UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2001
                        COMMISSION FILE NUMBER 000-28283

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
               (Exact name of registrant as specified in charter)


               UTAH                                        87-0392000
               ----                                        ----------
   (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                      Identification No.)

12885 HWY 183, STE 108-A, AUSTIN, TEXAS                      78750
---------------------------------------                      -----
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code       (512) 335-1494
                                                         --------------


Securities registered pursuant to section 12(b) of the Act:

   Title of Class                 Name of each exchange on which registered
       NONE                                         NONE


           Securities registered pursuant to section 12(g) of the Act:
                                  Common Stock

                                (Title of Class)

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

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

State issuer's revenues for its most recent fiscal year: $5,051.

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock as of a  specified  date  within the past 60
days: As of September 27, 2001,  the aggregate  market price of the voting stock
held by non-affiliates was approximately $1,864,985.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of September 27, 2001, the Company
had outstanding 24,931,847 shares of its common stock, par value $0.001.



<PAGE>



                                TABLE OF CONTENTS

   ITEM NUMBER AND CAPTION                                               PAGE
   PART I

     ITEM 1.      DESCRIPTION OF BUSINESS                                  3
     ITEM 2.      DESCRIPTION OF PROPERTY                                  6
     ITEM 3.      LEGAL PROCEEDINGS                                        7
     ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF
                  SECURITY HOLDERS                                         7

   PART II

     ITEM 5.      MARKET FOR REGISTRANTS COMMON EQUITY AND
                  RELATED STOCKHOLDER MATTERS                              7
     ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION OR PLAN OF OPERATION                 9
     ITEM 7.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA             12
     ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE                  23

   PART III

     ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                  CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
                  OF THE EXCHANGE ACT                                     23
    ITEM 10.      EXECUTIVE COMPENSATION                                  24
    ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT                                   24
    ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS          25
    ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K                        25



                                       2
<PAGE>



                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

BUSINESS

DeMarco  Energy  Systems,  Inc., a Texas  corporation,  was founded by Mr. Louis
DeMarco,  father of Victor DeMarco,  our current  Chairman,  President and Chief
Executive  Officer,  and began operations in June 1983. On November 17, 1989 Mr.
DeMarco, as an individual,  acquired a majority interest in Fountain Head, Inc.,
a public shell corporation with  shareholders but no operations.  We completed a
reverse merger with this shell on December 1, 1989,  thereby becoming a publicly
traded  corporation,  and  changed  the name of our  company to  DeMarco  Energy
Systems of America Inc., a Utah corporation. We are a development stage company.

From 1978 to 1982 (prior to the formation of DeMarco  Energy  Systems,  Inc.) we
designed and sold solar energy panels to the commercial and residential markets.
This phase of the business was  discontinued  and sold to a third party in 1982.
Mr. Louis DeMarco and two  engineers,  who became  employees of DeMarco  Energy,
then began working on the concept of an energy  efficient  geothermal heat pump.
They received a systems  patent on September 3, 1985 that was later  assigned to
DeMarco Energy Systems,  Inc. in December 1989 in exchange for 10,396,790 shares
of our common  stock.  Of these issued  shares,  Mr.  Victor  DeMarco,  received
4,900,000 shares from his father.  The remaining shares were issued to Mr. Louis
DeMarco for the rights to the patent.

We  currently   provide  energy   solutions  for   commercial  and   residential
applications.  We sell a highly  efficient  heating/cooling  system  called  the
"Energy  Miser".  The Energy  Miser is a patented  geothermal  heat pump  system
utilizing the municipal water main or any other underground piping loop to heat,
cool and provide  domestic hot water for buildings.  The patent  revolves around
the interface with a municipal  water main and has three basic  components.  The
first is taking water out of the  municipal  water main and running it through a
heat exchanger and returning the water to the municipal water main.  Second, the
water  running  through a heat  exchange  device;  and third that heat  exchange
device being an integral part of a geothermal  heat pump. Our patent consists of
all three of these  components  connected  together  in a specific  series.  The
patent is,  therefore,  primarily an installation  technology.  This patent will
expire on September 3, 2005.

From inception to date we have had a total of eleven installations of our Energy
Miser  system in five states.  Based on the results  from our limited  prototype
installations,  we believe  these heat pumps are from 30% to 70% more  efficient
than other methods for heating and air conditioning. We cannot assure you that a
specific percentage savings will occur in future installations of our system.

We derive our revenue in the form of  royalties  from sales of the Energy  Miser
system.  We have an  exclusive  brand  name  agreement  with  Florida  Heat Pump
Manufacturing  Inc.  ("FHP")  located in Florida.  FHP  manufactures  the units,
labels  them with the DeMarco  Energy  Miser name and sells them  through  their
existing  dealer/distributor  network. On February 7, 2001, we signed an amended
agreement  with FHP,  which also allows us to purchase  the Energy  Miser system
directly from FHP and sell our product to consumers  without going through a FHP
representative.  Since the  origination of this agreement  (dated  September 14,
1990) to date there have been a minimal  number of units sold.  We believe  that
the  primary  reason our sales have been  hampered  has been the  reluctance  of
various  government  agencies to allow us to tap into municipal  water mains and
our lack of sufficient operating capital (See "Government Regulations"). We also
believe this lack of sales was  partially  due to  distributors  and dealers not
having  adequate  engineering  instruction  manuals in order to  demonstrate  or
promote the system to prospective customers. In August of 2000, we completed the
engineering  manual and have  developed a marketing and  promotion  program that
introduced the manual to FHP's sales  representatives and distribution  network.
In  August   2001,   we  mailed  our   engineering   manuals  to  82  FHP  sales
representatives  in the  United  States and to 18 FHP sales  representatives  in
foreign countries.

We have also prepared a marketing presentation of the Energy Miser system, which
targets energy service  companies.  These  companies are  subsidiaries  of large
power  companies  that market their power services to large energy usage clients
such as federal  buildings.  Some of the power  companies that have these energy
service company  subsidiaries  include Reliant,  Northern States Power, Duke and
Southern  California  Edison.  Some  other  corporations  that also have  energy
service companies include Johnson Controls,  Honeywell and Chevron. The creation
of these type of  companies  stemmed  from a federal  mandate  signed in 1993 by
President  Clinton called the Climate Change Action Plan. It basically  mandates
that all federally owned  facilities save 30% of their total energy  consumption
by the year 2010.  Energy service  companies offer  performance  contracting for
projects generally greater than $10 million,  most of which require retrofitting
heating and cooling  systems.  They implement  systems that provide the greatest
percentage  of energy  reduction to maximize  savings  benefits and focus on the
shortest  return on  investment  cycle.  We cannot assure you that the marketing
program will produce the desired results of substantially increasing revenues or
profitability.

                                       3
<PAGE>


We have filed a second patent  application with the United States Patent office.
This  patent  is  for  an  invention   that  relates  to  heat  pumps  that  are
automatically  thermodynamically balanced to operate at optimum conditions using
water, and in this case reuse water systems.  This patent,  while similar to our
current  patent,  was designed to utilize  reuse water from  private,  public or
other  types of managed  secondary  water lines with the  DeMarco  Energy  Miser
heating and cooling  system.  Reuse water is defined as treated sewer water that
falls below the  standards of drinking  water.  For many years,  reuse water has
been used in  secondary  water  systems for  watering  lawns and  charging  fire
hydrants,  as well as other non-potable water applications.  It has only been in
recent  years  that  the  secondary   water  systems  have  been  given  greater
consideration due to water shortages.  If this patent is granted we believe that
government  agencies  will be much less  reluctant to allow us to tap into reuse
water mains, although we can give no assurances that they will be receptive.  We
have received  initial comments from the Patent Office and have replied to those
comments.  We are currently  waiting for any further  responses from that office
regarding  this  patent  application.  Over  the last  two  years we have  spent
approximately  $15,000 for research and development  costs as it relates to this
patent.

Prior Operating History

In July 1996, we founded Cyberlink Systems, Inc.  ("Cyberlink"),  a wholly-owned
subsidiary.  Cyberlink  was  organized  to  refurbish  and market used  computer
components such as computer monitors and printers.  Due to the continued decline
in costs of new computer  equipment our profit  margins eroded and continuing to
operate  became  unfeasible.  Cyberlink  ceased  doing  business  in  1998.  All
activities  regarding  Cyberlink  were  wound down over the next year and it was
dissolved in June 2000. (See "Liquidity and Capital Resources").

THE PRODUCTS

The DeMarco Energy Miser Heating and Cooling System

The  Energy  Miser is a  patented  geothermal  heat pump  system  utilizing  the
municipal  water main or any other  underground  piping  loop to heat,  cool and
provide  domestic  hot water  for  buildings.  A  traditional  heat pump  system
transfers energy to and from outside air. Geothermal heat pumps normally use the
heat  absorbing,  or heat  supplying,  capacity of large bodies of water such as
lakes,  ponds,  water  wells or  specially  constructed  networks of pipe called
ground  loops.  The  requirements  for a "large  body of water" as the  external
source or the  costly  excavating  required  for the heat  pump,  imposes  three
constraints on anyone wanting to take advantage of the system.  The first is the
need to be located near such a body of water if a natural  source is going to be
used. The second is the added expense of drilling a water-well. The third is the
need for enough property to accommodate the underground  installation of several
hundred feet of plastic pipe.

Our Energy  Miser  system is a  geothermal  heat pump  system that uses water to
provide the thermal  energy needed to heat and cool.  Our system is different in
that it utilizes municipal water mains,  reused water or any other managed water
supply.  There is no need for ground loops, wells,  chillers,  cooling towers or
boilers.  We believe this makes the Energy Miser system much more viable for the
consumer market.  Although some government  regulators and others have expressed
concerns about the integrity of the water, we believe the concerns are unfounded
because the water simply  passes  through a double  walled plate heat  exchanger
with no chance of contamination  and is returned to the water source with only a
slight temperature change.

The Energy  Miser system has to date  (pending the outcome of the second  patent
application  for the  utilization of reuse water sources) only utilized  potable
water systems as  demonstrated  within several  military bases, as well as other
commercial  and  institutional  applications  nationwide.  If the patent for the
utilization  of reuse water is approved we believe we will have greater  success
in  gaining  acceptance  from  government  regulators  as  their  concerns  over
contamination  of the potable  water supply will be lessened.  These reuse water
sources are controlled at the municipal level and we intend to launch  marketing
efforts in cities using or proposing to implement reuse water systems.  Although
we  anticipate  an increase  in  revenues if the reuse water  patent is approved
there can be no assurances that such marketing  efforts will have their intended
effect of increasing revenues or profitability.

Energy Efficient Lighting Systems

We are not presently involved in energy efficient lighting systems,  however, we
believe  there is a need to either  acquire an entity  that is or joint  venture
with such an entity. We have found that most projects that we are bidding on for
our air conditioning and heating systems also require the installation of energy
efficient  lighting.  We believe that by combining the bidding  process for both
types of energy  saving  services we can  generate  additional  sales  revenues.
However, we cannot assure you that such additional sales will occur.

                                       4
<PAGE>

We have  signed a  Strategic  Partnership  agreement  with  Lighting  Management
Consultants  (LMC) in Houston,  Texas.  The agreement  provides for  forthcoming
lighting  projects  awarded  to  DeMarco to be  performed  by LMC  within  their
geographic business environment.  This agreement was signed on December 20, 1999
and will continue in force until terminated by either party with 60 days written
notice.  All  projects  that are in place  at the  time of  termination  will be
completed  by LMC.  LMC will be  responsible  for all  aspects  of the  lighting
project  including  performing  energy  audits,  preparing the lighting bids and
completing the installation per the terms of the project  requirements.  We will
receive  5%  of  the  revenue   generated   from  all  accepted  bid  contracts.
Additionally,  we have  entered  into a  Strategic  Partnership  with SLi,  Inc.
(NYSE:SLI),  which  provides  for SLi to perform  lighting  retrofit  and energy
management services for DeMarco awarded contracts outside the parameters,  scope
and geography of the LMC partnership. This agreement was signed May 19, 2000 and
contains  the  same  termination  and  responsibility   provisions  as  the  LMC
agreement.

The lighting  retrofit  services  may be offered as a combined  package with the
DeMarco  Energy Miser  system,  creating a  marketing/sales  program  based upon
return on investment time parameters.  Sub-contractors  generally located within
the geographic  region of the project perform lighting  retrofit  installations.
These  sub-contractors  are  identified,  recruited  and  managed  by  DeMarco's
partners. As of the date of this prospectus, we have not initiated sales efforts
for lighting products.

MARKETING AND COMPETITION

We market  and sell our Energy  Miser  system  through a brand name  partnership
agreement with FHP, of Ft.  Lauderdale,  Florida,  and via exposure  through the
Geothermal  Heat Pump  Consortium.  The  Geothermal  Heat Pump  Consortium  is a
consortium of over 80 of the largest  utilities in the United States. A majority
of the heat pump  manufacturers  deal with the  Environmental  Protection Agency
("EPA").  These  utilities  and  manufacturers  have  formed  what is called the
Geothermal Heat Pump  Consortium or Geo Exchange based in Washington,  D.C. This
is our  industry  association.  It  provides  a  constant  source  of leads  and
technical papers and research materials.  DeMarco and FHP focus primarily on the
commercial and institutional markets. We display the Energy Miser at trade shows
in booths for public  exhibition and education.  In addition to trade shows,  we
market  the  Energy  Miser  directly  to end users,  architects,  designers  and
installers of HVAC (Heating,  Ventilation and Air  Conditioning)  equipment.  In
this business  segment,  we are in competition  with all other producers of HVAC
systems,  most of which are more firmly established in the marketplaces and have
substantially greater financial resources than us. We can give no assurance that
we will be able to compete in this market.

A commercial  job will  typically  start at the AE  (Architectural  Engineering)
design  level.  They will design a certain  type of system  requirement  for the
project.  Once this has been accomplished the mechanical engineers will actually
do the computer  design and draw  blueprints.  Then the General  Contractor will
request three (3) different bids on the equipment. If our system technology fits
within  the  requirements  of the  job,  FHP's  sales  representatives  will  be
contacted  and asked to bid the  equipment  portion  of the  project.  We have a
standardized  price for the equipment  although in certain cases,  especially in
military projects, it may be necessary to negotiate the price to be competitive.
In those  instances we will  negotiate  the royalty fees and cut the cost of the
equipment slightly to aid us in getting the project.

On  October  10,  2000,  we  retained  the  services  of  Marschall   Design,  a
fifteen-year-old corporate image consulting company. Marschall will assist us in
our marketing  efforts.  The new media materials became available for release in
February of 2001.  Marschall  assisted  us with  brochures,  tradeshow  display,
stationery,  web  design  plus  any  other  areas  requiring  image  design  and
enhancements.

PWG  Media of  Austin,  Texas  has  been  retained  by us to build an  effective
corporate  visual  program.  An eight-minute  video  describing the Energy Miser
system became available in December of 2000.

GOVERNMENT REGULATION

A significant  obstacle we have  confronted in the marketing of the Energy Miser
is local  governmental  interpretation  and regulation.  Local water regulations
vary from one local  government  agency to the next but most are centered around
concern over  contamination of the local potable water supply.  The Energy Miser
requires a constant  flow of water,  the  volume of which must  increase  as the
amount  of  space  to be  air-conditioned  and or  heated  increases.  For  many
applications,  this  requires  connecting  into the public  water supply to gain
access to "main"  water  lines.  In some  cases  public  officials  in charge of
maintaining  public water  supplies  challenge  any such tapping into the public
potable water  supply.  We contend that the Energy Miser does not use water - it
only uses the thermal  properties  of the water,  meaning that the water removed
from the main is returned at a slightly different temperature.  We are not aware
of any proof to support water quality concerns of public officials.  However, we
can offer no  assurances  that we will ever be able to overcome  the concerns of
public water officials.

                                       5
<PAGE>

At the  federal  level  there  has been some  positive  impact  from  government
actions.  President  Clinton signed the Climate Change Action Plan in 1993. This
required  all  federally  owned  facilities  to save 20% of their  total  energy
consumption by 2005. That act has been revised twice,  and, as of 1999,  federal
facilities were required to save 35% of their total energy  consumption by 2010.
This is a federal mandate.  Most of the military and federal  buildings have not
met this goal.  We believe  most of the  military  and  federal  facilities  are
continuing  to  attempt to find ways to save  energy.  We  further  believe  our
technology  has  the  ability  to  save  the  government  facility  that  energy
percentage  requirement  just by  changing to our air  conditioning  and heating
system  technology.  On the negative side, the federal  government does not have
any regulations  (i.e. the EPA or federal plumbing codes).  There are no federal
codes drawn around the use of municipal  water for this purpose,  which means we
are subject to the varying local laws.

We have spent an  inordinate  amount of time and  effort  over the past years in
lobbying  state and local  government  agencies to enact  legislation  to change
water  codes and rules to allow  access to that  market.  Despite  our  lobbying
efforts, to date there has been very little done by government agencies to enact
the above described  legislation.  As a result,  we have refocused our marketing
efforts  toward  entities  that either own or control  their own water  systems.
Entities  and  institutions  where  we are  concentrating  our  efforts  include
military  bases,  school  systems,  state  or  city  owned  buildings,   federal
facilities,  and large campus type facilities,  such as colleges. These types of
facilities  utilize large quantities of water and in several  instances  control
their own water system.  We have had prior  successes,  though limited in scope,
with  military  installations.  We also believe  smaller  communities  with less
stringent  government  bodies and  regulations  will be good  prospects  for our
energy saving products.  We can give no assurance that our refocused  efforts in
this market will be successful.

RECENT DEVELOPMENTS

During the  eight-month  period from January  through  August 2000,  we issued a
series of convertible  debentures  bearing 8% interest.  A total of $229,000 was
raised from this issuance.  The debentures  mature in 24 months from the time of
issue.  Interest  payments are calculated  quarterly and totaled upon conversion
and included in the stock distribution.  The debentures carry various conversion
rights  ranging  from  $0.10 to $0.45 a share.  The  holders  have the  right to
convert any or all of the principal  into our common stock at any time after the
first 12 months from  issuance.  If all debenture  holders elect to convert,  we
will issue  approximately  1.2 million shares of our common stock to the holders
and be  relieved  of the debt.  We utilized  the  proceeds of these  convertible
debentures to reduce accounts payable and for operating expenses.

We are  currently  finalizing a convertible  debt  offering of  $1,500,000  (see
"MANAGEMENT'S  DISCUSSION AND ANALYSIS OF RESULTS OF  OPERATIONS")  that will be
directed  toward  acquisitions,  marketing,  internal  corporate  infrastructure
development,  and/or  general  administrative  expenses.  We received  the first
$500,000 from this debt offering on September 27, 2000. In conjunction  with the
terms of this  convertible  debt offering we have filed a Form SB-2 on September
21,  2001  with  the  Securities  and  Exchange  Commission  to  register  up to
22,826,086 shares of our common stock.

On November 28, 2000, we in conjunction with the O'Connor Company of Rapid City,
South Dakota were issued the design-win for the DeMarco Energy Miser heating and
cooling system.  The system is currently being installed in the Community Center
in Belle  Fourche,  South  Dakota.  This is a community  center that includes an
olympic size pool, a basketball  court,  locker rooms,  meeting rooms, and a 200
seat auditorium.  The purchase order for 18 units has been issued and all of the
units were delivered by August 18, 2001. FHP manufactured the units.

In February 2001, Supermarket  Environment Services Company notified us that the
Energy Miser system is being  considered for an energy savings pilot program for
a regional  grocery store chain located in the  southwestern  part of the United
States.  We  cannot  assure  you that we will be  successful  in  securing  this
project.

ITEM 2. DESCRIPTION OF PROPERTY

We occupy  approximately  1,200  square  feet of office  space at 12885 Hwy 183,
Suite  108-A,  Austin,  Texas  78750.  We  own no  property  other  than  office
furniture, equipment, software and the patent for the Energy Miser System.

Employees

We  currently  employ  3 full  time  people.  It is  anticipated  that  up to 20
additional  personnel  will be  required  to meet the  demands of the  projected
market over the next five years.  Most of these  positions  will be added in the
areas of  sales,  marketing  and  project  management  as our  projected  volume
increases. We cannot assure you that such volume increases will occur.

                                       6
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any  material  legal  proceedings,  and no material  legal
proceedings  have been  threatened by or, to the best of our knowledge,  against
us.


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

The Company did not hold a  shareholders  meeting during the time period covered
by this report.

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

Our common stock is traded in the over-the-counter  market and quoted on OTC EBB
under the symbol "DMES" and quoted in the pink sheets  published by the National
Quotations  Bureau.  Since  1990,  from  time to time,  a very  small  number of
securities  broker-dealers published only intermittent quotations for our common
stock,  and there was no  continuous,  consistent  trading  market.  The trading
volume in our common stock has been and is extremely  limited.  During the above
period,  the limited  nature of the trading  market  created the  potential  for
significant  changes in the  trading  price for the common  stock as a result of
relatively  minor  changes in the  supply  and  demand for our common  stock and
perhaps  without  regard  to our  business  activities.  Because  of the lack of
specific  transaction  information  and our belief  that  quotations  during the
period were particularly sensitive to actual or anticipated volume of supply and
demand,  we do not believe that such quotations  during this period are reliable
indicators of a trading market for our common stock.

As of June 30, 2001,  there were  approximately  1,500  holders of record of our
common stock including stock held in street name.

Transfer Agent

The transfer agent for our common stock is Fidelity Transfer Company, 1800 South
West Temple, Salt Lake City, Utah 84115.

Subject to the above limitations, we believe that during the ten fiscal quarters
preceding the date of this filing,  the high and low sales prices for our common
stock  during each  quarter are as set forth in the table below (such prices are
without  retail  mark-up,  mark-down,  or  commissions).  The sales  prices were
obtained from the stock sales  history  charts from the on-line stock quote site
quicken.com.  Quicken quotes are provided by S&P Comstock Historical information
supplied by Iverson Financial Systems.

 QUARTER ENDED                            HIGH       LOW

June 30, 2001                             .28        .09
March 31, 2001                            .22        .09
December 31, 2000                         .43        .13
September 30, 2000                        .76        .31
June 30, 2000                             .875       .281
March 31, 2000                            .531       .125
December 31, 1999                         .25        .125
September 30, 1999                        .35        .125
June 30, 1999                             .281       .125
March 31, 1999                            .53        .125

We have not paid  any  dividends  to  date.  We can make no  assurance  that our
proposed  operations  will result in  sufficient  revenues to enable  profitable
operations or to generate  positive cash flow. For the  foreseeable  future,  we
anticipate  that we will use any funds  available  to finance  the growth of our
operations and that we will not pay cash dividends to stockholders.  The payment
of  dividends,  if any, in the future is within the  discretion  of the Board of
Directors and will depend on our earnings,  capital  requirements,  restrictions
imposed by lenders and financial condition and other relevant factors.

RECENT SALES OF UNREGISTERED SECURITIES

On September  13,1999,  we completed a private  placement (the  "Placement")  of
696,852 shares of our common stock to 33 individual and institutional investors.
The aggregate sales proceeds of the Placement were $174,300. We believe that the
issuance  of  shares  of  common  stock in the  Placement  was  exempt  from the
registration  requirements  under Rule 506 of the  Securities  Act. There was no
underwriter  involved  and all  persons  acquiring  the  stock  were  accredited
investors.

                                       7
<PAGE>

During the  eight-month  period from January  through  August 2000,  we issued a
series of convertible  debentures  bearing 8% interest.  A total of $229,380 was
raised from this issuance.  The debentures  mature in 24 months from the time of
issue.  Interest  payments are calculated  quarterly and totaled upon conversion
and included in the stock distribution.  The debentures carry various conversion
privileges  ranging from $0.10 to $0.45 a share. The debenture  holders have the
right to convert any or all of the principal  into our common Shares at any time
after the first 12 months  from  issuance.  If all  debenture  holders  elect to
convert, we will issue approximately 1,200,000 shares of our common stock to the
holders and be relieved of the debt.  We believe  that the issuance of shares of
common stock in the Placement was exempt from the  registration  requirements of
the Securities Act under Rule 506 adopted  thereunder.  There was no underwriter
involved and all persons  offered and acquiring the debentures  were  accredited
investors.

On September 26, 2000, we entered into an agreement  with AJW Partners,  LLC and
New Millennium  Capital Partners II, LLC for the private placement of $1,500,000
of our Secured  Convertible  Debentures.  These  debentures are convertible into
shares of our common  stock.  The  funding of the  debentures  will occur in two
phases with the first $500,000 (less legal and consulting fees of $45,000) being
received by us on September 27, 2000.  The remaining  $1,000,000  will be funded
within 5 days  following  the effective  registration  with the  Securities  and
Exchange  Commission  of the  underlying  securities of DeMarco  Energy.  If all
debenture  holders  elect to  convert,  we will issue  approximately  10,869,564
shares of our common  stock to the  holders  and will be  relieved  of the debt.
Since the debentures  were sold in a private  transaction,  solely to accredited
institutional  investors,  we believe  that the issuance of the  debentures  was
exempt from  registration  requirements  of the Securities Act under Rule 506 of
Regulation D and Section 4(2) of the Securities Act.

Mr. Victor DeMarco,  the Company's  controlling  shareholder and Chief Executive
Officer and director had personally loaned us approximately  $99,000 through the
period ended June 30, 2000. On September 29, 2000,  Mr.  DeMarco  converted this
entire debt into 1,650,000  shares of our common stock at a conversion  price of
$0.06 per share.  Because  Mr.  DeMarco is an officer  and  director  of DeMarco
Energy,  we believe the  issuance  of shares to Mr.  DeMarco was exempt from the
registration  requirements  of the Securities Act under Rule 506 of Regulation D
and Section 4(2) of the Securities Act.

Mr. Peter Des Camps, formerly our Senior Vice President of Corporate Development
also serves as President and Chief Executive  Officer for Lead Capital  Ventures
("LCV"), a private investment company formed in 1999. LCV paid a debt of DeMarco
Energy in the amount of $20,000 and acquired the common stock conversion  rights
associated with that debt. The conversion  rights were at $0.156 per share which
resulted in 133,333 shares of common stock being issued to LCV. This transaction
occurred on  September  29,  2000.  Because LCV is an  accredited  institutional
investor  and Mr.  Descamps  was an officer of DeMarco  Energy,  we believe this
transaction  was exempt from  registration  requirements  of the  Securities Act
under Rule 506 of Regulation D and Section 4(2) of the Securities Act.


                                       8
<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Financial Condition and Changes in Financial Condition

The financial  information set forth in the following  discussion should be read
in conjunction with, and qualified in its entirety by, the financial  statements
of DeMarco Energy  included  elsewhere  herein.  Our  independent  auditors have
issued a going-concern opinion as to our ability to continue operations.

Overall Operating Results:

Fiscal year ended June 30, 2001 compared to fiscal year ended June 30, 2000:

We had net royalty  revenues of $5,100 for the fiscal year ended June 30,  2001.
Prior year royalty  revenues  were $22,000.  Our total  expenses for the current
year were $758,700  versus $292,600 for last year. The expenses with the largest
increases during the current year as compared to the prior year were as follows:
marketing and  advertising was $55,900 versus $39,000 for the prior year period.
This  increase  was part of our plan to increase  our product  exposure;  travel
expenses were $28,900 as compared to $27,200 as we attended more industry  trade
shows in each of the last 2 fiscal years to increase our exposure to the market;
interest expense was $77,500 for the current year as compared to $29,200 for the
prior  year  period.  These  expenses  were  incurred  in  connection  with  the
convertible  debentures we issued throughout  calendar year 2000 (See "Liquidity
and Capital  Resources");  legal and professional  fees increased  $116,300 to a
total of $201,900.  These fees were incurred in connection with the current SB-2
filing, our annual audit, legal work performed for the debenture offerings,  our
quarterly and annual filings with the Securities and Exchange Commission as well
as for general  corporate  matters;  and our payroll for the year was  $246,100,
which represents an increase of $173,600 over the prior year payroll of $72,500.
We also added a vice president of sales in November 2000.

We incurred a net loss for the 2001 fiscal year of $753,600 as compared to a net
loss of $270,700 from  continuing  operations for the prior fiscal year. We plan
to continue to focus our  expenditures on marketing  efforts for the foreseeable
future.  These losses were incurred  primarily because of the costs and expenses
cited above.

Our inception to date income  statement  includes the sales and expenses related
to  Cyberlink  Systems,  Inc.,  a  former  wholly-owned  subsidiary.   Cyberlink
refurbished and marketed used computer  components such as computer monitors and
printers  (See"BUSINESS"  and "FINANCIAL  STATEMENTS").  Cyberlink  ceased doing
business in 1998 and all business  activities  regarding  this  subsidiary  were
dissolved in June 2000. In addition,  since  inception we had a one-time gain of
$66,000,  included in  extraordinary  items, for the forgiveness of debt owed to
the former majority shareholder, Louis DeMarco.

Liquidity and Capital Resources:

We have  recently  been financed  through a private  equity  offering that ended
during the third quarter of 1999 and a convertible debenture offering that began
in the first  quarter of 2000,  and have been  supported in the interim by loans
from our President and Chief Executive Officer, Victor DeMarco.

On  August  25th and  August  28th  2000,  we issued  the last of the  series of
convertible debentures bearing 8% interest. These two debentures totaled $57,500
and  $26,180  respectively,  and were part of a total of  $229,380  raised  from
January  through  August 2000 (see  "BUSINESS").  The proceeds were utilized for
repayment of accounts payable and operating expenses.

On September 26, 2000, we entered into an agreement  with AJW Partners,  LLC and
New  Millennium  Capital  Partners  II, LLC (the  "Debenture  Holders")  for the
private placement of $1,500,000 of our 10% Secured Convertible Debentures. These
debentures  are  convertible  into shares of the common stock of DeMarco  Energy
based on the terms listed below. The funding of the debentures will occur in two
phases.  The first $500,000 (less legal expenses of $25,000 and consulting  fees
of $20,000) was received by us on September 27, 2000.  The remaining  $1,000,000
will be funded  within 5 days  following  the  effective  registration  with the
Securities and Exchange Commission of the underlying shares of our common stock.
We anticipate  utilizing  the funds for legal and  consulting  fees,  marketing,
general and administrative expenses and for potential acquisitions.

The  aforementioned  $1,500,000  of  convertible  debentures is a part of a term
sheet agreement with AJW Partners,  LLC and New Millennium  Capital Partners II,
LLC.,  which calls for up to a total of $8,000,000 of convertible  debentures to
be issued over time as  warranted.  The term sheet  agreement  is not binding on
either party and  additional  purchases of our  convertible  debentures  will be
based on a mutually agreeable use of proceeds from the sale of these debentures.

                                       9
<PAGE>

The primary terms of the September 2000 Convertible Debentures are as follows:

-     Entire principal amount will mature on September 26, 2001.

-     Debentures  bear  10%  interest  per  annum  with  interest  payments  due
      quarterly. Interest to be paid in cash or shares of common stock solely at
      the option of the Company.

-     The debenture holders have the option to convert any unpaid principal into
      shares of our  common  stock at any time  after the  original  issue  date
      (subject to certain limitations).

-     The conversion  price per share in effect on any conversion  date shall be
      the lesser of (1) $0.34 per share or (2) 60% of the  average of the lowest
      three  inter-day  trading  prices during the ten trading days  immediately
      preceding the applicable conversion date.

-     The  debentures  bear  a  mandatory  prepayment  penalty  of  130%  of the
      principal and all accrued interest being prepaid.

-     The  debentures  are secured by all  unpledged  assets of DeMarco  Energy,
      including our current and pending patents.

-     DeMarco Energy is required to file a SB-2 Registration  Statement with the
      Securities and Exchange  registering  200% of the common stock  underlying
      the  debentures.  We filed a Form SB-2 on  September  21, 2001 to register
      22,826,086 shares of our common stock and are awaiting  responses from the
      Commission.

The Secured Convertible Debenture Purchase Agreement, the DeMarco Energy Systems
of America, Inc., 10% Secured Convertible Debenture, the Security Agreement, the
Intellectual Property Security Agreement, the Registration Rights Agreement, and
the Escrow Agreement were all filed electronically as Exhibits to the Securities
and Exchange Commission Form 8-K filed with the Commission on October 11, 2000.

We had  negative  working  capital  of $7,600 at June 30,  2001 as  compared  to
negative working capital of $77,800 at the end of the prior fiscal year end June
30, 2000.  This decrease in negative  working capital is primarily the result of
the funding of the convertible debentures.

We had an  unrestricted  cash  balance of $300 at June 30, 2001 as compared to a
cash  balance of $23,200 at June 30,  2000.  We also had  $250,000 of cash being
held in escrow pending a successful  registration of the  aforementioned  common
stock.  Subsequent to June 30, 2001,  this  restricted  cash was released to the
Company for use in operations.  The decrease in  unrestricted  cash balances was
caused by our  funding of  operations  for the  current  year out of the partial
proceeds  we  received  from  the  convertible  debenture  offering  as  well as
additional  funding  in the  amount  of  $250,400  from  our  current  Chairman,
President and Chief Executive Officer.

Variations  in  shareholder/insider   debt  (other  than  the  issuance  of  the
convertible  debentures)  are  attributable  to the  settlement of the estate of
Louis DeMarco, the prior majority shareholder,  and the dissolution of Cyberlink
Systems, Inc., a former subsidiary of DeMarco Energy (See:"BUSINESS"). Cyberlink
ceased doing business in March, 1998 and was officially dissolved in June, 2000.
DeMarco Energy continues to honor the outstanding obligations of Cyberlink which
consisted  of a  $100,000  line of  credit  and 4  leases  on  various  computer
equipment.  At this  point,  we have paid off the line of credit  but still have
approximately $50,000 remaining on the computer equipment leases. We continue to
utilize  the  computer  equipment  under these  leases.  There have not been any
defaults on these obligations to date.

New Accounting Pronouncements

We have adopted FASB  Statement 128. It is not expected that we will be impacted
by other recently  issued  standards.  FASB Statement 128 presents new standards
for  computing  and  presenting  earnings  per share  (EPS).  The  Statement  is
effective for financial  statements  for both interim and annual  periods ending
after December 15, 1997.

FASB  Statement  131 presents  news  standards  for  disclosures  about  segment
reporting.  We do not believe that this accounting standard applies to us as all
of our operations are  integrated  for financial  reporting and  decision-making
purposes.

Inflation

Our results of  operations  have not been  affected by  inflation  and we do not
expect inflation to have a significant effect on its operations in the future.

                                       10
<PAGE>

Forward-Looking Information

From  time  to  time,  we  or  our   representatives   have  made  or  may  make
forward-looking   statements,   orally  or  in  writing.   Such  forward-looking
statements  may be  included  in,  but not  limited  to,  press  releases,  oral
statements  made with the  approval  of an  authorized  executive  officer or in
various filings made by us with the Securities and Exchange Commission. Words or
phrases  "will  likely  result",   "are  expected  to",  "will  continue",   "is
anticipated",  "estimate",  "project or projected",  or similar  expressions are
intended to identify "forward-looking statements". Such statements are qualified
in their entirety by reference to and are accompanied by the above discussion of
certain  important  factors that could cause actual results to differ materially
from such forward-looking statements.

Management  is currently  unaware of any trends or  conditions  other than those
previously  mentioned in this  management's  discussion  and analysis that could
have a material adverse effect on the Company's consolidated financial position,
future results of operations,  or liquidity.  However,  investors should also be
aware of factors that could have a negative  impact on the  Company's  prospects
and the consistency of progress in the areas of revenue  generation,  liquidity,
and generation of capital resources.  These include:  (i) variations in revenue,
(ii)  possible  inability  to attract  investors  for its equity  securities  or
otherwise raise adequate funds from any source should the Company seek to do so,
(iii)  increased  governmental  regulation,  (iv)  increased  competition,   (v)
unfavorable outcomes to litigation involving the Company or to which the Company
may  become a party in the  future  and,  (vi) a very  competitive  and  rapidly
changing operating environment.

The risks  identified  here are not all inclusive.  New risk factors emerge from
time to time and it is not possible for  management  to predict all of such risk
factors,  nor can it assess the impact of all such risk factors on the Company's
business or the extent to which any factor or  combination  of factors may cause
actual results to differ materially from those contained in any  forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results.


                                       11
<PAGE>


ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                       12
<PAGE>




                          INDEX TO FINANCIAL STATEMENTS


                                TABLE OF CONTENTS

                                                                     PAGE


Independent Auditor's Report (Nathan M. Robnett, CPA)                 F-2
Balance Sheets at June 30, 2001 and June 30, 2000                     F-3
Statements of Operations for the Years ended
June 30, 2001 and June 30, 2000                                       F-4
Statements of Changes in Stockholders' Capital for
Years ended June 30, 2001 and June 30, 2000                           F-5
Statements of Cash Flows for the Years ended
June 30, 2001 and June 30, 2000                                       F-7
Notes to Financial Statements                                         F-8



                                       F-1


                                       13
<PAGE>






                          Independent Auditor's Report


To the Board of  Directors  of  DeMarco  Energy  Systems  of  America,  Inc.  (A
Development Stage Company)

We have audited the  accompanying  balance  sheets of DeMarco  Energy Systems of
America, Inc. as of June 30, 2001 and 2000 and the related statements of income,
changes in stockholders' capital, and cash flows for the years then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 DeMarco  Energy  Systems of
America,  Inc. as of June 30, 2001 and 2000,  and the results of its  operations
and its cash  flows  for the  years  then  ended in  conformity  with  generally
accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Corporation  will  continue as a going  concern.  As  discussed in Note I to the
financial  statements,  the  Corporation has suffered losses from operations and
has a net capital  deficiency that raise  substantial doubt about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  I.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.





Robnett & Company, P.C.
Austin, Texas

August 22, 2001



                                       F-2


                                       14
<PAGE>



<TABLE>
<CAPTION>
               DEMARCO ENERGY SYSTEMS of AMERICA, INC.
                    (A Development Stage Company)
                           BALANCE SHEETS
                AS OF JUNE 30, 2001 and JUNE 30, 2000


                              ASSETS                                        As of                As of
                                                                        June 30, 2001        June 30, 2000
                                                                        -------------        -------------
<S>                                                                     <C>                  <C>
Current Assets:
     Cash and Equivalents                                               $         261        $      23,213
     Restricted Escrow                                                        250,000                    -
     Accounts Receivable                                                          240                3,240
                                                                        -------------        -------------

          Total Current Assets                                                250,501               26,453
                                                                        -------------        -------------

Capital Assets:
     Fixtures, Fixtures and Equipment                                         165,335              151,137
     Less: Accumulated Depreciation                                         (150,134)            (124,331)
                                                                        -------------        -------------

          Total Fixed Assets                                                   15,201               26,806
                                                                        -------------        -------------

Other Assets:
     Patent, net of Accumulated Amortization of $991                            8,921                9,582
      and $330 at June 30, 2001 and 2000
     Manuals, net of Accumulated Amortization of                                7,000                9,000
     $3,000 and $1,000 at June 30, 2001 and 2000
     Deposits                                                                   1,000                1,000
                                                                        -------------        -------------
Total Other Assets                                                             16,921               19,582
                                                                        -------------        -------------

          TOTAL ASSETS                                                  $     282,623        $      72,841
                                                                        =============        =============


               LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES

Current Liabilities:
     Accounts Payable                                                   $     159,299        $      37,656
     Cash Overdraft                                                             4,284                    -
     Current Portion of Notes Payable                                          21,935               64,787
     Other Accrued                                                             72,566                1,773

                                                                        -------------        -------------
          Total Current Liabilities                                           258,084              104,216
                                                                        -------------        -------------
Long-Term Debt:
     Convertible Debentures                                                   700,680              197,000
     Notes Payable                                                                  -               22,586
     Due to Shareholders                                                      354,035              127,451
                                                                        -------------        -------------
          TOTAL LIABILITIES                                                 1,312,799              451,253
                                                                        -------------        -------------

SHAREHOLDERS' EQUITY
     Common Stock, 100,000,000 Shares Authorized, Par $0.001,
          and 24,931,847 and 22,839,414 shares issued at
          June 30, 2001 and 2000                                               24,932               22,837
     Additional Paid-In-Capital                                             2,186,739            2,244,329
     Retained Deficit Accumulated                                         (3,188,697)          (2,435,048)
     Subscriptions Receivable                                                (53,150)            (210,530)
                                                                        -------------        -------------
          TOTAL SHAREHOLDERS' EQUITY                                      (1,030,176)            (378,412)
                                                                        -------------        -------------

          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                    $     282,623        $      72,841
                                                                        =============        =============

See Notes to the Financial Statements.

</TABLE>

                                                                             F-3


                                       15
<PAGE>





<TABLE>
<CAPTION>

                     DEMARCO ENERGY SYSTEMS of AMERICA, INC.
                          (A Development Stage Company)
                           STATEMENTS OF OPERATIONS
               FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000







                                                       Year Ended      Year Ended       Cumulative
                                                     June 30, 2001    June 30, 2000   From Inception
                                                     -------------    -------------   --------------
<S>                                                  <C>              <C>             <C>
Revenues
      Royalty Fees                                     $    5,051      $    21,906      $    71,040
      Sales                                                     -                -          760,691
      Other Income                                              -                -           76,506
                                                     -------------    -------------   --------------
         Total Revenue                                      5,051           21,906          908,237
                                                     -------------    -------------   --------------
Costs and Expenses
      Selling and Administrative                          652,712          230,409        3,766,608
      Depreciation and Amortization                        28,464           32,949          154,125
      Interest                                             77,524           29,217          212,659
                                                     -------------    -------------   --------------
      Total Costs and Expenses                            758,700          292,575        4,133,392
                                                     -------------    -------------   --------------

Loss Before Extraordinary Item                          (753,649)        (270,669)      (3,225,155)

Extraordinary Items
      Foregiveness of Debt                                      -                -           66,356
                                                     -------------    -------------   --------------

Loss from Continuing Operations                         (753,649)        (270,669)      (3,158,799)

Discontinued Operations
      Loss from Operations of Discontinued
      Subsidiary (Cyberlink)                                    -                -         (10,032)
      Loss on Disposal of Assets of Subsidiary
      (Cyberlink)                                               -                -         (19,866)

Net Loss                                             $  (753,649)     $  (270,669)    $ (3,188,697)
                                                     =============    =============   ==============

      Earnings Per Share - Basic                     $    (0.030)     $    (0.012)
                                                     =============    =============
      Earnings Per Share - Fully Diluted             $    (0.025)     $    (0.012)
                                                     =============    =============

See Notes to the Financial Statements.

</TABLE>

                                                                             F-4


                                       16
<PAGE>



<TABLE>
<CAPTION>

                         DEMARCO ENERGY SYSTEMS of AMERICA, INC.
                             (A Development Stage Company)
                      STATEMENTS OF CHANGES in STOCKHOLDERS' CAPITAL
                    FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000


                                                                                             Retained Deficit
                                                                                               Accumulated
                                                            Additional                          During the
                                                            Paid - In     Subscriptions         Development
                                            Common Stock     Capital       Receivable             Stage               Total
                                            ------------    ----------    -------------      ----------------       ---------
<S>                                         <C>             <C>           <C>                   <C>               <C>
Balance - January 19, 1983                  $          -    $        -    $           -         $         -       $         -
                                            ------------    ----------    -------------      ----------------       ---------

Balance - June 30, 1988                                -             -                -                   -                 -
                                            ------------    ----------    -------------      ----------------       ---------

Issuance of 7,350,000 shares                       7,350         7,650                                                 15,000
of Common Stock

Issuance of 15,000,000 shares                     15,000       135,000                                                150,000
of Common Stock

Stock Offering Costs                                            15,694)                                               (15,694)

Cancellation of 4,350,000 shares                  (4,350)        4,350                                                      -
of Common Stock

Issuance of 20,000,000 shares                     20,000     4,980,000                                              5,000,000
for purchase of patent

Removal of patent, cancellation of                          (5,000,000)                                            (5,000,000)
20,000,000 shares

Forty to one reverse stock split                 (37,050)       37,050
reduction of 37,050,000 shares

Issuance of 10,196,190 shares                     10,196      (179,335)                                              (169,139)
of Common Stock

Issuance of 418,000 shares                           418       204,376                                                204,794
of Common Stock

Issuance of 1,482,500 shares                       1,483         6,529                                                  8,012
of Common Stock

Net Loss                                               -             -                -           (150,093)          (150,093)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1989                          13,047       179,926                -           (150,093)            42,880

Net Loss                                               -             -                -            (39,703)           (39,703)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1990                          13,047       179,926                -           (189,796)             3,177

Net Loss                                               -             -                -            (98,180)           (98,180)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1991                          13,047       179,926                -           (287,976)           (95,003)

Issuance of 3,863,849 shares                       3,860       459,303                -                   -           463,163
of Common Stock

Net Loss                                               -             -                -           (200,779)          (200,779)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1992                          16,907       639,229                -           (488,755)           167,381

Issuance of 18,793,840 shares                      1,887        96,031                -                  -             97,918
of Common Stock

Net Loss                                               -             -                -           (150,068)          (150,068)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1993 - Continued              18,794       735,260                -           (638,823)           115,231

See Notes to the Financial Statements.

</TABLE>

                                                                             F-5

                                       17
<PAGE>



<TABLE>
<CAPTION>

                       DEMARCO ENERGY SYSTEMS of AMERICA, INC.
                               (A Development Stage Company)
                      STATEMENTS OF CHANGES in STOCKHOLDERS' CAPITAL
                    FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000


                                                                                             Retained Deficit
                                                                                                Accumulated
                                                            Additional                           During the
                                                            Paid - In     Subscriptions         Development
                                            Common Stock      Capital       Receivable             Stage              Total
                                            ------------    ----------    -------------      ----------------       ---------
<S>                                         <C>             <C>           <C>                 <C>                 <C>
Balance at June 30, 1993 - Continued              18,794       735,260               -             (638,823)          115,231

Issuance of 1,495,750 shares                       1,496       451,072               -                    -           452,568
Common Stock

Net Loss                                               -             -               -             (250,529)         (250,529)
                                            ------------    ----------    -------------      ----------------       ---------
Balance at June 30, 1994                          20,290     1,186,332               -             (889,352)          317,270

Issuance of 284,500 shares                           285       234,594               -                    -           234,879
of Common Stock

Net Loss                                               -             -               -             (253,198)         (253,198)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1995                          20,575     1,420,926               -           (1,142,550)          298,951

Issuance of 284,490 shares                           284       212,749               -                    -           213,033
of Common Stock

Net Loss                                               -             -               -             (214,625)         (214,625)
                                            ------------    ----------    -------------      ----------------       ---------
Balance at June 30, 1996                          20,859     1,633,675               -           (1,357,175)          297,359

Issuance of 10,315,580 shares                     10,315       329,299               -                    -           339,614
of Common Stock

Subscriptions Receivable                               -             -        (189,080)                   -          (189,080)

Net Loss                                               -             -               -             (150,866)         (150,866)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1997                          31,174     1,962,974        (189,080)          (1,508,041)          297,027

Issuance of 446,000 shares                           447       141,791         (15,800)                   -           126,438
of Common Stock

Net Loss                                               -             -               -             (439,498)         (439,498)
                                            ------------    ----------    -------------      ----------------       ---------
Balance at June 30, 1998                          31,621     2,104,765        (204,880)          (1,947,539)          (16,033)

Redemtion of 9,166,483 shares                     (9,167)      119,127          (5,650)                   -           104,310
of Common Stock

Net Loss                                               -             -               -             (216,840)         (216,840)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 1999                          22,454     2,223,892        (210,530)          (2,164,379)         (128,563)

Issuance of 383,757 shares                           383        20,437               -                    -            20,820
of Common Stock

Net Loss                                               -             -               -             (270,669)         (270,669)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 2000                          22,837     2,244,329        (210,530)          (2,435,048)         (378,412)

Issuance of 2,094,433 shares                       2,095       (57,590)         157,380                   -           101,885
of Common Stock

Net Loss                                               -             -               -             (753,649)         (753,649)
                                            ------------    ----------    -------------      ----------------       ---------

Balance at June 30, 2001                    $     24,932    $2,186,739    $    (53,150)       $  (3,188,697)      $(1,030,176)

See Notes to the Financial Statements.

</TABLE>
                                                                             F-6


                                       18
<PAGE>



<TABLE>
<CAPTION>


                       DEMARCO ENERGY SYSTEMS of AMERICA, INC.
                               (A Development Stage Company)
                                 STATEMENTS OF CASH FLOWS
                    FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000

                                                                   For the Year         For the Year
                                                                      Ended                 Ended              Cumulative
                                                                  June 30, 2001         June 30, 2000         From Inception
                                                                  -------------         -------------         --------------

<S>                                                                 <C>                   <C>                  <C>
Cash flows from operating activities:
     Net Loss                                                       $ (753,649)           $ (270,699)          $(3,188,697)

Adjustments to reconcile net loss to net cash
Provided (used) by operating activities:
     Depreciation and Amortization                                  $   28,464            $   32,949           $   154,125

Changes in operating assets and liabilities:
     (Increase) Decrease in Accounts Receivable                          3,000                45,000                  (241)
     Increase in Other Assets                                                -                (3,240)               (1,000)
     Increase (Decease) in Accounts Payable                            121,643                (8,452)              159,299
     Increase  (Decrease) in Accrued Liabilities                        75,077                (2,615)               76,850
     Loss on Disposal of Assets of Subsidiary's Assets                       -                     -                19,867
                                                                  --------------        -------------         --------------
     Total Adjustments                                                 228,184                63,642               408,900
                                                                  --------------        -------------         --------------
    Net Cash Used by Operating Activities                             (525,465)             (207,057)           (2,779,797)
                                                                  --------------        -------------         --------------
Cash flows from investing activities:
     Patent                                                                  -                     -                (9,912)
     Manuals Development                                                     -               (10,000)              (10,000)
     Property and Equipment Additions                                  (14,198)               (2,311)             (185,201)
     Increase in Restricted Cash                                      (250,000)                    -              (250,000)
                                                                  --------------        -------------         --------------
     Net Cash Provided (Used) by Investing Activities                 (264,198)              (12,311)             (455,113)
                                                                  --------------        -------------         --------------
Cash flows from financing activities:
    Proceeds (Repayments) from Long - Term Debt                        (65,438)              (49,917)               21,935
    Proceeds from Notes to Shareholders                                226,584                72,031               354,035
    Proceeds from Convertible Debentures                               503,680               197,000               700,680
    Proceeds from Issuance of Common Stock                             101,885                20,820             2,158,521
                                                                  --------------        -------------         --------------
     Net Cash Provided by Financing Activities                         766,711               239,934             3,235,171
                                                                  --------------        -------------         --------------
Net increase (decrease) in Cash and Cash Equivalents                $  (22,952)           $   20,566           $       261
Cash and Cash Equivalents at the Beginning of the Year                  23,213                 2,647                     -
                                                                  --------------        -------------         --------------
Cash and Cash Equivalents at the End of the Year                    $      261            $   23,213           $       261
                                                                  ==============        =============         ==============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for Interest Expense                      $   15,382            $   10,696           $   145,985

See Notes to the Financial Statements.

</TABLE>


                                                                             F-7


                                       19
<PAGE>




                          DEMARCO ENERGY SYSTEMS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
               FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000

Note A - Summary of Significant Accounting Policies

Nature of Operations

DeMarco  Energy Systems of America,  Inc. (the Company) was organized  under the
laws of the State of Utah in 1983.  The Company is engaged in the  marketing  of
the DeMarco Energy Systems water-air  heating/cooling systems, energy audits and
energy related equipment such as lighting and electrical fixture retro-fittings.

During 1989, the Company exchanged  10,396,790 shares of its stock for exclusive
rights  to a  United  States  patent.  The  patent  was  granted  for  a  unique
water-source  heat pump system that both heats and cools  buildings and provides
domestic  hot water at an extremely  low cost to install and  operate.  The heat
pump is  specifically  designed  to utilize  municipal  water  systems as a heat
source/sink. Florida Heat Pump Manufacturing Co. manufactures the DeMarco Energy
Miser System under a patent licensing agreement.

During the fiscal year ending June 30, 1999,  the Company  filed an  application
with the United States  Patent  Office for a patent  covering a heat pump system
using gray water sources,  reclaimed water sources and other  non-potable  water
sources.  Costs of approximately  $20,000 related to the patent application have
been  capitalized.  At June 30,  2001,  the patent had not been  granted and the
eventual approval or denial of this patent application is indeterminable at this
time.

DeMarco Energy Systems of America,  Inc.  currently has installations in Oregon,
Pennsylvania, Washington, Montana, South Dakota, Mississippi, and California.

In July 1996, the Company  organized  Cyberlink  Systems,  Inc.  (Cyberlink),  a
wholly  owned  subsidiary.  Cyberlink  was  organized  to  refurbish  and market
after-market  computer  components.  During  March  of  1998,  Cyberlink  ceased
operations.  All components of Cyberlink were disposed of during the fiscal year
ended June 30, 1999 and the related  results from  discontinued  operations  are
reported on the income statements under loss from discontinued operations.

Basis of Financial Statements Presentation

The consolidated  financial  statements  include the accounts of the Company and
its subsidiary  (Cyberlink).  Inter-company  transactions and accounts have been
eliminated.

Furniture and Equipment

Furniture, equipment, and other long-term assets are recorded at historical cost
less depreciation and amortization.  Depreciation and amortization are accounted
for on the straight-line  method based on estimated useful lives.  Purchases and
improvements that extend the life of assets are capitalized whereas maintenance,
repairs and immaterial purchases expensed as incurred.

Estimates

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

Cash and Cash Equivalents

Holdings of highly liquid  investments  with  maturities of three months or less
when  purchased  are  considered  to be cash  equivalents.  The carrying  amount
reported in the balance  sheet for cash and cash  equivalents  approximates  its
fair value.


                                      F-8

                                       20
<PAGE>



Royalty Fee Arrangements

The Company has contracted  with Florida Heat Pump  Manufacturing,  Inc. of Fort
Lauderdale,  Florida for the manufacture and distribution of a water source heat
pump.  The  Company  receives  a 20%  royalty  fee,  calculated  from  the  base
production  price for  manufacture of each unit. The base  production  price may
vary.  Through the agreement  with Florida Heat Pump  Manufacturing,  Inc.,  the
Company has net  royalties of $5,051 and $21,906 at June 30, 2001 and 2000.  The
company recognizes royalty revenues when invoiced.

The  Company  has no  obligation  under the  agreement  with  Florida  Heat Pump
Manufacturing, Inc. to provide warranty or servicing services either financially
or otherwise for the equipment sold.

Advertising

The Company's policy is to expense  advertising costs as the costs are incurred.
Advertising  costs of $55,941 and $27,961 have been expensed for the years ended
June 30, 2001 and 2000, respectively.

Development Stage Company

The Company is in the "development stage" and as such is required to present the
financial  statements  from  inception.  The Company is involved in  obtaining a
patent and developing a market for that patent.  The Company is considered to be
in the development  stage until  substantial  revenues are produced in regard to
the operations of the organization.

Note B - Notes Payable

Notes payable,  relating to long-term  leasing  contracts and  collateralized by
computer  systems and other leased  equipment,  were  originally  capitalized at
$128,384  and have been  fully  depreciated.  The notes bear  interest  at rates
ranging from  12-18.55% and mature in the year ended June 30, 2002.  Outstanding
principal at June 30, 2001 and 2000 is $21,935 and $52,540, respectively.

During the year ended June 30, 2001, the Company paid off a note payable held by
a bank. Shares in the company owned by the company's president secured the note.
Outstanding  principal  of $0 and $34,833 was payable at June 30, 2001 and 2000,
respectively and interest accrued at a rate of 11.5%.

Note C - Commitments and Contingencies

Office Facility Lease

The  Company  has  entered  into an office  facility  lease,  guaranteed  by the
Company's president, calling for the following future rents:

              Year ending June 30, 2002          $   24,808
              Year ending June 30, 2003              25,906
              Year ending June 30, 2004              26,364
              Year ending June 30, 2005              10,527
                                                 ----------

                               Total             $   87,605
                                                 ==========

Escrowed Cash

Pursuant to the Escrow Agreement dated September 26, 2000,  $250,000 of the cash
proceeds  from the issuance of  $1,500,000  of debenture  bonds payable is to be
withheld and maintained in an escrow account to cover contingencies  should they
arise.  At the date of report,  the  escrowed  funds have been  released  to the
company and no contingencies related to the funds exist.

Note D - Earnings (Loss) per Common Share

Earnings  (Loss) per common  share are  computed by  dividing  net losses by the
weighted  average  number of  common  share  outstanding  during  the year.  The
weighted average number of common shares outstanding during the years ended June
30,  2001  and  2000  was  approximately   24,347,464  and  22,645,000   shares,
respectively. The fully diluted number of shares outstanding for the years ended
June 30, 2001 and 2000 was 29,945,014 and 23,301,018, respectively.

Note E - Income Taxes

As of June 30, 2001,  DeMarco Energy Systems,  Inc. had net operating loss carry
forwards of  approximately  $2,920,396 that expire between 2010 and 2021 and are
available to offset  future  taxable  income to the extent  permitted  under the
Internal Revenue Code. The Company's management estimates that the likelihood of
utilizing  the  deferred  tax  asset  associated  with  the net  operating  loss
carry-forwards  is less than fifty  percent (50 %). For this reason,  Management
does not feel the  recognition  of a deferred tax assets would be appropriate at
the date of report.
                                       F-9

                                       21
<PAGE>

Note F - Related Party Transactions

The  president of the company has advanced  sums of $250,351 and $99,651 at June
30, 2001 and 2000.  Additional  advancements  totaling $3,000 and $7,800 at June
30, 2001 and 2000 were  received  from a former  affiliate of the  Company.  The
loans bear  interest at 8% and $11,528 of interest  has been accrued at June 30,
2001.

An additional loan from a shareholder is recorded as having a balance of $20,000
at June 30, 2000.  During the year ended June 30, 2001,  this note was converted
into 133,333 shares of common stock and is considered settled.

During the year ending June 30, 1999, the chairman of the board passed away. His
estate  forgave  $66,356 owed by the company to him. The resultant gain from the
forgiveness  of debt is  included  as an  extraordinary  gain on the  cumulative
income statement.

Note G - Convertible Debt Issuance

The company has  outstanding,  $700,680 and $197,000 in  convertible  debentures
bonds at June 30, 2001 and 2000,  respectively.  Bonds with  principal  value of
$200,680  bear  interest at 8% per year payable  after being held for two years,
and are convertible  into the Company's common stock at conversion rates ranging
from $0.10 to $0.45 per share of common  stock.  Bonds with  principal  value of
$500,000 bear interest at 10% and contain a beneficial  conversion feature which
allows the holder to convert the bond's  principal  value plus accrued  interest
into  shares  of  common  stock at the  lesser of $0.34 per share and 60% of the
lowest of three days in the last ten days of a trading period.  At June 30, 2001
and 2000, $17,201 and $2,262 of interest was accrued and expensed in relation to
the debentures  bonds payable.  The debenture bonds mature during the year ended
June 30, 2002 and are expected to be converted into shares of common stock.  The
debenture bonds are not classified as current debt.

Note H - Fair Values of Financial Instruments

The  Company's  financial  instruments  consist of cash and notes  payable.  The
Company  estimates the fair values of all financial  instruments does not differ
materially  from the  aggregate  carrying  values of its  financial  instruments
recorded on the  accompanying  balance sheets.  The estimated fair value amounts
have been  determined  by the Company using  available  market  information  and
appropriate  valuation  methodologies.   Considerable  judgment  is  necessarily
required in interpreting market data to develop the estimates of fair value, and
accordingly,  the estimates are not  necessarily  indicative of the amounts that
the Company could realize in a current  market  exchange.  None of the financial
instruments are held for trading purposes.

Note I - Going Concern

As shown in the  accompanying  financial  statements,  the Company  incurred net
operating  losses of ($753,649) and ($270,669) for the years ended June 30, 2001
and  2000,  respectively  and as of June 30,  2001,  the  Corporation's  current
liabilities  exceed its  current  assets by  $7,583.  The  Company's  management
intents to raise capital  through equity  offerings and expects that $700,680 of
convertible  debenture  bonds  payable will be converted  to common  stock.  The
Company's  management  has  also  increased  their  marketing  efforts  to raise
revenues.  The financial statements do not include any adjustments that might be
necessary if the Corporation is unable to continue as a going concern.

                                      F-10


                                       22
<PAGE>



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

There have been no  changes  or  disagreements  with the  Company's  independent
accountant during the last 2 fiscal years.

No consultations  occurred  between the Company and Nathan M. Robnett,  C.P.A.'s
appointment  regarding the  application  of accounting  principles to a specific
completed  or  contemplated  transaction,  the type of audit  opinion,  or other
information  considered  by  the  Company  in  reaching  a  decision  as  to  an
accounting, auditing, or financial reporting issue.

                                    PART III

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

The  following  table  sets  forth  information  concerning  the  directors  and
executive officers of DeMarco Energy and their ages and positions. Each director
holds office until the next annual  stockholders'  meeting and thereafter  until
the  individual's  successor  is elected and  qualified.  Officers  serve at the
pleasure of the board of directors.


NAME                             AGE               POSITION

Victor M. DeMarco                 38        Chairman, President and CEO
John W. Adams                     50        Director, Vice-President of Sales
Mary L. DeMarco                   36        Director

Victor M. DeMarco, President/CEO. Mr. DeMarco served as Executive Vice President
of DeMarco  Energy  Systems from 1990 to 1992.  He was  appointed  President and
Chief  Executive  Officer in 1992. He became  Chairman of the Board in 1999 upon
the death of the then Chairman  Louis  DeMarco.  He has been employed by DeMarco
Energy  Systems of America,  Inc. for more than 15 years.  During that time, Mr.
DeMarco has been involved  with  research of  geothermal  heat pumps and related
technology,  resulting in an experienced  working  knowledge of geothermal  heat
pump  applications  ranging from  manufacturing  and  installation  to sales and
marketing of the Energy Miser  systems.  Mr.  DeMarco has been cited in numerous
industry trade  publications,  television  interviews,  news papers,  as well as
serving as an advisor  for the  Geothermal  Heat Pump  Consortium.  Mr.  DeMarco
majored in marketing and finance at Texas  Technological  University in Lubbock,
Texas.

John W. Adams,  Vice  President  of Sales and a Director.  Mr.  Adams joined our
operation in November  2000 and was appointed to the Board of Directors in April
2001.  From 1994 to  November  2000 he was Vice  President-Lighting  for  Sempra
Energy  Solutions  where he  directed  and managed the  lighting  division.  His
responsibilities  included analyzing and developing strategic plans for lighting
energy savings for clients.  He directed the business  development  unit and the
engineering and administrative  managers. Mr. Adams has experience in technology
based  sales,  marketing,  engineering,  energy  audits and  construction  as it
relates to energy savings performance  contracting.  He has been in the lighting
business since 1985 and has earned a certification  for LC (Lighting  Certified)
by the National Council on  Qualifications  for the Lighting  Professional and a
CLMC (Certified Lighting Management Consultant) by the International Association
of Lighting  Management  Companies.  He attended  the  University  of Houston in
Houston, Texas.

Mary L. DeMarco, wife of Victor DeMarco, was appointed to the Board of Directors
in April 2001. Ms. DeMarco attended Northwood Institute in Cedar Hill, Texas and
received an Associates Degree in Fashion Marketing/Merchandising. Since 1998 Ms.
DeMarco  has been  assisting  DeMarco  Energy on a  part-time  basis in  various
capacities.  From  1995 to  1998,  Ms.  DeMarco  was a  Merchandiser  for  Lange
Marketing in Springfield,  Illinois where she was responsible for maintaining 11
specialty/gourmet  markets.  Ms. DeMarco was a travel  representative for Travel
Center in Austin,  Texas from 1992 to 1995.  From 1985 to 1992 as Vice President
of Sales she managed and trained employees for Trophies, Inc., in Dallas, Texas,
an awards and incentive business.

All  officers  and  directors  devote  100% of  their  professional  time to our
business operations.

During the last five years,  no officers or directors  have been involved in any
legal proceedings,  bankruptcy proceedings, criminal proceedings or violated any
federal or state  securities or commodities laws or engaged in any activity that
would limit their  involvement  in any type of business,  securities  or banking
activities.

                                       23
<PAGE>

No person who, at any time during our past fiscal year, was a director, officer,
or beneficial owner of more than 10% of any class of equity securities failed to
file,  on a timely basis,  any report  required by Section 16(a) of the Exchange
Act during the most recent fiscal year.


ITEM 10. EXECUTIVE COMPENSATION

The following table reflects compensation paid to our chief executive officer.

<TABLE>
<CAPTION>

                                                                                              LONG TERM COMPENSATION
                                                                           --------------------------------------------------------
                                                                                   AWARDS
                                                  ANNUAL COMPENSATION      -----------------------      PAYOUTS
                                                -----------------------    RESTRICTED   SECURITIES      -------
                                                                             STOCK      UNDERLYING       LTIP           ALL OTHER
                                                SALARY    BONUS   OTHER      AWARD       OPTIONS        PAYOUTS       COMPENSATION
     NAME AND PRINCIPAL POSITION       YEAR      ($)       ($)     ($)        ($)        SARS(#)          ($)              ($)
------------------------------------  ------    ------    -----   -----    ----------   ----------      -------       -------------
<S>                                    <C>    <C>          <C>     <C>        <C>           <C>            <C>             <C>
Victor DeMarco......................   2001   $175,000     $ 0     $ 0        $ 0           0              0               $ 0
President & Chief Executive Officer    2000     45,600       0       0          0           0              0                 0
                                       1999     45,600       0       0          0           0              0                 0
</TABLE>

No other person  makes over  $100,000 per year.  Of Mr.  DeMarco's  2001 salary,
approximately $100,000 has been deferred until such time as it can be funded out
of future operations.

COMPENSATION OF DIRECTORS

We do not currently  compensate directors in cash for any services provided as a
director.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of June 30, 2001, the name and shareholdings,
including options to acquire common stock, of each person who owns of record, or
was known by us to own  beneficially,  5% or more of the  shares  of the  common
stock currently issued and outstanding;  the name and  shareholdings,  including
options to acquire the common stock, of each director;  and the shareholdings of
all executive officers and directors as a group

<TABLE>
<CAPTION>

                                 NAME AND ADDRESS                               AMOUNT AND NATURE
TITLE OF CLASS                   OF BENEFICIAL OWNER                            OF BENEFICIAL OWNERSHIP (2)         PERCENT OF CLASS
------------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                                                        <C>                                      <C>
Common Stock         Victor DeMarco                                             7,938,937  Direct/Indirect(3)              22.2%
                     12885 HWY 183, Ste 108A, Austin, Texas 78750
Common Stock         Mary L. DeMarco                                            7,938,937  Direct/Indirect(3)              22.2%
                     12885 HWY 183, Ste 108A, Austin, Texas 78750
Common Stock         John W. Adams                                                 38,500  Direct                           0.1%
                     12885 HWY 183, Ste 108A, Austin, Texas 78750
Common Stock         AJW Partners, LLC                                          5,434,782  Direct (1)                      15.2%
                     155 First Street, Ste B, Mineola, New York 11501
Common Stock         New Millennium Capital Partners II, LLC                    5,434,782  Direct (1)                      15.2%
                     155 First Street, Ste B, Mineola, New York 11501
Common Stock         Executive Officers and Directors as a Group (3 persons)    7,977,437  Direct/Indirect                 22.3%
                     12885 HWY 183, Ste 108A, Austin, Texas 78750

There are currently no outstanding options or warrants to purchase shares of our
stock.

<FN>

(1) Shares  issuable  upon  conversion  of 10%  Secured  Convertible  Debentures
    assuming a conversion price of $0.138 per share.

    AJW Partners,  LLC is a private  investment fund that is owned by all of its
    investors and managed by SMS Group,  LLC. SMS Group, LLC, of which Mr. Corey
    S. Ribotsky is the fund manager,  has voting and investment control over the
    shares listed above owned by AJW Partners, LLC.

    New Millennium Capital Partners II, LLC is a private investment fund that is
    owned by all of its investors  and managed by First Street  Manager II, LLC.
    First Street  Manager II, LLC, of which Mr. Glenn A. Arbeitman and Mr. Corey
    S. Ribotsky are the fund managers,  have voting and investment  control over
    the shares listed above owned by New Millennium Capital Partners II, LLC.

(2) Direct   ownership   indicates  shares  held  in  the  name  of  the  listed
    shareholder.  Indirect ownership indicates shares held indirectly (i.e. in a
    trust, by a spouse, etc.).

(3) Victor Demarco personally  controls  7,828,937 shares and Mary Demarco,  his
    spouse, controls 110,000 shares.

</FN>
</TABLE>

                                       24
<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Victor DeMarco, our controlling  shareholder and Chief Executive Officer and
Chairman  of the Board had  loaned us  approximately  $99,000  to cover  certain
indebtedness  of ours,  which he had personally  guaranteed.  We recorded a note
payable to him for that amount.  On September 29, 2000,  Mr.  DeMarco  converted
this debt into  1,650,000  shares of the Company's  common stock at a conversion
price  of $0.06  per  share.  As of June 30,  2001 Mr.  DeMarco  has  loaned  us
additional monies in the amount of $250,400 in order to fund our operations.

Mr. Peter Des Camps,  our former Senior Vice President of Corporate  Development
also serves as President and Chief Executive  Officer for Lead Capital  Ventures
("LCV"), a private investment company formed in 1999. LCV paid a debt of DeMarco
Energy in the amount of $20,000 and acquired the common stock conversion  rights
associated  with that debt.  The  conversion  rights were at $0.15625  per share
which  resulted  in 133,333  shares of common  stock being  issued to LCV.  This
transaction occurred on September 29, 2000. This debt was originally in the form
of a $50,000 convertible  debenture issued to a current shareholder on March 10,
1999.  We had paid the debt  down to the  $20,000  balance  via 2 cash  payments
totaling $16,719 in May and August 1999 and the issuance of 85,000 shares of our
common stock in April 1999 at a conversion  price of $0.15625 per share (a value
of $13,281 per the terms of the debenture).  The debenture  holder  individually
contacted  Lead Capital  Ventures  and Mr. Des Camps to purchase  the  remaining
$20,000  balance of the debenture.  LCV agreed to purchase this debt for $20,000
in cash and we agreed to the transfer.  We did not  participate  in or encourage
this transaction.  To our knowledge,  no other individuals were contacted or had
an offer presented to purchase this debt.

Mr.  DeMarco's  conversion  price of $0.06 was based on the lowest  market offer
price  for  shares  of the  common  stock  during  the  prior  year and was more
favorable to Mr. DeMarco than could have been obtained from  unaffiliated  third
parties. LCV's conversion price of $0.15625 was based on the conversion terms of
the debenture.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

b. The Company  filed a Form 8-K on October 11, 2000,  reporting  the details of
the agreements  reached on September 26, 2000 as they relate to the placement of
$1,500,000 of the Company's Secured  Convertible  Debentures (See "Liquidity and
Capital  Resources").  The following documents were filed as a part of that Form
8-K and are incorporated by reference.

Exhibit Number                       Name of Exhibit
--------------                       ---------------
    4.01              Secured Convertible Debenture Purchase Agreement
                      (Incorporated by reference from Form 8-K filed
                      electronically on October 11, 2000)

    4.02              DeMarco Energy Systems of America, Inc. 10% Secured
                      Convertible Debenture (Incorporated by reference from
                      Form 8-K filed electronically on October 11, 2000)

    4.03              Security Agreement (Incorporated by reference from
                      Form 8-K filed electronically on October 11, 2000)

    4.04              Intellectual Property Security Agreement (Incorporated
                      by reference from Form 8-K filed electronically on
                      October 11, 2000)

    4.05              Registration Rights Agreement (Incorporated by reference
                      from Form 8-K filed electronically on October 11, 2000)

    4.06              Escrow Agreement (Incorporated by reference from
                      Form 8-K filed electronically on October 11, 2000)



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<PAGE>







                                   SIGNATURES


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

             (Registrant)  DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                           By /s/  Victor M. DeMarco
                           Victor M. DeMarco, President/ Chief Operating Officer

                           Date September 29, 2001

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.



         Signature                     Title                         Date

 /s/ Victor M. DeMarco       President, Chief Operating       September 29, 2001
     -----------------       Officer, Chief Accounting
     Victor M. DeMarco       Officer

 /s/ John W. Adams           Director, Vice-President         September 29, 2001
     --------------          of Sales
     John W. Adams

 /s/ Mary L. DeMarco         Director                         September 29, 2001
     ----------------
     Mary L. DeMarco




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