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, 2002
                        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: $78,660.

         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, 2002,  the aggregate  market price of the
voting stock held by non-affiliates was approximately $322,400.

         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, 2002,
the Company had  outstanding  33,082,159  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                    8
   ITEM 7.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                11
   ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
             ON ACCOUNTING AND FINANCIAL DISCLOSURE                     20

 PART III

   ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
             CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
             OF THE EXCHANGE ACT                                        20
  ITEM 10.   EXECUTIVE COMPENSATION                                     20
  ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
             OWNERS AND MANAGEMENT                                      20
  ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS             21
  ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K                           21



                                       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  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.

         Our patent  revolves  around the interface with a municipal  water main
and has three basic  components.  We begin by taking water out of the  municipal
water main and running it through a heat  exchanger  and  returning the water to
the municipal water main; then the water running through a heat exchange device;
and lastly 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 and will expire on September 3, 2005.

         The 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.  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.

         We have confronted significant obstacles in the marketing of the Energy
Miser because of local governmental  interpretation and regulation.  These water
regulations  vary  from one  local  government  agency  to the next but most are
concerns  over  contamination  of the local  potable  water  supply.  Our system
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.  Public officials in charge of maintaining  public
water  supplies  often  challenge any such tapping into the public potable water
supply, which has severely hampered our marketing efforts to date.

         We have filed a second patent application with the United States Patent
office. This patent is for an installation technology 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 Energy  Miser
heating and cooling  system.  Reuse water is defined as treated sewer water that
falls  below the  standards  of  drinking  water.  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  comments from
the Patent Office and are currently formulating a response to those comments.



                                       3
<PAGE>


         Due to the  reluctance  in  obtaining  government  approval to tap into
municipal  water mains,  in January 2002 we began  marketing our products  using
traditional ground loop installations. Traditional geothermal heat pumps 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.  This  traditional  application  is  intended to  complement  our
patented 'Energy Miser' municipal water heat pump technology.

         We  believe  ground  loop  installations  are one of the most  advanced
efficient  heating  and cooling  systems to have  emerged in the market yet they
utilize the same geothermal  exchange process as seen in the DeMarco ground loop
system.  These systems are ground-source heat pumps, which move or transfer heat
with the earth itself as opposed to outside air.  Because the  year-round  earth
temperature  remains  relatively  constant,  geothermal  systems  do not have to
contend with the freezing air  temperatures  that plague  air-source  heat pumps
during winter months. This allows for a more efficient operation than air-source
systems and usually without the use of resistance  heat. Since these systems are
utilizing the constant earth temperatures to operate, the resultant temperatures
in the home are uniform and constant.

         Since there is no  combustion in the process,  geothermal  systems like
the DeMarco ground loop system present no danger from fire, smoke,  explosion or
indoor  pollutants like carbon  monoxide.  Furthermore,  the DeMarco ground loop
system has the ability to provide low-cost  domestic hot water,  thus increasing
operating  efficiency even further.  The DeMarco ground loop system is generally
2.5 to 4 or more times more efficient than resistance  heating and water heating
alone.  Because  the DeMarco  ground  loop  system has no outdoor  unit (as with
central air conditioners or air-source heat pumps), there are no weather-related
maintenance  problems.  Although the initial  installation  cost may be slightly
higher because of the necessary underground connections for heat transfer to and
from the earth,  we believe that the increased  efficiency of the DeMarco ground
loop system will result in an overall long-term energy savings for the consumer.
The DeMarco ground loop system provides lower  operating and  maintenance  costs
and greater comfort than other heating and cooling systems.  The market for this
product will be  nationwide;  all sales will be handled out of the Austin office
with assistance from our network of Florida Heat Pump sales representatives.

         To complement our energy efficient  systems,  in May 2002, we completed
the purchase of substantially all of the assets of Baker's Filter Service,  Inc.
("BFS"), a Waco Texas based heating and air conditioning filter service company,
for a purchase  price of $150,000.  BFS sells,  installs  and  provides  monthly
maintenance services for air filters used by retail and commercial businesses in
connection with their heating and air conditioning  systems. For many businesses
this is one of the most neglected  maintenance  items yet potentially one of the
most costly.  Clogged or  neglected  air filters  restrict  air flow,  which can
result in high energy  bills,  dirty coils,  and in the worst cases,  compressor
burn out. For a monthly  maintenance  fee, we will install,  maintain and change
out a business's air filter,  resulting in potentially  significant  savings. We
initially  maintained  the BFS  name  for  this  segment  of our  business,  but
transferred all filter sales, billing,  accounts receivable and customer contact
to our  headquarters  offices  in  Austin,  Texas.  We hope to  expand  this new
services segment of our business by acquiring  companies  similar to BFS located
in other geographic areas or by franchising the air filter maintenance  business
to independent  distributors  who would handle the actual  maintenance  while we
completed the  centralized  tasks listed above for a  pre-determined  percentage
fee.

         A DeMarco Energy Systems of America,  Inc.  filter  services  franchise
distributorship (through DeMarco Filter Services (DFS)), is a unique opportunity
in which the  distributor  is able to start a business with a positive cash flow
and a substantial  profit from the very first day. DFS has uniquely packaged the
filter service  business so that a distributor can purchase,  operate,  pay for,
and manage their own business.  A filter service business is a business in which
the distributor changes the air filters for almost any air flow system.

         A DFS  distributorship  will cost $150,000 and we estimate that it will
return a cash flow of at least  $40,000 per year to the owner after all expenses
and  franchise  note  payments.  The  DFS  distributorship  concept  allows  the
distributor the freedom to expand and grow their business while enjoying a great
cash flow. It is expected that all  distributorships  will grow at a rate of 20%
per  annum,  however  we can give no  assurances  that such cash flows or growth
factors will occur.



                                       4
<PAGE>

         The DFS  distributorship  will be a  turnkey  operation  in  which  the
distributor  will start  with all the  sales,  tools,  inventory  and  equipment
necessary (on the very first day) to operate the business.  The typical loan for
the  rights to a  franchise  will  require a small down  payment  and a pay-back
period of five years on the loan. DFS has a unique buy-back feature and right of
first  refusal  feature  that  greatly  minimizes  the  risk  of the  loan.  The
distributor  has to maintain  only a small amount of working  capital.  DFS will
provide  management  assistance  to  include  accounts  receivable,  accounting,
bookkeeping,  sales and  payroll  reports,  new sales  assistance,  installation
assistance and most other management assistance that may be required.

         We have many competitors in the heating/cooling  system business,  many
of whom are large with  well-known  brands and  manufacture  their own  systems.
While we believe our system is different  from our  competition,  because of the
relative  financial  strength of these  competitors,  we may not be afforded the
opportunity  to  demonstrate  the  advantages  of our system  over  competitors'
systems  and as such,  sales  will not  materialize  and we might not be able to
continue our business.

         In the filter system business most of our competitors are small,  local
family owned operations.  These filter businesses provide approximately the same
service,  the same  filter  media and the same  pricing  structure  as DFS.  The
competition  generally  maintains an office and incurs overhead.  We believe the
significant  advantages  of the DFS  distributorship  is the low  overhead  that
allows for a higher profit and a more competitive pricing structure.


ITEM 2.  DESCRIPTION OF PROPERTY

         We occupy  approximately 2,197 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 4 full time people.  It is anticipated that we will
need additional  personnel to meet the demands of the projected  market over the
next five years.  We recently hired a manager for filter sales and a manager for
geothermal energy system sales.


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

         On November 30, 2001, we held an annual shareholders meeting in Austin,
Texas. The following  proposals were presented and approved by a majority of the
voting shareholders:

         On  Proposal #1 To elect  three (3)  directors  to serve until the next
succeeding annual meeting and until their respective  successors are elected and
qualified; Victor M. DeMarco President & CEO, John W. Adams Vice President Sales
& Marketing and Mary L. DeMarco Secretary, the motion passed.

         On  proposal  #2  Proposal  to Ratify the  Appointment  by the Board of
Directors of Robnett & Company, P.C. as independent certified public accounts of
the company for fiscal year ending June 30, 2002, the motion passed.


                                    PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS


                                       5
<PAGE>


MARKET FOR COMMON STOCK

         The common stock is traded in the over-the-counter market and quoted on
the 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
the Common Stock, and there was no continuous,  consistent  trading market.  The
trading volume in the 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 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 the Common Stock.

         The  market  price of our common  stock may be  subject to  significant
fluctuations  in response  to numerous  factors,  including:  variations  in our
annual or quarterly financial results or those of our competitors; conditions in
the economy in general;  announcements of key developments by competitors;  loss
of key personnel;  unfavorable  publicity  affecting our industry or us; adverse
legal  events   affecting  us;  and  sales  of  our  common  stock  by  existing
stockholders.

         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
the 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, 2002                                .24      .04
        March 31, 2002                               .24      .05
        December 31, 2001                            .25      .05
        September 30, 2001                           .23      .05
        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

         As of September  27, 2002,  there were  approximately  1,500 holders of
record of our Common Stock including stock held in street name.

         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.

Transfer Agent

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



                                       6
<PAGE>


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  of the Securities Act
under Rule 506 under the Securities  Act. There was no underwriter  involved and
all persons acquiring the stock were accredited investors.

         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.  As of June 30, 2002,  15 of these  Debenture  Holders (a
total of $122,760 in principal) have converted their  debentures into a total of
415,436 shares of restricted common stock.

         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
$500,000 of our Secured Convertible Debentures. These debentures are convertible
into  shares of our Common  Stock.  We  received  the  $500,000  (less legal and
consulting  fees of $45,000) on September  27, 2000.  If all  debenture  holders
elect to convert,  we will estimate that we will issue  approximately  6,838,700
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.  In  addition,  Mr.  Victor  DeMarco  had
personally loaned us approximately $159,000 from July 1, 2000 through the period
ended  December 31, 2001.  During the quarter ended March 31, 2002,  Mr. DeMarco
converted  this  entire  debt into  3,174,940  shares of our  Common  Stock at a
conversion  price of $0.05 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.

         In January 2002, we sold 395,000  restricted shares of our Common Stock
in a private  placement to Mr.  Phillip  Peterson,  a  sophisticated  accredited
investor.  Total  proceeds  to the Company  were  $59,250.  We believe  that the
issuance  of  shares  of  Common  Stock in the  Placement  was  exempt  from the
registration  requirements of the Securities Act under Section 4(2) and Rule 506
adopted thereunder. There was no underwriter involved in the private placement.



                                       7
<PAGE>

         During the  quarter  ended March 31,  2002 we issued  5,000  restricted
shares  of our  Common  Stock  to Mr.  Kenneth  Bates  for  consulting  services
performed.  These  services  were valued at $700 or $0.14 per share.  We believe
that the issuance of such shares was exempt from  registration  requirements  of
the Securities Act under Section 4(2) of the Securities Act.

         During the quarter  ended March 31, 2002 we issued  225,000  restricted
shares of our Common  Stock to NIR Group for  consulting  services  performed in
connection with the issuance of the $1,000,000 of convertible  debentures  dated
March 26,  2002.  We believe  that the  issuance  of such shares was exempt from
registration  requirements  of the Securities Act under Rule 506 of Regulation D
and Section 4(2) of the Securities Act.

         On March 26, 2002, we entered into an agreement with AJW Partners, LLC,
New Millennium  Capital  Partners,  II, LLC, Pegasus Capital  Partners,  LLC and
AJW/New Millennium Offshore, Ltd. for the private placement of $1,000,000 of the
Company's 2002  Convertible  Debentures.  These  Debentures are convertible into
shares of our common stock. We received $700,000 (less legal and consulting fees
of $92,000) on March 28, 2002.  Provided certain conditions are satisfied by the
Company,  the  remaining  $300,000  will be funded  within 5 days  following the
effective  registration statement with the Securities and Exchange Commission of
the 2002 Convertible Debentures.  The remaining $300,000 was funded in July 2002
upon the effective registration. If all 2002 Debenture Holders elect to convert,
we estimate that we will issue  approximately  12.8 million shares of our common
stock  (based  on a  conversion  price  of  $.078  per  share.  Since  the  2002
Convertible Debentures were sold in a private transaction,  solely to accredited
institutional  investors,  we believe that the issuance of the 2002  Convertible
Debentures was exempt from registration requirements of the Securities Act under
Rule 506 of Regulation D and Section 4(2) of the Securities Act.

         On April 9, 2002,  Ms. Lanelle  Gillreath  converted her debenture into
5,830 shares of our Common Stock at $0.10 per share.

         On April 9,  2002,  we issued  60,000  our  Common  Stock to Ms.  Stacy
Kelcher for services rendered. These services were valued at $0.05 per share.




                                       8
<PAGE>


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

         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.

Financial Condition and Changes in Financial Condition

Overall Operating Results:

         Fiscal year ended June 30, 2002  compared to fiscal year ended June 30,
2001:

         We had gross Energy Miser revenues of $72,400 for the fiscal year ended
June 30, 2002.  Prior year Energy Miser revenues were $5,100.  Cost of sales for
the Energy  Miser for the current year were  $59,000  which  resulted in a gross
margin of $13,400 or 18.5%. The purchase of the filter business in late May 2002
resulted in one month of sales of $6,300 and a gross  margin of $5,300 or 84.4%.
We anticipate that filter sales will contribute  significantly to our operations
for the fiscal year ending June 30, 2003 and thereafter, however, we can give no
assurance that such sales will develop.

         Our  total  expenses  for  the  current  year  were  $2,012,800  versus
$1,092,000 for last year, which represents an increase of $920,800 or 84.3%. The
expenses with the largest  increases  during the current year as compared to the
prior year were as follows:

     o   Interest  expense was  $1,078,400  for the current  year as compared to
         $410,800 for the prior year  period.  For the fiscal year June 30, 2002
         we  incurred  $987,000  in non-cash  interest  in  connection  with the
         issuance of the  convertible  debentures  (See  "Liquidity  and Capital
         Resources").  This interest  amount was calculated as a function of the
         excess of market value over the  discounted  conversion  rate of common
         stock at the date of issuance and was expensed on those dates.  We also
         incurred $81,200 of non-cash  interest on debentures that do not have a
         beneficial  conversion  feature.  Interest  expense for the fiscal year
         ended June 30, 2001 included  $77,500  incurred in connection  with the
         convertible  debentures  we issued  throughout  calendar  year 2000. In
         addition,  we incurred $333,300 in non-cash interest charges to reflect
         the beneficial  conversion  features  associated  with the  convertible
         debentures we issued in September 2000.
     o   Marketing and advertising was $71,500 versus $55,900 for the prior year
         period.  This  increase  was part of our plan to  increase  our product
         exposure.
     o   Travel expenses were $29,200 as compared to $28,900 as we attended more
         industry trade shows in each of the last 2 fiscal years to increase our
         exposure to the market.
     o   Legal and  professional  fees were  327,400 for the current year versus
         $201,900 for June 30, 2001. These fees were incurred in connection with
         the  registration  filing on Form  SB-2,  our annual  audit,  legal and
         consulting  work performed for the debenture  offerings,  our quarterly
         and annual filings with the Securities and Exchange  Commission as well
         as for general corporate matters.
     o   Our payroll for the year was $273,200,  which represents an increase of
         $27,100  over the prior year  payroll of  $246,100.  Mr.  DeMarco,  our
         President,  voluntarily  elected  to  reduce  his  annual  salary  from
         $175,000 to $60,000  effective  April 1, 2002. This action was taken in
         light of the current  economic  climate and to accelerate the timing of
         the Company's goal of achieving operating profitability.

         We  incurred  a net loss  for the 2002  fiscal  year of  $1,994,100  as
compared to a net loss of $1,086,900  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.

Liquidity and Capital Resources:

         We have been financed by loans from our  President and Chief  Executive
Officer,  Victor DeMarco.  As of June 30, 2002 we are indebted to Mr. DeMarco in
an amount of $66,800 for these loans and his deferral of salary. In addition, we
have been financed by the issuance of convertible debentures.



                                       9
<PAGE>

         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  was to
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  was to be funded  within 5 days  following  the effective
registration  with the  Securities  and Exchange  Commission  of the  underlying
shares of our common stock,  provided that, among other things, the Registration
Statement was filed and declared effective within a specified time period.

         The Debenture Holders did not fund the remaining $1,000,000 at the time
of  effectiveness  in November 2001 citing the Company's  failure to timely gain
effectiveness  of  its  Registration  Statement  under  the  original  Debenture
Purchase Agreement and related Registration Rights Agreement.

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

     o   Entire  principal  amount  of the  $500,000  of  debentures  issued  in
         September 2000 matured on September 26, 2001. The debenture holders did
         not  demand  payment  for these  debentures  at  maturity,  but plan to
         exercise their conversion privileges to purchase the shares.
     o   Debentures  bear 10%  interest  per annum with  interest  payments  due
         quarterly.
     o   Interest  to be paid in cash or shares of  Common  Stock  solely at the
         option of the Company.
     o   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).
     o   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.
     o   The  debentures  bear a  mandatory  prepayment  penalty  of 130% of the
         principal and all accrued interest being prepaid.
     o   The debentures are secured by all unpledged  assets of DeMarco  Energy,
         including our current and pending patents.
     o   DeMarco Energy filed a SB-2 Registration  Statement with the Securities
         and  Exchange  registering  200% of the  Common  Stock  underlying  the
         debentures.

         As of April 8, 2002,  a total of $80,000 of these  debentures  has been
converted into 1,454,084  shares of our Common Stock at an average of $0.055 per
share.

         On March 26,  2002,  we entered into a new  agreement  with the Selling
Stockholders  for the private  placement of  $1,000,000  of the  Company's  2002
Convertible  Debentures.  These  debentures are  convertible  into shares of the
Common Stock of the Company based on the formula described below. The funding of
the 2002 Convertible  Debentures  occurred in two phases with the first $700,000
(less legal  expenses  and  consulting  fees of $92,000)  being  received by the
Company on March 28, 2002 and the remaining  $300,000  being received on July 2,
2002.  The  Company  used  $150,000 of these funds to purchase a heating and air
conditioning  filter  service  business and plans to utilize the  remaining  net
proceeds for marketing and sales promotion,  internal  corporate  infrastructure
development and general operating expenses.



                                       10
<PAGE>

The primary terms of the 2002 Convertible Debentures are as follows:

     o   Entire principal amount will mature on March 25, 2003.
     o   Debentures  bear 10%  interest  per annum with  interest  payments  due
         quarterly.
     o   Interest  to be paid in cash or added to the  principal  amount  of the
         debentures.
     o   The 2002  Debenture  Holders  have the  option to  convert  any  unpaid
         principal  into shares of the Company's  Common Stock at any time after
         the original issue date (subject to certain limitations).
     o   The conversion  price per share in effect on any conversion  date shall
         be the lesser of (1) $0.15 per share and (2) 60% of the  average of the
         lowest three  inter-day  trading prices for the Company's  Common Stock
         during  the ten  trading  days  immediately  preceding  the  applicable
         conversion date.
     o   The  debentures  bear a  mandatory  prepayment  penalty  of 130% of the
         principal and all accrued interest being prepaid.
     o   The  debentures  are  secured by all  unpledged  assets of the  Company
         including our current and pending patents.
     o   The Company is required to file a SB-2 Registration  Statement with the
         Securities and Exchange registering 210% of the Common Stock underlying
         the debentures.



                                       11
<PAGE>


         We had an  unrestricted  cash  balance of  $276,700 at June 30, 2002 as
compared to a cash balance of $300 at June 30, 2001.  At June 30, 2001,  we also
had $250,000 of cash being held in escrow.  Subsequent  to June 30,  2001,  this
restricted  cash was  released  to the  Company  for use in its  operations.  In
addition, we have outstanding convertible debentures in the amount of $1,581,000
as of June 30, 2002. We anticipate  that  substantially  all of these  debenture
holders will  convert  their  indebtedness  into shares of our Common Stock over
time.  We  anticipate  that we will need  additional  funding  to  substantially
increase our marketing  presence in the future.  We cannot assure you that these
efforts will have the desired effect of increasing sales or profitability.

New Accounting Pronouncements

         In June 2001, the Financial  Accounting Standards Board ("FASB") issued
Statements of Financial  Accounting  Standards  No. 141 "Business  Combinations"
("SFAS 141") and No. 142  "Goodwill  and Other  Intangible  Assets ("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001, to be
accounted for under the purchase method. For all business combinations for which
the date of acquisition is after June 30, 2001,  SFAS 141  establishes  specific
criteria for the recognition of intangible  assets  separately from goodwill and
requires  unallocated  negative  goodwill  to be written off  immediately  as an
extraordinary  gain,  rather than deferred and  amortized.  SFAS 142 changes the
accounting for goodwill and other  intangible  assets after an acquisition.  The
most significant changes made by SFAS 142 are: 1) goodwill and intangible assets
with  indefinite  lives will no longer be amortized;  2) goodwill and intangible
assets with  definitive  lives must be tested for impairment at least  annually;
and 3) the amortization  period for intangible  assets with finite lives will no
longer be limited to forty years. The Company does not believe that the adoption
of these  statements  will have a  material  effect on its  financial  position,
results of operations or cash flows.

         In June  2001,  the FASB also  approved  for  issuance  SFAS 143 "Asset
Retirement  Obligations."  SFAS  143  establishes  accounting  requirements  for
retirement obligations  associated with intangible long-lived assets,  including
1) the  timing of the  liability  recognition,  2)  initial  measurement  of the
liability,  3) allocation  of asset  retirement  cost to expense,  4) subsequent
measurement of the liability and 5) financial  statement  disclosures.  SFAS 143
requires that an asset retirement cost should be capitalized as part of the cost
of the related long-lived asset and subsequently  allocated to expense using the
systematic and rational method.  The Company will adopt the statement  effective
no later than January 1, 2003, as required.  The transition adjustment resulting
from the  adoption  of SFAS 143 will be  reported  as a  cumulative  effect of a
change in accounting principle.  At this time, the Company does not believe that
the adoption of this  statement will effect its financial  position,  results of
operations or cash flows.

         In August 2001,  the FASB also approved SFAS 144,  "Accounting  for the
Impairment  or Disposal  of  Long-Lived  Assets."  SFAS 144  replaces  SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The new accounting  model for long-lived  assets to be disposed
of by sale applies to all long-lived assets,  including discontinued operations,
and  replaces  the  provisions  of APB  Opinion  No. 30,  "Reporting  Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business'"  for
the  disposal  of  segments of a business.  Statement  144  requires  that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell,  whether  reported in  continuing  operations  or in  discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable  value or include  amounts  for  operating  losses  that have not yet
occurred.  Statement 144 also broadens the reporting of discontinued  operations
to include all components of an entity with operations that can be distinguished
from the  rest of the  entity  and  that  will be  eliminated  from the  ongoing
operations of the entity in a disposal transaction.  The provisions of Statement
144 are  effective for financial  statements  issued for fiscal years  beginning
after December 15, 2001, and,  generally,  are to be applied  prospectively.  At
this time,  the Company  cannot  estimate  the effect of this  statement  on its
financial position, results of operations or cash flows.

Inflation

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



                                       12
<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.




                                       13
<PAGE>



ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                          INDEX TO FINANCIAL STATEMENTS


                                TABLE OF CONTENTS

                                                                    PAGE
                                                                    ----

Independent Auditor's Report (Nathan M. Robnett, CPA)                F-2
Balance Sheet at June 30, 2002                                       F-3
Statements of Operations for the
  Years ended June 30, 2002 and 2001                                 F-4
Statements of Stockholders' Capital for
  Years ended June 30, 2002 and 2001                                 F-5
Statements of Cash Flows for the Years ended
  June 30, 2002 and 2001                                             F-7
Notes to Financial Statements                                        F-8



                                       F-1



<PAGE>



 Independent Auditor's Report
 ----------------------------

 To the Board of Directors of DeMarco Energy Systems of America, Inc.

 We have audited the  accompanying  balance sheet of DeMarco  Energy  Systems of
 America,  Inc. as of June 30, 2002 and the related  statements  of  operations,
 changes in stockholders'  capital,  and cash flows for the years ended June 30,
 2002  and  2001.  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 auditing standards generally accepted
 in the United  States.  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, 2002,  and the results of its operations and cash
 flows for the years ended June 30, 2002 and 2001 in conformity  with accounting
 principles generally accepted in the United States.

 The  accompanying   financial   statements  have  been  prepared  assuming  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

 September 27, 2002

                                       F-2


<PAGE>





                     DeMarco Energy Systems of America, Inc.
                          (A Development Stage Company)
                                  BALANCE SHEET
                                  June 30, 2002


                                     ASSETS

Current Assets:
     Cash and Equivalents                                     $   276,745
     Inventory                                                      7,533
     Accounts Receivable                                              962
                                                              -----------
          Total Current Assets                                    285,240

Capital Assets:
     Fixtures, Fixtures and Equipment                             199,131
     Less: Accumulated Depreciation                              (162,008)
                                                              -----------
          Total Fixed Assets                                       37,123

Other Assets:
     Goodwill, net of Accumulated Amortization of $529            126,355
     Patent                                                         9,912
     Deposits                                                       1,000
                                                              -----------
          Total Other Assets                                      137,267
                                                              -----------

          Total Assets                                        $   459,630
                                                              ===========


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
     Accounts Payable                                         $    76,908
     Other Accrued Liabilities                                     80,839
     Convertible Debentures                                     1,581,000
     Due to Related Parties                                        66,790
                                                              -----------
          Total Current Liabilities                             1,805,537
                                                              -----------

Shareholders' Capital
     Common Stock, Par Value $0.001
          100,000,000 authorized,
          32,190,492 issued and outstanding                        32,190
     Additional Paid-In Capital                                 4,132,249
     Retained Deficit Accumulated During
          the Development Stage                                (5,510,346)
                                                              -----------
          Total Shareholders' Capital                          (1,345,907)
                                                              -----------

          Total Liabilities and Shareholders' Capital         $   459,630
                                                              ===========

See notes to the financial statements.

                                       F-3


<PAGE>

<TABLE>
<CAPTION>
                     DeMarco Energy Systems of America, Inc.
                          (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
                   For the Years Ended June 30, 2002 and 2001
                and Cumulative Since Inception (January 19, 1983)


                                                                               Cumulative
                                                                                  From
                                                  2002            2001          Inception
                                               -----------     -----------     -----------
<S>                                            <C>             <C>             <C>
  Revenues
     Sales                                     $      --       $      --       $   760,691
     Construction Revenues                          72,363            --            72,363
     Royalties                                        --             5,051          71,040
     Service Revenues                                6,297            --             6,297
     Other Income                                     --              --            76,506
                                               -----------     -----------     -----------
                                                    78,660           5,051         986,897

   Cost of Revenues
     Construction Costs                            (58,983)           --           (58,983)
     Cost of Goods Sold                               (984)           --              (984)
                                               -----------     -----------     -----------
                                                   (59,967)           --           (59,967)
                                               -----------     -----------     -----------

         Gross Margin                               18,693           5,051         926,930


  Costs and Expenses
     Selling and Administrative                    886,700         652,712       4,653,308
     Amortization and Depreciation                   9,403          28,464         163,528
     Interest                                    1,078,422         410,791       1,624,348
     Loss from Extinguishment of
       Debt in Stock                                38,250            --            38,250
                                               -----------     -----------     -----------
                                                 2,012,775       1,091,967       6,479,434
                                               -----------     -----------     -----------


  Loss Before Discontinued Operations
    and Extraordinary Items                     (1,994,082)     (1,086,916)     (5,552,504)

  Discontinued Operations
     Loss from Operations, Discontinued
       Subsidiary                                     --              --           (10,032)
     Loss from Disposal of Assets,
       Subsidiary                                     --              --           (19,866)
                                               -----------     -----------     -----------
                                                      --              --           (29,898)

   Extraordinary Items
     Forgiveness of Debt                              --              --            66,356
     Unrealized Gain from Debt to be
       Extinguished in Stock                         5,700            --             5,700
                                               -----------     -----------     -----------
                                                     5,700            --            72,056
                                               -----------     -----------     -----------

Net Loss                                       $(1,988,382)    $(1,086,916)    $(5,510,346)
                                               ===========     ===========     ===========

   Earnings Per Share - Basic                  $    (0.062)    $    (0.045)
   Earnings Per Share - Fully Diluted          $    (0.021)    $    (0.036)
</TABLE>

                     See notes to the financial statements.

                                       F-4


<PAGE>

<TABLE>
<CAPTION>
                     DeMarco Energy Systems of America, Inc.
                          (A Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' CAPITAL
                   For the Years Ended June 30, 2002 and 2001
                and Cumulative Since Inception (January 19, 1983)

                                                                                                     Retained Deficit
                                                         Shares of                                     Accumulated
                                           Common         Common         Additional                     During the
                                          Stock at         Stock         Paid - In     Subscriptions   Development
                                        Par $(0.001)    Outstanding       Capital       Receivable        Stage           Total
                                        ------------    ------------    ------------   ------------    ------------    ------------
<S>                                     <C>             <C>             <C>            <C>             <C>             <C>
Balance at June 30, 1988                $       --      $       --      $       --     $       --      $       --      $       --

     Issuance of 38,000,000 Shares of
          Common Stock at Acquisition
          of Corporate Shell                  38,000      38,000,000         111,306           --              --           149,306

     Reduction of 37,050,000 Shares
          of Common Stock in 40 to 1
          reverse stock split                (37,050)    (37,050,000)           --             --              --           (37,050)

     Issuance of 12,092,105 Shares of
          Common Stock                        12,092      12,092,105          68,625           --              --            80,717

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

Balance at June 30, 1989                      13,042      13,042,105         179,931           --          (150,093)         42,880

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

Balance at June 30, 1990                      13,042      13,042,105         179,931           --          (189,796)          3,177

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

Balance at June 30, 1991                      13,042      13,042,105         179,931           --          (287,976)        (95,003)

     Issuance of 3,864,849 Shares of
          Common Stock                         3,865       3,864,849         459,298           --              --           463,163

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

Balance at June 30, 1992                      16,907      16,906,954         639,229           --          (488,755)        167,381

     Issuance of 1,886,884 Shares of
          Common Stock                         1,887       1,886,884          96,031           --              --            97,918

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

Balance at June 30, 1993                      18,794      18,793,838         735,260           --          (638,823)        115,231

     Issuance of 1,424,752 Shares of
          Common Stock                         1,425       1,424,752         451,143           --              --           452,568

     Net Loss                                   --              --              --             --          (250,529)       (250,529)
                                        ------------    ------------    ------------   ------------    ------------    ------------

Balance at June 30, 1994                      20,219      20,218,590       1,186,403           --          (889,352)        317,270

     Issuance of 246,400 Shares of
          Common Stock                           246         246,400         234,633           --              --           234,879

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

Balance at June 30, 1995                      20,465      20,464,990       1,421,036           --        (1,142,550)        298,951

     Issuance of 393,590 Shares of
          Common Stock                           394         393,590         212,639           --              --           213,033

     Net Loss                                   --              --              --             --          (214,625)       (214,625)
                                        ------------    ------------    ------------   ------------    ------------    ------------

Balance at June 30, 1996                      20,858      20,858,580       1,633,676           --        (1,357,175)        297,359

     Issuance of 10,315,560 Shares of
          Common Stock                        10,316      10,315,560         329,298           --              --           339,614

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

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

Balance at June 30, 1997                      31,174      31,174,140       1,962,974       (189,080)     (1,508,041)        297,027

     Issuance of 446,000 Shares of
          Common Stock                           446         446,000         141,792        (15,800)           --           142,238

     Net Loss                                   --              --              --             --          (439,498)       (439,498)
                                        ------------    ------------    ------------   ------------    ------------    ------------

Balance at June 30, 1998                      31,620      31,620,140       2,104,766       (204,880)     (1,947,539)        (16,033)
</TABLE>


                     See notes to the financial statements.

                                       F-5


<PAGE>

<TABLE>
<CAPTION>
                     DeMarco Energy Systems of America, Inc.
                          (A Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' CAPITAL
                   For the Years Ended June 30, 2002 and 2001
                and Cumulative Since Inception (January 19, 1983)


                                                                                                     Retained Deficit
                                                         Shares of                                     Accumulated
                                           Common         Common         Additional                     During the
                                          Stock at         Stock         Paid - In     Subscriptions   Development
                                        Par $(0.001)    Outstanding       Capital       Receivable        Stage           Total
                                        ------------    ------------    ------------   ------------    ------------    ------------
<S>                                     <C>             <C>             <C>            <C>             <C>             <C>
Balance at June 30, 1998 - Continued          31,620      31,620,140       2,104,766       (204,880)     (1,947,539)        (16,033)

     Redemtion of 9,166,483 Shares of
          Common Stock                        (9,166)     (9,166,483)        119,126         (5,650)           --           109,960

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

Balance at June 30, 1999                      22,454      22,453,657       2,223,892       (210,530)     (2,164,379)       (122,913)

     Issuance of 383,757 Shares of
          Common Stock                           384         383,757          20,436           --              --            20,820

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

Balance at June 30, 2000                      22,838      22,837,414       2,244,328       (210,530)     (2,435,048)       (378,412)

     Issuance of 2,094,433 Shares of
          Common Stock                         2,094       2,094,433         (57,589)       157,380            --           101,885

     Beneficial Conversion Feature of
          Convertible Debt (Note C)             --              --           333,267           --              --           333,267

     Net Loss                                   --              --              --             --        (1,086,916)     (1,086,916)
                                        ------------    ------------    ------------   ------------    ------------    ------------

Balance at June 30, 2001                      24,932      24,931,847       2,520,006        (53,150)     (3,521,964)     (1,030,176)

     Issuance of 7,252,012 Shares of
          Common Stock                         7,258       7,258,645         678,436           --              --           685,694

     Beneficial Conversion Feature of
          Convertible Debt (Note C)             --              --           986,957           --              --           986,957

     Net Loss                                   --              --              --             --        (1,988,382)     (1,988,382)
                                        ------------    ------------    ------------   ------------    ------------    ------------

Balance at June 30, 2002                $     32,190      32,190,492    $  4,185,399   $    (53,150)   $ (5,510,346)   $ (1,345,907)
</TABLE>


                     See notes to the financial statements.

                                       F-6


<PAGE>

<TABLE>
<CAPTION>
                     DeMarco Energy Systems of America, Inc.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
                   For the Years Ended June 30, 2002 and 2001
                and Cumulative Since Inception (January 19, 1983)

                                                                                              Cumulative
                                                                                                 From
                                                                 2002            2001          Inception
                                                              -----------     -----------     -----------
<S>                                                           <C>             <C>             <C>
Cash flows from operating activities:
   Net Income                                                 $(1,988,382)    $(1,086,916)    $(5,510,346)
                                                              -----------     -----------     -----------
   Adjustments to reconcile net income to net
   cash provided by operating activities:
      Depreciation and amortization                                 9,403          28,464         163,528
      (Increase) decrease in accounts receivable                     (962)          3,000          (1,203)
      Increase in other assets                                       --              --            (1,000)
      Increase (decrease) in accounts payable                     (86,675)        121,643          72,624
      Increase in accrued liabilities                              84,684          75,077         161,534
      Non-cash interest from beneficial conversion feature        986,957         333,267       1,320,224
      Increase in inventories                                      (5,067)           --            (5,067)
      Non-cash services fees settled in stock                      65,720            --            65,720
      Non-cash penalties settled in stock                          90,000            --            90,000
      Loss on disposal of subsidiary's assets                        --              --            19,867
                                                              -----------     -----------     -----------
      Total adjustments                                         1,144,060         561,451       1,886,227
                                                              -----------     -----------     -----------
   Net cash used by operating activities                         (844,322)       (525,465)     (3,624,119)

Cash flow from investing activities:
      Patent                                                         --              --            (9,912)
      Manuals development                                            --              --           (10,000)
      Property and equipment additions                             (3,146)        (14,198)       (188,347)
      Increase (decrease) in restricted cash                      250,000        (250,000)           --
      Purchase of business assets and client base                (150,000)           --          (150,000)
                                                              -----------     -----------     -----------
   Net cash (provided) used by investing activities                96,854        (264,198)       (358,259)


Cash flow from financing activities:
      Repayments of long-term debt                                (48,115)        (65,438)        (26,180)
      Proceeds (repayments) of notes to shareholders              (47,423)        226,584         306,612
      Proceeds from convertible debentures                      1,000,000         503,680       1,700,680
      Proceeds from issuance of common stock                      119,250         101,885       2,277,771
      Proceeds of debt of related parties                             240            --               240
                                                              -----------     -----------     -----------
   Net cash provided by financing activities                    1,023,952         766,711       4,259,123
                                                              -----------     -----------     -----------

Net increase (decrease) in cash and equivalents                   276,484         (22,952)        276,745
Cash and equivalents, beginning of year                               261          23,213            --
                                                              -----------     -----------     -----------
Cash and equivalents, end of year                             $   276,745     $       261     $   276,745
                                                              ===========     ===========     ===========

Cash paid during the year for interest expense                $     3,655     $    15,382     $   149,640
                                                              ===========     ===========     ===========

Non-cash financing activities: Conversion of
     debt to equity                                           $   412,368     $      --       $      --
                                                              ===========     ===========     ===========
</TABLE>

                     See notes to the financial statements.


                                       F-7


<PAGE>



                     DeMarco Energy Systems of America, Inc.
                 NOTES TO THE FINANCIAL STATEMENTS For the Years
                          Ended June 30, 2002 and 2001


 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,
 energy   related   equipment   such  as   lighting   and   electrical   fixture
 retro-fittings,  and the sales  and  servicing  of  commercial  air  filtration
 devises.

 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.

 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.

 During the year ended June 30, 2002, the Company purchased the operating assets
 and customer base of Baker Filter Services,  Inc. (the "Acquired  Company") for
 $150,000.  The  acquired  company was in the  business  of sales and  servicing
 commercial air and grease filtration devises.  Demarco is currently  continuing
 operations in these markets.

 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.

 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.

 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.  The  Company,  at times,  maintains  cash  balances  in excess of
 federally insured amounts.  No losses on these funds have been realized at June
 30, 2002 or the date of this report.




                                      F-8
<PAGE>


                     DeMarco Energy Systems of America, Inc.
                        NOTES TO THE FINANCIAL STATEMENTS
                   For the Years Ended June 30, 2002 and 2001


 Inventory
 ---------

 Inventory is stated at the lower of cost (first-in, first-out) or market.

 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,
 which   approximate  5-7  years  for  equipment  and  furniture  and  fixtures,
 respectively.  Purchases  and  improvements  that extend the life of assets are
 capitalized whereas  maintenance,  repairs and immaterial purchases expensed as
 incurred.

 Goodwill
 --------

 Goodwill  resulted from purchase of a business segment and is calculated as the
 difference  between the purchase price and the fair-market  value of the assets
 purchased. Goodwill is amortized over a forty (40) year term.

 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.

 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 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.

 Revenue and Cost Recognition
 ----------------------------

 Revenue    from    construction    contracts    is    recognized    using   the
 percentage-of-completion  method,  measured for each contract by the percentage
 of  costs  incurred-to-date  to  estimated  total  costs at  completion.  Other
 revenues are recognized at the point of sale or as services have been performed
 and are billable.

 Advertising
 -----------

 The Company's policy is to expense advertising costs as the costs are incurred.
 Advertising costs of $20,630 and $55,941 have been expensed for the years ended
 June 30, 2002 and 2001, respectively.


                                      F-9
<PAGE>



                     DeMarco Energy Systems of America, Inc.
                        NOTES TO THE FINANCIAL STATEMENTS
                   For the Years Ended June 30, 2002 and 2001


 Note B - Patent
 ---------------

 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  $9,912 related to the patent application have
 been  capitalized.  At June 30,  2002,  the patent had not been granted and the
 eventual  approval or denial of this patent  application is  indeterminable  at
 this time.


 Note C - Convertible Debt Issuance
 ----------------------------------

 The company has outstanding,  $1,581,000 in convertible debenture bonds at June
 30, 2002.

 Bonds with  principal  value of $161,000  bear  interest at 8% per year payable
 after being held for two years,  and are convertible  into the Company's common
 stock at fixed conversion rates ranging from $0.10 to $0.45 per share of common
 stock,  which at date of  issuance,  approximated  the fair value of the common
 stock.  There is not a  beneficial  conversion  feature  associated  with these
 bonds.

Bonds with principal  value of $1,420,000  bearing  interest at 10% and maturing
from September 26, 2001 to May 1,2003,  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 $0.15 per share and the
average of the lowest  three days in the last ten  trading  days  preceding  the
conversion at a forty (40) percent  discount and are  convertible at the date of
issuance.  Interest of $986,957  and  $333,267 for the years ended June 30, 2002
and 2001,  respectively,  was  calculated  as a function of the excess of market
value  over  the  discounted  conversion  rate of  common  stock  at the date of
issuance and was expensed on those dates.

 At June 30, 2002, $74,942 of interest was accrued in relation to the debentures
 bonds payable. During the year ended June 30, 2002, debenture bonds and accrued
 interest of $93,500 and $58,120,  respectively,  were  converted into 1,976,405
 shares  of  common  stock.  The  bonds and  accrued  interest  are  immediately
 convertible into shares of common stock and are classified as current debt.


 Note D - 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, 2003          $   25,906
                  Year ending June 30, 2004              26,364
                  Year ending June 30, 2005              10,527
                                                     ----------
                                    Total            $   62,797
                                                     ==========


                                      F-10
<PAGE>


                     DeMarco Energy Systems of America, Inc.
                        NOTES TO THE FINANCIAL STATEMENTS
                   For the Years Ended June 30, 2002 and 2001


 Note E - 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 quarter.  The
 weighted average number of common shares outstanding during the year ended June
 30, 2002 was  approximately  32,190,492  shares.  The fully  diluted  number of
 shares outstanding for the year ended June 30, 2002 was 96,874,054.


 Note F - Income Taxes
 ---------------------

 As of June 30, 2001, DeMarco Energy Systems,  Inc. had net operating loss carry
 forwards of approximately  $4,635,529 that expire between 2010 and 2022 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 asset would be appropriate at
 the date of report.

A reconciliation of book to federal income tax net loss is as follows:

                                                   2002              2001
                                               ------------      ------------
Net loss, per books                            $ (1,988,382)     $ (1,086,916)

Add book to tax differences from:
     50% Meals & Entertainment                        2,823             1,142
     Amortization and Depreciation                        -            10,171

Less book to tax differences from:
     Amortization and Depreciation                  (18,748)                -
     Taxable Wages & Salaries                       (42,917)          100,684
                                               ------------      ------------

Net loss, per Federal Income Tax Return        $ (2,047,224)     $   (974,919)
                                               ============      ============


 Note G - Related Party Transactions
 -----------------------------------

 The  president  of the company has  advanced  cash to the  Corporation  to fund
 operational deficits. The president converted $236,822 and $20,926 of principle
 and accrued  interest,  respectively,  into  4,824,940  shares of common  stock
 during the year ended June 30, 2002.  The loans bear  interest at 8% and $9,022
 and $0 of principal  and interest,  respectively,  is  outstanding  at June 30,
 2002.

 Additionally, the president deferred salary from the Corporation at the rate of
 $175,000 per annum until March 31, 2002. At June 30, 2002,  $57,767 of deferred
 salary is outstanding.

 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 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 ($1,988,382) and ($1,086,916) for the years ended June 30,
 2002 and 2001,  which raise  substantial  doubt about the Company's  ability to
 continue as a going concern.. The Company's management intends to raise capital
 through equity  offerings and expects that $1,581,000 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-11
<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

Mary L. DeMarco                36           Director

William Berry                  55           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.

         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,  headquartered in Springfield, Illinois, for whom 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.



                                       25
<PAGE>


         William  Berry was  appointed  to the Board of Directors in April 2002.
Mr. Berry graduated from the University of Texas at Austin in January 1970, with
a  Bachelors  of  Business  Administration  and a major  in  accounting.  He was
employed  by a regional  accounting  firm  located in Mineral  Wells,  Texas and
Dresser  Industries  from 1970 to September  1977. He became a Certified  Public
Accountant  in August  1977,  and  joined  the  family  accounting  business  in
September  1977. Mr. Berry still operates this  accounting  practice,  which has
been in existence since 1958. Mr. John Adams was our Vice-President of Marketing
and a  Director  since  November  2000.  In April  2002 he  resigned  from these
positions to pursue other business interests.

         All  officers  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.

         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......................   2002   $ 60,000     $ 0     $ 0       $ 0           0            0            $ 0
President & Chief Executive Officer    2001    175,000       0       0         0           0            0              0
                                       2000     45,600       0       0         0           0            0              0
</TABLE>

No other  person  makes  over  $100,000  per year.  Effective  April 1, 2002 Mr.
DeMarco  voluntarily  reduced his annual  compensation  from $175,000 to $60,000
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,  2002,  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.



                                       26
<PAGE>

<TABLE>
<CAPTION>

                                Name and Address                                Amount and Nature         Percent
 Title of Class                Of Beneficial Owner                           Of Beneficial Ownership      of Class
 -----------------------------------------------------------------------------------------------------------------
<S>                <C>                                                            <C>                      <C>
 Common Stock      Victor DeMarco                                                 11,113,887 (4)            22.4%
                   12885 HWY 183, Ste 108A, Austin, Texas 78750

 Common Stock      Mary L. DeMarco                                                11,113,887 (4)            22.4%
                   12885 HWY 183, Ste 108A, Austin, Texas 78750

 Common Stock      William Berry                                                     475,000                 1.0%
                   12885 HWY 183, Ste 108A, Austin, Texas 78750

 Common Stock      AJW Partners, LLC                                               5,356,693 (1)            10.8%
                   155 First Street, Ste B, Mineola, New York 11501

 Common Stock      New Millennium Capital Partners II, LLC                         5,356,693 (1)            10.8%
                   155 First Street, Ste B, Mineola, New York 11501

 Common Stock      Pegasus Capital Partners, LLC                                   1,831,487 (2)             3.7%
                   155 First Street, Ste B, Mineola, New York 11501

 Common Stock      AJW/New Millennium Offshore Ltd.                                6,410,256 (3)            12.9%
                   155 First Street, Ste B, Mineola, New York 11501

 Common Stock      Executive Officers and Directors as a Group (3 persons)        11,588,887                23.3%
                   12885 HWY 183, Ste 108A, Austin, Texas 78750
</TABLE>

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

(1)  Includes 375,000 shares owned and 2,692,308 shares issuable upon conversion
     of 10% Secured  Convertible  Debentures dated September 26, 2000 assuming a
     conversion  price of $0.078 per share and  2,289,385  shares  issuable upon
     conversion  of 10%  Secured  Convertible  Debentures  dated  March 26, 2002
     assuming  a   conversion   price  of  $0.078  per  share.   (See   "Selling
     Stockholders").

     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. Corey S.  Ribotsky is the
     fund  manager,  have voting and  investment  control over the shares listed
     above owned by New Millennium Capital Partners II, LLC.

(2)  Includes   1,831,487   shares  issuable  upon  conversion  of  10%  Secured
     Convertible  Debentures dated March 26, 2002 assuming a conversion price of
     $0.078 per share. (See "Selling Stockholders").

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

(3)  Includes   6,410,256   shares  issuable  upon  conversion  of  10%  Secured
     Convertible  Debentures dated March 26, 2002 assuming a conversion price of
     $0.078 per share. (See "Selling Stockholders").

     AJW/New Millennium Offshore Ltd. is a private investment fund that is owned
     by all of its investors. Mr. Corey S. Ribotsky is the fund manager, and has
     voting and investment control over the shares listed above owned by AJW/New
     Millennium Offshore Ltd.

(4)  Victor Demarco personally controls 11,003,887 shares and Mary Demarco,  his
     spouse, controls 110,000 shares.


                                       27
<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 December  31, 2001 Mr.  DeMarco has
loaned us  additional  monies in the  amount  of  $159,000  in order to fund our
operations.  During the quarter ended March 31, 2002, Mr. DeMarco converted this
entire debt into 3,174,940  shares of our Common Stock at a conversion  price of
$0.05 per share. As of June 30, 2002 we are indebted to Mr. DeMarco in an amount
of $66,800 for various loans and his deferral of salary.

         Mr. DeMarco's  conversion  prices were based on the lowest market offer
price for shares of the Common Stock during the year  preceding the  conversions
and were more  favorable  to Mr.  DeMarco  than  could have been  obtained  from
unaffiliated third parties.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

b. Reports on Form 8-K

         On April 3, 2002 we filed a Form 8-K reporting the following:

         On March  26,  2002  DeMarco  Energy  Systems  of  America,  Inc.  (the
"Company")  entered into an agreement  with AJW  Partners,  LLC, New  Millennium
Capital Partners II, LLC, Pegasus Capital Partners,  LLC and AJW/New  Millennium
Offshore Ltd. (the "Debenture  Holders") for the private placement of $1,000,000
of  the  Company's  Secured   Convertible   Debentures.   These  debentures  are
convertible into shares of the Common Stock of the Company based on the formulas
listed below.  The funding of the  debentures  will occur in two phases with the
first $700,000 being received by the Company on March 28, 2002. Provided certain
conditions  are satisfied,  the remaining  $300,000 will be funded within 5 days
following the effective registration with the Securities and Exchange Commission
of the securities underlying the Company's debentures.  The Company will utilize
the funds for marketing and sales promotion,  internal corporate  infrastructure
development and general operating expenses.

         On June 14, 2002 we filed a Form 8-K reporting the following:

         On May 29, 2002, DeMarco Energy Systems of America, Inc. (the"Company")
completed  a purchase  of  substantially  all of the  assets of  Baker's  Filter
Services,  Inc. ("BFS"),  based in Waco, Texas. BFS sells, installs and provides
monthly  maintenance  services on air filters in connection with heating and air
conditioning  systems used within commercial  businesses.  The Company purchased
all of the assets and none of the  liabilities  of BFS. The  purchase  price was
$150,000  cash.  The  source of funds  for the  purchase  was a  portion  of the
proceeds from the Company's March 26, 2002 sale of $1,000,000 of its 10% Secured
Convertible Debentures to certain institutional investors.


 Exhibit Number                           Name of Exhibit
 --------------                           ---------------

     4.01           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible Debenture issued to AJW Partners, LLC (1)

     4.02           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible  Debenture  issued  to  New  Millennium  Capital
                    Partners II, LLC (1)



                                       28
<PAGE>


     4.03           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible  Debenture  issued to Pegasus Capital  Partners,
                    LLC (1)

     4.04           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible  Debenture issued to AJW/New Millennium Offshore
                    Ltd. (1)

     4.05           Transfer Agent Instructions (1)

     4.06           Secured Convertible Debenture Purchase Agreement (1)

     4.07           Registration Rights Agreement (1)

     4.08           Intellectual Property Security Agreement (1)

     4.09           Security Agreement (1)

     10.05          Baker's Filter Service, Inc. Asset Purchase Agreement (2)

------------------------------------------------------
     (1) Previously filed as part of Form 8-K filed on April 3, 2002.
     (2) Previously filed as part of Form 8-K filed on June 14, 2002.



                                       29
<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 30, 2002

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 30, 2002
        -----------------     Officer, Chief Accounting
        Victor M. DeMarco     Officer

    /s/ William Berry         Director                      September 30, 2002
        -------------
        William Berry

    /s/ Mary L. DeMarco       Director                      September 30, 2002
        ----------------
        Mary L. DeMarco




                                       30
<PAGE>



                            Certification Pursuant to
                             18 U.S.C. Section 1350,
                             As adopted pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Victor M. DeMarco, certify that:

1. I have reviewed this annual report on Form 10-KSB of DeMarco  Energy  Systems
of America, Inc. ("DeMarco");

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report; and

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects  the  financial  condition,  results  of  operations  and cash flows of
DeMarco as of, and for, the periods presented in this annual report.


Date: September 30, 2002                        s/Victor M. DeMarco
                                                -------------------
                                                Victor M. DeMarco
                                                President and
                                                Chief Accounting Officer




                            Certification Pursuant to
                             18 U.S.C. Section 1350,
                             As adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

In connection  with this annual report on Form 10-KSB of DeMarco  Energy Systems
of  America,  Inc.  ("DeMarco"),  I,  Victor  M.  DeMarco,  President  and Chief
Accounting Officer of DeMarco,  certify,  pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The report fully complies with the  requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

2. The  information  contained in this report fairly  presents,  in all material
respects, the financial condition and results of operations of DeMarco.


Date: September 30, 2002                        /s/Victor M. DeMarco
                                                --------------------
                                                Victor M. DeMarco
                                                President and Chief
                                                Accounting Officer



                                       31
<PAGE>



                                TABLE OF EXHIBITS


 Exhibit Number                           Name of Exhibit
 --------------                           ---------------

     4.01           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible Debenture issued to AJW Partners, LLC (1)

     4.02           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible  Debenture  issued  to  New  Millennium  Capital
                    Partners II, LLC (1)

     4.03           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible  Debenture  issued to Pegasus Capital  Partners,
                    LLC (1)

     4.04           DeMarco  Energy   Systems  of  America,   Inc.  10%  Secured
                    Convertible  Debenture issued to AJW/New Millennium Offshore
                    Ltd. (1)

     4.05           Transfer Agent Instructions (1)

     4.06           Secured Convertible Debenture Purchase Agreement (1)

     4.07           Registration Rights Agreement (1)

     4.08           Intellectual Property Security Agreement (1)

     4.09           Security Agreement (1)

     10.05          Baker's Filter Service, Inc. Asset Purchase Agreement (2)

------------------------------------------------------
     (1) Previously filed as part of Form 8-K filed on April 3, 2002.
     (2) Previously filed as part of Form 8-K filed on June 14, 2002.




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<PAGE>