**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





x Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange


Act
      of
      1934





For
      the
      Fiscal Year Ended July 31, 2006







o Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For
      the
      Transition Period____________ to_____________.





Commission
      File Number 000-49816





**MEGOLA
      INC.**


(Name
      of
      small business issuer in its charter)





Nevada
            
            88-0492605(State
                or other jurisdiction of
            
            (I.R.S.
                employer identification number)Incorporation
                or organization)





446
                Lyndock St., Suite 102Corunna,
                ON, Canada
            N0N
                1G0(Address
                of principal executive offices)
            (Zip
                code)





Issuer's
      telephone number: (519) 481-0628




Securities
      Registered Pursuant to Section 12(b) of the Act: NONE





Securities
      Registered Pursuant to Section 12(g) of the Act:




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act 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. o Yes   x
      No





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B is
      not contained
      in this form, and no disclosure will be contained, to the best of registrant's
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
      o





The
      issuer's revenues for its most recent fiscal year were $743,787.





As
      of the
      date of this filing, the Company's Common Stock is trading on the Pink Sheets
      under the symbol of MGOA.





The
      number of shares outstanding of each of the issuer's classes of common stock,
      as
      of July 31, 2006 was 37,716,029.




**DOCUMENTS
      INCORPORATED BY REFERENCE**





If
      the
      following documents are incorporated by reference, briefly describe them and
      identify the part of the Form 10- KSB (e.g., Part I, Part II, etc.) into which
      the document is incorporated: (1) any annual report to security holders; (2)
      any
      proxy or information statement; and (3) any prospectus filed pursuant to Rule
      424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
      documents should be clearly described for identification purposes (e.g. annual
      report to security holders for fiscal year ended December 24,
      1990).




Transitional
      Small Business Disclosure Format (Check one):


Yes
o 
No
x









**PART
                I**ITEM
                1. DESCRIPTION OF BUSINESS
            1ITEM
                2. DESCRIPTION OF PROPERTY
            9ITEM
                3. LEGAL PROCEEDINGS
            9ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            9**PART
                II.**ITEM
                5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS
            9ITEM
                6. MANAGEMENT DISCUSSION AND PLAN OF OPERATION
            13ITEM
                7. FINANCIAL STATEMENT
            16INDEPENDENT
                REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT
            17ITEM
                8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            27ITEM
                8A. CONTROLS AND PROCEDURE
            27ITEM
                8B. OTHER INFORMATION
            28**PART
                III**ITEM
                9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
            28ITEM
                10. EXECUTIVE COMPENSATION
            29ITEM
                11. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY
                HOLDERS
            30ITEM
                12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
            30ITEM
                13. EXHIBITS AND REPORTS ON FORM 8-K
            30ITEM
                14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            31SIGNATURES
            31CERTIFICATION
            32





-i-




**PART
      I - ITEM 1. DESCRIPTION OF BUSINESS.**




**BUSINESS
      DEVELOPMENT**





Megola,
      Inc. was incorporated in Ontario, Canada on August 28, 2000 as Corporation
      No.
      1375595. It was renamed Megola, Inc. on December 21, 2001. Megola was formed
      to
      sell physical water treatment devices to residential, commercial, industrial
      and
      agricultural end-users in the United States, Canada and other international
      locations under a license granted by the German manufacturer, Megola GmbH.
      Initial operations and sales began in October 2000.




On
      November 26, 2003, Megola was acquired by SuperiorClean, Inc. in a transaction
      accounted for as a reverse acquisition. Megola’s shareholders were issued
      13,389,591 SuperiorClean shares in exchange for 100% of the outstanding common
      and preferred stock of Megola, plus $250,000 in cash and $200,000 in notes
      payable. Two major shareholders of SuperiorClean and two other persons then
      signed consulting contracts for 1,250,000 common shares. Prior to the merger,
      SuperiorClean had no assets or operations. SuperiorClean’s name was later
      changed to Megola Inc.




Our
      ScaleGuard Systems products are sold under a license granted by the German
      manufacturer, Megola GmbH. Under the terms of our agreement with Megola GmbH,
      we
      are the exclusive distributor of ScaleGuard devices in North America, Mexico,
      and Asia excluding India. We may not sell competing devices without the
      permission of Megola GmbH. Prices we pay are established by Megola GmbH and
      may
      be changed from time to time at the discretion of Megola GmbH. The agreement
      has
      no termination date, but may be terminated for cause as defined in the
      agreement. As of June 30, 2006 we have now independently acquired certain
      additional patents used in our products directly from the owners of Megola
      GmbH.




On
      July
      26, 2006 we entered into a non-binding letter of intent with Global Monitoring
      Systems, Inc., a Florida corporation ("GMSJ"). The basic terms and conditions
      proposed by MGOA and to be incorporated into the definitive agreements will
      include, but not be limited to, the following:




a.
            GMSJ
                will exclusively license its intellectual property within the territory
                of
                the North America to MGOA pursuant to an exclusive license agreement
                (the
                "License Agreement"). As consideration for the License Agreement,
                MGOA
                shall issue to GMSJ a determined amount of restricted shares of common
                stock of MGOA. The term of the License Agreement shall be for five
                (5)
                years.




b.
            The
                License Agreement shall also grant to GMSJ an option (or put) to
                sell (the
                "Asset Sale") all of its assets to MGOA throughout the term of the
                License
                Agreement. In consideration for the Asset Sale and in exchange for
                the
                assets of GMSJ, GMSJ shall receive that number of restricted shares
                of
                common stock of MGOA. Simultaneous with the consummation of the Asset
                Sale, GMSJ shall issue the shares of MGOA that it received pursuant
                to




Section
      (a) and (b) to its shareholders as a dividend.




The
      LOI
      contains other terms and conditions and has been filed as an exhibit to this
      report. Please refer to the exhibit for additional information.




The
      parties to this LOI are not affiliates in any way.




The
      parties to this LOI have not entered into a binding agreement.




For
      fiscal year ended July 31, 2006 76% of our revenues were generated from sales
      of
      ScaleGuard products under our agreement with Megola GmbH (Germany).


-1-




Business





Our
      principal executive offices are located at 466 Lyndock Street, Suite 102,
      Corunna, Ontario N0N 1G0. Our telephone number is (519) 481-0628.





Our
      principal product is our ScaleGuard Systems. Megola’s ScaleGuard technology cost
      effectively conditions hard water while also eliminating the historical build-up
      of scale caused by hard water in residential, commercial and industrial
      applications.





ScaleGuard
      units are a one-time capital cost as there are no ongoing chemical additives
      required and since the units have no moving parts they are essentially
      maintenance free. Cost savings on chemical treatments and the associated labor
      make ScaleGuard cost effective. ScaleGuard units use electromagnetic technology
      to condition and soften water, both preventing the ongoing build-up of scale
      and
      eliminating historical scale build-up in water delivery systems and machinery.
      Rather than attempting to prevent - by removing or adding chemicals - the
      natural tendency of hard water to form scale, ScaleGuard treatment actually
      assists and encourages scale formation by electronic means. The coils that
      are
      wrapped on the exterior of the water pipe introduce variable, high frequency
      magnetic impulses that alter the properties of the water in such a manner that
      the scale remains suspended in the water rather than forming on surfaces within
      the water system. These suspended crystals of scale will also carry away -
      slowly but surely - any scale that already exists in the system.





Due
      to
      excessive scale build-up pipes, showers, bathtubs, water heaters, spas, boilers,
      nozzles, valves, heat exchange compressors and other equipment need to be
      prematurely replaced. Scale can also reduce water flow and pressure and
      negatively impact the ability of heating elements. The advantage of ScaleGuard
      is that it can be installed on any pipe material in any home or building and
      does not require chemical agents and their associated costs and
      dangers.





We
      also
      sell air purification, microbiological control and waste water treatment products.





Air
      issues: Airborne germs that result in asthma, flu and colds





Water
      (Microbiological) Issues:


Unsanitary
      water may be dangerous due to bacteria,
      viruses, pathogens such as
      e-coli, giardia, cryptosporidium.





At
      July
      31, 2006 we had an accumulated deficit of ($4,337,973). We lost ($859,715)
      in
      fiscal year 2006. Our independent auditors have indicated that there is
      substantial doubt about our ability to continue as a going concern over the
      next
      twelve months.




During
      the year ending July 31, 2006 our revenues increased from $713,135 for 2005
      to
      $743,787 for the year ended July 31, 2006




**PRINCIPAL
      PRODUCTS AND SERVICES**





Our
      principal product is our ScaleGuard Systems. Megola’s ScaleGuard technology cost
      effectively conditions hard water while also eliminating the historical build-up
      of scale caused by hard water in residential, commercial and industrial
      applications. ScaleGuard units use a revolutionary electromagnetic technology
      to
      condition the soften water, both preventing the ongoing build-up of scale and
      eliminating historical scale build-up in water delivery systems and
      machinery.  -2-




Megola,
      Inc. is a leading solution provider in physical water treatment, microbiological
      control, wastewater treatment and air purification. Our environmentally
      friendly, technologically advanced product lines have us positioned at the
      forefront of environmental air and water treatment. Our experience in these
      fields allows us to provide tailor-made solutions to our clients using the
      technology available to us. For more information on Megola products, please
      go
      to www.megola.com .





**THE
      SCALEGUARD SYSTEM**





Description
      of ScaleGuard:




Traditionally,
      hard water problems - the underlying cause of scale - have been solved with
      ion-exchange (salt) water softeners or chemical treatments. These solutions
      are
      often environmentally unfriendly, time-consuming and expensive.




Megola’s
      scientists have invented a deceptively simple-looking box containing a
      computer-programmable chip that delivers low-voltage, high-frequency magnetic
      impulses that can alter the scale-forming properties of water. The company’s
      revolutionary solution prevents new scale formation, while eliminating previous
      scale build-up.




**ScaleGuard** is a
      non-invasive, physical water treatment device. That is, it does not make any
      direct contact with the water, and it neither adds chemicals to nor removes
      chemicals from the water.




Due
      to
      the high technological nature of our systems and limited knowledge of the
      technical functions by our consumers, Megola, at times, installs systems on
      trial basis with prospective industrial customers in an effort to collect data
      and prove ScaleGuard’s reliability and success. Megola is confident these trial
      installation situations will convert to sales, while increasing product
      exposure.





We
      no
      longer offer residential trials. We encourage our dealers to install systems
      for
      their personal use. For commercial and industrial installations we may install
      as part of a pilot project with a predetermined time schedule. See following
      example:





A
      Southwestern Ontario refinery (Suncor) was having a scaling issue with a four
      bank tube and shell exchanger. This exchanger was undersized when designed
      and
      needed cleaning every 8-10 weeks as after 10 weeks there was no heat
      exchange taking place at all. Megola offered a trial of its
      ScaleGuard â electronic conditioner for 3 months. The exchanger was cleaned as per its
      regular maintenance and the ScaleGuard â system
      was installed. The operators said they would know within 4 weeks if the
      ScaleGuard â system
      was keeping the exchanger from fouling as the performance of the exchanger
      to cool the product was well documented. After 4 weeks there was no loss of
      cooling. Normally after an 8 week period this exchanger would lose almost all
      of
      its ability to cool. However with the ScaleGuard â system
      installed in this exchanger never needed descaling and had only lost one
      degree of cooling over the next 21 months (90 weeks). It was approximated that
      the refinery saved $60,000 in costs during the time that
      the ScaleGuard â was in
      use. The client purchased the systems.





Dennis
      Davies has the title of Distribution Manager. This also includes the
      responsibility of sales. Our sales are primarily to our distributor network,
      of
      which Mr. Davies is in charge. Retail sales/quotations are handled in office
      by
      all staff as per our pricing guidelines.  -3-


We
      have
      no retail suggested price, as our dealers offer their own rebates, incentives,
      and volume discounts. It is our intention never to undercut our own
      dealers.





We
      are
      currently developing a revised business plan to deploy our ScaleGuard devices
      through our distribution network throughout the world. We believe that the
      increasing data that we have been collecting, and continue to collect on our
      systems, and the increasing market exposure we have been getting through our
      satisfied customers, can be used as sales tools for our distributors.





ScaleGuard
      Models:





We
      currently have eight models of ScaleGuard devices, all of which have been used
      in trials and sold to customers that have hard water or scale problems. Over
      the
      years, Megola has sold these units all over the world, ranging from residential
      applications to large industrial applications. The principal differences between
      the eight models, other than cost, are that they are designed to work with
      different water flows and pipe sizes.





The
      final
      cost of the individual units may vary, as they may be designed for certain
      customers to perform differently based on their specific needs. Also, depending
      on the geographic region, some distributors may sell the ScaleGuard products
      for
      more than Megola’s suggested retail price.





ScaleGuard
      Models:


TFK


SG


SG100


SG200


SG300


SG400


SG500


SG1000





Manufacturing:





The
      ScaleGuard devices were designed and custom manufactured in Germany under the
      direction of Megola GmbH. The technology of the product is owned by Megola
      GmbH
      and is protected under intellectual/ software property rights. The units are
      pre-assembled in Germany and are then shipped to China where the final assembly
      is completed and packaged.


-4-





Notable
      Installations of our ScaleGuard Systems:





Our
      systems have been in operation with various customers with some in operation
      for
      over 6 years. Some of our more notable installations include:




LanXess
              Nova
                Chemicals
              The
                Great Hall of the People (the national assembly of China)
              Mengniu
                Dairy Group
              Runan
                Mu Gong Shan Group
              Zhoushan
                Gang Ming Foodstuff Industries
              Zhong
                Mei Coal Mining Company
              Zhujiang
                Brewery
              Country
                Fresh Dairy
            Tim
                Horton’s
              Kentucky
                Fried Chicken
              Zurn
                Industries
              Royal
                Plastics
              TRW
                Automotive
              Parmalat
              FritoLay
              Honeywell
              DuPont
                Canada
              Colgate
                University




For
      fiscal year ended July 31, 2006 76% of our revenues were generated from sales
      of
      ScaleGuard products under our agreement with Megola GmbH (Germany).




**A** **IR
      PURFICIATION**





**AirGuardian
      System**





The
      AirGuardian 1000 is a uniquely engineered, integrated UVC & UVV system
      designed to dramatically reduce/control airborne allergens and toxic compounds,
      such as mold, fungus, formaldehyde, xylene gases and tobacco smoke along with
      infectious agents, such as bacteria, influenza, hemolytic streptococci and
      many
      others. This product is duct-mounted on the central Heating, Ventilation, Air
      Conditioning (HVAC) system and, to enhance system effectiveness, is designed
      to
      run continuously with the HVAC system fan in the "on' position. This product
      is
      certified by the American Institute of Toxicology to produce only safe levels
      of
      UVV (ozone) and is available with a UVC only bulb. There
      are 3 different AirGuardian models.


(manufactured
      in china)





**AirGuardian
      Power Filter**





The
      AirGuardian Power Filter uses an active electromagnetic field to magnetize
      both
      airborne particles and the fibers of the disposable filter pad. This creates
      a
      virtual "force field" within the ductwork, capturing many of the smallest,
      most
      dangerous to breathe submicron particles. This 1" filter is a very cost
      effective and easy to maintain electronic air cleaner and is an essential
      component of any air purification system. Under normal operating
      conditions, each disposable filter pad remains at peak operating efficiency
      for
      about four months before needing to be replaced.


(manufactured
      in USA)





21.25%
      of
      our sales were AirGuardian for fiscal year 2006.







**Portable
      Ozone Systems**




Equipment
      Master - Sports equipment Deodorizing unit


Room
      Blaster - Room Deodorizing unit


Air
      Care
      - Room Air Treatment unit


(all
      units manufactured in China)


1%
      of our
      sales were Ozone Systems for fiscal year 2006.


-5-




**Microbiological
      Control and Waste Water Treatment**




**Ozone
      Treatment Systems**




Megola
      Inc. is a North American distributor of ozone treatment systems manufactured
      by
      Dalian Bingshan H203 Solutions Co., Ltd. Utilizing the powerful biocidal
      properties of ozone, these systems are an alternative to chemical treatments
      for
      microbiological control. Megola has accepted a verbal agreement to distribute
      the products and will negotiate terms at the end of Megola’s year end 2006.




Applications
      include:




§
            Cooling
                towers


§
            HVAC
                systems


§
            Drinking
                water (agriculture)


§
            Surface
                disinfection water




**Bioguard
      UltraViolet (UV) Water Treatment Systems**




Ultraviolet
      treatment is the disinfection process of passing water by a special light
      source. Immersed in the water in a protective transparent sleeve, the special
      light source emits UV waves that can inactivate harmful
      microorganisms.




Applications
      include:




§
            Disinfection
                of fresh, process, wash, and cooling
                water


§
            Disinfection
                and biodegradability improvement of
                wastewater


§
            Drinking
                water - POE and POU systems


§
            Swimming
                pools and ponds


§
            Medical
                and pharmaceutical industries


§
            Quality
                control measures


§
            Vending
                machines (manufactured in China)




1.75%
      of
      our sales were for Micro-Bio and Waste Water Treatment Systems for fiscal year
      2006.




**IonClear
      - Copper Ionization Systems**




The
      IonClear System is an electronic, non-chemical means to disinfect and treat
      dirty water. The system is used for killing bacteria, viruses, pathogens &
other coli forms together with the treatment of algae, typically found and/or
      associated with the following:




§
            Swimming
                Pools


§
            Hydrotherapy,
                heated pool & spas


§
            Ornamental
                water gardens, fountains &
ponds


§
            Water
                storage tanks


§
            Water
                cooling towers, water cooled heat exchangers, &
                evaporators(manufactured in China)





-6-




Future
      Business Plans and Arrangements




On
      the
      4th day of July, 2006, we entered into an agreement with Uwe Pfefferle and
      Alois
      Sitter, two German residents whose principal office in the city of Munich,
      Germany, to acquire and own the following patents, patents pending and IP Rights
      developed and owned by them:




o
            Patent
                # US 6,485,624 B1 - This patent is for the CDI (Capacitive Deionization)
                system




o
            Patent
                pending is for a non-invasive pipe wrapping method for PWT (Physical
                Water
                Treatment) systems




o
            IP
                Rights for the ScaleGuard series (TFK, SG, SG100, SG200, SG300, SG400,
                SG500) of PWT systems




Upon
      Closing Megola Inc. will pay a consideration of MGOA restricted common stock
      ("Stock Consideration") of 300,000 shares (total) as per Rule 144 and MGOA
      shall
      issue such stock in the name of the Vendors and or its assigns. Megola will
      also
      pay a cash consideration of $ 7,500 Euro.




MGOA
      guarantees that on the 12 months anniversary of the signing of this Purchase
      Agreement the stock consideration given to the Vendors (Pfefferle, Sitter)
      will
      have a value of no less then $30,000 USD ("Minimum Value") and if there is
      a
      shortfall of that minimum value, MGOA will remedy that by either of the
      following:




a.
            issuing
                additional MGOA common stock for the difference;




b.
            issue
                cash consideration for the
                difference;




c.
            MGOA
                will have the discretion of either issuing common stock or cash and/or
                a
                combination thereof




On
      the 12
      months anniversary of the signing of the definitive agreement, Megola will
      have
      the option of buying back the issued stock from the vendors for a price of
      no
      more than $1.00 per share.




The
      parties to this agreement are not affiliates in any way other than through
      the
      agreement.




This
      newest patent is designed for the physical treatment of drinking water. No
      chemical treatment is needed to prepare drinking water adjusted to meet all
      environmental and health standards with respect to organic contaminations.
      This
      future development will need funding of a five hundred thousand USD. This
      investment will see one hundred marketable units and will take approximately
      one
      year to bring to fruition. These first lot units could produce as much as two
      hundred and fifty thousand dollars in returned revenue. Future production is
      where Megola will reap the benefits of larger production.




This
      patent and technology acquired required additional funding to achieve
      feasibility and as result the cost to obtain this patent and technology have
      been expensed as research and development cost during the year ended June 30,
      2006.




*Global
      Monitoring System*




On
      July
      26, 2006 we entered into a non-binding letter of intent with Global Monitoring
      Systems, Inc., a Florida corporation ("GMSJ"). The basic terms and conditions
      proposed by


-7-




MGOA
      and
      to be incorporated into the definitive agreements will include, but not be
      limited to, the following:




a.
            GMSJ
                will exclusively license its intellectual property within the territory
                of
                the North America to MGOA pursuant to an exclusive license agreement
                (the
                "License Agreement"). As consideration for the License Agreement,
                MGOA
                shall issue to GMSJ a determined amount of restricted shares of common
                stock of MGOA. The term of the License Agreement shall be for five
                (5)
                years.




b.
            The
                License Agreement shall also grant to GMSJ an option (or put) to
                sell (the
                "Asset Sale") all of its assets to MGOA throughout the term of the
                License
                Agreement. In consideration for the Asset Sale and in exchange for
                the
                assets of GMSJ, GMSJ shall receive that number of restricted shares
                of
                common stock of MGOA. Simultaneous with the consummation of the Asset
                Sale, GMSJ shall issue the shares of MGOA that it received pursuant
                to




Section
      (a) and (b) to its shareholders as a dividend.




The
      LOI
      contains other terms and conditions and has been filed as an exhibit to this
      report. Please refer to the exhibit for additional information.




The
      parties to this LOI are not affiliates in any way.




As
      of
      today, we are waiting for the audited financials to help determine their value
      for their company and product lines.




*BuyMax*




Effective
      March 22, 2005 Megola signed an agreement with BuyMax, LLC, which gave BuyMax
      the exclusive distribution/selling rights to Megola's residential ScaleGuard
      units for the USA.




In
      Fiscal
      year 2006, internal changes within Buymax created a disagreement regarding
      the
      BuyMax, LLC agreement with Megola. Subsequently, BuyMax, LLC decided not to
      not
      handle (stock) Scaleguard inventory, thus negating the terms of the agreement.
      The alternative (rather than threaten litigation) proposed by Megola was to
      have
      Megola as a vendor partner into their network, thus having BuyMax receiving
      a
      rebate on goods sold into their network. Status today: As of July 31, 2006,
      no
      completed agreement has been accepted but negotiations are continued.




Megola
      has signed a letter of understanding with another of its distributors (Physical
      H2O) that will help sell the BuyMax inventory on consignment thus paying Megola
      the exact amounts of the outstanding invoice to BuyMax. This inventory is back
      in Megola’s possession and we have begun to sell this inventory subsequent to
      June 30, 2006. At June 30, 2006 this inventory was adjusted to the lower of
      cost
      or market and carried on our balance sheet as such.




**Inventory
      Impairment**





We
      have
      identified certain slow moving inventory as obsolete and have adjusted our
      inventory to the lower of cost or market based upon the market value of this
      inventory. Because the products that are in the class are considered seasonal,
      it is possible but unlikely that we may sell this inventory in the future.
      If
      this inventory is sold there will be no cost of goods sold recorded.  -8-




**Product
      Liability**





We
      currently carry our own product liability insurance. We are currently working
      with our Insurer increasing our liability coverage. We have deployed and
      installed a variety of extensive systems, there have been no claims made against
      us.





**Employees**





We
      currently have 4 full-time employees and 3 part-time employees




**PART
      I - ITEM 2. DESCRIPTION OF PROPERTY**




Description
      of Property





Our
      principal executive offices are located at 466 Lyndock Street, Suite 102,
      Corunna, Ontario N0N 1G0. We leased this 4,000 square foot facility at a rental
      of $2,928 per month for a four-year term ending August 31, 2007. This facility
      consists of an office and administration area. To the extent that we require
      additional space in the near future, we believe that we will be able to secure
      additional leased facilities at commercially reasonable rates.





Our
      telephone number at the above location is 519-481-0628





We
      do not
      intend to renovate, improve, or develop properties. We are not subject to
      competitive conditions for property and currently have no property to insure.
      We
      have no policy with respect to investments in real estate or interests in real
      estate and no policy with respect to investments in real estate mortgages.
      Further, we have no policy with respect to investments in securities of or
      interests in persons primarily engaged in real estate activities.




**PART
      I - ITEM 3. LEGAL PROCEEDINGS**




We
      are
      not currently involved in any legal proceedings nor do we have knowledge of
      any
      threatened litigation.




**PART
      I - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





We
      did
      not hold a shareholders meeting in 2006, thus there was no vote of securities
      holders in 2006. We anticipate holding an initial annual shareholder meeting
      in
      September 2006.




**PART
      II**




**PART
      II - ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





Our
      stock
      became qualified for quotation on the over the counter bulletin board under
      the
      symbol “MGOA” in 2004.





High
      and
      low sales prices for each quarter within the last two fiscal years in which
      our
      stock traded under the symbol MGOA:*  -9-





QUARTER
                END
            HIGH
            LOW(Price
                per Share $)
            (Price
                per Share $)July
                31, 2006
            .06
            .05April
                30, 2006
            .11
            .11January
                31, 2006
            .10
            .10Oct
                31, 2005
            .19
            .15July
                31, 2005
            .24
            .20April
                30, 2005
            .40
            .33January
                31, 2005
            .37
            .33October
                31, 2004
            .34
            .32July
                31, 2004
            .53
            .45







*
            The
                quotations reflect inter-dealer prices, without mark-up, mark-down
                or
                commission and may not represent actual
                transactions.





ROYALTY
      INCOME:





One
      of
      the company's manufacturers also sells certain Megola products directly
      throughout Asia. By agreement, Megola is entitled a royalty payment for each
      of
      these units. Megola recognizes royalty revenue upon fulfillment of its
      contractual obligations and upon sale by the manufacturer of royalty-bearing
      products





Options,
      Warrants, Convertible Securities





On
      February 2, 2006, Megola issued 375,000 shares of its common stock for
      professional services, under an agreement, valued at $32,213. On August 29,
      2005, one of the former officers exercised his option to convert $100,000 notes
      payable, plus accrued interest of $12,360 due to him into 1,123,600 shares
      of
      Megola's common stock at a price of $0.10 per share.





On
      September 14, 2005, Megola issued 1,200,000 restricted shares of its common
      stock, to a vendor under an agreement for services, valued at
      $252,000.





**Unregistered
      sales of common stock**





Megola
      has issued 9,965,000 unregistered shares as of Nov 26,2003




**Reclassification**




Certain
      amounts presented at July 31, 2005 have been reclassified to conform to
      presentation at July 31, 2006.


-10-




**Penny
      Stock Considerations**





Our
      shares will be "penny stocks" as that term is generally defined in the
      Securities Exchange Act of 1934 to mean equity securities with a price of less
      than $5.00. Our shares thus will be subject to rules that impose sales practice
      and disclosure requirements on broker-dealers who engage in certain transactions
      involving a penny stock.





Under
      the
      penny stock regulations, a broker-dealer selling a penny stock to anyone other
      than an established customer or accredited investor must make a special
      suitability determination regarding the purchaser and must receive the
      purchaser's written consent to the transaction prior to the sale, unless the
      broker-dealer is otherwise exempt. Generally, an individual with a net worth
      in
      excess of $1,000,000 or annual income exceeding $100,000 individually or
      $300,000 together with his or her spouse is considered an accredited investor.
      In addition, under the penny stock regulations the broker-dealer is required
      to:





*****
            Deliver,
                prior to any transaction involving a penny stock, a disclosure schedule
                prepared by the Securities and Exchange Commissions relating to the
                penny
                stock market, unless the broker-dealer or the transaction is otherwise
                exempt;




*****
            Disclose
                commissions payable to the broker-dealer and our registered
                representatives and current bid and offer quotations for the
                securities;




*****
            Send
                monthly statements disclosing recent price information pertaining
                to the
                penny stock held in a customer's account, the account's value and
                information regarding the limited market in penny stocks;
                and




*****
            Make
                a special written determination that the penny stock is a suitable
                investment for the purchaser and receive the purchaser's written
                agreement
                to the transaction, prior to conducting any penny stock transaction
                in the
                customer's account.




Because
      of these regulations, broker-dealers may encounter difficulties in their attempt
      to sell shares of our common stock, which may affect the ability of selling
      shareholders or other holders to sell their shares in the secondary market
      and
      have the effect of reducing the level of trading activity in the secondary
      market. These additional sales practice and disclosure requirements could impede
      the sale of our securities, if our securities become publicly traded. In
      addition, the liquidity for our securities may be decreased, with a
      corresponding decrease in the price of our securities. Our shares in all
      probability will be subject to such penny stock rules and our shareholders
      will,
      in all likelihood, find it difficult to sell their securities.





Holders


As
      of
      July 31, 2006, we had 143 holders of record of our common stock.





Dividends





We
      have
      not declared any cash dividends on our common stock since our inception and
      do
      not anticipate paying such dividends in the foreseeable future. We plan to
      retain any future earnings for use in our business. Any decisions as to future
      payments of dividends will depend on our earnings and financial position and
      such other facts, as the board of directors deems relevant.





Reports
      to Shareholders





We
      have
      become subject to the information and reporting requirements of the Securities
      Exchange Act of 1934 and will file periodic reports, proxy statements and other
      information with the Securities and Exchange Commission. We intend to
      voluntarily send an annual


-11-




report
      with audited financial statements to our security holders.





Where
      You
      Can Find Additional Information





For
      further information about us and the shares of common stock registered
      hereunder, please refer to the registration statement and the exhibits and
      schedules thereto. The registration statement and exhibits may be inspected,
      without charge, and copies may be obtained at prescribed rates, at the SEC's
      Public Reference Room at 100F. St., N.E., Washington, D.C. 20549. The public
      may
      obtain information on the operation of the Public Reference Room by calling
      the
      SEC at 1-800-SEC-0330. The registration statement and other information filed
      with the SEC are also available at a web site maintained by the SEC at
      http://www.sec.gov.


-12-




**PART
      II - ITEM 6. MANAGEMENT DISCUSSION & PLAN OF OPERATION**





**Special
      Information Regarding Forward Looking Statements**





Some
      of
      the statements in this report are “forward-looking statements.” These
      forward-looking statements involve certain known and unknown risks,
      uncertainties and other factors which may cause our actual results, performance
      or achievements to be materially different from any future results, performance
      or achievements expressed or implied by these forward-looking statements. These
      factors include, among others, the factors set forth above under “Risk Factors.”
The words “believe,” “expect,” “anticipate,” “intend,” “plan,” and similar
      expressions identify forward-looking statements. We caution you not to place
      undue reliance on these forward-looking statements. We undertake no obligation
      to update and revise any forward-looking statements or to publicly announce
      the
      result of any revisions to any of the forward-looking statements in this
      document to reflect any future or developments. However, the Private Securities
      Litigation Reform Act of 1995 is not available to us as a penny stock issuer
      and
      thus we may not rely on the statutory safe harbor from liability for
      forward-looking statements.





Overview




Megola
      Inc. is committed to solving environmental problems without the use of harsh
      chemicals that, in the long run, can have deleterious effects on company budgets
      and our environment. Megola Inc. is the exclusive worldwide distributor for
      Megola GmbH, a German company that designs and manufactures the ScaleGuard
      series of physical water treatment equipment. Megola Inc. has created a
      distribution network throughout the world.




Since
      the
      introduction of the ScaleGuard line of physical water treatment products, Megola
      has identified the need for a more comprehensive approach to
      environmentally-friendly water treatment. Now, five years later, Megola has
      obtained rights to market and distribute technologically advanced products
      for
      the industrial, commercial, residential and agricultural markets.




Also,
      new
      technology brings new opportunities and Megola has further expanded into the
      development and distribution of air purification products for indoor air quality
      enhancement and odor control. In addition to our Physical Water Treatment
      Division and Air Purification Division, Megola Inc. has recently expanded to
      include Microbiological Control and WasteWater Treatment products. Sales of
      our
      air purification products accounted for 21.25% of total revenue in 2006. 1.75%
      and 1% of total revenue was due to sales of our microbiological/wastewater
      systems and ozone systems respectively. It is our expectations that sales will
      increase for all of these product line in the coming year now that they are
      an
      established part of our product offerings.




**Current
      Results of Operations and Financial Status**





Results
      of Operations:





Our
      revenues are difficult to forecast and may vary significantly from quarter
      to
      quarter and year to year. In addition, our expense levels for each quarter
      are,
      to a significant extent, fixed in advance based upon our expectation as to the
      net revenues to be generated during that quarter. We therefore are generally
      unable to adjust spending in a timely manner to compensate for any unexpected
      shortfall in net revenues. Further, as a result of these factors, any delay
      in
      product introductions, whether due to internal delays or delays caused by
      third  -13-


party
      difficulties, or any significant shortfall in demand in relation to our
      expectations, would have an almost immediate adverse impact on our operating
      results and on ability to maintain profitability in a quarter.




Comparison
      of the year ended July 31, 2006 with the year ended July 31, 2005





During
      the year ending July 31, 2006 our revenues increased from $713,135 for 2005
      to
      $743,787 for the year ended July 31, 2006, an increase of 4.3% over the prior
      year. This
      increase was due to continued sales of our ScaleGuard systems in North American
      and in Asia along with the introduction of our AirGuardian units into the
      marketplace. With the efforts of our staff having been primarily devoted to
      preparing new products for market and researching possible acquisitions we
      foresee increasing revenues in 2007 as AirGuardians are now established in
      our
      product line and we expect to add our UV water treatment systems and WholeHouse
      water and air treatment centers as well. For 2007 we also expect to receive
      revenue through the opening of a retail outlet at our corporate offices that
      will offer further products for residential customers.





Cost
      of
      sales consists of direct manufacturing costs and applied overhead expenses
      for
      our cost of raw materials to manufacture the ScaleGuard and other systems.
      Cost
      of sales decreased to $ 145,894 and, as a percentage of revenues, decreased
      to
      19.62% in the year ended July 31, 2006, as compared to $464,179 or 65.09% of
      revenue for the year ended July 31, 2005. The overall decrease in the cost
      of
      sales during 2006 is directly attributable to the change in the nature of our
      revenues. During
      the year needed July 31, 2006, 60% of our revenues were generated from
      royalties. When royalty payments are received, we do not incur any cost of
      sales.





General
      and administrative (operating) expenses increased 56.32% to $ 1,415,784 during
      2006 from $905,676 in 2005 due to a bad debt expense of $149,473. It is expected
      that in 2007 we will be required to issue stock for services as we will require
      consultants to aid in our product expansion and sales in new markets. It is
      hoped that with increased product sales that such consultant fees will be
      payable with cash rather than stock.





Interest
      expense decreased in 2006 to $20,850 from $293,581 in 2005, because the majority
      of our notes payable were exchanged for stock. The only significant interest
      incurred was for bank overdrafts and imputed interest on shareholder
      loans.


-14-




**Net
      Income (Loss)**




For
      the
      reasons outlined above, we realized a net loss of $ 859,715 for the year ended
      July 31, 2006 as compared to a net loss of $968,121 for the year ended July
      31,
      2005, a decrease of 11.20%.





2006
            
            2005**REVENUE****Sales**
            
            $
            296,287
            
            $
            713,135**Royalty**
            
            
            447,500**Total
                Revenue**
            
            
            743,787
            
            
            713,135COST
                OF SALES
            
            
            145,894
            
            
            464,179SELLING
                and GENERAL ADMINISTRATIVE
            
            
            1,415,784
            
            
            905,676DEPRECIATION
                and AMMORTIZATION
            
            
            20,974
            
            
            17,820INTEREST
            
            
            20,850
            
            
            293,581Total
                Expenses
            
            
            1,603,502
            
            
            1,681,256**NET
              LOSS**
            
            $
            (859,715
            )
            $
            (968,121
            )





Liquidity
      and Capital Resources





Cash
      and
      cash equivalents at July 31, 2006 was $ 4,858 and $17,183 at July 31, 2005.
      Our
      inventory increased for the same period from $82,206 to $352,197 or 328.5%;





Megola
      is
      also pursuing other financial resources to augment its cash requirements for
      retirement of debt, expansion of operations and acquisition of suitable
      companies and products.





Our
      success and ongoing financial viability is contingent upon its selling of our
      products and the related generation of cash flows. We evaluate our liquidity
      and
      capital needs on a continuous basis and based on our requirements and capital
      market conditions may, from time to time, raise working capital through
      additional debt or equity financing. There is no assurance that such financing
      will be available in the future to meet our additional capital needs, or that
      any such terms or conditions of any such financing would be favorable to us.
      Both our current growth and expanded business involve significant financial
      risk
      and require significant capital investment.  -15-


One
      customer accounted for 59% of sales in 2006. One customer accounted for 68%
      of
      sales in 2005. One vendor accounted for 68% of cost of goods sold in 2006.
      One
      vendor accounted for 84 % of cost of goods sold in 2005.





Our
      ability to continue as a going concern is dependent on our ability to raise
      funds to implement our planned development; however we may not be able to raise
      sufficient funds to do so. Our independent auditors have indicated that here
      is
      substantial doubt about our ability to continue as a going concern over the
      next
      twelve months. Our poor financial condition could inhibit our ability to achieve
      our business plan. Because we are currently operating at a substantial loss,
      an
      investor cannot determine if we will ever become profitable.





**PART
      II - ITEM 7. FINANCIAL STATEMENTS**




The
      following documents (pages 11-18) form part of the report on the Financial
      Statements




PAGEReport
                of Independent Registered Public Accounting Firm
            17Balance
                Sheets
            18Statements
                of Operations
            19Statement
                of Stockholders' Equity (Deficit)
            20Statement
                of Cash Flows
            21Notes
                to Financial Statements
            22


-16-




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and Stockholders


Megola,
      Inc.


Corunna,
      Ontario, Canada





We
      have
      audited the accompanying consolidated balance sheet of Megola, Inc. as of July
      31, 2006 and the related statements of operations, stockholders’ equity
      (deficit) and cash flows for the years ended July 31, 2006 and 2005. These
      financial statements are the responsibility of Megola’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Megola, Inc. as of July 31, 2006
      and the results of its operations and its cash flows for the years ended July
      31, 2006 and 2005 in conformity with accounting principles generally accepted
      in
      the United States of America.





The
      accompanying financial statements have been prepared assuming that Megola,
      Inc.
      will continue as a going concern. As discussed in Note 2 to the financial
      statements, Megola has suffered recurring losses from operations which raises
      substantial doubt about its ability to continue as a going concern. Management’s
      plans regarding those matters also are described in Note 2. The consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.





Malone
      & Bailey, PC


www.malone-bailey.com


Houston,
      Texas





February
      14, 2007  -17-


**MEGOLA,
                INC.****CONSOLIDATED
                BALANCE SHEET****July
                31, 2006**




**ASSETS**
            
            2006Current
                AssetsCash
            
            $
            4,858Inventory
            
            
            352,197*Total
                Current Assets*
            
            
            357,055Property
                and Equipment, Net of Accumulated Depreciation of $42,802
            
            
            12,278TOTAL
                ASSETS
            
            $
            369,333**LIABILITIES
                & STOCKHOLDERS' DEFICIT**Current
                LiabilitiesBank
                Overdraft
            
            $
            48,841Accounts
                Payable
            
            
            290,930Distributor
                Deposits
              Accrued
                Interest - related parties
            
            
            4,361
                14,816Accrued
                Expenses
            
            
            85,448Notes
                payable - related parties
            
            
            86,857*Total
                Current Liabilities*
            
            
            531,253TOTAL
                LIABILITIES
            
            
            531,253STOCKHOLDERS'
                DEFICITCommon
                Stock, $0.001 Par Value 50,000,000 Shares
              Authorized,
                37,716,029 Shares Issued and Outstanding,
            
            
            37,716Additional
                Paid In Capital
            
            
            4,157,582Accumulated
                Deficit
            
            
            (4,337,973
            )Cumulative
                Translation Adjustment
            
            
            (19,245
            )*Total
                Stockholders' Deficit*
            
            
            (161,920
            )TOTAL
                LIABILITIES & STOCKHOLDERS' DEFICIT
            
            $
            369,333


*The
      accompanying footnotes are an integral part of the consolidated financial
      statements.*  -18-




**MEGOLA,
                INC.****CONSOLIDATED
                STATEMENTS OF OPERATIONS****Years
                Ended July 31, 2006 and
                2005**




2006
            
            2005**REVENUE**Sales
            
            $
            296,287
            
            $
            713,135Royalty
                income
            
            
            447,500Total
                Revenue
            
            
            743,787
            
            
            713,135Cost
                Of Sales
            
            
            145,894
            
            
            464,179**GROSS
                PROFIT**
            
            
            597,893
            
            
            248,956OPERATING
              EXPENSES:SELLING,
                General and Administrative
            
            
            1,415,784
            
            
            905,676DEPRECIATION
                and AMMORTIZATION
            
            
            20,974
            
            
            17,820INTEREST
            
            
            20,850
            
            
            293,581Total
                Expenses
            
            
            1,457,608
            
            
            1,217,077NET
                LOSS APPLICABLE TO COMMON STOCK
            
            $
            (859,715
            )
            $
            (968,121
            )OTHER
              COMPREHENSIVE INCOME (EXPENSE)Foreign
                currency translation
            
            
            52,328
            
            
            (109,568
            )Net
                Comprehensive loss
            
            $
            (
                807,387
            )
            $
            (1,077,689
            )(0.02
            )
            
            (0.03
            )Weighted
                average shares outstanding
            
            
            36,853,879
            
            
            32,368,754


*The
      accompanying footnotes are an integral part of the consolidated financial
      statements.*  -19-




**MEGOLA,
                INC.****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)****YEARS
                ENDED JULY 31, 2006 and
                2005**




**Common
                Stock****Shares**
            
            **Par**
            
            **Other**
              **Comprehensive**
              **Income
                (Loss)**
            
            **Additional**
              **Paid
                In**
              **Capital**
            
            **Accumulated**
              **Deficit**
            
            **Totals****July
                31, 2004**
            
            
            27,814,550
            
            $
            27,814
            
            $
            37,995
            
            $
            2,236,045
            
            $
            (2,510,137
            )
            
            (208,283
            )Stock
                Issued for Services
            
            
            1,500,000
            
            
            1,500
            
            
            -
            
            
            555,900
            
            
            
            
            
            557,400Discount
                on Notes Payable
            
            
            -
            
            
            -
            
            
            -
            
            
            112,500
            
            
            -
            
            
            112,500Stock
                for Debt
            
            
            5,052,879
            
            
            5,053
            
            
            -
            
            
            398,913
            
            
            -
            
            
            403,966Stock
                for Intangible Assets
            
            
            300,000
            
            
            300
            
            
            -
            
            
            110,700
            
            
            -
            
            
            111,000Stock
                for Cash
            
            
            350,000
            
            
            350
            
            
            -
            
            
            349,650
            
            
            -
            
            
            350,000Net
                Loss Applicable to Common Shareholders
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (968,121
            )
            
            (968,121
            )Foreign
                Currency
            
            
            -
            
            
            -
            
            
            (109,568
            )
            
            -
            
            
            -
            
            
            (109,568
            )**July
                31, 2005**
            
            
            35,017,429
            
            $
            35,017
            
            $
            (71,573
            )
            $
            3,763,708
            
            $
            (3,478,258
            )
            $
            248,894Stock
                Issued for Services
            
            
            1,575,000
            
            
            1,575
            
            
            -
            
            
            282,638
            
            
            -
            
            
            284,213Discount
                on Notes Payable
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -Stock
                for Debt
            
            
            1,123,600
            
            
            1,124
            
            
            -
            
            
            111,236
            
            
            -
            
            
            112,360Net
                Loss Applicable to Common Shareholders
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (859,715
            )
            
            (859,715
            )Foreign
                Currency
            
            
            -
            
            
            -
            
            
            52,328
            
            
            -
            
            
            -
            
            
            52,328**July
                31, 2006**
            
            
            37,716,029
            
            $
            37,716
            
            $
            (19,245
            )
            $
            4,157,582
            
            $
            (4,337,973
            )
            $
            (161,920
            )


*The
      accompanying footnotes are an integral part of the consolidated financial
      statements.*  -20-




**MEGOLA,
                INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****YEARS
                ENDED JULY 31, 2006 and
                2005**





2006
            
            2005**CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                Loss applicable to common shareholders
            
            $
            (859,715
            )
            $
            (968,121
            )Adjustments
                to Reconcile Net Loss to Net Cash Used in Operating
                ActivitiesDepreciation
                & Amortization
            
            
            20,974
            
            
            17,820Asset
                Impairment
            
            
            99,899Bad
                Debt Expense & Increase in inventory reserve
            
            
            203,384Shares
                for Services
            
            
            284,213
            
            
            557,400Amortization
                Beneficial Conversion Feature
            
            
            
            
            
            272,656Changes
                in assets and liabilities:Accounts
                Receivable
            
            
            247,975
            
            
            (341,447
            )Other
                current assets
            
            
            11,762
            
            
            (2,419
            )Inventory
            
            
            (323,905
            )
            
            (9,681
            )Prepaid
                Expenses
            
            
            143,492
            
            
            -Accounts
                Payable
            
            
            (88,262
            )Accrued
                Expenses & Other
            
            
            102,676
            
            
            320,817Deferred
                Revenue
            
            
            4,361
            
            
            -Net
                Cash Used by Operating Activities
            
            
            (153,146
            )
            
            (152,975
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Deposit
                for Anticipated merger
            
            
            -
            
            
            (143,492
            )Purchase
                of fixed assets
            
            
            -
            
            
            (2,506
            )Net
                Cash Used in Investing Activities
            
            
            -
            
            
            (145,998
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Proceeds
                from Issuance of Investor Loans
            
            
            212,829
            
            
            112,500Principal
                Payments on Investor Loans
            
            
            (124,465
            )
            
            (6,344
            )Proceeds
                from the sale of Common Stock
            
            
            
            
            
            350,000Net
                Cash Provided by (Used in) Financing Activities
            
            
            88,364
            
            
            456,156**EFFECT
                OF EXCHANGE RATE CHANGES ON CASH**
            
            
            52,457
            
            
            (140,441
            )NET
                INCREASE (DECREASE) IN CASH
            
            
            (12,325
            )
            
            16,742BEGINNING
                CASH BALANCE
            
            
            17,183
            
            
            441**ENDING
                CASH BALANCE**
            
            $
            4,858
            
            $
            17,183








**SUPPLEMENTAL
                DISCLSOURES**Cash
                Paid For Interest
            
            $
            -
            
            $
            415***Non
                Cash Transactions:***Debt
                exchange for shares of common stock
            
            $
            100,000
            
            $
            403,996Shares
                for accrued interest on debt
            
            $
            12,360
            
            $
            -Purchase
                of intangible assets for common shares
            
            $
            -
            
            $
            111,000


*The
      accompanying footnotes are an integral part of the consolidated financial
      statements.*


-21-




**MEGOLA,
      INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**July
      31, 2006**








**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Nature
      of Operations***





Megola,
      Inc. was incorporated in Ontario, Canada on August 28, 2000 as Corporation
      No.
      1375595. It was renamed Megola, Inc. on December 21, 2001. Megola was formed
      to
      sell physical water treatment devices to commercial end-users in both the United
      States and Canada under a license granted by the German manufacturer, Megola
      GmbH. Initial operation and sales began in October 2000.





***Principles
      of Consolidation***





Megola’s
      consolidated financial statements include the accounts of Megola and it’s wholly
      and majority owned subsidiaries. All significant intercompany accounts and
      transactions have been eliminated in consolidation.





***Estimates***





The
      preparation of the financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates. We
      believe our critical estimates are depreciation rates, calculation of
      impairments, reserves established for receivables, income taxes and
      contingencies.





***Currency
      and foreign exchange***




Megola
      determined its functional currency is the Canadian Dollar as substantially
      all
      of its operations are in Canada. Megola’s reporting currency is U.S.
      dollars.




Transactions
      and balances originally denominated in U.S. dollars are presented at their
      original amounts. Transactions and balances in other currencies are converted
      into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation,
      and are included in determining net income or loss.




For
      foreign operations with the local currency as the functional currency, assets
      and liabilities are translated from the local currencies into U.S. dollars
      at
      the exchange rate prevailing at the balance sheet date. Revenues and expenses
      are translated at weighted average exchange rates for the period to approximate
      translation at the exchange rates prevailing at the dates those elements are
      recognized in the financial statements. Translation adjustments resulting from
      the process of translating the local currency financial statements into U.S.
      dollars are included in determining comprehensive loss. As of December 31,
      2006,
      the exchange rate for the Canadian Dollar was $1.00 U.S. for $1.17 Canadian.  -22-




Although
      the economic situation in Canada has remained relatively stable in recent years,
      a return to higher levels of inflation, and currency fluctuations could
      adversely affect Megola' s
      operations. The devaluation or valuation of the Canadian Dollar in relation
      to
      the U.S. dollar may have significant effects on Megola's consolidated financial
      statements.




***Cash
      Equivalents***





For
      purposes of the statement of cash flows, Megola considers all highly liquid
      investments purchased with an original maturity of three months or less to
      be
      cash equivalents.





***Revenue
      Recognition***





Revenue
      is recognized when it is realized or realizable and earned. Megola considers
      revenue realized or realizable and earned when persuasive evidence of an
      arrangement exists, services have been provided, and collectability is
      reasonably assured.





In
      the
      case of exclusive agreements with distributors, finished goods are shipped
      directly FOB manufacturer/point of assembly. Megola offers no independent
      warranty and refers any warranty claims to the manufacturer for products it
      sells. Therefore, Megola recognizes revenue under these agreements when the
      goods are shipped. Megola recognized royalty revenue as they are informed that
      such payments are due.





***Fair
      Value of Financial Instruments***





Financial
      instruments, including cash, receivables, accounts payable, and loans payable
      are carried at amounts which reasonably approximate their fair value due to
      the
      short-term nature of these amounts or due to variable rates of interest which
      are consistent with market rates. No adjustments have been made in the current
      period.





***Allowance
      for Doubtful Accounts***





Megola
      does not require collateral from its customers with respect to accounts
      receivable but performs periodic credit evaluations of such customer’s financial
      conditions. Megola determines any required allowance by considering a number
      of
      factors including lengths of time accounts receivable are past due and Megola’s
      previous loss history. Megola provides reserves for accounts receivable when
      they become uncollectible, and payments subsequently received on such
      receivables are credited to the allowance for doubtful accounts. As of July
      31,
      2006 and 2005, Megola has determined that no allowance for doubtful accounts
      is
      required. During the fiscal year ending July 31, 2006, Megola determined that
      their accounts receivable were not collectable and as a result recorded bad
      debt
      expense of $149,473.





***Property
      and Equipment***





Property
      and equipment are stated on the basis of historical cost less accumulated
      depreciation. Depreciation is provided using the straight-line method over
      the
      estimated useful lives of the assets, which range from 3 to 7 years.
      Depreciation expense for the years ended July 31, 2006 and 2005 was $20,974
      and
      $17,820, respectively.


-23-




***Income
      Taxes***




Megola
      accounts for income taxes under Statement of Financial Accounting Standards
      No.
      109, "Accounting for Income Taxes.". Under Statement 109, deferred tax assets
      and liabilities are recognized for the future tax consequences attributable
      to
      differences between the financial statement carrying amounts of existing assets
      and liabilities and their respective tax basis. Deferred tax assets and
      liabilities are measured using enacted tax rates expected to apply to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. Under Statement 109, the effect on deferred tax assets
      and
      liabilities of a change in tax rates is recognized in income in the period
      that
      includes the enactment date. There was no current or deferred income tax expense
      or benefits for the period ending June 30, 2006 and 2005.




***Impairment
      of Long-Lived Assets***





Long-lived
      assets require the recognition of an impairment loss whenever it is indicated
      that an asset may be impaired and the future cash flows from that asset are
      less
      than the asset’s carrying value





As
      of
      July 31, 2006 and 2005, Megola reflected impairment amounting to $99,899 and
      $0,
      respectively, on its long-term assets specifically acquired technology. The
      acquired technology which Megola could not demonstrate effectively development
      of as of December 31, 2006 consisted of Bioguard Ultraviolet Water Treatment
      Systems, models, technology and customer lists.





***Inventory***





Inventory
      is valued at the lower of cost (determined on a first -in, first-out method)
      or
      market. Megola records provisions to write down its inventory for estimated
      obsolescence or unmarketable inventory equal to the difference between cost
      of
      the inventory and its estimated market value based on assumptions about future
      market demand and market conditions. If future demand or market conditions
      are
      less favorable than currently expected, additional inventory provisions may
      be
      required. During the fiscal years ended July 31, 2006 and 2005 impairment
      expense was $53,911 and $0, respectively related to inventory impairments.
      Management has determined that no valuation allowance for obsolete inventory
      is
      necessary at July 31, 2006 and 2005.





***Stock-Based
      Compensation***





Megola
      accounts for stock-based employee compensation arrangements using the fair
      value
      method in accordance with the provisions of SFAS No. 123(R) *,
      Share-Based Payments, and Staff Accounting Bulletin No. 107,* or
      SAB
      107, *Share-Based
      Payments* .
      Veracity accounts for the stock options issued to non-employees in accordance
      with the provisions of SFAS No. 123, *Accounting
      for*  *Stock-Based
      Compensation* ,
      and
      Emerging Issues Task Force No. 96-18, *Accounting
      for*  *Equity
      Instruments with Variable Terms That Are Issued for Consideration other
      Than*  *Employee
      Services Under FASB Statement no. 123.* The
      fair
      value of stock options and warrants granted to employees and non-employees
      is
      determined using the Black-Scholes option pricing model. Megola has adopted
      SFAS
      123(R) and applied it in the period presented.





***Loss
      Per Common share***





Basic
      and
      diluted net loss per share calculations are calculated on the basis of the
      weighted average number of common shares outstanding during the year. The per
      share amounts


-24-




include
      the dilutive effect of common stock equivalents in years with net income. Basic
      and diluted loss per share is the same due to the absence of common stock
      equivalents.





***Recent
      Accounting Pronouncements***





The
      Company does not expect the adoption of any recently issued accounting
      pronouncements to have a significant impact on its financial position, results
      of operations or cash flows.




**NOTE
      2 - GOING CONCERN**





As
      shown
      in the accompanying financial statements, Megola incurred recurring net losses
      chargeable to common shareholders of $ 859,715 and $968,121 in fiscal 2006
      and
      2005, respectively, and has an accumulated deficit of $ 4,337,973 as of July
      31,
      2006. These conditions create an uncertainty as to Megola's ability to continue
      as a going concern. Management is trying  to
      raise
      additional capital through various funding arrangements. The financial
      statements did not include any adjustment that might be necessary if Megola
      is
      unable to continue as a going concern.





**NOTE
      3 - ROYALTY INCOME**





One
      of
      the company's manufacturers also sells certain Megola products directly
      throughout Asia. By agreement, Megola is entitled a royalty payment for each
      of
      these units. Megola recognizes royalty revenue upon fulfillment of its
      contractual obligations and upon sale by the manufacturer of royalty-bearing
      products








**NOTE
      4 - INCOME TAXES**





Income
      taxes are not due since Megola has had losses since inception. Since inception,
      Megola has had approximately $2,203,709 in the U.S. dollar value of Canadian
      net
      operating losses for tax purposes, which expire in Canada in Fiscal years 2010
      thru 2014.





The
                components of deferred taxes are as follows:Deferred
                tax assetsNet
                operating loss carryforwards
            
            $
            771,298Less:
                valuation allowance
            
            $
            (771,298
            )Current
                net deferred tax assets
            
            $
            -




-25-




**NOTE
      5 - COMMITMENTS**





Megola
                currently has one office lease which expires December 31,
                2008.Minimum
                lease payments are due as follows:




Year
                Ended July 31, 2007
            
            $
            16,776Year
                Ended July 31, 2008
            
            
            16,776Year
                Ended July 31, 2009
            
            
            6,990Total
            
            $
            40,542






**NOTE
      6 - COMMON STOCK**





On
      August
      29, 2005, one of the former officers exercised his option to convert $100,000
      notes payable, plus  accrued
      interest of $12,360 due to him into 1,123,600 shares of Megola's common stock
      at
      a price of $0.10 per share.




On
      September 14, 2005, Megola issued 1,200,000 shares of its common stock, to
      a
      vendor under an agreement for services, valued at $252,000.




On
      February 2, 2006, Megola issued 375,000 shares of its common stock for
      professional services, under an agreement, valued at $32,213 based upon the
      closing stock price at the award measurement date.




**NOTE
      7 - RELATED PARTY TRANSACTIONS**





During
      the year ending July 31, 2006, Megola borrowed $86, 857 from several of its
      shareholders. The loans are payable on demand and has no stated interest rate.
      Management used an effective interest rate of 9% to impute
      interest.





**NOTE
      8 - SEGMENT REPORTING**





Megola
      sells in North America and China, and has two reportable geographic segments,
      with summary information as follows:





**North
                America**
            
            **International**
            
            **Total**Year
                Ended July 31, 2006Revenues
            
            $
            310,602
            
            $
            433,185
            
            $
            743,787Net
                Loss
            
            $
            (859,715
            )
            
            -
            
            $
            (859,715
            )Depreciation
            
            $
            -
            
            $
            20,974
            
            $
            20,974Interest
                Expense
            
            $
            -
            
            $
            20,850
            
            $
            20,850Total
                Assets
            
            
            
            
            $
            369,333
            
            $
            369,333




-26-




Year
                Ended July 31, 2005
            
            **North
                America**
            
            **International**
            
            **Total**Revenues
            
            $
            653,753
            
            $
            59,382
            
            $
            713,135Net
                Loss
            
            $
            (333,056
            )
            $
            (635,065
            )
            $
            (968,121
            )Depreciation
            
            $
            -
            
            $
            6,720
            
            $
            17,820


Interest
                Expense
            
            $
            -
            
            $
            293,581
            
            $
            293,581Total
                Assets
            
            $
            -
            
            $
            781,281
            
            $
            781,281




**NOTE
      9-CONCENTRATIONS**





During
      2006, one customer accounted for 59% of sales, in addition one customer
      accounted for 68% of the sales for 2005. One vendor accounted for 68% of cost
      of
      goods for 2006 and one vendor accounted for 84% of cost of goods for
      2005.




**PART
      II - ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE**




None--Not
      Applicable




**PART
      III - ITEM 8A. CONTROLS AND PROCEDURES**




(a)
      Evaluation of disclosure control and procedures. Our management, including
      our
      Chief Executive Officer, has determined that the effectiveness of disclosures
      controls and procedures under Rule 13a-15(e) and Rule 15d-15(e) of the
      Securities Exchange Act of 1934 are inadequate as of July 31,2006. Our auditors,
      Malone & Bailey, P.C. have advised us that, under standards established by
      the Public Company Oversight Accounting Board (United States), reportable
      conditions involve matters that come to the attention of auditors that relate
      to
      significant deficiencies in the design or operation of internal controls of
      an
      organization that, in the auditors’ judgment, could adversely affect the
      organization’s ability to record, process, summarize and report financial data
      consistent with the assertions of management in the financial statements.





Malone
      & Bailey, P.C. had advised our management that, in Malone & Bailey’s
      opinion, there were reportable conditions during 2005 which constituted
“material weaknesses” in internal controls. The weakness concerned the
      application of ordinary accounting principles in the area of the Company’s
      financing transactions, and resulted from the fact that the Company needs
      additional personnel and outside consulting expertise with respect to the
      application of some of the more complex accounting principles to its financial
      statements. While all of these transactions were recorded, Malone & Bailey
      in their audit work noted instances where adjustments to the Company’s financial
      statements were required.





As
      a
      result of the material weaknesses described above, our management, including
      our
      Chief Executive Officer, has determined that our disclosure controls and
      procedures were not effective as of July 31,2006. The Company is considering
      engaging outside expertise to enable the Company to properly apply complex
      accounting principles to its financial statements, when necessary. The
      implementation of these plans will be largely dependent upon the future cash
      flows of the Company.





(b)
      Changes in internal control over financial reporting. There were no significant
      changes in our internal control over financial reporting during the fourth
      quarter that materially affected, or is likely to materially affect, our
      internal control over financial reporting.  -27-


**PART
      II - ITEM 8B. OTHER INFORMATION**




None—Not
      Applicable




**PART
      III**




**PART
      III - ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**




The
      names, ages and positions of the Company's directors and executive officers
      are
      as follows:





Name
            
            Age
            
            PositionJoel
                Gardner
            
            39
            
            Chief
                Executive Officer, Director, PresidentDon
                Greer
            
            71
            
            COO,
                DirectorTodd
                Clark
            
            44
            
            Secretary
                Director




Joel
      Gardner joined Megola as president, CEO and Director in August 2000. From
      November 13, 1998 to July 2000, he was vice president of Aqua-Cristall Limited.
      From September 1990 to August 1998, he played professional hockey. In 1990
      he
      received a BA, education major, minor in geology from Colgate University,
      NY.





Mr.
      Don
      Greer joined us as COO in September 2004. He became a director in December
      2004.
      He devotes approximately 40% of his time to our business. From October 2001
      to
      date, he has been manager of Canadian sales for Inpro/Seal, Rock Island IL,
      a
      manufacturer of bearing seals. From January 2000 to October 2001, he was a
      manufacturing representative for a Chicago IL based manufacturer of lubricants.
      From May 1995 to December 20999, he was director of sales and marketing -
      industrial group for Chicago Rewhide, Elgin IL. He received a BS in Chemistry
      from Queens, Dundee Scotland in 1963.





Mr.
      Todd
      Clark joined Megola as director in October 2000. He has been in management
      positions with Ron Clark Motors since 1981. In May, 1981 he received a Diploma
      from Fanshawe College.





***Family
      Relationships***




There
      are
      no family relationships among our officers or directors.


-28-




***Legal
      Proceedings***





No
      officer, director, or persons nominated for such positions, promoter or
      significant employee has been involved in the last five years in any of the
      following:




·
                Any
                    bankruptcy petition filed by or against any business of which
                    such person
                    was a general partner or executive officer either at the time
                    of the
                    bankruptcy or within two years prior to that
                    time;





·
            Any
                conviction in a criminal proceeding or being subject to a pending
                criminal
                proceeding (excluding traffic violations and other minor
                offenses);





·
            Being
                subject to any order, judgment, or decree, not subsequently reversed,
                suspended or vacated, of any court of competent jurisdiction, permanently
                or temporarily enjoining, barring, suspending or otherwise limiting
                his
                involvement in any type of business, securities or banking activities;
                and





·
            Being
                found by a court of competent jurisdiction (in a civil action), the
                Commission or the Commodity Futures Trading Commission to have violated
                a
                federal or state securities or commodities law, and the judgment
                has not
                been reversed, suspended, or
                vacated.





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
      and executive officers, and persons who beneficially own more than 10% of a
      registered class of our equity securities, to file reports of beneficial
      ownership and changes in beneficial ownership of our securities with the SEC
      on
      Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes
      of
      Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial
      Ownership of Securities). Directors, executive officers and beneficial owners
      of
      more than 10% of our Common Stock are required by SEC regulations to furnish
      us
      with copies of all Section 16(a) forms that they file. Based solely on review
      of
      the copies of such forms furnished to us, or written representations that no
      reports were required, we believe that for the fiscal year ended July 31 2006
      beneficial owners complied with Section 16(a) filing requirements applicable
      to
      them.




**PART
      III - ITEM 10. EXECUTIVE COMPENSATION**




The
      following sets forth summary information concerning the compensation received
      for services rendered to us during the fiscal year ended July 31, 2005 by our
      Chief Executive Officer; received $ 63,000 for fiscal year 2006. No other
      executive officers received aggregate compensation during our last fiscal year
      that exceeded, or would exceed on an annualized basis, $100,000.




***EXECUTIVE
      COMPENSATION***





Particulars
      of compensation awarded to, earned by or paid to:





(a)
            Our
                company’s Chief Executive Officer (CEO) is to receive an annual salary of
                $67,727 USD.; He has received $-0- for this year, however, he expects
                he
                will be compensated in stock and/or cash sometime in
                2007.




(b)
            Don
                Greer, our Chief Operating Officer, works two days per week and receives
                a
                salary of $ 322.50 USD per day;




Employment
      Contracts or Arrangements





We
      do not
      have employment agreements. We have no agreements to pay any of our officers
      any
      compensation, except as set forth above,


-29-




***Board
      Compensation***





Members
      of our board of directors do not receive cash compensation for their services
      as
      directors; however, Don Greer received 15,000 common shares for services as
      director. Directors are reimbursed for reasonable expenses incurred in attending
      board or committee meetings.
      Megola currently does expect to give director compensation in the future.




***Advisory
      Board***





Megola
      Inc. has formed an Advisory Board that consist of individuals that it believes
      to be an important group of people that will play an integral role in assisting
      Megola in the overall growth of the company. The Company will turn, from time
      to
      time, to its Advisory Board for direction and advice on certain business matters
      of the company. Megola compensated these individuals 10,000 common
      shares.




**PART
      III - ITEM 11. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY
      HOLDERS**




The
      following tables set forth the ownership, as of the fiscal year end, of our
      common stock by each person known by us to be the beneficial owner of more
      than
      5% of our outstanding common stock, our directors, and our executive officers
      and directors as a group. To the best of our knowledge, the persons named have
      sole voting and investment power with respect to such shares, except as
      otherwise noted. There are not any pending or anticipated arrangements that
      may
      cause a change in control of our company. The business address for all persons
      is 446 Lyndock St #102, Corunna, ON, Can., N0N1G0.




Amount
                and Nature of
            
            PercentageName
                of Beneficial Owner
            
            Beneficial
                Ownership
            
            of
                Class(1)Joel
                Gardner
            
            
            3,378,297(2
            )
            
            9.0
            %Todd
                Clark
            
            
            2,046,204
            
            
            5.4
            %Don
                Greer
            
            
            15,000




All
      executive officers and directors as a group-3 persons have 5,439,501 shares
      or 14.4%




(1)
      Based
      on 37,716,029 shares of common stock issued and outstanding as of July 31,
      2007.
      Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission and generally includes voting or investment
      power with respect to securities. Except as otherwise indicated, we believe
      that
      the beneficial owners of the common stock listed above, based on information
      furnished by such owners, have sole investment and voting power with respect
      to
      such shares, subject to community property laws where applicable.





**PART
      III - ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS**




**PART
      III - ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**




**Form:**  8-K  **Filing
      Date:** 7/7/2006


**Form:**  8-K  **Filing
      Date:** 7/31/2006


-30-




Item
      31
      Certification


Item
      32
      Certification





**PART
      III - ITEM 14. FEES FOR ACCOUNTING SERVICES**





We
      paid
      Malone & Bailey, PC fees for auditing services of $29,363 during fiscal
      2006.  There were no non-audit fees.




**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.




**Megola
      Inc** .


(Registrant)




Signature
            Title
            DateJoel
                Gardner
            President
                (CEO) and Director, Principal Executive Officer, and Principal Financial
                and Accounting Officer
            November
                13,2006




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
            DateJoel
                Gardner
            Chief
                Executive Officer
            November
                13, 2006Todd
                Clark
            Director
            November
                13, 2006Don
                Greer
            Chief
                Operating Officer
            November
                13, 2006




-31-