UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                 Form 10-KSB/A-2
                    (Amendment No. 2 Filed on March 2, 2000)

(MarkOne)

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

     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934 For the transition period ___________ from ______________

Commission file number 1-12738

                            ONSITE ENERGY CORPORATION
                 (Name of small business issuer in its charter)


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

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

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

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

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

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

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

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

State issuer's revenues for its most recent fiscal year..............$44,100,561

State the aggregate market value of the voting and non-voting common equity held
by non affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  price of such  common  equity,  as of a
specified date within the past 60 days................................$1,117,682
as of September 27, 1999.

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

<PAGE>2
                                     PART I

Item 1.  Description of Business

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

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

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


<PAGE>3


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

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

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

        Onsite  Energy  Services,  Inc. In October  1997,  the Company  acquired
Westar Business Services,  Inc. ("WBS"), an indirect wholly-owned  subsidiary of
Western  Resources,  Inc.  ("Western  Resources")  (NYSE:WR).  As  part  of  the
transaction, WBS was renamed Onsite Business Services, Inc. Subsequently, Onsite
Business  Services,  Inc.  changed  its name to  Onsite  Energy  Services,  Inc.
("OES"). The purchase price was 1,700,000 shares of the Company's Class A Common
Stock  issued  upon  closing  to Westar  Capital,  Inc.  ("Westar  Capital"),  a
wholly-owned subsidiary of Western Resources,  with an additional 800,000 shares

<PAGE>4

of Class A Common Stock being released to Westar Capital from an escrow in March
1998  when  certain  conditions  set  forth in the  acquisition  documents  were
satisfied.  With its primary  office in Topeka,  Kansas,  OES  provides  utility
services  and  industrial  water  services  primarily  in the  states of Kansas,
Missouri and Oklahoma.

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

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

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

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

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

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

     Revenue  Recognition/Financial   Statement  Restatement.  The  Company  had
previously been  corresponding  with the SEC regarding the Company's Form 10-KSB
for the year ended June 30, 1998.  In response to  information  submitted by the
Company,  on  December  3, 1999,  the SEC sent a comment  letter  directing  the
Company to restate its  financial  statements  for each of the last three fiscal
years  ended June 30,  1999,  1998,  and 1997 as well as for the  quarter  ended
September 30, 1999.  The  restatement is the result of a review of the Company's
accounting  policies as it related to the timing of the  recognition of revenues
and expenses.

<PAGE>5


The SEC took  exception to certain  applications  of  accounting  principles  as
applied by ONSITE SYCOM in the areas of the timing of revenue  recognition where
utility  incentive  payments are a part of ONSITE SYCOM's  revenue  stream,  the
timing of revenue recognition with respect to the sale of future utility revenue
payments and the timing of revenue and expense recognition relative to contracts
containing  future  commitments  of services  following  the  implementation  of
certain projects.  The Company,  along with its independent  auditors,  believed
that it was adhering to Generally Accepted  Accounting  Principles  ("GAAP") and
had provided  the SEC with  arguments in support of its position in these areas.
Rather  than  continue  to  utilize  resources  in an  appeal  to the SEC  Chief
Accountant,  the Company decided to amend previously filed financial  statements
and  reports to reflect  the SEC's  position on the timing of income and expense
recognition  in these areas.  As a result,  ONSITE SYCOM restated its previously
filed  financial  statements  for each of the fiscal years ending June 30, 1997,
1998 and 1999, as well as the first fiscal quarter ended September 30, 1999.

The Company  implemented  several projects in fiscal 1998 where the price to the
customer  was less than the cost to implement  the project,  creating a loss for
accounting purposes. This "loss" was recovered and profits were achieved through
the Company's retaining a share of utility incentive payments that resulted from
energy savings from the implemented  project.  In these  instances,  the Company
estimated its revenue from these utility  incentive  payments and recognized the
revenue as the project was being  implemented using the percentage of completion
methodology.  The SEC has  required  the  Company  to defer  recognition  of the
utility  incentive payment component of revenue until the point in time that the
utility is billed for the incentive payments. Generally, these billings occur on
a quarterly basis for a three year period.

Further,  the Company sold other future utility  incentive  payment streams to a
third party on a non-recourse basis. At the time of the sale, in fiscal 1997 and
1998, the Company recognized revenue to the extent it received cash. The SEC has
required the Company to record these payments as a financing  transaction (debt)
and to  recognize  revenue  related to the utility  incentive  payments on an as
billed basis, again quarterly over a three year period.

In  addition,  the Company has a small  number of  contracts  for which it has a
commitment  to  provide  relamping  services  several  years  after the  initial
implementation of the project. The Company originally recognized all the revenue
and an estimate of the future cost as the project was being implemented. The SEC
has  required  the Company to defer a portion of the revenue and  eliminate  the
reserve for future cost until the relampings actually occur.

Lastly,  the  Company  has  approximately  15  contracts  that call for  ongoing
services generally over a ten year period.  The Company originally  recorded the
estimated future costs associated with these  commitments on a net present value
basis.  The SEC has  required  the  Company to record  these  commitments  on an
undiscounted basis.

        Unaudited filing of Form 10-KSB.  The original and first amended filings
of Form  10-KSB for the fiscal  year  ended  June 30,  1999 were  audited by the
Company's  independent  auditors,   Hein+Associates.   The  opinion  issued  was
qualified subject to the Company's ability to continue as a going concern. As of
the time of filing amendment number 2, the Company's  auditors have not reviewed
revisions  resulting from the  restatements due to non-payment by the Company of
accounting and tax fees, and therefore,  the Company's  auditor's opinion is not
included with this filing.

        Loss from Operations,  Possible Need for Additional  Working Capital and
Potential  Dilution to Existing  Shareholders.  The Company has suffered  losses
from  operations  for the past two fiscal  years.  For the years  ended June 30,

<PAGE>6


1999,  and 1998,  the  Company  had net  losses of  $6,466,108  and  $2,211,295,
respectively,  negative working capital of $7,098,826 and an accumulated deficit
of $27,185,601 as of June 30, 1999. Management believes that the Company will be
able to generate additional revenues and improve operating  efficiencies through
its  acquisitions  as well as by other means to achieve  profitable  operations.
During the year ended June 30,  1999,  the Company  took steps to  mitigate  the
losses and enhance its future viability. In addition, during the fiscal year end
1999, the Company  exercised its right under a stock  subscription  agreement to
require  Westar  Capital to purchase an  additional  400,000  shares of Series C
Convertible Preferred Stock for $2,000,000. Subsequent to its most recent fiscal
year end, the Company also  privately  placed shares of newly  created  Series E
Convertible  Preferred  Stock  ("Series E Stock") to existing  shareholders  for
$1,000,000. Concurrent with this private placement, members of senior management
of the Company  have agreed to receive  shares of the  Company's  Class A Common
Stock in lieu of a portion of their salary in an effort to reduce cash  outflows
related to  compensation.  Subsequent  to June 30,  1999, a decision was made to
explore the sale or disposition of the Company's  lighting  subsidiaries,  which
could provide  capital,  reduce  operating  losses and will allow  management to
better focus on its core ESCO business activities.  In addition,  the Company is
exploring   strategic   relationships  with  companies  that  could  involve  an
investment  in the Company.  The Company may also raise cash through the sale of
long term future  revenue  streams that it currently  owns or has rights to. The
Company is also  examining ways to further reduce  overhead  including,  but not
limited to, the possibility of targeted staff reductions.  Further, the Company,
through the acquisition of other energy service  companies,  expects to continue
to gain economies of scale through the use of a consolidated management team and
the  synergies  of  marketing  efforts  of the  different  entities.  Management
believes  that all of the above  actions will allow the Company to continue as a
going concern.  Future cash requirements depend on the Company's  profitability,
its  ability  to manage  working  capital  requirements  and its rate of growth.
Additional  financing  through  the sale of  securities  may  have an  ownership
dilution effect on existing shareholders.

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

        Control of the Company.  The directors,  officers and shareholders  that
own more than 5 percent of the Company's Class A Common Stock  beneficially  own
approximately 78.2 percent of the Company in the aggregate. As a result of their
ownership,  such  shareholders  will have  substantial  control  of all  matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions.  Such concentration of ownership also may
have the effect of delaying or preventing a change in control of the Company. In
addition, as discussed in Subsidiaries/Partnership  section above, in connection
with the  acquisition of the assets and certain  liabilities of SYCOM,  LLC, the

<PAGE>7


Company  issued  157,500  shares of Series D Stock to SYCOM  Corporation.  Under
certain  conditions,  the Series D Stock may be converted into 15,750,000 shares
of the  Company's  Class A Common  Stock and  currently  is held in escrow.  The
Series D Stock may be released to SYCOM  Corporation  provided  that the Company
achieves  certain net income  thresholds and the Company's  Class A Common Stock
trades above $2.00.  If the Company's net income and price of its Class A Common
Stock meets these  thresholds  and other  applicable  conditions  are met, SYCOM
Corporation would  beneficially own  approximately  48.42 percent of the Company
(based upon current ownership).

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

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

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

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

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

<PAGE>8

affect the ability of broker-dealers  to sell the Company's  securities and also
affect the ability of purchasers to sell their shares in the secondary market.

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

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

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

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


Item 6.  Management's Discussion and Analysis

When used in this discussion and the financial statements that follow, the words
"expect(s)," "feel(s)," "believe(s)," "will," "may," "anticipate(s)" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and  uncertainties  that could cause actual results
to differ  materially from those  projected.  Readers are cautioned not to place

<PAGE>9

undue reliance on these forward-looking  statements,  which speak only as of the
date  hereof.   The  Company  undertakes  no  obligation  to  republish  revised
forward-looking  statements to reflect  events or  circumstances  after the date
hereof or to reflect the occurrence of  unanticipated  events.  Readers also are
urged to  carefully  review and  consider  the various  disclosures  made by the
Company that attempt to advise interested parties of the factors that affect the
Company's  business,  including  the  discussion  under Item 1.  Description  of
Business,  as well as the Company's periodic reports on Forms 10-KSB, 10-QSB and
8-K filed with the SEC.

        The  original  and first  amended  filings of Form 10-KSB for the fiscal
year ended June 30, 1999 were  audited by the  Company's  independent  auditors,
Hein+Associates.  The  opinion  issued was  qualified  subject to the  Company's
ability  to  continue  as a going  concern.  As of the time of filing  amendment
number  2,  our  auditors  have  not  reviewed  revisions   resulting  from  the
restatements  due to  non-payment  of fees,  and therefore  their opinion is not
included with this filing.

        The SEC took exception to certain applications of accounting  principles
as  applied by ONSITE  SYCOM in the areas of the  timing of revenue  recognition
where utility  incentive  payments are a part of ONSITE SYCOM's  revenue stream,
the timing of revenue  recognition  with  respect to the sale of future  utility
revenue payments and the timing of revenue and expense  recognition  relative to
contracts containing future commitments of services following the implementation
of certain projects. The Company, along with its independent auditors,  believed
that it was adhering to GAAP and had provided the SEC with  arguments in support
of its position in these areas.  Rather than continue to utilize resources in an
appeal to the SEC Chief  Accountant,  the  Company  decided to amend  previously
filed  financial  statements  and reports to reflect  the SEC's  position on the
timing of income and expense  recognition  in these areas.  As a result,  ONSITE
SYCOM restated its previously filed financial  statements for each of the fiscal
years ending June 30, 1997,  1998 and 1999, as well as the first fiscal  quarter
ended September 30, 1999.

        The Company  implemented several projects in fiscal 1998 where the price
to the customer was less than the cost to implement the project, creating a loss
for  accounting  purposes.  This "loss" was  recovered and profits were achieved
through the  Company's  retaining  a share of utility  incentive  payments  that
resulted from energy savings from the implemented  project.  In these instances,
the Company  estimated  its revenue from these  utility  incentive  payments and
recognized the revenue as the project was being implemented using the percentage
of completion methodology. The SEC has required the Company to defer recognition
of the utility  incentive  payment  component of revenue until the point in time
that the utility is billed for the incentive payments. Generally, these billings
occur on a quarterly basis for a three year period.

        Further, the Company sold other future utility incentive payment streams
to a third party on a  non-recourse  basis.  At the time of the sale,  in fiscal
1997 and 1998,  the Company  recognized  revenue to the extent it received cash.
The SEC has  required  the  Company  to record  these  payments  as a  financing
transaction  (debt) and to recognize  revenue  related to the utility  incentive
payments on an as billed basis, again quarterly over a three year period.

        In addition,  the Company has a small  number of contracts  for which it
has a commitment to provide  relamping  services several years after the initial
implementation of the project. The Company originally recognized all the revenue
and an estimate of the future cost as the project was being implemented. The SEC
has  required  the Company to defer a portion of the revenue and  eliminate  the
reserve for future cost until the relampings actually occur.

<PAGE>10

        Last, the Company has  approximately  15 contracts that call for ongoing
services generally over a ten year period.  The Company originally  recorded the
estimated future costs associated with these  commitments on a net present value
basis.  The SEC has  required  the  Company to record  these  commitments  on an
undiscounted basis.

        The following  table shows the originally  reported and revised  results
for each of the last three fiscal years.


                                  Fiscal year ended June 30,
                          1997               1998                 1999

As Filed            $  (1,388,598)      $  (2,218,482)      $  (6,909,011)

As restated         $  (2,240,028)      $   2,211,295       $  (6,466,108)
                    -------------       -------------       -------------
Difference          $    (851,430)      $       7,187       $     442,903
                    =============       =============       =============


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

Results of Operations.

        Revenues.  Revenues increased in the fiscal year ended June 30, 1999, by
$44,100,561 or 257.05  percent.  This increase is primarily  attributable to the
activity  from  newly  acquired  subsidiaries.  After  elimination  of  revenues
attributable  to  newly  acquired   subsidiaries  and  prorated   revenues  from
subsidiaries acquired mid-fiscal year 1998, revenues increased by $3,395,366, or
27.49  percent  from  fiscal  year ended  June 30,  1998 to June 30,  1999.  The
increase  in  revenues  occurred  as a result of the  completion  of projects in
process as of the  beginning  of the fiscal year as well as the start of several
new long term  construction  projects  in the fiscal  year ended June 30,  1999.
Consulting  revenues  increased  by 57.50  percent  due to  consulting  services
provided to three major customers.

        Gross  Margin.  Gross margin for the fiscal year ended June 30, 1999 was
20.31 percent of revenues  compared to 18.01 percent in fiscal year 1998.  After
elimination  of  revenues  and cost of  sales  attributable  to  newly  acquired
subsidiaries,  gross margin was 22.34  percent for the fiscal year 1999 compared
to 19.05 percent in fiscal year 1998. The Company  typically  engages in several
different  types of business with  substantially different margin  results.  The
project  types are as follows:  general  construction  projects  that  produce a
typical  margin in the 10 to 35 percent  range;  fee based  projects,  where the
major  construction  subcontractors  are hired by the customer and, as such, the
costs and related  revenues  do not flow  through the Company and the margin can
range from 30 to 80 percent; consulting contracts, where the typical margins are
50 to 70 percent;  and lighting projects,  through LTS, REEP and ERSI, where the
margins  typically  are lower,  usually in the range of 10 to 25  percent.  As a
result  of the mix in  margins,  the  gross  margin  for any  given  period  can
fluctuate significantly and is not necessarily indicative of a trend.

        Selling,  General  &  Administrative  Expenses.   Selling,  general  and
administrative  ("SG&A")  expenses were $11,193,561 or 25.70 percent of revenues
in the fiscal year ended June 30, 1999,  compared to $3,879,237 or 31.62 percent

<PAGE>11

of revenues in fiscal year 1998. After elimination of revenues and SG&A expenses
attributable  to newly acquired  subsidiaries,  SG&A as a percentage of revenues
was 28.93  percent  for fiscal year end 1999  compared to 31.62  percent for the
fiscal year 1998.  The decrease was primarily due to the 23.25 percent  increase
in revenue  without  corresponding  increases  to SG&A.  Without SG&A from newly
acquired subsidiaries,  SG&A increased by 12.75 percent from fiscal year 1998 to
fiscal year 1999.  However,  there were several significant changes from 1998 to
1999.  Bad debt expense  increased  by $93,000,  or 310 percent from fiscal year
1998 to 1999. The closing of two regional offices decreased  facilities expenses
by $237,000, or 67.47  percent in fiscal year 1999 compared to fiscal year 1998,
and one time  professional  service and office set up charges that were incurred
in fiscal year end 1998 were not repeated, which caused other office expenses to
decrease by 55.67 percent.

        Depreciation  expense  was  $572,464  as of June 30,  1999  compared  to
$258,572 as of June 30, 1998. The increase of 121.39 percent was attributable to
the activity related to the newly acquired subsidiaries.

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

        Loss from Operations.  Loss from operations increased in the fiscal year
ended June 30, 1999 by  $4,170,803 or 188.79  percent.  This increase was mainly
attributable to the loss  recognized  related to the decision to sell or dispose
of the  Company's  lighting  subsidiaries  and the write off of excess  purchase
price over net assets acquired for SO Corporation.  As a result of the operating
losses of SO  Corporation,  management  determined  that the  carrying  value of
excess of purchase  price over net assets  acquired had been impaired as of June
30,  1999.  The effect of this  determination  was to charge  against  operating
earnings (additional loss) of $1,918,851, the unamortized balance as of June 30,
1999. After elimination of revenues and expenses  attributable to newly acquired
subsidiaries, loss from operations decreased by $208,492, or 9.42 percent.

        Other  Income/Expense.  Other expense  increased  $82,010 for the fiscal
year ended June 30, 1999. The change was attributable to an increase in interest
income of $121,153  offset by an increase of interest  expense of $203,163.  The
interest income arises from notes  receivable from newly acquired  subsidiaries.
The  interest  expense  is  related  to  notes  payable  on  certain  long  term
construction projects added with the acquisition of SO Corporation and financing
attributable to utility incentive payment streams. After elimination of activity
attributable  to newly  acquired  subsidiaries,  other  income was  $163,672 for
fiscal year ended June 30,  1999,  compared  to other  expense of $2,117 for the
same period in 1998.  The change was due to an  increase  of interest  income of
$168,453 with little change in interest expense.

        Net  Loss.  Net loss for the year  ended  June  30,  1999  increased  by
$4,254,813,  or 192.41 percent from the loss for fiscal year 1998. This resulted
in a loss per share of $0.36,  compared  to the loss per share for  fiscal  year
1998  of  $0.16.   The  increase  in  preferred  stock  dividends  of  $155,421,
accompanied with the reserve taken related to the decision to sell or dispose of
the lighting  subsidiaries, and the  write-off  of goodwill for SO  Corporation,
contributed   significantly   to the increase  in  the  loss  per  share.  After

<PAGE>12

elimination   of  revenues  and   expenses   attributable   to  newly   acquired
subsidiaries,  the  decrease  in net loss was  $208,492,  or a decrease  of 9.43
percent.

Liquidity and Capital Resources.

        The Company's  cash  decreased by $1,192,598 in fiscal year end June 30,
1999, a decrease of 56.98 percent.  Working capital was a negative  $7,098,826as
of June 30, 1999,  compared to a negative  $3,604,344  as of June 30,  1998,  an
increase in negative  working  capital of $3,494,482.  The increased  deficit in
working capital was largely  attributable to the increase in the current portion
of notes payable acquired from  acquisitions and an increase in accounts payable
of approximately $6.8 million,  offset by an increase in accounts  receivable of
approximately $3.7 million.

        Cash flows used in operating activities for the year ended June 30, 1999
were  $285,056,  compared to $806,491  provided by operating  activities for the
year ended June 30, 1998.  Increases in receivables and decreases in billings in
excess of costs and estimated  earnings on uncompleted  contracts  increased the
cash used in operations.  This increase was partially  offset by the increase in
accounts payable.

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

        The Company has suffered  losses from operations for the past two fiscal
years.  For the years ended June 30, 1999,  and 1998, the Company had net losses
of  $6,466,108  and  $2,211,295,   respectively,  negative  working  capital  of
$7,098,826  and an  accumulated  deficit  of  $27,185,601  as of June 30,  1999.
Management  believes  that  the  Company  will be able  to  generate  additional
revenues and operating efficiencies through its acquisitions as well as by other
means to achieve profitable operations. During the year ended June 30, 1999, the
Company took steps to mitigate the losses and enhance its future  viability.  In
addition, during the fiscal year end 1999, the Company exercised its right under
a stock  subscription  agreement  to  require  Westar  Capital  to  purchase  an
additional   400,000  shares  of  Series  C  Convertible   Preferred  Stock  for
$2,000,000.  Subsequent  to its most recent  fiscal year end,  the Company  also
privately  placed shares of newly created Series E Convertible  Preferred  Stock
("Series E Stock") to existing shareholders for $1,000,000. Concurrent with this
private  placement,  members of senior  management of the Company have agreed to
receive  shares of the  Company's  Class A Common  Stock in lieu of a portion of
their  salary in an effort to reduce  cash  outflows  related  to  compensation.
Subsequent  to June  30,  1999,  a  decision  was  made to  explore  the sale or
disposition of the Company's lighting subsidiaries, which could provide capital,
reduce  operating  losses and will allow  management to better focus on its core
ESCO  business  activities.  In  addition,  the Company is  exploring  strategic
relationships  with  companies  that could involve an investment in the Company.
The  Company may also raise cash  through  the sale of long term future  revenue
streams that it currently  owns or has rights to. The Company is also  examining
ways to further reduce overhead  including,  but not limited to, the possibility
of targeted staff reductions.  Further, the Company,  through the acquisition of
other energy service  companies,  expects to continue to gain economies of scale
through the use of a consolidated management team and the synergies of marketing
efforts of the  different  entities.  Management  believes that all of the above
actions  will allow the  Company to  continue  as a going  concern.  Future cash

<PAGE>12

requirements  depend  on the  Company's  profitability,  its  ability  to manage
working  capital  requirements  and its  rate of  growth.  Additional  financing
through the sale of securities may have an ownership dilution effect on existing
shareholders.

        The  original  and first  amended  filings of Form 10-KSB for the fiscal
year ended June 30, 1999 were  audited by the  Company's  independent  auditors,
Hein+Associates.  The  opinion  issued was  qualified  subject to the  Company's
ability  to  continue  as a going  concern.  As of the time of filing  amendment
number 2, the Company's auditors have not reviewed revisions  resulting from the
restatements  due to  non-payment by the Company of accounting and tax fees, and
therefore, the Company's auditor's opinion is not included with this filing.

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

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

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

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

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

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

<PAGE>14

position.  Any risks the  Company  faces are  expected to be external to ongoing
operations.  The Company has numerous alternative vendors for critical supplies,
materials  and  components.  Current  vendors  and  subcontractors  who have not
adequately  prepared for the year 2000 can be substituted in favor of those that
have prepared.

Item 7. Financial Statements.

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

<PAGE>15


                                   SIGNATURES

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



Date: March 2, 2000             By: /s/  RICHARD T. SPERBERG
                                -------------------------------------
                                Richard T. Sperberg
                                Chief Executive Officer (Principal Executive
                                Officer), Director

Date: March 2, 2000             By: /s/  J. BRADFORD HANSON, CPA
                                -------------------------------------
                                J. Bradford Hanson, CPA
                                Chief Financial Officer,
                                Principal Financial and Accounting Officer


<PAGE>F-1

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




Independent Auditor's Report ..................................................*

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

Consolidated Statements of Operations - For the Years ended
  June 30, 1999, 1998 and 1997...............................................F-4

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

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

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

     * The original and first amended filings of Form 10-KSB for the fiscal year
ended  June  30,  1999  were  audited  by the  Company's  independent  auditors,
Hein+Associates.  The  opinion  issued was  qualified  subject to the  Company's
ability  to  continue  as a going  concern.  As of the time of filing  amendment
number 2, the Company's auditors have not reviewed revisions  resulting from the
restatements  due to  non-payment by the Company of accounting and tax fees, and
therefore, the Company's auditor's opinion is not included with this filing.


<PAGE>F-2

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  June 30, 1999
                                   (Unaudited)
<TABLE>
<CAPTION>



<S>                                                                           <C>
ASSETS

Current Assets:
Cash                                                                           $   900,408
Accounts receivable, net of allowance for doubtful accounts of $35,000           6,071,729
Inventory                                                                          185,562
Capitalized project costs                                                          147,022
Costs and estimated earnings in excess of billings on uncompleted contracts      1,109,315
Other current assets                                                                50,634
                                                                               -----------
TOTAL CURRENT ASSETS                                                             8,464,670

Cash-restricted                                                                    147,838
Property and equipment, net of accumulated depreciation and
  amortization of $1,258,000                                                     1,413,918
Other assets                                                                       101,483
                                                                               -----------
TOTAL ASSETS                                                                   $10,127,909
                                                                               ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Note payable - related party                                                   $   211,914
Notes payable                                                                    2,900,612
Accounts payable                                                                 9,035,325
Billings in excess of costs and estimated earnings on uncompleted contracts      1,445,790
Accrued expenses and other liabilities                                           1,776,903
Liabilities in excess of assets held for sale                                      235,861
                                                                               -----------
TOTAL CURRENT LIABILITIES                                                       15,606,405

Long-Term Liabilities:
Accrued future operation and maintenance costs associated with energy
  services agreements                                                              140,288
Notes payable, less current portion                                                 56,866
                                                                               -----------
TOTAL LIABILITIES                                                               15,803,559
                                                                               -----------
Commitments and contingencies (Notes 2, 3, 4, 8, 11, 12, 14, 15, 20)

Shareholders' Equity (Deficit):
Preferred Stock, Series C, 842,500 shares authorized, 649,120 issued and
  outstanding (Aggregate $3,245,600 liquidation preference)                           649
Preferred Stock, Series D, 157,500 shares authorized, issued and
  outstanding and held in escrow                                                        -
Common Stock, $.001 par value, 24,000,000 shares authorized:
Class A common stock, 23,999,000 shares authorized, 18,584,853 issued
  and outstanding                                                                   18,585
Class B common stock, 1,000 shares authorized, none issued and outstanding               -
Additional paid-in capital                                                      25,583,816
Notes receivable - shareholders                                                 (4,093,099)
Accumulated deficit                                                            (27,185,601)
                                                                               -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                            (5,675,650)
                                                                               -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                           $10,127,909
                                                                               ===========
</TABLE>


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


<PAGE>F-3

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF OPERATIONS For the
                    Years Ended June 30, 1999, 1998 and 1997


<TABLE>
<CAPTION>


                                                     1999                  1998               1997
                                                -------------         -------------       ------------

<S>                                             <C>                   <C>                 <C>
Revenues                                        $  43,539,867         $  11,942,659       $  8,473,223
Utility Revenue                                       560,694               408,738            129,323

Cost of sales                                      35,144,224             9,998,788          6,544,797
                                                -------------         -------------       ------------
    Gross margin                                    8,956,337             2,352,609          2,057,749

Selling, general, and administrative expenses      11,193,561             3,879,237          3,121,332
Depreciation and amortization expense               1,074,855               539,499            587,077
Reserve on sale or disposal of subsidiary           1,010,000                     -            425,240
Impairment of excess of purchase price
  over net assets acquired                          1,918,851                     -                  -
                                                -------------         -------------       ------------
    Operating loss                                 (6,240,930)           (2,066,127)        (2,075,900)
                                                -------------         -------------       ------------
Other income (expense):
  Interest expense                                   (366,114)             (162,951)          (180,911)
  Interest income                                     146,436                25,283             25,283
                                                -------------         -------------       ------------
    Total other expense                              (219,678)             (137,668)          (155,628)
                                                -------------         -------------       ------------
Loss before provision for income taxes             (6,460,608)           (2,203,795)        (2,231,528)

Provision for income taxes                              5,500                 7,500              8,500
                                                -------------         -------------       ------------
Net loss                                          ($6,466,108)          ($2,211,295)       ($2,240,028)
                                                =============         =============       ============
Net loss allocated to common shareholders         ($6,670,676)          ($2,252,942)       ($2,240,028)
                                                =============         =============       ============
Basic and diluted loss per common share:               ($0.36)               ($0.16)            ($0.21)
                                                =============         =============       ============
Weighted average number of shares
  used in per common share calculation:            18,469,094            13,790,185         10,818,498
                                                =============         =============       ============
</TABLE>


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


<PAGE>F-5

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


<TABLE>
<CAPTION>

                                       Common Stock            Preferred Stock
                                   ------------------ ------------------------------------------------------------------------
                                         Class A         Series C         Series D
                                   ------------------ --------------- --------------------------------------------------------
                                                                                                Notes                    Share-
                                                                               Additional    Receivable-                 holders
                                                                                 Paid-In       Share-    Accumulated     Equity
                            Shares    Amount    Shares  Amount Shares  Amount    Capital       holders     Deficit      (Deficit)
                          --------------------------------------------------------------------------------------------------------


<S>                      <C>         <C>        <C>     <C>    <C>     <C>    <C>          <C>           <C>           <C>
Balances July 1, 1997     10,944,172 $ 10,944        -  $   -       -  $    -  $17,052,961  $         -  $(18,254,483) $(1,190,578)
Issued to Onsite 401k
  Plan                        49,912       50        -      -       -       -       17,399            -             -       17,449
Issued pursuant to
  private offering net
  of expenses              2,000,000    2,000        -      -       -       -      951,542            -             -      953,542
Stock issued for
  acquisitions             4,940,000    4,940        -      -       -       -    4,031,923            -             -    4,036,863
Exercise of stock
  options                    309,104      309        -      -       -       -       86,854            -             -       87,163
Sale of Series C
  preferred stock                  -        -  200,000    200       -       -      999,800            -             -    1,000,000
Series C preferred
  stock dividend                   -        -    8,205      8       -       -       49,139            -       (49,147)           -
Compensation recognized
  upon issuance of
  warrants                         -        -        -      -       -       -       18,980            -             -       18,980
Notes receivable from
  shareholders acquired
  in acquisitions                  -        -        -      -       -       -            -   (1,335,217)            -   (1,335,217)
Net Loss                           -        -        -      -       -       -            -            -    (2,211,295)  (2,211,295)
                          ------------------- ---------------  --------------  ---------------------------------------------------

Balances June 30, 1998    18,243,188 $ 18,243  208,205  $ 208       -  $    -  $23,208,598  $(1,335,217) $(20,514,925) $ 1,376,907

Exercise of stock options     75,334       75        -      -       -       -       23,404            -             -       23,479
Issued to Onsite 401k
  Plan                       266,331      267        -      -       -       -      147,687            -             -      147,954
Series C preferred stock
  dividend                         -        -   40,915     41       -       -      204,527            -      (204,568)           -
Sale of Series C
  preferred stock                  -        -  400,000    400       -       -    1,999,600            -             -    2,000,000
Notes receivable from
  shareholders acquired
  in acquisitions                  -        -        -      -       -       -            -   (2,757,882)            -   (2,757,882)
Net Loss                           -        -        -      -       -       -            -            -    (6,466,108)  (6,466,108)
                          ------------------- ---------------  --------------  ---------------------------------------------------
Balances June 30, 1999    18,584,853 $ 18,585  649,120  $ 649       -  $    -  $25,583,816  $(4,093,099) $(27,185,601) $(5,675,650)
                          ==================  ===============  ==============  ===================================================

</TABLE>


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

<PAGE>F-5

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

<TABLE>
<CAPTION>


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

Net loss                                                             $ (6,466,108)     $  (2,211,295)
Adjustments to reconcile net loss to net cash
  provided by (used in) Operating activities:
    Amortization of excess purchase price over net assets acquired        502,390            280,927
    Adjustment resulting from impairment in estimated carrying
      value of excess purchase price over net assets acquired           1,918,851
    Amortization of acquired contract costs                                50,196                  -
    Estimated loss on disposal of subsidiary                            1,010,000                  -
    Accrued future operation and maintenance costs                         88,930            (14,562)
    Provision for bad debts                                                35,000             30,192
    Depreciation                                                          572,465            258,572
    Compensation recognized upon issuance of stock warrants                                   18,980

    Accounts receivable                                                (3,780,739)          (781,792)
    Increase in costs and estimated earnings in excess of
      billings on uncompleted contracts                                  (252,419)          (225,324)
    Inventory                                                              (7,347)            (5,758)
    Other assets                                                           44,100           (435,120)
    Cash-restricted                                                         9,998            115,331
    Accounts payable                                                    6,847,535          1,351,806
    Increase (decrease) in billings in excess of costs and
      estimated earnings on uncompleted contracts                      (1,124,173)         1,739,390
    Accrued expenses and other liabilities                                 79,977            622,889
    Deferred income                                                       186,288             62,255
                                                                     ------------      -------------
      Net cash provided by (used in) operating activities                (285,056)           806,491
                                                                     ------------      -------------
Cash flows from investing activities:
  Purchases of property and equipment                                     (82,539)          (119,075)
  Loan to shareholders                                                 (2,757,882)            (7,911)
  Acquisition of businesses, net of cash aquired                                -         (1,203,805)
                                                                     ------------      -------------
      Net cash used in investing activities                            (2,840,421)        (1,330,791)
                                                                     ------------      -------------
Cash flows from financing activities:
  Proceeds from notes payable                                           1,178,108            552,234
  Proceeds from issuance of common stock                                        -            953,542
  Proceeds from issuance of preferred stock                             2,000,000          1,000,000
  Proceeds from exercise of stock options                                  23,479             87,163
  Repayment of notes payable - related party                             (256,415)           (46,804)
  Repayment of notes payable                                           (1,012,293)          (455,723)
                                                                     ------------      -------------
      Net cash provided by financing activities                         1,932,879          2,090,412
                                                                     ------------      -------------
Net increase (decrease) in cash                                        (1,192,598)         1,566,112

Cash, beginning of year                                                 2,093,006            526,894
                                                                     ------------      -------------
Cash, end of year                                                    $    900,408      $   2,093,006
                                                                     ============      =============
Supplemental disclosures of non-cash transactions:

  Payment of Series C Preferred Stock dividends with
    Series C Preferred stock                                         $    204,568      $      49,147
                                                                     ============      =============
  Payment of accrued liabilities with common stock                   $    147,954      $      17,449
                                                                     ============      =============
  Liabilities accrued for acquisition costs                          $          -      $     285,594
                                                                     ============      =============
  Fair market value of assets, less liabilities of
    businesses acquired with common stock                            $          -      $   4,036,863
                                                                     ============      =============
Supplemental disclosures of cash transactions:
  Interest paid                                                      $    385,937      $     168,936
                                                                     ============      =============
  Income taxes paid                                                  $      5,500      $      36,175
                                                                     ============      =============

</TABLE>


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


<PAGE>F-7


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Organization and Nature of Operations:

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

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

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

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

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

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

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

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

<PAGE>F-8

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



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

2.  Summary of Significant Accounting Policies

    Principles of Consolidation

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

    Revenue Recognition

    Revenue   Recognition/Financial   Statement  Restatement.  The  Company  had
    previously  been  corresponding  with the SEC regarding  the Company's  Form
    10-KSB  for the year  ended  June  30,  1998.  In  response  to  information
    submitted by the Company, on December 3, 1999, the SEC sent a comment letter
    directing  the Company to restate its financial  statements  for each of the
    last three fiscal years ended June 30, 1999,  1998,  and 1997 as well as for
    the quarter ended  September 30, 1999.  The  restatement  is the result of a
    routine  review of the  Company's  accounting  policies as it related to the
    timing of the recognition of revenues and expenses. The financial statements
    reflect the changes mandated by the SEC.


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

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

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

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

<PAGE>F-9

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

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

    Operation and Maintenance Agreements

    Commencing  July 1, 1993, the Company,  on a limited  basis,  began entering
    into long  term  operation  and  maintenance  ("O&M")  and  measurement  and
    verification   ("M&V")   agreements  with  some  of  its  customers.   These
    agreements,  where they exist, are components of the construction  contracts
    that  provide  for  ongoing  service  on  the  installed  energy  efficiency
    projects.   These  agreements  are  entered  into  as  a  condition  of  the
    implementation contract and are not a primary service of the Company and are
    accounted  for as a  component  cost  on  the  installed  energy  efficiency
    project.  In the instances where estimated costs exceed  estimated  revenue,
    the Company records as an expense the estimates of future deficit cash flows
    and recognizes  expense and a related liability in its financial  statements
    during the construction  period. In instances where revenues associated with
    the operation  and  maintenance  exceed  estimated  costs,  the revenues are
    recognized as services are performed.  Estimated costs associated with these
    revenues are accrued at the time the revenues are recognized. As of June 30,
    1999, the total liability for deferred  operations and maintenance  costs is
    $183,197,  of which  $42,909 is  expected  to be incurred in the next fiscal
    year.

    Cash and Cash Equivalents

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

    Restricted Cash

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

    Inventory

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

<PAGE>F-10

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


    Property and Equipment

    Property and equipment are recorded at cost.  Replacements  and improvements
    are  capitalized,  while repairs and  maintenance  are charged to expense as
    incurred. Depreciation and amortization are provided using the straight-line
    method  over  the  assets  estimated  useful  lives  ranging  from 5 to 31.5
    years.  Leasehold  improvements  and leased equipment are amortized over the
    useful life or term of the  respective  lease,  whichever  is less.  When an
    asset  is  sold  or  otherwise   disposed  of,  the  cost  and   accumulated
    depreciation  or amortization is removed from the accounts and any resulting
    gain or loss is recognized currently.

    Excess of Purchase Price Over Net Assets Acquired

    Excess of purchase price over net assets  acquired  ("Goodwill")  represents
    the purchase price in excess of the fair value of the net assets of acquired
    businesses and is being  amortized using the  straight-line  method over its
    estimated  useful life. The carrying  value is evaluated at least  annually.
    The Company considers current facts and  circumstances,  including  expected
    future operating  income and cash flows to determine  whether it is probable
    that  impairment  has occurred.  As a result of the  operating  losses of SO
    Corporation,  management  determined  that the  carrying  value of excess of
    purchase  price over net assets  acquired  had been  impaired as of June 30,
    1999.  The  effect  of this  determination  was a  charge  against  earnings
    (additional  loss) of  $1,918,851,  the  unamortized  balance as of June 30,
    1999.

    Income Taxes

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

    Earnings Per Common and Common Equivalent Share

    Basic  earnings per share  excludes  dilution and is  calculated by dividing
    income  (loss)  available  to common  shareholders  by the  weighted-average
    number of common  shares  outstanding  for the period.  Loss  applicable  to
    common  shareholders  was  calculated  by adding  $204,568  and  $49,147  of
    preferred  stock dividends to net loss for the years ended June 30, 1999 and
    1998,  respectively.  Diluted  earnings  per share  reflects  the  potential
    dilution that could occur if  securities or other  contracts to issue common
    stock were  exercised  or  converted  into  common  stock or resulted in the
    issuance  of common  stock that then  shared in the  earnings of the entity.
    Options,  warrants  and  preferred  stock  convertible  to an  aggregate  of
    23,692,958  and  20,827,116  for the years  ending  June 30,  1999 and 1998,
    respectively  were  excluded in the earnings per share  computation  because
    their effect was anti-dilutive.

<PAGE>F-11

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


     Impairment of Long-Lived Assets

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

     Stock-Based Compensation

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

     Impact of Recently Issued Standards

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

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

     Use of Estimates

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

     The Company's  financial  statements are based upon a number of significant
     estimates,  including the allowance  for doubtful  accounts,  percentage of
     completion on long term contracts,  the estimated useful lives selected for
     property and equipment and intangible assets, realizability of deferred tax
     assets,  realizability  of shareholder  notes receivable and accrued future

<PAGE>F-12

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


     operation and maintenance costs associated with energy services agreements.
     Due to the uncertainties inherent in the estimation process, it is at least
     reasonably  possible that these  estimates  will be further  revised in the
     near term and such revisions could be material.

    Fair Value of Financial Instruments

    The estimated fair values for financial instruments under FASB Statement No.
    107, "Disclosures about Fair Value of Financial Instruments," are determined
    at  discrete  points in time based on  relevant  market  information.  These
    estimates involve uncertainties and cannot be determined with precision. The
    fair value of cash is its demand value which is equal to its carrying value.
    The fair  value of notes  payable  are based upon  borrowing  rates that are
    available  to the  Company  for loans with  similar  terms,  collateral  and
    maturity.  As of June 30, 1999,  the estimated  fair values of notes payable
    approximate their carrying values.

    Concentrations of Credit Risk

    Credit risk  represents the accounting  loss that would be recognized at the
    reporting date if counterparties failed completely to perform as contracted.
    Concentrations  of credit risk (whether on or off balance  sheet) that arise
    from  financial  instruments  exist  for  groups of  customers  or groups of
    counterparties  when they have similar economic  characteristics  that would
    cause their ability to meet contractual obligations to be similarly effected
    by changes in economic or other conditions. In accordance with FASB No. 105,
    "Disclosure    of   Information    about    Financial    Instruments    with
    Off-Balance-Sheet  Risk and Financial  Instruments  with  Concentrations  of
    Credit  Risk," the  credit  risk  amounts  shown in Note 18 do not take into
    account the value of any collateral or security.

    Reclassification

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

3.  Basis of Presentation

    As shown in the accompanying financial statements,  the Company has suffered
    losses from  operations  for the past two fiscal years.  For the years ended
    June 30,  1999,  and 1998,  the  Company  had net losses of  $6,466,108  and
    $2,2111,295,  respectively,  negative  working  capital of $7,098,826 and an
    accumulated deficit of $27,185,601 as of June 30, 1999.  Management believes
    that the Company will be able to generate  additional revenues and operating
    efficiencies  through its  acquisitions as well as by other means to achieve
    profitable operations. During the year ended June 30, 1999, the Company took
    steps to mitigate the losses and enhance its future viability.  In addition,
    during the fiscal  year end 1999,  the Company  exercised  its right under a
    stock  subscription  agreement  to require  Westar  Capital to  purchase  an
    additional  400,000  shares  of  Series C  Convertible  Preferred  Stock for
    $2,000,000.  Subsequent to its most recent fiscal year end, the Company also
    privately  placed  shares of newly created  Series E  Convertible  Preferred
    Stock ("Series E Stock") to existing shareholders for $1,000,000. Concurrent

<PAGE>F-13

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


    with this private  placement,  members of senior  management  of the Company
    have agreed to receive shares of the Company's  Class A Common Stock in lieu
    of a portion of their salary in an effort to reduce cash outflows related to
    compensation.  Subsequent  to June 30,  1999, a decision was made to explore
    the sale or disposition of the Company's lighting subsidiaries,  which could
    provide capital, reduce operating losses and will allow management to better
    focus on its core ESCO  business  activities.  In  addition,  the Company is
    exploring  strategic  relationships  with  companies  that could  involve an
    investment in the Company.  The Company may also raise cash through the sale
    of long term future revenue streams that it currently owns or has rights to.
    The Company is also examining ways to further reduce overhead including, but
    not limited to, the possibility of targeted staff reductions.  Further,  the
    Company, through the acquisition of other energy service companies,  expects
    to continue to gain  economies  of scale  through the use of a  consolidated
    management  team and the  synergies  of marketing  efforts of the  different
    entities.  Management  believes that all of the above actions will allow the
    Company to continue as a going concern.  Future cash requirements  depend on
    the  Company's   profitability,   its  ability  to  manage  working  capital
    requirements and its rate of growth.  Additional  financing through the sale
    of   securities   may  have  an  ownership   dilution   effect  on  existing
    shareholders.

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

4.  Acquisitions

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

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

    Effective June 13, 1998, the Company acquired all of the outstanding  common
    shares of LTS,  in  exchange  for 690,000  shares of the  Company's  Class A

<PAGE>F-14

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

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

    On June  30,  1998,  the  Company  acquired  all  the  assets  and  specific
    liabilities of SYCOM Enterprises, LLC ("SYCOM, LLC") through a newly-created
    subsidiary  (SO  Corporation)  in  exchange  for  1,750,000  shares  of  the
    Company's  Class A Common  Stock.  This  stock  issuance  was  valued at the
    average of the  closing  bid and ask prices for three days  before and after
    the  acquisition  was agreed to by the Company and SYCOM,  LLC. In addition,
    under a Sale and Noncompetition  Agreement SO Corporation acquired the right
    to the services and expertise of all of the  employees of SYCOM  Corporation
    and SYCOM Enterprises,  L.P.,  affiliates of SYCOM, LLC, in exchange for the
    right to receive  157,500  shares of Series D  Convertible  Preferred  Stock
    ("Series  D  Stock")  that is  convertible  into  15,750,000  shares  of the
    Company's Class A Common Stock.  The Series D Stock (including the shares of
    the  Company's  Class A  Common  Stock  into  which  the  Series  D Stock is
    convertible)  will be held in escrow and will be released  if and when:  (i)
    the market value of the  Company's  Class A Common Stock  reaches  $2.00 per
    share; (ii) annualized  after-tax  earnings total $0.15 per share (including
    the Class A Common Shares into which the Series D Stock is convertible) over
    four consecutive quarters;  and (iii) certain debts of SYCOM Corporation and
    SYCOM Enterprises,  L.P. (including those to the Company and its affiliates)
    have been satisfied.  These share values and earnings thresholds increase by
    10 percent  per year after  December  31,  1999.  Pursuant to the terms of a
    Share Repurchase Agreement, the Company may repurchase the escrowed Series D
    Stock  (including the Company's Class A Common Stock into which the Series D
    Stock  is   convertible)   for  $0.001  per  share  if:  (i)  the  Sale  and
    Noncompetition  Agreement is terminated;  and (ii) after June 30, 2000, such
    repurchase is justifiable  based on the reasonable  business judgment of the
    Company's Board of Directors  considering the following factors: (a) the key
    employees  of  SYCOM   Corporation  no  longer  are  being  retained  by  SO
    Corporation;  and (b) there is no reasonably foreseeable likelihood that all
    of the following  conditions  shall be satisfied:  specific debts to a third
    party  and the  Company  will  be  satisfied,  and  both  share  performance
    benchmarks described in the Escrow Agreement shall be achieved.  The Company
    also may repurchase the escrowed  Series D Stock (and the Company's  Class A
    Common Stock into which the Series D Stock is convertible) during the 30 day
    period prior to the  scheduled  release date (that is, June 30, 2006) if any
    one of the  specified  conditions  for release of the Series D Stock has not
    been  satisfied.  Due to the  uncertainty  of the  ultimate  issuance of the
    preferred shares, no value will be attributed to such preferred shares until
    they are released from escrow.

    The  Company  has  agreed  to make  loans to  SYCOM  Corporation  and  SYCOM
    Enterprises,   L.P.   from  time  to  time  equal  to  their   general   and
    administrative  expenses and debt service to third  parties with interest at

<PAGE>F-15

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


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

     In  addition,  the Company  agreed to pay  $50,000  and issued  warrants to
     purchase  160,000  shares  of  Class A Common  Stock  which  are  currently
     exercisable  at $0.4185  per share,  through  June 30,  2003,  to  entities
     affiliated  with a director of the Company as  consideration  for  services
     rendered in connection with the acquisition. The Company recognized $92,016
     related to these  warrants  which was accounted for as additional  purchase
     price. The transaction was accounted for as a purchase and accordingly, the
     inclusion  of  the  operations  of  SO  Corporation  in  the   consolidated
     operations  commenced on the acquisition date. The resulting purchase price
     including  acquisition costs was $2,060,439 with $2,132,056 being allocated
     to excess of purchase  price over net assets  acquired.  As a result of the
     operating  losses of SO Corporation,  a further  evaluation of the carrying
     value of excess purchase price over net assets acquired as of June 30, 1999
     resulted in the write-off of $1,918,851 through a charge to earnings.

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

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

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

  Revenue                                     $  45,391,000      $  41,212,000
                                              =============      =============
  Operating Income (Loss)                     $  (6,942,000)     $ (10,310,000)
                                              =============      =============
  Net Loss                                    $  (7,205,000)     $ (12,751,000)
                                              =============      =============
  Basic and Diluted loss per common share     $       (0.39)     $       (0.79)
                                              =============      =============

<PAGE>F-16

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


5.  Accounts Receivable

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

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

          Trade receivables                                 1,324,111

          Less:  Allowance for doubtful accounts              (35,000)
                                                        -------------
          Total                                         $   6,071,729
                                                        =============

6.  Costs and Estimated Earnings on Uncompleted Contracts

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

         Costs incurred                                 $  28,496,874
         Estimated earnings                                 7,477,447
                                                        -------------
                                                           35,974,321
         Less:  Billings to date                          (36,310,796)
                                                        -------------
                                                        $    (336,475)
                                                        =============
         Included in the accompanying Balance Sheet
           under the following captions:
            Costs and estimated earnings in excess of
              billings on uncompleted contracts         $   1,109,315
            Billings in excess of costs and earnings on
              uncompleted contracts                        (1,445,790)
                                                        -------------
                                                        $    (336,475)
                                                        =============


<PAGE>F-17
                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)


7.   Property and Equipment

    Property and equipment at June 30, 1999 consisted of:
                                                            Estimated Useful
                                                                  Lives
                                                            -----------------
      Office furniture and equipment        $  1,287,071        5-7 years
      Land                                        44,000           -
      Building                                    80,000       31.5 years
      Water treatment plants                     993,517      Contract life
                                                            (50 to 56 months)
      Equipment and tools                        201,832       7-10 years
      Vehicles                                    23,674         5 years
      Leasehold improvements                      41,824       5-20 years
                                            ------------
                                            $  2,671,918

      Less:  Accumulated Depreciation         (1,258,000)
                                            ------------
                                            $  1,413,918
                                            ============

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

8.  Notes Payable

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

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

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

      Notes payable  collateralized by utility  incentive  payments
        with interest at 12.0%                                           458,023
                                                                     -----------
      Less: current portion                                            2,900,612
                                                                     -----------
                                                                     $    56,866
                                                                     ===========

<PAGE>F-18

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


9.  Note Payable - related party

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

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

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

10. Accrued expenses and other liabilities

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

      Payroll and related payroll taxes                              $   266,798
      Accrued job costs                                                  305,912
      Accrued utility commitments                                        448,497
      Accrued interest                                                    48,347
      Deferred income                                                    658,988
      Accrued operation and maintenance costs associated with
        energy services agreements                                        42,909
      Other accrued liabilities                                            5,452
                                                                     -----------
                                                                     $ 1,776,903
                                                                     ===========

11. Shareholders' Equity

    Stock Subscription Agreement

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

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

<PAGE>F-19

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


    Class A and Class B Common Stock

    Holders of Class A Common  Stock are  entitled to one vote per share for the
    election of directors and other  corporate  matters which  shareholders  are
    entitled or permitted to vote.  Holders of Class B Common Stock shall not be
    entitled to vote but are entitled to receive  dividends ratably with Class A
    Common Stock when and as declared by the Board of Directors.  As of June 30,
    1999, there were no shares of Class B Common Stock issued and outstanding.

    Warrants

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

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

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

    Preferred Stock

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

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

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

<PAGE>F-20

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


    Notes Receivable - Shareholders

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

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

12. Stock Option Plans:

    WEM 1991 Non-Statutory Stock Option Plan

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

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

    The Onsite 1993 Stock Option Plan

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

<PAGE>F-21

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


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

                                Outstanding     Exercise Price     Exercisable
                                  Options         Per Share          Options

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

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

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

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

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

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

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

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

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

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

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

            Granted                  394,000            $   0.5364
            Exercised                (75,334)           $   0.3302
            Cancelled               (326,691)           $   0.5289
                                   ---------

          June 30, 1999            2,990,233            $   0.6326
                                   =========

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

<PAGE>F-22

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


    Proforma Information

    As stated in Note 2, the Company  has not adopted the fair value  accounting
    prescribed  by FASB 123 for  employees.  Had  compensation  cost  for  stock
    options issued to employees been determined based on the fair value at grant
    date for awards in 1999 and 1998 consistent with the provisions of FASB 123,
    the  Company's  net loss and net loss per share would have been  adjusted to
    the proforma amounts indicated below:

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

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

    The fair value of each  option is  estimated  on the date of grant using the
    Black-Scholes   option-pricing   model.   The   following   weighted-average
    assumptions: expected volatility of 117.83 percent, 116.8 percent for grants
    during the year ended June 30,  1998,  an  expected  life of three years for
    option shares,  no dividends  would be declared  during the expected term of
    the options,  and a risk-free  interest rate using the monthly U.S. Treasury
    T-Strip Rate at the option grant date for fiscal years ended 1999, and 1998,
    respectively.

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

    SYCOM Non Plan Options

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

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

                             Outstanding      Exercise Price    Exercisable
                               Options           Per Share        Options
                              ---------     -----------------    ----------
      June 30, 1998                   -                                   -
                              =========                          ==========

         Options granted        899,126     $0.3850 - $0.8125       765,126
         Options exercised            -                                   -
         Options cancelled      (11,000)    $0.4185 - $0.8125             -
                              ---------
      June 30, 1999             888,126     $0.3850 - $0.5465       765,126
                              =========                          ==========

<PAGE>F-23

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


13. Income Taxes

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

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

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

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

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


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

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

<PAGE>F-24

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



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

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

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

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

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

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

14. Related Parties

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

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

    Westar  Capital  has  guaranteed  any  shortfalls  of energy  savings on the
    Company's  contract  with  one  customer.  Such  guaranty  is  backed  by an
    insurance  police  purchased  by the  Company  for a short  fall  of  energy
    savings.  In addition,  Westar Capital and an affiliate  have  indemnified a
    bonding company for bid and performance bonds obtained by the Company. (Also
    see Notes 9 and 11).

<PAGE>F-25

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



15. Commitments and Contingencies

    Leases

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

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

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

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

    Employment Agreements

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

    Ongoing Maintenance for Water Treatment Plants

    OES has two contracts with Western  Resources  whereby OES  constructed  and
    maintains  equipment  for  supplying  demineralized  water for boiler makeup
    water at Lawrence Energy Center and Tecumseh  Energy Center.  Both contracts
    terminate  on December 31,  2001,  unless  renewed at the end of the term as
    agreed upon by both parties. OES is responsible for producing the quality of
    demineralized  water as  specified.  If damage  occurs due to the  specified
    quality of  demineralized  water not being  produced,  OES is liable for the
    cost of the repairs to the  equipment  limited to a maximum of $300,000  per

<PAGE>F-26

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


    incident.  There have been no damage occurrences since the inception of both
    contracts and management believes any future loss to be remote.

    Environmental Costs

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

    Guaranteed Savings

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

    Litigation

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

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

16. Defined Contribution Plan

    The  Company  sponsors a 401(k)  defined  contribution  plan,  which  covers
    substantially all employees.  Company matching  contributions are determined
    annually at the  discretion of management and vest at the rate of 20 percent
    per year of  employment.  For the current  year,  the  company  match was 75
    percent of the employee contribution up to 6 percent of their annual salary.

<PAGE>F-27

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


    During  the years  ended  June 30,  1999 and 1998,  the  Company's  matching
    contribution  expense  was $83,046 and  $53,480,  respectively.  The Company
    match  was in the  form  of  Class  A  Common  Stock  issued  to the  plan's
    fiduciary.  Shares issued in matching were 266,331 and 49,912 for the fiscal
    years 1999 and 1998, respectively.

17. Significant Customers

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

18. Concentration of Credit Risk

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

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

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

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

19. Year 2000

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

<PAGE>F-28

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


    prepared  for the year 2000 can be  substituted  in favor of those that have
    prepared.

20. Subsequent Events

    Private Placement of Securities

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

    Sale or Disposal of Subsidiaries

    On  September  28,  1999,  the  Company  decided  to  explore  the  sale  or
    disposition  of its  interests  in the  lighting  contracting  subsidiaries,
    namely,  LTS,  REEP and ERSI.  As a result  of this  decision,  the  Company
    recorded a reserve on the disposition of the combined entities of $1,010,000
    at June 30, 1999. Further, the assets and liabilities of these entities have
    been  reclassified to the category  liabilities in excess of assets held for
    sale.

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

       ASSETS:
         Accounts receivable                                       $  1,192,880
         Cost and estimated earnings in excess of
           billings on uncompleted contracts                             87,924
         Property and equipment, net                                     54,335
         Other assets                                                   467,066
                                                                   ------------
           Total assets                                               1,802,205
                                                                   ------------
       LIABILITIES:
         Accounts payable                                          $  1,192,481
         Billings in excess of costs and estimated
           earnings on uncompleted contracts                            318,696
         Accrued expenses and other liabilities                         526,889
                                                                   ------------
           Total liabilities                                          2,038,066
                                                                   ------------
           Liabilities in excess of assets held for sale           $    235,861
                                                                   ============

<PAGE>F-29

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


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


21. Restated Financial Statements

The Company was required to restate previously issued financial statements for a
change in the timing of the recording of certain revenue and expense items.  The
following  table  shows  each of the  quarters  revised  results  for the fiscal
quarters over the last two fiscal years.


                                            Three Month Period Ended
                                September 30,    December 31,        March 31
                                     1997            1997              1998
                                ------------     ------------      ------------
Revenues                           2,156,683        3,222,456        3,371,530
Utility Revenue                      102,185          102,185           102,185

Cost of sales                      1,572,172        2,540,449         2,663,083
                                ------------     ------------      ------------
  Gross margin                       686,696          784,192           810,632

Selling, general, and
  administrative expenses            596,047        1,096,902         1,180,828
                                ------------     ------------      ------------
  Operating income (loss)             90,649         (312,710)         (370,196)

Other income (expense)               (38,373)         (30,176)          (77,899)
                                ------------     ------------      ------------
Income (loss) before provision
  for income taxes                    52,276         (342,886)         (448,095)

Provision for income taxes             6,738            5,499             4,438
                                ------------     ------------      ------------
Net income (loss)               $     45,538     $   (348,385)     $   (452,533)
                                ============     ============      ============
Net loss allocated to
  common stockholders           $     45,538     $   (348,385)     $   (476,908)
                                ============     ============      ============
Basic and diluted loss
per common share                $       0.00     $      (0.03)     $      (0.03)
                                ============     ============      ============
Weighted average shares
outstanding                       10,944,172       13,519,572        14,714,361
                                ============     ============      ============

<PAGE>F-30

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


                                            Three Month Period Ended
                                September 30,    December 31,        March 31
                                     1997            1997              1998
                                ------------     ------------      ------------

Revenues                        $  9,314,041     $  9,315,984      $ 12,627,875
Utility Revenue                      140,174          140,174           140,174

Cost of sales                      7,899,511        7,763,819         9,305,795
                                ------------     ------------      ------------
  Gross margin                     1,554,704        1,692,339         3,462,254

Selling, general, and
  administrative expenses          2,982,080        3,021,839         2,950,054
                                ------------     ------------      ------------
  Operating income (loss)         (1,427,376)      (1,329,500)          512,200

Other income (expense)               (72,404)         (66,772)          (26,687)
                                ------------     ------------      ------------
Income (loss) before provision
  for income taxes                (1,499,780)      (1,396,272)          485,513

Provision for income taxes                 -                -                 -
                                ------------     ------------      ------------

Net income (loss)               $ (1,499,780)    $ (1,396,272)     $    485,513
                                ============     ============      ============

Net loss allocated to
  common stockholders           $ (1,525,355)    $ (1,446,640)     $    433,917
                                ============     ============      ============
Basic and diluted loss
  per common share              $      (0.08)    $      (0.08)     $       0.02
                                ============     ============      ============
Weighted average shares
  outstanding                     18,295,536       18,488,514        18,537,128
                                ============     ============      ============

The following  table shows the originally  reported and revised results for each
of the last three fiscal years.

<PAGE>31

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

                                     Fiscal year ended June 30,

                              1997                1998                1999

As Filed                 $  (1,388,598)      $  (2,218,482)      $  (6,909,011)

As restated              $  (2,240,028)      $   2,211,295       $  (6,466,108)
                         -----------------------------------------------------
Difference               $    (851,430)      $       7,187       $     442,903
                         =====================================================