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

Business of Issuer.    The Company is an energy services company (“ESCO”) that assists energy customers in lowering their energy costs by developing, engineering, installing, owning and operating efficient, environmentally sound energy efficiency and on-site electricity generation projects and advising customers on the purchasing of energy in deregulated energy markets. The Company offers its services to industrial, commercial and institutional 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 itself and through a wholly-owned subsidiary also provides professional consulting services in the areas of market assessment, business strategies and public policy analysis. It is the Company’s mission is to help customers save money through independent energy solutions.

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

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

Energy Nexus Group, Inc.     On July 1, 2001, the Company activated Energy Nexus Group, Inc. (“ENG”), a California corporation, to facilitate the Company’s continuing consulting services business. The Company owns 100 percent of ENG’s outstanding common stock. On July 1, 2001, the Company transferred all of its consulting business unit personnel and related consulting projects backlog to the new subsidiary. During the fiscal year ended June 30, 2002, ENG generated $1,679,000 in consulting revenues and $168,000 in operating losses. As a result, the Company has decided as of September 30, 2002, to wind-down the operations of ENG. As part of this process, the Company and ENG have executed a letter of intent with an unrelated third party for the purchase and sale of certain of ENG’s assets. The Company and ENG also will retain certain key personnel, or

subcontract with the third party purchaser, to complete the remaining backlog of open contracts retained by ENG. Completion of the sale to the third party is contingent upon the execution of a definitive agreement and completion of due diligence. Management’s plan is to cease all selling, general and administrative (SG&A) expenditures, such as business development, that are not directly involved with the completion of the backlog and to cease all operations of ENG at such time as the backlog has been depleted, which is anticipated to be by the end of fiscal year ended June 30, 2003. The Company plans to use the anticipated positive cash flows from the completion of the backlog to pay the outstanding debts of ENG and to recover cash invested by the Company in ENG.

SYCOM ONSITE Corporation.     Effective June 30, 1998, the Company, through its wholly-owned subsidiary SYCOM ONSITE Corporation (“SO Corporation”), acquired all of the assets and specific liabilities of privately-held SYCOM Enterprises, L.L.C. (“SYCOM LLC”), an independent ESCO. SO Corporation acquired the project assets and certain specific liabilities of SYCOM LLC in exchange for 1,750,000 shares of the Company’s Class A Common Stock. In addition, under a Sale and Noncompetition Agreement, SO Corporation acquired the right to the services and expertise of all of the employees of SYCOM Corporation, and SYCOM Corporation and SYCOM Enterprises, L.P. (“SYCOM LP”) agreed to certain non-compete provisions, in exchange for 157,500 shares of non-voting, non-dividend Series D Convertible Preferred Stock of the Company (“Series D Stock”) convertible in the aggregate into 15,750,000 shares of the Company’s Class A Common Stock. The Series D Stock was held in escrow under an Escrow Agreement, to be released when the Company’s Class A Common Stock reached $2.00 per share and annualized after-tax earnings totaled $0.15 per share (including the shares of Class A Common Stock into which the Series D Stock was convertible) over four consecutive quarters, and certain specified debts of SYCOM Corporation and SYCOM LP had been satisfied. These share values and earnings thresholds increased by 10 percent per year after December 31, 1999. Pursuant to the terms of a Stock Repurchase Agreement, the Company could repurchase the escrowed Series D Stock for $0.001 per share if: (i) the Sale and Noncompetition Agreement was terminated; and (ii) after June 30, 2000, such repurchase was 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 were being retained by SO Corporation; and (b) there was 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 could 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 had not been satisfied. At such time as the Series D Stock was to be released from the escrow to SYCOM Corporation, SYCOM Corporation could designate up to three additional members of the Company’s Board of Directors. Two members designated by SYCOM LLC were added to the Company’s Board of Directors in 1998 as a result of the acquisition. These members subsequently resigned in September 2000. The acquisition added offices in New Jersey and Washington D.C. Effective June 30, 2000, the Company terminated the Sale and Noncompetition Agreement with SYCOM Corporation and subsequently closed the New Jersey and Washington, D.C. offices. All outstanding shares of Series D Stock were repurchased. SO Corporation continues to operate as a subsidiary.

Onsite Energy Services, Inc.     In October 1997, the Company acquired Westar Business Services, Inc. (“WBS”), an indirect wholly-owned subsidiary of Westar Energy, Inc. (fka Western Resources, Inc.) (“Westar Energy”) (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., now known as Westar Industries, Inc. (“Westar Industries”), a wholly-owned subsidiary of Westar Energy, with an additional 800,000 shares of Class A Common Stock being released to Westar Industries from an escrow in March 1998 when certain conditions set forth in the acquisition documents were satisfied. Since February 2000, OES focused primarily on providing industrial water services. In December 2001, the Company sold substantially all of the operating assets in OES, which effectively ceased all operations in the subsidiary for the Company. This discontinued operation generated $88,000 in operating income for the year ended June 30, 2002. The Company recognized a gain of $68,000 from the sale of OES’s assets. The assets of OES were sold to an affiliated company of a stockholder for $125,000. This sale was accounted for in accordance with SFAS No. 144.

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

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

Stockholder Deficit, Possible Need for Additional Working Capital and Potential Dilution to Existing Stockholders.     For the years ended June 30, 2000 and 1999, the Company had net losses of $6,637,000 and $6,477,000, respectively, negative working capital of $7,704,000 and stockholders’ deficit of $8,314,000 as of June 30, 2000. However, in fiscal year ended June 30, 2001, the Company achieved net income of $1,657,000. By June 30, 2001, the Company reduced its negative working capital position to $5,619,000 and stockholders’ deficit to $5,494,000. In the fiscal year ended June 30, 2002, the Company generated net income of $255,000 and reduced its stockholders’ deficit to $5,207,000. Management plans to operate the Company so that it will continue to generate additional revenues, through further additions of new projects and improve operating efficiencies by other means to continue profitable operations.

The following steps taken by the Company during the years ended June 30, 2000, 2001 and 2002, helped the Company return to profitability, improve financial position and enhance its future viability:

During the fiscal year ended June 30, 2000, the Company privately placed shares of newly created Series E Convertible Preferred Stock (“Series E Stock”) to existing stockholders for $1,000,000. Concurrent with this private placement, members of senior management of the Company agreed to receive shares of the Company’s Class A Common Stock in lieu of a portion of their salary in an effort to reduce cash outflows related to compensation.

During fiscal years 2000 through 2003 to date, the Company has continued to close operations that were either producing financial losses or operating at marginal profitability levels. These operations were comprised of the following: In fiscal year 2000, the Company sold Lighting Technology Services, Inc. (a lighting contractor) (“LTS”), sold substantially all of the assets of Onsite/Mid-States, Inc. (a manufacturing company based in Kansas) (“OMS”), and discontinued operations associated with its wholly-owned East Coast subsidiaries REEP Onsite, Inc. (a residential energy services operation) (“REEP Onsite”), and ERSI Onsite, Inc. (a commercial energy services operation) (“ERSI Onsite”). In June 2000, the Company terminated the Sale and Noncompetition Agreement with SYCOM Corporation. In December 2001, the Company sold all of the assets and discontinued operations of OES. Finally, in September 2002, the Company decided to wind-down or sell the operations of ENG. The Company and ENG executed a letter of intent with an unrelated third party for the purchase and sale of a majority of ENG’s assets. Completion of the sale to the third party is contingent upon the execution of a definitive agreement and completion of due diligence. Management plans to cease solicitation of new contracts for ENG and complete the remaining backlog of outstanding ENG consulting contracts.

In addition to discontinuing non-performing operations, the Company is attempting to generate cash to fund operations and to retire existing debt through the sale of remaining energy projects on the East Coast in which the Company has significant cash flow interests. During fiscal year 2002, the revenue from such sales was $423,000.

Management believes that all of the above actions will improve the Company’s potential to continue as a going concern by enabling the Company to focus on its core business of providing energy services and projects to customers in the western United States. 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 stockholders.

Divestiture of Recently Acquired Subsidiaries.     As discussed above, the Company has divested itself of several recently acquired subsidiaries over the past three fiscal years. In fiscal years 2001 and 2002, the Company divested its operations in OES through an asset sale in December 2001, and substantially reduced the operations in New Jersey through a termination of the Sale and Noncompetition Agreement with SYCOM Corporation. As a result, the Company has focused on its core business of being a western regional ESCO.

Control of the Company.     The directors, officers and stockholders that own more than 5 percent of the Company’s Class A Common Stock beneficially own approximately 68 percent of the Company in the aggregate. As a result of their ownership, such stockholders 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.

Under the Certificate of Designations for the Series C Convertible Preferred Stock (“Series C Stock”) (see Item 5. Market for Common Equity and Related Stockholder Matters) if, at any time, four or more quarterly dividends, whether or not consecutive, in 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. Although the Company currently is in default on the payment of these dividends, Westar Industries, the holder of all of the issued and outstanding shares of the Series C Stock, has not exercised its rights as of October 8, 2002.

Dependence on Limited Key and New Customers.     For the fiscal years ended June 30, 2002 and 2001, three customers in the aggregate accounted for approximately 49 percent and 29 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.

Loss of Large Non-Residential Standard Performance Contract (“LNSPC”) Program in California.     In mid-2002, the investor owned utilities, and Pacific Gas and Electric Company (“PG&E”) in particular, fully subscribed their budgets for their LNSPC program, which provides financial incentives for large businesses to install energy efficiency projects. During fiscal year 2002, approximately 55 percent of the Company’s energy efficiency projects in terms of revenue participated and benefited from incentives provided by this program. To mitigate this development, the Company received a grant from the California Energy Commission to subsidize energy efficiency projects in California focused on the food processing, beverage and food distribution industries. While the Company believes this development will not have a material negative long-term impact to its operations, the near-term effect could hinder the Company in securing contracts for energy efficiency projects in California.

Revenues Dependent upon Phased Approvals from Government Agencies and Customers.     Pursuant to its energy 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 may be subject to public hearings and local government approval. Therefore, even though the Company has entered into energy efficiency agreements for 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 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, President and Chief Executive Officer, and/or Elizabeth T. Lowe, Vice President, 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, the Class A Common Stock has limited liquidity. Therefore, stockholders may have a difficult time selling their Class A Common Stock without adversely affecting the price of such stock. The NASDAQ has recently announced that it will be discontinuing operations of the OTC Bulletin Board market, and in its place will be launching a new market (BBX) for companies with capitalization similar to the Company. Management is currently evaluating a decision to list the Company’s shares on this market.

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

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

Environmental Risks.     As discussed in Governmental Regulations/Environmental Laws below, the energy efficiency projects of the Company may involve the handling and/or removal of hazardous substances such as polychlorinated biphenals (PCB), asbestos or asbestos-containing materials (ACMs), urea-formaldehyde paneling, fluorescent lamps or HID lamps, and the emissions from on-site electricity 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.

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 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 were paid through the issuance of shares of Series C Stock.

Major Events, Contracts and Customers.    In addition to the acquisitions and divestitures discussed above, the following is a list of major events and contracts that occurred in the fiscal year ended June 30, 2002, and how they are significant to the last two fiscal years’ revenues.

California Energy Crisis.     During fiscal year ended June 30, 2002, the electric utility infrastructure in California was recovering from a severe shortage in electricity generating capacity in meeting the demands of the residents and businesses located in California. The California electricity markets also began to recover from unusually high prices that occurred during the peak of the crisis. The aftermath of the shortage, and the associated high electricity prices left the State of California with over $13 billion in debts and major commitments to purchase power from commercial generators at rates well in excess of normal spot market wholesale rates. While the State of California continues to attempt to renegotiate its purchase contracts, most energy purchasers in California will continue to experience high prices for electricity throughout most of the state. These increases were reflected immediately in rates in the San Diego area and only since June 1, 2001, have they been reflected in rates of other California investor owned utilities. The Company has responded by continuing to promote its services to businesses throughout California. The Company to date has seen significant increases in business development opportunities, but only modest additional actual contract activity, as a direct result of the shortages and higher electricity prices.

Significant Projects

Northern California Business Operations.     In 1998, the Company established an operating business unit in Northern California to develop the energy efficiency projects business for companies primarily engaged in the food processing and distribution industry. The unit combines its food industry and energy efficiency expertise to provide design, installation and verification of energy efficiency measures for food processing and distribution businesses. Typical projects earn revenue from a combination of installation, consulting and sharing of revenues from utility incentive programs available from regional public utilities.

Revenues to the Company from this business unit were $3,903,000 and $3,084,000 for the fiscal years ended June 30, 2002, and 2001, respectively.

City of San Diego.     In November 1999, the Company entered into a master energy services agreement with the City of San Diego, California for the implementation of energy efficiency projects. The first two phases of what is anticipated to be multiple phases identified under the agreement involved lighting, controls and mechanical projects intended to reduce consumption at several City buildings. In the fiscal year ended June 30, 2001, the Company received executed contract amendments for projects under the master agreement for approximately $2,600,000.

Revenues to the Company from these projects were approximately $2,598,000 and $1,600,000 for the fiscal years ended June 30, 2002, and 2001, respectively.

Miller Brewing Company (“MBCO”), Texas.     In November 2001, the Company entered into a $2,308,000 contract with MBCO to install condensers and controls at MBCO’s Fort Worth, Texas brewery. The project is designed to improve the efficiency of MBCO’s refrigeration system by replacing seven existing condensers with six larger condensers with variable frequency drives. The Company also installed a controls system to manage condensers, compressors and other refrigeration equipment.

Revenues to the Company for this project were approximately $2,308,000 and $0 for the fiscal years ended June 30, 2002, and 2001, respectively.

Middletown Township Board of Education.     The Company has executed contracts with the Middletown Township Board of Education (“MBOE”) in Middletown, New Jersey, under a master energy services agreement with total project costs of approximately $22,800,000. The projects are expected to save MBOE approximately $9,000,000 in energy costs over 10 years, and MBOE will receive substantial benefits from incentives paid by the local utility. The project enables MBOE to make significant energy-related capital improvements to its facilities and to fund these improvements primarily through energy cost savings and utility incentives. 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 extending through mid-2004.

Revenues to the Company for this project were approximately $1,105,000 and $940,000 in the fiscal years ended June 30, 2002, and 2001, respectively.

New Jersey Mall.     On September 30, 2002, the Company sold its rights to certain excess revenues under an Energy Services Agreement for $650,000 to its customer, a real estate trust. Under the Energy Services Agreement, the Company provides certain services to the customer, which included collecting payments for electricity and electrical services. These revenues were deposited in a lock-box account and used to pay utility bills and other identified obligations, as set forth in the Energy Services Agreement, with any remaining revenues being distributed between the Company and the customer. In exchange for $650,000, paid by the customer to the Company, the Company relinquished its right to its share of the remaining revenues. The purchase price was determined based on an analysis of the present value of the Company’s future share of the remaining revenues to be earned under the Energy Services Agreement, which was to terminate in or about 2019. While the Company will continue to perform certain services under the Energy Services Agreement, the customer will assume responsibility for the maintenance of the lock-box account and payment of the obligations. The parties also acknowledged their mutual intent for the customer to engage a third party other than the Company to perform the services the Company is continuing to perform under the Energy Services Agreement. Upon engagement of this third party, the Company will no longer have any further obligations under the Energy Services Agreement.

Consulting.     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); 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); 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.). The majority of the Company’s consulting services currently are being performed by ENG. As disclosed above, in September 2002, the Company decided to wind-down or sell the operations of ENG. As part of this process, the Company and ENG executed a letter of intent with an unrelated third party for the purchase and sale of certain of ENG’s assets. Completion of the sale to the third party is contingent upon the execution of a definitive agreement and completion of due diligence. Management plans to cease solicitation of new ENG contracts and complete the remaining ENG backlog of outstanding consulting contracts.

Consulting revenues to the Company were approximately $2,603,000 and $2,300,000 for the fiscal years ended June 30, 2002, and 2001, respectively.

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

Traditional ESCOS.     ESCOs traditionally have provided energy efficiency and related services to customers. These ESCOs have provided services through performance contracting that usually involve a guarantee of savings and financing of the energy efficiency measures installed that is paid for out of savings. An ESCO is a full-service, vertically integrated company that provides a complete range of energy efficiency and power management services to its customers. An ESCO offers 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:

 
 
• An initial energy audit

 
 
• Evaluation of purchase options for electricity and fuel, including tariff analysis

 
 
• Detailed economic and feasibility analysis

 
 
• Engineering and construction services

 
 
• Management of project implementation

 
 
• Verification of savings

 
 
• Monitoring of performance and maintenance during the service term

 
 
• Guaranteed savings and/or shared savings programs

 
 
• Performance contracting with utilities and customers

 
 
• 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 may enter into a Letter of Agreement providing for an audit/feasibility analysis. Under a typical Letter of Agreement, 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, energy efficiency measures and on-site electricity generation 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 savings exceeds the cost of financing for the project.

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

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

Operation and Maintenance (O&M) Services:     This 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 some projects. Guarantees of annual and total savings are coupled with ongoing maintenance of the installed energy efficiency equipment.

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

Performance Contracting.     Performance contracting is the term used to describe the terms and conditions under which an ESCO delivers energy services, typically under a guarantee of energy savings to the customer. The ESCOs payment is based upon delivery of actual energy savings to the customer. The values of these energy savings are used to service the project financing costs if the project is financed or to provide positive cash flow to the customer. In short, the performance contracting process ties payments to actual results, not projections.

Providing Utility Incentives for Customers.     In many markets, utilities are administering performance incentives for customers that install projects 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 available incentives for its projects. These incentives have been delivered through Standard Performance Contract (“SPC”) programs or through utility Demand-Side Management (“DSM”) programs, where the incentive payments are provided based on actual energy savings achieved from the implemented project or through utility rebate programs. 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 and on-site electricity generation 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 operating costs resulting from the project, generally with net positive cash flow to the customer generated throughout the life of the project.

During the last nine 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); PG&E (August 1996); and TXU Electric Company (December 2000). The Company also has been a leading ESCO sponsor for SPC programs in New Jersey, California and Texas.

At June 30, 2002, the Company was delinquent in remitting to some of its customers the customers’ portion of cash utility incentives received by the Company. The Company plans to repay these amounts from future anticipated operating profit and sales of its existing energy efficiency project assets. The Company cannot project with certainty the timeframe in which these obligations will be brought into current status. See Liquidity and Capital Resources for additional discussion.

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 may have significant impacts on the method by which electric power is delivered to customers in the future, and also may affect the way energy services are valued and provided. 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 has expanded the scope of services offered by ESCOs in the competitive marketplace. The Company has expanded its services and organized them to serve the changing energy marketplace. In addition to the traditional ESCO services, the Company is providing the services described below directly to end-use customers or through utility and new energy service companies that are using the Company as an alliance partner to provide the other value-added services:

Services to Assist Customers in Deregulating Markets.

Bill Auditing, Tariff Analyses and Distribution Upgrade:     The Company audits bills, develops load profiles 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 also can 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. The Company also looks for opportunities to upgrade customers to higher, less expensive levels of transmission and distribution service.

Energy Efficiency and Load Management:     Energy efficiency is still the core of the services offered by the Company. Decreasing the use of energy while continuing to perform 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 reduce the customer’s consumption during specific times of high prices, or 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 and 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 local utility’s power 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 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 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.

Demand Reduction Programs:     The Company has developed a demand reduction program by which it coordinates with end-users of electricity to reduce their consumption at periods when California’s power grid is experiencing critical shortages of capacity. The Company may be compensated for the actual reductions in power usage achieved during the period of shortage, and anticipates sharing the revenue with its participating end-user customers in the program.

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 and coordinating evaluation of responses.

Energy Consulting:     The Company offers consulting services for customers, suppliers and other stakeholders on energy assessments, market developments and new power technology applications.

Markets Served and Results of Service.     The Company provides various customer services that focus on saving energy dollars in 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 on-site electricity 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 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. Many utilities have entered the energy efficiency services market through wholly-owned subsidiaries of holding companies in direct competition with ESCOs, including the Company. However, the Company sometimes teams with utility service subsidiaries whereby the utility subsidiary functions as a source of financing for energy efficiency services projects developed and implemented by the Company.

An important competitive advantage for any ESCO is its ability to provide financing and performance guarantees to the customer. This is the area in which many small, independent ESCOs may be at a disadvantage when compared with the larger companies and utilities. However, the Company has successfully used financing sources such as Academic Capital, L.L.C. (“Academic”), Dana Commercial Credit, Koch Financial (“Koch”) and PFG Energy Capital (“PFG”), among others, to provide financing for qualified energy projects, thus maintaining

this important advantage for the Company. Over the last four years, Academic, PFG 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 experience in certain market sectors and regions, 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, several factors 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). The Company does not promote one energy specific technology ( e.g. , an electric technology) when another technology ( e.g. , a gas technology) could better serve the customer.

Projects Experience:     Since 1982, the Company and its acquired affiliates have provided energy efficiency and related services in over 750 facilities and has saved customers well over $150,000,000. These services have been performed in all types of facilities, including industrial facilities, large and small commercial buildings, schools, government buildings, waste water treatment plants, hospitals and homes.

Personnel:     The Company has an experienced staff of energy service professionals, whose senior managers are recognized leaders in the energy services industry. The President and Chief Executive Officer of the Company is a previous President of the National Association of Energy Service Companies (“NAESCO”) and the American Cogeneration Association, and currently serves on the Board of Directors of NAESCO.

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

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

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, California recently initiated an incentive program for on-site electricity generation. 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.

However, some government laws and regulations impose requirements upon the Company. The Company is subject to rules and regulations of the Environmental Protection Agency, the Occupational Safety and Health Administration and other federal, state, county and municipal agencies. The Company’s business entails “indirect” environmental risks from its subcontractors’ handling and removal of polychlorinated biphenals (PCBs) ballasts, asbestos or asbestos-containing materials (ACMs), urea-formaldehyde paneling, fluorescent lamps or HID lamps, and air quality compliance for emissions from its CHP facilities. The Company contracts with certified hazardous waste removal companies or requires its customers or subcontractors to contract with

certified hazardous waste removal companies. The Company obtains 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 12, 2002, the Company employed approximately 34 persons in regular or temporary full-time or part-time positions.