UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                   FORM 10-KSB

[x]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                      For the year ended December 31, 2003

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                  For the transition period from _____ to _____

                        Commission file number 000-27825


                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                 (Name of small business issuer in its charter)

                 Nevada                                 73-1552304
      (State or other jurisdiction         (I.R.S. Employer Identification No.)
   of incorporation or organization)

    2903 N.E. 109th Avenue, Suite D
         Vancouver, Washington                             98682
(Address of principal executive offices)                (Zip Code)

                    Issuer's telephone number (360) 883-5949

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

Securities registered under Section 12(g) of the Exchange Act:
Common stock, $0.001 par value per share

Check whether the issuer (1) filed all reports required to be file by Section 13
or 15(d) of the Exchange Act during the past 12 months and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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
amendments to this Form 10-KSB. [X]

Issuer's revenues during the year ended December 31, 2003: $-0-

The aggregate market value of the voting and non-voting common equity held by
non-affiliates was $1,386,977.73 computed by reference to the price at which
common equity was sold as reported by the OTC Bulletin Board ($0.03) as of May
19, 2004.

The number of shares outstanding of the issuer's common stock as of May 19,
2004, was 60,812,591 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None

                                       -1-
<PAGE>
                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

General

Hydro Environmental Resources,  Inc. was organized as an Oklahoma corporation on
November 10, 1998. We  reorganized  as a Nevada  corporation  in August 2001. We
design,  build,  and manage  inexpensive and  environmentally  friendly fuel and
power producing systems. Our systems employ a prototype technology that produces
clean  burning , low cost  hydrogen gas at low pressure  using any water sources
and at low  temperature.  We focus on the production of alternate energy with an
emphasis on "off grid" solutions that meet market and customer  requirements for
"green  energy,"  waste  treatment,  and  clean,  potable  water  that uses this
technology. Our systems also produce high grade by-products for sale.

We  acquired  our  technology  in 1999 from  James  Pelto  (also  known as James
Strader),  one of its inventors,  and in 2003 from David  Youngblood,  the other
inventor.

Overview of ECHFR

Our principal product,  an electrical  chemical hydrogen fuel reactor ("ECHFR"),
is a fuel  reactor  that  produces a  commercial  grade of  hydrogen  gas at low
pressure.  The ECHFR uses a closed system  electrical  chemical  procedure  that
produces both  hydrogen gas and residual  heat. A user  introduces  certain safe
compounds to any water based liquid.  The introduction of these compounds causes
a low voltage electrical reaction to take place at temperatures  ranging between
60 and 300 degrees  Fahrenheit.  This  reaction  produces  both hydrogen gas and
distilled potable water suitable for human consumption.

Users control both the timing of the  production  and the amount of the hydrogen
gas produced by controlling  the timing and the amount of the compounds added to
the ECHFR.  As a result,  users are not required to store hydrogen for later use
in high pressure tanks. The ECHFR also does not emit any odors, fumes, or smoke.
Instead,  it produces a commercial  grade of pure  hydrogen  without the need of
further treatment.

We produce ECHFRs in varying sizes ranging from  extremely  compact and portable
(hand-size)  to large volume  systems of 3,000 gallons or more.  The most common
sizes manufactured are five gallon and double five gallon systems.

Our other  principal  products  are chemical  by-products  produced by the ECHFR
during the production of hydrogen.  The ECHFR, in addition to producing hydrogen
and such  chemical  by-products,  may be used as an alternate  energy  source to
supply heat energy for homes and businesses.

Benefits of ECHFR

We believe that the ECHFR has the following benefits:

         - Pure Hydrogen.  Our recent testing of the hydrogen  demonstrated that
           the  purity  ranged  from a low  99.999  percent to a high of 99.9992
           percent. We are currently  developing a stainless steel reactor which
           we expect will improve  purity to a 99.9999  level.  Our testing also
           has  demonstrated  that the cost to operate the ECHFR is low. It will
           cost  approximately  65 cents to produce 10.78 cubic feet of hydrogen
           gas for a cost of six cents per cubic foot of hydrogen gas  produced.
           Our estimates do not include packaging costs. We expected those costs
           to vary depending on the application,  the size of the ECHFR, and the
           gas purity required.

         - Low  Pressure.  The ECHFR  does not  require  high  pressure  or high
           temperatures to produce hydrogen (although we may configure the ECHFR
           to produce hydrogen gas at a higher pressure, if needed).

                                       -2-
<PAGE>
         - Cost Effective.  We use compounds (that is,  chemicals and metals) in
           the ECHFR that are readily available and are highly  affordable.  The
           ECHFR does not require pure or potable water to produce hydrogen.  It
           can use sewer water.  We calibrate  the ECHFR to control the hydrogen
           production by switching on and off its reaction process and, in doing
           so, we allow users to conserve the amount of compounds used.

         - Environmentally  Safe. The ECHFR does not generate any odors,  fumes,
           or smoke  and does not  otherwise  emit  any  pollutants.  The  waste
           material from the chemicals the ECHFR uses in the reaction process is
           inert and can be disposed of easily and  safely.  Hydrogen  also does
           not produce any greenhouse gases, particularly carbon dioxide.

         - Low  Maintenance.  The ECHFR does not have any moving  parts and does
           not require frequent  replacement of the chemicals and metals used in
           the reaction process.  It also does not require pure or potable water
           to produce hydrogen unlike other hydrogen conversion processes.

         - Customizable.  The  ECHFR is  available  in many  sizes.  We also can
           retrofit  it to satisfy  variable  energy  demands or to operate as a
           parallel  system  or  as  one  large  unit  for  high  output  energy
           applications.

Potential Applications of ECHFR

We believe the ECHFR has the following potential applications:

         - For  integration  with  fuel cell  technology  for the  operation  of
           automobiles and for heating homes and office buildings.

         - For  applications  that  currently  use fossil  fuels  (such as coal,
           petroleum, and natural gas).

         - For use in  industries  requiring  hydrogen as a raw material such as
           the  semiconductor  industry which uses hydrogen gas to clean silicon
           wafers.

         - For use in remote regions where geographic and economic factors leave
           people in those regions  without  sufficient  energy,  given that the
           ECHFR is economical, easy to use, and safe.

         - For treating water since the ECHFR uses any form of water,  including
           salt water, industrial waste water, polluted water, or rain water.

         - For heating homes and businesses as an alternate energy source.

We also believe that hydrogen is the next generation energy source and will soon
be a viable affordable alternative to fossil fuels. As a result, we believe that
our products will have increased  applications as hydrogen becomes more and more
of an energy source.

Competition

The  market for fuel and power  producing  systems  is highly  competitive.  Our
competitors  have  substantially   greater  capital   resources,   research  and
development capabilities,  manufacturing and marketing resources, and experience
than us. These companies  represent  significant  long-term  competition for us.
Competitors  may be able to develop  products  that are as effective as, or more
effective,  easier or cheaper  to use,  than  those  offered by us.  There is no
assurance that we will be able to  successfully  compete with them or compete at
all.

We believe one of our principal direct competitors are manufacturers of hydrogen
fuel  cells.  Hydrogen  fuel cells are  electro-chemical  devices,  similar to a
battery,  in which hydrogen (either pure hydrogen gas or hydrogen extracted from
a fuel that  contains  the  element)  and oxygen  from the air are  combined  to
produce  electricity,  water and a modest amount of

                                       -3-
<PAGE>
waste heat. The conversion  efficiency can be as high as 80 percent,  but actual
values  vary with fuel cell types.  Each cell  produces  0.5 to 0.9 volts.  As a
result,  a large  number of cells  must be  stacked  together  and  electrically
connected  in a series  and  parallel  to achieve  the  desired  output.  Like a
battery,  a fuel cell stack has no moving parts (except for small fans and pumps
to remove or recover  waste heat) has near-zero  emissions  except for water and
operate quietly.  These  characteristics  make the fuel cell a highly attractive
power source for automobiles and other vehicles and for stationary power plants.

Fuel cell power systems are comprised of three types:

         - Those  that  will   replace  the   internal   combustion   engine  in
           automobiles, trucks and buses.

         - Those that will serve as a distributed  generation  power plant close
           to homes, buildings, and manufacturing plants.

         - Those  that  will  replace  batteries  in  everything  from  cellular
           telephones,  flashlights,  computers,  radios,  golf  carts,  powered
           wheelchairs, to portable outdoor signs.

As reported at a  conference  on The  Business  Case for Fuel Cells (July 15-16,
1999), total worldwide research and development spending on fuel cell technology
is nearly $1 billion per year.  Companies such as Daimler Chrysler and Ford have
recognized  the  future  commercial  potential  of  hydrogen  fuel cells for the
automotive  industry.  They have  developed  strategic  alliances  with and have
invested over $500 million in Ballard Power  Systems,  a leading  company in the
commercialization of the hydrogen fuel cell. Ballard, together with its alliance
partners and  associated  companies,  is  developing  portable  power  products,
transit bus engines,  stationary power products,  and automotive engines.  Other
manufacturers and marketers of hydrogen fuel cells include DCH Technology, Inc.,
ONSI, Ergenics, H Power Corp., and Powerball Technologies.

Patents and Other Intellectual Property Rights

We applied for patents for our  technology on April 16, 2003. We cannot give any
assurances  that  patents  will be issued and, if patents are issued,  that they
will not infringe on other  patents.  We do not have an estimated time frame for
the patents to be issued.

We also rely on trade secrets and proprietary  know-how which we protect in part
by confidentiality  agreements with our employees,  consultants,  and others. We
cannot give any assurances that these  agreements will not be breached,  that we
would not otherwise have adequate remedies in the event of their breach, or that
our trade secrets will not otherwise become known or independently  developed by
competitors and others.

Employees

We presently have three officers and three directors. The officers and directors
are engaged in other  business  activities and devote no more than 50 percent of
their time to our business. We currently do not have any full-time employees. We
hope to hire up to nine employees  during the next twelve months to continue the
development  and testing of and to market the ECHFR to the extent that available
cash resources will permit us to employ them.

ITEM 2.    DESCRIPTION OF PROPERTY

We do not own any real  property.  We lease  offices at 2903 N.E.  109th Avenue,
Suite D, Vancouver, Washington 98682.

ITEM 3.    LEGAL PROCEEDINGS

There are  currently no material,  pending legal  proceedings  to which we are a
party. From time to time, we become involved in ordinary, routine, or regulatory
legal proceedings incidental to our business.


                                       -4-
<PAGE>
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We do not have anything to report under this item.

                                     PART II

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

Our common stock, $.001 par value, is our only class of common equity, is traded
on the  over-the-counter  under the  symbol  "HYVR.OB"  and is quoted on the OTC
Bulletin  Board.  Over-the-counter  market reflect  inter-dealer  prices without
retail  mark-up,  mark-down,  or commission  and may not  necessarily  represent
actual transactions.  The high and low sales prices for the years ended December
31, 2002 and 2003, were as follows:

             Fiscal 2002               High                       Low

             Quarter 1                 $0.14                      $0.018
             Quarter 2                 $0.058                     $0.017
             Quarter 3                 $0.055                     $0.030
             Quarter 4                 $0.150                     $0.040

             Fiscal 2003               High                       Low

             Quarter 1                 $0.09                      $0.057
             Quarter 2                 $0.75                      $0.045
             Quarter 3                 $0.055                     $0.025
             Quarter 4                 $0.042                     $0.02

The number of shareholders of record and approximate number of beneficial owners
of our common stock at May 19, 2004, were 493 and 1,458 respectively.

We did not  declare  or pay any  cash  dividends  in 2002 or 2003 on our  common
stock.  We do not  anticipate  declaring or paying cash  dividends on our common
stock in the foreseeable future.

Sales of Unregistered Securities

In the three years preceding the filing of this Annual Report on Form 10-KSB, we
have issued our common stock in the  following  transactions,  each of which was
either  intended  to  be  exempt  from  the  registration  requirements  of  the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereunder:

         - On March 20, 2002, we issued 250,000 shares of our common stock to an
           entity for public relations and marketing services.

         - On May 6, 2002, we sold  1,300,000  shares of our common stock to two
           persons for $10,000.

         - On May 16, 2002,  we issued  2,500,000  shares of our common stock to
           three  persons  for  legal,   administrative,   engineering,   public
           relations,  and  marketing  services and sold  450,000  shares to two
           persons for $6,000 in the aggregate.

         - On May 24, 2002,  we issued  1,000,000  shares of our common stock to
           one person for consulting services.

                                       -5-
<PAGE>
         - On June 11, 2002, we issued  1,100,000  shares of our common stock to
           four persons for legal, engineering,  public relations, and marketing
           services  and sold  6,400,000  shares to ten persons and entities for
           $151,500 in the aggregate.

         - On June 13, 2002, we issued  1,800,000  shares of our common stock to
           three  persons for  consulting,  public  relations,  and  promotional
           services and sold 5,170,000  shares to three persons and entities for
           $55,000 in the aggregate.

         - On June 17, 2002,  we issued 60,000 shares of our common stock to one
           person in payment of rent.

         - On June 21, 2002, we issued 160,000 shares of our common stock to one
           person for promotional services.

         - On June 27,  2002,  we sold  1,530,000  shares of our common stock to
           three persons for $39,900 in the aggregate.

         - On July 19, 2002,  we sold 580,000  shares of our common stock to one
           person for $14,500.

         - On September 6, 2002, we issued 300,000 shares of our common stock to
           one person for engineering,  public relations, and marketing services
           and  sold  1,350,000  shares  to  four  persons  for  $27,500  in the
           aggregate.

         - On October 3, 2002, we sold  2,000,000  shares of our common stock to
           one entity for $50,000.

         - On October 31, 2002,  we sold  354,684  shares of our common stock to
           three persons for $11,156 in the aggregate.

         - On November 19, 2002,  we sold 500,000  shares of our common stock to
           one person for $27,500.

         - On December 3, 2002,  we sold  700,000  shares of our common stock to
           one person for $41,750.

         - On December 29, 2002, we issued 725,000 shares of our common stock to
           nine persons who serve as our employees,  officers,  and/or directors
           as compensation for their services.

         - On December 31, 2002,  we sold 225,000  shares of our common stock to
           two persons for $10,000 in the aggregate.

         - On January 17, 2003,  we sold  285,715  shares of our common stock to
           two persons for $10,000 in the aggregate.

         - On January 27, 2003, we issued  580,000 shares of our common stock to
           one of our officers and directors as compensation for his services.

         - On January 30, 2003,  we sold  500,000  shares of our common stock to
           seven persons for $20,000 in the aggregate.

         - On February  12, 2003,  we sold 60,000  shares of our common stock to
           one person for $3,750.

         - On February 21, 2003,  we sold 378,572  shares of our common stock to
           three persons for $15,000 in the aggregate.

         - On February 27, 2003,  we sold 50,000 shares to one entity for $3,850
           and issued  420,000  shares to one person in  repayment  of a debt we
           owed to such person.

                                       -6-
<PAGE>
         - On March 18, 2003, we sold 125,000  shares of our common stock to two
           persons for $5,000 in the aggregate.

         - On March 26, 2003,  we issued  725,000  shares of our common stock to
           nine persons who serve as our employees,  officers,  and/or directors
           as compensation for their services.

         - On March 31, 2003, we sold 333,330  shares of our common stock to one
           person for $10,000.

         - On April 15, 2003,  we sold  2,000,000  shares of our common stock to
           one entity for $50,000.

         - On April 23, 2003, we sold 633,330 shares of our common stock to four
           persons for $20,000 in the aggregate.

         - On April 30, 2003, we sold 333,333  shares of our common stock to one
           person for $10,000.

         - On May 2, 2003, we issued  825,000  shares of our common stock to two
           of our officers and directors as compensation for their services.

         - On May 5, 2003,  we sold  100,000  shares of our common  stock to one
           person for $3,000.

         - On May 28, 2003,  we sold  400,000  shares of our common stock to one
           person for $12,000.

         - On May 30, 2003,  we sold  166,666  shares of our common stock to two
           persons for $5,000 in the  aggregate  and issued 25,000 shares to one
           person for consulting services.

         - On June 6, 2003, we sold 216,666  shares of our common stock to three
           persons for $6,500 in the aggregate.

         - On June 9, 2003, we sold 416,665  shares of our common stock to three
           persons for $12,000 in the  aggregate and issued 25,000 shares to one
           person for consulting services.

         - On June 30, 2003,  we sold 283,332  shares of our common stock to two
           persons for $8,500 in the aggregate.

         - On July 22, 2003,  we sold 250,000  shares of our common stock to one
           person  for  $5,000,  issued  216,375  shares  to  three  persons  of
           consulting  services,  and  issued  825,000  shares  to  three of our
           officers and directors as compensation for their services.

         - On July 28, 2003, we issued 500,000 shares of our common stock to one
           of our employees,  officers and/or  directors as compensation for his
           services.

         - On September 23, 2003, we sold  1,050,000  shares of our common stock
           to four persons for $22,500 in the aggregate.

         - On January 30, 2004, we issued  1,525,010  shares of our common stock
           to  five  persons  who  serve  as  our  employees,  officers,  and/or
           directors as compensation  for their services,  issued 125,000 shares
           to three  persons for public  relations  and other  services,  issued
           250,000 shares to two persons for goods, issued 100,000 shares to one
           person  in  settlement  of a claim,  and sold  200,000  shares to one
           person for $16,000.

         - On March 24, 2004,  we issued  100,000  shares to one of our officers
           and directors as compensation for his services.

ITEM 6.    MANAGEMENT'S PLAN OF OPERATION

Forward-Looking Statements

                                       -7-
<PAGE>
This report  contains  certain  forward-looking  statements and of all known and
unknown  risks  and   uncertainties.   Our  actual  results,   performance,   or
achievements  could differ materially from historical or from any future results
anticipated by the  forward-looking  statements.  In addition to statements that
explicitly  describe  such  risks and  uncertainties,  readers  should  consider
statements    containing   words   like   "believes,"    "expects,"   "intends,"
"anticipates," or "plans" to be uncertain and  forward-looking.  Important risks
that could cause actual  results,  performance,  or  achievements to differ from
those expressed or implied by the forward-looking statements are described below
and elsewhere in this Annual Report on Form 10-KSB.  Investors are cautioned not
to place undue reliance on the forward-looking statements.

Plan of Operation

We intend to satisfy  our cash  requirements  over the next twelve  months.  Our
management is considering the following options:

         - Public and private offerings and sales of our common stock.

         - Issuance of our common stock in exchange for services and products.

         - Loans.

         - Government grants and subsidies.

         - Strategic alliances.

         - Sales and licensing of our products and technology.

We will perform the following  product research and development  during the term
of our plan:

         - Ongoing development of our vehicles that operate using hydrogen.

         - Research and development of hydrogen as a source of heat.

         - Development  of a  fuel  station  for  vehicles  that  operate  using
           hydrogen.

         - Continuing development of our ECHFR.

We do not expect to purchase any significant plan and equipment. We hope to hire
up to nine employees to the extent available cash resources permit us to do so.

We cannot guarantee that we can satisfy our cash  requirements  over the next 12
months and thereafter. If we cannot satisfy such cash requirements,  then we may
not be able to continue as a going concern and, among other things, complete the
development, testing, marketing, and sale of the ECHFRs.

ITEM 7.    FINANCIAL STATEMENTS

The financial  statements and notes thereto  required by this item begin on page
F-1 as listed in Item 13 of Part IV of this Annual Report on Form 10-KSB.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

We do not have anything to report under this item.

                                       -8-
<PAGE>
ITEM 8A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our interim Chief  Executive  Officer and our interim Chief  Financial  Officer,
after  evaluating  our  "disclosure  controls  and  procedures"  (as  defined in
Securities  Exchange  Act of  1934,  as  amended  (the  "Exchange  Act"),  Rules
13a-14(c) and  15-d-14(d)),  have concluded that as of a date within ninety (90)
days of the filing date of this report (the  "Evaluation  Date") our  disclosure
controls and procedures are effective to ensure that information we are required
to  disclose  in  reports  that we file or  submit  under  the  Exchange  Act is
recorded, processed,  summarized, and reported within the time periods specified
in the SEC rules and forms.

Our management,  including our interim Chief Executive Officer and interim Chief
Financial Officer,  does not expect that our disclosure  controls and procedures
will  prevent all error and all fraud.  Because of inherent  limitations  in any
system of  disclosure  controls and  procedures,  no  evaluation of controls can
provide absolute  assurance that all instances of error or fraud, if any, may be
detected. However, our management, including our interim Chief Executive Officer
and interim Chief Financial Officer,  have designed our disclosure  controls and
procedures to provide  reasonable  assurance of achieving  their  objectives and
have, pursuant to the evaluation discussed above,  concluded that our disclosure
controls and procedures  are, in fact,  effective at this  reasonable  assurance
level.

Changes in Internal Controls

Subsequent to the  Evaluation  Date,  there were no  significant  changes in our
internal  controls  or in other  factors  that  could  significantly  affect our
disclosure controls and procedures,  nor were there any significant deficiencies
or material  weaknesses  identified in our internal  controls.  As a result,  no
corrective actions were required or undertaken.

                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Our directors and executive officers are as follows:

<TABLE>
<CAPTION>
------------------------------------ -------- ----------------------------------------- ----------------------------
               NAME                    AGE                    POSITION                         SERVED SINCE
------------------------------------ -------- ----------------------------------------- ----------------------------
<S>                                    <C>      <C>                                       <C>
Ray Heiser                             40       Director                                  September 2003
------------------------------------ -------- ----------------------------------------- ----------------------------
Stephen Lennon                         41       Vice President and Director               June 2002
------------------------------------ -------- ----------------------------------------- ----------------------------
Mark Shmulevsky                        45       Interim Chief Executive Officer,          July 2002
                                                Interim Chief Financial Officer, Chief
                                                Information Officer, Secretary,
                                                Treasurer, and Director
------------------------------------ -------- ----------------------------------------- ----------------------------
Ernie Stockton                         43       Vice President - Sales                    March 2004
------------------------------------ -------- ----------------------------------------- ----------------------------
</TABLE>

Ray Heiser

Mr. Heiser has served as our director since  September 2003. Mr. Heiser has over
14 years of  experience  building the sales and  marketing  operations  for both
start-up companies and ongoing concerns.  Most recently,  Mr. Heiser managed the
northwest  region for a subsidiary of AT&T.  He has extensive  experience in the
systems  integration  sector of  business.  Mr.  Heiser is a graduate of Western
Michigan University.

Stephen Lennon

                                       -9-
<PAGE>
Mr. Lennon has served as our Vice President and Director since June 2002.  Prior
to serving as our Vice President and Director, he served as an Administrator and
Operations Manager for over 20 years for a mechanical contractor, one of the ten
largest mechanical  contractors in the United States of America. Mr. Lennon also
currently serves on the Board of Directors of the Oregon Mechanical  Contractors
Association.  He is certified in certain engineering medias, including pure bond
fusion and infrared fusion.




















































                                      -10-
<PAGE>
Mark Shmulevsky

Mr. Shmulevsky has served as our Interim Chief Executive Officer,  Interim Chief
Financial  Officer,  and Secretary since January 2004. He also has served as our
Chief  Information  Officer,  Treasurer,  and Director since July 2002. Prior to
serving as our officer and  director,  he served as a professor  as Latvia State
Polytechnic  University in Riga, Latvia. During that time, he also has consulted
with many companies,  including Intel,  Lucent,  and Terabean,  and with several
governmental  agencies.  He has  served on the  boards of  directors  of several
companies,   including  Structured  Network  Systems,   Storied  Learning,   and
RealIntellect.

Ernie Stockon

Mr.  Stockton has served as our Vice  President - Sales since March 2004. He has
been involved in the sale and marketing of leading edge,  high tech products for
over  20  years.  He is  most  recently  involved  with  OneTier,  LLC,  a sales
acceleration  firm that provides  product  positionings  and outsourced sales to
early stage companies.  Prior to his involvement with OneTier,  LLC, he has held
sales management positions with five other start-up companies.

Section 16(a) Beneficial Ownership Reporting Compliance

Section  16(a) of the Exchange Act,  requires  that the  Company's  officers and
directors, and persons who own more than ten percent (10%) of a registered class
of the  Company's  equity  securities,  file reports of ownership and changes of
ownership with the SEC.  Officers,  directors and greater than ten percent (10%)
shareholders  are required by SEC  regulation to furnish the Company with copies
of all such reports they file.

Based  solely  on its  review  of the  copies of such  reports  received  by the
Company, and on written  representations by the Company's officers and directors
regarding their  compliance  with the applicable  reporting  requirements  under
Section 16(a) of the Exchange Act, the Company  believes  that,  with respect to
its fiscal year ended  December 31,  2003,  substantially  all of the  Company's
directors  and officers and all of the persons  known to the Company to own more
than ten percent (10%) of the Company's common stock either failed to file, on a
timely basis, or have yet to file the required beneficial ownership reports with
the SEC.

Audit Committee Financial Expert

We do not have a separately  designated  standing  audit  committee.  Our entire
Board of Directors oversees our accounting and financial reporting processes and
the audits of our financial statements.  Since our common stock is not currently
listed  on or  with  a  national  securities  exchange  or  national  securities
association, the Exchange Act does not require that we have an independent audit
committee.  Therefore,  since  we do not have an  audit  committee,  we have not
designated an audit committee financial expert.

Code of Ethics

We adopted a Code of Business  Conduct and Ethics that applies to our  principal
executive officer and our principal financial and accounting officer. We filed a
copy of our Code of  Business  Conduct  and Ethics as Exhibit 14 to this  Annual
Report on Form 10-KSB.


                                      -11-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION

                           Summary Compensation Table

--------------------------------- ------- --------------------------------------
                                                   ANNUAL COMPENSATION
                                          ----------- ---------- ---------------
                                                                   OTHER ANNUAL
    NAME AND PRINCIPAL POSITION    YEAR     SALARY      BONUS      COMPENSATION
                                             ($)         ($)           ($)
--------------------------------- ------- ----------- ---------- ---------------
David Rosenberg(1)                 2003     $12,500       $0          $90,875(2)
Former Chief Executive Officer,    2002          $0       $0          $63,000(3)
President, and Director            2001

--------------------------------- ------- ----------- ---------- ---------------
Jack H. Wynn(4)                    2002          $0       $0             $0
Former President and Director      2001          $0       $0             $0
--------------------------------- ------- ----------- ---------- ---------------

Director Compensation

We pay $250 to each  director for  attending a meeting of the Board of Directors
(although  we are not  obligated  to pay such fee and will not start paying such
fee until we have sufficient available cash resources to pay it). We also issued
to each  director  10,000  shares  of our  common  stock  under  our 2002  Stock
Incentive  Plan on the first  business day  following  the end of each  calendar
quarter, as long as such director is a director on that date and has served as a
director for the entire quarter.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth the beneficial  ownership of our common stock as
of May 19, 2004, by:

         - Each person known by us to be the beneficial  owner of more than five
           percent of our outstanding common stock;

         - Each of our directors;

         - Each of our named executive officers; and

         - All directors and officers as a group.

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

      (1) Mr. Rosenberg resigned as our Chief Executive Officer,  President, and
Director on January 15, 2004.

      (2) We issued to Mr. Rosenberg 525,000 shares of common stock on March 26,
2003,  625,000 shares of our common stock on May 22, 2003, and 625,000 shares of
our  common  stock on July 22,  2003.  The  dollar  amount  for these  shares is
computed by  reference  to the closing  price of our common stock as reported on
the OTC  Bulletin  Board  as of  March  26,  2003  ($0.06),  as of May 22,  2003
($0.055), and as of July 22, 2003 ($0.04).

      (3) We issued to Mr. Rosenberg 1,000,000 shares of common stock on May 22,
2002, under our Consulting  Agreement with him. We also awarded to Mr. Rosenberg
525,000  shares of common  stock on  December  29,  2002,  under our 2002  Stock
Incentive  Plan.  The dollar amount for those shares is computed by reference to
the closing  price of our common stock as reported by the OTC Bulletin  Board as
of May 22, 2002 ($0.21) and as of December 29, 2002 ($0.08).

      (4) Mr. Wynn resigned as our President and Director on January 17, 2002.

                                      -12-
<PAGE>
Except as  otherwise  indicated,  we believe that the  beneficial  owners of our
common stock listed below, based on information  furnished by such owners,  have
sole  investment  and voting  power  with  respect  to such  shares,  subject to
community  property  laws  where  applicable.  We do not  have  any  outstanding
options, rights, or warrants.

<TABLE>
<CAPTION>
-------------------------------------------------------- ---------------------- -----------------
                                                                                   PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1)                  AMOUNT OF OWNERSHIP(2)     CLASS(3)
-------------------------------------------------------- ---------------------- -----------------
<S>                                                              <C>                  <C>
Ray Heiser                                                       775,000              1.27%
-------------------------------------------------------- ---------------------- -----------------
Stephen Lennon4                                                2,655,000              4.37%
-------------------------------------------------------- ---------------------- -----------------
David Rosenberg                                                3,775,000              6.21%
2808 N.W. Westover Road
Portland, Oregon 97210
-------------------------------------------------------- ---------------------- -----------------
Mark Shmulevsky                                                3,125,000              5.14%
-------------------------------------------------------- ---------------------- -----------------
Ernie Stockton                                                         0               *
-------------------------------------------------------- ---------------------- -----------------
15700 South McKinley Avenue, LLC                               8,000,000             13.16%
1800 Whipple Avenue
Redwood City, California 94062
-------------------------------------------------------- ---------------------- -----------------
Officers and directors as a group (four persons)               6,555,000             10.79%
-------------------------------------------------------- ---------------------- -----------------
</TABLE>

<TABLE>
<CAPTION>
                                        Equity Compensation Plan Information

------------------------------ ---------------------------- --------------------------- ----------------------------
                                                                                           NUMBER OF SECURITIES
                                                                                          REMAINING AVAILABLE FOR
                               NUMBER OF SECURITIES TO BE   WEIGHTED-AVERAGE EXERCISE      FUTURE ISSUANCE UNDER
                                 ISSUED UPON EXERCISE OF       PRICE OF OUTSTANDING      EQUITY COMPENSATION PLANS
                                  OUTSTANDING OPTIONS,        OPTIONS, WARRANTS, AND       (EXCLUDING SECURITIES
        PLAN CATEGORY             WARRANTS, AND RIGHTS                RIGHTS             REFLECTED IN COLUMN (A))
                                           (A)                         (B)                          (C)
------------------------------ ---------------------------- --------------------------- ----------------------------
<S>                                         <C>                         <C>                      <C>
Equity compensation plans                  n/a                         n/a                          n/a
approved by security holders
------------------------------ ---------------------------- --------------------------- ----------------------------
Equity compensation plans                   0                           0                        6,775,000
not approved by security
holders
------------------------------ ---------------------------- --------------------------- ----------------------------
TOTAL                                       0                           0                        6,775,000
------------------------------ ---------------------------- --------------------------- ----------------------------
</TABLE>
---------------
      (1) The  address of each  officer  and  director is that of the Company at
2903 N.E. 109th Avenue, Suite D, Vancouver, Washington 98682.

      (2) We determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission ("SEC") based on factors including voting and
investment power with respect to shares.

      (3) Based on an aggregate of 60,812,591  shares of our common stock issued
and outstanding as of May 19, 2004.

      (4) The number of shares owned by Mr.  Lennon  includes  1,285,000  shares
that he holds as nominee  for Joe Lennon.  Mr.  Lennon  disclaims  any voting or
investment power with respect to these shares.

                                      -13-
<PAGE>
Background

The Board of  Directors  adopted the 2002 Stock  Incentive  Plan on December 29,
2002.  The  purposes  of the plan are to attract  and retain the best  available
personnel,  to  provide  additional  incentives  to  employees,  directors,  and
consultants, and to promote the success of our business.

Awards

The plan permits us to award to employees,  directors, officers, and consultants
our common  stock,  options to purchase  our common  stock (both  incentive  and
nonqualified stock options),  and stock appreciation rights. The total number of
shares of our common stock  available  for awards  under the plan is  7,500,000,
increased  annually on the first day of each our fiscal years  beginning in 2004
by a  percentage  equal to five  percent of the fully  diluted  number of shares
outstanding as of that date or a lesser number of shares determined by us.

Our  Board of  Directors  administers  our  plan.  It has the  authority  in its
discretion to:

         - Select the employees,  officers,  directors,  and consultants to whom
           awards may be granted from time to time under the plan.

         - Determine  whether  and to what extent  awards are granted  under the
           plan.

         - Approve the form of award agreement for use under the plan.

         - Determine  the terms and  conditions  of any award  granted under the
           plan.

         - Amend  the  terms of any  outstanding  award  granted  under the plan
           (provided that any amendment will not adversely  affect the rights of
           the person to whom the award was granted under an  outstanding  award
           without that person's written consent).

         - Construe and interpret  the terms of the plan and the awards  granted
           under the plan.

         - Take such other action not inconsistent with the terms of the plan as
           it deems appropriate.

The plan permits  awards  other than  incentive  stock  options to be granted to
employees,  officers,  directors,  and  consultants.  However,  it permits  only
employees to be granted incentive stock options.

We intend to submit the plan to the  shareholders for their approval at the next
annual or special  meeting of our  shareholders.  In the  meantime,  we will not
permit  any  person  to whom we  grant an  incentive  stock  option  (if any) to
exercise  that  incentive  stock option unless and until our  shareholders  have
approved the plan.

We may issue  shares to persons or entities  outside of our plan.  The plan does
not require that we issue shares under that plan only.

We issued shares of our common stock to certain of our employees,  officers, and
directors in 2003 in payment of  compensation  we owed to them. We did not issue
those shares under the plan.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On May 22, 2002, we entered into a consulting  agreement  with David  Rosenberg,
formerly our President and Chief Executive Officer and a director. Mr. Rosenberg
agreed to provide the following services to us:

         - To assist us in our capital formation efforts.

                                      -14-
<PAGE>
         - To assist us in retaining directors and hiring key employees.

         - To assist us in negotiating contracts with federal,  state, and local
           government agencies.

         - To assist us in  establishing  our office and hiring of employees for
           our office.

         - To perform such other duties as the Board of Directors  may from time
           to time request that he provide to us.

We issued  to him  1,000,000  shares of our  common  stock on May 22,  2002,  in
consideration for providing those services to us. We also agreed to issue to him
an  additional  1,000,000  shares of common stock in quarterly  installments  of
250,000  shares of common stock with the first  installment to be issued on July
1, 2002, and subsequent installments to be issued on October 1, 2002, January 1,
2003,  and April 1,  2003.  To date,  we have  issued Mr.  Rosenberg  a total of
1,000,000 shares pursuant to the consulting agreement. Mr. Rosenberg resigned on
January 15, 2004, as our President,  Chief Executive Officer, and director.  The
shares of our common stock that we issued to Mr. Rosenberg in 2003 satisfied our
remaining obligations under the Consulting Agreement to him.

Mr. Jack Wynn,  formerly  our  President  and a director,  loaned to us $53,600,
$134,559,  $24,777,  and $4,500 in each of the years ended  December  31,  1999,
2000, 2001, and 2002,  respectively,  for working capital. These loans each bear
interest at six percent and are due on demand.  As of December 31, 2003,  we had
repaid  $23,099 of these loans.  As of such date, the accrued  interest  totaled
$44,062. The balance due as of December 31, 2003, to Mr. Wynn equals $238,399.

On March 11, 2002,  David  Youngblood,  formerly our  Secretary,  Chief  Science
Officer, and a director, loaned to us $75,000. This loan is interest free and is
due on demand.  Mr.  Youngblood  may  convert his loan into shares of our common
stock.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Financial Statements and Schedules

A list of the Financial  Statements and Financial  Statement  Schedules filed as
part of this  Report  is set  forth in Item 7, and  appears  at page F-1 of this
Report, which list is incorporated herein by reference.

(a)      Exhibits

         Number            Description
         ------            -----------

         3.1               Articles of Incorporation  (incorporated by reference
                           to the Quarterly Report on Form 10-QSB filed with the
                           Securities  and  Exchange  Commission  on August  20,
                           2001).

         3.2               Bylaws  (incorporated  by reference to the  Quarterly
                           Report on Form 10-QSB filed with the  Securities  and
                           Exchange Commission on August 20, 2001).

         3.3               Articles of Merger  (incorporated by reference to the
                           Quarterly  Report  on  Form  10-QSB  filed  with  the
                           Securities  and  Exchange  Commission  on August  20,
                           2001).

         4.1               Form of common  stock  certificate  (incorporated  by
                           reference   to  Exhibit   3.1  to  the   Registration
                           Statement on Form 10-SB filed with the Securities and
                           Exchange Commission on March 22, 2000).

                                      -15-
<PAGE>

         10.1              Stock Purchase  Agreement  dated June 29, 2001,  with
                           PowerTek  Holdings LTD  (incorporated by reference to
                           Appendix  E to the  Proxy  Statement  filed  with the
                           Securities and Exchange Commission July 16, 2001).

         10.2              Lease  Agreement dated December 4, 2002, with Pacific
                           NW Properties  Limited  Partnership  (incorporated by
                           reference  to the Annual  Report on Form 10-KSB filed
                           with the Securities and Exchange  Commission on April
                           15, 2003).

         10.3              Consulting  Agreement  dated May 22, 2002, with David
                           Rosenberg  (incorporated  by  reference to the Annual
                           Report on Form 10-KSB filed with the  Securities  and
                           Exchange Commission on April 15, 2003).

         10.4              2002 Stock Incentive Plan  (incorporated by reference
                           to the Annual  Report on Form  10-KSB  filed with the
                           Securities  and  Exchange  Commission  on  April  15,
                           2003).

         10.5              Form of Award  Agreement  under 2002 Stock  Incentive
                           Plan  (incorporated by reference to the Annual Report
                           on Form 10-KSB filed with the Securities and Exchange
                           Commission on April 15, 2003).

         10.6              Assignment   dated  January  15,  2003,   from  David
                           Youngblood  (incorporated  by reference to the Annual
                           Report on Form 10-KSB filed with the  Securities  and
                           Exchange Commission on April 15, 2003).

         14                Code of Business Conduct and Ethics.

         23                Consent of Cordovano and Honeck, P.C.

         31                Certification  of Chief  Executive  Officer and Chief
                           Financial Officer pursuant to Rule 13a-14(a).

         32                Certifications   pursuant   to  Section  906  of  the
                           Sarbanes-Oxley Act of 2002.

(b)      Reports on Form 8-K

Fees

We did not  file any  Current  Reports  on Form 8-K  during  the  quarter  ended
December 31, 2003.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

The  following  fees were paid to  Cordovano  and Honeck,  P.C.,  our  principal
accountant for the audit of our annual financial statements and related services
in fiscal 2003 and 2002:

                                            2003                2002
                                       ---------------     ----------------
         Audit Fees                        $8,400.00            $9,500.00
         Audit Related Fees                    $0.00              $367.50
         Tax Fees                              $0.00              $350.00
         All Other Fees                        $0.00                $0.00
                                       ---------------     ----------------
                                           $8,400.00           $10,217.50
                                       ===============     ================

Pre-Approval Policies

                                      -16-
<PAGE>
Prior to retaining  Cordovano and Honeck,  P.C. to provide services,  we discuss
the proposed services with the members of the Board of Directors. Their decision
to retain Cordovano and Honeck,  P.C. is then  communicated  back to the Company
and, if  approved,  it is formally  approved at the next meeting of the Board of
Directors.

                                   SIGNATURES

Pursuant to the  requirements  of Section 13 or 15(d) of the  Exchange  Act, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                        HYDRO ENVIRONMENTAL RESOURCES, INC.

                                   By:  /s/ MARK SHMULEVSKY
                                        ----------------------------------------
                                        Mark Shmulevsky, Director, Interim Chief
                                        Executive Officer, Interim Chief
                                        Financial Officer, Secretary, Treasurer,
                                        and Chief Information Officer

                                        Dated:  May 26, 2004

Pursuant to the  requirements  of the Exchange  Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated on May 24, 2004.

Signature                            Title                              Date
---------                            -----                              ----

/s/ STEPHEN LENNON                   Vice President and Director    May 26, 2004
---------------------------------
Stephen Lennon


/s/ RAY HEISER                       Director                       May 26, 2004
---------------------------------
Ray Heiser





















                                      -17-
<PAGE>
                                  EXHIBIT LIST


Exhibit No.       Description
-----------       -----------

3.1               Articles of  Incorporation  (incorporated  by reference to the
                  Quarterly  Report on Form 10-QSB filed with the Securities and
                  Exchange Commission on August 20, 2001).

3.2               Bylaws  (incorporated  by reference to the Quarterly Report on
                  Form 10-QSB filed with the Securities and Exchange  Commission
                  on August 20, 2001).

3.3               Articles of Merger (incorporated by reference to the Quarterly
                  Report on Form 10-QSB filed with the  Securities  and Exchange
                  Commission on August 20, 2001).

4.1               Form of common stock certificate (incorporated by reference to
                  Exhibit 3.1 to the Registration  Statement on Form 10-SB filed
                  with the  Securities  and  Exchange  Commission  on March  22,
                  2000).

10.1              Stock Purchase  Agreement  dated June 29, 2001,  with PowerTek
                  Holdings LTD  (incorporated  by reference to Appendix E to the
                  Proxy   Statement  filed  with  the  Securities  and  Exchange
                  Commission July 16, 2001).

10.2              Lease  Agreement  dated  December  4,  2002,  with  Pacific NW
                  Properties Limited  Partnership  (incorporated by reference to
                  the Annual Report on Form 10-KSB filed with the Securities and
                  Exchange Commission on April 15, 2003).

10.3              Consulting  Agreement dated May 22, 2002, with David Rosenberg
                  (incorporated by reference to the Annual Report on Form 10-KSB
                  filed with the Securities and Exchange Commission on April 15,
                  2003).

10.4              2002 Stock  Incentive Plan  (incorporated  by reference to the
                  Annual  Report on Form 10-KSB  filed with the  Securities  and
                  Exchange Commission on April 15, 2003).

10.5              Form of  Award  Agreement  under  2002  Stock  Incentive  Plan
                  (incorporated by reference to the Annual Report on Form 10-KSB
                  filed with the Securities and Exchange Commission on April 15,
                  2003).

10.6              Assignment  dated  January  15,  2003,  from David  Youngblood
                  (incorporated by reference to the Annual Report on Form 10-KSB
                  filed with the Securities and Exchange Commission on April 15,
                  2003).

14                Code of Business Conduct and Ethics.

23                Consent of Cordovano and Honeck, P.C.

31                Certification  of Chief Executive  Officer and Chief Financial
                  Officer pursuant to Rule 13a-14(a).

32                Certifications  pursuant to Section 906 of the  Sarbanes-Oxley
                  Act of 2002.

                                      -18-
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          INDEX TO FINANCIAL STATEMENTS

                                                                           Page
                                                                           ----
Report of Independent Auditors............................................  F-2

Balance Sheet at December 31, 2003........................................  F-3

Statements of Operations  for the years ended December 31, 2003 and 2002
         and for the period from November 10, 1998 (inception) through
         December 31, 2003................................................  F-4

Statement of Changes in Shareholders' Deficit for the period from
         November 10, 1998 (inception) through December 31, 2003..........  F-5

Statements of Cash Flows for the years ended  December 31, 2003 and 2002
         and for the period from November 10, 1998 (inception)
         through December 31, 2003........................................ F-10

Notes to Financial Statements ............................................ F-11





































                                       F-1
<PAGE>
To the Board of Directors and Shareholders
Hydro Environmental Resources, Inc.

                         REPORT OF INDEPENDENT AUDITORS

We have  audited the balance  sheet of Hydro  Environmental  Resources,  Inc. (a
development  stage company) as of December 31, 2003, and the related  statements
of  operations,  shareholders'  deficit,  and cash  flows  for the  years  ended
December 31, 2003 and 2002, and from November 10, 1998 (inception)  December 31,
2003.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Hydro Environmental  Resources,
Inc. as of December 31,  2003,  and the results of its  operations  and its cash
flows for the years ended December 31, 2003 and 2002, and from November 10, 1998
(inception) through December 31, 2003, in conformity with accounting  principles
generally accepted in the United States of America.

As  explained  in  Note  2 to  the  financial  statements,  Hydro  Environmental
Resources,  Inc.  conducted  significant  transactions  with  its  officers  and
shareholders during the periods presented.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As  discussed  in Note 1 to the  financial
statements,  the Company is in default on certain loans at December 31, 2003 and
has  suffered  significant  operating  losses  since  inception,   which  raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 1. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.




Cordovano and Honeck, P.C.
Denver, Colorado
April 8, 2004

                                       F-2
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                  BALANCE SHEET

                                DECEMBER 31, 2003


<TABLE>
<CAPTION>
                                     ASSETS
Current Assets:
<S>                                                                                              <C>
     Cash........................................................................................$         5,850
                                                                                                  --------------
                  Total current assets...........................................................          5,850

Property and equipment, net of $222,886 of accumulated depreciation (Note 1).....................         22,402
Patent rights and interests, net of $13,500 of accumulated amortization (Note 2).................          1,500
                                                                                                 ---------------
                                                                                                 $        29,752
                                                                                                 ===============
                      LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
     Accounts payable and accrued liabilities....................................................$       157,911
     Due to former officers (Note 2).............................................................        313,399
     Notes payable, convertible to common stock (Note 4).........................................         25,000
     Accrued interest on notes payable (Note 4)..................................................          5,750
                                                                                                 ---------------
                  Total current liabilities......................................................        502,060
                                                                                                 ---------------

Shareholders' deficit (Note 5):
     Preferred stock, $.001 par value; 5,000,000 shares authorized, -0- issued and outstanding...            ---
     Common stock, $.001 par value; 500,000,000 shares authorized, 58,612,581 shares issued
         and outstanding.........................................................................         58,613
     Additional paid-in capital..................................................................      2,844,339
     Deficit accumulated during development stage................................................     (3,375,260)
                                                                                                 ---------------
                  Total shareholders' deficit....................................................       (472,308)
                                                                                                 ---------------
                  ...............................................................................$        29,752
                                                                                                 ===============
</TABLE>


See accompanying notes to financial statements.













                                       F-3
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                                       NOVEMBER 10,
                                                                                                           1998
                                                                  FOR THE YEARS ENDED DECEMBER         (INCEPTION)
                                                                               31,                       THROUGH
                                                                 --------------------------------      DECEMBER 31,
                                                                     2003              2002                2003
                                                                 --------------    --------------    -----------------
<S>                                                              <C>               <C>               <C>
Operating expenses:
     Research and development............................        $    80,608       $       ---       $       194,804
     General and administrative:
         Stock-based compensation:
              Consulting services (Note 5):
                  Officers and directors.................             71,250           112,500               183,750
                  Shareholders...........................                ---           178,567               178,567
                  Other..................................             24,598           181,083             1,408,494
              Legal services.............................                ---            57,000               235,000
              Other......................................              6,000             1,800                45,300
         Related parties.................................                ---               ---                37,000
         Compensation....................................                ---            66,931               196,283
         Professional and consulting services............             87,760            95,760               523,373
         Other...........................................             76,996            95,443               612,008
                                                                 --------------    --------------    -----------------
                           Total operating expenses......            347,212           789,084             3,614,579
                                                                 --------------    --------------    -----------------
                           Loss from operations..........           (347,212)         (789,084)           (3,614,579)

Non-operating income:
     Gain on debt restructure............................             16,140           309,004               325,144
     Other...............................................                ---               300                 1,300
Interest expense:
     Related parties (Note 2)............................            (11,660)          (11,660)              (44,062)
     Amortization of debt issue costs....................                ---               ---               (26,250)
     Other...............................................             (2,000)           (2,000)              (16,813)
                                                                 --------------    --------------    -----------------
                           Loss before income taxes......           (344,732)         (493,440)           (3,375,260)

Income tax provision (Note 3)............................                ---               ---                   ---
                                                                 --------------    --------------    -----------------

                           Net loss......................        $  (344,732)         (493,440)      $    (3,375,260)
                                                                 ==============    ==============    =================

 Basic and diluted loss per share........................        $     (0.00)      $     (0.02)
                                                                 ==============    ==============
Basic and diluted weighted average common shares
     outstanding.........................................         54,721,561        26,114,959
                                                                 ==============    ==============
</TABLE>

See accompanying notes to financial statements.

                                       F-4
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                  STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                                                                          DEFICIT
                                                                                                        ACCUMULATED
                                                                                          ADDITIONAL      DURING
                                                                                           PAID-IN      DEVELOPMENT
                                             PREFERRED STOCK         COMMON STOCK          CAPITAL         STAGE          TOTAL
                                          -------------------- ------------------------ ------------- ---------------- ------------
                                           SHARES   PAR VALUE     SHARES     PAR VALUE
                                          -------- ----------- ------------ ----------- ------------- ---------------- ------------
<S>                                       <C>      <C>         <C>           <C>           <C>              <C>        <C>
Balance, November 10, 1998 (inception)...      --  $       --           --   $      --     $      --        $      --  $        --
Office space contributed by the
    president (Note 2)...................      --          --           --          --         1,000               --        1,000
Net loss.................................      --          --           --          --            --           (1,010)      (1,010)
                                          -------- ----------- ------------ ----------- ------------- ---------------- ------------
    BALANCE, DECEMBER 31, 1998                 --          --           --          --         1,000           (1,010)         (10)

February 1999, sale of common stock
    to officer and affiliates for cash
    ($.001/share) (Note 2)...............      --          --    4,250,000       4,250            --               --        4,250

February 1999, sale of common stock,
    net of $1,925 of offering costs
    ($.001/share) (Note 5)...............      --          --   11,300,000      11,300        (1,925)              --        9,375

March 1999, capital contribution by
    the president (Note 2)...............      --          --           --          --         3,210               --        3,210

May 1999, expenses paid by the
    president on behalf of the
    Company (Note 2).....................      --          --           --          --         1,700               --        1,700

June 1999, shares issued in exchange
    for patent interest and rights
    ($.00l/share) (Note 2)...............      --          --   15,000,000      15,000            --               --       15,000

July 1999, shares issued in exchange
    for financial advisory agreement
    ($.00l/share) (Note 5)...............      --          --      750,000         750            --               --          750

Office space and use of equipment
    contributed by the president
    (Note 2).............................      --          --           --          --        12,000               --       12,000

Net loss.................................      --          --           --          --            --          (78,517)     (78,517)
                                          -------- ----------- ------------ ----------- ------------- ---------------- ------------
    BALANCE, DECEMBER 31, 1999                 --          --   31,300,000      31,300        15,985          (79,527)     (32,242)
</TABLE>


See accompanying notes to financial statements.



                                       F-5
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                  STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                                                                          DEFICIT
                                                                                                        ACCUMULATED
                                                                                          ADDITIONAL      DURING
                                                                                           PAID-IN      DEVELOPMENT
                                             PREFERRED STOCK         COMMON STOCK          CAPITAL         STAGE          TOTAL
                                          -------------------- ------------------------ ------------- ---------------- ------------
                                           SHARES   PAR VALUE     SHARES     PAR VALUE
                                          -------- ----------- ------------ ----------- ------------- ---------------- ------------
<S>                                       <C>      <C>         <C>           <C>           <C>              <C>        <C>
July 2000, sale of common stock..........      --          --    1,000,000       1,000        59,000               --       60,000

Office space and use of equipment
    contributed by the president (Note 2)      --          --           --          --        12,000               --       12,000

Net loss.................................      --          --           --          --            --         (224,139)    (224,139)
                                          -------- ----------- ------------ ----------- ------------- ---------------- ------------
    BALANCE, DECEMBER 31, 2000                 --          --   32,300,000      32,300        86,985         (303,666)    (184,381)

March 2001, shares issued to
    attorney in exchange for legal
    services (Note 5)....................      --          --      200,000         200        51,800               --       52,000

May 2001, shares issued as debt
    issue costs related to promissory
    notes (Note 4).......................      --          --      125,000         125        26,125               --       26,250

May 2001, shares issued in exchange
    for consulting services (Note 5).....      --          --    1,280,078       1,280       304,918               --      306,198

May 2001, shares gifted to a
    shareholder (Note 5).................      --          --      150,000         150        37,350               --       37,500

June 2001, sale of common stock..........      --          --      590,000         590        28,910               --       29,500

Reverse stock split through Plan of
    Merger (Note 5)......................      --          --  (27,716,050)    (27,716)        27,716              --           --

August 2001, shares issued to
    attorney in exchange for legal
    services (Note 5)....................      --          --      200,000         200        49,800               --       50,000

September 2001, shares issued to
    attorney in exchange for legal
    services (Note 5)....................      --          --       50,000          50         9,950               --       10,000

September 2001, shares issued to
    shareholders in exchange for
    consulting services (Note 2).........      --          --    1,000,000       1,000       199,000               --      200,000

October 2001, shares issued to
    attorney in exchange for legal
    services (Note 5)....................      --          --      300,000         300        65,700               --       66,000
</TABLE>

                 See accompanying notes to financial statements.

                                       F-6
<PAGE>

                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                  STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
                                                                                                           DEFICIT
                                                                                                         ACCUMULATED
                                                                                           ADDITIONAL      DURING
                                                                                            PAID-IN      DEVELOPMENT
                                              PREFERRED STOCK         COMMON STOCK          CAPITAL         STAGE          TOTAL
                                           -------------------- ------------------------ ------------- ---------------- ------------
                                            SHARES   PAR VALUE     SHARES     PAR VALUE
                                           -------- ----------- ------------ ----------- ------------- ---------------- ------------
<S>                                        <C>      <C>         <C>           <C>           <C>              <C>        <C>
October 2001, shares issued in exchange
    for consulting services (Note 5).......     --          --    2,379,096       2,379       459,486               --      461,865
November 2001, shares issued in exchange
    for consulting services (Note 5).......     --          --    1,080,000       1,080       187,920               --      189,000
December 2001, shares issued to shareholder
    in exchange for consulting services
    (Note 2)...............................     --                  300,000         300        44,700               --       45,000
Office space and use of equipment
    contributed by the president (Note 2)       --          --           --          --        12,000               --       12,000
Net loss...................................     --          --           --          --            --       (2,233,422)  (2,233,422)
                                           -------- ----------- ------------ ----------- ------------- ---------------- ------------
    BALANCE, DECEMBER 31, 2001                  --          --   12,238,124      12,238     1,592,360       (2,537,088)    (932,490)

February 2002, shares issued to attorney
    in exchange for legal services (Note
    5).....................................     --          --      500,000         500        24,500                        25,000

February 2002, shares issued in exchange
    for consulting services (Note 5).......     --          --    1,478,663       1,479        72,454               --       73,933

February 2002, shares issued to
    shareholder in exchange for
    consulting services (Note 2)...........     --          --    1,021,337       1,021        50,046               --       51,067

March 2002, shares issued to attorney in
    exchange for legal services (Note 5)...     --          --      600,000         600        17,400               --       18,000

March 2002, shares issued in exchange
    for consulting services (Note 5).......     --          --      250,000         250         6,000               --        6,250

March 2002, shares issued to shareholder
    in exchange for consulting services
    (Note 2)...............................     --          --    3,000,000       3,000        87,000               --       90,000

Cancellation of common shares..............     --          --     (350,000)       (350)          350               --           --

May 2002, sale of common stock.............     --          --    1,750,000       1,750        14,250               --       16,000

May 2002, shares issued in exchange for
    consulting services (Note 5)...........     --          --    2,000,000       2,000        51,000               --       53,000
</TABLE>


                 See accompanying notes to financial statements.

                                       F-7
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                  STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
                                                                                                           DEFICIT
                                                                                                         ACCUMULATED
                                                                                           ADDITIONAL      DURING
                                                                                            PAID-IN      DEVELOPMENT
                                              PREFERRED STOCK         COMMON STOCK          CAPITAL         STAGE          TOTAL
                                           -------------------- ------------------------ ------------- ---------------- ------------
                                            SHARES   PAR VALUE     SHARES     PAR VALUE
                                           -------- ----------- ------------ ----------- ------------- ---------------- ------------
<S>                                        <C>      <C>         <C>           <C>           <C>              <C>        <C>
May 2002, shares issued to
    shareholders in exchange for
    consulting services (Note 2).........       --          --    1,500,000       1,500        36,000               --       37,500

June 2002, sale of common stock..........       --          --   13,100,000      13,100       233,300               --      246,400

June 2002, shares issued to attorney
    in exchange for legal services
    (Note 5).............................       --          --      500,000         500        13,500               --       14,000

June 2002, shares issued in exchange
    for consulting services (Note 5).....       --          --    2,560,000       2,560        82,840               --       85,400

June 2002, shares issued in exchange
    for rental services (Note 5).........       --          --       60,000          60         1,740               --        1,800

July 2002, sale of common stock..........       --          --      580,000         580        13,920               --       14,500

September 2002, sale of common stock.....       --          --    1,350,000       1,350        32,400               --       33,750

September 2002, shares issued in
    exchange for consulting services
    (Note 5).............................       --          --      300,000         300        14,700               --       15,000

October 2002, sale of common stock.......       --          --    2,354,684       2,355        58,801               --       61,156

November 2002, sale of common stock......       --          --      500,000         500        27,000               --       27,500

December 2002, sale of common stock......       --          --      925,000         925        50,825               --       51,750

December 2002, shares issued to
    officers and directors in exchange
    for services (Note 2)................       --          --      625,000         625        49,375               --       50,000

December 2002, shares issues in
    exchange for consulting services
    (Note 5).............................       --          --      125,000         125         9,875               --       10,000

Net loss.................................       --          --           --          --            --         (493,440)    (493,440)
                                           -------- ----------- ------------ ----------- ------------- ---------------- ------------
    BALANCE, DECEMBER 31, 2002                  --          --   46,967,808      46,968     2,539,636       (3,030,528)    (443,924)
</TABLE>


                 See accompanying notes to financial statements.

                                       F-8
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                  STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                                                                           DEFICIT
                                                                                                         ACCUMULATED
                                                                                           ADDITIONAL      DURING
                                                                                            PAID-IN      DEVELOPMENT
                                              PREFERRED STOCK         COMMON STOCK          CAPITAL         STAGE          TOTAL
                                           -------------------- ------------------------ ------------- ---------------- ------------
                                            SHARES   PAR VALUE     SHARES     PAR VALUE
                                           -------- ----------- ------------ ----------- ------------- ---------------- ------------
<S>                                        <C>      <C>         <C>           <C>           <C>              <C>        <C>
January 2003, shares issued in
    exchange for consulting services
    (Note 5).............................       --          --      520,000         520        17,680               --       18,200

January 2003, sale of common stock.......       --          --      785,715         786        29,214               --       30,000

February 2003, sale of common stock......       --          --      395,358         395        14,605               --       15,000

March 2003, sale of common stock.........       --          --      458,333         458        14,542               --       15,000

April 2003, sale of common stock.........       --          --    2,966,663       2,967        77,033               --       80,000

April 2003, shares issued in exchange
    for consulting services (Note 5).....       --          --      219,000         219         6,351               --        6,570

May 2003, sale of common stock...........       --          --      500,000         500        14,500               --       15,000

May 2003, shares issued to officers
    in exchange for services (Note 2)....       --          --      825,000         825        23,925               --       24,750

May 2003, shares issued in exchange
    for consulting services (Note 5).....       --          --       25,000          25           725               --          750

June 2003, sale of common stock..........       --          --    1,083,329       1,083        30,917               --       32,000

June 2003, shares issued in exchange
    for consulting services (Note 5).....       --          --       25,000          25           725               --          750

July 2003, sale of common stock..........       --          --      250,000         250         4,750               --        5,000

July 2003, shares issued to officers
    in exchange for services (Note 2)....       --          --    2,325,000       2,325        44,175               --       46,500

July 2003, shares issued in exchange
    for consulting services (Note 5).....       --          --      216,375         217         4,111               --        4,328

September 2003, sale of common stock.....       --          --    1,050,000       1,050        21,450               --       22,500

Net loss.................................       --          --           --          --            --         (344,732)    (344,732)
                                           -------- ----------- ------------ ----------- ------------- ---------------- ------------
    BALANCE, DECEMBER 31, 2003                  --    $     --  $58,612,581   $  58,613    $2,844,339      $(3,375,260)   $(472,308)
                                           ======== =========== ============ =========== ============= ================ ============
</TABLE>

                  See accompany notes to financial statements.


                                       F-9
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                                NOVEMBER 10,
                                                                                                                    1998
                                                                                                                (INCEPTION)
                                                                                                                  THROUGH
                                                                             FOR THE YEAR ENDED                 DECEMBER 31,
                                                                                DECEMBER 31,                        2003
                                                                    --------------------------------------    -----------------
                                                                          2003                 2002
                                                                    ------------------    ----------------    -----------------
<S>                                                                        <C>                 <C>               <C>
Cash flows from operating activities:
     Net loss         ........................................             (344,732)           $ (493,440)        (3,375,260)
     Adjustments to reconcile net loss to net cash used in
         operating activities:
             Depreciation and amortization....................               12,133                 5,262             26,306
             Stock-based compensation.........................              101,848               530,950          2,076,361
             Gain on settlement of debt.......................              (16,140)             (309,004)          (325,144)
             Services contributed by officers (Note 2)........                   --                    --             12,000
             Office space and use of equipment contributed
                  by president (Note 2).......................                   --                    --             25,000
             Changes in operating liabilities:
                  Accounts payable and accrued liabilities....               20,864                16,629            206,234
                                                                    ------------------    ----------------    -----------------
                      Net cash used in operating activities...             (226,027)             (249,603)        (1,354,503)
                                                                    ------------------    ----------------    -----------------
Cash flows from investing activities:
     Purchases of equipment...................................              (17,443)              (13,038)           (35,208)
                                                                    ------------------    ----------------    -----------------
                      Net cash used in financing activities...              (17,443)              (13,038)           (35,208)
                                                                    ------------------    ----------------    -----------------
Cash flows from financing activities:
     Capital contributions from the president.................                   --                    --              4,910
     Proceeds from advances from the Company's
         president    ........................................                   --                 4,500            238,178
     Repayment of advances from the president (Note 2)........                   --                    --            (23,099)
     Proceeds from advances from the Company's
         shareholders ........................................                   --               143,510            569,967
     Repayment of advances from shareholders (Note 2).........                   --              (226,916)          (296,076)
     Proceeds from notes and loans convertible to common
         stock        ........................................                   --                75,000            283,000
     Repayment of convertible notes and loans.................                   --              (150,000)          (150,000)
     Proceeds from sale of common stock (Note 5)..............              214,500               451,056            770,606
     Payment of offering costs................................                   --                    --             (1,925)
                                                                    ------------------    ----------------    -----------------
                      Net cash provided by financing
                           activities.........................              214,500               297,150          1,395,561
                                                                    ------------------    ----------------    -----------------
                           Net change in cash.................              (28,970)               34,509              5,850
Cash, beginning of period.....................................               34,820                   311                 --
                                                                    ------------------    ----------------    -----------------
Cash, end of period   ........................................      $         5,580       $        34,820     $        5,580
                                                                    ==================    ================    =================
Supplemental disclosure of cash flow information:
     Income taxes     ........................................      $            --       $            --     $           --
                                                                    ==================    ================    =================
     Interest         ........................................      $            --       $            --     $           --
                                                                    ==================    ================    =================
Non-cash financing activities:
     Common stock issued in exchange for patent interests
         and rights (Note 2)..................................      $            --       $            --     $      (15,000)
                                                                    ==================    ================    =================
</TABLE>

                See accompanying notes to financial statements.

                                      F-10
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

(1)      NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

The Company was  incorporated  under the laws of Oklahoma on November  10, 1998.
The principal activities since inception have included the acquisition of patent
interests  and rights  for an  Electro-Chem  Hydrogen  Fuel  Reactor  ("ECHFR"),
research and  development  of the ECHFR,  and the sale and issuance of shares of
its $.001 par value common  stock.  The Company was formed to design,  build and
manage inexpensive and environmentally friendly fuel and power producing systems
for remote areas of the world that are without  electricity and other sources of
power. The Company has not earned any revenue since its inception.

BASIS OF PRESENTATION

The  accompanying  financial  statements  have been  prepared on a going concern
basis,  which  contemplates  the  realization of assets and the  satisfaction of
liabilities  in the  normal  course of  business.  As shown in the  accompanying
financial  statements,  the Company is a  development  stage  company that is in
default on certain  loans at  December  31,  2003 and has  suffered  significant
operating losses since inception. These factors, among others, may indicate that
the Company will be unable to continue as a going concern for reasonable  period
of time.

The  financial  statements  do  not  include  any  adjustments  relating  to the
recoverability  and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going  concern is dependent  upon its ability to generate  sufficient  cash
flow to meet  its  obligations  on a  timely  basis  and  ultimately  to  attain
profitability.  The Company's  management  intends to satisfy cash  requirements
through  the sale of its  common  stock  and cash  advances  from  officers  and
principal  shareholders  in exchange for debt or  restricted  common  stock.  In
addition,  management  plans to continue  the policy of issuing  common stock in
exchange for services. Management is also considering (1) a private offering and
sale of common stock,  (2) a public  offering and sale of common stock, or (3) a
combination  of the two  previous  options.  The  Company's  future  success  is
dependent  upon  its  ability  to  create  an  effective   product  and  provide
competitive services on a timely and cost-effective  basis and,  ultimately,  to
attain profitability.

DEVELOPMENT STAGE COMPANY

Hydro Environmental Resources,  Inc. (the "Company") is in the development stage
in accordance with Financial  Accounting  Standards Board ("FASB") Statements of
Financial  Accounting  Standards  ("SFAS") No. 7  "Accounting  and  Reporting by
Development Stage Enterprises".

USE OF ESTIMATES

The  preparation  of the  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  the  reported  amounts of  assets,  liabilities,  and
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

CASH EQUIVALENTS

For the  purposes of the  statement  of cash flows,  the Company  considers  all
highly  liquid debt  instruments  purchased  with an original  maturity of three
months or less to be cash  equivalents.  The Company had no cash  equivalents at
December 31, 2003.


                                      F-11
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

PROPERTY, EQUIPMENT AND DEPRECIATION

Property  and  equipment  are  stated  at cost and are  depreciated  over  their
estimated  useful  lives  (ranging  from 3 to 7 years)  using the  straight-line
method.

Upon  retirement  or  disposition  of the property and  equipment,  the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.  Repairs and maintenance are charged to expense
as incurred and expenditures for additions and improvements are capitalized.

INTANGIBLE ASSETS

Intangible  assets are stated net of  accumulated  amortization  and include the
patent  application  rights and  interests  to the  proprietary  technology  and
processes  involving the ECHFR valued at $15,000.  The $15,000 is amortized on a
straight-line  basis over five years.  Amortization  expense for the years ended
December  31,  2003  and  2002,  and for  the  period  from  November  10,  1998
(inception)  through  December 31, 2003  totaled  $3,000,  $3,000,  and $13,500,
respectively.  Estimated aggregate amortization for December 31, 2004 is $1,500,
when the rights will become fully amortized.

IMPAIRMENTS ON LONG-LIVED ASSETS

The Company  evaluates  the carrying  value of its  long-lived  assets under the
provisions  of SFAS No.  144,  Accounting  for the  Impairment  or  Disposal  of
Long-Lived Assets.  Statement No. 144 requires  impairment losses to be recorded
on long-lived  assets used in  operations  when  indicators  of  impairment  are
present and the  undiscounted  future cash flows  estimated  to be  generated by
those  assets are less than the  assets'  carrying  amount.  If such  assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying value or fair value,  less
costs to sell.

DEBT ISSUE COSTS

Debt issue costs consist of common stock issued to note holders  during the year
ended  December 31, 2001.  Debt issue costs are deferred and amortized  over the
period of the notes.  Amortized  deferred  issue costs are  recorded as interest
expense.  All of the notes  matured  during the year ended  December  31,  2001;
therefore,  the debt issue  costs are  included  in the  accompanying  financial
statements as interest expense.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments,  including cash and current liabilities are
carried at cost, which  approximates  their fair value because of the short-term
maturity of these instruments.

LOSS PER SHARE

The Company  reports net loss per share using a dual  presentation  of basic and
diluted loss per share.  Basic net loss per share  excludes the impact of common
stock equivalents.  Diluted net loss per share utilizes the average market price
per share when applying the treasury  stock method in  determining  common stock
equivalents.  The  Company  has a  simple  capital  structure  for  all  periods
presented;  therefore,  basic and diluted  losses per share at December 31, 2003
and 2002 are equal.

                                      F-12
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

INCOME TAXES

Income taxes are provided  for the tax effects of  transactions  reported in the
financial  statements  and consist of taxes  currently due plus  deferred  taxes
related  primarily to  differences  between the recorded  book basis and the tax
basis of assets and  liabilities  for  financial and income tax  reporting.  The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes are also recognized for
operating  losses that are  available to offset  future  taxable  income and tax
credits that are available to offset future federal income taxes.

STOCK-BASED COMPENSATION

The Company  accounts for  stock-based  employee  compensation  arrangements  in
accordance with Accounting  Principles Board ("APB") Opinion 25, "Accounting for
Stock Issued to Employees" and complies with the  disclosure  provisions of SFAS
No.  123,   "Accounting  for  Stock-Based   Compensation."  Under  APB  No.  25,
compensation  expense is based on the difference,  if any, on the date of grant,
between  the fair  value of the  Company's  stock and the  exercise  price.  The
Company  accounts  for stock  issued to  non-employees  in  accordance  with the
provisions  of SFAS No. 123.  SFAS 123  requires  the fair value based method of
accounting for stock issued to non-employees in exchange for services.

Companies  that  elect to use the  method  provided  in APB 25 are  required  to
disclose pro forma net income and pro forma earnings per share  information that
would have resulted from the use of the fair value based method. The Company has
elected  to  continue  to  determine  the  value  of  stock-based   compensation
arrangements   with  employees  under  the  provisions  of  APB  25.  Pro  forma
disclosures are not included in the accompanying  financial  statements as there
were no employee stock-based compensation arrangements as of December 31, 2003.

(2)      RELATED PARTY TRANSACTIONS

During May 2003,  the  Company  issued  825,000  shares of its  common  stock to
officers as payment for  salaries.  The market  value of the common stock on the
transaction  date was $.03 per share.  The stock issuances are recognized in the
accompanying financial statements as stock-based compensation expense at a value
of $24,750 for the year ended December 31, 2003.

During July 2003,  the Company  issued  2,325,000  shares of its common stock to
officers as payment for  salaries.  The market  value of the common stock on the
transaction  date was $.02 per share.  The stock issuances are recognized in the
accompanying financial statements as stock-based compensation expense at a value
of $46,500 for the year ended December 31, 2003.

During the years ended December 31, 2003,  2002, 2001, 2000 and 1999, an officer
loaned the Company $-0-, $4,500, $24,777,  $134,559, and $53,600,  respectively,
for  working  capital.  The loans bear  interest  at six  percent and are due on
demand. As of December 31, 2003, the Company had repaid $23,099.  As of December
31, 2003, accrued interest payable on the advances totaled $44,062. The $238,399
balance  of  outstanding  advances  and  accrued  interest  is  included  in the
accompanying financial statements as due to former officers.

During the year ended December 31, 2002, the Company issued  3,125,000 shares of
its common  stock to officers  and  directors  of the  Company in  exchange  for
administrative,  engineering,  public relations, marketing, and other consulting
services.  The market  value of the common  stock  ranged  from $.03 to $.08 per
share.  Stock-based  compensation  expense of  $112,500  was  recognized  in the
accompanying financial statements for the year ended December 31, 2002.

During the year ended December 31, 2002, the Company issued  5,521,337 shares of
its common stock to  shareholders  of the Company in exchange  for  engineering,
public relations,  marketing, and other consulting services. The market value of
the common  stock ranged from $.03 to $.05 per share.  Stock-based  compensation
expense of $178,567 was recognized in the accompanying  financial statements for
the year ended December 31, 2002.

                                      F-13
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

During the year ended  December  31,  2001,  shareholders  advanced  the Company
$425,457 for working capital. The advances do not carry an interest rate and are
due on demand.  The Company  repaid  $69,160 as of December  31, 2001  leaving a
remaining  balance of $365,297 owed at December 31, 2001.  During the year ended
December 31, 2002, the shareholder  advanced the Company an additional  $75,000.
The Company settled  repayment of the advances during 2002 for total payments of
$226,916,  resulting in a gain of $265,641. The $265,641 gain is included in the
accompanying financial statements as gain on debt restructure.

On March 11, 2002, an officer advanced the Company $75,000 to repay liabilities.
The advance does not carry an interest rate and is due on demand. As of December
31, 2003,  the  individual  is no longer an officer of the Company.  The $75,000
balance is included in the  accompanying  financial  statements as due to former
officers.

The president  provided  office space to the Company at no charge from inception
through  December 31, 2001. The office space was valued at $500 per month and is
included  in the  accompanying  financial  statements  as  rent  expense  with a
corresponding credit to additional paid-in capital.

During the periods from  inception  through  December 31,  2001,  the  president
contributed the use of office equipment to the Company. The use of equipment was
valued  at  $500  per  month  and  is  included  in the  accompanying  financial
statements as office expense with a corresponding  credit to additional  paid-in
capital.

On December 5, 2001,  the Company issued 300,000 shares of its common stock to a
shareholder in exchange for consulting services.  The market value of the common
stock  on the  transaction  date was $.15 per  share  resulting  in  stock-based
compensation expense of $45,000.

On September 10, 2001, the Company issued  1,000,000  shares of its common stock
to  shareholders  in exchange for consulting  services.  The market value of the
common  stock  on  the  transaction   date  was  $.20  per  share.   Stock-based
compensation  expense of $200,000 was recognized in the  accompanying  financial
statements for the year ended December 31, 2001.

During the year ended December 31, 1999, the president contributed $3,210 to the
Company for working  capital and paid a $1,700 expense on behalf of the Company.
These  amounts  are  included  in  the  accompanying   financial  statements  as
additional paid-in capital.

On June 16, 1999,  the Company  issued 15 million  shares of its $.001 par value
common  stock in exchange  for an  assignment  of the  interest  and rights in a
patent  pending in Australia for an  Electro-Chem  Hydrogen  Fuel  Reactor.  The
transaction has been valued at predecessor  cost in the  accompanying  financial
statements.

On February 25, 1999,  4,250,000  shares of common stock were sold to an officer
and affiliates of the Company for $4,250 ($.001 per share).

On November  17, 1998,  an affiliate  advanced the Company $100 to open its bank
account. The Company repaid the $100 on February 24, 1999.

                                      F-14
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

(3)      INCOME TAXES

A reconciliation of the U.S.  statutory federal income tax rate to the effective
rate is as follows:

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                  ---------------------------
                                                                                     2003            2002
                                                                                  -----------     -----------
<S>                                                                                   <C>             <C>
U.S. federal statutory graduated rate.....................................            33.88%          34.00%
State income tax rate, net of federal benefit.............................             0.00%           0.00%
Net operating loss for which no tax benefit is currently available........           -33.88%         -34.00%
                                                                                  -----------     -----------
                                                                                       0.00%           0.00%
                                                                                  ===========     ===========
</TABLE>

At December 31, 2003, deferred taxes consisted of a net tax asset of $1,133,096,
due to operating loss carryforwards of $3,320,426,  which was fully allowed for,
in the valuation  allowance of $1,133,096.  The valuation  allowance offsets the
net deferred  tax asset for which there is no assurance of recovery.  The change
in the  valuation  allowance  for the years  ended  December  31,  2003 and 2002
totaled  $110,740 and $167,770.  Net operating  loss  carryforwards  will expire
through 2023.

The  valuation   allowance  will  be  evaluated  at  each  balance  sheet  date,
considering  positive  and  negative  evidence  about  whether the asset will be
realized.  At that time,  the  allowance  will either be  increased  or reduced;
reduction could result in the complete  elimination of the allowance if positive
evidence  indicates  that  the  value of the  deferred  tax  asset is no  longer
impaired and the allowance is no longer required.

Should the Company undergo an ownership  change as defined in Section 382 of the
Internal  Revenue  Code,  the Company's  tax net  operating  loss  carryforwards
generated prior to the ownership change will be subject to an annual limitation,
which could reduce or defer the utilization of these losses.

(4)      NOTES PAYABLE

CONVERTIBLE PROMISSORY NOTES

During the year  ended  December  31,  2001,  the  Company  received  $25,000 in
exchange for  convertible  promissory  notes and 125,000 shares of the Company's
$.001 par value common stock. The notes were as follows:

Note payable to individual, dated February 12, 2001, interest rate
   at 8.00 percent, maturing August 5, 2001..........................    $5,000
Note payable to individual, dated February 12, 2001, interest rate        5,000
   at 8.00 percent, maturing August 5, 2001..........................
Note payable to individual, dated February 12, 2001, interest rate        5,000
   at 8.00 percent, maturing August 5, 2001..........................
Note payable to individual, dated February 12, 2001, interest rate        5,000
   at 8.00 percent, maturing August 5, 2001..........................
Note payable to individual, dated February 12, 2001, interest rate        5,000
   at 8.00 percent, maturing August 5, 2001..........................
                                                                      ----------
                                                                        $25,000
                                                                      ==========

The notes have been in default since August 6, 2001.

                                      F-15
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

On May 17, 2001, the Company  issued  125,000  shares of its  restricted  common
stock to promissory  note holders as debt issue costs for the notes.  The market
value of the common stock on the transaction date was $.21 per share. Debt issue
costs of $26,250 were  recognized in the  accompanying  financial  statements as
interest  expense for the year ended  December  31,  2001.  Interest  expense of
$2,000,  $2,000 and  $32,000  (including  $26,250 of debt issue  costs) has been
recognized in the accompanying financial statements for the years ended December
31, 2003 and 2002,  and the period from  November 10, 1998  (inception)  through
December 31, 2003, respectively.

Each $5,000 note is convertible  into 125,000 shares of the Company's  $.001 par
value common stock.

(5)      SHAREHOLDERS' DEFICIT

PREFERRED STOCK

The Board of Directors  is  authorized  to issue  shares of  preferred  stock in
series  and  to fix  the  number  of  shares  in  such  series  as  well  as the
designation, relative rights, powers, preferences, restrictions, and limitations
of all such series.  The Company had no preferred  shares issued and outstanding
at December 31, 2002.

COMMON STOCK

Shares sold for cash
--------------------

On September 23, 2003, the Company sold 1,050,000 shares of its common stock for
$22,500 ($.02 per share).

On July 22, 2003, the Company sold 250,000 shares of its common stock for $5,000
($.02 per share).

On June 30, 2003, the Company sold 283,332 shares of its common stock for $8,500
($.03 per share).

On June 6, 2003, the Company sold 799,997 shares of its common stock for $23,500
($.03 per share).

On May 28, 2003, the Company sold 500,000 shares of its common stock for $15,000
($.03 per share).

On April 30,  2003,  the Company  sold  333,333  shares of its common  stock for
$10,000 ($.03 per share).

On April 23,  2003,  the Company  sold  633,330  shares of its common  stock for
$20,000 ($.03 per share).

On April 15,  2003,  the Company sold  2,000,000  shares of its common stock for
$50,000 ($.025 per share).

On March 31,  2003,  the Company  sold  333,333  shares of its common  stock for
$10,000 ($.03 per share).

On March 18,  2003,  the Company  sold  125,000  shares of its common  stock for
$5,000 ($.04 per share).

On February  21, 2003,  the Company sold 395,358  shares of its common stock for
$15,000 ($.04 per share).

On January 30, 2003,  the Company  sold  500,000  shares of its common stock for
$20,000 ($.04 per share).

On January 17, 2003,  the Company  sold  285,715  shares of its common stock for
$10,000 ($.035 per share).

During  December  2002,  the Company sold 925,000 shares of its common stock for
$51,750 ($.06 per share).

During  November  2002,  the Company sold 500,000 shares of its common stock for
$27,500 ($.06 per share).

                                      F-16
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

During October 2002,  the Company sold 2,354,684  shares of its common stock for
$61,156 ($.03 per share).

During September 2002, the Company sold 1,350,000 shares of its common stock for
$33,750 ($.03 per share).

During  July 2002,  the  Company  sold  580,000  shares of its common  stock for
$14,500 ($.03 per share).

During June 2002,  the Company  sold  13,100,000  shares of its common stock for
$246,400 ($.02 per share).

During May 2002,  the  Company  sold  1,750,000  shares of its common  stock for
$16,000 ($.01 per share).

During  February 1999,  the Company  offered for sale  11,300,000  shares of its
$.001 par value common stock for $.001 per share  pursuant to an exemption  from
registration  claimed  under Rule 504 of Regulation D of the  Securities  Act of
1933,  as amended (the "Act").  The Company sold all  11,300,000  shares for net
proceeds of $9,375, after deducting offering costs totaling $1,925.

Reverse stock split
-------------------

On August 16, 2001,  subsequent to shareholder  approval at the Company's Annual
Meeting of  Shareholders,  the Company  completed its  redomiciling  merger with
Hydro Environmental Resources, Inc., a Nevada corporation,  and, pursuant to the
Plan of Merger, each five (5) shares of common stock of the Oklahoma corporation
was  exchanged  for one share of the Nevada  corporation.  Following the Plan of
Merger,  the Company's issued and outstanding  common shares totaled  6,929,028.
The loss per share and weighted average common shares outstanding disclosures in
the accompanying  financial statements have been restated to reflect the reverse
stock split.

Stock-based compensation
------------------------

During  July 2003,  the Company  issued  216,375  shares of its common  stock to
unrelated  third parties in exchange for web  development  and other  consulting
services.  The market value of the common stock on the transaction date was $.02
per share.  Stock-based  compensation  expense of $4,328 was  recognized  in the
accompanying financial statements for the year ended December 31, 2003.

During June 2003,  the Company  issued  25,000  shares of its common stock to an
unrelated third party in exchange for consulting  services.  The market value of
the  common  stock on the  transaction  date was  $.03  per  share.  Stock-based
compensation  expense  of $750  was  recognized  in the  accompanying  financial
statements for the year ended December 31, 2003.

During May 2003,  the Company  issued  25,000  shares of its common  stock to an
unrelated third party in exchange for consulting  services.  The market value of
the  common  stock on the  transaction  date was  $.03  per  share.  Stock-based
compensation  expense  of $750  was  recognized  in the  accompanying  financial
statements for the year ended December 31, 2003.

During  April 2003,  the Company  issued  219,000  shares of its common stock to
unrelated  third parties in exchange for public  relations and other  consulting
services.  The market value of the common stock on the transaction date was $.03
per share.  Stock-based  compensation  expense of $6,570 was  recognized  in the
accompanying financial statements for the year ended December 31, 2003.

During  January 2003,  the Company  issued 520,000 shares of its common stock to
unrelated third parties in exchange for public  relations and business  planning
services. The market value of the common stock on the transaction date was $.035
per share.  Stock-based  compensation  expense of $18,200 was  recognized in the
accompanying financial statements for the year ended December 31, 2003.

                                      F-17
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

During the year ended December 31, 2002, the Company issued  4,213,663 shares of
its common stock to  unrelated  third  parties in exchange  for  administrative,
marketing,  public relations,  engineering,  and other consulting services.  The
market value of the common stock ranged from $.03 to $.08 per share. Stock-based
compensation  expense of $181,083 was recognized in the  accompanying  financial
statements for the year ended December 31, 2002.

During the year ended December 31, 2002, the Company issued  1,600,000 shares of
its common  stock to its  attorney in exchange  for legal  services.  The market
value of the  common  stock  ranged  from  $.03 to $.05 per  share.  Stock-based
compensation  expense of $57,000 was  recognized in the  accompanying  financial
statements for the year ended December 31, 2002.

During the year ended December 31, 2002, the Company issued 60,000 shares of its
common stock to an unrelated  third party in exchange for rental  services.  The
market  value of the common  stock on the date of the  transaction  was $.03 per
share.  Stock-based  compensation  expense  of  $1,800  was  recognized  in  the
accompanying financial statements for the year ended December 31, 2002.

During the year ended  December 31, 2001,  the Company  issued 750,000 shares of
its common  stock to its  attorney in exchange  for legal  services.  The market
value of the  common  stock  ranged  from  $.20 to $.26 per  share.  Stock-based
compensation  expense of $178,000 was recognized in the  accompanying  financial
statements for the year ended December 31, 2001.

During the year ended December 31, 2001, the Company issued  4,739,174 shares of
its common stock to unrelated third parties in exchange for marketing,  funding,
administrative,  managing,  due diligence  and other  consulting  services.  The
market value of the common stock ranged from $.15 to $.25 per share. Stock-based
compensation  expense of $957,063 was recognized in the  accompanying  financial
statements for the year ended December 31, 2001.

On May 31, 2001, the Company  gifted  150,000  shares of its  restricted  common
stock to a shareholder.  The market value of the common stock on the transaction
date was  $.25 per  share.  Stock-based  compensation  expense  of  $37,500  was
recognized in the accompanying  financial statements for the year ended December
31, 2001.

On July 10,  1999,  the Company  entered  into a  consulting  agreement  with an
unrelated  third party to provide  financial  advisory  services to the Company.
Upon signing the agreement,  the Company agreed to issue the consultant  750,000
shares of its $.001 par value common stock.  The  transaction  was valued at the
estimated  fair value of the common stock on the date of issuance as  determined
by the Board of Directors based on contemporaneous equity transactions and other
analysis.  The Company  recorded  stock-based  compensation in the  accompanying
financial statements totaling $750.

(6)      COMMITMENTS AND CONTINGENCIES

OFFICE LEASE

The Company  entered  into an  operating  lease for office  space on December 4,
2002. The lease commenced January 1, 2003 and expires December 31, 2005. Minimum
monthly payments range from $1,490 to $1,580 over the term of the lease.  Future
minimum lease payments are as follows:

     December 31,
         2004................................................      $     18,420
         2005................................................            18,960
                                                                   -------------
                                                                   $     37,380
                                                                   =============


                                      F-18
<PAGE>
                       HYDRO ENVIRONMENTAL RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS)

(7)      STOCK PURCHASE AGREEMENT

During  June of  2001,  the  Company  signed  a stock  purchase  agreement  with
PowerTek. PowerTek agreed to purchase shares of the Company's common stock equal
to the number of shares issued and outstanding, on a fully diluted basis, on the
date of closing for $500,000.  Also,  PowerTek agreed to expend not less than $2
million on research and  development in the field of hydrogen  powered fuel cell
technology.  The resulting research and development and related technology would
be  licensed  to  the  Company  on a  non-exclusive,  royalty-free  basis  for a
seven-year period subject to various terms listed in the agreement.

Prior to closing,  PowerTek agreed to loan the Company funds for working capital
at an interest  rate of ten percent.  Upon  closing,  the amounts owed under the
loans would be credited against PowerTek's  $2,000,000  research and development
expenditure  obligation  under the  agreement.  If the  closing  did not  occur,
PowerTek had the option to demand  immediate  payment in full, or to convert the
loans to the  Company's  common  stock at a price of 75 percent  of the  average
quoted  market  price of the  stock at the  close of the  thirty  business  days
immediately preceding the conversion demand date.

The agreement was  terminated on September 1, 2001. As of December 31, 2001, the
Company owed PowerTek $183,000 for loans advanced during the year ended December
31, 2001. $10,363 of interest had accrued on the loans as of December 31, 2001.

On March 13, 2002, the Company entered into a settlement agreement with PowerTek
for the debt and accrued interest owed by the Company to PowerTek. In accordance
with the settlement  agreement,  the Company paid PowerTek  $150,000 against the
debt and PowerTek  forgave the remaining  balance due of $43,363.  The 43,363 is
included in the accompanying financial statements as gain on debt restructure.



























                                      F-19