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, 2003

                        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.)


                  2600 McHale Court, Suite 170             78758
            ----------------------------------------     ----------
            (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: $579,673.

         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 November 4, 2003,  the  aggregate  market  price of the
voting stock held by non-affiliates was approximately $352,595.

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of November 4, 2003, the
Company had outstanding 50,917,569 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 ..............................      4
   ITEM 3.    LEGAL PROCEEDINGS ....................................      5
   ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF
                SECURITY HOLDERS ...................................      5


 PART II

   ITEM 5.    MARKET FOR REGISTRANTS COMMON EQUITY AND
                RELATED STOCKHOLDER MATTERS ........................      5
   ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION OR PLAN OF OPERATION ...........      7
   ITEM 7.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..........     11
   ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                ON ACCOUNTING AND FINANCIAL DISCLOSURE .............     24
   ITEM 8A.   CONTROLS AND PROCEDURES ..............................     24


 PART III

   ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
                OF THE EXCHANGE ACT ................................     25
   ITEM 10.   EXECUTIVE COMPENSATION ...............................     26
   ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                OWNERS AND MANAGEMENT ..............................     26
   ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......     27
   ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K .....................     27
   ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES ...............     28



                                       2
<PAGE>


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

BUSINESS

         DeMarco Energy Systems of America Inc., a Utah corporation,  is engaged
in the  marketing  of  water-air  heating/cooling  systems  and  the  sales  and
servicing of commercial air filtration devices.

         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.  The  patent  is,
therefore,  primarily an installation technology and will expire on September 3,
2005.

         The Energy Miser system  provides 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 not a 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.

         To overcome these government  concerns regarding the utilization of the
potable water supply, 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.  This patent was granted
in  August  2003 and 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.

         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.  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.  Since these  systems are  utilizing  the constant  earth
temperatures to operate, the resultant  temperatures in the home are uniform and
constant.

         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.  We believe the
DeMarco ground loop system provides lower  operating and maintenance  costs 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.



                                       3
<PAGE>


         To complement our energy efficient  systems,  in May 2002, we completed
the purchase of  substantially  all of the assets of a Waco Texas based  heating
and air conditioning  filter  service's  company.  We sell,  install and provide
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
airflow,  which can result in high-energy  bills,  dirty coils, and in the worst
cases, compressor burn out. For a monthly maintenance fee, we install,  maintain
and change out a business's air filters,  resulting in  potentially  significant
savings. We have transferred all filter sales, billing,  accounts receivable and
customer contact to our headquarters in Austin,  Texas. We intend to expand this
new service segment of our business into other geographic areas and by licensing
distributorships   for  the  air  filter  maintenance  business  to  independent
distributors  who would  handle the  actual  maintenance  while we  perform  the
centralized tasks listed above for a pre-determined percentage fee.

         A  DeMarco   Energy   Systems  of   America,   Inc.   filter   services
distributorship  (through DeMarco Filter Systems (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 airflow system.  The DFS
distributorship  concept allows the  distributor  the freedom to expand and grow
their  business  while  enjoying  positive  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.

         The DFS distributorship is a turnkey operation in which the distributor
will start with all the sales,  tools,  inventory  and  equipment  necessary  to
operate the business.  The typical loan for the rights to a distributorship will
require a small down payment and a payback period of five years on the loan. DFS
has a 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 7,447 square feet of office and warehouse space
located at 2600 McHale Court, Suite 170, Austin, Texas 78758. We own no property
other than office  furniture,  equipment,  software,  filter  inventory  and the
patent for the Energy Miser System.

Employees

         We employ 19 full time people. Most of these personnel are in sales and
marketing.  It is anticipated that we will need additional personnel to meet the
demands of the projected market over the next five years.



                                       4
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

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


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

         On December 20, 2002, we held our annual shareholder meeting in Austin,
Texas.

         A total  of  33,080,062  shares  were  voted  for the  election  of the
following members to service on the Board of Directors while there were no votes
against and 2,100 shares abstaining:

         Victor M. DeMarco, William Berry, Brian Winterowd, Robin Jones

         By the same vote count the shareholders ratified the appointment by the
Board of Directors of Sprouse & Anderson,  LLP as independent  certified  public
accountants of the Company for the fiscal year ending June 30, 2003.



                                    PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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. The trading volume in the Common Stock has been
and is extremely  limited.  The limited  nature of the trading market can create
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  are
particularly  sensitive to actual or anticipated volume of supply and demand, we
do not believe that such quotations 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.



                                       5
<PAGE>

                     QUARTER ENDED                 HIGH      LOW
         -------------------------------------     ----      ---

         June 30, 2003                              .08      .02
         March 31, 2003                             .12      .01
         December 31, 2002                          .05      .01
         September 30, 2002                         .06      .01
         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

         As of September  30, 2003,  there were  approximately  1,700 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.

RECENT SALES OF UNREGISTERED SECURITIES

         During  the  quarter  ended  June  30,  2003 we  issued  the  following
unregistered shares of our common stock:

         On May 30, 2003 we issued 600,000 shares each to 2 members of our board
of directors  (William Berry and Robin Jones) for Board Risk Fees.  These shares
were valued at $0.033 per share for a total value of $19,800 each.

         On June 16,  2003 we issued  450,000  shares to Robin  Jones for office
furnishings. These shares were valued at $22,500 or $.05 per share.

         On June 16,  2003 we  issued  120,000  shares  to Brian  Winterowd  for
serving on the board of  directors.  These shares were valued at $1,800 or $.015
per share.

         On  June  16,  2003  we  issued   120,000  shares  to  an  employee  as
compensation. These shares were valued at $6,000 or $.05 per share.

         On  June  16,  2003  we  issued   75,000   shares  to  an  employee  as
compensation. These shares were valued at $3,750 or $.05 per share.

DEFAULTS UPON SENIOR SECURITIES

         As of June 30, 2003, the company had outstanding convertible debentures
totaling  $1,344,000  that had matured  and the company is in default  under the
repayment  terms of these  debentures.  The debentures are secured by all of the
unpledged assets of the company  including our current and pending patents.  The
debenture  holders have not demanded  payment as of the date of this filing.  If
they  choose to  exercise  their  rights to  foreclose  on all of our  remaining
assets,  the shareholders of the company could lose their entire  investments in
our common stock.  We are currently in negotiations  with the debenture  holders
and we have  an  oral  agreement  to  extend  the  maturity  date of the  entire
$1,344,000  debenture  principal  balance to May 1, 2004. We anticipate that the
debenture  holders will convert their debentures into shares of our common stock
over the  next few  months.  We can  give no  assurance  that we will be able to
successfully reach a written agreement regarding the restructuring of these debt
instruments.

                                       6
<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, 2003  compared to fiscal year ended June 30,
2002:

         We had gross  revenues  of $579,673  for the year ended June 30,  2003.
Revenue for the prior year was  $78,660.  Cost of sales for the current year was
$244,594,  which  resulted in a gross  margin of  $335,079.  Current  year sales
consisted of ground loop Energy Miser  installations,  which resulted in revenue
of $126,184;  Filter  distributorship  sales for our first year in this business
totaled  $350,000;  filter  service  revenue  totaled  $92,714 and  interest and
miscellaneous  income  totaled  $10,775.  We anticipate  that filter service and
filter  distributorship  sales will continue to contribute  significantly to our
operations for the foreseeable  future,  however,  we can give no assurance that
such sales will  develop.  Prior year sales  consisted  primarily of ground loop
installations totaling $72,363 and filter service sales of $6,297.

         Our  total  expenses  for  the  current  year  were  $1,922,314  versus
$1,202,173 for the prior year, which represents an increase of $720,141.

         Expenses for the year ended June 30, 2003 were as follows:

         The  largest  expense  incurred  for the year ended  June 30,  2003 was
interest  expense on  debentures  and bank debt,  which totaled  $957,106.  This
includes  a non-cash  charge of  $793,555  for  beneficial  conversion  interest
incurred in connection with the convertible  debentures  previously issued. 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  $146,950 of regular  interest on the
debentures outstanding and $16,600 of interest on bank loans. We anticipate that
the  debenture  interest  will be  converted  into  shares of our common  stock.
Payroll  costs and related  benefits  were  $442,393 as we have  recently  added
marketing  and  filter  sales  staff in order to  increase  our  sales  efforts.
Consulting  fees totaled  $126,485 and were incurred for marketing and financial
consulting.  Board  of  director  fees  and  shareholder  meeting  fees  totaled
$118,797,  which  consists  primarily of the issuance of common stock in lieu of
cash for services rendered as board members. These non-cash stock issuances were
valued at $107,100. Advertising,  marketing and travel expenses were $92,001 and
were  incurred  in  connection  with our  efforts  to  increase  sales of filter
distributorships  and Energy Miser systems.  Legal and  accounting  fees totaled
$73,411  incurred for the audit and review of our financial  statements  and the
cost associated with our compliance filings with the SEC. The remaining expenses
were for general business operations.

         Expenses for the year ended June 30, 2002 were as follows:

         Interest  expense was $268,349  for the prior year period.  We incurred
$193,402 in non-cash interest in connection with the issuance of the convertible
debentures.  We also incurred $64,700 of non-cash interest on debentures that do
not have a beneficial conversion feature. Marketing and advertising was $71,500.
Travel expenses were $29,200 as we attended more industry trade shows in each of
the last 2 fiscal  years to  increase  our  exposure  to the  market.  Legal and
professional fees were $327,400. 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. Our
payroll for the year was  $273,200.  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.


                                       7
<PAGE>

         We  incurred  a net loss  for the 2003  fiscal  year of  $1,587,235  as
compared  to a net loss of  $1,177,780  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   primarily  by  loans  from  our   president,
individuals and the issuance of convertible  debentures.  As of June 30, 2003 we
are indebted to 5 individuals in the total amount of $93,900 and have $1,420,500
in total convertible  debentures  outstanding.  We are also indebted for various
loans  to  fund  the  start  up  costs   associated   with  the  various  filter
distributorships in an amount of $185,000.

         The convertible debentures consist of the following issuances:

         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.  The proceeds were utilized for repayment of
accounts  payable and operating  expenses.  As of June 30, 2003 $76,500 of these
debentures remains outstanding.

         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.  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.

         On March 26,  2002,  we  entered  into an  agreement  with  these  same
Debenture  Holders 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.  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 utilized a majority of the remaining net proceeds for marketing and
sales  promotion,  internal  corporate  infrastructure  development  and general
operating expenses.  The combined  outstanding balance of the September 26, 2000
and the March 26, 2002  debentures  was  $1,344,000  as of June 30, 2003. We are
currently  in default on these  debentures  (See ITEM 3.  "DEFAULTS  UPON SENIOR
SECURITIES").

         In March 2003,  we received  private  funding in the amount of $185,000
for the up-front  costs for the filter service  distributorships  that are being
developed. The up-front costs of the filter service distributorships include the
sales commissions,  a work vehicle for the service  technician,  all appropriate
tools and the filter material and metal frame inventory. These private notes are
collateralized  with the assets of each  individual  area until the territory is
completed.  Upon the final funding of the  distributorship,  the notes are to be
repaid plus 10% interest.

         During the quarter ended June 30, 2003 we received  additional  funding
of $93,900 from loans from 5 individuals.  These funds were utilized for general
operating expenses.

         We had cash  balances  of $681 at June 30,  2003 as  compared to a cash
balance of $276,745 at June 30, 2002. We utilized the cash during this period to
increase our marketing efforts and for general operating expenses.  Our accounts
and notes receivable balances increased to $344,597 primarily due to the sale of
the filter distributorships  located in Waco,  Temple/Killeen,  Georgetown/Round
Rock and Austin,  Texas. 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.


                                       8
<PAGE>

         We had a net working  capital  deficit of  $2,094,358 at June 30, 2003.
However,  we anticipate that most of the convertible denture holders included in
this working capital deficit  ($1,420,500 balance at June 30, 2003) will convert
their debt into  shares of common  stock over time but we can give no  assurance
that they will convert.

New Accounting Pronouncements

         In November  2002,  the FASB issued  Financial  Interpretation  No. 45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect   Guarantees  of  Indebtedness  of  Others."  FIN  45  sets  forth  the
disclosures required to be made by a guarantor in its financial statements about
its obligations  under certain  guarantees that it has issued. It also clarifies
that a guarantor is required to recognize,  at the  inception of a guarantee,  a
liability  for the fair  value  of the  obligation  undertaken  in  issuing  the
guarantee.  The adoption of FIN 45 is not expected to have a material  effect on
the Company's financial position or results of its operations.

         In December  2002, the FASB issued  Statements of Financial  Accounting
Standards  No. 148  "Accounting  for  Stock-Based  Compensation--Transition  and
Disclosure--an  amendment of FASB Statement No. 123, This Statement  amends FASB
Statement  No.  123,  Accounting  for  Stock-Based   Compensation,   to  provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  this
Statement  amends  the  disclosure  requirements  of  Statement  123 to  require
prominent  disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported  results.  The  adoption of SFAS 148 is not  expected to
have a material  effect on the  Company's  financial  position or results of its
operations.

         In May 2003 the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial  Instruments  with  Characteristics  of both  Liabilities and Equity",
which  requires that certain  financial  instruments be presented as liabilities
that  were  previously   presented  as  equity  or  as  temporary  equity.  Such
instruments include mandatory redeemable preferred and common stock, and certain
options and warrants.  SFAS 150 is effective for financial  instruments  entered
into or modified after May 31, 2003 and is generally  effective at the beginning
of the first interim period  beginning after June 15, 2003. The adoption of SFAS
150 is not  expected  to  have a  material  effect  on the  Company's  financial
position or results of its operations.

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.

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.


                                       9
<PAGE>

         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.




                                       10
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          INDEX TO FINANCIAL STATEMENTS


                                TABLE OF CONTENTS

                                                                      PAGE


Independent Auditor's Report (Sprouse & Anderson, LLP)                 F-1
Balance Sheet at June 30, 2003                                         F-2
Statement of Operations for the Year ended June 30, 2003               F-3
Statement of Stockholders' Capital for Year ended June 30, 2003        F-4
Statement of Cash Flows for the Year ended June 30, 2003               F-5
Notes to Financial Statements                                          F-6






                                       11

<PAGE>


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


INDEPENDENT AUDITORS' REPORT


We have audited the  accompanying  balance  sheet of DeMarco  Energy  Systems of
America,  Inc.  (Company) as of June 30,  2003,  and the related  statements  of
operations,  stockholders' equity, and cash flows for the year then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

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

In our opinion,  the  financial  statements  referred to in the first  paragraph
present  fairly,  in all material  respects,  the financial  position of DeMarco
Energy  Systems of  America,  Inc. as of June 30,  2003,  and the results of its
operations  and its cash flows for the year then ended in  conformity  with U.S.
generally accepted accounting principles.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As  discussed  in Note L to the  financial
statements,  the Company has suffered recurring losses from operations and has a
working capital  deficiency.  The Company has relied primarily on capital raised
through  offerings of convertible debt securities to fund its operations.  It is
uncertain whether the Company will be able to secure additional  capital to fund
its operations and this raises  substantial doubt about the Company's ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.



SPROUSE & ANDERSON, L.L.P.
September 26, 2003
Austin, Texas


                                      F-1
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                                  BALANCE SHEET
                                  JUNE 30, 2003

                                     ASSETS


Current Assets
   Cash and Equivalents                                    $       681
   Inventory                                                    50,809
   Accounts Receivable                                          32,065
   Prepaid Expenses                                              1,116
   Notes Receivable, current                                    49,368
                                                           -----------
      Total Current Assets                                     134,039
                                                           -----------
Fixed Assets
   Furniture, Fixtures and Equipment                           213,934
   Less:  Accumulated Depreciation                             (94,992)
                                                           -----------
      Total Fixed Assets                                       118,942
                                                           -----------
Other Assets
   Notes Receivable, less current portion                      263,164
   Goodwill                                                     36,884
   Patent                                                        9,912
   Deposits                                                     10,929
                                                           -----------
      Total Other Assets                                       320,889
                                                           -----------

            TOTAL ASSETS                                   $   573,870
                                                           ===========

                      LIABILITIES AND SHAREHOLDERS CAPITAL

Current Liabilities
   Accounts Payable                                        $   139,921
   Other Accrued Liabilities                                   374,964
   Convertible Debentures                                    1,420,500
   Notes Payables to Individuals                               288,304
   Capital Leases, current portion                               4,708
   Due To Related Parties                                            0
                                                           -----------
      Total Current Liabilities                              2,228,397
                                                           -----------

Notes Payable, long-term                                        37,285
                                                           -----------
Capital Leases, net of current portion                          24,851
                                                           -----------
Shareholders' Capital (Deficit)
   Common Stock, Par Value $0.001, 100,000,000
     authorized 46,163,495 issued and outstanding               46,163
   Additional Paid-In Capital                                4,524,153
   Retained Deficit                                         (6,286,979)
                                                           -----------
                                                            (1,716,663)
                                                           -----------

            TOTAL LIABILITIES AND SHAREHOLDERS' CAPITAL    $   573,870
                                                           ===========


                     See notes to the financial statements


                                      F-2
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                             STATEMENT OF OPERATIONS
                        FOR THE YEAR ENDED JUNE 30, 2003


Revenues
   Geothermal                                                  $   126,184
   Filter                                                           92,714
   Sale of Filter Distributorships                                 350,000
   Other Income                                                     10,775
                                                               -----------

      Total Revenues                                               579,673
                                                               -----------
Cost of Revenues
   Costs of Geothermal Sales                                        95,769
   Cost Of Distributorships Sold                                   121,977
   Costs of Filter Service Revenues                                 26,848
                                                               -----------

      Cost of Goods Sold                                           244,594
                                                               -----------

         Gross Margin                                              335,079
                                                               -----------
Other Costs and Expenses
   Selling and Administrative                                      951,538
   Amortization and Depreciation                                    13,670
   Interest                                                        957,106
   Loss from Extinguishment of Debt in Stock                             0
                                                               -----------

      Total Costs and Expenses                                   1,922,314
                                                               -----------

Loss Before Discontinued Operations and Extraordinary Items     (1,587,235)
                                                               -----------

Discontinued Operations
   Loss from Operations, Discontinued Subsidiary                         0
   Loss from Disposal of Assets, Subsidiary                              0
                                                               -----------

                                                                         0
                                                               -----------
Extraordinary Items
   Forgiveness of Debt                                                   0
   Unrealized Gain from Debt to be Extinguished in Stock                 0
                                                               -----------

                                                                         0
                                                               -----------

NET LOSS                                                       $(1,587,235)
                                                               ===========

Earnings Per Share - Basic                                     $    (0.033)
Earnings Per Share - Fully Diluted                             $    (0.033)


                     See notes to the financial statements


                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                       STATEMENTS OF SHAREHOLDERS' CAPITAL
                        FOR THE YEAR ENDED JUNE 30, 2003



                           Common Stock     Shares Of      Additional
                                At         Common Stock     Paid-In      Subscriptions     Retained
                           Par $ 0.001     Outstanding      Capital       Receivable        Deficit         Total
                           ------------    ------------    ----------    -------------    -----------    -----------
<S>                        <C>             <C>             <C>           <C>              <C>            <C>
Balance June 30, 2002 as
  previously reported      $     32,190      32,190,492    $4,185,399    $     (53,150)   $(5,510,348)   $(1,345,907)

Prior Period Adjustment                                                                       810,602        810,602
                           ------------    ------------    ----------    -------------    -----------    -----------
Balance June 30, 2002,
  as restated                    32,190      32,190,492     4,185,399          (53,150)    (4,699,744)      (535,305)

Subscriptions Receivable,
  voided                                                      (53,150)          53,150                             0

Issuance of 13,973,003
  Shares of Common Stock         13,973      13,973,003       391,904                0              0        405,877

Net Loss For The Year                 0               0             0                0     (1,587,235)    (1,587,235)
                           ------------    ------------    ----------    -------------    -----------    -----------

Balance June 30, 2003      $     46,163      46,163,495    $4,524,153    $           0    $(6,286,979)   $(1,716,663)
                           ============    ============    ==========    =============    ===========    ===========
</TABLE>

                      See notes to the financial statements



                                      F-4
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                             STATEMENT OF CASH FLOWS
                        FOR THE YEAR ENDED JUNE 30, 2003


 Cash flows from operating activities:
 Net Loss                                                    $(1,587,235)
                                                             -----------
 Adjustments to reconcile net income to net cash
 provided by operating activities:
    Depreciation and amortization                                 13,670
    (Increase) decrease in accounts receivable                   (31,103)
    (Increase) decrease in prepaid expenses                       (1,116)
    (Increase) decrease in other assets                           (9,929)
    Increase (decrease) in accounts payable                       63,013
    Increase in accrued liabilities                              277,663
    Non-cash interest from beneficial conversion feature         793,555
    (Increase) decrease in inventories                           (43,276)
    Non-cash expenses settled in stock                           124,067
    Non-cash penalties settled in stock                             --
                                                             -----------
    Total adjustments                                          1,186,544
                                                             -----------
 Net cash used by operating activities                          (400,691)

 Cash flow from investing activities:
    Issuance of notes receivable                                (230,000)
    Payments under notes receivable                                7,468
    Property and equipment purchases                             (43,155)
    Increase (decrease) in restricted cash                          --
                                                             -----------
 Net cash (provided) used by investing activities               (265,687)

 Cash flow from financing activities:
    Repayments of long-term debt                                 (19,099)
    Repayments under capital lease                                  (275)
    Proceeds (repayments) of notes to shareholders                     0
    Proceeds (repayments) of convertible debentures                    0
    Proceeds from note payable to bank                            50,788
    Proceeds from note payable to individuals                    358,900
    Proceeds from issuance of common stock                             0
    Proceeds of debt of related parties                             --
                                                             -----------
 Net cash provided by financing activities                       390,314

 Net increase (decrease) in cash and equivalents                (276,064)
 Cash and equivalents, beginning of period                       276,745
                                                             -----------
 Cash and equivalents, end of period                         $       681
                                                             ===========

 Cash paid for interest expense                              $    16,600
                                                             -----------

 Cash paid for income taxes                                  $         0
                                                             -----------
 Non-cash financing activities: conversion of
    notes payable to equity                                  $    70,000
                                                             -----------
 Non-cash financing activities: conversion of
    debentures to equity                                     $   189,310
                                                             -----------
 Non-cash financing activities: stocks for fixed assets      $    22,500
                                                             -----------
 Non-cash financing activities: fixed asset capital
    lease                                                    $    29,834
                                                             -----------
 Non-cash financing activities: non-cash interest
    expense on convertible debt                              $   793,555
                                                             -----------
 Non-cash operating activities: stock for compensation       $   114,900
                                                             -----------
 Non-cash operating activities: stock for consulting         $     9,167
                                                             -----------
 Non-cash investing activities: sale of assets for a
    note receivable                                          $    90,000
                                                             -----------
 Non-cash investing activities: sale of assets for a
    note receivable                                          $    23,968
                                                             -----------

                     See notes to the financial statements


                                      F-5
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        FOR THE YEAR ENDED JUNE 30, 2003


Note A - Organization

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,  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.

The Company  currently has  installations in Oregon,  Pennsylvania,  Washington,
Montana, South Dakota, Mississippi, California and Texas.

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.  A11 components of Cyberlink were disposed of during the fiscal year
ended June 30, 1999.

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 air
and grease filtration devices. During the year ended June 30, 2003, DeMarco sold
part of the company as a filter  service  distributorship  and is utilizing  the
manufacturing  portion  of the  acquired  company  to cut  filters  for  various
distributorships that they sell.

Change From Development Stage Reporting To Operational Reporting

As of March 1, 2003,  the Company  had  developed  current and future  revenues,
expanded  into diverse  markets and had  sufficient  overall  operations  in all
aspects of its business,  that it was able to move out of the development  stage
and into the operational stage of financial reporting.


Note B - Summary of Significant Accounting Policies

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, 2003, or the date of this report.

Inventory

Inventory is  accounted  for under the first in, first out method and is carried
at the lower of cost or market.  Inventory consists of finished goods of filters
and frames.


                                       F-6
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        FOR THE YEAR ENDED JUNE 30, 2003


Accounts Receivable

The Company records uncollectible accounts receivable using the direct write off
method of accounting for bad debts.  Historically,  the Company has  experienced
minimal credit losses and has not written off any uncollectible  accounts during
the fiscal year.

Notes Receivable

The Company self finances  distributorships  that have been sold.  The intent is
for the  purchaser to find  alternate  financing,  while paying the Company on a
monthly basis in the meantime. In the event of default on a note receivable, the
Company will take over the distributorship and re-sell it when appropriate.

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 are expensed as incurred.

Goodwill and Intangible Assets

Goodwill  and  intangible  assets are  periodically  reviewed by  management  to
evaluate the future economic benefits or potential impairments, which may affect
their  recorded  values.  Goodwill  represents  the excess of the cost of assets
acquired  over the fair  market  value of those  tangible  assets on the date of
their  acquisition.  The Company has adopted  Statement on Financial  Accounting
Standard No. 142 "Goodwill and other  intangible  assets,"  under which goodwill
acquired in a business  combination after June 30, 2001, shall not be amortized,
but  reviewed  for  impairment  in value.  Goodwill  recorded  in the  financial
statements relates to costs capitalized in conjunction with the acquisition of a
business segment and the patent relates to costs capitalized in conjunction with
a patent  application.  These assets are not subject to amortization  and have a
total balance of $46,796 at June 30, 2003.

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 for geothermal sales using the
percentage-of-completion  method.  Revenue  and  costs  are  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 $28,098  has been  expensed  for the years  ended June 30,
2003.


                                      F-7
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        FOR THE YEAR ENDED JUNE 30, 2003


Note B - Accounts Receivable

Accounts receivable consist of the following:

                                                June 30, 2003
                                                -------------
       Trade accounts receivable                $      17,796
       Distributorship accounts receivable             11,974
       Other - related party                            2,295
                                                -------------
                                                       32,065
       Less: allowance for doubtful accounts               (0)
                                                -------------
                                                $      32,065
                                                =============


Note C - Fixed Assets

Fixed assets consist of the following:

                                                June 30, 2003
                                                -------------
       Furniture and fixtures                   $      55,987
       Equipment                                      111,781
       Vehicles                                        39,763
       Leasehold Improvements                           6,403
                                                -------------
                                                      213,934
       Less: accumulated depreciation
             and amortization                         (94,992)
                                                -------------
                                                $     118,942
                                                -------------


Note D - Short-term Notes Payable and Long-term Debt

Long-term debt consists of the following:
                                                        June 30,
                                                          2003
                                                       ----------
Convertible  debentures  bearing  interest at 10%,
convertible  into  shares of  common  stock at the
lesser of $0.15 per  share or the  average  of the
lowest   three   trading  days  in  the  ten  days
preceding  the  conversion at a 40% discount.  The
conversion  rights  were  valued  at $986,957  and
recorded as a discount to the  note at the time of
issuance.                                              $1,344,000

Convertible  dentures bearing interest at 8 - 10%,
convertible  into shares of common  stock at rates
ranging from $0.10 - $0.45                                 76,500

Short-term  notes payable to  individuals  bearing
interest at 10%, to be paid in full on various due
dates during fiscal year 2004,  collateralized  by
the assets of filter service distributorships             185,000

Short-term  notes payable to  individuals  bearing
interest at 10%, to be paid in full on various due
dates during fiscal year 2004, notes are unsecured         93,900

Vehicle notes payable in monthly installments with
payments  ranging from $285 - $388  through  2009,
bearing  interest  rates ranging from 7.0 - 8.25%,
collateralized by vehicles                                 46,689
                                                       ----------
                                                        1,746,089
Less current maturities                                (1,708,804)
                                                       ----------
Long-term debt                                         $   37,285
                                                       ==========


                                      F-8
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        FOR THE YEAR ENDED JUNE 30, 2003

The  aggregate  annual  maturities  of  long-term  debt at June 30,  2003 are as
follows:

                  Fiscal Year Ending
                  ------------------
                        2004                    $1,708,804
                        2005                        10,132
                        2006                        10,915
                        2007                        11,760
                        2008                         4,478
                                                ----------
                              Total             $1,746,089
                                                ==========


Note E - Sale of Distributorship

During  the year ended June 30,  2003,  the  Company  began  selling  filtration
distributorships  and  financing  the sales  themselves.  Under the terms of the
agreement,  the buyer pays  $15,000 in cash,  and the  remainder of the purchase
price is financed  through a note receivable  which accrues  interest at 8%. The
notes  receivable  are  secured by the  distributorship  agreement  and  certain
assets. In addition, if the buyer does not meet performance guidelines under the
agreement,  the  Company has the right to  re-acquire  the  distributorship  and
certain collateral and re-sell the distributorship.

Accounts   and  notes   receivable   consist   primarily  of  amounts  due  from
distributorships  and  distributorship  fees  due for  sales  of  filters  as is
required under the distributorship agreement.


Note F - Capital Lease Obligations

The Company  entered  into a capital  lease in May 2003  totaling  $39,554  with
monthly payments of $659 including  interest at 11.7% annual rate. The equipment
is included in property and  equipment at June 30, 2003 at a cost of $29,834 and
accumulated depreciation of $57.

Future minimum payments due under capital lease obligations are as follows:

         Total future minimum lease payments                         $ 38,895
         Less amount representing interest                             (9,336)
                                                                     --------
         Present value of minimum lease payments                       29,559
         Less current installments                                     (4,708)
                                                                     --------
         Obligations under capital leases, net of current portion    $ 24,851
                                                                     ========

Principal  payments on capital leases for each of the next five fiscal years are
as follows:

              Future Maturities
              -----------------
                    2005                    $ 5,290
                    2006                      5,944
                    2007                      6,679
                    2008                      6,938
                                            -------
                                            $24,851



                                      F-9
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        FOR THE YEAR ENDED JUNE 30, 2003

Note G - Operating Lease Obligation

Office Facility Lease

The Company entered into an office  facility lease,  guaranteed by the Company's
President,  and ending on November  30,  2003.  The Company  will not renew that
"old" lease and has  entered  into a "new"  sixty-six  (66) month  lease,  which
started May 1, 2003. Rent expense under these  operating  leases for fiscal 2003
and 2002 was $47,507 and $24,565,  respectively.  Future  minimum lease payments
are as follows:

              Fiscal Year Ending
              ------------------
                    2004                   $ 58,940
                    2005                     54,508
                    2006                     58,087
                    2007                     59,568
                    2008                     59,568
                    Thereafter               19,856
                                           --------
                    Total                  $310,527
                                           ========

Note H - Common Stock

Common Stock

During fiscal 2003,  the Company issued  13,973,003  shares of common stock as a
result of the  conversion  of  convertible  notes  payable and  related  accrued
interest,  as well as, for stock fees paid to board  members and  employees  and
other consultants.

The major debenture  holder  converted  $81,000 of principal and interest during
the year into 8,590,726 shares of free trading common stock.

The rest of the debenture holders  converted  $108,310 of principal and interest
during the year into 1,275,607 shares of restricted Sec. 144 common stock.

Note payable holders converted $70,000 of principal and interest during the year
into 700,000 shares of restricted SEC 144 common stock.

Previous board member,  Brian  Winterowd,  received 120,000 shares of restricted
Sec. 144 common stock,  valued at $1,800,  as compensation for his tenure on the
board of directors.

Current board member, Victor DeMarco, received 365,000 shares of restricted Sec.
144 common stock, valued at $18,250, as compensation for his tenure on the board
of directors.

Current board member, Robin L. Jones, received 965,000 shares of restricted Sec.
144 common stock, valued at $38,050, as compensation for his tenure on the board
of directors.

Current board member, Robin L. Jones, installed marble and other furniture items
in the new offices and received  450,000  shares of  restricted  Sec. 144 common
stock, valued at $22,500.

Current board member,  William C. Berry,  received  965,000 shares of restricted
Sec. 144 common stock,  valued at $38,050, as compensation for his tenure on the
board of directors.

Two  individuals  received  166,670 shares of restricted  Sec. 144 common stock,
valued at $9,167, as compensation for consulting services.

Four management  level employees  received 375,000 shares of restricted Sec. 144
common stock, valued at $18,750, as additional compensation.

Earnings (Loss) Per Common Share

Earnings  (Loss) per common  share are  computed by  dividing  net losses by the
weighted average number of common shares outstanding.  Diluted per share amounts
assume the  conversion,  exercise  or  issuance of all  potential  common  stock
instruments  unless the effect is  anti-dilutive,  thereby  reducing the loss or
increasing  the income per common share.  The weighted  average number of common
shares   outstanding   during  the  year  ended  June  30  2003  and  2002,  was
approximately 37,875,786 and 32,190,492 shares, respectively.  The fully diluted
number of shares  outstanding  for the years ended June 30,  2003 and 2002,  was
85,839,574 and 96,874,054,  respectively.  However, because the Company incurred
losses in both 2003 and 2002, the inclusion of these potential  common shares in
the  calculation of diluted loss per share would have an  anti-dilutive  effect.
Therefore, basic and diluted per share are the same in both 2003 and 2002.

Beneficial Conversion Feature

As described in greater  detail in Note C, the Company issued notes payable with
beneficial  conversion  features during fiscal 2002. The value of the beneficial
conversion feature was determined to be $986,957. This amount was recorded as an
increase to  additional  paid in capital and $793,555 and $193,402 was amortized
to interest expense during 2003 and 2002, respectively.


                                      F-10
<PAGE>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        FOR THE YEAR ENDED JUNE 30, 2003

Note I - Income Taxes

As of June 30, 2003,  DeMarco Energy Systems,  Inc. had net operating loss carry
forwards of approximately $6,000,000 that expire between 2010 and 2022. They are
available to offset  future  taxable  income to the extent  permitted  under the
Internal  Revenue  Code.  The use of these losses to reduce  future income taxes
will  depend  on the  generation  of  sufficient  taxable  income  prior  to the
expiration of the net  operating  loss carry  forwards.  In the event of certain
changes in the control of DeMarco Energy,  there will be an annual limitation on
the  amount of net  operating  loss  carry  forwards  which can be used.  No tax
benefit has been  reported in the financial  statements  for the year ended June
30, 2003 and 2002, because the loss carry forwards may expire unused.

Note J - 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 principal
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 there is no
principal or interest outstanding at June 30, 2003.

Additionally,  the president deferred salary from the Corporation at the rate of
$175,000 per annum until March 31, 2002.  At June 30, 2003, there is no deferred
salary amount outstanding.

The Company holds notes  receivable  from the spouse of an executive  officer in
the amount of  $177,532 at June 30,  2003.  The notes  receivable  relate to the
purchase of two distributorships and are being financed by the Company.

Note K - Fair Values of Financial Instruments

The  Company's  financial  instruments  consist of cash and notes  payable.  The
Company  estimates  that the fair  values of all  financial  instruments  do 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 L - Going Concern

As shown in the  accompanying  financial  statements,  the Company  incurred net
operating  losses of $1,587,235 and $1,177,780 for the years ended June 30, 2003
and 2002, and has an accumulated  deficit of $6,286,979 at June 30, 2003,  which
raises  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 the  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>

                     DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        FOR THE YEAR ENDED JUNE 30, 2003

Note M - Prior Period Adjustment

At June 30, 2002, the beneficial  conversion  feature amount of $986,957 related
to the $1,000,000 in convertible  debentures was expensed entirely.  However, as
the life of the  convertible  instrument was one year from the date of issuance,
the beneficial conversion feature should be amortized over the remaining life of
the debt  regardless of when the  convertible  instrument is  convertible by the
holder.

As such,  net income was  understated  and interest  expense was  overstated  by
$793,555 at June 30, 2002.

Additionally,  interest  expense  on  several  of the  debentures  was  computed
incorrectly.  The interest rate and the terms on several of the debentures  were
incorrectly  stated.  Interest  expense  was  overstated  by $16,518 and accrued
interest payable was overstated by $16,518.

Also,  $529 of the  goodwill  was  amortized  in the year ended  June 30,  2002.
Goodwill is no longer amortized.

Retained Deficit Accumulated during the Development
         Stage, as previously reported                          $(5,510,346)
         Less:  Overstated Beneficial Interest Expense              793,555
                Over amortized goodwill                                 529
                Overstated Accrued Interest Expense                  16,518
                                                                -----------
                                                                    810,602
                                                                -----------
Retained Deficit Accumulated during the
         Development Stage, as restated                         $(4,699,744)
                                                                -----------

Note N - Subsequent Event

The Company  closed on a $300,000  debenture  subsequent  to June 30, 2003.  The
monies received will be used to fund operations in the short-term.




                                      F-12
<PAGE>

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

         On  November  15,  2002 we filed a Form 8-K  with  the  Securities  and
Exchange Commission reporting that we changed our Independent  Accountants as of
October 28, 2002. The following information was filed in that current report:

         On October  28,  2002,  the  Registrant  engaged  the firm of Sprouse &
Anderson,  LLP ("Sprouse & Anderson") as the Registrant's  independent certified
public accountants to audit the Registrant's  financial statements on an ongoing
basis.  At the same time, the Registrant  terminated the engagement of Robnett &
Company,  P.C.  ("Robnett"),  previously  the  Registrant's  independent  public
accountant. This change in independent certified public accountants was approved
by the Registrant's Board of Directors.

         Robnett's reports on the Registrant's  financial  statements during the
two most recent fiscal years contained no adverse opinion, disclaimer of opinion
or  modification of the opinion other than the statement that the Registrant has
suffered  losses from  operations  and has a net capital  deficiency  that raise
substantial  doubt about its ability to continue as a going concern.  During the
Registrant's  two most recent fiscal years and all  subsequent  interim  periods
preceding  the  termination  of  the  engagement  of  Robnett,   there  were  no
disagreements with Robnett on any matter of accounting  principles or practices,
financial statement disclosure or auditing scope or procedure.

         The Registrant has provided  Robnett with a copy of the  disclosures it
is making herein and has requested Robnett to furnish it with a letter addressed
to the Securities  and Exchange  Commission  stating  whether it agrees with the
statements  made by the Registrant  herein and, if not,  stating the respects in
which it does not agree. A copy of Robnett's  letter  responsive to such request
is attached as Exhibit 16.1 to Form 8-K filed on November 15, 2002.

         Prior to the  engagement  of  Sprouse  &  Anderson  as its  independent
certified  public  accountant,  the  Registrant  did not consult  with Sprouse &
Anderson or receive any written or oral advice from Sprouse & Anderson regarding
any  matter,   including  without   limitation  the  application  of  accounting
principles to any transaction,  the type of audit opinion that might be rendered
on the Registrant's financial statements or any matter that was the subject of a
disagreement or reportable event.


ITEM 8A. CONTROLS AND PROCEDURES

         Disclosure  controls and procedures  are controls and other  procedures
that are designed to ensure that information required to be disclosed in company
reports  filed or  submitted  under  the  Securities  Exchange  Act of 1934 (the
"Exchange Act") is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange  Commission's  rules and forms.
Disclosure  controls and procedures include,  without  limitation,  controls and
procedures  designed to ensure that  information  required  to be  disclosed  in
company reports filed under the Exchange Act is accumulated and  communicated to
management,  including the Company's Chief Executive Officer and Chief Financial
Officer (the  "Certifying  Officers"),  as appropriate to allow timely decisions
regarding required disclosure.

         As required by Rules  13a-15 and 15d-15  under the  Exchange  Act,  the
Certifying Officers carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of June 30,
2003. Their  evaluation was carried out with the  participation of other members
of the  Company's  management.  Based  upon  their  evaluation,  the  Certifying
Officers  concluded that the Company's  disclosure  controls and procedures were
effective.


                                       24
<PAGE>


         The Company's  internal  control over financial  reporting is a process
designed by, or under the supervision  of, the Certifying  Officers and effected
by the Company's Board of Directors,  management and other personnel, to provide
reasonable  assurance  regarding  the  reliability  of the  Company's  financial
reporting and the preparation of the Company's financial statements for external
purposes in accordance with generally accepted accounting  principles.  Internal
control over financial  reporting  includes policies and procedures that pertain
to the  maintenance of records that in reasonable  detail  accurately and fairly
reflect the  transactions  and  dispositions  of the Company's  assets;  provide
reasonable  assurance  that  transactions  are  recorded as  necessary to permit
preparation of the Company's  financial  statements in accordance with generally
accepted accounting principles, and that the Company's receipts and expenditures
are being made only in accordance with the  authorization of the Company's Board
of  Directors  and  management;   and  provide  reasonable  assurance  regarding
prevention or timely detection of unauthorized  acquisition,  use or disposition
of the  Company's  assets  that could have a  material  effect on its  financial
statements.  There has been no change in the  Company's  internal  control  over
financial  reporting that occurred in the fiscal year ended June 30, 2003,  that
has  materially  affected,  or is  reasonably  likely to affect,  the  Company's
internal control over financial reporting.



                                    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            39            President

Robin Jones                  41            Secretary & Treasurer

William Berry                56            Chairman, CEO & CFO


         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.



                                       25
<PAGE>


ITEM 10. EXECUTIVE COMPENSATION

         The following table reflects  compensation  paid to our chief executive
officer.
<TABLE>
<CAPTION>
                                                                                               LONG TERM COMPENSATION
                                                                                 ---------------------------------------------------
                                                                                          AWARDS
                                                                                 ------------------------    PAYOUTS
                                                      ANNUAL COMPENSATION        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, President                 2002    $ 64,750                      $   18,250
   President & Chief Executive Officer     2001    $175,000
 William C. Berry, Chairman & CEO          2002    $ 71,500                      $   38,050
 William C. Berry, Director                2001    $ 10,000
 Robin L. Jones, V. Chairman & Secretary   2002    $ 23,500                      $   38,050
</TABLE>

 No other persons makes over $100,000 per year.

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,  2003,  the name and
shareholdings,  including  options to acquire  Common Stock,  of each person who
owns of record, or was known by us to own beneficially, 5% or more of the shares
of  the  Common  Stock   currently   issued  and   outstanding;   the  name  and
shareholdings,  including options to acquire the Common Stock, of each director;
and the shareholdings of all executive officers and directors as a group.

<TABLE>
<CAPTION>
                                       Name and Address                          Amount and Nature       Percent of
 Title of Class                      Of Beneficial Owner                      Of Beneficial Ownership      Class
 --------------     ------------------------------------------------------    -----------------------    ----------
<S>                 <C>                                                       <C>                        <C>
 Common Stock       Victor DeMarco                                                  11,478,887 (1)          24.9%
                    2600 McHale Court, Suite 170, Austin, Texas 78758
 Common Stock       Mary L. DeMarco                                                 11,478,887 (1)          24.9%
                    2600 McHale Court, Suite 170, Austin, Texas 78758
 Common Stock       William Berry                                                    2,235,722               4.8%
                    2600 McHale Court, Suite 170, Austin, Texas 78758
 Common Stock       Robin L. Jones                                                   1,943,500               4.2%
                    2600 McHale Court, Suite 170, Austin, Texas 78758
 Common Stock       Executive Officers and Directors as a Group (3 persons)         15,658,109              33.9%
                    12885 HWY 183, Ste 108A, Austin, Texas 78750
</TABLE>

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

(1) Victor DeMarco personally controls  11,368,887 shares and Mary DeMarco,  his
spouse, controls 110,000 shares.



                                       26
<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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
principal 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
there is no principal or interest outstanding at June 30, 2003.

         Additionally, the president deferred salary from the Corporation at the
rate of $175,000 per annum until March 31, 2002.  At June 30, 2003,  there is no
deferred salary amount outstanding.

         The Company  holds  notes  receivable  from the spouse of an  executive
officer in the amount of $177,532 at June 30, 2003. The notes receivable  relate
to the purchase of two distributorships and are being financed by the Company.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

 Exhibit Number        Name of Exhibit
 --------------        ---------------------------------------------------------
    31.1               Certification  of Chief  Executive  Officer,  pursuant to
                       Rule 13a-14(a) of the Exchange Act, as enacted by Section
                       302 of the Sarbanes-Oxley Act of 2002.

    31.2               Certification  of Chief  Financial  Officer,  pursuant to
                       Rule 13a-14(a) of the Exchange Act, as enacted by Section
                       302 of the Sarbanes-Oxley Act of 2002.

    32.1               Certification  of  Chief  Executive   Officer  and  Chief
                       Financial  Officer,  pursuant  to 18 United  States  Code
                       Section   1350,   as  enacted  by  Section   906  of  the
                       Sarbanes-Oxley Act of 2002.


b. Reports on Form 8-K

None



                                       27
<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

         The company paid audit and  financial  statement  review fees  totaling
$13,725  for the  fiscal  year ended June 30,  2003 to Sprouse &  Anderson,  our
current independent accountants.

         The  company  paid  $22,232  for the fiscal year ended June 30, 2003 to
Robnett & Company, our previous independent accountants, for financial statement
reviews  of our  quarterly  reports  and the audit of our  acquisition  of Baker
Filter  Services.  In addition,  we paid Robnett & Company $35,639 for audit and
financial statement review fees for the fiscal year ended June 30, 2002.

Audit-Related Fees

         None

Tax Fees

         The company paid $800 to Robnett & Company for  preparing the company's
Federal tax returns for each of the 2 years ended June 30, 2002 and 2001.

All Other Fees

         None

Audit committee policies & procedures

         All of  the  above  services  were  approved  by  the  company's  audit
committee, which is comprised of the members of the Board of Directors





                                       28
<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/ William C. Berry
                                         ---------------------------------
                                         William C. Berry, Chairman, Chief
                                         Executive Officer & Chief Financial
                                         Officer

                                   Date: November 14, 2003

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            November 14, 2003
   ---------------------
   Victor M. DeMarco




                                       29
<PAGE>