UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                 Form 10-KSB/A-3
                     (Amendment No. 3 Filed on June , 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 ________________ to_________________

Commission file number 1-12738

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


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

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

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

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

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

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

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

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

State issuer's revenues for its most recent fiscal year..............$44,101,409

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.

Since  the  close  of the  transaction  in June  1998,  Onsite  has  experienced
significant  losses and as a result has been unable to provide  sufficient loans
to SYCOM Corporation to enable SYCOM Corporation and its affiliate, SYCOM LP, to
make the requisite payments on a previous loan from Public Service  Conservation
Resources  Corporation  ("PSCRC") to SYCOM LP. PSCRC has given a notice to SYCOM
Corporation  and SYCOM LP  alleging a default  by SYCOM LP under its  agreements
with PSCRC.  On June 1, 2000, the Company  announced that it had given notice to
Sycom  Corportion of the  termination of the Sale and  Noncompetetion  Agreement
between the Company and Sycom Corporation,  and will return to doing business as
Onsite Energy  Corporation.  The Company's  notice to SYCOM  Corporation  of the
termination of the Sale and Noncompetition  Agreement,  given in accordance with
the  Company's  rights under that  Agreement,  is a result of the PSCRC  default
notice and the Company's  continuing losses. The Company,  however,  will retain
the  project  assets  purchased  from SYCOM LLC in June 1998 as well as projects
developed since. In connection with the termination,  S. Lynn Sutcliffe resigned
as the President of Onsite. See also Notes to Consolidated Financial Statements,
Note 20 - Subsequent events.

        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

<PAGE>4

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 sold
95 percent of its interest in LTS to a previous  shareholder of LTS.  Operations
of LTS were not material to the consolidated financial statements.

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

     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.  Subsequent to its fiscal year end, the Company sold all of the
assets of OMS to a company owned by two former  employees of OES.  Operations of
OMS were not material to the consolidated financial statements.

     REEP Onsite,  Inc.  and ERSI  Onsite,  Inc.  Effective  April 1, 1999,  the
Company formed REEP Onsite, Inc. ("REEP"),  and ERSI Onsite, Inc. ("ERSI"),  for
the  purpose  of  acquiring  substantially  all of the assets of REEP,  Inc.  in
exchange for  assumption  of 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 shut down the  operations
of  REEP  and to  explore  the  sale  or  disposition  of  ERSI.  As part of the
separation from the Sycom entities,  the Company anticipates  disposing of ERSI.
Operations  of REEP and ERSI were not  material  to the  consolidated  financial
statements.

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

     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.

<PAGE>5

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.

     The SEC took exception to certain applications of accounting  principles as
applied by the Company in the areas of the timing of revenue  recognition  where
utility  incentive  payments are a part of the  Company'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.  As a result,  the  Company  restated  its  previously  filed
financial statements for each of the fiscal years ending June 30, 1997, 1998 and
1999, as well as the first (a second amendment) and second fiscal quarters ended
September 30, 1999 and December 31, 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 and other ongoing  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.

        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 three fiscal years.  For the years ended June 30,
1999, 1998 and 1997, the Company had net losses of $6,477,458,  $2,098,906,  and
$2,398,202,  respectively, and had negative working capital of $6,511,390 and an

<PAGE>6

accumulated deficit of $27,467,050 as of June 30, 1999. Management believes that
the Company will be able to generate  additional  revenues and improve operating
efficiencies  through the sale or  disposition of its previous  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 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.  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
believed that the acquisitions of these businesses would 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.  Subsequent to its fiscal year end,
the Company has changed its direction  through  divesting itself of OMS and LTS,
discontinuing the operation of REEP and, effective June 30, 2000, will terminate
its working  agreement with SYCOM  Corporation.  As a result of all of the above
actions,  the Company will focus on its core  activity,  ESCO  activities in the
Western and Mid-West regions as well as international opportunities.

        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.

<PAGE>7

        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,  or Frank J. Mazanec
among others may materially adversely affect the Company's business.

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

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

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

<PAGE>8

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

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

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

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

<PAGE>9

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

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

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

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

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

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

<PAGE>10

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

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

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

        Middletown Board of Education.  The Company has signed contracts for the
third, fourth and fifth phases under a master energy services agreement with the
Middletown  Board of Education  ("MBOE") in Middletown,  New Jersey,  with total
additional  project costs of approximately  $13 million.  The Company's  overall
contracts  now total  approximately  $22.8  million (of which the  Company  will
recognize  approximately  $6.2  million  in revenue  and the MBOE will  contract
directly with other  subcontractors for the remainder in costs) in project costs
and is expected to save MBOE  approximately  $9 million in energy  costs over 10
years and will receive substantial  benefits from incentives paid from the local
utility. The project enables the MBOE to make significant energy-related capital
improvements  to its  facilities and to fund these  improvements  mostly through
energy cost  savings and  incentives  provided  by the local host  utility.  The
Company is accomplishing the overall project at MBOE through the installation of
geothermal heat pumps and the retrofit of facility lighting.  The implementation
of the project is expected to be completed  over a period of  approximately  two
years.

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

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

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

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

<PAGE>11

by Public  Service  Electric  and Gas  Company  ("PSE&G"),  through  which PSE&G
purchases energy savings generated by the project.

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

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

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

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

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

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

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

<PAGE>12

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

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

        Southern  California  Edison Demand Side  Management  Energy  Efficiency
Agreements.  In April 1994,  the Company  executed a DSM contract  with Southern
California  Edison  Company  ("SCE")  after  being  selected  as a  result  of a
competitive  bid  solicitation  (the  "Onsite  SCE  Agreement").  The Onsite SCE
Agreement  required the  installation of energy  efficiency  measures to provide
consistent,  innovative  and verifiable  energy savings in selected  commercial,
industrial  and/or  institutional  host  customer  facilities  within a specific
eligible SCE service area market region.  In July 1995, the Company  acquired an
additional,  similar DSM contract  with SCE via an  assignment to the Company by
KENETECH Energy  Management,  Inc. ("KEM"),  of all of KEMs interest in the same
(the "KEM SCE Agreement").  This acquisition augmented the Onsite SCE Agreement.
Both the Onsite SCE Agreement and the KEM SCE Agreement (collectively,  the "SCE
Agreements")  were approved by the  California  Public  Utilities  Commission in
October  1994.  The SCE  Agreements  provided for the  implementation  of energy
efficiency  projects for host customers within SCEs service territory to provide
up to approximately 53 million kWh per year in measured energy savings.

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

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

        City of Anthony,  Kansas. In March 1998, OES contracted with the City of
Anthony,  Kansas (the "City"),  to construct a voltage  regulator station and to
upgrade a portion of the City's 4.16kV electric distribution system to 12kV. The
City, which operates its own municipal  electric utility system in south central

<PAGE>13

Kansas,  expects to realize increased reliability and improved system efficiency
from this upgrade.  Construction is expected to be complete by calendar year-end
1999.  Total  revenue to the  Company  from this  project is  estimated  at $2.0
million.

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

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

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

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

        R.E.  Thomason  General  Hospital.  In 1996, the Company entered into an
agreement with R.E. Thomason General Hospital ("Thomason") for the operation and
maintenance ("O&M") of its central utility plant. The original agreement ran for
a 27 month period,  commencing February 1996, with additional  extensions at the
option of Thomason.  In April 1999,  Thomason  renewed the O&M  agreement for an
additional 12 months.  In connection  with this O&M  agreement,  the Company has
staffed the central plant facility with eight  full-time  positions  including a
supervisor, mechanic and plant operators.

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

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

<PAGE>14

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

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

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

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

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

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

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

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

o     An initial energy audit
o     Evaluation  of purchase options for electricity and fuel, including tariff
      analysis
o     Detailed economic and feasibility analysis
o     Engineering and construction services
o     Management of project implementation
o     Verification of savings
o     Monitoring of performance and maintenance during the service term
o     Guaranteed savings and/or shared savings programs

<PAGE>15

o     Performance contracting with utilities, customers
o     Financing, including direct loans and equipment leases (on and off balance
      sheet)

        A more detailed discussion of these services follows.

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

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

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

        Procurement and Construction:  This phase involves equipment purchasing,
subcontractor selection and construction management to final project completion.
Construction  management consists of an experienced project execution team under
the overall direction of one of the Company's experienced project managers.

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

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

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

        Performance  Contracting.  Performance  contracting  is the term used to
describe the terms and conditions  under which an ESCO delivers energy services,
typically under a guarantee of energy savings to the customer. The ESCOs payment
is based upon delivery of actual energy  savings to the customer.  The values of

<PAGE>16

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

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

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

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

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

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

        Deregulation of the electric  utility industry is expanding the scope of
services offered by ESCOs in the competitive  marketplace.  To purchase electric
power in the  deregulated  market,  large  consumers  will need to  collect  and

<PAGE>17

analyze their past, present and future electrical  consumption data and profiles
in order to identify  their  demand,  and procure  cost-effective  and  reliable
electric  power.  The Company  currently is performing  and marketing  these new
energy  services  for  large  electricity   consumers  in  preparation  for  the
competitive market.

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

        Services to Prepare Customers for Deregulation

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

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

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

<PAGE>18

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

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

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

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

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

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

<PAGE>19

customer.  In general,  subcontractors  are solicited from the customer's  local
geographic area. The Company's standard agreements with subcontractors  (usually
in the form of an Engineering,  Procurement and Construction  Agreement) contain
general provisions  standard for the construction  industry for the installation
of energy efficiency measures.

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

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

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

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

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

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

<PAGE>20

of holding  companies in direct  competition with ESCOs,  including the Company.
However,  the Company sometimes teams with utility service  subsidiaries whereby
the utility subsidiary  functions as a source of financing for energy efficiency
services projects developed and implemented by the Company.

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

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

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

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

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

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

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

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

<PAGE>21

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

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

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

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

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

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

Item 2.  Description of Property

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

<PAGE>22

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

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

Item 3.  Legal Proceedings

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

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

Item 4.  Submission of Matters to Vote of Security Holders

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

<PAGE>23

                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters

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


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

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

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

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

Item 6.  Management's Discussion and Analysis

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

<PAGE>24

        The  original,  first and third  amended  filings of Form 10-KSB for the
fiscal  year  ended June 30,  1999 were  audited  by the  Company's  independent
auditors, Hein+Associates,  LLP. The opinion issued was qualified subject to the
Company's ability to continue as a going concern.

        The SEC took exception to certain applications of accounting  principles
as  applied by the  Company  in the areas of the  timing of revenue  recognition
where utility incentive payments are a part of the Company'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.  As a result,  the  Company  restated  its  previously  filed
financial statements for each of the fiscal years ending June 30, 1997, 1998 and
1999, as well as the first (a second amendment) and second fiscal quarters ended
September 30, 1999 and December 31, 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 and other ongoing  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.

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

<PAGE>25

                                       Fiscal year ended June 30,

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

Net loss, as filed            $ (6,909,011)  $ (2,218,482)  $ (1,388,598)

Net loss, as restated         $ (6,477,458)  $ (2,098,806)  $ (2,398,202)
                              ------------   ------------   ------------
Difference                    $    431,553   $    119,676   $ (1,009,604)
                              ============   ============   ============

On a per share basis was as follows:

                                       Fiscal year ended June 30,

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

Loss per share, as filed      $      (0.39)  $      (0.16)  $      (0.13)

Loss per share, as restated   $      (0.36)  $      (0.16)  $      (0.22)
                              ------------   ------------   ------------
Difference                    $       0.03   $          -   $      (0.09)
                              ============   ============   ============

        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.

Fiscal year ended June 30, 1999 compared to June 30, 1998

        Revenues.  Revenues increased in the fiscal year ended June 30, 1999, by
$31,655,773 or 254.35  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 $3,217,726, or
25.85  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
20.28 percent of revenues  compared to 19.54 percent in fiscal year 1998.  After
elimination  of  revenues  and cost of  sales  attributable  to  newly  acquired
subsidiaries,  gross margin was 22.26  percent for the fiscal year 1999 compared

<PAGE>26

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 25.38 percent of revenues
in the fiscal year ended June 30, 1999,  compared to $3,879,237 or 31.17 percent
of revenues in fiscal year 1998. After elimination of revenues and SG&A expenses
attributable  to newly acquired  subsidiaries,  SG&A as a percentage of revenues
was 28.20  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 end
1999 compared to $266,667 for the fiscal year end 1998. Goodwill amortization in
fiscal year 1998 arises  primarily out of the acquisition of Onsite-Cal in 1994,
which  resulted in goodwill of $1,600,000  that was  amortized  over a four year
period, which ended in February 1998.

        Loss from Operations.  Loss from operations increased in the fiscal year
ended June 30, 1999 by  $4,256,903 or 214.30  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  $113,649 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 $234,802.  The
interest income arises from notes  receivable from newly acquired  subsidiaries.

<PAGE>27

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 $90,892 for fiscal
year ended June 30,  1999,  compared to other  expense of $104,983  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
$4,378,552,  or 208.61 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
elimination   of  revenues  and   expenses   attributable   to  newly   acquired
subsidiaries,  the  decrease  in net loss was  $67,275,  or a  decrease  of 3.11
percent.

Fiscal year end June 30, 1998 compared to June 30, 1997

        Revenues  Revenues  increased in the fiscal year ended June 30, 1998, by
$3,807,912 or 44.1 percent.  After elimination of revenues attributable to newly
acquired  subsidiaries  and  the  divestiture  of  TCC,  revenues  increased  by
$889,718,  or 10.30  percent.  This  increase is  attributable  to a increase in
utility  revenue of $300,000  as well as an  increase  in  contract  revenues of
approximately  $1.0  million  offset  by a decline  in  consulting  revenues  of
approximately $400,000.  Consulting revenues were generally lower in fiscal year
1998 due to the conversion of consulting  agreements into long term construction
contracts.

        Gross  Margin  Gross  margin for the fiscal  year ended June 30, 1998 is
19.54%  compared  to 21.99  percent in fiscal year 1997.  The  decrease in gross
margin as a percentage of sales is  attributable to lower budgeted gross margins
in long term contracts entered into in the fiscal year 1998.

        Selling,  General  and  Administrative  Expenses  Selling,  general  and
administrative ("SG&A") expenses were $4,418,736 or 35.50 percent of revenues in
the fiscal year end June 30, 1998  compared to  $4,133,649,  or 47.86 percent in
fiscal year 1997. The percentage of expenses to revenues decreased primarily due
to an  increase  in  revenues  as  well  as a  $425,240  loss  on the  sale of a
subsidiary in 1997.

        Goodwill amortization included in SG&A in the fiscal year ended June 30,
1998 was  $266,667  compared to $400,000 in the fiscal year ended June 30, 1997.
Goodwill  amortization  arises  primarily out of the  acquisition of Onsite-Cal,
which  resulted in goodwill of $1,600,000  that was  amortized  over a four-year
period. The remainder of goodwill was amortized in the fiscal year 1998.

        Other  Income/(Expense).  Other  income  (expense)  was a net expense of
$104,982  in the fiscal  year ended June 30,  1998,  compared to $155,628 in net
expense in the fiscal year ended June 30, 1997, a decrease of $50,646  primarily
due to a $68,765  decrease in interest  expense  offset in part by a decrease in
interest income of $18,119.

        Net Loss. Net loss for the year ended June 30, 1998 was  $2,098.906,  or
$.16 loss per  share,  compared  to a net loss of  $2,398,202,  or $.21 loss per
share, a decrease in loss per share of $299,296, or 12.48%

<PAGE>28

Liquidity and Capital Resources.

        The Company's  cash  decreased by $1,192,598 in fiscal year end June 30,
1999, a decrease of 56.98 percent.  Working capital was a negative $6,511,390 as
of June 30, 1999,  compared to a negative  $3,260,514  as of June 30,  1998,  an
increase in negative  working  capital of $3,250,876.  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 $5.7 million,  offset by an increase in accounts  receivable of
approximately $2.6 million.

        Cash flows used in operating activities for the year ended June 30, 1999
were $488,544,  compared to $1,027,832 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 several
fiscal years.  For the years ended June 30, 1999, 1998 and 1997, the Company had
net losses of $6,477,458 and $2,098,906 and  $2,398,202,  respectively,  and had
negative working capital of $6,511,390 and an accumulated deficit of $27,467,050
as of June  30,  1999.  Management  believes  that the  Company  will be able to
generate additional revenues and operating efficiencies through its acquisitions
as well as by other  means to  achieve  profitable  operations.  During the year
ended June 30,  1999,  the Company took steps to mitigate the losses and enhance
its future viability. In addition,  during the fiscal year end 1999, the Company
exercised  its right  under a stock  subscription  agreement  to require  Westar
Capital  to  purchase  an  additional  400,000  shares of  Series C  Convertible
Preferred Stock for  $2,000,000.  Subsequent to its most recent fiscal year end,
the Company also  privately  placed shares of newly created Series E Convertible
Preferred  Stock  ("Series E Stock") to existing  shareholders  for  $1,000,000.
Concurrent  with this private  placement,  members of senior  management  of the
Company have agreed to receive  shares of the Company's  Class A Common Stock in
lieu of a portion of their salary in an effort to reduce cash  outflows  related
to compensation. Subsequent to June 30, 1999, a decision was made to explore the
sale or disposition of the Company's lighting subsidiaries,  which could provide
capital,  reduce  operating  losses and will allow management to better focus on
its core ESCO  business  activities.  In  addition,  the  Company  is  exploring
strategic  relationships  with companies that could involve an investment in the
Company.  The Company  may also raise cash  through the sale of long term future
revenue  streams  that it  currently  owns or has rights to. The Company is also
examining ways to further  reduce  overhead  including,  but not limited to, the
possibility  of targeted staff  reductions.  Further,  the Company,  through the
acquisition  of other  energy  service  companies,  expects to  continue to gain
economies of scale  through the use of a  consolidated  management  team and the
synergies of marketing efforts of the different  entities.  Management  believes
that all of the above  actions  will allow the  Company to  continue  as a going
concern.  Future cash requirements  depend on the Company's  profitability,  its
ability  to  manage  working  capital  requirements  and  its  rate  of  growth.
Additional  financing  through  the sale of  securities  may  have an  ownership
dilution effect on existing shareholders.

<PAGE>29

        The  original,  first and third  amended  filings of Form 10-KSB for the
fiscal  year  ended June 30,  1999 were  audited  by the  Company's  independent
auditors,  Hein+Associates  LLP. 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 did not review  revisions  resulting
from the  restatements  due to  non-payment by the Company of accounting and tax
fees.

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
position.  Any risks the  Company  faces are  expected to be external to ongoing
operations.  The Company has numerous alternative vendors for critical supplies,

<PAGE>30

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-30.

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

        None.



                  [Remainder of page intentionally left blank]



<PAGE>31

                                    PART III

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

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

      Director                    Age                       Director Since
      --------                    ---                       --------------
Charles C. McGettigan             54                            1993

H. Tate Holt                      47                            1994

Timothy G. Clark                  60                            1994

Richard T. Sperberg               48                            1982 (1)

S. Lynn Sutcliffe                 56                            1998

Richard L. Wright                 56                            1998

(1) Includes time of service with Onsite Energy, a California  corporation and a
    predecessor of the Company ("Onsite-Cal").

Background of Current Directors.

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

H. Tate Holt.  Mr. Holt has been a director of the Company  since May 1994.  Mr.
Holt  currently is the  President  and Chief  Executive  Officer of Newstar Ltd.
("Newstar"), a technology firm. Prior to joining Newstar, Mr. Holt served as the
President of Holt & Associates,  a corporate growth management  consulting firm,
and held that position from July 1990 through August 1999. Previously, from 1987
to 1990, Mr. Holt was Senior Vice President of Automatic Data  Processing,  Inc.
("ADP"),  in Santa  Clara,  California.  Mr.  Holt has over twenty (20) years of
experience in various  senior sales and marketing  positions with Fortune 50 and
Inc. 500 companies, including IBM, Triad Systems and ADP. He has participated in
major restructuring and strategic planning in several divisions of each of these
companies.  Additionally,  in his  position  with Holt &  Associates,  Mr.  Holt
assisted small and medium-sized  clients in developing and achieving  aggressive

<PAGE>32

growth  targets.  Mr. Holt  currently  serves on the Boards of  Directors of DBS
Industries,  Inc., and AremisSoft Corporation. He is the author of the book "The
Business Doc -  Prescriptions  for Growth." Mr. Holt holds an A.B.  from Indiana
University.

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

Richard T. Sperberg.  Mr.  Sperberg has been a director and the Chief  Executive
Officer of the Company since its  inception,  served as the Company's  President
through October 1998, when Mr.  Sutcliffe was elected  President,  and served as
the Company's  Chief  Financial  Officer from May 1997 through July 1998. He has
been the Chief Executive Officer of WEM since January 1993, and began serving as
a director of WEM in February 1994. In 1982, Mr. Sperberg co-founded Onsite-Cal,
and served as President,  Chief Executive  Officer and a director until February
1994, when Onsite-Cal and WEM reorganized  into Onsite Energy  Corporation.  Mr.
Sperberg has been involved in project management of energy efficiency,  advanced
energy  technologies,  alternative energy and cogeneration  projects for over 23
years,  with specific  management  experience with Onsite-Cal,  the Gas Research
Institute  ("GRI"),  and the U.S.  Department  of Energy.  He holds a Masters of
Science in Nuclear  Engineering from the University of California,  Los Angeles,
and a  Bachelor  of  Science  in  Nuclear  Engineering  from the  University  of
California,  Santa  Barbara.  Mr.  Sperberg  previously  served on the Boards of
Directors  of  the  American   Cogeneration   Association   and  the  San  Diego
Cogeneration Association,  and currently serves as the President of the National
Association of Energy Service Companies  (NAESCO),  and as a member of its Board
of Directors.

S. Lynn  Sutcliffe.  In  addition  to  serving  as a director  since  1998,  Mr.
Sutcliffe  currently  serves as the  President of the Company.  Since 1990,  Mr.
Sutcliffe also has served as the President and Chief Executive  Officer of SYCOM
Corporation,  which is the general  partner of SYCOM LP. From 1968 through 1977,
Mr. Sutcliffe was General Counsel of the U.S. Senate Commerce  Committee,  which
had  jurisdiction  over all electric and gas utility issues.  Mr. Sutcliffe left
the  Commerce  Committee  to become one of the  founding  partners  of Van Ness,
Feldman,  Sutcliffe & Curtis,  P.C., a law firm  nationally  recognized  for its
expertise in energy law and policy. Mr. Sutcliffe  participated in this law firm
until 1990.  Mr.  Sutcliffe's  expertise  includes a wide range of  legislative,
regulatory,  contractual, financial and developmental issues associated with the
energy  industry.  From 1994 through 1996, Mr. Sutcliffe served as the President
of the National  Association of Energy Services  Companies  (NAESCO),  and was a
member of the Energy and Transportation Task Force of the President's Council on
Sustainability  in  1996.  He  currently  serves  as  the  Vice-Chairman  of the
Distributed  Power  Coalition of America  (DPCA).  Mr.  Sutcliffe  brings to the
Company's Board over 24 years of experience in the energy services industry.  He
holds  an A.B.  from  Princeton  University,  and a  Juris  Doctorate  from  the
University of Washington.

Richard L.  Wright.  Mr.  Wright has served as a director of the  Company  since
1998,  and served as the Treasurer of SYCOM  Corporation  and SYCOM LP from 1995
through  June 1999,  during  which time he  performed  project  development  and
strategic  planning  functions at the  executive  level.  Mr. Wright has over 11
years of experience in developing  and financing  energy  related  companies and
projects.  He has  extensive  knowledge  of the  federal  and state  legislative
processes  as  well  as of  the  decision-making  processes  at the  county  and
municipal level. In 1977, Mr. Wright served on the White House Energy Task Force
and later as the  Assistant  Secretary  at the  Department  of Energy.  Prior to
joining  the  SYCOM  entities,  Mr.  Wright  served as the Chief of Staff of the
former  Governor  of New Jersey from 1993  through  1994,  and as the  Associate
Treasurer of the State of New Jersey from 1990 through 1993. Mr. Wright earned a

<PAGE>33

Bachelor of Arts in Religion from Princeton  University,  and a Juris  Doctorate
from the University of California Boalt Hall School of Law.

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

       Name               Positions with the Company      Age  Office Held Since
       ----               --------------------------      ---  -----------------
Charles C. McGettigan      Chairman of the Board          54        1994

Richard T. Sperberg        Chief Executive Officer        48        1982 (1)

S. Lynn Sutcliffe          President                      56        1998

J. Bradford Hanson         Chief Financial Officer        44        1995 (2)

Frank J. Mazanec           Senior Vice President          51        1992 (1)

Keith G. Davidson          Senior Vice President          48        1994

Hector A. Esquer           Vice President                 41        1991 (1)

J. Derek Shockley          Vice President                 39        1997

Elizabeth T. Lowe          Vice President                 36        1997

Bruce A. Hedman            Vice President                 48        1998

Dominick J. Aiello         Vice President                 40        1998

Roger Dower                Vice President                 49        1998

Christian J. Bitters       Vice President                 42        1998

Russell Wm. Royal          President/Chief Operating      47        1992 (4)
                           Officer - Lighting
                           Technology Services, Inc.(3)

Audrey Nelson Stubenberg   Secretary/General Counsel      36        1998

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

(2)  Mr.  Hanson  served as Chief  Financial  Officer of the Company from August
     1995 through May 1997, rejoining the Company in October 1998.

(3)  Lighting Technology Services, Inc. ("LTS"), is a wholly-owned subsidiary of
     the Company. As previously disclosed,  the Company is exploring the sale or
     disposition of LTS.

(4)  Includes time of service with LTS.

<PAGE>34

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

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

J.  Bradford  Hanson.  Mr.  Hanson  has over 15 years of  financial  accounting,
administration  and shareholder  relations  experience in the energy  efficiency
services,  financial,  manufacturing,  software  development  and retail  market
sectors.  Mr. Hanson,  who has served as the Company's Chief  Financial  Officer
since October 1998, also served as the Company's  Chief  Financial  Officer from
August 1995 through May 1997.  From May 1997 through  October  1998,  Mr. Hanson
worked for Sports Group International, Inc., and as an independent financial and
accounting  consultant.  From 1991 through  mid-1995,  Mr.  Hanson  worked as an
independent financial and accounting  consultant for small businesses.  Prior to
1991, he held various Chief  Financial  Officer,  Controller and Senior Auditing
positions with companies such as DAROX Company, BSD Bancorp, Inc., International
Totalizator  Systems,  Inc., and KPMG Peat Marwick. Mr. Hanson earned a Bachelor
of Science from San Diego State University and is a Certified Public Accountant.

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

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

Hector A. Esquer.  Mr. Esquer is a professional  engineer licensed in the states
of California  and Kansas.  Mr. Esquer  joined  Onsite-Cal in 1986,  and as Vice
President is responsible  for the overall  management of project  implementation
for the Company's West Coast operations.  Over the past 12 years, Mr. Esquer has
managed the implementation of over $30,000,000 of energy efficiency projects for
the Company.  Mr. Esquer  previously was a Project  Engineer for San Diego Gas &
Electric  Company  and Fluor  Corporation.  He holds a  Bachelor  of  Science in
Electrical Engineering from San Diego State University and is a Certified Energy
Manager.

<PAGE>35

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

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

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

Dominick J. Aiello.  Mr.  Aiello,  an employee of SYCOM  Corporation,  currently
serves  as the  Company's  Vice  President,  and  is  directly  responsible  for
overseeing the Company's  Project  Development  efforts primarily in the Eastern
U.S.  Mr.  Aiello has more than seven  years  experience  in  developing  energy

<PAGE>36

efficiency  projects in both the public and private  sectors.  He is responsible
for managing a national sales force of eight project developers. Mr. Aiello also
has been a key contributor in implementing a sales training  curriculum for both
the current sales team and new hires.  Prior to joining SYCOM  Corporation,  Mr.
Aiello served as a Sales Manager for IBM.

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

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

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

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

<PAGE>37

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

     Based  solely on  review  of the  copies  of such  forms  furnished  to the
Company,  or written  representations  that such filings were not required,  the
Company  believes  that since July 1, 1998,  through  the end of the 1999 fiscal
year,  all  Section  16(a)  filing  requirements  applicable  to its  directors,
officers  and  stockholders  of more than 10  percent of the  Company's  Class A
Common  Stock were  complied  with  except as follows:  (i) one report  (Form 3)
covering one transaction  inadvertently  was filed late by Mr. Aiello;  (ii) one
report (Form 3) covering  one  transaction  inadvertently  was filed late by Mr.
Dower;  (iii) one report (Form 3) covering  one  transaction  inadvertently  was
filed late by Mr.  Bitters;  (iv) two reports  (Form 4 and Form 5) covering  two
transactions  inadvertently  were filed late by Mr.  McGettigan;  (v) one report
(Form 4) covering one  transaction  inadvertently  was filed late by Mr. Esquer;
and (vi) one report (Form 5) covering one  transaction  inadvertently  was filed
late by Mr. Mazanec. Additionally, the Company has not received copies of a Form
5 from two (2) former officers of the Company.

Item 10. Executive Compensation.

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


                            [Remainder of page intentionally left blank]



<PAGE>38

                                     SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

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

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

<S>                     <C>   <C>           <C>        <C>           <C>          <C>          <C>    <C>
Richard T. Sperberg     1999  $175,000      $ -0-      $12,372 (4)     -0-          -0-          -0-     $ -0-
CEO                     1998  $149,125 (2)  $32,500    $17,889 (4)     -0-        126,954 (7)    -0-     $ -0-
                        1997  $136,000      $ -0-      $15,781 (4)     -0-        314,616 (8)    -0-     $ -0-

S.  Lynn  Sutcliffe(1)  1999  $278,486      $ -0-      $ 6,600 (4)     -0-          -0-          -0-     $ -0-
President

Frank J. Mazanec       1999   $140,000     $40,000     $ 8,909 (4)      -0-         -0-          -0-     $ -0-
Senior Vice            1998   $137,154 (2) $22,083     $10,923 (4)(5)   -0-        75,000 (9)    -0-     $ -0-
President              1997   $127,000     $ -0-       $64,471 (4)(5)   -0-       268,352 (10)   -0-     $ -0-

Keith G. Davidson      1999   $140,000     $40,000     $ 8,385 (4)      -0-         -0-          -0-     $ -0-
Senior Vice            1998   $121,342 (2) $23,333     $ 7,702 (4)(5)   -0-       140,000 (11)   -0-     $ -0-
President              1997   $102,000     $ -0-       $20,838 (4)(5)   -0-       119,118 (12)   -0-     $ -0-

Dominick  J. Aiello(1) 1999   $120,000     $36,000 (3) $65,741 (4)(6)   -0-       164,281 (13)   -0-     $ -0-
Vice President

</TABLE>

(1)     Messrs.  Sutcliffe and Aiello are executive  officers of the Company but
        employees of SYCOM  Corporation.  In connection  with the acquisition of
        the assets of SYCOM,  LLC, and as an integral  part of the  transactions
        contemplated  by the  underlying  asset  purchase  and  sale  agreement,
        pursuant to a Sale and Noncompetition Agreement the Company acquired the
        right to the  services and  expertise  of all of the  employees of SYCOM
        Corporation,  including Messrs. Sutcliffe and Aiello. In accordance with
        the terms and conditions of the Sale and Noncompetition  Agreement,  the
        Company  reimburses  SYCOM  Corporation  for  the  costs  of  the  SYCOM
        Corporation  employees at their current salary and fringe benefit levels
        (including reasonable general and administrative costs). Because Messrs.
        Sutcliffe and Aiello became officers of the Company in fiscal year 1999,
        information  for  Messrs.  Sutcliffe  and Aiello is being  reported  for
        fiscal year 1999 only.

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

(3)     Mr. Aiello was entitled to a management bonus of $72,000,  and he agreed
        to accept payment of one-half of this bonus, plus certain commissions as
        disclosed  in footnote  (6) below,  in the form of a five year option to
        purchase 164,281 shares of the Company's Class A Common Stock at $0.4185
        per share, which options are fully vested.

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

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

(6)     Pursuant to the commission policy of SYCOM  Corporation,  Mr. Aiello was
        entitled to certain commissions payable in cash, and he agreed to accept
        payment  of  one-half  of these  commissions,  plus  certain  bonuses as
        disclosed  in footnote  (3) above,  in the form of a five year option to
        purchase 164,281 shares of the Company's Class A Common Stock at $0.4185
        per share, which options are fully vested.

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

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

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

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

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

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

(13)    As disclosed in footnotes (3) and (6) above, includes a five year option
        to purchase  164,281 shares of Class A Common Stock at $0.4185 per share
        granted on May 26, 1999, which options are fully vested.

<PAGE>40

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


                      Option/SAR Grants in Last Fiscal Year
                                INDIVIDUAL GRANTS


<TABLE>
<CAPTION>

                          Number of    Percentage of
                         Securities       Total
                         Underlying    Options/SARs                   Market
                        Options/SARs    Granted to    Exercise or    Price on
                          Granted       Employees     Base Price     Date of     Expiration
Name                        (#)       In Fiscal Year   ($/Share)      Grant         Date
----                    ------------  --------------  -----------    --------    ----------

<S>                    <C>            <C>            <C>            <C>          <C>
Richard T. Sperberg        -0-            N/A            N/A           N/A           N/A
S. Lynn Sutcliffe          -0-            N/A            N/A           N/A           N/A
Frank J. Mazanec           -0-            N/A            N/A           N/A           N/A
Keith G. Davidson          -0-            N/A            N/A           N/A           N/A
Dominick J. Aiello       164,281        12.7 (1)       $0.4185       $0.4185       5/26/04

</TABLE>

 (1)    Mr. Aiello's  options are non-plan  options,  and were not granted under
        the  Company's  1993 Stock Option Plan.  This  percentage  is calculated
        based upon the total number of options  granted to employees of both the
        Company  under  the 1993  Stock  Option  Plan and SYCOM  Corporation  as
        non-plan options.


                  [Remainder of page intentionally left blank]


<PAGE>41

            Aggregated Option/SARs Exercises in Last Fiscal Year and
                       FISCAL YEAR-END OPTION/SARS VALUES

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

<S>                        <C>           <C>          <C>               <C>
Richard T. Sperberg        4,000         $1,568       584,190/167,969      $16,242/$1,650

S. Lynn Sutcliffe           -0-          $ -0-            -0-/ -0-           $ -0-/$ -0-

Frank J. Mazanec           4,000         $2,193       264,571/133,333       $9,140/$4,117

Keith G. Davidson           -0-          $ -0-        250,932/126,665      $10,888/$1,647

Dominick J. Aiello          -0-          $ -0-        164,281/ -0-           $ -0-/$ -0-

</TABLE>


        *Based upon the average price of $0.345 as of June 30, 1999.

Directors' Compensation.  Prior to June 1, 1998, directors who are not employees
of the Company were not compensated,  other than the grant of stock options, for
their service on the Board of Directors. Beginning June 1, however, non-employee
directors  are  paid a fixed  fee for  personal  attendance  at a Board  meeting
($1,000 per  meeting),  or for  attendance  at a meeting via  telephone  ($750).
Additionally,  non-employee directors' out-of-pocket  expenditures currently are
reimbursed. Non-employee directors also receive periodic grants of stock options
issued under the Company's 1993 Stock Option Plan.  Each  non-employee  director
automatically  is granted an option to purchase  25,000 shares of Class A Common
Stock on the date he or she  becomes  a  director  of the  Company,  and on each
anniversary date thereafter.  The exercise price is the fair market value of the
Company's  Class A Common  Stock on the date of  becoming a director  and on the
anniversary  date,  as  appropriate.  Each  option when  granted is  immediately
exercisable  and has a five year term.  Directors  who also are  officers of the
Company do not receive additional compensation for serving as directors.

Employment  Agreements with Executive  Officers.  In June 1998, when the Company
acquired LTS, Mr. Royal  executed an Employment  Agreement  with the Company and
LTS (together referred to in the Employment Agreement as the "Company") pursuant
to which the Company  secured the services of Mr.  Royal on an  exclusive  basis
(upon the terms and  conditions  set forth in the  Employment  Agreement)  until
March 31, 2000 (unless  terminated  earlier in  accordance  with the  Employment
Agreement)  at a base  salary of  $125,000  per year,  subject to  increases  as
determined by the Company's  Board of Directors  based upon a number of factors.
Mr. Royal also receives a monthly car allowance,  and is entitled to participate
in employee benefit and fringe benefits plans that LTS makes available generally

<PAGE>42

to its employees.  Mr. Royal also is entitled to certain bonus and/or  severance
payments.  Under the terms of the Employment Agreement,  Mr. Royal is prohibited
from engaging in any activity  competitive  with the Company  during the term of
the Employment Agreement. As previously disclosed,  the Company is exploring the
sale or disposition of LTS.

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

        The following table sets forth certain  information  about the ownership
of the  Company's  Class A Common  Stock as of October  26,  1999,  by (i) those
persons known by the Company to be the beneficial  owners of more than 5 percent
of the total number of outstanding  shares of any class  entitled to vote;  (ii)
each  director  and highly  compensated  officer;  and (iii) all  directors  and
officers  of the Company as a group.  The table  includes  Class A Common  Stock
issuable upon the exercise of Options or Warrants that are exercisable within 60
days.  Except as indicated in the footnotes to the table, the named persons have
sole voting and investment power with respect to all shares of the Company Class
A Common  Stock  shown as  beneficially  owned by  them,  subject  to  community
property laws where applicable.  The ownership figures in the table are based on
the books and records of the Company.

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

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

Dominick J. Aiello                              164,281 (1)           *
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873

Timothy G. Clark                                175,000 (2)           *
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

Keith G. Davidson                               298,295 (3)          1.58
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

William M. Gary III                           1,837,947 (4)          9.85
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

Gruber & McBaine Capital Management., LLC     4,502,073 (5)         20.45
50 Osgood Place
San Francisco, CA 94133

<PAGE>43


Jon D. Gruber                                 9,675,041 (6)         38.13
50 Osgood Place
San Francisco, CA 94133

H. Tate Holt                                    348,082 (7)          1.85
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

Lagunitas Partners, L.P.                      4,233,102 (8)         19.28
50 Osgood Place
San Francisco, CA 94133

Thomas Lloyd-Butler                           4,510,073 (9)         20.05
50 Osgood Place
San Francisco, CA 94133

Frank J. Mazanec                                728,709 (10)         3.85
Mazanec Family Trust
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

J. Patterson McBaine                          9,668,441 (11)        38.10
50 Osgood Place
San Francisco, CA 94133

Charles C. McGettigan                         5,554,468 (12)        24.97
50 Osgood Place
San Francisco, CA 94133

Proactive Investment Managers, L.P.           5,049,468 (13)        22.95
50 Osgood Place
San Francisco, CA 94133

Proactive Partners, L.P.                      4,909,633 (14)        22.40
50 Osgood Place
San Francisco, CA 94133

Richard T. Sperberg                           3,115,082 (15)        15.93
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009

<PAGE>44


S. Lynn Sutcliffe                             1,750,000 (16)         9.39
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873

SYCOM Enterprises, LLC                        1,750,000 (17)         9.39
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873

Westar Capital, Inc.                          7,745,600 (18)        35.39
818 South Kansas Street
Topeka, KS 66601

Myron A. Wick III                             5,049,468 (19)        22.95
50 Osgood Place
San Francisco, CA 94133

All Directors and Officers as a Group (17)   13,098,266 (20)        52.54


(1)     Includes  Options to  purchase  164,281  shares of Class A Common  Stock
        exercisable  until  May  26,  2004.  Additionally,  in  August  1999  in
        connection with the private  placement of shares of Series E Convertible
        Preferred Stock to certain existing shareholders of the Company, certain
        executive  officers of the Company,  including Mr. Aiello,  entered into
        Salary Reduction  Agreements pursuant to which they agreed to reductions
        in salary  and/or  commissions  owed (for a six month period from August
        1999  through  January  2000) in  exchange  for shares of Class A Common
        Stock and  certain  Warrants.  Under the terms of the  Salary  Reduction
        Agreements,  the shares of Class A Common Stock and Warrants are subject
        to forfeiture in the event the officer voluntarily terminates his or her
        employment  during  the  six-month  reduction  period.  In the  event of
        involuntary termination by the Company, however, the officer is entitled
        to a prorata  portion of such stock and Warrants (as earned  through the
        date of termination). Thus the table does not reflect all or any prorata
        portion of 50,000  shares of Class A Common  Stock and 25,000  shares of
        Class A Common Stock underlying  Warrants expiring August 13, 2009, that
        Mr. Aiello will be entitled to  (immediately or upon the exercise of the
        Warrants) under the terms of his Salary Reduction Agreement.

        Each  of  the  Salary  Reduction  Agreements  entered  into  by  certain
        executive  officers of the Company,  as described above,  hereinafter in
        these  footnotes   shall  be  referred  to  as  the  "Salary   Reduction
        Agreement."

(2)     Includes Options to purchase 50,000,  25,000, 25,000, 25,000, 25,000 and
        25,000  shares of Class A Common  Stock  exercisable  until  January 25,
        2001, October 3, 2001, April 23, 2002, October 3, 2002, October 3, 2003,
        and October 3, 2004, respectively.

(3)     In  addition  to 34,030  shares of Class A Common  Stock  over which Mr.
        Davidson has sole voting and  investment  power (which  number  includes
        30,600 shares held by Mr. Davidson's minor children), the table reflects
        264,265 shares of Class A Common Stock that may be immediately  acquired
        upon the exercise of Options  expiring  August 9, 2005 (70,000  shares),
        November 20, 2005 (37,072 shares), January 25, 2006 (11,407 shares), May
        22, 2006 (19,118 shares),  March 13, 2007 (66,667  shares),  October 28,
        2007  (26,667)  and April 1, 2008  (33,334).  The table does not reflect
        33,333  shares of Class A Common  Stock  that may be  acquired  upon the
        exercise of Options  expiring  March 13, 2007,  in the event a change in

<PAGE>45

        control  is deemed  to have  occurred.  In this  event,  Mr.  Davidson's
        percent of class ownership would be 1.75 percent.

        Additionally,  as previously disclosed, in August 1999 certain executive
        officers of the Company,  including Mr. Davidson,  entered into a Salary
        Reduction Agreement.  Thus the table does not reflect all or any prorata
        portion of 90,000  shares of Class A Common  Stock and 50,000  shares of
        Class A Common Stock underlying  Warrants expiring August 13, 2009, that
        Mr.  Davidson will be entitled to  (immediately  or upon the exercise of
        the Warrants) under the terms of his Salary Reduction Agreement.

(4)     The table  reflects an aggregate  of 1,545,926  shares of Class A Common
        Stock (which  number  includes  130,000  shares held by Mr. Gary's minor
        children and family members) (i) of which  1,159,016  shares are subject
        to a Stockholders  Agreement among certain  stockholders of the Company,
        including Mr. Gary, and Westar Capital (the  "Stockholders  Agreement");
        and (ii) all of which  shares are  subject to a Voting  Agreement  among
        certain stockholders of the Company,  including Mr. Gary, SYCOM, LLC and
        SYCOM  Corporation  (the  "Voting  Agreement").  Under the  Stockholders
        Agreement, Westar Capital (i) has the right to nominate a certain number
        of directors,  and the principal  stockholders of the Company that are a
        party to the Stockholders Agreement,  including Mr. Gary, have agreed to
        vote  for  Westar  Capital's  nominees;  and  (ii)  shall  vote  for the
        remaining nominees selected by the Nominating  Committee of the Company.
        The  Stockholders  Agreement  terminates  the  earlier of (i) five years
        after  the  date of the  Agreement;  or (ii)  the date  upon  which  the
        stockholdings  of  Westar  Capital  and its  affiliates,  counted  on an
        as-converted  basis,  falls below 10 percent of the  outstanding  Common
        Stock of the Company,  calculated on a fully-diluted  basis as specified
        in the Stockholders Agreement.

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

        Additionally  the table reflects  292,021 shares of Class A Common Stock
        that are  subject  to an  Agreement  of Stock  Purchase  and Sale  among
        Messrs.  Gary, Esquer,  Mazanec and Sperberg.  Messrs.  Gary, Esquer and
        Sperberg  have  entered  into such  Agreement  whereby  they have  sold,
        subject  to payment  and  vesting  schedules,  shares of  Onsite-Cal  to
        Messrs.  Esquer  and  Mazanec.  Until a share is paid for all voting and
        dispositive  rights  remain with the seller.  Upon  vesting and payment,
        each such purchaser of the Onsite-Cal shares became entitled to the same
        number of the Company  Class A Common  Stock  received  by the  sellers,
        pursuant to the  Reorganization,  with respect to the shares  sold.  The
        table reflects all adjustments for shares that have vested and been paid
        for in full.

(5)     Gruber & McBaine  Capital  Management,  LLC  ("Gruber &  McBaine"),  the
        successor-in-interest  to Gruber & McBaine Capital  Management,  Inc., a
        California  corporation,  is an investment advisor and a general partner
        of Lagunitas Partners, L.P. Consequently, Gruber & McBaine has or shares
        voting or  dispositive  power  over  3,377,073  shares of Class A Common
        Stock (which number  includes  2,250,000  shares of Class A Common Stock
        underlying  22,500 shares of Series E Convertible  Preferred  Stock) and
        1,125,000  shares  of  Class A  Common  Stock  that  may be  immediately
        acquired upon the exercise of Warrants expiring August 2, 2009. See also
        footnote (8).

(6)     Mr.  Gruber is a member of Gruber &  McBaine  Capital  Management,  LLC,
        which is an  investment  advisor  and a  general  partner  of  Lagunitas
        Partners,  L.P.,  and  is a  general  partner  of  Proactive  Investment
        Managers,  L.P., which also is an investment advisor and general partner
        of  Proactive  Partners,  L.P.,  and Fremont  Proactive  Partners,  L.P.
        Consequently, in addition to 123,500 shares of Class A Common Stock over
        which Mr.  Gruber has sole voting and  investment  power  (which  number

<PAGE>46

        includes shares held by Mr.  Gruber's  family members and  foundations),
        Mr. Gruber also has or shares voting or dispositive power over 7,066,541
        shares of Class A Common Stock (which number includes  4,250,000  shares
        of Class A Common Stock underlying 42,500 shares of Series E Convertible
        Preferred  Stock) and 2,485,000  shares of Class A Common Stock that may
        be immediately acquired upon the exercise of Warrants expiring September
        11, 2002,  June 30, 2003, and August 2, 2009. See also footnotes (8) and
        (14).

(7)     Includes  175,000 shares of Class A Common Stock that may be immediately
        acquired upon the exercise of Options  expiring January 25, 2001 (50,000
        shares),  May 4, 2001 (25,000  shares),  April 23, 2002 (25,000 shares),
        May 4, 2002 (25,000  shares),  May 4, 2003 (25,000  shares),  and May 4,
        2004 (25,000). Additionally the table reflects 30,000 shares held by Mr.
        Holt's  children.  The table  also  reflects  143,082  shares of Class A
        Common  Stock that are  subject to the Voting  Agreement  among  certain
        stockholders of the Company, including Mr. Holt as the President of Holt
        & Associates, SYCOM, LLC and SYCOM Corporation.

(8)     Includes  2,250,000  shares of Class A Common  Stock  underlying  22,500
        shares of Series E Convertible  Preferred Stock and 1,125,000  shares of
        Class A Common Stock that may be immediately  acquired upon the exercise
        of Warrants expiring August 2, 2009, and over which Lagunitas  Partners,
        L.P.  ("Lagunitas") has sole voting and investment power. The table also
        reflects an aggregate  of 858,102  shares of Class A Common Stock (i) of
        which 550,982  shares are subject to the  Stockholders  Agreement  among
        certain  stockholders of the Company,  including  Lagunitas,  and Westar
        Capital;  and  (ii)  all of  which  shares  are  subject  to the  Voting
        Agreement  among  certain   stockholders   of  the  Company,   including
        Lagunitas, SYCOM, LLC and SYCOM Corporation.

(9)     Mr.  Lloyd-Butler  is a member of Gruber & McBaine  Capital  Management,
        LLC, an investment advisor and a general partner of Lagunitas  Partners,
        L.P.  Consequently,  in addition  to the 8,000  shares of Class A Common
        Stock  over  which  he  has  sole  voting  and  investment   power,  Mr.
        Lloyd-Butler  has or shares voting or  dispositive  power over 3,377,073
        shares of Class A Common Stock (which number includes  2,250,000  shares
        of Class A Common Stock underlying 22,500 shares of Series E Convertible
        Preferred  Stock) and 1,125,000  shares of Class A Common Stock that may
        be immediately acquired upon the exercise of Warrants expiring August 2,
        2009. See also footnote (8).

(10)    Includes  264,571 shares of Class A Common Stock that may be immediately
        acquired upon the exercise of Options expiring  November 20, 2005 (7,736
        shares), January 25, 2006 (46,816 shares), May 22, 2006 (18,352 shares),
        March  13,  2007  (166,667   shares),   and  April  1,  2008   (25,000).
        Additionally,  the table reflects 187,757 shares of Class A Common Stock
        over which Mr. Mazanec, as a trustee of the Mazanec Family Trust, has or
        shares voting or  dispositive  power.  The table does not reflect 83,333
        shares of Class A Common Stock that may be acquired upon the exercise of
        Options  expiring  March 13,  2007,  in the event a change in control is
        deemed to have occurred.  In this event, Mr. Mazanec's  percent of class
        ownership would be 4.28 percent

        The table also reflects  276,381 shares of Class A Common Stock that are
        subject  to an  Agreement  of  Stock  Purchase  and Sale  among  Messrs.
        Mazanec,  Esquer, Gary and Sperberg.  As previously  disclosed,  Messrs.
        Esquer,  Gary and Sperberg have entered into such Agreement whereby they
        have  sold,  subject  to  payment  and  vesting  schedules,   shares  of
        Onsite-Cal to Messrs. Esquer and Mazanec.  Until a share is paid for all
        voting and dispositive  rights remain with the seller.  Upon vesting and
        payment, each such purchaser of the Onsite-Cal shares became entitled to
        the same  number of the  Company  Class A Common  Stock  received by the
        sellers,  pursuant  to the  Reorganization,  with  respect to the shares
        sold. The table reflects all adjustments for shares that have vested and
        been paid for in full.

        Additionally,  as previously disclosed, in August 1999 certain executive
        officers of the Company,  including Mr.  Mazanec,  entered into a Salary
        Reduction Agreement.  Thus the table does not reflect all or any prorata
        portion of 90,000  shares of Class A Common  Stock and 50,000  shares of
        Class A Common Stock underlying  Warrants expiring August 13, 2009, that
        Mr. Mazanec will be entitled to (immediately or upon the exercise of the
        Warrants) under the terms of his Salary Reduction Agreement.

(11)    Mr. McBaine is a member of Gruber & McBaine Capital Management,  LLC, an
        investment  advisor and a general partner of Lagunitas  Partners,  L.P.,
        and is a general partner of Proactive Investment Managers, L.P., also an
        investment  advisor and a general partner of Proactive  Partners,  L.P.,
        and Fremont Proactive Partners,  L.P.  Consequently,  in addition to the
        116,900 shares of Class A Common Stock over which he has sole voting and

<PAGE>47

        investment  power (which number  includes  shares held by Mr.  McBaine's
        family members),  Mr. McBaine has or shares voting or dispositive  power
        over  7,066,541  shares of Class A Common Stock (which  number  includes
        4,250,000  shares of Class A Common Stock  underlying  42,500  shares of
        Series E Convertible  Preferred  Stock) and 2,485,000  shares of Class A
        Common  Stock that may be  immediately  acquired  upon the  exercise  of
        Warrants expiring September 11, 2002, June 30, 2003, and August 2, 2009.
        See also footnotes (8) and (14).

(12)    Includes Options to purchase 75,000,  25,000, 25,000, 25,000, 25,000 and
        25,000  shares of Class A Common  Stock  exercisable  until  January 25,
        2001,  July 13, 2001,  April 23, 2002, July 13, 2002, July 13, 2003, and
        July 13, 2004,  respectively.  In addition to 305,000  shares of Class A
        Common  Stock in which Mr.  McGettigan  has sole  voting and  investment
        power  (which  number  includes  250,000  shares of Class A Common Stock
        underlying 2,500 shares of Series E Convertible  Preferred  Stock),  Mr.
        McGettigan is a general partner of Proactive Investment Managers,  L.P.,
        an investment advisor and a general partner of Proactive Partners, L.P.,
        and  Fremont  Proactive  Partners,  L.P.,  and is a general  partner  of
        McGettigan,  Wick & Co., Inc., and  consequently has or shares voting or
        dispositive  power over 3,689,468  shares of Class A Common Stock (which
        number  includes  2,250,000  shares of Class A Common  Stock  underlying
        22,500 shares of Series E Convertible  Preferred  Stock),  and 1,360,000
        shares of Class A Common Stock that may be immediately acquired upon the
        exercise of Warrants  expiring  September 11, 2002,  June 30, 2003,  and
        August 2, 2009. See also footnote (14).

(13)    Proactive  Investment  Managers,  L.P. ("PIM"),  is a general partner of
        Proactive  Partners,  L.P., and Fremont  Proactive  Partners,  L.P., and
        consequently  has or shares voting or  dispositive  power over 3,689,468
        shares of Class A Common Stock (which number includes  2,250,000  shares
        of Class A Common Stock underlying 22,500 shares of Series E Convertible
        Preferred  Stock) and 1,280,000  shares of Class A Common Stock that may
        be immediately acquired upon the exercise of Warrants expiring September
        11, 2002,  June 30, 2003,  and August 2, 2009.  The table also  reflects
        80,000 shares of Class A Common Stock that may be  immediately  acquired
        upon the exercise of Warrants expiring June 30, 2003, and over which PIM
        has sole voting and investment power. See also footnote (14).

(14)    In  addition  to  2,036,678  shares of Class A Common  Stock  over which
        Proactive  Partners,  L.P.  ("Proactive") has sole voting and investment
        power (which number  includes  2,000,000  shares of Class A Common Stock
        underlying 20,000 shares of Series E Convertible  Preferred Stock),  the
        table  reflects  1,280,000  shares of Class A Common  Stock  that may be
        immediately  acquired upon the exercise of Warrants  expiring  September
        11, 2002,  June 30, 2003, and August 2, 2009. The table also reflects an
        aggregate  of  1,592,955  shares  of Class A Common  Stock  (i) of which
        1,073,905 shares are subject to the Stockholders Agreement among certain
        stockholders of the Company,  including  Proactive,  and Westar Capital;
        and (ii) all of which shares are subject to the Voting  Agreement  among
        certain stockholders of the Company, including Proactive, SYCOM, LLC and
        SYCOM Corporation

(15)    Includes  584,190 shares of Class A Common Stock that may be immediately
        acquired upon the exercise of Options  expiring  August 9, 2005 (150,000
        shares),  November 20, 2005 (107,781  shares),  January 25, 2006 (52,808
        shares), May 22, 2006 (64,616 shares),  March 13, 2002 (166,667 shares),
        and April 1, 2003 (42,318),  325,988 shares of Class A Common Stock that
        may be  immediately  acquired  upon the  exercise of  Warrants  expiring
        September  11, 2002,  and 4,090 shares over which Mr.  Sperberg has sole
        voting and investment power. The table does not reflect 83,333 shares of
        Class A Common  Stock that may be acquired  upon the exercise of Options
        expiring  March 13, 2002,  in the event a change in control is deemed to
        have occurred.  In this event, Mr. Sperberg's percent of class ownership
        would be 15.93 percent.

        The table also  reflects an  aggregate  of  1,848,922  shares of Class A
        Common Stock (including 70,545 shares held by Mr. Sperberg's minor son),
        (i) of which 1,216,097 shares are subject to the Stockholders  Agreement
        among certain stockholders of the Company,  including Mr. Sperberg,  and
        Westar  Capital;  and (ii) all of which shares are subject to the Voting
        Agreement  among  certain  stockholders  of the Company,  including  Mr.
        Sperberg, and SYCOM LLC and SYCOM Corporation.

        Additionally  the table reflects  351,892 shares of Class A Common Stock
        that are  subject  to an  Agreement  of Stock  Purchase  and Sale  among
        Messrs.  Sperberg,  Esquer, Gary and Mazanec.  As previously  disclosed,

<PAGE>48

        Messrs.  Sperberg,  Esquer  and Gary have  entered  into such  Agreement
        whereby they have sold, subject to payment and vesting schedules, shares
        of Onsite-Cal to Messrs.  Esquer and Mazanec.  Until a share is paid for
        all voting and dispositive  rights remain with the seller.  Upon vesting
        and  payment,  each  such  purchaser  of the  Onsite-Cal  shares  became
        entitled to the same number of the Company Class A Common Stock received
        by the  sellers,  pursuant to the  Reorganization,  with  respect to the
        shares sold.  The table  reflects all  adjustments  for shares that have
        vested and been paid for in full.

        Finally,  as  previously  disclosed,  in August 1999  certain  executive
        officers of the Company,  including Mr. Sperberg,  entered into a Salary
        Reduction Agreement.  Thus the table does not reflect all or any prorata
        portion of 87,500  shares of Class A Common  Stock and 43,750  shares of
        Class A Common Stock underlying  Warrants expiring August 13, 2009, that
        Mr.  Sperberg will be entitled to  (immediately  or upon the exercise of
        the Warrants) under the terms of his Salary Reduction Agreement.

(16)    Mr.  Sutcliffe  is the majority  shareholder  of SSBKK,  Inc.,  the sole
        member of SYCOM, LLC, and of SYCOM Corporation,  and consequently has or
        shares  voting or  dispositive  power over  1,750,000  shares of Class A
        Common  Stock.  Additionally,  as previously  disclosed,  in August 1999
        certain  executive  officers of the Company,  including  Mr.  Sutcliffe,
        entered  into a Salary  Reduction  Agreement.  Thus the  table  does not
        reflect all or any prorata  portion of 139,000  shares of Class A Common
        Stock and  69,500  shares of Class A Common  Stock  underlying  Warrants
        expiring  August  13,  2009,  that Mr.  Sutcliffe  will be  entitled  to
        (immediately  or upon the exercise of the  Warrants)  under the terms of
        his Salary Reduction Agreement.  The table also does not reflect 157,500
        shares of Series D Convertible Preferred Stock (or the 15,750,000 shares
        of Class A Common Stock underlying the same) issued to SYCOM Corporation
        that currently is being held in escrow under an Escrow Agreement because
        such shares are non-voting  and the conditions  precedent to the release
        of such shares will not be satisfied  within the next 60 days.  See also
        footnote (17).

(17)    Represents  1,750,000 shares of Class A Common Stock that are subject to
        the Voting Agreement among certain  stockholders of the Company,  SYCOM,
        LLC and SYCOM Corporation.

(18)    Includes the following  securities that are subject to the  Stockholders
        Agreement among certain  stockholders of the Company and Westar Capital:
        4,500,000  shares of Class A Common Stock, and 3,245,600 shares of Class
        A Common  Stock  underlying  649,120  shares  of  Series  C  Convertible
        Preferred Stock.

(19)    Mr. Wick is a general partner of Proactive  Investment  Managers,  L.P.,
        an investment advisor and a general partner of Proactive Partners, L.P.,
        and  Fremont  Proactive  Partners,  L.P.,  and  is  a general partner of
        McGettigan, Wick & Co.,  Inc.,  and  consequently  has or shares  voting
        or  dispositive power  over 3,689,468 shares of Class A Common Stock and
        1,360,000  shares  of  Class  A  Common  Stock  that  may be immediately
        acquired  upon  the  exercise of Warrants  expiring  September 11, 2002,
        June 30, 2003, and August 2, 2009.  See also footnote (14).

(20)    Includes the aggregate of ownership of Messrs.  Aiello, Clark, Davidson,
        Holt,  Mazanec,  McGettigan,  Sperberg  and  Sutcliffe  as set  forth in
        footnotes  (1),  (2),  (3),  (7),  (10),  (12),  (15) and  (16),  and an
        aggregate  of  417,720  shares  of  Class A Common  Stock  held by other
        officers and directors,  524,149 shares of Class A Common Stock that may
        be acquired within the next sixty (60) days upon the exercise of options
        held by other  officers  (but not including any shares of Class A Common
        Stock and/or shares of Class A Common Stock underlying Warrants expiring
        August 13, 2009,  that such officers will be entitled to (immediately or
        upon the exercise of the Warrants)  under the terms of their  respective
        Salary Reduction Agreements), and 374,372 shares of Class A Common Stock
        that are subject to a Stock Purchase  Agreement  among Hector A. Esquer,
        and Messrs. Gary, Mazanec and Sperberg. For purposes of calculating this
        footnote,  the number of shares  attributable  to Mr.  Sperberg does not
        include  351,892  shares that are  subject to the above  Stock  Purchase
        Agreement  because these shares are counted as owned by Messrs.  Mazanec
        and Esquer.

* Less than one percent (1%).

<PAGE>49

Item 12. Certain Relationships and Related Transactions.

Guaranty of Bonds.  In  connection  with the Company's  acquisition  of OBS, the
Company  entered into a Transition  Agreement  pursuant to which Westar  Energy,
Inc. ("Westar Energy"), a sister corporation to Westar Capital, a shareholder of
the  Company,  agreed,  for a period of one year  after the  closing  of the OBS
acquisition  (November  1997),  to maintain an indemnity  agreement  with Westar
Capital  at a level  sufficient  to  provide  credit  support to OBS for bid and
performance  bonds required to be posted in connection with OBS's business.  OBS
pays all actual and  out-of-pocket  fees and costs  associated with these bonds.
OBS (individually or with the Company)  currently has three bonds outstanding on
projects that are in the final stages of completion  and for which Westar Energy
and/or Westar Capital have provided the requisite credit support. Westar Capital
is a 5 percent or more shareholder of the Company.

Westar Transaction.  As previously disclosed, in February 1998, OMS acquired the
operating assets of Mid-States Armature in exchange for $290,000.  In connection
with this  transaction,  the Company  executed an agreement  with Westar  Energy
pursuant to which Westar Energy agreed to loan to the Company an amount equal to
the amount paid by the Company for the  operating  assets.  In April 1998,  this
loan was made by Westar Energy to the Company, and was to be repaid by the first
anniversary of the closing of the asset acquisition. Pursuant to a February 1999
settlement agreement entered into by the Company,  Westar Capital, Westar Energy
and Western  Resources in connection with litigation  among the parties,  Westar
Energy,  Westar Capital and Western  Resources  agreed to apply certain payments
due from Western Resources to OES under existing water treatment plant contracts
to  repayment of the subject loan in the event the same was not repaid as above.
Westar Capital is a 5 percent or more shareholder of the Company.

Guaranty of  Performance.  In March 1998,  the  Company  entered  into an energy
services  agreement with a customer to install energy  efficient  equipment in a
large  number  of  the  customer's  facilities.  A  condition  precedent  to the
customer's execution of its agreement,  however, was the customer's receipt of a
guaranty  from  Westar  Capital,  guaranteeing  the payment  obligations  of the
Company  under  the  customer  agreement.   Accordingly,  in  exchange,  and  as
consideration  for,  Westar  Capital's  execution of the  guaranty,  the Company
agreed, in essence, to indemnify Westar Capital in the event Westar Capital must
perform under its guaranty,  executed a promissory note to cover any amounts the
Company may owe to Westar  Capital as a result of Westar  Capital's  performance
under its  guaranty,  and  granted  Westar  Capital a security  interest  in the
Company's  assets to secure its  payment  of the note.  The  security  agreement
includes certain exceptions in the security interest granted therein. No amounts
currently are outstanding  under the note. Westar Capital is a 5 percent or more
shareholder of the Company.

Engagement of Investment  Advisor.  In connection with acquisition of the assets
of SYCOM,  LLC, the Company  engaged  McGettigan Wick & Co., Inc., an investment
banking firm  ("McGettigan  Wick"),  to assist the Company in the  structure and
negotiation of the transaction.  Under the terms of the engagement,  the Company
agreed to pay McGettigan Wick $50,000 one year after the closing the transaction
(which was June 30, 1998), and issue warrants to McGettigan Wick (which warrants
immediately were transferred by McGettigan Wick to its affiliates, Proactive and
Proactive Investment Managers,  L.P. ("PIM")) to acquire 160,000 shares of Class
A Common  Stock of the Company at the exercise  price of $1.17 per share,  which
was  the  current  price  of the  Company's  Class  A  Common  Stock  on the OTC
Electronic  Bulletin Board on June 30, 1998.  These warrants  subsequently  were
repriced on May 26, 1999,  to $0.4185 per share,  which was the current price of
the Company's Class A Common Stock on May 26, 1999. Mr.  McGettigan is a general
partner of Proactive and PIM, 5 percent or more shareholders of the Company, and
is the Chairman of the Board of Directors of the Company.

Outstanding Obligations.  Under agreements with Western Resources, OES maintains
equipment  for  supplying  demineralized  water for boiler makeup water that OES
installed at Western  Resources'  Lawrence  Energy  Center and  Tecumseh  Energy
Center. As of the fiscal year ended June 30, 1999, OBS had outstanding  accounts

<PAGE>50

receivable  from  Western  Resources  in the amount of  $47,415.  As  previously
disclosed, Westar Capital is a 5 percent or more shareholder of the Company.

August 1999 Private  Placement.  In August 1999, the Company completed a private
placement of shares of Series E Convertible  Preferred Stock and the issuance of
warrants  to  purchase  shares  of the  Company  Class A Common  Stock  with Mr.
McGettigan,  the Chairman of the Board, and other related  investors,  including
Proactive and Lagunitas  Partners,  L.P.,  current  shareholders of the Company.
Terms of the  placement  include  the  issuance  of  50,000  shares  of Series E
Convertible  Preferred  Stock (which is  convertible  initially  into  5,000,000
shares of Class A Common Stock) in exchange for $1,000,000, warrants to purchase
1,250,000  shares of the Company  Class A Common  Stock at $0.50 per share,  and
warrants to purchase  1,250,000  shares of the Company  Class A Common  Stock at
$0.75 per  share.  As stated  above,  Mr.  McGettigan  is a general  partner  of
Proactive,  a 5 percent or more shareholder of the Company,  and is the Chairman
of the Board of Directors of the Company.

Item 13. Exhibits and Reports on Form 8-K

No Form 8-Ks were filed  during the last  quarter of fiscal  year ended June 30,
1999.


                  [Remainder of page intentionally left blank]

<PAGE>51

                                   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: June 23, 2000              By: /s/  Richard T. Sperberg
                                     -------------------------------------
                                     RICHARD T. SPERBERG
                                     Chief Executive Officer



Date: June 23, 2000              By: /s/  J. Bradford Hanson, CPA
                                     ------------------------------
                                     J. BRADFORD HANSON
                                     Chief Financial Officer



<PAGE>52

                                   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: June 23, 2000              By: /s/  Richard T. Sperberg
                                    -------------------------------------
                                    Richard T. Sperberg
                                    Chief Executive Officer (Principal Executive
                                    Officer), Director

Date: June 23, 2000              By: /s/  J. Bradford Hanson, CPA
                                    ------------------------------
                                    J. Bradford Hanson, CPA
                                    Chief Financial Officer,
                                    Principal Financial and Accounting Officer


<PAGE>53

                                   SIGNATURES

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

                                         ONSITE ENERGY CORPORATION


Date: June 23, 2000              By: /s/  Charles C. McGettigan
                                    --------------------------------------------
                                    Charles C. McGettigan
                                    Chairman of the Board and
                                    Outside Director


Date: June 23, 2000              By:  /s/  Richard T. Sperberg
                                    --------------------------------------------
                                    Richard T. Sperberg
                                    Chief Executive Officer
                                    and Director


Date: June 23, 2000              By:  /s/  S. Lynn Sutcliffe
                                    --------------------------------------------
                                    S. Lynn Sutcliffe
                                    Director


Date: June 23, 2000              By:  /s/  Richard L. Wright
                                    --------------------------------------------
                                    Richard L. Wright
                                    Senior Vice President and Director



Date: June 23, 2000              By: /s/  H. Tate Holt
                                    --------------------------------------------
                                    H. Tate Holt
                                    Outside Director

<PAGE>F-1

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




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

Consolidated Balance Sheets - June 30, 1999 and 1998.........................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, 1998 and 1997........................................F-5

Consolidated Statements of Cash Flows - For the Years ended
   June 30, 1999, 1998 and 1997..............................................F-7

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

<PAGE>F-2

                          INDEPENDENT AUDITOR'S REPORT



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

We have audited the  accompanying  consolidated  balance sheets of Onsite Energy
Corporation and  subsidiaries  (the "Company") as of June 30, 1999 and 1998, and
the  related  consolidated   statements  of  operations,   shareholders'  equity
(deficit),  and cash flows for each of the years in the three year period  ended
June 30, 1999. These consolidated financial statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Onsite
Energy  Corporation  and  subsidiaries  as of June 30,  1999 and  1998,  and the
results  of their  operations  and their cash flows for each of the years in the
three year period ended June 30, 1999, in  conformity  with  generally  accepted
accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations, has a working capital deficit of $6,511,390, and an accumulated
deficit of  $27,467,050.  These  conditions  raise  substantial  doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these  matters  are also  described  in Note 3.  The  consolidated  financial
statement  do not include any  adjustments  relating to the  recoverability  and
classification  of reported asset amounts or the amounts and  classification  of
liability that might result from the outcome of this uncertainty.

As discussed in Note 3 to the consolidated financial statements, the Company has
restated  certain  financial  statement  amounts  related to the  recognition of
contract revenues and expenses.

/s/HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
September 3, 1999,  except for the Financial  Statement  Restatement  section of
Note 3, which is as of June 20, 2000


<PAGE>F-3

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                            June 30,

                                                       1999           1998
                                                  -------------  -------------
ASSETS
Current Assets:
Cash                                             $     900,408   $   2,093,006
Accounts receivable, net of allowance for
  doubtful accounts of $35,000 and $15,030           6,071,729       3,468,191
Inventory                                              185,562         178,215
Capitalized project costs                              147,022               -
Costs and estimated earnings in excess of
  billings on uncompleted contracts                  1,109,315         944,820
Other current assets                                    50,634         611,195
                                                 -------------   -------------
TOTAL CURRENT ASSETS                                 8,464,670       7,295,427

Cash-restricted                                        147,838         157,836
Property and equipment, net of accumulated
  depreciation and amortization of $1,258,000        1,413,918       1,958,178

Excess of purchase price over net assets
  acquired, net                                              -       3,563,718
Other assets                                           101,483          28,142
                                                 -------------   -------------
TOTAL ASSETS                                     $  10,127,909   $  13,003,301
                                                 =============   =============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Note payable - related party                     $     211,914   $     468,329
Note payable, current portion                        2,903,230       2,130,140
Accounts payable                                     9,035,325       3,380,271
Billings in excess of costs and estimated
  earnings on uncompleted contracts                  1,445,790       2,888,659
Accrued expenses and other liabilities               1,143,940       1,688,542
Liabilities in excess of assets held for sale          235,861               -
                                                 -------------   -------------
TOTAL CURRENT LIABILITIES                           14,976,060      10,555,941

Long-Term Liabilities:
Deferred income                                      1,072,553         897,263
Notes payable, less current portion                     36,395         443,289
                                                 -------------   -------------
TOTAL LIABILITIES                                   16,085,008      11,896,493
                                                 -------------   -------------

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             208
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          18,243
  Class B common stock, 1,000 shares
    authorized, none issued and outstanding                  -               -
Additional paid-in capital                          25,583,816      23,208,598

Notes receivable - shareholders                     (4,093,099)     (1,335,217)

Accumulated deficit                                (27,467,050)    (20,785,024)
                                                 -------------   -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                (5,957,099)      1,106,808
                                                 -------------   -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
  EQUITY (DEFICIT)                               $  10,127,909   $  13,003,301
                                                 =============   =============

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

<PAGE>F-4

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                For the Years Ended June 30, 1999, 1998 and 1997


<TABLE>
<CAPTION>

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

<S>                                               <C>                  <C>                  <C>
Revenues                                          $  43,534,737        $  12,055,601        $  8,527,143
Utility Revenue                                         566,672              390,035             110,581
                                                  -------------        -------------        ------------
    Total Revenues                                   44,101,409           12,445,636           8,637,724

Cost of sales                                        35,157,469           10,013,324           6,738,149
                                                  -------------        -------------        ------------
    Gross margin                                      8,943,940            2,432,312           1,899,575

Selling, general, and administrative expenses        11,193,561            3,879,237           3,139,018
Depreciation and amortization expense                 1,074,855              539,499             587,077
Reserve on sale or disposal of subsidiary             1,010,000                    -                   -
Loss on disposition of partnership interest                   -                    -             425,240
Impairment of excess of purchase price over
  net assets acquired                                 1,918,851                    -                   -
Gain on sale of assets                                        -                    -             (17,686)
                                                  -------------        -------------        ------------
  Operating loss                                     (6,253,327)          (1,986,424)         (2,234,074)

Other income (expense):
  Interest expense                                     (365,067)            (130,265)           (199,030)
  Interest income                                       146,436               25,283              43,402
                                                  -------------        -------------        ------------
     Total other expense                               (218,631)            (104,982)           (155,628)
                                                  -------------        -------------        ------------
Loss before provision for income taxes               (6,471,958)          (2,091,406)         (2,389,702)

Provision for income taxes                                5,500                7,500               8,500
                                                  -------------        -------------        ------------
Net loss                                            ($6,477,458)         ($2,098,906)        ($2,398,202)
                                                  =============        =============        ============
Net loss allocated to common shareholders           ($6,682,026)         ($2,148,053)        ($2,398,202)
                                                  =============        =============        ============
Basic and diluted loss per common share:                 ($0.36)              ($0.16)             ($0.22)
                                                  =============        =============        ============
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, 1998 and 1997

<TABLE>
<CAPTION>

                                                                  Preferred Stock                      Common Stock
                            -------------------------------------------------------------------    --------------------
                                Series A           Series B         Series C        Series D              Class A
                            ---------------   ----------------  ---------------  --------------    --------------------
                            Shares   Amount    Shares   Amount  Shares   Amount  Shares  Amount     Shares      Amount
                            ------   ------   --------  ------  -------  ------  ------  ------    --------    --------
<S>                        <C>      <C>       <C>      <C>      <C>     <C>      <C>     <C>      <C>         <C>
Balance, July 1, 1996,
as originally reported      3,810    $    4    605,641  $  605        -  $    -       -  $    -    6,263,463   $  6,263

Prior period adjustments        -         -          -       -        -       -       -       -            -          -
                            ------   ------   --------  ------  -------  ------  ------  ------    --------    --------
Balance, July 1, 1996,
as restated                 3,810         4    605,641     605        -       -       -       -    6,263,463      6,263

Issued to Onsite 401k plan      -         -          -       -        -       -       -       -       48,562         49
Conversion of accounts
payable to Class A
common stock                    -         -          -       -        -       -       -       -       62,077         62

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

Conversion of Series
A preferred stock          (3,810)       (4)         -       -        -       -       -       -    3,571,494      3,572

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

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

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


</TABLE>
<TABLE>
<CAPTION>


                                    Common      Additional       Notes
                                    Shares        Paid-In      Receivable      Accumulated
                                   Issuable       Capital     Shareholders       Deficit          Total
                                   --------     ----------    ------------    -------------   ------------
<S>                             <C>           <C>             <C>            <C>              <C>
Balance, July 1, 1996,
as originally reported            $  608,439   $ 16,336,469   $        -      $ (15,758,615)  $  1,193,165

Prior period adjustments                   -              -            -           (480,154)      (480,154)
                                  ----------   ------------   ----------      -------------   ------------
Balance, July 1, 1996,
as restated                          608,439     16,336,469            -        (16,238,769)       713,011

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

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

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

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

Conversion of Series
B preferred stock                          -              -            -                  -              -

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

Net Loss                                   -              -            -         (2,398,202)    (2,398,202)
                                  ----------   ------------   ----------      -------------   ------------
Balance, June 30, 1997                     -     17,052,961            -        (18,636,971)    (1,573,066)

</TABLE>

<PAGE>F-6

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                For the Years Ended June 30, 1999, 1998 and 1997
                                   (continued)


<TABLE>
<CAPTION>


                                                                  Preferred Stock                      Common Stock
                            -------------------------------------------------------------------    --------------------
                                Series A           Series B         Series C        Series D              Class A
                            ---------------   ----------------  ---------------  --------------    --------------------
                            Shares   Amount    Shares   Amount  Shares   Amount  Shares  Amount     Shares      Amount
                            ------   ------   --------  ------  -------  ------  ------  ------    --------    --------


<S>                       <C>       <C>       <C>      <C>      <C>     <C>      <C>    <C>      <C>         <C>
Balance, June 30, 1997            -  $    -          -  $    -        -  $    -       -  $    -   10,944,172   $ 10,944

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

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

Stock issued for
acquisitions                      -       -          -       -        -       -       -       -    4,940,000      4,940

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

Sale of Series C preferred
stock                             -       -          -       -  200,000     200       -       -            -          -

Series C preferred stock
dividend                          -       -          -       -    8,205       8       -       -            -          -

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

Notes receivable from
shareholders acquired in
acquisitions                      -       -          -       -        -       -       -       -            -          -

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

Exercise of stock options         -       -          -       -        -       -       -       -       75,334         75

Issued to Onsite 401k Plan        -       -          -       -        -       -       -       -      266,331        267

Series C preferred stock
dividend                          -       -          -       -   40,915      41       -       -            -          -

Sale of Series C preferred
stock                             -       -          -       -  400,000     400       -       -            -          -

Notes receivable from
shareholders acquired in
acquisitions                      -       -          -       -        -       -       -       -            -          -

Net Loss                          -       -          -       -        -       -       -       -            -          -
                             ------  ------   --------  ------  -------  ------  ------  ------   ----------   --------
Balances June 30, 1999            -       -          -       -  649,120  $  649       -       -   18,584,853   $ 18,585
                             ======  ======   ========  ======  =======  ======  ======  ======   ==========   ========
</TABLE>

<PAGE>F-7


<TABLE>
<CAPTION>

                                    Common      Additional       Notes
                                    Shares        Paid-In      Receivable      Accumulated
                                   Issuable       Capital     Shareholders       Deficit          Total
                                   --------     ----------    ------------    -------------   ------------

<S>                           <C>            <C>             <C>             <C>              <C>
Balance, June 30, 1997                         $ 17,052,961   $          -    $ (18,636,971)  $ (1,573,066)

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

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

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

Exercise of stock options                            86,854              -                          87,163

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

Series C preferred stock
dividend                                             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                                                                 -       (2,098,906)    (2,098,906)
                                   --------    ------------   ------------    -------------   ------------
Balance, June 30, 1998                         $ 23,208,598   $ (1,335,217)   $ (20,785,024)  $  1,106,808

Exercise of stock options                            23,404                                         23,479

Issued to Onsite 401k Plan                          147,687                                        147,954

Series C preferred stock
dividend                                            204,527                        (204,568)             -

Sale of Series C preferred stock                  1,999,600                                      2,000,000

Notes receivable from
shareholders acquired in
acquisitions                                                    (2,757,882)                     (2,757,882)

Net Loss                                 -                                       (6,477,458)    (6,477,458)
                                   --------    ------------   ------------    -------------   ------------
Balances June 30, 1999                         $ 25,583,816   $ (4,093,099)   $ (27,467,050)  $ (5,957,099)
                                   ========    ============   ============    =============   ============

</TABLE>


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


<PAGE>F-8

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


<TABLE>
<CAPTION>


                                                                1999                 1998                 1997
                                                            ------------         ------------         ------------
<S>                                                       <C>                   <C>                 <C>
Cash flows from operating activities:

Net loss                                                    $ (6,477,458)        $ (2,098,906)        $ (2,398,202)
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              400,000
    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                    -              399,032
    Estimated loss on disposal of subsidiary                   1,010,000                    -
    Provision for bad debts                                       35,000               30,192               37,093
    Depreciation                                                 572,465              258,572              187,077
    Compensation recognized upon issuance of
      stock warrants                                                   -               18,980                    -
    Loss on disposition of partnership interest                        -                    -              425,240
    Gain on sale of assets                                             -                    -              (17,686)
      Accounts receivable                                     (3,831,418)            (731,113)             747,923
      Increase in costs and estimated earnings
        in excess of billings on uncompleted
        contracts                                               (252,419)            (225,324)           2,051,592
      Inventory                                                   (7,347)              (5,758)                   -
      Other assets                                               (44,588)            (346,432)             260,322
      Cash-restricted                                              9,998              115,331              (50,467)
      Accounts payable                                         6,847,535            1,351,806           (1,464,594)
      Increase (decrease) in billings in excess
        of costs and estimated earnings on
        uncompleted contracts                                 (1,124,173)           1,739,390           (1,130,080)
      Accrued expenses and other liabilities                     158,449              637,335             (325,864)
      Deferred income                                            143,975                2,832              (17,190)
                                                            ------------         ------------         ------------
        Net cash provided by (used in)
          operating activities                                  (488,544)           1,027,832             (895,804)
                                                            ------------         ------------         ------------
Cash flows from investing activities:
  Purchases of property and equipment                            (82,539)            (119,075)              (4,473)
  Proceeds from sale of assets                                         -                    -              540,081
  Loan to shareholders                                        (2,757,882)              (7,911)                   -
  Acquisition of businesses, net of cash acquired                      -           (1,203,805)                   -
                                                            ------------         ------------         ------------
     Net cash provided by (used in) investing
       activities                                             (2,840,421)          (1,330,791)             535,608
                                                            ------------         ------------         ------------
Cash flows from financing activities:
  Proceeds from notes payable                                  1,382,953              359,348            1,026,422
  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               45,090
  Repayment of notes payable - related party                    (256,415)             (46,804)          (1,071,571)
  Repayment of notes payable                                  (1,013,650)            (484,178)             (89,321)
                                                            ------------         ------------         ------------
     Net cash provided by (used in)
       financing activities                                    2,136,367            1,869,071              (89,380)
                                                            ------------         ------------         ------------
Net increase (decrease) in cash                               (1,192,598)           1,566,112             (449,576)

Cash, beginning of year                                        2,093,006              526,894              976,470
                                                            ------------         ------------         ------------
Cash, end of year                                           $    900,408         $  2,093,006         $    526,894
                                                            ============         ============         ============
Supplemental disclosures of non-cash transactions:

  Payment of Series A and B Preferred Stock
    dividends with Common Stock                             $          -         $          -         $        347
                                                            ------------         ------------         ------------
  Payment of Series C Preferred Stock dividends
    with Series C Preferred stock                           $    204,568         $     49,147         $          -
                                                            ============         ============         ============
  Payment of accrued liabilities with common stock          $    147,954         $     17,449         $     67,035
                                                            ============         ============         ============
  Liabilities accrued for acquisition costs                 $          -         $    285,594         $          -
                                                            ============         ============         ============
  Fair market value of assets, less liabilities
    of businesses acquired with common stock                $          -         $  4,036,863         $          -
                                                            ============         ============         ============
  Conversion of preferred stock to common stock             $          -         $          -         $      4,167
                                                            ------------         ------------         ------------
Supplemental disclosures of cash transactions:
  Interest paid                                             $    390,558         $    140,521         $    180,288
                                                            ============         ============         ============
  Income taxes paid                                         $      5,500         $     36,175         $     41,290
                                                            ============         ============         ============

</TABLE>


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

<PAGE>F-9


                   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-10

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

2.   Summary of Significant Accounting Policies

     Principles of Consolidation

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

     Revenue Recognition

     Revenues on development and construction of energy efficiency  projects 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 earned
     which coincides with invoicing to the utility.

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

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

     Operation and Maintenance Agreements

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

<PAGE>F-11

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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.

     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  (December 1999) provided  certain  conditions and milestones
     are achieved.  In the event that conditions or milestones are not achieved,
     the  Company  may be  required  to forfeit  its right to some or all of the
     funds on deposit. As of June 30, 1999, the Company has $43,000 reserved for
     funds that have a low  probability of return.  Of the remaining  balance of
     $147,838,  the Company  believes that all conditions and milestones will be
     achieved and that no additional  funds under these projects will be subject
     to forfeiture.

     Inventory

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

     Property and Equipment

     Property and equipment are recorded at cost.  Replacements and improvements
     are  capitalized,  while repairs and  maintenance are charged to expense as
     incurred.   Depreciation   and   amortization   are   provided   using  the
     straight-line  method over the assets estimated useful lives ranging from 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

<PAGE>F-12

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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.

     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.

<PAGE>F-13

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Impact of Recently Issued Standards

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

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

     Use of Estimates

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

     The Company's  financial  statements are based upon a number of significant
     estimates,  including the allowance  for doubtful  accounts,  percentage of
     completion on long term contracts,  the estimated useful lives selected for
     property and equipment and intangible assets, realizability of deferred tax
     assets  and  realizability  of  shareholder  notes  receivable.  Due to the
     uncertainties inherent in the estimation process, it is at least reasonably
     possible that these  estimates will be further revised in the near term and
     such revisions could be material.

     Fair Value of Financial Instruments

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

<PAGE>F-14

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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 three fiscal years. For the years ended
     June 30, 1999,  1998,  and 1997,  the Company had net losses of $6,477,458,
     $2,098,906 and $2,398,202,  respectively,  and had negative working capital
     of $6,511,390  and an  accumulated  deficit of  $27,467,050  as of June 30,
     1999.  Management  believes  that  the  Company  will be  able to  generate
     additional revenues and operating  efficiencies through its acquisitions as
     well as by other means to achieve  profitable  operations.  During the year
     ended June 30,  1999,  the Company  took steps to  mitigate  the losses and
     enhance its future viability. In addition, during the fiscal year end 1999,
     the Company  exercised  its right under a stock  subscription  agreement to
     require Westar Capital to purchase an additional 400,000 shares of Series C
     Convertible  Preferred Stock for $2,000,000.  Subsequent to its most recent
     fiscal year end, the Company also privately  placed shares of newly created
     Series E  Convertible  Preferred  Stock  ("Series  E  Stock")  to  existing
     shareholders  for  $1,000,000.  Concurrent  with  this  private  placement,
     members of senior  management of the Company have agreed to receive  shares
     of the Company's  Class A Common Stock in lieu of a portion of their salary
     in an effort to reduce cash outflows related to compensation. Subsequent to
     June 30, 1999, a decision  was made to explore the sale or  disposition  of
     the Company's lighting  subsidiaries,  which could provide capital,  reduce
     operating losses and will allow management to better focus on its core ESCO
     business  activities.  In  addition,  the  Company is  exploring  strategic
     relationships  with  companies  that  could  involve an  investment  in the
     Company.  The  Company  may also raise cash  through  the sale of long term
     future revenue streams that it currently owns or has rights to. The Company
     is also  examining  ways to  further  reduce  overhead  including,  but not
     limited to, the  possibility of targeted  staff  reductions.  Further,  the
     Company, through the acquisition of other energy service companies, expects
     to continue to gain  economies of scale  through the use of a  consolidated
     management  team and the  synergies of marketing  efforts of the  different
     entities.  Management believes that all of the above actions will allow the
     Company to continue as a going concern.  Future cash requirements depend on
     the  Company's  profitability,   its  ability  to  manage  working  capital
     requirements and its rate of growth.  Additional financing through the sale
     of  securities   may  have  an  ownership   dilution   effect  on  existing
     shareholders.

     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

<PAGE>F-15

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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.

     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.

     The SEC took exception to certain applications of accounting  principles as
     applied by the  Company  in the areas of the timing of revenue  recognition
     where  utility  incentive  payments  are a part  of the  Company'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.  As a result, the Company
     restated its previously  filed financial  statements for each of the fiscal
     years ending June 30, 1997,  1998 and 1999,  as well as the first (a second
     amendment) and second fiscal quarters ended September 30, 1999 and December
     31, 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 over 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 and other ongoing  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>F-16

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The accompany financial  statements for 1999, 1998 and 1997 and accumulated
     deficit  at the  beginning  of 1997  have  been  restated  to  correct  the
     recognition of revenues and expenses discussed above. Beginning accumulated
     deficit for 1997 has been increased by $480,154 which had no associated tax
     benefit. The impact of these corrections on the company's financial results
     as originally reported is summarized below:

<TABLE>
<CAPTION>

                          1999             1999               1998              1998              1997               1997
                  As Originally Filed   As restated    As Originally Filed   As restated   As Originally Filed    As restated
                  -------------------  -------------   -------------------  -------------  -------------------   -------------

<S>                  <C>               <C>               <C>               <C>               <C>               <C>
Revenues             $  43,557,902     $  44,101,409     $  12,267,148     $  12,445,636       $   9,561,375     $   8,637,724
                     -------------     -------------     -------------     -------------       -------------     -------------
Net loss             $  (6,909,011)    $  (6,477,458)    $  (2,218,482)    $  (2,098,906)      $  (1,388,598)    $  (2,398,202)
                     -------------     -------------     -------------     -------------       -------------     -------------
Loss per share
  basic and diluted  $       (0.39)    $       (0.36)    $       (0.16)    $       (0.16)      $       (0.13)    $       (0.22)
                     =============     =============     =============     =============       =============     =============
Accumulated deficit,
  end of year        $ (26,528,421)    $ (27,467,050)    $ (19,414,842)    $ (20,785,024)      $ (17,147,213)    $ (18,636,971)
                     =============     =============     =============     =============       =============     =============
</TABLE>


4.   Acquisitions

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

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

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

<PAGE>F-17

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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
     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).

<PAGE>F-18

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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      Year Ended
                           June 30, 1999     June 30, 1998    June 30, 1997
                           -------------     -------------    -------------

Revenue                    $  45,935,000     $  41,390,000    $  48,802,000
                           =============     =============    =============
Operating Income (Loss)    $  (6,438,000)    $ (10,088,000)   $   2,663,000
                           =============     =============    =============
Net Loss                   $  (6,773,000)    $ (12,631,000)   $  (1,079,000)
                           =============     =============    =============
Basic and Diluted loss
per common share           $       (0.37)    $       (0.92)   $       (0.10)
                           =============     =============    =============

<PAGE>F-19

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.  Accounts Receivable

    Accounts Receivable consisted of the following as of June 30, 1999 and 1998:

                                                  1999                1998
                                              ------------        ------------
    Contracts Receivable:
      Completed Contracts                     $    705,561        $    472,590
      Contracts in Progress                      4,077,057           2,382,102

    Trade receivables                            1,324,111             628,529

    Less: Allowance for doubtful accounts          (35,000)            (15,030)
                                              ------------        ------------
     Total                                    $  6,071,729        $  3,468,191
                                              ============        ============


6.  Costs and Estimated Earnings on Uncompleted Contracts

    Costs and  estimated  earnings  on  contracts  as of June 30, 1999 and 1998,
consisted of the following:

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

    Costs incurred                            $ 28,496,874        $ 11,796,701
    Estimated earnings                           7,477,447           2,234,198
                                              ------------        ------------
                                                35,974,321          14,030,899
    Less:  Billings to date                    (36,310,796)        (15,974,738)
                                              ------------        ------------
                                              $   (336,475)       $ (1,943,839)
                                              ============        ============
    Included in the accompanying
      Balance Sheet under the
      following captions:

      Costs and estimated earnings in
        excess of billings on
        uncompleted contracts                 $  1,109,315        $    944,820

      Billings in excess of costs and
        earnings on uncompleted contracts       (1,445,790)         (2,888,659)
                                              ------------        ------------
                                              $   (336,475)       $ (1,943,839)
                                              ============        ============

<PAGE>F-20

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.  Property and Equipment

    Property and equipment at June 30, 1999 and 1998 consisted of:

                                                              Estimated Useful
                                     1999          1998             Lives
                                 ------------  -----------    ----------------
Office furniture and equipment   $  1,287,071  $    474,915        5-7 years
Land                                   44,000        44,000           -
Building                               80,000        80,000       31.5 years
                                                                Contract life
Water treatment plants                993,517       993,516   (50 to 56 months)
Equipment and tools                   201,832       722,639       7-10 years
Vehicles                               23,674        39,971         5 years
Leasehold improvements                 41,824        42,135       5-20 years
                                 ------------  ------------
                                 $  2,671,918  $  2,397,176

Less: Accumulated Depreciation     (1,258,000)      438,998
                                 ------------  ------------
                                 $  1,413,918  $  1,958,178
                                 ============  ============

     Depreciation  expense  amounted to $572,465,  $258,572 and $187,077 for the
     years ended June 30, 1999, 1998 and 1997, respectively.

<PAGE>F-21

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.  Notes Payable

    Notes payable at June 30, 1999 and 1998, consisted of the following:

                                                     1999             1998
                                                 -----------      -----------
Notes payable, collateralized by utility
incentive payments with interest at 12%          $   440,170      $   723,549

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

Notes payable with payments upon completion
of certain milestones with interest at 18.%,
past due, secured by accounts receivable
and other assets                                      69,049        1,132,961

Notes payable with payments upon completion
of certain milestones, interest at 12.5% to
18% collateralized by accounts receivable
and other assets                                   2,430,406          669,126

Notes payable with monthly installments
of $1,175 including interest at 10.75%,
maturing August through September 1998,
collateralized by certain automobiles                      -            8,667

Notes payable, non-interest bearing, due
in monthly installments of $1,000, unsecured               -            6,777

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

Note payable, due in monthly installments
of $1,631, including interest at 9% maturing
September 1999, unsecured                                  -           22,978
                                                 -----------      -----------
Total notes payable                                2,939,625        2,573,429

Less: Current portion                              2,903,230        2,130,140
                                                 -----------      -----------
Total Long Term Notes Payable                    $    36,395      $   443,289
                                                 ===========      ===========

<PAGE>F-22

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.   Note Payable - related party

     Note  payable - related  party at June 30, 1999 and 1998  consisted  of the
     following:

                                                     1999             1998
                                                 -----------      -----------
Note payable due on demand to related
party, interest at 12.0% per annum in
1999 and 8% at June 30, 1998                     $   211,914      $   178,329

Note payable due to related party,
interest at 12.0% per annum, due
April 1999                                                 -          290,000
                                                 -----------      -----------
                                                 $   211,914      $   468,329
                                                 ===========      ===========

10.  Accrued expenses and other liabilities

     At June 30, 1999 and 1998, accrued expenses and other liabilities consisted
     of the following:

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

Payroll and related payroll taxes                $   266,798      $   383,910
Accrued job costs                                    305,912          798,476
Accrued utility commitments                          448,497                -
Accrued interest                                      57,858           83,349
Deferred income                                       59,423           60,890
Other accrued liabilities                              5,452          161,917
Consideration related to acquisition                       -          200,000
                                                 -----------      -----------
                                                 $ 1,143,940      $ 1,688,542
                                                 ===========      ===========

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-23

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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 and 1998,  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.

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

     Preferred Stock

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

     Each holder of a share of Series C Convertible Preferred Stock ("Series C")
     is  entitled  to one vote per share for each share of Class A Common  Stock
     that Series C is convertible  into and to an annual dividend at the rate of
     9.75  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-24


                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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 as of June 30, 1999 are amounts due from affiliates of SYCOM,
     LLC in the amount of $3,787,473.

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

     Also  included,  as of June 30, 1998,  are amounts due from  affiliates  of
     SYCOM  Enterprises,  LLC in the  amount  of  $1,155,190.  The loan  accrues
     interest  at 9.75%  per  annum,  is due on or before  June 30,  2006 and is
     collateralized by certain assets of an affiliate of SYCOM Enterprises, LLC.
     Additionally, see Note 4.

     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.

12.  Stock Option Plans:

     WEM 1991 Non-Statutory Stock Option Plan

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

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

<PAGE>F-25

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Onsite 1993 Stock Option Plan

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

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

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

July 1, 1996               1,807,483        $0.25 - $5.625          1,395,901
                           =========                                =========

  Options granted          1,508,440        $0.25 - $5.3125
  Options canceled          (816,645)       $0.25 - $0.50
  Options exercised          (42,553)       $0.25 - $0.50
                           ---------

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

  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.

<PAGE>F-26

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     A summary of option transactions under the 1993 plan during the years ended
     June 30, 1999, 1998 and 1997 is as follows:

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

July 1, 1996            1,807,483          $   0.7573
                        =========
  Granted               1,508,440          $   0.2909
  Exercised               (42,553)         $   0.4628
  Canceled               (816,645)         $   0.4764
                        ---------
June 30, 1997           2,456,725          $   0.5789
                        =========
  Granted                 880,954          $   0.6224
  Exercised              (206,004)         $   0.2752
  Cancelled              (133,417)         $   0.2797
                        ---------
June 30, 1998           2,998,258          $   0.6259
                        =========
  Granted                 394,000          $   0.5364
  Exercised               (75,334)         $   0.3302
  Cancelled              (326,691)         $   0.5289
                        ---------
June 30, 1999           2,990,233          $   0.6326
                        =========

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

     Proforma Information

     As stated in Note 2, the Company has not adopted the fair value  accounting
     prescribed  by FASB 123 for  employees.  Had  compensation  cost for  stock
     options  issued to  employees  been  determined  based on the fair value at
     grant date for awards in 1999, 1998 and 1997 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            1997
                              ------------    ------------    ------------

 Net Loss                     $ (7,093,388)   $ (2,360,441)   $ (2,480,932)
                              ============    ============    ============
 Basic and Diluted Loss Per
 Common Share                 $      (0.38)   $      (0.17)   $      (0.23)
                              ============    ============    ============

     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 for the year ended June
     30,  1999,  116.8  percent for grants  during the year ended June 30, 1998,

<PAGE>F-27

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     116.9  percent for the year ended June 30, 1997,  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,
     1998, and 1997 respectively.

     The  weighted-average  fair value of stock  options  granted  to  employees
     during the years ended June 30, 1999,  1998 and 1997, was $0.38,  $0.36 and
     $0.19, 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-28

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



13.  Income Taxes

     Income tax  expense  for the years  ended June 30,  1999,  1998 and 1997 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
                               =========     ==========      =========

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

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

                                       1999            1998            1997
                                   ------------     ----------      ----------
Amount of expected tax (benefit)   $ (2,200,400)    $ (711,000)     $ (812,500)
Non-deductible expenses                 450,000         13,900           4,400
State taxes, net                          3,600          4,900           5,600
Effect of change in state tax rate            -         27,600              --
Change in valuation allowance for
  deferred tax assets                 1,752,300        672,100         811,000
                                   ============     ==========      ==========
           Total                   $      5,500     $    7,500      $    8,500
                                   ============     ==========      ==========

<PAGE>F-29

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     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
  Vacation accrual                                 70,100            44,400
  Inventory reserve                                26,200             6,000
  Deferred Revenue                                602,600           645,600
  Book compensation on issuance of
    stock options                                       -             7,600
  Allowance for doubtful accounts                  14,400             6,000
  Other                                               800               600
                                             ------------      ------------
                                                  720,900           726,200
  Valuation allowance                            (720,900)         (726,200)
                                             ------------      ------------
    Net current deferred tax asset           $          -      $          -
                                             ============      ============

                                                 1999              1998
                                             ------------      ------------
Long-Term deferred tax assets (liabilities):
  Net operating loss carryforwards           $  7,865,500      $  6,943,200
  Goodwill due to difference in
    amortization                                1,202,100           453,300
  Depreciation                                        700          (137,100)
  Capital loss carryforward                             -                 -
  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.

<PAGE>F-30

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

14.  Related Parties

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

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

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

15.  Commitments and Contingencies

     Leases

     The  Company  leases its  administrative  facility  under a  noncancellable
     operating lease expiring in 2001 with a three-year  renewal  option.  As of
     August 1, 1998,  the Company  increased  its office  space that is included
     under the current  lease.  The Company  expanded  its  regional  offices to
     include San Ramon, California, where office space is rented on a three year
     lease that expires March 2001. The Company also leases, on a month by month
     basis,  a 250 square  foot  storage  facility in  Carlsbad,  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
                                                                   ===========
<PAGE>F-31

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Total  rent  expense,   including  month-to-month  equipment  rentals,  was
     $467,000, $202,000 and $272,641 in 1999, 1998 and 1997, respectively.

     Employment Agreements

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

     Ongoing Maintenance for Water Treatment Plants

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

     Environmental Costs

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

     Guaranteed Savings

     The Company is  contingently  liable to some of its  customers  pursuant to
     contractual terms in the event annual  guaranteed  savings are not achieved
     by the customer. These guarantees are derived from conservative engineering
     estimates and generally are  guaranteed at a level of less than 100 percent
     of the  total  estimated  savings.  As of  June  30,  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

<PAGE>F-32

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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 the year 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.

     Additionally, see Note 20.

     Sale or Disposal of Subsidiaries

     Subsequent to its fiscal year end, 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.

<PAGE>F-33

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

16.  Defined Contribution Plan

     The Company  sponsors a 401(k)  defined  contribution  plan,  which  covers
     substantially all employees.  Company matching contributions are determined
     annually at the discretion of management and vest at the rate of 20 percent
     per year of  employment.  For the current  year,  the company  match was 75
     percent  of the  employee  contribution  up to 6  percent  of their  annual
     salary.  During the years ended June 30, 1999, 1998 and 1997, the Company's
     matching   contribution   expense  was   $83,046,   $53,480  and   $43,088,
     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,
     49,912 and 48,562 for the fiscal years 1999, 1998 and 1997, respectively.

17.  Significant Customers

     Revenues  from the three  largest  customers  accounted  for 34 percent (16
     percent,  11 percent and 9 percent each) of total  revenues in fiscal 1999,
     and  revenues  from three  other  customers  accounted  for  31percent  (11
     percent,  10 percent,  10 percent  each) of total  revenues in fiscal 1998.
     Revenues from three other customers  accounted for 32 percent (10%, 9%, 13%
     each) of total revenues in fiscal year 1997.

<PAGE>F-34

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.  At June 30,
     1998,  accounts  receivable totaled $3,468,191 and the Company had provided
     an allowance for doubtful accounts of $15,030.

     For the  years  ended  June 30,  1999,  1998 and 1997,  bad  debts  totaled
     $123,000,  $30,000 and $37,000 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 digits to define the  applicable  year.  Any of
     the Company's or its suppliers' and customers'  computer programs that have
     date  sensitive  software may  recognize a date using "00" as the year 1900
     rather  than the year  2000.  This  could  result  in  system  failures  or
     miscalculations  causing disruptions of operations  including,  among other
     things, a temporary inability to process  transactions,  send invoices,  or
     engage in similar normal  business  activities.  The Company  believes that
     substantially  all  software  applications  currently  being  used  for the
     financial and operational  systems have adequately  addressed any year 2000
     issues.  All  hardware  systems  have been  assessed  and  plans  have been
     developed to address systems modification requirements.  The costs incurred
     to date related to its Year 2000  activities  have not been material to the
     Company,  and based upon  current  estimates,  the Company does not believe
     that the  total  cost of its  Year  2000  readiness  programs  will  have a
     material adverse impact on the Company's results of operations or financial
     position.  Any risks the  Company  faces are  expected  to be  external  to
     ongoing  operations.  The  Company  has  numerous  alternative  vendors for
     critical   supplies,   materials  and   components.   Current  vendors  and
     subcontractors  who have not  adequately  prepared for the year 2000 can be
     substituted in favor of those that have prepared.

20.  Subsequent Events (unaudited)

     In November  1999,  the sale of LTS was completed and resulted in an actual
     loss of approximately  $651,000.  The Company had established a reserve for
     loss on this sale of $1,010,000 as of June 30, 1999.

     The company shut down the operation of REEP during its third fiscal quarter
     and it continues to examine options with regards to ERSI.

<PAGE>F-35

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In  February  2000,  the  Company  sold  the  assets  of OMS  at a loss  of
     approximately  $37,000.  Concurrent with the closing of the asset sale, OES
     was  reduced  to one  employee  and its  operations  became  limited to the
     operation of two industrial water plants in Kansas.

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

     The Company will maintain its subsidiary,  SO Corporation,  for the purpose
     of completing  several long-term  construction  projects as well as for the
     management of other revenue  generating  activities and to meet its ongoing
     commitments  for M&V located  primarily  on the East  Coast.  Efforts by SO
     Corporation  to develop  any new  business  in this region will cease as of
     June 30, 2000.

     In the fiscal  year ended  June 30,  1999,  SO  Corporation  accounted  for
     approximately  $20 million in revenues  and  approximately  $3.7 million in
     gross margin. In addition, SO Corporation had approximately $5.4 million in
     S,G&A expenses.  It is anticipated that the revenue and margin contribution
     will be substantially  less in the fiscal year ended June 30, 2000 and that
     all revenue and expense amounts will continue to decline in future years.

     As a  result  of the  disposition  of  subsidiaries  and  the  decision  to
     terminate  its  arrangement  with Sycom,  the  Company has been  reduced to
     essentially  how it existed at the end of the fiscal year 1997. The Company
     has become a smaller ESCO,  without as broad a national  exposure as it had
     over the course of the last two fiscal  years.  The  Company,  as it exists
     today,  will generate  significantly  less in revenues and expenses than it
     had generated in fiscal 1999 and what is expected in the fiscal year ending
     June 30, 2000.

     Pursuant to the  Certificate of  Designations  for the Series C Convertible
     Preferred  Stock (the  "Series C Stock"),  each holder of Series C Stock is
     entitled, when and as declared by the Board of Directors of the Company and
     out of any funds legally  available  therefore to an annual dividend at the
     rate of 9.75 percent of the  liquidation  preference ($5 per share),  which
     dividend is payable quarterly.  All of the issued and outstanding shares of
     Series C Stock  are held by  Westar  Capital,  Inc.  ("Westar").  Under the
     Certificate  of  Designations  if,  at any  time,  four or  more  quarterly
     dividends,  whether  or not  consecutive,  on the  Series  C  Stock  are in
     default,  in  whole,  or in part,  the  holders  of the  Series C Stock are
     entitled to elect the smallest  number of  directors as would  constitute a
     majority  of the Board of  Directors  of the Company and the holders of the
     Company's  Class A  Common  Stock as a class  are  entitled  to  elect  the
     remaining   directors.   Additionally,   under  the   October   1997  Stock
     Subscription  Agreement  entered  into by Westar  and the  Company,  Westar
     agreed  for a period of five  years to limit its  equity  ownership  of the
     Company to 45 percent of the outstanding shares of the Class A Common Stock
     on a fully diluted  basis and to not take certain other actions  related to
     controlling  or  attempting  to control the Company  unless it receives the
     Company's  permission  via  the  majority  vote  of  the  directors  of the
     Company's Board of Directors who are not directors  designated by Westar or
     are affiliates of Westar.  However,  if, at any time,  Westar exercises its
     rights to elect the majority of the Board of Directors because four or more
     quarterly dividends,  whether or not consecutive, on the Series C Stock are
     in default, in whole or in part, all directors are entitled to vote on such
     ownership issue and not just the non-Westar designated directors.

     Dividends  were  declared  and paid as  required  for each of the  quarters
     through  April 15,  1999.  While the Board has  authorized  the  payment of
     dividends  to the extent  such  declaration  and  payment is allowed  under
     applicable  Delaware  corporate law,  under Delaware law,  dividends on the
     Series C Stock could not be declared and paid as required on July 15, 1999,
     October 15, 1999,  January 15, 2000 or April 15, 2000.  In March 2000,  the
     Company  reached an  agreement  with Westar  whereby the  dividends  due on
     October 15, 1999,  and January 15, 2000,  were waived by Westar in exchange
     for the  Company's  release of Westar and its  parent,  Western  Resources,
     Inc., from certain non-compete  agreements.  The Company remains delinquent
     on the July 15,  1999  (15,823  shares of Series C Stock) and the April 15,
     2000,  dividend  ($81,040 cash dividend)  requirements.  The amounts waived
     were  16,208  shares of Series C stock  related to the  October  15,  1999,
     dividend  and $83,015 in cash  dividends  related to the January 15,  2000,
     dividend.


<PAGE>F-36

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Litigation update. 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 Company settled this matter in
     April 2000.

     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 sought  reimbursement for expenses  allegedly  incurred by ECCI in the
     preparation  of an audit  and lost  profits.  OES  settled  this  matter in
     December 1999, and execution of the final settlement agreement is pending.

     The settlements of the two matters discussed above were immaterial.

     In  November  1999,   Independent   Energy  Services,   Inc.   ("IES"),   a
     subcontractor  to the Company,  filed a suit (United States District Court,
     District of New Jersey,  Case No.  99-5159  (AET))  against the Company and
     three of its directors and officers alleging breach of contract and related
     causes of action in connection with one of the Company's projects. The suit
     seeks payment of monies  ($434,234)  allegedly due under a subcontract,  as
     well as consequential damages, interest and costs of suit. In January 2000,
     IES filed a second action  (Superior  Court of New Jersey,  Morris  County,
     Docket No.  L-214-00)  against  the Company  and two of its  directors  and
     officers  alleging  similar breach of contract and related causes of action
     in  connection  with  another of the  Company's  projects.  This suit seeks
     payment of monies ($710,562) allegedly due under a subcontract,  as well as
     consequential  damages,  interest and costs of suit.  The Company has filed
     its answers in both actions, which included counterclaims  alleging,  among
     other things,  that IES breached the applicable  subcontracts by failing to
     comply with their respective terms.

     Additionally,  in January 2000, EUA Cogenex Corporation ("Cogenex") filed a
     suit (United States District  Court,  District of  Massachusetts,  Case No.
     00-10128)  alleging,  among other things,  breach of contract in connection
     with a Forbearance  Agreement entered into by the Company and Cogenex.  The
     Company  negotiated a settlement of this matter that involves the execution
     and filing of an amended standstill order and a stipulated  judgment if the
     Company fails to make certain agreed-upon payments to Cogenex.

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

     In April 2000, the Company was served with two separate  actions by General
     Accident  Insurance Company of America  (Superior Court of New Jersey,  Law
     Division, Atlantic County, Docket No. ATL-L-93-00 and Superior Court of New
     Jersey,  Law Division,  Morris  County,  Docket No.  L-214-00)  against the
     Company and other parties  alleging  breach of contract and related actions
     in  connection  with  one of  the  Company's  projects.  The  actions  seek
     indemnification  (in the  amount  of  $710,562)  allegedly  owed  under  an
     indemnity agreement executed by the Company, plus interest, costs and other
     damages.  The Company has filed its answers in both actions.  Additionally,

<PAGE>F-37

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     in May 2000, D. Falasca Plumbing,  Heating,  Cooling, Inc., a subcontractor
     to the Company on this  project,  filed  certain  cross-claims  against the
     Company in the above actions alleging breach of contract and related causes
     of actions in connection with this project.  The cross-claims  seek payment
     of monies ($757,337)  allegedly owed under certain agreements,  including a
     subcontract,  plus interest,  costs of suit and other alleged damages.  The
     Company was served  with copies of these  claims in late May and early June
     2000, and is in the process of preparing its responsive pleadings.

<PAGE>F-38

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


21.  Restated Quarterly Financial Statements (unaudited)

    The Company was required to restate  previously issued financial  statements
    (additionally,  see note 3) for a change in the timing of the  recording  of
    certain  revenue  and  expense  items.  The impact of these  corrections  on
    company's financial results for the quarters in the fiscal years ending June
    30, 1998 and 1999 is summarized below:

<TABLE>
<CAPTION>


                                                              Three month periods ended,

                                          September 30,    September 30,      December 31,      December 31,
                                               1997            1998               1997              1998
                                          ------------     ------------       ------------      ------------

<S>                                       <C>              <C>                <C>               <C>
Revenues                                  $  2,184,918     $  9,312,759       $  3,250,691      $  9,314,702
Utility Revenue                                 97,509          141,668             97,509           141,668
                                          ------------     ------------       ------------      ------------
  Total Revenues                             2,282,427        9,454,427          3,348,200         9,456,370
Cost of sales                                1,575,806        7,902,823          2,544,083         7,767,131
                                          ------------     ------------       ------------      ------------
  Gross margin                                 706,621        1,551,604            804,117         1,689,239

Selling, general, and administrative
  expenses                                     596,047        2,982,080          1,096,902         3,021,839
                                          ------------     ------------       ------------      ------------
  Operating income (loss)                      110,574       (1,430,476)          (292,785)       (1,332,600)

Other income (expense)                         (30,201)         (72,142)           (22,004)          (66,510)
                                          ------------     ------------       ------------      ------------
Income (loss) before provision for
  income taxes                                  80,373       (1,502,618)          (314,789)       (1,399,110)

Provision for income taxes                       6,738                -              5,499                 -
                                          ------------     ------------       ------------      ------------
Net income (loss)                         $     73,635     $ (1,502,618)      $   (320,288)     $ (1,399,110)
                                          ============     ============       ============      ============
Net income (loss) allocated to
  common stockholders                     $     73,635     $ (1,528,193)      $   (320,288)     $ (1,449,478)
                                          ============     ============       ============      ============
Basic income (loss) per common share      $       0.01     $      (0.08)      $      (0.02)     $      (0.08)
                                          ============     ============       ============      ============
Diluted income (loss) per common share    $       0.01     $      (0.08)      $      (0.02)     $      (0.08)
                                          ============     ============       ============      ============
Weighted average shares outstanding -
  basic                                     10,944,172       18,295,536         13,519,572        18,488,514
                                          ============     ============       ============      ============
Weighted average shares outstanding -
  diluted                                   10,944,172       18,295,536         13,519,572        18,488,514
                                          ============     ============       ============      ============

</TABLE>

<PAGE>F-39

                   ONSITE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                              Three month periods ended,

                                             March 31             March 31
                                               1998                 1999
                                          --------------       --------------
Revenues                                   $  3,399,765         $ 12,626,593
Utility Revenue                                  97,509              141,668
                                           ------------         ------------
Total Revenue                                 3,497,274           12,768,261
                                           ------------         ------------
Cost of sales                                 2,666,717            9,309,107
                                           ------------         ------------
  Gross margin                                  830,557            3,459,154

Selling, general, and administrative
  expenses                                    1,185,266            2,950,054
                                           ------------         ------------
  Operating income (loss)                      (354,709)             509,100

Other income (expense)                          (69,727)             (26,425)
                                           ------------         ------------
Income (loss) before provision for
  income taxes                                 (424,436)             482,675

Provision for income taxes                            -                    -
                                           ------------         ------------
Net income (loss)                          $   (424,436)        $    482,675
                                           ============         ============
Net income (loss) allocated to common
  stockholders                             $   (448,811)        $    431,079
                                           ============         ============
Basic income (loss) per common share       $      (0.03)        $       0.02
                                           ============         ============
Diluted income (loss) per common share     $      (0.03)        $       0.02
                                           ============         ============
Weighted average shares outstanding          14,714,361           18,537,128
                                           ============         ============
Weighted average shares outstanding          14,714,361           22,567,490
                                           ============         ============