall in
Elizabeth,  New Jersey.  The Company is constructing a distribution and electric
supply  system that will provide  energy to light,  heat and air  condition  the
Jersey  Gardens  Mall's  more  than  1,600,000  square  feet of  planned  space.

<PAGE>8

Construction of both the Mall and the distribution  system were completed in the
current fiscal year. The Company also will arrange  purchases of electricity for
the Mall under New Jersey's new deregulation law.

         Revenues to the Company were approximately  $43,000 for the fiscal year
ended June 30, 2000. Revenues to the Company were approximately $3.3 million for
the fiscal year ended June 30, 1999

         Middletown Board of Education. The Company has signed contracts under a
master energy services agreement with the Middletown Board of Education ("MBOE")
in  Middletown,  New Jersey,  with total  project costs of  approximately  $22.8
million (of which the  Company  will  recognize  approximately  $6.2  million in
revenue and the MBOE will contract  directly with other  subcontractors  for the
remainder in costs) in project costs and is expected to save MBOE  approximately
$9 million in energy costs over 10 years and will receive  substantial  benefits
from  incentives  paid from the local utility.  The project  enables the MBOE to
make significant  energy-related  capital  improvements to its facilities and to
fund these  improvements  mostly  through  energy cost  savings  and  incentives
provided by the local host  utility.  The Company is  accomplishing  the overall
project  at MBOE  through  the  installation  of  geothermal  heat pumps and the
retrofit of facility lighting.  The implementation of the project is expected to
be completed over a period of approximately two years.

         Revenues to the Company were  approximately  $1.5 million in the fiscal
year ended June 30, 2000. Revenues to the Company were approximately $500,000 in
the fiscal year ended June 30, 1999.

         National Railroad  Passenger  Corporation  ("Amtrak").  The Company has
implemented  several  projects  for  Amtrak to  reduce  energy  losses  from the
existing steam distribution  system and to generate process and heat energy with
more  cost-efficient  equipment.  The  existing  steam  distribution  system was
replaced with  oil-fired and electric  boilers at the points of use. For heating
purposes,  oil fired  boilers  and  electric  resistance  heat will  serve  each
building's  needs.  These projects will generate  approximately  $1.3 million in
revenues for the Company.

         Revenues to the Company were approximately  $130,000 in the fiscal year
ended June 30, 2000. Revenues to the Company were approximately  $927,000 in the
fiscal year ended June 30, 1999.

         Newark Schools. In December 1998, the Company entered into an agreement
to perform work on state-operated  educational facilities in the City of Newark,
New Jersey to total $7.5  million in  revenues  for the  Company.  This  project
required the Company,  as a subcontractor to Johnson Controls,  Inc., to procure
and install certain lighting  equipment  designed to improve the efficiency with
which the Newark Schools use various forms of energy  (electricity  and gas) and
to reduce  expenditures  for that  energy.  The Company also  arranged  for, and
sponsored  participation of the facilities in the Standard Offer Program offered
by Public  Service  Electric  and Gas  Company  ("PSE&G"),  through  which PSE&G
purchases energy savings generated by the project.

         Revenues to the Company were  approximately $3.6 million for the fiscal
year ended June 30,  2000.  Revenues  to the  Company  were  approximately  $3.9
million for the fiscal year ended June 30, 1999.

         Board of Education of the Hudson County Schools of Technology. In April
1999,  the Company  entered into an energy  services  agreement  with the Hudson
County Schools of Technology  Board of Education (the "Hudson BOE").  Under this
agreement,   the  Company  is  responsible  for  the  design,   procurement  and
installation of all equipment and the execution of an energy services  agreement
with  PSE&G in order for Hudson BOE to  benefit  from  payments  under the PSE&G
Standard  Offer Program for energy saved by the project  equipment.  The Company
will also install  certain  measurement and  verification  equipment in order to
monitor the energy saved.  The total  revenues  generated  from this project are
$1.7 million.

         Revenues to the Company were  approximately  $.3 million for the fiscal
year ended June 30,  2000.  Revenues  to the  Company  were  approximately  $1.4
million for the fiscal year ended June 30, 1999.

<PAGE>9

         Passaic Valley Sewerage  Commission,  Newark,  New Jersey.  In December
1996, the Company entered into a master energy efficiency agreement with Passaic
Valley  Sewerage  Commission  (the  "Commission").  The second  amendment to the
agreement  involves a fee to the Company of  approximately  $1.3 million for the
interface between the Commission and the host utility.  This interface  involves
the  application for utility  incentive  payments as well as the development and
installation  of a  measurement  and savings  verification  plan and the related
equipment on a project that involves installation of equipment that improves the
process of producing sludge.  Utility incentive payments,  all of which are paid
to the Commission, are expected to be approximately $19 million over 10 years.

         Revenues to the Company were  approximately  $60,000 in the fiscal year
ended June 30, 2000. Revenues to the Company were approximately  $900,000 in the
fiscal year ended June 30, 1999.

         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  were  approximately  $6.0  million.   Construction  was
substantially completed by the fiscal year end 1999. OES initially developed the
project, which included the installation of multiple energy efficiency measures,
including lighting  retrofits,  energy management  systems,  chiller and furnace
replacements,  and variable speed motor controllers.  The Company estimates that
the project should result in savings to the District of approximately $7,775,000
in  energy  and  operating  costs  over the 10 year term of the  agreement.  The
Company also will provide  training,  post-installation  measurement and savings
verification  services,  and steam trap maintenance repair services for the term
of the agreement  following the completion of construction  of the project.  The
Company's  future revenues  associated with these ongoing services are estimated
at approximately $818,000 over the 10 year contract period.

         Revenues to the Company were approximately  $150,000 in the fiscal year
ended June 30,  2000.  Revenues to the Company  were $5.9  million in the fiscal
year ended June 30, 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 1999,  Thomason  renewed the O&M  agreement for an
additional 12 months.  In connection  with this O&M  agreement,  the Company has
staffed the central plant facility with eight  full-time  positions  including a
supervisor,  mechanic and plant operators.  This contract expires  September 30,
2000 and the Company has been notified by Thomason that the contract will not be
renewed.

         Revenues  for  fiscal  year  ended  June 30,  2000  were  approximately
$873,000.  Revenues  for  fiscal  year ended  June 30,  1999 were  approximately
$850,000.


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

<PAGE>10


         Consulting  revenues to the Company were approximately $1.0 million and
$1.5 million for the fiscal years ended June 30, 2000, and 1999, respectively.

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

         Traditional ESCOs.  Energy service companies (ESCOs) have traditionally
provided energy  efficiency and related services to customers.  These ESCOs have
provided  services  through  performance  contracting  that  usually  involved a
guarantee of savings and financing of the energy efficiency  measures  installed
that was paid for out of  savings.  NAESCO  defines  an ESCO as a  full-service,
vertically   integrated  company  that  provides  a  complete  range  of  energy
efficiency and power management  services to its customers.  In order to qualify
as an  accredited  ESCO,  a company  must be able to offer a method of financing
projects  and  guaranteeing  savings as  services  offered to  customers.  These
elements  generally are what  differentiate an ESCO from contractors,  equipment
suppliers and other providers. The Company provides traditional ESCO services to
many of its customers. The services are described in greater detail below.

         Comprehensive  Energy  Services.  The Company provides its customers
with  comprehensive  energy services.  Such services include:

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

         A more detailed discussion of these services follows.

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

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

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

<PAGE>11


         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.

         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 ESCOs payment
is based upon delivery of actual energy  savings to the customer.  The values of
these  energy  savings are used to service the  project  financing  costs if the
project is financed or to provide positive cash flow to the customer.  In short,
the performance contracting process requires payment for actual results, not for
projections.

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

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

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

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

<PAGE>12


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

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

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

         Services to Prepare Customers for Deregulation

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

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

         On-site and Distributed  Generation/Combined  Heat & Power: The Company
has experience as a distributed generation and a combined heat and power ("CHP")
developer  and  implementer  for  systems  ranging  from 60 kW to  20,000  kW at
facilities  such as  industrial  facilities,  hospitals,  multi-family  housing,
nursing  homes,  recreational  centers,  health  clubs and  hotels.  Development
activities may be related to on-site generation where the electricity generation
is only  used  on-site  and not  transmitted  to the  grid or it can be  locally
distributed  to  the  grid.  In  either  case,  it  may  combine  generation  of
electricity  with  heat  recovery  -CHP.  CHP is the  sequential  production  of
electricity  and thermal energy  utilizing a single fuel source.  The by-product
thermal  energy from the  production of electricity is utilized to provide steam
heating,  domestic hot water and/or chilled water (through absorption  chilling)
to the host facility.  As a result, 60 percent to 90 percent of the input fuel's
energy content can be utilized to produce heat and electricity  compared to only
25 percent to 40 percent of the fuel's energy content to make electricity  alone
in a utility or independent generating plant. The thermal energy produced by the
CHP  system  is used by the  host  facility  to  reduce  fuel  consumption  that
otherwise  would be needed to supply the thermal  energy  produced by boilers or
other fuel  burning  equipment.  A typical  system  consists of a  reciprocating


<PAGE>13

engine  or gas  turbine  generally  fueled  by  natural  gas,  which  drives  an
electrical  generator.  A heat recovery system reclaims the heat produced by the
engine  generator  set,  yielding  steam  or hot  water  to be used in the  host
facility  for  domestic,  process  or space  heating/cooling  needs.  Electrical
control  relays and switch gear  protect the  equipment  from  overload,  ensure
proper voltage and frequency,  and  interconnect  with the local utility's power
grid.  Since  completing  its first CHP  system in 1984,  the  Company  has been
associated  with  over  35 CHP  projects.  Electric  industry  restructuring  in
California,  New  Jersey  and  Illinois  as well as other  parts of the U.S.  is
creating a renewed interest in on-site (distributed) generation by customers and
utilities.  Furthermore, CHP is getting increased attention by state and federal
environmental agencies as a generation source that can provide net environmental
quality benefits to help mitigate global climate change.

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

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

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


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

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

         The  Company's   competitive   advantage   historically  has  been  its
independence from affiliation with commodity suppliers (utilities) and equipment
vendors, and its ability to offer a broader range of services and equipment than

<PAGE>14

other  ESCOs  can  offer.  In  addition,  the  Company  has  been in the  energy
efficiency  business for a longer  period of time with a  significantly  greater
number of successful projects, than most other ESCO competitors.

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

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

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

         Personnel:  The  Company  has an  experienced  staff of energy  service
professionals  whose  senior  managers  are  recognized  leaders  in the  energy
services industry. The President of the Company is a past President of NAESCO.

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

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

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

         Accreditation:  As discussed in National  Accreditation  above, the
Company is  accredited by NAESCO.  It is also on the U.S.  Department of Defense
and Department of Energy approved lists of energy services companies.

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

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

         However,  some government laws and regulations impose requirements upon
the  Company.   The  Company  is  subject  to  rules  and   regulations  of  the
Environmental   Protection   Agency,   the   Occupational   Safety   and  Health
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 requires its customers or subcontractors to
contract with certified  hazardous waste removal companies.  The Company obtains

<PAGE>15

indemnification from applicable customers and subcontractors as to liability the
Company  might incur in connection  with  hazardous  materials or  environmental
concerns. The Company may also be subject to certain lighting level requirements
in certain  public  facilities  when it undertakes  lighting  retrofits.  It has
substantial  experience in meeting such  standards at both the Federal and State
level.

Employees.  As of October 5, 2000 the Company employed  approximately 40 persons
in regular or temporary full-time or part-time positions.

Item 2.  Description of Property.

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

         The  Company's  subsidiaries  are located in  Somerset,  New Jersey (SO
Corporation) and Topeka,  Kansas (OES).  Additionally,  under a former agreement
with SYCOM Corporation,  the Company was required to reimburse SYCOM Corporation
for the  applicable  continuing  operating  expenses  (including  rent)  for the
offices and a small  warehouse  in  Somerset,  New Jersey.  This  agreement  was
terminated effective June 30, 2000. No other office or warehouse space is leased
or owned by the Company. Management believes that the current properties will be
suitable for the Company's operations.

Item 3. Legal  Proceedings  In June 2000, the Company was served with an amended
complaint by D. Falasca Plumbing, Heating Cooling, Inc. ("Falasca") in an action
previously  disclosed  by the Company  (Superior  Court of New Jersey,  Atlantic
County,  Docket No.  ATL-L-93-00).  In July 2000,  the Company was served with a
third party  complaint  by General  Accident in response to the Falasca  amended
complaint.  Both  actions  are  related to one of the  Company's  projects.  The
General Accident action pleads similar causes of actions (breach of contract and
related actions), and seeks indemnification and damages substantially similar to
those sought in the prior action filed by General  Accident.  The Falasca action
seeks  indemnification,  and  alleges  breach of contract  and seeks  payment of
monies ($757,337) allegedly owed under a subcontract  agreement,  plus interest,
costs of suit,  attorneys' fees and other costs.  The Falasca action also pleads
similar  causes of actions  (breach of contract  and related  actions) and seeks
damages substantially similar to those sought in the prior cross-claims filed by
Falasca. Both prior actions were previously disclosed by the Company in its Form
10-QSB  for the  quarter  ended  March  31,  2000.  The  Company  has  filed its
responsive pleadings in both actions and continues to evaluate this matter.

In early August 2000, the Company was served with a complaint by Planergy,  Inc.
("Planergy")  (Superior  Court of New Jersey,  Law  Division,  Somerset  County,
Docket No. SOM-L-1069-00)  against the Company and other parties,  including two
of the Company's  subsidiaries,  seeking  payment in the amount of $94,428 (plus
interest) for equipment and services allegedly supplied by Planergy. The Company
is in the process of preparing its responsive pleadings in this matter.

In August  2000,  the  Company  received a copy of a  complaint  (United  States
District  Court,  District  of New Jersey,  Camden  Vicinage,  Civil  Action No.
00cv942  (SMO))  filed  by  Independent   Energy  Services,   Inc.  ("IES"),   a
subcontractor of the Company,  against the Company and other parties,  including
General  Accident  and two of the  Company's  current  or  former  officers  and
directors,  alleging  breach  of  contract  and  related  causes  of  action  in
connection  with one of the  Company's  projects.  The action  seeks  payment of
monies  ($710,562.78)  allegedly  owed  under  a  subcontract  agreement,   plus
interest,  costs of suit and other alleged  damages.  This action is related to,
and seeks damages substantially similar to those sought in, another action filed
by IES (for breach of contract and related causes of action) and an action filed
by General Accident (for indemnification)  (Superior Court of New Jersey, Morris
County,  Docket No.  L-214-00).  Both prior actions by IES and General  Accident
were  previously  disclosed  by the  Company in its Form  10-QSB for the quarter
ended  December 31, 1999,  and Form 10-QSB for the quarter ended March 31, 2000,
respectively.  While the Company has received a copy of the filed complaint, the

<PAGE>16


Company has not been properly  served in this action but  nevertheless is in the
process of evaluating this claim. The Company continues to work with the parties
to settle this matter.

In August 2000, Falasca filed a complaint (Superior Court of New Jersey,  Hudson
County,  Law  Division,  Docket No.  L-4713-00)  against  the  Company and other
parties,  including  three of the  Company's  current  or former  directors  and
officers,  alleging  breach  of  contract  and  related  causes  of  actions  in
connection  with one of the  Company's  projects.  The action  seeks  payment of
monies ($658,000) allegedly owed under a subcontract  agreement,  plus interest,
costs of suit and  other  alleged  damages.  The  Company  was  served  with the
complaint  in late  August and is in the  process of  preparing  its  responsive
pleadings.

In August  2000,  the Company  received a copy of a  complaint  filed by Johnson
Controls,  Inc.  (United States  District Court,  District of New Jersey,  Civil
Action No. 00-2533  (HAA)) against the Company and other parties,  including one
of the Company's subsidiaries, alleging breach of contract and related causes of
action in  connection  with one of the  Company's  projects.  The  action  seeks
payment of monies ($490,707) allegedly owed under a subcontract agreement,  plus
interest,  attorneys' fees,  costs of suit and other alleged damages.  While the
Company  has  received a copy of the filed  complaint,  the Company has not been
properly served in this action but  nevertheless is in the process of evaluating
this claim, including any applicable counter-claims.  The Company also continues
to work with the parties to settle this matter.

As previously  disclosed by the Company, in March 2000,  Powerweb  Technologies,
Inc. ("Powerweb"), a subcontractor to ERSI-Onsite,  Inc. (ERSI), filed an action
(Superior  Court  of  New  Jersey,  Law  Division,   Essex  County,  Docket  No.
ESX-L-2071-00)  against  ERSI and the Company  alleging  breach of contract  and
related causes of action in connection with one of the Company's  projects.  The
suit sought payment of monies ($121,800)  allegedly due under  subcontracts,  as
well as interest,  costs of suit and punitive damages.  Because the subcontracts
contain arbitration  provisions  requiring that any disputes between the parties
be settled by binding arbitration,  the action was dismissed. In September 2000,
Powerweb filed a demand for  arbitration.  The Company and ERSI continue to make
efforts  to settle  this  matter;  however,  no  settlement  agreement  has been
reached.

The Company has recognized expense associated with the amounts claimed under the
various legal proceedings in the Company's prior financial statements,  although
the Company will  continue to incur legal fees,  expenses  and costs  related to
these proceedings until the various matters are resolved.


Item 4.  Submission of Matters to Vote of Security Holders

         No matters  have been  submitted  during the fiscal year ended June 30,
2000 to a vote of securities holders.

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

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

   Quarter Ended                       High                     Low
-----------------------              ---------                --------
September 30, 1998                    $1.2500                 $0.7812
 December 31, 1998                    $0.7810                 $0.4687
    March 31, 1999                    $0.9062                 $0.5000
     June 30, 1999                    $0.6250                 $0.3125
September 30, 1999                    $0.4500                 $0.2600
 December 31, 1999                    $0.3300                 $0.1400
    March 31, 2000                    $0.5800                 $0.1550
     June 30, 2000                    $0.2850                 $0.0900

<PAGE>17


         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 October 5, 2000, there were  approximately  230 holders of record
of the Common Stock.

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

         Dividends  were  declared and paid as required for each of the quarters
through April 15, 1999.  While the Board has authorized the payment of dividends
to the extent such declaration and payment is allowed under applicable  Delaware
corporate law, under Delaware law,  dividends on the Series C Stock could not be
declared  and paid as required on July 15, 1999,  October 15, 1999,  January 15,
2000,  April 15,  2000,  or July 15,  2000.  Such,  dividends  were  payable  in
additional shares of Series C Stock or cash at the option of the Company through
November 1999. Thereafter, dividends are payable in cash.

         Under the Certificate of Designations for the Series C Stock if, at any
time,  four or more  quarterly  dividends,  whether or not  consecutive,  on the
Series C Stock are in default, in whole, or in part, the holders of the Series C
Stock are entitled to elect the smallest number of directors as would constitute
a majority  of the Board of  Directors  of the  Company  and the  holders of the
Company's  Class A Common Stock as a class are  entitled to elect the  remaining
directors.  Additionally,  under the October 1997 Stock  Subscription  Agreement
entered into by Westar and the Company, Westar agreed for a period of five years
to limit its equity  ownership  of the Company to 45 percent of the  outstanding
shares  of the  Class A Common  Stock on a fully  diluted  basis and to not take
certain  other  actions  related to  controlling  or  attempting  to control the
Company unless it receives the Company's permission via the majority vote of the
directors of the Company's  Board of Directors who are not directors  designated
by  Westar or are  affiliates  of  Westar.  However,  if,  at any  time,  Westar
exercises  its rights to elect the  majority of the Board of  Directors  because
four or more quarterly  dividends,  whether or not consecutive,  on the Series C
Stock are in default, in whole or in part, all directors are entitled to vote on
such ownership issue and not just the non-Westar designated directors.

         In March 2000, the Company reached an agreement with Westar whereby the
dividends due on October 15, 1999,  and January 15, 2000,  were waived by Westar
in  exchange  for the  Company's  release  of  Westar  and its  parent,  Western
Resources,  Inc.,  from certain  non-compete  agreements.  The amounts waived by
Westar  were  16,208  shares of Series C stock  related to the  October 15, 1999
dividend,  valued at $28,202 and $83,015 in cash related to the January 15, 2000
dividend.  The Company remains delinquent on the July 15, 1999 (15,823 shares of
Series C Stock),  the April 15, 2000  ($81,040  cash) and July 15, 2000 ($81,040
cash) dividend requirements

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

<PAGE>18


are urged to carefully  review and consider the various  disclosures made by the
Company that attempt to advise interested parties of the factors that affect the
Company's  business,  including  the  discussion  under Item 1.  Description  of
Business,  as well as the Company's periodic reports on Forms 10-KSB, 10-QSB and
8-K filed with the SEC.

         As discussed in Item 1.  Description of Business,  the Company acquired
OES, OMS, LTS and SO Corporation  during the fiscal year 1998, and REEP and ERSI
during the fiscal year 1999.  During the fiscal year 2000, the Company sold LTS,
OMS and limited the operation OES to industrial water purification in Kansas. In
addition,  the Company  terminated  its Sale and  Noncompetition  agreement with
SYCOM  Corporation  and  discontinued  the  operations  of  REEP  and  ERSI.  To
accurately depict the change in operations, liquidity and capital resources, the
Company has given a consolidated comparative and also a comparative that removes
the impact of its newly acquired and or divested subsidiaries.


The Company has gone  through  significant  changes over the past few years that
involved aggressive growth through acquisition and the subsequent divestiture or
ceased operations of nearly all of the newly  added/created  subsidiaries.  As a
result,  the Company  anticipates  substantial  reductions in revenues,  cost of
sales and selling,  general and administrative expenses. The Company has focused
itself  back on its core  business  of being an  energy  services  company  with
primary emphasis in California markets.

Results of Operations.

         Revenues. Revenues decreased in the fiscal year ended June 30, 2000, by
$25,893,797  or 58.71  percent.  This  decrease is primarily  attributable  to a
decline in revenues of approximately  $12.9 million at SO Corporation and a drop
in revenues due to sale or disposition of other subsidiaries.  After elimination
of  revenues  attributable  to  newly  acquired  and or  divested  subsidiaries,
revenues decreased by $19,126,956,  or 60.40 percent from fiscal year ended June
30, 1999 to June 30, 2000. The decrease in revenues  occurred as a result of the
decrease discussed above as well as a decrease in revenues at OES resulting from
the limiting in scope of OES to industrial water services whereas before OES was
involved in industrial  energy projects.  Revenues at Onsite Energy  Corporation
("OEC") also declined due to the inclusion in the prior year of a single project
that contributed approximately $5 million in revenue.

         Gross Margin.  Gross margin for the fiscal year ended June 30, 2000 was
31.55 percent of revenues  compared to 20.28 percent in fiscal year 1999.  After
elimination of revenues and cost of sales  attributable to newly acquired and or
divested  subsidiaries,  gross margin was 31.35 percent for the fiscal year 2000
compared to 21.75 percent in fiscal year 1999. The Company  typically engages in
several different types of business with substantially different margin results.
The project types are as follows:  general construction  projects that produce a
typical  margin in the 15 to 35 percent  range;  fee based  projects,  where the
major  construction  subcontractors  are hired by the customer and, as such, the
costs and related  revenues  do not flow  through the Company and the margin can
range from 30 to 80 percent;  consulting contracts where the typical margins are
50 to 70 percent;  and lighting projects,  through LTS, REEP and ERSI, where the
margins  typically  are lower,  usually in the range of 10 to 25  percent.  As a
result  of the mix in  margins,  the  gross  margin  for any  given  period  can
fluctuate significantly and is not necessarily indicative of a trend.

         Selling,  General  &  Administrative   Expenses.   Selling,  general  &
administrative ("SG&A") expenses were $8,724,692 or 47.92 percent of revenues in
the fiscal year ended June 30, 2000, compared to $11,193,561 or 25.38 percent of
revenues in fiscal year 1999.  After  elimination  of revenues and SG&A expenses
attributable  to newly acquired  subsidiaries,  SG&A as a percentage of revenues
was 56.24  percent  for fiscal year end 2000  compared to 29.16  percent for the
fiscal year 1999.  The increase was primarily due to the 58.71 percent  decrease
in revenue without corresponding  decreases to SG&A. However, there were several
significant  changes in the fiscal year ended June 30, 2000 as  discussed  above
that will have a dramatic impact (decrease) on SG&A in the future.

<PAGE>19


Bad debt expense - related party was  $2,518,160 for the fiscal year ending June
30, 2000. The expense is the result of an assessment of the underlying  estimate
of collateral value and the result being much less than the then carrying value.
This  is  primarily  due  to the  termination  of the  Sale  and  Noncompetition
agreement with SYCOM Corporation.

Impairment of property and equipment of $389,141 in the current year is also the
result of the  termination of the Sale and  Noncompetition  agreement with SYCOM
Corporation.  The Company will be surrendering title of these assets back to its
original owners and does not anticipate any consideration for them.

Depreciation  and  amortization  expense was  $514,293 for the fiscal year ended
June 30, 2000  compared  to  $1,074,855  as of June 30,  1999.  The  decrease of
$560,562  was  the  result  of  the  inclusion  of  approximately   $503,000  of
amortization of excess of purchase price over net assets acquired  (goodwill) in
the prior year  whereas the current  year there was no  amortization  due to the
write off of goodwill relating to Sycom as of June 30, 1999.

Recovery of reserve  provided for the sale of subsidiary was $358,670  reduction
in expense in the  current  year,  whereas in the  previous  year,  a reserve of
$1,010,000 was established for the estimated loss on disposition of LTS.

Loss on  disposition  of assets  resulted from the sale of some of the assets of
OES and all of the  assets  of OMS offset  by a gain recognized  on the sale and
leaseback of certain assets.

         Loss from Operations. Loss from operations increased in the fiscal year
ended June 30,  2000 by  $58,009 or less than one  percent.  This  increase  was
mainly  attributable to the loss recognized related to the decision to terminate
the Sale and  Noncompetition  agreement with SYCOM  Corporation.  In the current
year,  the  Company  charged to expense a total of  $2,907,301  due to  impaired
values of amounts due from  shareholders and the fixed assets of SO Corporation.
In  fiscal  1999,  as a  result  of  the  operating  losses  of SO  Corporation,
management  determined  that the carrying value of excess of purchase price over
net assets acquired had been impaired.  The effect of this  determination was to
charge  against  operating  earnings   (additional  loss)  of  $1,918,851,   the
unamortized balance as of June 30, 1999.

         Other  Income/Expense.  Other expense increased $100,479 for the fiscal
year ended June 30, 2000. The change was  attributable to a decrease in interest
income of  $138,866  offset by a decrease of  interest  expense of $38,387.  The
interest  income in the  fiscal  year  ending  June 30,  1999  arose  from notes
receivable from  shareholders.  Further accrual of interest was suspended as the
realizibility of the asset became questionable.  The interest expense is related
to notes  payable  on certain  long-term  construction  projects  added with the
acquisition of SO Corporation and financing  attributable  to utility  incentive
payment streams.

         Net  Loss.  Net loss for the year  ended  June 30,  2000  increased  by
$159,588,  or 2.5 percent from the loss for fiscal year 1999. This resulted in a
loss per share of $0.42,  compared to the loss per share for fiscal year 1999 of
$0.36.

Liquidity and Capital Resources.

          Working  capital  was a  negative  $7,703,629  as of  June  30,  2000,
compared to a negative  $6,511,390  as of June 30, 1999, an increase in negative
working capital of $604,803.

         Cash flows  used in  operating  activities  for the year ended June 30,
2000 were $410,352, compared to $488,544 used for the year ended June 30, 1999.

         Cash flows  provided by investing  activities for the fiscal year ended
June 30, 2000,  were  $1,192,891  compared to  $2,840,421  in cash flows used in
investing  activities  for the fiscal year ended June 30,  1999,  an increase of
$4,033,312.  This  change  was  primarily  due  to the  reduction  in  loans  to
shareholders  acquired  with the new  subsidiaries  as well as proceeds from the
sale of assets.


<PAGE>20


         Cash flows used in financing  activities  was  $1,456,867 in the fiscal
year  ending  June  30,  2000  compared  to cash  flows  provided  by  financing
activities  of  $2,136,367,  a change of  $3,593,234.  The  change  was due to a
decline in  proceeds  from  issuance  of  preferred  stock and notes  payable of
$1,998,667 and an increase of repayments on notes payable of $1,571,088.

         As of June 30, 2000, the Company's  auditors issued a qualified opinion
subject to the  Company's  ability to  continue  as a going  concern.  The going
concern issues are the result of continued  operating  losses,  negative working
capital and a negative shareholders' equity.

         The Company has suffered  significant  losses from  operations  for the
past two fiscal years.  For the years ended June 30, 2000 and 1999,  the Company
had net losses of $6,637,046 and  $6,477,458,  respectively,  and had a negative
working  capital of $7,703,629 and an  accumulated  deficit of $34,978,075 as of
June 30,  2000.  Management  believes  that the Company will be able to generate
additional  revenues and improve  operating  efficiencies  through a substantial
reduction in overhead, the addition of new projects as well as by other means to
achieve profitable operations.  During the year ended June 30, 2000, the Company
took steps to mitigate the losses and enhance its future viability. In addition,
during the fiscal year end 2000,  the Company  privately  placed shares of newly
created  Series E  Convertible  Preferred  Stock  ("Series E Stock") to existing
shareholders for $1,000,000.  Concurrent with this private placement, members of
senior management of the Company agreed to receive shares of the Company's Class
A Common  Stock in lieu of a portion of their salary in an effort to reduce cash
outflows related to  compensation.  During the fiscal year, the Company sold its
wholly-owned  subsidiaries,  LTS and OMS in an effort to raise  cash and  reduce
operating  losses.  In a further step to reduce  operating  losses,  the Company
terminated  its  Sale  and  Noncompetition  agreement  with  Sycom  Corporation,
discontinued the operations of REEP Onsite, Inc and ERSI Onsite, Inc. Management
believes  that all of the above  actions will allow the Company to continue as a
going  concern,  with  reduced  revenues  and  reduced  expenses.   Future  cash
requirements  depend on the  Company's  profitability,  it's  ability  to manage
working capital requirements and its rate of growth.

Seasonality  and  Inflation.  Management  does  not  believe  that the  business
of the Company is effected by seasonality or inflation.

Industry.  As  described  in  detail in Item 1.  Description  of  Business,  the
deregulation of the electric  utility  industry in California and throughout the
U.S. has created a more  competitive  environment for electric power  generation
and energy services. This has and will continue to provide opportunities for the
Company to expand the scope of  services.  The Company  continues  to market new
energy services for larger consumers in preparation for the emerging competitive
marketplace created by deregulation.

Foreign  Operations.  On April 8, 1998,  the  Company  formed  Onsite  Energy de
Panama,  S.A. This Panamanian  corporation was formed in order to facilitate the
acquisition and  development of potential  projects in Panama and Latin America.
There was no operating activity through the fiscal year ended June 30, 2000.

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

Impact of Recently  Issued  Standards.  In Fiscal 1999, the FASB issued SFAS No.
133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities".  This
statement   establishes   accounting  and  reporting  standards  for  derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts and for hedging activities.  It requires that an entity recognizes all
derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and measures those instruments at fair value.

<PAGE>21


Subsequently,   the  FASB  issued  SFAS  No.  137,   Accounting  for  Derivative
Instruments  and Hedging  Activities -- Deferral of the  Effective  Date of FASB
Statement No. 133, which amends the effective date of SFAS No. 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company plans to
adopt SFAS No. 133 in Fiscal  Year 2001 and is  currently  assessing  the impact
this statement will have on its consolidated  financial  statements.  Management
believes that the impact of SFAS No. 133 will not be significant to the Company.

In December 1999, the  Securities and Exchange  Commission  (SEC) released Staff
Accounting bulletin (SAB) 101 "Revenue Recognition in Financial Statements". SAB
101 establishes  guidelines in applying generally accepted accounting principles
to the  recognition  of revenue in financial  statements  based on the following
four  criteria;  persuasive  evidence of an  arrangement  exists,  delivery  has
occurred or services  have been  rendered,  the  seller's  price to the buyer is
fixed or determinable,  and  collectibility is reasonably  assured.  SAB 101, as
amended by SAB 101A, is effective no later than the first fiscal  quarter of the
fiscal year beginning  after  December 15, 1999,  except that  registrants  with
fiscal years that begin between December 16, 1999 and March 15, 2000, may report
any resulting  change in accounting  principle no later than their second fiscal
quarter of the fiscal year  beginning  after December 15, 1999. The Company does
not  believe  that the  adoption  of SAB 101 will have a material  effect on its
financial position or result of operations.


Item 7. Financial Statements.

     The Company's  consolidated  financial statements are attached as pages F-1
through F-27.

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

     None.

                                    PART III

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

     The  information  included  under the  headings  "Election  of  Directors,"
"Directors  and  Executive  Officers"  and  "Compliance  with  Section 16 of the
Securities Exchange Act of 1934" in the Company's definitive Proxy Statement for
the  Annual  Meeting  of  Stockholders  to be  held  on  December  5,  2000,  is
incorporated herein by reference.

Item 10. Executive Compensation.

     The  information  included  under  the  heading  "Directors  and  Executive
Officers" in the Company's  definitive Proxy Statement for the Annual Meeting of
Stockholders  to be  held  on  December  5,  2000,  is  incorporated  herein  by
reference.

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

     The information included under the heading "Voting Securities and Principal
Stockholders Thereof" in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders  to be held on December 5, 2000, is incorporated  herein
by reference.

<PAGE>22


Item 12. Certain Relationships and Related Transactions.

     Information with respect to certain relationships and related transactions,
appearing under the heading "Certain  Relationships and Related Transactions" in
the Company's  definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on December 5, 2000 is incorporated herein by reference.


               [ Remainder of this page intentionally left blank ]



<PAGE>23
                                     PART IV

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

     a)   Exhibit

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

     3.1  Certificate of Incorporation*

     3.2  Form of Bylaws*

     10.1 1993 Stock Option Plan*

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

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

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

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

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

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

    10.32A. 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  and
          Hercules Incorporated,  predecessor-in-interest to Alliant Techsystems
          Inc., dated February 8, 1995***

<PAGE>24


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>25


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>26


   10.88.1Performance  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

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

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

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

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

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

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

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

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

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


b)   Reports on Form 8-K


<PAGE>27

                                   SIGNATURES

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


Date:    October 10, 2000                  By: /s/ RICHARD T. SPERBERG
                                              ----------------------------------
                                              Richard T. Sperberg
                                              Chief Executive Officer
                                              (Principal Executive
                                              Officer), Director


Date:    October 10, 2000                  By: /s/ J. BRADFORD HANSON
                                              ----------------------------------
                                              J. Bradford Hanson, CPA
                                              Chief Financial Officer,
                                              Principal Financial and Accounting
                                              Officer




<PAGE>28


                                   SIGNATURES

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

                                                  ONSITE ENERGY CORPORATION


Date: October 10, 2000                        By: /s/ CHARLES C. MCGETTIGAN
                                                  -------------------------
                                                  Charles C. McGettigan
                                                  Chairman of the Board and
                                                  Outside Director


Date: October 10, 2000                        By: /s/ RICHARD T. SPERBERG
                                                  -------------------------
                                                  Richard T. Sperberg
                                                  Chief Executive  Officer,
                                                  President and Director


                                              By:
                                                  -------------------------
                                                  H. Tate Holt
                                                  Outside Director


Date: October 10, 2000                        By: /s/ FRANK J. MAZANEC
                                                  -------------------------
                                                  Frank J. Mazanec
                                                  Director
                                                  Senior Vice President




<PAGE>F-1

<TABLE>
<S>                                                                                       <C>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


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

Consolidated Balance Sheet - June 30, 2000 ......................................................F-3

Consolidated Statements of Operations - For the Years ended
     June 30, 2000 and 1999......................................................................F-4

Consolidated Statement of Shareholders' Equity (Deficit) - For the Years ended
     June 30, 2000 and 1999......................................................................F-5

Consolidated Statements of Cash Flows - For the Years ended
     June 30, 2000 and 1999......................................................................F-6

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

</TABLE>


<PAGE>F-2

                          INDEPENDENT AUDITOR'S REPORT

To the Stockholders and Board of Directors
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, 2000 and the related
consolidated statements of operations,  shareholders' equity (deficit), and cash
flows for the years ended June 30, 2000 and 1999. These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  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 consolidated financial position of Onsite
Energy  Corporation  and  subsidiaries  as of June 30, 2000,  and the results of
their  operations  and their  cash flows for the years  ended June 30,  2000 and
1999, in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations, has a working capital deficit of $7,703,629, and an accumulated
deficit of  $34,978,075.  These  conditions  raise  substantial  doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these  matters  are also  described  in Note 3.  The  consolidated  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of reported asset amounts or the amounts and  classification  of
liabilities that might result from the outcome of this uncertainty.


/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
September 9, 2000


<PAGE>F-3

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  June 30, 2000
<TABLE>
<S>                                                                                     <C>
ASSETS
-------
Current Assets:
    Cash                                                                                  $    226,080
    Accounts receivable, net of allowance for doubtful accounts of $61,000                     794,068
    Capitalized project costs                                                                   87,793
    Other assets                                                                                42,659
                                                                                          ------------
           TOTAL CURRENT ASSETS                                                              1,150,600

    Property and equipment, net of accumulated depreciation and
     amortization of $302,000                                                                  451,726
    Other assets                                                                                30,948
                                                                                          ------------
           TOTAL ASSETS                                                                   $  1,633,274
                                                                                          ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
    Notes payable, current portion                                                        $    126,091
    Capitalized lease obligation, current portion                                              212,120
    Liabilities in excess of assets held for sale                                            5,274,803
    Accounts payable                                                                         1,714,934
    Billings in excess of costs and estimated earnings on uncompleted contracts                155,515
    Accrued expenses and other liabilities                                                   1,370,766
                                                                                          ------------

          TOTAL CURRENT LIABILITIES                                                          8,854,229
Long-Term Liabilities:
    Notes payable , less current portion                                                        76,196
    Capitalized lease obligation, less current portion                                         171,174
    Deferred income                                                                            846,102
                                                                                          ------------
          TOTAL LIABILITIES                                                                  9,947,701
                                                                                          ------------
Commitments and contingencies (Notes 3 and 14)

Shareholders' Equity (Deficit):
     Preferred Stock, Series C, $.001 par value, 842,500 shares authorized, 649,120
     issued and outstanding
         (aggregate $3,245,600 liquidation preference)                                             649
     Preferred Stock, Series D, $.001 par value,
        157,500 shares  authorized,  issued and outstanding and held in escrow                       -
     Preferred Stock, Series E, $.001 par value, 50,000 shares authorized,
        issued and outstanding,(aggregate  $1,000,000 liquidation preference)                       50
    Common stock, $.001 par value, 24,000,000 shares authorized:
       Class A common stock, 23,999,000 shares authorized, 18,069,267 issued and
       outstanding                                                                              18,069
       Class B common stock, 1,000 shares authorized, none issued and outstanding                   --
    Additional paid-in capital                                                              27,394,880
    Notes receivable - shareholders                                                           (750,000)
    Accumulated deficit                                                                    (34,978,075)
                                                                                          ------------
         TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                               (8,314,427)
                                                                                          ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                                      $  1,633,274
                                                                                          ============

</TABLE>


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

<PAGE>F-4

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   For the Years Ended June 30, 2000 and 1999

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

                                                                             2000                   1999
                                                                        -------------          --------------

Revenues                                                                $ 17,010,408            $ 43,534,737
Utility Revenues                                                           1,197,204                 566,672
                                                                        -------------          --------------
  Total revenues                                                          18,207,612              44,101,409

Cost of sales                                                             12,464,008              35,157,469
                                                                        -------------          --------------

    Gross margin                                                           5,743,604               8,943,940

Selling, general, and administrative expenses                              8,724,692              11,193,561
Bad debt expense - related party                                           2,518,160                      --
Impairment of property and equipment                                         389,141                      --
Depreciation and amortization expense                                        514,293               1,074,855
Recovery of reserve/reserve provided for sale
   of subsidiary                                                            (358,670)              1,010,000
Impairment of excess of purchase price
  over net assets acquired                                                   205,433               1,918,851
Loss on disposition of assets                                                 61,891                      --
                                                                        --------------          --------------
     Operating loss                                                       (6,311,336)             (6,253,327)
                                                                        --------------          --------------
Other income (expense):
   Interest expense                                                         (326,680)               (365,067)
   Interest income                                                             7,570                 146,436
                                                                        --------------          --------------
     Total other expense                                                    (319,110)               (218,631)
                                                                        --------------          --------------
Loss before provision for income taxes                                    (6,630,446)             (6,471,958)

Provision for income taxes                                                     6,600                   5,500
                                                                        --------------          --------------
Net loss                                                                $ (6,637,046)           $ (6,477,458)
                                                                        ==============          ==============
Net loss allocated to common shareholders                               $ (7,593,096)           $ (6,682,026)
                                                                        ==============          ==============
Loss per common share - basic and diluted:                              $      (0.42)           $      (0.36)
                                                                        ==============          ==============
Weighted average number of shares
   used in per common share calculation - basic and diluted:              18,185,543              18,469,094
                                                                        =============           ==============

</TABLE>


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


<PAGE>F-5
                                  ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                                For the Years Ended June 30, 2000 and 1999
<TABLE>
<S>                                     <C>    <C>          <C>      <C>         <C>        <C>       <C>            <C>
                                                            Preferred Stock                                 Common Stock
                                       -------------------------------------------------------------  -------------------------
                                           Series C            Series D              Series E                 Class A

                                        Shares     Amount   Shares    Amount      Shares     Amount      Shares       Amount
                                       --------- --------- -------- ---------    --------   --------  -----------  ------------
Balances, July 1, 1998                 208,205   $    208     --    $    --            --    $   --    18,243,188   $ 18,243

Exercise of stock options                   --         --     --         --            --        --        75,334         75
Issued to Onsite 401k plan                  --         --     --         --            --        --       266,331        267
Sale of Series C preferred stock       400,000        400     --         --            --        --            --         --
Series C preferred stock dividend       40,915         41     --         --            --        --            --         --
Notes receivable from shareholders
   acquired in acquisitions                 --         --     --         --            --        --            --         --
Net loss                                    --         --     --         --            --        --            --         --
                                       --------- --------- -------- ---------    --------   --------  -----------  ------------
Balances, June 30, 1999                649,120        649     --         --            --        --    18,584,853     18,585
Issued to Onsite 401k plan                  --         --                              --        --       154,414        154
Sale of Series E preferred stock            --         --     --         --        50,000        50            --         --
Beneficial conversion element of
   Series E preferred stock                 --         --     --         --            --        --            --         --
Compensation recognized upon
issuance of preferred stock                 --         --     --         --            --        --            --         --
Acquisition of stock on sale of
   subsidiary                               --         --     --         --            --        --      (690,000)      (690)
Dividends waived in exchange
   for release of non-compete
   agreement                                --         --     --         --            --        --            --         --
Common stock issued for services            --         --     --         --            --        --        20,000         20
Repayment of notes receivable from
 shareholders acquired in acquisitions      --         --     --         --            --        --            --         --
Write-down to realizable value notes
   receivable from shareholders
   acquired in acquisitions                 --         --     --         --            --        --            --         --
Compensation expense recognized
   upon repricing of stock options          --         --     --         --            --        --            --         --
Net loss                                    --         --     --         --            --        --            --         --
                                       --------- --------- -------- ---------    --------   --------  -----------  ------------
 Balances, June 30, 2000               649,120   $    649     --    $    --        50,000    $   50    18,069,267   $ 18,069
                                       ========= ========= ======== =========    ========   ========  ===========  ============
</TABLE>
<TABLE>

<S>                                          <C>              <C>                 <C>                 <C>
                                              Additional             Notes
                                               Paid-In             Receivable        Accumulated
                                               Capital           Shareholders           Deficit              Total
                                             -------------      --------------       -------------       -------------
Balances, July 1, 1998                       $ 23,208,598        $ (1,335,217)       $(20,785,024)       $  1,106,808

Exercise of stock options                          23,404                  --                  --              23,479
Issued to Onsite 401k plan                        147,687                  --                  --             147,954
Sale of Series C preferred stock                1,999,600                  --                  --           2,000,000
Series C preferred stock dividend                 204,527                  --            (204,568)                 --
Notes receivable from shareholders
   acquired in acquisitions                            --          (2,757,882)                 --          (2,757,882)
Net loss                                               --                  --          (6,477,458)         (6,477,458)
                                             -------------      --------------       -------------       -------------
Balances, June 30, 1999                        25,583,816          (4,093,099)        (27,467,050)         (5,957,099)

Issued to Onsite 401k plan                         46,129                  --                  --              46,283
Sale of Series E preferred stock                  999,950                  --                  --           1,000,000
Beneficial conversion element of
   Series E preferred stock                       762,762                  --            (762,762)                 --
Compensation recognized upon
   issuance of preferred stock                     47,500                  --                  --              47,500
Acquisition of stock on sale of                  (192,512)                 --                  --            (193,202)
   subsidiary
Dividends waived in exchange
   for release of non-compete
   agreement                                      111,217                  --            (111,217)                 --
Common stock issued for services                    7,180                  --                  --               7,200
Repayment of notes receivable from
    shareholders acquired in acquisitions              --             824,939                  --             824,939
Write-down to realizable value notes
   receivable from shareholders
   acquired in acquisitions                            --           2,518,160                  --           2,518,160
Compensation expense recognized
   upon repricing of stock options                 28,838                  --                  --              28,838
Net loss                                               --                  --          (6,637,046)         (6,637,046)
                                             -------------      --------------       -------------       -------------
 Balances, June 30, 2000                     $ 27,394,880        $   (750,000)       $(34,978,075)       $ (8,314,427)
                                             =============      ==============       =============       =============
</TABLE>

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

<PAGE>F-6

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                   For the Years Ended June 30, 2000 and 1999

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

                                                                               2000                1999
                                                                          -------------        -------------
Cash flows from operating activities:
Net loss                                                                   $(6,637,046)         $(6,477,458)
Adjustments to reconcile net loss to net cash (used in)
   operating activities:
       Bad debt expense - related party                                      2,518,160                   --
       Adjustment resulting from impairment of property and equipment          389,141                   --
       Amortization of excess purchase price over net assets acquired               --              502,390
       Adjustment resulting from impairment of estimated carrying
        value of excess in purchase price over net assets acquired             205,433            1,918,851
       Amortization of acquired contract costs                                      --               50,196
       Estimated loss on disposal of subsidiary                                     --            1,010,000
       Loss on sale of assets                                                   61,891                   --
       Provision for bad debts                                                  26,000               35,000
       Depreciation and amortization                                           514,293              572,465
       Recovery of reserve provided for sale or disposal of subsidiary        (358,670)                  --
       Compensation recognized upon issuance of stock                          312,912                   --
       Expense related to issuance of common stock to 401k plan                107,102               83,046
       Compensation recognized upon repricing of stock options                  28,838                   --
(Increase) decrease:
       Accounts receivable                                                   4,604,625           (3,831,418)
       Costs and estimated earnings in excess of billings
           on uncompleted contracts                                            729,348             (252,419)
       Inventory                                                                 6,411               (7,347)
       Other assets                                                             69,704              (44,588)
       Capitalized project costs                                                16,569                   --
       Cash-restricted                                                         147,838                9,998
Increase (decrease):
       Accounts payable                                                     (2,464,716)           6,847,535
       Billings in excess of costs and estimated earnings
           on uncompleted contracts                                           (836,080)          (1,124,173)
       Accrued expenses and other liabilities                                  210,838               75,403
       Deferred income                                                         (62,943)             143,975
                                                                          -------------        -------------
             Net cash used in operating activities                            (410,352)            (488,544)
                                                                          -------------        -------------

Cash flows from investing activities:
       Purchases of property and equipment                                     (37,872)             (82,539)
       Repayment of loans to shareholders                                      511,673                   --
       Loans to shareholders                                                        --           (2,757,882)
       Proceeds from sale of assets                                            719,090                   --
                                                                          -------------        -------------
             Net cash provided by (used in) investing activities             1,192,891           (2,840,421)
                                                                          -------------        -------------

(continued)
</TABLE>

<PAGE>F-7

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF CASH FLOWS - Continued
                   For the Years Ended June 30, 2000 and 1999
<TABLE>
<S>                                                                              <C>                    <C>


                                                                                     2000                    1999
                                                                                  ------------           ------------
Cash flows from financing activities:
       Proceeds from issuance of preferred stock                                    1,000,000              2,000,000
       Proceeds from notes payable                                                    384,286              1,382,953
       Proceeds from exercise of stock options                                             --                 23,479
       Repayment of notes payable - related party                                    (215,694)              (256,415)
       Repayment of notes payable                                                  (2,625,459)            (1,013,650)
                                                                                  ------------           ------------
             Net cash provided by (used in) financing activities                   (1,456,867)             2,136,367
                                                                                  ------------           ------------
Net decrease in cash                                                                 (674,328)            (1,192,598)
Cash, beginning of period                                                             900,408              2,093,006
                                                                                  ------------           ------------
Cash, end of period                                                               $   226,080            $   900,408
                                                                                  ============           ============
Supplemental disclosures of non-cash transactions:
       Purchase of equipment with notes payable                                   $   421,543            $        --
                                                                                  ============           ============
       Deferral of gain on sale/leaseback of equipment                            $    98,624            $        --
                                                                                  ============           ============
       Beneficial conversion feature of Series E preferred stock                  $   762,762            $        --
                                                                                  ============           ============
       Dividends waived on Series C preferred stock in exchange
        for release of covenant not to compete                                    $   111,217            $        --
                                                                                  ============           ============
       Sale of LTS in exchange for return of Class A common stock                 $   193,202            $        --
                                                                                  ============           ============
       Payment of Series C preferred stock dividends
          with Series C Preferred stock                                           $        --            $   204,568
                                                                                  ============           ============
       Payment of accrued liabilities with common stock                           $    19,192            $    79,119
                                                                                  ============           ============
Supplemental disclosures of cash transactions:
       Interest paid                                                              $   232,170            $   390,558
                                                                                  ============           ============
       Income taxes paid                                                          $     6,600            $     5,500
                                                                                  ============           ============

</TABLE>


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

<PAGE>F-8

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Organization and Nature of Operations:

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

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

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

         In February  1998,  OES acquired  the  operating  assets of  Mid-States
         Armature Works,  Inc.  ("Mid-States  Armature")  through a newly formed
         subsidiary  Onsite/Mid-States,  Inc. ("OMS") (see Note 4). OMS provided
         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. The Company sold the assets of OMS to two
         former employees of OES in February 2000. (See note 4)

         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, 2000,  there has
         been no operating activity in this subsidiary.

         In June 1998, the Company acquired Lighting Technology  Services,  Inc.
         ("LTS") (see Note 4). LTS provides energy  efficiency  projects through
         retrofits  of  lighting  and  controls  either  independently  or  as a
         subcontractor  to the  Company and other  ESCOs  primarily  in Southern
         California. Effective September 30, 1999, the Company sold the stock of
         LTS back to one of LTS' founders. (See note 4)

         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.  While SO Corporation  continues to exist to meet
         commitment and servicing  requirements of existing  customers,  its new
         business development activities have been discontinued.

         Effective April 1, 1999, the Company formed REEP Onsite,  Inc. ("REEP")
         and  ERSI   Onsite,   Inc.   ("ERSI")  for  the  purpose  of  acquiring
         substantially all of the assets of REEP, Inc. for assumption of certain
         liabilities  (see Note 4). The acquired  assets were allocated  between
         REEP and ERSI. REEP provides  residential energy services while ERSI is
         a commercial lighting contractor.  Effective June 30, 2000, the Company
         ceased the operations of REEP and ERSI.

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


<PAGE>F-9

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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  projects  are
         recorded using the percentage of completion method.  Under this method,
         the revenue recognized is that portion of the total contract price that
         the cost  expended to date bears to the  anticipated  final total costs
         based on current  estimates of the costs to complete  the project.  The
         implementation  period for a typical project is approximately  three to
         six months.  The  implementation  period for larger  projects (those in
         excess of $2,000,000) can range from six to twenty four months.

         When the total  estimated  costs to complete a project exceed the total
         contract amount, thereby indicating a loss, the entire anticipated loss
         is recognized currently.

         Revenues  attributable  to the  Company's  share of  utility  incentive
         payments resulting from savings on implemented  projects are recognized
         as billed to the utility.

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

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

         Operation and Maintenance Agreements

         Commencing  July 1,  1993,  the  Company,  on a  limited  basis,  began
         entering  into  long-term  operation  and  maintenance  ("O&M") and M&V
         agreements  with some of its customers.  These  agreements,  where they
         exist,  are components of the  construction  contracts that provide for
         ongoing  service on the installed  energy  efficiency  projects.  These
         agreements  are  entered  into  as a  condition  of the  implementation
         contract and are not a primary service of the Company and are accounted
         for as a component cost on the installed energy efficiency  project. In
         the instances  where  estimated  costs exceed  estimated  revenue,  the
         Company  records as an expense the  estimates  of future  deficit  cash
         flows and recognizes  expense and a related  liability in its financial
         statements during the construction  period. In instances where revenues
         associated with the operation and maintenance  exceed  estimated costs,
         the revenues  are  recognized  as costs are incurred  using the percent
         complete method of accounting.  In many instances, the Company has been
         paid or receives payments in advance of providing the service. In these

<PAGE>F-10

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         instances, amounts attributable to future services to be performed have
         been treated as deferred  income and will be recognized as services are
         performed and/or costs are incurred.

         Cash and Cash Equivalents

         The Company considers all short-term, highly liquid investments with an
         original maturity of three months or less to be cash equivalents. As of
         June 30, 2000 and 1999, there were no cash equivalents outstanding.

         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  5 to  31.5  years.  Leasehold  improvements  and  leased
         equipment are amortized  over the useful life or term of the respective
         lease,  whichever is less. When an asset is sold or otherwise  disposed
         of, the cost and  accumulated  depreciation  or amortization is removed
         from  the  accounts  and any  resulting  gain  or  loss  is  recognized
         currently.

         Excess of Purchase Price Over Net Assets Acquired

         Excess  of  purchase  price  over  net  assets  acquired   ("Goodwill")
         represented  the purchase  price in excess of the fair value of the net
         assets  of  acquired  businesses  and was  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.
         As a result  of the  operating  losses  of SO  Corporation,  management
         determined that the carrying value of excess of purchase price over net
         assets  acquired had been  impaired as of June 30, 1999.  The effect of
         this  determination was a charge against earnings  (additional loss) of
         $1,918,851, the unamortized balance as of June 30, 1999.

         As a result of REEP's  poor  operating   performance  and  due  to  the
         termination  of  the  Sale  and  Noncompetition  agreement  with  SYCOM
         Corporation  that resulted in the  termination of the ERSI  operations,
         the excess purchase price over net assets acquired at REEP and ERSI was
         deemed to have been impaired. As a result, $205,433 was charged against
         earnings (additional loss) in the fiscal year ending June 30, 2000.

         Income Taxes

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

         Earnings Per Common and Common Equivalent Share

         Basic  earnings  per  share  excludes  dilution  and is  calculated  by
         dividing  income  (loss)  available  to  common   shareholders  by  the
         weighted-average  number of common shares  outstanding  for the period.
         Loss  applicable  to  common  shareholders  was  calculated  by  adding
         $956,050 and $204,568 of preferred  stock dividends to net loss for the

<PAGE>F-11

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         years ended June 30, 2000 and 1999, respectively.  Diluted earnings per
         share reflects the potential dilution that could occur if securities or
         other  contracts to issue common stock were exercised or converted into
         common  stock or  resulted in the  issuance  of common  stock that then
         shared in the earnings of the entity.  Options,  warrants and preferred
         stock  convertible  into an aggregate of 31,388,045  and 23,692,958 for
         the years ending June 30, 2000 and 1999,  respectively were excluded in
         the  earnings   per  share   computation   because   their  effect  was
         anti-dilutive.

         Impairment of Long-Lived Assets

         In the event that  facts and  circumstances  indicate  that the cost of
         assets  may be  impaired,  an  evaluation  of  recoverability  would be
         performed.  If  an  evaluation  were  required,  the  estimated  future
         undiscounted  cash flows associated with the asset would be compared to
         the asset's  carrying  amount to determine  if a  write-down  to market
         value or discounted cash flow is required.

         Stock-Based Compensation

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

         Impact of Recently Issued Standards

         In  Fiscal  1999,  the  FASB  issued  SFAS  No.  133,  "Accounting  for
         Derivative   Instruments  and  Hedging   Activities".   This  statement
         establishes   accounting   and  reporting   standards  for   derivative
         instruments, including certain derivative instruments embedded in other
         contracts  and for  hedging  activities.  It  requires  that an  entity
         recognizes  all  derivatives  as either  assets or  liabilities  in the
         statement of financial  position and measures those instruments at fair
         value.  Subsequently,  the FASB  issued SFAS No.  137,  Accounting  for
         Derivative  Instruments  and  Hedging  Activities  --  Deferral  of the
         Effective  Date of FASB  Statement No. 133,  which amends the effective
         date of  SFAS  No.  133 to all  fiscal  quarters  of all  fiscal  years
         beginning  after June 15, 2000. The Company plans to adopt SFAS No. 133
         in  Fiscal  Year  2001  and is  currently  assessing  the  impact  this
         statement  will  have  on  its   consolidated   financial   statements.
         Management  believes  that  the  impact  of SFAS  No.  133  will not be
         significant to the Company.

         In December 1999, the Securities and Exchange Commission (SEC) released
         Staff Accounting  Bulletin (SAB) 101 "Revenue  Recognition in Financial
         Statements".  SAB 101  establishes  guidelines  in  applying  generally
         accepted  accounting  principles  to  the  recognition  of  revenue  in
         financial  statements based on the following four criteria;  persuasive
         evidence of an  arrangement  exists,  delivery has occurred or services
         have  been  rendered,  the  seller's  price  to the  buyer  is fixed or
         determinable,  and  collectibility is reasonably  assured.  SAB 101, as
         amended  by SAB 101A,  is  effective  no later  than the  first  fiscal
         quarter of the fiscal year beginning  after  December 15, 1999,  except
         that registrants with fiscal years that begin between December 16, 1999
         and March 15,  2000,  may report  any  resulting  change in  accounting
         principle no later than their second fiscal  quarter of the fiscal year
         beginning  after  December 15, 1999.  The Company does not believe that
         the  adoption of SAB 101 will have a material  effect on its  financial
         position or result of operations.

<PAGE>F-12
                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED 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  realizability of shareholders
         notes receivable.  Due to the uncertainties  inherent in the estimation
         process,  it is at least reasonably  possible that these estimates will
         be  further  revised  in the  near  term and  such  revisions  could be
         material.

         Fair Value of Financial Instruments

         The  estimated  fair  values  for  financial   instruments  under  FASB
         Statement  No.  107,   "Disclosures   about  Fair  Value  of  Financial
         Instruments,"  are  determined  at  discrete  points  in time  based on
         relevant market information.  These estimates involve uncertainties and
         cannot be  determined  with  precision.  The fair  value of cash is its
         demand  value which is equal to its carrying  value.  The fair value of
         notes payable are based upon borrowing  rates that are available to the
         Company for loans with similar terms,  collateral  and maturity.  As of
         June 30, 2000, the estimated  fair values of notes payable  approximate
         their carrying values.

         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 17 do not take  into  account  the  value of any
         collateral or security.

         Reclassification

         Certain  reclassifications have been made to the consolidated financial
         statements for the year ended June 30, 1999 to conform with the current
         year presentation. Such reclassifications had no effect on net loss.

3.       Basis of Presentation

         As shown in the  accompanying  financial  statements,  the  Company has
         suffered  significant  losses from  operations  for the past two fiscal
         years.  For the years ended June 30, 2000 and 1999, the Company had net
         losses of $6,637,046 and $6,477,458,  respectively,  and had a negative
         working capital of $7,703,629 and an accumulated deficit of $34,978,075
         as of June 30, 2000.  Management believes that the Company will be able
         to generate  additional  revenues  and improve  operating  efficiencies
         through a  substantial  reduction  in  overhead,  the  addition  of new

<PAGE>F-13

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         projects  as well as by other means to achieve  profitable  operations.
         During the year ended June 30, 2000, the Company took steps to mitigate
         the losses and enhance its future  viability.  In addition,  during the
         fiscal year ended June 30, 2000, the Company privately placed shares of
         newly created Series E Convertible  Preferred  Stock ("Series E Stock")
         to existing  shareholders for $1,000,000.  Concurrent with this private
         placement,  members  of  senior  management  of the  Company  agreed to
         receive  shares of the  Company's  Class A Common Stock and warrants to
         purchase  Class A Common  Stock in lieu of a portion of their salary in
         an effort to reduce cash outflows related to  compensation.  During the
         fiscal year, the Company sold its  wholly-owned  subsidiaries,  LTS and
         OMS (see  note 4) in an  effort  to raise  cash  and  reduce  operating
         losses.  In a further  step to reduce  operating  losses,  the  Company
         terminated its Sale and Noncompetition agreement with SYCOM Corporation
         and ceased  operations of REEP Onsite,  Inc and ERSI Onsite,  Inc. (see
         note 4)  Management  believes  that all of the above actions will allow
         the Company to continue as a going  concern.  Future cash  requirements
         depend on the Company's  profitability,  it's ability to manage working
         capital requirements,  its ability to sell or dispose of certain assets
         of the Company or for which it is a secured  creditor,  and its rate of
         growth. Additional financing through the sale of securities may have an
         ownership dilution effect on existing shareholders.

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

4.       Acquisitions/Dispositions

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

         In February  1998,  OES acquired  the  operating  assets of  Mid-States
         Armature for $290,000  through its newly created  subsidiary,  OMS. The
         transaction  was  accounted  for as a  purchase  and  accordingly,  the
         inclusion  of the  operations  of OMS  in the  consolidated  operations
         commenced on the  acquisition  date. The Company sold the assets of OMS
         and  some  of the  assets  of OES to two  former  employees  of OES for
         $290,000  cash plus any unpaid  earnings  on  projects  in  progress in
         February 2000. As a result of the sale, the Company  incurred a loss of
         $72,521.

         Effective  June 13, 1998, the Company  acquired all of the  outstanding
         common  shares of LTS, in exchange for 690,000  shares of the Company's
         Class A Common Stock plus  $500,000.  This stock issuance was valued at
         the average of the closing bid and ask prices for three days before and
         after  the  acquisition  was  agreed  to by the  Company  and LTS.  The
         transaction  was  accounted  for as a  purchase  and  accordingly,  the
         inclusion  of the  operations  of LTS  in the  consolidated  operations


<PAGE>F-14

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         commenced  on  the  acquisition  date.  The  resulting  purchase  price
         including  acquisition  costs was $995,788 which resulted in $1,445,922
         being  allocated to excess of purchase price over net assets  acquired.
         The  excess  of  purchase  price  over net  assets  acquired  was being
         amortized  over a period of 60 months  beginning  July 1998.  Effective
         September 30,1999,  the Company sold 95 percent of its interest in LTS.
         The Company received the 690,000 shares of the Company's Class A Common
         Stock that it had originally  issued in connection with the acquisition
         of  LTS  as  well  as  a  ten  year   non-interest   bearing  note  for
         approximately  $936,000,  which  may be  repaid  by  LTS  by  providing
         lighting services to the Company. In addition,  the note has been fully
         reserved due to uncertainty surrounding the collectibility of the note.
         In fiscal year 1999,  when the Company had made the decision to dispose
         of LTS, it had  established  a reserve for the loss on  disposition  of
         $1,010,000.  The actual loss to the Company was $651,330 resulting in a
         recovery  of reserve for loss of $358,670 in the fiscal year ended June
         30, 2000.

         On June 30,  1998,  the Company  acquired  all the assets and  specific
         liabilities  of  SYCOM  Enterprises,   LLC  ("SYCOM,  LLC")  through  a
         newly-created  subsidiary  (SO  Corporation)  in exchange for 1,750,000
         shares of the Company's  Class A Common Stock.  This stock issuance was
         valued at the  average of the closing bid and ask prices for three days
         before  and after the  acquisition  was  agreed to by the  Company  and
         SYCOM, LLC. In addition,  under a Sale and Noncompetition  Agreement SO
         Corporation  acquired the right to the services and expertise of all of
         the  employees of SYCOM  Corporation  and SYCOM  Enterprises,  L.P. and
         affiliates of SYCOM,  LLC, in exchange for the right to receive 157,500
         shares of Series D Convertible  Preferred Stock ("Series D Stock") that
         is convertible  into 15,750,000  shares of the Company's Class A Common
         Stock.  The Company  terminated the Sale and  Noncompetition  Agreement
         with SYCOM Corporation effective June 30, 2000. The Company will retain
         the project assets  purchased  from SYCOM,  LLC as well as the projects
         developed  over the past two  years.  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
         will be achieved. The Company also may repurchase the escrowed Series D
         Stock  during the 30 day period  prior to the  scheduled  release  date
         (June 30, 2006) if any one of the specified  conditions  for release of
         the Series D Stock has not been  satisfied.  Due to the  uncertainty of
         the ultimate  issuance of these shares, no value was ever attributed to
         the  Preferred  shares.  As of September  9, 2000,  the Company had not
         repurchased the Series D Stock.

         In connection with the Sale and Noncompetition  Agreement,  the Company
         had agreed to make loans to SYCOM  Corporation  and SYCOM  Enterprises,
         L.P.  from  time to time  equal to  their  general  and  administrative
         expenses  and debt  service  to third  parties  with  interest  at 9.75
         percent per annum.  (See Note 11).  The  Company may require  immediate
         repayment of such loans if certain earnings  thresholds are not met. As
         a result of the termination of the Sale and  Noncompetition  Agreement,
         the advances  were deemed to have been impaired and written down to its
         estimated  realizable  value  of  $750,000,   the  estimated  value  of
         underlying  collateral.  The charge against earnings (increase to loss)
         was $2,518,160 in the year ended June 30, 2000.

<PAGE>F-15

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Effective  April 1,  1999,  the  Company,  through  two  newly  formed
         entities,   REEP  Onsite,   Inc.  and  ERSI  Onsite,   Inc.,  acquired
         substantially  all of the  assets  of REEP,  Inc.  for  assumption  of
         certain  liabilities.  Effective June 30, 2000, the Company ceased the
         operations of REEP and ERSI.

5.       Accounts Receivable

         Accounts Receivable consisted of the following as of June 30, 2000:


Contracts Receivable:
     Completed Contracts                                            $    20,717
     Contracts in Progress                                               84,827

Trade receivables                                                       749,524

Less: Allowance for doubtful accounts                                    61,000
                                                                    -----------
Total                                                               $   794,068
                                                                    ===========

6.       Cost and Estimated Earnings on Uncompleted Contracts

         Costs and estimated  earnings on  uncompleted  contracts as of June 30,
2000 consisted of the following:


Costs incurred                                                      $   905,203
Estimated earnings                                                      273,382
                                                                    ------------
                                                                      1,178,585
Less:  Billings to date                                               1,334,100
                                                                    ------------
                                                                    $  (155,515)
                                                                    ============

Included in the accompanying Balance Sheet under
 the following captions:

Costs and estimated earnings in excess of
     billings on uncompleted contracts                              $        --

Billings in excess of costs and earnings
     on uncompleted contracts                                           155,515
                                                                    -----------
                                                                    $   155,515
                                                                    ===========

<PAGE>F-16

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.    Property and Equipment

      Property and equipment at June 30, 2000 consisted of:

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

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

        Office furniture and equipment               $       47,295              5-7 years
        Water treatment plants, under
         capital lease                                      421,543               50 to 56 months
        Equipment and tools                                 262,489             7-10 years
        Vehicles                                              2,450                5 years
        Leasehold improvements                               19,949             5-20 years
                                                     ---------------
                                                            753,726

        Less:  Accumulated depreciation     and
        amortization                                       (302,000)
                                                     ---------------
                                                     $      451,726
                                                     ===============

</TABLE>

         Depreciation and amortization expense amounted to $514,293 and $572,465
         for the years ended June 30, 2000 and 1999, respectively.

<TABLE>
<S>                                                                            <C>

8.      Notes Payable

        Notes payable at June 30, 2000 consisted of the following:

        Notes payable,  collateralized by utility incentive  payments with
        interest at 12%                                                         $  202,287

        Less: Current portion                                                      126,091
                                                                               -------------
        Total Long Term Notes Payable                                           $   76,196
                                                                               =============

        Future scheduled principal payments for notes payable are as follows:

        Year Ending June 30,
        2001                                                                    $  126,091
        2002                                                                        76,196
                                                                               -------------
                                                                                $  202,287
                                                                               =============

</TABLE>

<PAGE>F-17

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.       Accrued expenses and other liabilities

         At June 30, 2000 accrued  expenses and other  liabilities  consisted of
the following:


        Accrued utility commitments                    $       437,052
        Payroll and related payroll taxes                      376,584
        Stock in lieu of pay                                   258,212
        Deferred income                                        131,744
        Accrued interest                                        61,601
        Consideration related to acquisition                    50,000
        Accrued legal settlements                               47,911
        Other accrued liabilities                                7,662
                                                       ----------------
                                                       $     1,370,766
                                                       ================

10.      Shareholders' Equity

         Stock Subscription Agreement

         On October 28,  1997,  the Company  entered  into a Stock  Subscription
         Agreement (the "Stock Agreement") with Westar Capital.  Pursuant to the
         Stock Agreement, the Company completed a private placement of 2,000,000
         shares  of the  Company's  Class A Common  Stock at $0.50 per share and
         200,000  shares of the  Company's  newly-created  Series C  Convertible
         Preferred Stock at $5.00 per share.  Each share of Series C Convertible
         Preferred  Stock is  convertible  into five (5) shares of the Company's
         Class A Common  Stock.  Conversion  can take place by the holder at any
         time.  The Company has the right to require  conversion  if the average
         closing price of the  Company's  Class A Common Stock equals or exceeds
         $2.00 per share.

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

         Class A and Class B Common Stock

         Holders of Class A Common  Stock are entitled to one vote per share for
         the  election  of  directors   and  other   corporate   matters   which
         shareholders  are  entitled or  permitted  to vote.  Holders of Class B
         Common  Stock shall not be entitled to vote but are entitled to receive
         dividends ratably with Class A Common Stock when and as declared by the
         Board of Directors.  As of June 30, 2000, there were no shares of Class
         B Common Stock issued and outstanding.

         Warrants

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

         On June 30, 1998, the Company agreed to pay $50,000 and issued warrants
         to  purchase  160,000  shares of Class A Common  Stock at  $0.4185  per
         share, through June 30, 2003, to entities affiliated with a director as

<PAGE>F-18

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         consideration for services rendered in the acquisition of the assets of
         SYCOM,  LLC. The Company  recognized  $92,016 related to these warrants
         which was accounted for as additional purchase price of SO Corporation.

         On  August  2,  1999,  in  connection  with the  issuance  of  Series E
         Preferred  Stock,  the Company  issued  warrants to purchase  1,250,000
         shares of Class A Common Stock at an exercise  price of $0.50 per share
         and  1,250,000  shares of Class A Common Stock at an exercise  price of
         $0.75 per share  expiring  on August 2, 2009.  All but 250,000 of these
         warrants were issued to parties related to the Company.

         On August 2, 1999,  in  connection  with the stock in lieu of pay,  the
         Company  issued  warrants to purchase  189,437 shares of Class A Common
         Stock at an  exercise  price of $0.50 per share and  189,437  shares of
         Class A Common Stock at an exercise  price of $0.75 per share  expiring
         on August 2, 2009.

         As of June 30, 2000, the Company has issued and  outstanding a total of
         3,564,872  warrants to purchase shares of its Class A Common Stock. The
         exercise  prices range from $0.1875 to $0.75 per share with  expiration
         dates ranging from September 2002 through August 2009.

         Preferred Stock

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

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

         Dividends  were  declared and paid as required for each of the quarters
         through April 15, 1999.  While the Board has  authorized the payment of
         dividends to the extent such  declaration  and payment is allowed under
         applicable Delaware corporate law, under Delaware law, dividends on the
         Series C Stock could not be  declared  and paid as required on July 15,
         1999,  October 15, 1999,  January 15, 2000, April 15, 2000, or July 15,
         2000.  Such,  dividends  were payable in additional  shares of Series C
         Stock or cash at the  option  of the  Company  through  November  1999.
         Thereafter, dividends are payable in cash.

         Under the Certificate of Designations for the Series C Stock if, at any
         time, four or more quarterly dividends,  whether or not consecutive, on
         the Series C Stock are in default, in whole, or in part, the holders of
         the  Series C Stock  are  entitled  to elect  the  smallest  number  of
         directors  as would  constitute a majority of the Board of Directors of
         the Company and the holders of the Company's  Class A Common Stock as a
         class are entitled to elect the remaining directors.

         Additionally,  all of the  issued  and  outstanding  shares of Series C
         Stock are held by Westar.  Under the  October  1997 Stock  Subscription
         Agreement  entered into by Westar and the Company,  Westar agreed for a
         period of five years to limit its equity ownership of the Company to 45
         percent  of the  outstanding  shares of the  Class A Common  Stock on a
         fully diluted  basis and to not take certain  other actions  related to
         controlling or attempting to control the Company unless it receives the

<PAGE>F-19

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Company's  permission  via the  majority  vote of the  directors of the
         Company's Board of Directors who are not directors designated by Westar
         or are affiliates of Westar. However, if, at any time, Westar exercises
         its rights to elect the majority of the Board of Directors because four
         or more  quarterly  dividends on the Series C Stock are in default,  in
         whole or in part,  all directors are entitled to vote on such ownership
         issue and not just the non-Westar designated directors.

         In March 2000, the Company reached an agreement with Westar whereby the
         dividends due on October 15, 1999, and January 15, 2000, were waived by
         Westar in exchange for the Company's  release of Westar and its parent,
         Western  Resources,  Inc.,  from certain  non-compete  agreements.  The
         amounts  waived by Westar were 16,208  shares of Series C stock related
         to the October 15, 1999 dividend, valued at $28,202 and $83,015 in cash
         related  to  the  January  15,  2000  dividend.   The  Company  remains
         delinquent  on the July 15,  1999  (15,823  shares  of  Series C Stock,
         valued at $1,661),  the April 15, 2000 ($81,040 cash) and July 15, 2000
         ($81,040 cash) dividend requirements. The total cash value of dividends
         in arrears as of June 30, 2000 was $82,071.

         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).

         Each holder of a share of Series E Convertible Preferred Stock ("Series
         C") is  entitled to one vote per share for each share of Class A Common
         Stock  that  Series  E  is  convertible  into.   Holders  of  Series  E
         Convertible  Preferred  Stock are entitled to receive  dividends if and
         when declared by the Board.  Each share of Series E is convertible,  at
         the option of the holder, into 100 shares of Class A Common Stock.

         In August  1999,  the Company  completed a private  placement of equity
         securities with its Chairman of the Board and other related  investors.
         Terms of the placement  include the issuance of 50,000 shares of Series
         E Convertible Preferred Stock that is convertible into 5,000,000 shares
         of Class A Common Stock, warrants to purchase 1,250,000 shares of Class
         A Common Stock at an exercise  price of $0.50 per share and warrants to
         purchase  1,250,000 shares of Class A Common Stock at exercise price of
         $0.75 per share.  The preferred shares were convertible at a rate which
         was below  market on the date of  issuance,  resulting  in a beneficial
         conversion  element.  The shares are  immediately  convertible  and the
         beneficial  conversion  element of $762,762 was recorded as a preferred
         stock  dividend in the fiscal year ending June 30,  2000.  A portion of
         the securities was sold to a director. The intrinsic value of preferred
         shares  sold to the  director  was  $47,500,  and  resulted in a charge
         against  earnings  (increased  loss) in the fiscal year ending June 30,
         2000.

         As a  condition  to the  investment  in the  Series E  Preferred  Stock
         discussed above,  certain employees of the Company accepted a reduction
         in their base  salary  over a six month  period  totaling  $151,500  in
         exchange  for 757,748  shares of Class A Common  Stock and  warrants to
         purchase  Class A Common  Stock at an  exercise  price  above  the then
         existing  market price.  The purchase price of the stock was at a price
         below market at the time the agreements were entered into, resulting in
         additional compensation expense of $113,662.

         Notes Receivable - Shareholders

         As of June 30, 2000 notes receivable  shareholders includes amounts due
         from   affiliates   of  SYCOM,   LLC  in  the   amount  of   $3,268,160
         collateralized by certain assets of these affiliates.  Such amounts are
         classified as contra-equity. The Company wrote off, as uncollectible, a


<PAGE>F-20

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         total of  $2,518,160  in the  current  fiscal  year as a result  of the
         termination of the SYCOM agreement  discussed in Note 4. As a result of
         the write off, the net carrying  value of these notes is $750,000,  the
         estimated value of its underlying collateral.

11.      Stock Option Plans

         WEM 1991 Non-Statutory Stock Option Plan

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

         There was no option  activity  under the 1991 plan for the years  ended
         June  30,  2000 or  1999.  As of June  30,  2000,  all  85,000  options
         outstanding  under the plan were exercisable at $5.3125 through January
         15, 2003.

         The Onsite 1993 Stock Option Plan

         During  fiscal  year 1994,  the  Company  adopted the Onsite 1993 Stock
         Option Plan (the "1993 Plan"). The 1993 Plan, as amended,  provides for
         the  granting  of  options  to  directors,   officers,   employees  and
         consultants to purchase up to 3,300,000  shares of Class A Common Stock
         and is  administered by a committee of outside  directors  appointed by
         the Board of Directors. The maximum term for grants under the 1993 Plan
         is 10 years with a maximum  vesting  period of three  years for options
         granted prior to June 10, 1998. Any grants  subsequent to June 10, 1998
         have a maximum vesting period of four years.

         As of June 30, 2000, the status of the 1993 Plan was as follows:

<TABLE>
<S>                              <C>                  <C>                         <C>              <C>
                                                                                     Weighted
                                                                                       Average
                                  Outstanding            Exercise Price              Exercise        Exercisable
                                   Options                 Per Share                   Price           Options
                                 -------------        -----------------            -------------     ------------

July 1, 1998                       2,998,258            $0.23 - $5.3125            $     0.6259       1,596,651
                                 =============

    Options granted                  394,000            $0.36 - $1.2180            $     0.5364
    Options exercised                (75,334)           $0.25 - $0.5000            $     0.3302
    Options cancelled               (326,691)           $0.25 - $1.1250            $     0.5289
                                 -------------

 June 30, 1999                     2,990,233            $0.23 - $5.3125            $     0.6326       1,588,626

    Options granted                3,111,808           $0.0975 - $0.336            $     0.106
    Options exercised                     --                         --                     --
    Options cancelled             (3,215,234)          $0.155 - $5.3125            $     0.473
                                 ------------                                                        ------------
June 30, 2000                      2,886,807           $0.0975 - $0.105            $     0.098        2,357,912
                                 ============                                                        ============

</TABLE>

         At June 30, 2000, no additional  options were available for granting to
         purchase shares of Class A Common Stock.

<PAGE>F-21

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The weighted  average  contractual  life for all options as of June 30,
         2000, was  approximately  six years,  with exercise prices ranging from
         $.0975 to $.105.

         On June 1, 2000 the Company repriced  2,883,808  existing options under
         the plan to $.0975 price per share, the average between the bid and ask
         closing market price on that date. As a result of the repricing,  these
         options  will be  accounted  for as  variable  plan  options  under the
         provisions  of APB 25 for the  life of the  options.  As  such,  future
         increases  in the market  price of the  Company's  Class A Common Stock
         will  result in  additional  compensation  expense.  In the fiscal year
         ended June 30,  2000,  $28,838  was  recorded as  compensation  expense
         related to these repriced options.

         Proforma Information

         As  stated  in Note 2, the  Company  has not  adopted  the  fair  value
         accounting prescribed by FASB 123 for employees.  Had compensation cost
         for stock options issued to employees been determined based on the fair
         value at grant  date for  awards in 2000 and 1999  consistent  with the
         provisions  of FASB 123, the  Company's net loss and net loss per share
         would have been adjusted to the proforma amounts indicated below:

                                              Year Ended June 30,
                                             2000            1999
                                      ----------------  -------------------

        Net Loss                      $   (6,880,961)   $  (7,093,388)
                                      ================  ===================
        Basic and Diluted Loss Per
          Common Share                $        (0.38)   $       (0.38)
                                      ================  ===================

         The fair value of each option is  estimated  on the date of grant using
         the Black-Scholes  option-pricing model. The following weighted-average
         assumptions  were used:  expected  volatility of 125.33 percent for the
         year ended June 30,  2000,  117.83  percent for the year ended June 30,
         1999, an expected life of three years for option  shares,  no dividends
         would be  declared  during  the  expected  term of the  options,  and a
         risk-free interest rate using the monthly U.S. Treasury T-Strip Rate at
         the  option   grant  date  for  fiscal   years   ended  2000  and  1999
         respectively.

         The weighted  average fair value of stock options  granted to employees
         during the fiscal  years  ending  June 30,  2000 and 1999 was $0.08 and
         $0.38 respectively.

         SYCOM Non Plan Options

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



<PAGE>F-22

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         A summary of Non-Plan Option  transactions  during the years ended June
30, 2000, and 1999 is as follows:

<TABLE>
<S>                                           <C>                       <C>                     <C>
                                                 Outstanding             Exercise Price             Exercisable
                                                   Options                  Per Share                 Options
                                              -------------------    ------------------------    -------------------
        July 1, 1998                                        -                                                  -

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

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

             Options granted                                -                   -                              -
             Options exercised                              -                   -                              -
             Options cancelled                        (32,000)               $0.4185                           -
                                              -------------------                                -------------------

        June 30, 2000                                 856,126           $0.3850 - $0.5465                787,876
                                              ===================                                ===================

</TABLE>

         The weighted-average  exercise price of stock options exercisable under
         the Non  Plan  Options  at June 30,  2000 and  1999,  was  $0.4184  and
         $0.4185, respectively.

12.      Income Taxes

         Income  tax  expense  for the  years  ended  June 30,  2000 and 1999 is
         comprised of the following:

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

        Year ended June 30, 2000          Current             Deferred              Total

             Federal                  $         -        $          -        $           -
             State                          6,600                   -                6,600
                                      ---------------    -----------------   -----------------
                                      $     6,600        $          -        $       6,600
                                      ===============    =================   =================


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

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

<TABLE>
<S>                                                               <C>             <C>
                                                                      2000            1999
                                                                  --------------  ---------------

        Amount of expected tax (benefit)                          $   (2,254,300) $   (2,200,400)
        Non-deductible expenses                                            2,800         450,000
        State taxes, net                                                   4,400           3,600
        Change in valuation allowance for deferred tax
        assets                                                         2,253,700       1,752,300
                                                                  --------------  ---------------
             Total                                                $        6,600  $        5,500
                                                                  ==============  ===============

</TABLE>

<PAGE>F-23

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The components of the net deferred tax asset  recognized as of June 30,
2000, are as follows:


Current deferred tax assets (liabilities):
     Litigation settlement accrual                                 $     14,000
     Vacation accrual and deferred compensation                         130,000
     Inventory reserve                                                   26,200
     Deferred revenue                                                    45,400
     Book compensation on issuance of stock
       options                                                           64,300
     Allowance for doubtful accounts                                     32,900
     Other                                                                  900
                                                                   ------------
                                                                        313,700
     Valuation allowance                                               (313,700)
                                                                   ------------
         Net current deferred tax asset                            $         --
                                                                   ============
Long-term deferred tax assets (liabilities):
     Net operating loss carryforwards                              $ 10,083,700
     Goodwill due to difference in amortization                       1,181,500
     Depreciation                                                       112,800
     Alternative minimum tax credit                                      11,200
                                                                    ------------
                                                                     11,389,200
     Valuation allowance                                            (11,389,200)
                                                                   ------------
         Net current deferred tax asset                            $         --
                                                                   ============

         The  deferred  tax asset also  includes  the future  benefit of the tax
         deduction  for the exercise of stock  options of $84,000.  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, 2000, the Company has net operating loss  carryforwards  of
         approximately $28,739,000, which expire in the years 2006 through 2020.
         The Company has California net operating loss carryforwards at June 30,
         2000 of $3,536,000, which expire in years 2000 through 2005.

         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.

13.      Related Parties

         During  the  fiscal  year ended June 30,  1999,  the  Company  paid one
         director of the Company  professional fees in the amount of $14,535. No
         such fees were incurred during the fiscal year ended June 30, 2000.

         As of June 30,  2000,  OES has  outstanding  accounts  receivable  with
         Western  Resources,  Inc.,  the parent  company of a shareholder of the
         Company, in the amount of $41,326 in relation to water treatment plants
         in Lawrence,  Kansas and Tecumseh,  Kansas. OES recognized  $465,354 in
         revenue from Western related to these water treatment facilities.


<PAGE>F-24

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Westar  Capital has  guaranteed any shortfalls of energy savings on the
         Company's  contract  with one  customer.  Such guaranty is backed by an
         insurance  policy  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 Note 10).

14.      Commitments and Contingencies

         Leases

         The Company leases its administrative  facility under a non-cancellable
         operating lease expiring in 2001 with a three-year  renewal option.  As
         of August 1, 1998,  the  Company  increased  its  office  space that is
         included  under the current  lease.  The Company  expanded its regional
         offices to include San Ramon, California,  where office space is rented
         on a three year lease that expires March 2001. The Company also leases,
         on a month to month  basis,  a 250  square  foot  storage  facility  in
         Carlsbad, CA.

         The Company sold its water treatment plants for $421,543 in April 2000.
         The  plants  were  leased  back from the  purchaser  for a period of 22
         months.  The resulting lease is being accounted for as a capital lease,
         and the resulting gain of $110,325 is being  amortized over the life of
         the lease.  During the fiscal year ended June 30, 2000,  $11,701 of the
         gain was  recognized.  The lease  requires  the  Company  to  customary
         operating and repair expenses and requires a $50,000 buyback at the end
         of the term.

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

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

                                                                   Operating
                       Year Ending June 30,                         Leases               Capital Leases
         -------------------------------------------------    ------------------    -----------------------
                              2001                            $         411,000     $          251,380
                              2002                                       73,000                180,730
                              2003                                       27,000                      -
                              2004                                       16,000                      -
                              2005                                            -                      -
                                                             -------------------    -----------------------
         Total minimum lease payments                         $          527,000                432,110
                                                             ===================
        Less: amount representing interest                                                      48,816
                                                                                    -----------------------
        Present value of capitalized lease
           payments                                                                            383,294
        Less: current portion                                                                  212,120
                                                                                    -----------------------
                                                                                    $          171,174
                                                                                    =======================
</TABLE>

         Total rent expense,  including  month-to-month  equipment rentals,  was
         approximately $416,000 and $467,000 in 2000 and 1999, respectively.

         Ongoing Maintenance for Water Treatment Plants

         OES has two contracts with Western  Resources  whereby OES  constructed
         and maintains  equipment for supplying  demineralized  water for boiler
         makeup water at Lawrence Energy Center and Tecumseh Energy Center. Both
         contracts  terminate on December 31, 2001, unless renewed at the end of
         the  term as  agreed  upon  by both  parties.  OES is  responsible  for
         producing the quality of  demineralized  water as specified.  If damage
         occurs due to the specified  quality of  demineralized  water not being

<PAGE>F-25
                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         produced,  OES is liable for the cost of the  repairs to the  equipment
         limited  to a maximum  of  $300,000  per  incident.  There have been no
         damage occurrences since the inception of both contracts and management
         believes the likelihood of any future loss to be remote.

         Environmental Costs

         The Company is subject to federal,  state and local  environmental laws
         and regulations. Environmental expenditures are expensed or capitalized
         depending on their future economic benefit. Expenditures that relate to
         an existing  condition caused by past operations and that has no future
         economic  benefits are  expensed.  Liabilities  for  expenditures  of a
         non-capital  nature are recorded  when  environmental  assessments  are
         probable, and the costs can be reasonably estimated.

         Guaranteed Savings

         The Company is contingently liable to some of its customers pursuant to
         contractual  terms  in the  event  annual  guaranteed  savings  are not
         achieved  by  the   customer.   These   guarantees   are  derived  from
         conservative  engineering  estimates and generally are  guaranteed at a
         level of less than 100 percent of the total  estimated  savings.  As of
         June 30, 2000,  projects  with  associated  savings  guarantees  had an
         aggregate  annual  savings of  approximately  $5.4 million of which the
         Company has  guaranteed  an  aggregate  of  approximately  $4.0 million
         annually.  To date, the Company has not incurred any losses  associated
         with these  guarantees  and any risk of future losses  attributable  to
         these guarantees is considered by management to be remote.

         Litigation

         The Company is currently  involved in  approximately  13  lawsuits,  or
         suits about to be filed  aggregating  approximately $4.0  million  for
         non-payment to its  subcontractors  on various projects  implemented by
         the Company.  In almost every matter,  the party is seeking  payment of
         amounts due them plus  interest and legal costs  incurred.  The Company
         has accrued  amounts  claimed under the various legal  proceedings  and
         included  it in the  financial  statements  in  accounts  payable.  The
         Company will  continue to incur legal fees,  expenses and costs related
         to these proceedings until the various matters are resolved.

         Sale or Disposal of Subsidiaries

         The Company terminated its Sale and Noncompetition Agreement with SYCOM
         Corporation (see also Note 4). As a result,  SO Corporation  operations
         are limited to projects acquired from Sycom LLC and projects  developed
         since  acquisition.   New  business   development   efforts  from  this
         subsidiary have been terminated.  SO Corporation has ongoing  servicing
         commitments,   uncompleted   projects  and  other  revenue   generating
         activities  that  will  either  be  sold  or  contracted  out to  SYCOM
         Corporation or other parties.  As a result,  the assets and liabilities
         of SO Corporation have been  reclassified to the category  "liabilities
         in excess of assets held for sale".

         The termination of the Sale and  Noncompetition  Agreement affected the
         realizability of amounts due from  shareholders as well as property and
         equipment.  As a result of these  determinations,  the notes receivable
         from  shareholders  was written  down by  $2,518,160  to a net carrying
         value of $750,000,  the estimated  value of underlying  collateral  and
         property  and  equipment  was  written  down by  $389,141 to a zero net
         carrying value as the Company expects it will not realize  anything for

<PAGE>F-26

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         these  assets.  A total of  $2,907,301  was  charged  against  earnings
         (increased  loss) in the fiscal  year  ending  June 30,  2000 for these
         write downs.

         The amounts  included in the financial  statements as of June 30, 2000,
         related to SO Corporation, consisted of the following:

        ASSETS:
        Accounts receivable                                    $    1,120,936
        Cost and estimated earnings in excess of billings on
             uncompleted contracts                                    375,380
                                                               -----------------
             Total assets                                           1,496,316
                                                               -----------------
        LIABILITIES:
        Accounts payable                                       $    5,199,215
        Notes payable                                                 579,476
        Billings in excess of costs and estimated earnings on
             uncompleted contracts                                    405,167

        Deferred income                                               262,132
        Accrued expenses and other liabilities                        325,129
                                                               -----------------
              Total liabilities                                      6,771,119
                                                               -----------------
        Liabilities in excess of assets held for sale          $    5,274,803
                                                               =================

         Total  revenues  generated by SO  Corporation  was  approximately  $7.1
         million  and $20.0  million for the years ended June 30, 2000 and 1999,
         respectively.   Loss   before   taxes   for  these   subsidiaries   was
         approximately $6.1 and $3.8 for the years ended June 30, 2000 and 1999,
         respectively.

15.      Defined Contribution Plan

         The Company sponsors a 401(k) defined  contribution  plan, which covers
         substantially  all  employees.   Company  matching   contributions  are
         determined  annually at the  discretion of  management  and vest at the
         rate of 20 percent per year of  employment.  For the current year,  the
         company  match was 75  percent  of the  employee  contribution  up to 6
         percent of their  annual  salary.  During the years ended June 30, 2000
         and 1999, the Company's matching  contribution expense was $107,103 and
         $83,046,  respectively.  The  Company  match was in the form of Class A
         Common Stock issued to the plan's fiduciary.  Shares issued or issuable
         in matching  were  673,725  and  266,331 for the fiscal  years 2000 and
         1999, respectively.

16.      Significant Customers

         Revenues from the three largest customers  accounted for 33 percent (20
         percent,  8 percent  and 5 percent  each) of total  revenues  in fiscal
         2000, and revenues from three other customers  accounted for 34 percent
         (16 percent,  11 percent,  9 percent each) of total  revenues in fiscal
         1999.

17.      Concentration of Credit Risk

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

<PAGE>F-27

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         At June 30, 2000, accounts receivable totaled $794,068, and the Company
         has provided an allowance for doubtful accounts of $61,000.

         For the years ended June 30, 2000, and 1999, bad debts totaled  $30,000
         and  $123,000  respectively.   The  Company  performs  periodic  credit
         evaluations on its customers' financial condition and believes that the
         allowance for doubtful accounts is adequate.

         At  June  30,  2000,  the  Company  maintained  cash  balances  with  a
         commercial  bank, which were  approximately  $126,000 in excess of FDIC
         insurance limits.