U. S. SECURITIES AND EXCHANGE COMMISSION

                          WASHINGTON, D.C.  20549

                                FORM 10-KSB
  
(Mark One)
<circle> ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
      SECURITIES EXCHANGE ACT OF 1934

      For the fiscal year ended June_30,_1997.

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

      FOR THE TRANSITION PERIOD FROM ______________TO______________

      COMMISSION FILE NUMBER 1-12738

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

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

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

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

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

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

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

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

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

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

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

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

                      DOCUMENTS INCORPORATED BY REFERENCE

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

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

<PAGE>2
                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

INTRODUCTION.   Onsite  Energy  Corporation, a Delaware corporation ("Onsite"),
was formed pursuant to a business  reorganization  effective  February 15, 1994
(the  "Reorganization"),  between Western Energy Management, Inc.,  a  Delaware
corporation  formed  in 1991  ("Western"),  and  Onsite  Energy,  a  California
corporation  formed  in   1982   ("Onsite-Cal").    Under  the  Reorganization,
Onsite-Cal merged with and into Onsite, and a newly formed subsidiary of Onsite
merged  with  and  into  Western,  which  survived and became  a  wholly  owned
subsidiary of Onsite. This transaction was  accounted  for  as  a  purchase  of
Onsite-Cal by Onsite.

BUSINESS  OF  ISSUER.   Onsite  is an energy services company (an "ESCO") which
assists  energy  customers  in  lowering  their  energy  bills  by  developing,
engineering, installing, owning and  operating efficient, environmentally sound
energy efficiency and power supply projects.  Onsite  offers  its  services  to
industrial,  commercial and institutional customers.  By combining development,
engineering, analysis,  and  project  and  financial  management skills, Onsite
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, Onsite offers professional consulting services in the areas of direct
access   planning,   market  assessment,  business  strategies,  public  policy
analysis, and environmental impact feasibility studies.

PARTNERSHIPS/SUBSIDIARIES.  Substantially  all  of  the  revenues of Onsite are
generated through energy services and consulting services.   Other partnerships
and subsidiaries are as follows:

      WESTERN   ENERGY   MANAGEMENT,   INC.    As  discussed  above,  via   the
Reorganization, Western became the wholly owned  subsidiary  of  Onsite.  While
Western   was  engaged  in  the  business  of  providing  comprehensive  energy
management  services  designed  to  reduce  the utility costs of its customers,
Western's current primary function is to monitor  its  remaining contracts with
customers.  Revenues from Western were immaterial.

      TELEVISION CITY COGEN, L.P.  Prior to February 1997, Onsite owned general
and limited partnership interests in Television City Cogen,  L.P., a California
limited  partnership  ("TCC").    Onsite  also  owned  all  of  the issued  and
outstanding  stock  of Onsite/TCC Corp., a Delaware corporation ("Onsite/TCC"),
which is the other general  partner  in  TCC.   Thus,  directly and indirectly,
Onsite  owned  100%  of  TCC.   TCC's  major  asset  is  a  1415-kilowatt  (kW)
cogeneration  system (the "System") located at CBS Studios ("CBS"),  Television
City in Los Angeles,  California.   Onsite completed construction of the System
in 1988, and was responsible for the ownership, operation, maintenance, savings
verification and billing for the System,  which  provides  electricity, chilled
water and thermal energy for the CBS Studios complex.  CBS receives  discounted
rates  on  electric and thermal energy provided by the System based on the  Los
Angeles Department  of  Water  and  Power  electricity  rates  and the Southern
California  Gas  rates  over the 20 year term of the Energy Services  Agreement
between   TCC   and  CBS.   For   more   information   on   cogeneration,   see
COGENERATION/SMALL POWER DEVELOPMENT below.  Onsite sold all of its interest in
TCC and Onsite/TCC, effective February 17, 1997.

      Unless the context indicates otherwise, reference to Onsite shall include
its wholly owned subsidiary, Western.

<PAGE>3

MAJOR EVENTS AND CONTRACTS DURING THE YEAR.

      SALE OF TCC.  Late in 1995, Onsite decided to sell all of its interests in
TCC for the purpose  of  retiring  certain  existing  long-term debt, which was
secured  by substantially all of the assets of Onsite.   Onsite  completed  the
sale of TCC,  effective  February 17, 1997.  Onsite used the proceeds to pay off
its long-term notes payable as of June 30, 1997.

      R.E. THOMASON GENERAL  HOSPITAL  ("THOMASON").   In  1996, Onsite entered
into  an agreement with Thomason for the operation and maintenance  ("O&M")  of
the central  utility  plant.   The  contract  runs for a 27-month period, which
commenced February 1996, with additional extensions  at the option of Thomason.
In  connection  with this O&M contract, Onsite has staffed  the  central  plant
facility with eight  full-time  positions  including a supervisor, mechanic and
plant operators.

      GENERAL MOTORS CORPORATION ("GM"). Onsite  entered into an agreement with
GM to provide turnkey technical services for the installation  of  a  strategic
energy   management   system   at   one   of   GM's   plants.  Onsite  provided
state-of-the-art control technology for the North American Truck Group Assembly
Plant  located in Wentzville, Missouri. In 1995, Onsite  entered  into  another
agreement  with  GM's  Linden,  New  Jersey,  assembly  plant  to  install high
efficiency  lighting  equipment,  which  was  completed  in 1996. Onsite has  a
continuing contract to provide post-installation energy savings measurement and
verification  services  over  a  10-year period.  Onsite entered  into  another
agreement with GM to provide comprehensive audits for four GM facilities.

      POWER RESOURCES MANAGERS, L.L.C.  ("PRM")/ONSITE ENERGY ALLIANCE.  Onsite
entered into a energy alliance with PRM to jointly offer direct access planning
services  to  industrial,  commercial and institutional  utility  customers  in
California, allowing such customers  to  participate  in the newly restructured
California electric power marketplace. California Assembly  Bill  1890,  signed
into  law on September 23, 1996, enables customers direct access to alternative
power suppliers.  The  alliance  is  intended to help consumers reduce both the
amount  of energy consumed as well as the  price  paid  for  such  energy.  The
PRM/Onsite  alliance  helps  customers understand more thoroughly the magnitude
and  variance  of  their  existing  energy  use,  identify  ways  to  implement
cost-effective  energy efficiency  and  load-leveling  projects,  and  identify
opportunities to  maximize power purchase savings in the competitive market for
electricity.  PRM, owned  by  Howard  Energy  Co.,  Inc.,  is  a power marketing
company  providing  power  management,  electricity  procurement  services  and
related consulting work.

      CALIFORNIA STATE UNIVERSITY, FRESNO ("CSUF").  Onsite has entered into an
agreement  with  CSUF  to  provide  energy  efficiency services, including  the
installation  of  high  efficiency  lighting retrofits  and  a  "free  cooling"
retrofit.  The benefits to CSUF are anticipated  to  include  over  1.6-million
kWh/year reduction  in  energy  consumption,  as  well  as fixture upgrades and
improved  lighting  and  cooling equipment.  CSUF should realize  approximately
$120,000 per year in energy  cost savings and a total of approximately $160,000
in  incentive payments from Onsite  through  Onsite's  Power  Savings  Partners
agreement with Pacific Gas and Electric Company ("PG&E"), the regional utility.
(See  CAUTIONARY  STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.)

      SOUTHERN CALIFORNIA  EDISON ("SCE") DEMAND SIDE MANAGEMENT ("DSM") ENERGY
EFFICIENCY AGREEMENTS.  Onsite  completed  several projects in fiscal year 1997
under  its  DSM  agreements  with  SCE, including  a  project  with  Mobil  Oil
Corporation  to  provide  energy  efficiency  equipment  at  Mobil's  Torrance,
California,  Refinery.  The  project  resulted   in  approximately  2.1-million
kWh/year  energy  savings.   Onsite  installed lighting  equipment,  electronic
ballasts, optical reflectors and lamps.   Onsite also entered into an agreement
with McDonnell Douglas Corporation under the  SCE  DSM  agreements  to  install
energy  efficient  equipment  at  McDonnell  Douglas',  Long  Beach, California
facility.

<PAGE>4

This  project  included the conversion of 2,552 Mercury vapor fixtures  to  583
Metal Halide HID  (High-Density  Discharge)  fixtures.  The project resulted in
approximately 5.3-million kWh/year reduction in energy consumption. The SCE DSM
agreements also call for Onsite to provide monitoring and  verification ("M&V")
services  for  a  three-year  period.  Other projects installed under  the  DSM
contracts with SCE included Hughes Aircraft  Company,  Deutsch Metals, Tecstar,
Inc., Foothill Presbyterian Hospital and West Covina Unified School District.

      MOVES  TO  REDUCE COSTS AND INCREASE CONSULTING FEES.   As  a  result  of
losses in the first  two  fiscal  quarters, Onsite reduced its staff and closed
its  Michigan office.  In addition,  Onsite  has  substantially  increased  its
reimbursable  consulting  activities, which has the benefit of more predictable
margins and cash flows.

INDUSTRY OF ISSUER.  Following  is  a  description of the ESCO industry and the
business of Onsite.

      ENERGY EFFICIENCY SERVICES COMPANY.   An  ESCO is defined by the National
Association  of  Energy  Service  Companies  ("NAESCO")   as   a  full-service,
vertically  integrated  company  that  provides  a  complete  range  of  energy
efficiency and power management services to its customers.  In order to qualify
as an ESCO, a company must be able to offer a method of financing projects  and
guaranteeing savings as services offered to customers. These elements generally
are what differentiate an ESCO from energy efficiency contractors and equipment
suppliers.   Onsite  provides such services and is an accredited ESCO member of
NAESCO.  Onsite provides  the  customer  with  "one-stop  shopping"  for energy
efficiency.  Such services include:

      <circle> An initial energy audit
      <circle> Detailed economic and feasibility analysis
      <circle> Engineering and construction services
      <circle> Management of project implementation
      <circle> Verification of savings
      <circle>  Monitoring of performance and maintenance during the service
                term
      <circle> Guaranteed savings and/or shared savings programs
      <circle> Performance contracting with utilities
      <circle> Financing, direct loans and equipment leases
      <circle>  Professional  consulting  services   in  the  areas  of  market
            assessment,   business   strategy,  public  policy   analysis   and
            environmental impact/feasibility studies

Through its systems integration program,  Onsite  provides  various services to
the  customer that focus on energy efficiency in commercial, institutional  and
industrial  facilities.   Using multiple, proven energy efficiency technologies
provided by Onsite, today's building owners and operators can receive both cash
flow savings and environmental  benefits while optimizing energy efficiency, in
most cases without any up front capital  required  from the customer.  Onsite's
integrated energy measures work together to:

      REDUCE energy consumption
      SAVE energy dollars
      PROMOTE efficient use of energy
      IMPROVE the environment
      INCREASE business profitability

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

<PAGE>5

      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
efficiency services  are  valued  and  provided.   In the restructured electric
industry, the competition of the new marketers in the  industry  is anticipated
to  facilitate  a  rapid  evolution of energy value added services in  the  new
marketplace.   New  energy  supply  marketers  will  move  to  diversify  their
electricity supply services with  other  services,  which  will  include energy
efficiency services.

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

      Onsite is actively  involved in monitoring the regulatory and legislative
process that will determine  the rules for the restructured electricity market,
and firmly believes that the benefits  and  value  of  energy  efficiency  will
expand  through  the  evolution  of  a more competitive market for electricity.
Onsite has registered with the California  Public  Utilities  Commission  as an
Electric Service Provider (ESP).

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

      COGENERATION/DISTRIBUTED   GENERATION.    Onsite   has  experience  as  a
cogeneration/distributed generation developer in systems ranging  from 60 kW to
20,000  kW at facilities such as industrial facilities, hospitals, multi-family
housing,   nursing  homes,  recreational  centers,  health  clubs  and  hotels.
"Cogeneration"  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 heating, domestic hot water
and/or chilled water (through absorption  chilling) to the host facility.  As a
result,  60%  to 90% of the input fuel's energy  content  can  be  utilized  to
produce heat and  electricity  compared to only 25% to 40% of the fuel's energy
content to make electricity alone  in  a utility generating plant.  The thermal
energy produced by the cogeneration system  is  used  by  the  host facility to
reduce  fuel consumption that otherwise would be needed to supply  the  thermal
energy produced  by  boilers or other fuel burning equipment.  A typical system
consists of a reciprocating  engine or gas turbine fueled by natural gas, which
drives an electrical generator.   A  heat  recovery  system  reclaims  the heat
produced by the engine generator set, yielding steam or hot water to be used in
the  host  facility  for  domestic,  process  or  space  heating/cooling needs.
Electrical controls, relays and switchgear protect the equipment from overload,
ensure proper voltage and frequency, and interconnect with  the local utility's
power grid.  Since completing its first cogeneration system in 1984, Onsite has
been associated with over 35 cogeneration projects.

Electric  industry  restructuring  in  California and throughout  the  U.S.  is
creating a renewed interest in on-site (distributed)  generation  by  customers
and utilities.

<PAGE>6

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

      Onsite's  approach  to  marketing  its energy efficiency services  is  to
provide a comprehensive energy efficiency  project  with financing alternatives
for the customer.  Over the past several years, Onsite  has  been successful in
maximizing  the  incentives  from  public utilities in the form of  rebates  or
through utility DSM contracts, whereby  the utility provides incentive payments
based on actual energy savings, which can  offset  a substantial portion of the
investment necessary to implement the energy efficiency  measures.  The utility
payments historically have been based upon the resource and environmental value
of the energy savings (as compared to the cost of building power plants).  This
contribution  from  the  utility 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, Onsite'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  cost and profit of the
retrofit  programs implemented by Onsite within the customer's  facilities  are
recouped by  the  savings  in energy and maintenance costs of the project, with
net positive cash flow to the  customer  generated  throughout  the life of the
project.

      During  the  last  five years, Onsite has successfully completed  several
utility DSM competitive bidding programs with PacifiCorp (April 1993); Southern
California Edison (SCE) (May  1994, and July 1995, by acquisition); Puget Sound
Power & Light Company (June 1994);  and  Pacific  Gas & Electric Company (PG&E)
(August 1996).

      Onsite generally does not supply actual construction  labor  or materials
in   the  implementation  of  projects;  rather,  Onsite  relies  primarily  on
subcontractors   and   vendors   to  provide  these  services.  The  source  of
subcontractors varies by project,  but  generally Onsite selects subcontractors
based  upon experience, quality of work, price  and  other  factors,  including
previous  relationship  with  the  customer.   In  general,  subcontractors are
solicited  from  the  customer's  local  geographic  area.   Onsite's  standard
agreements  with  subcontractors  (usually  in  the  form  of  an  Engineering,
Procurement and Construction Agreement) contain general provisions standard for
the construction industry for the installation of energy efficiency measures.

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

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

      AUDIT/FEASIBILITY ANALYSIS:  Upon execution of a Letter of Agreement by a
customer, Onsite's technical staff conducts  an  on-site analysis in sufficient
detail to establish the potential savings, capital  cost estimates and scope of
the project.  Onsite's engineers and technicians monitor  energy  use with data
logger equipment.  This data is analyzed to determine savings opportunities and
energy  efficiency  measures  appropriate  for  a  particular  facility.   This
information  also  provides empirical data on which to base the rebate  or  DSM
application that will  be  made  to  the utility company, if applicable.  These
findings  are  presented  to  the  customer   in   the   form  of  a  technical
proposal/audit report for the project.

<PAGE>7

      DETAILED ENGINEERING:  Upon the execution by a customer  and Onsite of an
Energy  Efficiency Services Agreement (an "ESA") or similar contract,  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, Onsite arranges financing for
the project in cooperation  with  the customer.  Financing can take many forms,
from energy savings-based agreements to equipment capital and operating leases,
to traditional loans.  Onsite has experience in arranging such
financing  for  projects  based  upon anticipated  annual  savings.   Financing
packages are negotiated for the customer  in  most cases such that the customer
is not required to invest its own funds.

      PROCUREMENT AND CONSTRUCTION:  This phase  involves equipment purchasing,
subcontractor   selection  and  construction  management   to   final   project
completion.   Construction   management  consists  of  an  experienced  project
execution team under the overall  direction  of  one  of  Onsite'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   Onsite   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:  Onsite 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, Onsite and the utility, if applicable.

      COMPETITION.   In  general,  Onsite's  competitors  are other ESCOs  that
provide similar comprehensive services to customers.  Some of these competitors
are large companies with more assets, and a larger manpower  and  resource base
than  Onsite.   Utility  companies  and  their affiliates can function as  both
competitors and partners for Onsite.  Many  utilities  now are entering the DSM
market  through  wholly  owned  subsidiaries  of  holding companies  in  direct
competition with ESCOs, including Onsite.  However, Onsite sometimes teams with
utility DSM subsidiaries whereby the utility subsidiary  functions  as a source
of  financing for energy efficiency services projects developed and implemented
by Onsite.

      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 are at a disadvantage  when  compared  with
the  larger  companies  and  utilities.   However, Onsite has successfully used
financing sources such as Academic Capital,  L.L.C.  ("Academic"),  and ChiCorp
Financial Services, Inc. (nka ABN AMRO Chicago Corporation) ("ChiCorp"),  among
others,  to  provide  financing  for qualified energy efficiency projects, thus
maintaining this important advantage  for  Onsite.   Over  the last four years,
Academic  and/or  ChiCorp  has provided financing on most of Onsite's  projects
that have been financed.  More  recently, though, Onsite 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 Onsite's customers have the ability to
obtain their own financing or to pay for the cost of the project themselves.

      Onsite's competitive advantage historically has been its ability to offer
a broader range of services and equipment than  other  ESCOs can offer, who may
be limited to supplying their own equipment.  In addition,  Onsite  has been in
the  energy  efficiency  business  for a longer period of time than most  other
independent ESCO competitors.

<PAGE>8

      RAW MATERIALS.  Onsite 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 Onsite may have custom built
also typically are available from several sources.

MAJOR  PROJECTS  AND  CUSTOMERS.   A summary of Onsite's major energy efficient
projects and utility DSM programs is as follows:

      SOUTHERN CALIFORNIA EDISON (SCE).   In  April 1994, Onsite executed a DSM
contract  with  SCE  after  being selected as a result  of  a  competitive  bid
solicitation  (the  "SCE  Agreement").    The   SCE   Agreement   requires  the
installation  of  energy  efficiency measures to provide consistent, innovative
and  verifiable  energy  savings  in  selected  commercial,  industrial  and/or
institutional host customer  facilities  within a specific eligible SCE service
area market region.  In July 1995, Onsite  acquired  an additional, similar DSM
contract  with SCE via an assignment to Onsite by KENETECH  Energy  Management,
Inc. ("KEM"),  of  all of KEM's interest in the same (the "KEM SCE Agreement").
This acquisition augments  the  SCE  Agreement.  Both the SCE Agreement and the
KEM SCE Agreement (collectively, the "SCE  Agreements")  were  approved  by the
California Public Utility Commission in October 1994.  The SCE Agreements  call
for  the implementation of energy efficiency projects for host customers within
SCE's  service territory to provide up to approximately 53 million kWh per year
in measured  energy  savings.  During the fiscal years ended June 30, 1996, and
1997, Onsite implemented projects that qualify for a contribution under the SCE
Agreements with the following  host  customers:  Hughes  Aircraft  Company  (El
Segundo,  CA); West Covina Unified School District (West Covina, CA); McDonnell
Douglas Corporation (Long Beach, CA); Foothill Presbyterian Hospital (Glendora,
CA); Mobil Oil Corporation (Torrance, CA), and Tecstar, Inc. (City of Industry,
CA).  Subsequent  to June 30, 1997, Onsite executed an agreement to implement a
project with TRW, Inc. (Redondo Beach, CA).

      As a result of  the  executed contracts, Onsite has sold approximately 44
million of the 53 million kWh  in annual energy savings committed to in the SCE
Agreements.   As a forward-looking  statement,  Onsite  expects  that  it  will
fulfill  its obligations  under  the  SCE  Agreements,  subject  to  successful
negotiation   and   implementation  of  currently  identified  projects.   (See
CAUTIONARY STATEMENT  FOR  PURPOSES  OF  THE  "SAFE  HARBOR"  PROVISIONS OF THE
PRIVATE  SECURITIES LITIGATION REFORM ACT OF 1995.)  If, however,  Onsite  does
not deliver  the  energy  savings  required  per  the SCE Agreements, Onsite is
subject to forfeiture of portions of certain milestone and performance security
funds.

      Revenues earned by Onsite under these projects  were  approximately  $4.0
and  $7.1  million  for  the  fiscal  years  ended  June  30,  1997,  and 1996,
respectively.

      PACIFIC  GAS  AND  ELECTRIC  COMPANY  (PG&E).   In December, 1995, Onsite
signed  a  contract  with  PG&E  for  the  development  and  implementation  of
demand-side  resources for customers in the PG&E service territory  (the  "PG&E
Agreement"). Under  the  terms  of  the  PG&E  Agreement, Onsite will identify,
design, contract for and complete energy efficiency projects that are estimated
to supply energy savings of approximately 30 million  kWh  per  year  for up to
seven  years. In general, the price paid by PG&E to Onsite for savings will  be
approximately $0.02/kWh for energy savings and $20/kW for demand savings.  Each
host customer  project  is  subject  to  approval by PG&E and Onsite.  The PG&E
Agreement was approved by the California Public Utilities Commission, effective
August 1, 1996.  Onsite has signed contracts  for energy services with CSUF and
a  shopping  mall  in  Northern California, a portion  of  which  projects  are
eligible for funds under the PG&E Agreement.

      No revenues were earned under the PG&E Agreement in fiscal 1997 or 1996.

<PAGE>9

      CALIFORNIA  STATE UNIVERSITY,  FRESNO  (CSUF).   Onsite's  first  project
implemented under the  PG&E  Agreement was with CSUF.  Onsite has completed the
first phase lighting retrofit  of the project for $600,000. The second lighting
phase for approximately $1 million  has  been initiated.  Phases three and four
are planned for fiscal year ending 1998, and  may  include lighting, mechanical
and a substation transformer.

      GENERAL  MOTORS  CORPORATION  (GM).   Onsite  has  signed   a  number  of
agreements with GM to provide a variety of services at several GM facilities.

            GM  LINDEN,  NEW  JERSEY  ASSEMBLY PLANT. In December 1995,  Onsite
signed an agreement with GM to provide  energy  efficiency  equipment purchases
and services at GM's Linden, New Jersey Assembly Plant.  Onsite  completed  the
project  by  June  30,  1996.   The project was sponsored by Onsite through the
Public Service Electric and Gas Company  ("PSE&G")  Standard  Offer DSM program
and includes a 10-year commitment for M&V services.

            GM AUDITS. Onsite also received a purchase order for  GM to provide
engineering and technical services to complete detailed plant energy audits for
four  GM  facilities located in Lordstown, Ohio (two plant sites), Linden,  New
Jersey, and  Ft.  Wayne,  Indiana.   The project was substantially completed in
this fiscal period.  The revenues were  approximately  $152,522 for this fiscal
year.

            GM  WENTZVILLE,  MISSOURI  ASSEMBLY  PLANT.  In July  1996,  Onsite
received  a  purchase  order  from  GM  to  provide for the installation  of  a
Strategic Energy Management System ("EMS") at the assembly plant in Wentzville,
Missouri.  The EMS provides for computer-based  control and monitoring of plant
operating systems.  The project was substantially  completed by the end of this
fiscal period and represents approximately $519,312 of revenue.

      Revenues to Onsite for the GM projects were approximately $811,000 and $4
million for the fiscal years ended June 30, 1997, and 1996, respectively.

      OTHER PROJECTS.  Onsite contracted with a major equipment manufacturer in
Illinois to perform a comprehensive energy audit and  engineering  study.   The
$119,000  study  addressed lighting, heating, ventilation, process measures and
on-site generation.  An implementation proposal was submitted in August 1997.

CONSULTING.  In addition  to  energy efficiency retrofit/construction services,
Onsite also provides professional  energy efficiency consulting services within
various target markets such as utilities,  product  suppliers  and  government.
These  consulting services include engineering design, project feasibility  and
development,  market assessments, business strategy, public policy analysis and
environmental impact/feasibility  studies.   Consulting  contracts include, but
are  not  limited  to, projects for the Gas Research Institute  (Chicago,  IL);
Solar Turbines (San  Diego,  CA); R.E. Thomason General Hospital (Thomason) (El
Paso, TX); American Gas Cooling  Center (Arlington, VA); Tokyo Gas Co. (Japan);
Martin Marietta Energy Systems, Inc.  (Oak  Ridge, TN); Electric Power Research
Institute  (Palo Alto, CA); Volvo (Stockholm,  Sweden);  and  Caterpillar  Inc.
(Lafayette, IN).

      Consulting  revenues  to  Onsite were approximately $1.4 million and $ .5
million for the fiscal years ended June 30, 1997, and 1996, respectively.

<PAGE>10

GOVERNMENT REGULATION/ENVIRONMENTAL  LAWS.   Onsite  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.
Onsite'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 cogeneration facilities. Onsite contracts  with  certified
hazardous waste removal  companies  or  requires its subcontractors to contract
with   certified   hazardous   waste   removal   companies.    Onsite   obtains
indemnification from applicable customers and subcontractors  as  to  liability
Onsite  might  incur  in  connection  with hazardous materials or environmental
concerns.

Onsite has not to date incurred unanticipated  material capital expenditures to
comply with environmental laws and regulations.   However,  Onsite was required
by the South Coast Air Quality Management District to comply  with the Regional
Clean  Air  Incentives  Market  ("RECLAIM") rules and regulations for  the  TCC
project,  which  required an additional  capital  investment  of  approximately
$170,000.  This requirement  was fulfilled in fiscal 1996. Presently no actions
are  pending  against Onsite concerning  environmental  matters.   However,  no
assurances can  be  given that proposed or future laws and regulations will not
adversely impact Onsite's  operations.  Onsite's management believes that it is
currently in compliance with all applicable government regulations.

EMPLOYEES.  As of October 6,  1997, Onsite employed approximately 37 persons in
regular full-time or part-time positions.  Western has no employees.

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  report  are
"forward looking" statements that involve  risks  and  uncertainties that could
cause actual results to differ materially from projected results.  The "forward
looking" statements contained herein are cross-referenced  to  this  paragraph.
Such "forward looking" statements include, but are not necessarily limited  to,
statements  regarding  anticipated  levels  of future revenue and earnings from
operations of Onsite, projected costs and expenses  related  to Onsite's energy
services agreements, and the availability of future debt and equity  capital on
commerically  reasonable  terms.   Factors  that could cause actual results  to
differ materially include, in addition to the  other factors identified in this
report, the cyclical and volatile price of energy, the inability to continue to
contract sufficient customers to replace contracts  as  they  become completed,
unanticipated delays in the approval of proposed energy efficiency  measures by
Onsite'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
Onsite's  activities  as  an  ESCO  and the activities of the  nation's  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 Onsite's Securities and Exchange Commission  filings
including the risk factors set forth in Onsite's Registration Statement on Form
S-4, SEC File No.  33-66010.   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.  Onsite disclaims  any
intent or obligation to publicly update  these  "forward  looking"  statements,
whether  as  a  result  of  new information, future events or otherwise.

<PAGE>11

ITEM 2.  DESCRIPTION OF PROPERTY.

      Onsite's  corporate  headquarters is located at 701 Palomar Airport Road,
Suite 200, Carlsbad, CA 92009, on a five-year lease expiring in April 1998, and
covering approximately 10,000  square  feet.   Onsite also leases approximately
640  square feet of office space at 16400  South  Center  Parkway,  Suite  204,
Seattle (Tukwila), WA, on a month-to-month lease (regional office).  Onsite has
terminated  this  lease effective October 31, 1997.  In addition, Onsite leases
approximately 2400  square  feet  of  separate industrial space at 6102 Avenida
Encinas, Suite I, Carlsbad, CA, on a five-year  lease  expiring  July  1998, to
maintain  and  store  its  inventory,  parts  and  records.  No other office or
warehouse space is leased or owned by Onsite.

ITEM 3.  LEGAL PROCEEDINGS.

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

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.

      None.


                 [Remainder of page intentionally left blank]

<PAGE>12

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

      Since  August 2, 1995, Onsite's Class A Common Stock (the "Common Stock")
has  traded  on   the   National   Association  of  Securities  Dealers  (NASD)
Over-the-Counter (OTC) Electronic Bulletin  Board under the symbol "ONSE."  The
following table sets forth the high and low prices  per  share  of  the  Common
Stock for the quarters ended September 30, 1995 (from August 2, 1995), December
31, 1995, March 31, 1996, June 30, 1996, September 30, 1996, December 31, 1996,
March 31, 1997, and June 30, 1997:


      QUARTER ENDED           HIGH              LOW

      September 30, 1995      $ 1               $1/4

      December 31, 1995       $3/4              $3/8

      March 31, 1996          $1-3/4            $1/2

      June 30, 1996           $2-1/2            $1-3/8

      September 30, 1996      $1-5/8            $1-7/16

      December 31, 1996       $1/2              $1/2

      March 31, 1997          $1/4              $1/4

      June 30, 1997           $1/4              $1/2


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

      As of September 23, 1997,  there were approximately 217 holders of record
of the Common Stock.

      Onsite has not paid dividends  on  the  Common  Stock,  nor  does  Onsite
anticipate paying dividends on the Common Stock in the foreseeable future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

GENERAL.   As  discussed  in ITEM 1. DESCRIPTION OF BUSINESS, Onsite was formed
pursuant to the Reorganization  (that  is, the reorganization pursuant to which
Onsite-Cal merged with and into Onsite, and a newly formed subsidiary of Onsite
merged  with  and  into  Western,  which survived  and  became  a  wholly-owned
subsidiary of Onsite).  As stated previously,  the Reorganization was accounted
for as a purchase of Onsite-Cal by Onsite.

SUBSIDIARIES/PARTNERSHIPS.

      WESTERN  ENERGY  MANAGEMENT, INC. (WESTERN)   As  discussed  in  ITEM  1.
DESCRIPTION OF BUSINESS,  via the Reorganization, Western became a wholly owned
subsidiary of Onsite.  Western's  current  primary  business  is to monitor its
existing contracts with customers.

      TELEVISION CITY COGEN, L.P. (TCC)  As discussed in ITEM 1. DESCRIPTION OF
BUSINESS, prior to February 1997, Onsite owned general and limited  partnership
interests  in TCC. Onsite also owned all of the stock of Onsite/TCC, the  other
general partner  in  TCC.   Thus, directly and indirectly, Onsite owned 100% of
TCC.  Effective February 17,  1997,  Onsite sold all of its interest in TCC and
Onsite/TCC.  As a result of the sale, Onsite incurred a loss of $425,240.

<PAGE>13

RESULTS OF OPERATIONS.

      1997 COMPARED TO 1996.  Net income  (loss)  for  the  year ended June 30,
1997, was a loss of $1,388,598, or $.13 per share, compared to  net  income for
the  year  ended  June 30, 1996, of $819,264, or $.03 per share, a decrease  of
$2,207,862 from 1996 to 1997.

      Per share earnings  were  reduced  in  fiscal year 1996 as a result of an
accounting  requirement  to  reduce  net earnings  by  preferred  dividends  in
calculating the earnings per share.  As  a  result  of  the negative impact the
declaration  of  preferred  dividends  had  on  the  per  share  earnings,  the
shareholders of the Series A and Series B Convertible Preferred Stock agreed to
convert  their  preferred  shares  to  Class  A Common Stock immediately.   The
conversion of the preferred shares resulted in  the  issuance  of approximately
4.2 million shares of Class A Common Stock on July 1, 1996.

      Revenues  for  the  fiscal  year  ended  June  30,  1997, were $9,561,375
compared to revenues in fiscal 1996 of $22,722,728, a decrease  of  $13,161,353
or  58%. The decrease in revenues was primarily attributable to the recognition
of revenues from one significant contract in fiscal year 1997 compared to three
significant contracts in fiscal year 1996.

      Gross  margin for the fiscal year ended June 30, 1997, was $2,869,177, or
30% of revenues, compared to a gross margin of $5,155,740, or 22.7% of revenues
in fiscal 1996.  The  increase  in  margin was primarily attributed to a larger
percentage  of  consulting  revenues  in  fiscal  year  1997,  which  contracts
generally provide higher gross margins.

      Deregulation  of  the  electric  utility   industry   in  California  and
throughout  the  U.S. has created a more competitive environment  for  electric
power generation.   This  has and will continue to expand the scope of services
offered by Onsite.  Onsite  continues  to market new energy services for larger
consumers in preparation for the emerging  competitive  marketplace  created by
deregulation.

      Selling, general and administrative ("SG&A") expenses were $3,726,095 for
the year ended June 30, 1997, compared to $3,748,988 for fiscal year ended June
30,  1996,  a  decrease  in  SG&A  expenses  of  $22,893. Goodwill amortization
included in SG&A in the fiscal year ended June 30,  1997, was $400,000 compared
to  $490,000  in  the  fiscal  year ended June 30, 1996. Goodwill  amortization
arises  primarily  out of the acquisition  of  Onsite-Cal,  which  resulted  in
goodwill of $1,600,000  that  is  being  amortized  over  a  four-year  period.
Amortization relating to this goodwill was $400,000 in each of the fiscal years
1996  and  1997.  The unamortized balance at June 30, 1997, was $266,667, which
will be amortized in fiscal year 1998.

      Income  (loss)  from  operations for the fiscal year ended June 30, 1997,
was a loss of $1,264,472, compared  to income from operations of $1,110,624 for
the previous fiscal year, a decrease in operating income of $2,375,096.

      Other income (expense) was a net  expense  of  $115,626  in  fiscal 1997,
compared to a net expense of $240,360 for the fiscal year ended June  30, 1996,
a  decrease  in  net  other  expense of $124,734.  The decrease in other income
(expense) was due to the decrease  in  interest  expense  for fiscal year ended
June 30, 1997.

<PAGE>14

      1996 COMPARED TO 1995.  Net income for the year ended  June 30, 1996, was
$819,264,  or  $.03 per share, compared to a loss for the year ended  June  30,
1995, of $929,607, or $.26 per share, an improvement of $1,748,871 from 1995 to
1996.  Per share earnings were reduced as a result of an accounting requirement
to reduce net earnings  by  preferred dividends in calculating the earnings per
share.  For the fiscal year ending  June  30,  1996,  the reduction to earnings
attributable  to  the  dividends  for the Series A and B Convertible  Preferred
Stock utilized in calculating the earnings  per  share  aggregated $608,439, or
$.09 per share.

      As a result of the negative impact the declaration of preferred dividends
had on the per share earnings, the shareholders of the Series  A  and  Series B
Convertible Preferred Stock agreed to convert their preferred shares to Class A
Common  Stock  immediately. The conversion of the preferred shares resulted  in
the issuance of approximately 4.2 million shares of Class A Common Stock.

      Revenues for  the  fiscal  year  ended  June  30, 1996, were $22,722,728,
compared to revenues in fiscal 1995 of $11,996,571, an increase of $10,726,157,
or 89.4%.  The increase in revenues in 1996 was primarily  attributable to  the
addition of three large contracts that contributed approximately $11 million in
revenue  for  the  year ended June 30, 1996.  Also contributing to the earnings
growth was the implementation  of  new  projects  under Onsite's  DSM agreement
with PacifiCorp, which was successfully completed in fiscal 1996.

      Gross margin for the fiscal year ended June 30,  1996, was $5,155,740, or
22.7%  of  revenues,  compared  to a gross margin of $2,825,278,  or  23.6%  of
revenues in fiscal 1995.

      Selling, general and administrative ("SG&A") expenses were $3,748,988 for
the year ended June 30, 1996, compared to $4,337,323 for fiscal year ended June
30, 1995, a decrease in SG&A expenses  of $588,335. Contributing to the overall
decrease in SG&A expenses was a decrease  in  legal  and  accounting expense of
$553,185 from 1995 to 1996.  The decrease in legal and accounting  expense  was
expected and was the result of a substantial decline in legal expenses relating
to  litigation  that was settled during the fiscal year ended June 30, 1995. In
addition, the SG&A  decline  was  partially attributable to the sale of Lanikai
Lighting,  Inc. a Hawaii corporation  ("Lanikai"),  whereby  Lanikai  SG&A  was
included for  approximately half of the current year, whereas the previous year
included a full  year impact on SG&A. Goodwill amortization included in SG&A in
the fiscal year ended  June  30, 1996, was $490,000 compared to $416,174 in the
fiscal year ended June 30, 1995.  Goodwill amortization arises primarily out of
the acquisition of Onsite-Cal, which resulted in goodwill of $1,600,000 that is
being amortized over a four-year period. Amortization relating to this goodwill
was  $400,000 in each of the fiscal  years  1995  and  1996.   The  unamortized
balance  at June 30, 1996, was $666,667, of which $400,000 will be amortized in
fiscal 1997, and $266,667 will be amortized in fiscal 1998.

      Income  from  operations  for  the  fiscal  year ended June 30, 1996, was
$1,110,624, compared to a loss from operations of $1,512,045  for  the previous
fiscal year, an improvement in operating income of $2,622,669.

      Other  income  (expense)  was  a net expense of $240,360 in fiscal  1996,
compared to net other income of $582,438  for  the  fiscal  year ended June 30,
1995,  an  increase  in  net  other expense of $822,798. Contributing  to  this
increase of net expense in fiscal  1996  was  the  loss  on  the disposition of
Lanikai  of  $296,128  in  the  fiscal year 1996.  Also, fiscal year  1995  had
substantial net other income attributable  to  the $800,000 gain on the sale by
Onsite of its interest in EUA/Onsite L.P., a California Limited Partnership.

<PAGE>15

      LIQUIDITY AND CAPITAL RESOURCES. Onsite's  cash and cash equivalents were
$526,894 as of June 30, 1997, compared to $976,470,  a  decrease of $449,576 as
of June 30, 1996.  Working capital was a negative $30,333  as of June 30, 1997,
compared  to  $354,544  as of June 30, 1996, a decrease in working  capital  of
$384,877.  The decrease in  working  capital  was attributable to the operating
performance  of  Onsite, and the sale of TCC.  Cash  flows  used  in  operating
activities for the  year ended June 30, 1997, was a negative $357,735, compared
to $1,302,999 for the year ended June 30, 1996.

      Cash flows provided  by  investing  activities  for the fiscal year ended
June 30, 1997, were $535,608, compared to $170,519 for  the  fiscal  year ended
June 30, 1996, an increase of $365,089.  The primary reason for the increase in
cash flows was Onsite's sale of TCC and a decrease in purchases of property and
equipment  during  fiscal  year ended June 30, 1997.  Cash flows from financing
activities were a negative $1,026,481  for the fiscal year ended June 30, 1997,
compared to a negative $509,053 for the same period in fiscal 1996, an increase
of $517,428.  The principal reason for the  change from year-to-year was due to
the repayment of $1,071,571 of long-term debt during fiscal year ended June 30,
1997.

ITEM 7.  FINANCIAL STATEMENTS.

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

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 Onsite's definitive Proxy Statement for the
Annual  Meeting of Stockholders to be held on December 5, 1997, is incorporated
herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION.

      The  information  included  under  the  heading  "Directors and Executive
Officers"  in  Onsite's definitive Proxy Statement for the  Annual  Meeting  of
Stockholders to  be  held  on  December  5,  1997,  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 Onsite's definitive Proxy Statement for the
Annual Meeting  of Stockholders to be held on December 5, 1997, is incorporated
herein by reference.

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  Onsite's definitive Proxy Statement for the Annual Meeting of
Stockholders to be  held  on  December  5,  1997,  is  incorporated  herein  by
reference.

<PAGE>16

                                    PART IV

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

a)    Exhibit

NO.

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

3.1   Certificate of Incorporation*

3.2   Form of Bylaws*

10.1  1993 Stock Option Plan*

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

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

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

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

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

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

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

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

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

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

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

10.50 Agreement between Onsite Energy and EUA Cogenex Corporation**

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

10.52 Debt Conversion and Preferred Stock Purchase Agreement**

<PAGE>17

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>18

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>19

11    Statement Regarding Computation of Per Share Earnings

21    Subsidiaries of the Registrant

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

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

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

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

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

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

b)    REPORTS ON FORM 8-K

      None.

<PAGE>
                                  SIGNATURES

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

                                  ONSITE ENERGY CORPORATION

Date:  October 8, 1997            By:   RICHARD T. SPERBERG
                                  Richard T. Sperberg, President


<PAGE>

                                  SIGNATURES

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

                                   ONSITE ENERGY CORPORATION


Date: October 8, 1997              By: CHARLES C. MCGETTIGAN
                                   Charles C. McGettigan
                                   Chairman of the Board and Outside Director



Date: October 8, 1997              By: RICHARD T. SPERBERG
                                   Richard T. Sperberg
                                   President, Chief Executive Officer, Chief 
                                   Financial Officer, Principal Accounting 
                                   Officer and Director

Date: October 8, 1997              By: WILLIAM M. GARY III
                                   William M. Gary, III
                                   Executive Vice President, Chief Operating
                                   Officer, Corporate Secretary and Director

Date: October 8, 1997              By: TIMOTHY G. CLARK
                                   Timothy G. Clark
                                   Outside Director

Date: October 8, 1997              By: H. TATE HOLT
                                   H. Tate Holt
                                   Outside Director


<PAGE>F-1

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

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

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

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

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

<PAGE>F-2

                         INDEPENDENT AUDITOR'S REPORT

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


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

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

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




HEIN + ASSOCIATES LLP
Certified Public Accountants


Orange, California
August 28, 1997

<PAGE>F-3

                           ONSITE ENERGY CORPORATION
                          Consolidated Balance Sheet
                                 June 30, 1997
                                    Assets

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

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

           LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

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

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

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

The accompanying notes are an integral part of the financial statements

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

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

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

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

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


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


<PAGE>F-5

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

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

Issued to Onsite 401k plan               50,989          51

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

Issued pursuant to legal settlement     158,416         158

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

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

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

Exercise of stock options                83,287          83

Common shares issuable for Series
  A and B preferred dividends

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

Issued to Onsite 401k plan               48,562          49

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

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

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

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

Exercise of stock options                45,887          44

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

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

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

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

Issued pursuant to legal settlement                    124,842                   125,000

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

Conversion of Series A
  preferred stock                                          (94)                        -

Conversion of Series B
  preferred stock                                          -                           -

Exercise of stock options                                29,809                    29,892

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

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

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

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

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

Conversion of Series A
  preferred stock                                        (3,567)

Conversion of Series B
  preferred stock                                          -                            -

Exercise of stock options                                20,066                    20,110

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

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS

<PAGE>F-6


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

                      
                                                         1997            1996
Cash flows from operating activities:

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

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

Cash, beginning of year                                  976,470       (85,751)

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

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

Supplemental disclosures of cash
  transactions:

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


The accompanying notes are an integral part of the financial statements

<PAGE>F-7

                              ONSITE ENERGY CORPORATION
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     _______


1.    BUSINESS ACTIVITY

BACKGROUND

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

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

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

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

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

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

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

<PAGE>F-8

                                ONSITE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

REVENUE RECOGNITION

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

GUARANTEED SAVINGS

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

SERVICE REVENUE

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

OPERATION AND MAINTENANCE AGREEMENTS

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

RESTRICTED CASH

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

<PAGE>F-9                     

                              ONSITE ENERGY CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


COSTS INCURRED ON FUTURE PROJECTS

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

PROPERTY AND EQUIPMENT

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

CASH AND CASH EQUIVALENTS

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

GOODWILL

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

INCOME TAXES

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

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

EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

STOCK-BASED COMPENSATION

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

IMPACT OF RECENTLY ISSUED STANDARDS

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

<PAGE>F-11 

                          ONSITE ENERGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

USE OF ESTIMATES

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CONCENTRATIONS OF CREDIT RISK

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

<PAGE>F-12

                            ONSITE ENERGY CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

3.    ACCOUNTS RECEIVABLE

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

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

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

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

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

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

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

                               ONSITE ENERGY CORPORATION
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.    PROPERTY AND EQUIPMENT

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

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

6.    NOTES PAYABLE

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

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

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

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

         Fiscal year ending June 30, 
                   1999                                            $    46,804


7.    ACCRUED EXPENSES AND OTHER LIABILITIES

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

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

                               ONSITE ENERGY CORPORATION
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.    SHAREHOLDERS' EQUITY (DEFICIT)

Class A Common Stock

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

WARRANTS

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

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

9.    STOCK OPTION PLANS:

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

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

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

                            Outstanding    Exercise Price       Exercisable
                              Options         Per Share           Options

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

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

WESTERN 1991 NONSTATUTORY STOCK OPTION PLAN

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

<PAGE>F-15

                             ONSITE ENERGY CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

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

                         Outstanding       Exercise Price          Exercisable
                           Options            Per Share               Options

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

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

NONPLAN OPTIONS

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

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

                             Outstanding       Exercise Price      Exercisable
                               Options           Per Share            Options

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

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

THE ONSITE 1993 STOCK OPTION PLAN

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

<PAGE>F-16

                           ONSITE ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

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

                           Outstanding         Exercise Price     Exercisable
                             Options              Per Share         Options

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

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

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

Fixed Options                Shares         Weighted-Average
                                             Exercise Price

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

Fixed Options                Shares         Weighted-Average
                                             Exercise Price

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

<PAGE>F-17

                          ONSITE ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

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

Proforma Information

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

                                                           June 30,
                                                 1997                   1996

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

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


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

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

10.   INCOME TAXES

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

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

<PAGE>F-18

                            ONSITE ENERGY CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

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

                                                  1997                 1996

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

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

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

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

<PAGE>F-19 

                            ONSITE ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

11.   RELATED PARTIES

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

12.   COMMITMENTS AND CONTINGENCIES

LEASES

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

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

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

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

ENVIRONMENTAL COSTS

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

GUARANTEED SAVINGS

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

LITIGATION

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

<PAGE>F-20 

                         ONSITE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


13.   DEFINED CONTRIBUTION PLAN

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

14.   SIGNIFICANT CUSTOMERS

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

15.   CONCENTRATION OF CREDIT RISK

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

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

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

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

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

16.   SUBSEQUENT EVENTS

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