UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-KSB


(Mark
One)




xQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
Fiscal Year Ended: July 31, 2007


Or


 ̈TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
transition period from ____________ to _____________




MEGOLA,
INC.




(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)




Nevada
                  
                  88-0492605(STATE
      OR OTHER JURISDICTION
                  
                  (IRS
      EMPLOYEROF
                  
                  INDENTIFICATION
      NO. )INCORPORATION
      OR ORGANIZATION)





SEC File
Number: 000-49815





704
      Mara Street, Suite 111Point
      Edward, ON
                  
                  N7V
      1X4(Address
      of Principal
                  
                  (Zip
      Code)Executive
      Offices)




Registrant's
telephone number, including area code: Tel: (519) 336-0628









(Former
Name or Former Address, if Changed Since Last Report)










Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes  ̈ No
x


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes  ̈ No
x




APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS: Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes  ̈ No
 ̈




APPLICABLE
ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date:
48,486,029 at July 31, 2007









Megola,
Inc.





Table of
Contents





PART
      I – DESCRIPTION OF BUSINESS
                3Item
      1. Business Development
                3Item
      2. Principal Products and Services
                5Item
      3. Description of Property
                11Item
      4. Legal Proceedings
                11PART
      II – FINANCIAL INFORMATION
                16Item
      1. Audited Consolidated Financial Statements
                16Item
      2. Management's Discussion and Plan of Operation
                35Forward-Looking
      StatementsItem
      3. Controls and Procedures
                35PART
      II - OTHER INFORMATION
                36Item
      1. Legal Proceedings
                36Item
      2. Changes in Securities
                36Item
      3. Defaults upon Senior Securities.
                36Item
      4. Submission of Matters to a Vote of Security Holders.
                36Item
      5. Other Information.
                36Item
      6. Exhibits and Reports on S-8
                36Signatures
                36Report
      of Independent Registered Public Accounting Firm
                37Certification


2




PART
I – DESCRIPTION OF BUSINESS




Item
1. 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 stockholders 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 stockholders 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.





For
fiscal year ended July 31, 2007 82% of our revenues were generated from sales of
ScaleGuard products under our agreement with Megola GmbH (Germany).





Business





Our
principal executive offices are located at 704 Mara Street, Suite 111, Point
Edward, Ontario N7V 1X4. Our telephone number is (519) 336-0628.





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.


3


At July
31, 2007 we had an accumulated deficit of $5,078,725. We had a net loss of
$740,752 in fiscal year 2007. 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, 2007 our revenues decreased from $743,787 for 2006 to
$277,336 for the year ended July 31, 2007.


4


Item
2. 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.


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 ScaleGuardâ
electronic conditioner for 3 months. The exchanger was cleaned as per its
regular maintenance and the ScaleGuardâ
system was installed. The operators said they would know within 4 weeks if the
ScaleGuardâ
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 ScaleGuardâ
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 ScaleGuardâ
was in use. The client purchased the systems.





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.


5


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.





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, 2007 82% of our revenues were generated from sales of
ScaleGuard products under our agreement with Megola GmbH
(Germany).


6


AIR
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)





1% of our
sales were AirGuardian for fiscal year 2007.





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)


We did
not have any sales for Ozone Systems for fiscal year 2007.




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.





Applications
include:




§
            Cooling
      towers§
            HVAC
      systems§
            Drinking
      water (agriculture)§
            Surface
      disinfection water


7


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)





We did
not have any sales for Micro-Bio and Waste Water Treatment Systems for fiscal
year 2007.





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)




HARTINDO
LINE OF ANTI-FIRE PRODUCTS




HARTINDO
AF11E




1:1
direct drop-in replacement for both Halon 1301 and 1211




Belonging
to the Halocarbon group of vapourizing liquid fire extinguishing chemicals AF11E
is similar in action to Halon but without any of the environmental or toxicity
problems associated with Halons.




Of all
the Halocarbon alternatives to Halon ,AF11E has the lowest overallenvironmental
impact.




In common
with other Halocarbons Hartindo AF11E is:


• Multi
Purpose, effective on A, B, and C class fires


• aClean Agent, leaving no
residue after


•Non Electrically
conductive




Unique
qualities of Hartindo AF11E




•
            Only
      replacement to Halon that can be used as both a total flooding gas as well
      as a streaming agent for use in Portable fire
    extinguishers.




•
            The
      world’s first,and so far only
      proven,1:1
      direct drop-in replacement for HALON
1301.


8




HARTINDO
AF21




a
      water-based, non-toxic, non-corrosive, fire
  inhibitor




Hartindo
AF21 is a colourless water based solution that is:


•
Non-toxic


•
Non-corrosive


•
Biodegradable


•
Environment friendly





Features:


•
Prevents the spread of fire


•
Eliminates afterglow


• Treated
materials classified Class 0 non-flammable


• Ease of
application (spraying, padding, dipping, brushing or fogging)


• Does
not affect the look, feel, smell or color of the treated items


• Offers
permanent protection from fire once applied





Uses:Suitable for use on all
water absorbent as well as many synthetic fibre materials
including:


•
Curtains


• Carpets
and rugs


•
Upholstery fabrics


•
Mattresses


• Porous
wall coverings / Partitions


• Exposed
wood surfaces prior to all decorative surface treatments


•
Corks


• Dried
flowers


• Soft
toys


•
Polypropylene backed carpets


• 100%
polyester


• Paper /
Cardboard





Standards
and Approvals:


Hartindo
AF21 meets all international standards including British Standards (BTTG WIRA
& LPC tested to Civil Aviation Authority CAA, UK); US Regulations (tested to
Federal Aviation Administration - FAA, USA); SISIR (Singapore); SIRIM (Malaysia)
and BPPT (Indonesia).




Testing/Certifications;




§
            ASTM
      E84 (CLASS A) – surface burning characteristics of building
      materials


§
            ASTM
      E84 (with Bluwood) (CLASS A) – various types of wood products – Douglas
      Fir, Southern Yellow Pine (SYP), SPF, plywood,
  etc...


§
            16
      CFR 1633 – open flame mattress flammability
test


§
            ASTM
      D 3201 – Hygroscopicity Test(compared to Dricon (pressure-treated
      wood))


§
            NFPA
      701- vertical burn test; flame propagation of
  textiles


§
            NFPA
      2112 – flame resistance for protection of industrial personnel against
      flash fires




HARTINDO
AF31




a
multi-purpose, water-based, non-toxic, non-corrosive and environmentally
friendly fire extinguishing and inhibiting agent


9


Hartindo
AF31 is


• a
"Environment Friendly" non Ozone Depleting Substance.


• Water
based, biodegradable and non toxic.


• Clean,
requires no specialized clean up procedures.


•
Effective in portable form on all classes of fire (Class A, B, C, D and
F/K)


• Easy to
use with it's fast knockdown.


• Able to
render objects non-flammable, preventing re-ignition.


• Able to
be delivered by conventional water or foam dispersal systems.


•
Suitable for use in all water or foam tenders without modification.


• Able to
provide rapid extinction of fire with no reignition creating a safe escape route
for rescue.


• Most
effective media for creating fire breaks when fighting forest fire.


•
Suitable for training purposes




Hartindo
AF31 eliminates all worries and dangers when fighting reactive fires such as
metal, coal, car tire dumps and deep pan oil fires.




Testing/Certifications;





§
            ASTM
      E84 (CLASS A) – Surface burning characteristics of building materials (to
      show inhibition of reignition on Class A fires and potential as a fire
      inhibitor


§
            Aquatic
      toxicity


§
            Standard
      toxicity (mammalian) – oral, dermal, eye irritation (prerequisites for
      NFPA approvals)




Titan 21 Fire
Blanket




100%
cotton blanket that protects from flash fires as well as direct fire
attack




The Titan
21 Fire Blanket can protect people from fire and can also be used to blanket,
and extinguish, the fire source. It is ideal for houses, offices, hospitals,
hotels, buses, ships, nightclubs, etc. Unlike synthetic fire blankets, that are
designed to only withstand flash fire, the 100% cotton Titan 21 Fire Blanket
protects from flash fires as well as DIRECT FIRE attack over
1000°C.




Testing/Certifications;




§
            NFPA
      701 – flame propagation of textiles


§
            NFPA
      2112 – flame resistant garments for protection of industrial personnel
      against flash fire


§
            International
      Standard BS 476 Part 6 & Part 7: Class 0 (LPC BRE UK, SIRIM Malaysia
      and BOMBA Malaysia)




DECTAN


a
water-based, environmentally friendly rust converter and priming
agent




DECTAN is
a complex mixture of a Vinyl Acrylic Copolymer and Tannic Acid. When used to
treat corroded steel and iron surfaces, it neutralizes the corrosion process by
converting the rust into a blueblack metallo-organic complex which passivates
the surfaces. It has been tested and certified as fit for use for the carriage
of grain and can also be used in sensitive foodstuff areas.




DECTAN
can also be applied to non-finished wooden structures as a priming agent and may
be coated when cured with any conventional paint using brush, roller or
spray.




DECTAN
resists spillage to a wide range of corrosive chemicals including strong acids,
alkalis, aliphatic solvents, alcohols, glycols, petrol, crude oil and diesel
oil. It is designed for application by spray and brush and dries to the touch in
as little as 10 minutes to two hours depending on temperature, humidity and air
movement.




Testing/Certifications;




§
            ASTM
      B117 – continuous salt-spray test




For
fiscal year ended July 31, 2007 17% of our revenues were generated from sales of
Hartindo Fire Products.


10


Employees





We
currently have 4 full-time employees and 1 part-time employee





Item
3. DESCRIPTION OF PROPERTY





Description
of Property





Our
principal executive offices are located at 704 Mara Street, Suite 111, Point
Edward, Ontario N7V 1X4. We lease this 2,600 square foot facility at a rental of
$3,683 per month for a five-year term ending August 1, 2013. 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 519-336-0628





We do not
intend to renovate, improve, or develop properties. 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.





Item
4. LEGAL PROCEEDINGS





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


11


ROYALTY
INCOME:





One of
the company's manufacturers also sells certain Megola products directly
throughout Asia. By agreement, Megola is entitled to 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





Unregistered
sales of common stock





Megola
has issued 48,486,029 unregistered shares as of July 31, 2007





Reclassification





Certain
amounts presented at July 31, 2006 have been reclassified to conform to
presentation at July 31, 2007.





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
stockholders 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 stockholders will,
in all likelihood, find it difficult to sell their securities.





Holders


As of
July 31, 2007, we had 131 holders of record of our common stock and 1,245 NOBO
(non objective beneficial owner)


12


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 Stockholders





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 report with audited consolidated 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.





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.


13


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
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, 2007 with the year ended July 31, 2006





During the year ending July 31, 2007
our revenues decreased from $743,787 for 2006 to $277,336 for the year ended
July 31, 2007, a decrease of 62.71% over the prior year. Our revenues for the
year ended July 31, 2007 vs. year ended July 31, 2006 decreased due to a
reduction in sales initiatives owing to a restructuring of product offerings and
staffing. Staff focus during this period was allocated to new product
acquisitions and reconfiguring of existing product lines. In order to
accommodate potential new product initiatives, the Company intends to increase
sales staff in the future.





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 increased to $344,092 and, as a percentage of revenues, increased to
124.07% in the year ended July 31, 2007, as compared to $145,894 and 19.62% of
revenue for the year ended July 31, 2006. The overall increase in the cost of
sales during 2007 is directly attributable to re-classing the current inventory
to slow moving. In note 3(j) we indicated a reduction to inventory during the
year-end. Even though these items have been slow to move, they are still salable
and there is little concern with obsolescence. Some have since been sold and are
reflected in the $58,221 current inventory. Future product sales of these slow
moving items will have no corresponding cost of sales due to the reduction
entered above. During the year ended July 31, 2007, 57.69% (2006-60.17 %) 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 decreased 38.21% to $813,055 during 2007
from $1,315,885 in 2006. It is expected that in 2008 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 increased 31.10% in 2007 to $27,334 from $20,850 in 2006, because of the
Company's imputed interest on stockholder loans.


14


Net
Income (Loss)





For the
reasons outlined above, we realized a net loss of $740,752 for the year ended
July 31, 2007 as compared to a net loss of $859,715 for the year ended July 31,
2006, a decrease of 13.84%.





2007
                          
                          
                          2006REVENUESales
                          
                          $
                          117,336
                          
                          
                          $
                          296,287Royalty
                          
                          
                          160,000
                          
                          
                          
                          447,500Total
      Revenue
                          
                          
                          277,336
                          
                          
                          
                          743,787COST
      OF SALES
                          
                          
                          344,092
                          
                          
                          
                          145,894SELLING
      and GENERAL ADMINISTRATIVE
                          
                          
                          813,055
                          
                          
                          
                          1,315,885Write
      off of Intangible Assets
                          
                          
                          0
                          
                          
                          
                          99,899DEPRECIATION
      and AMMORTIZATION
                          
                          
                          5,107
                          
                          
                          
                          20,974EXPENSE
      RECOVERY
                          
                          
                          (171,500
                          )INTEREST
                          
                          
                          27,334
                          
                          
                          
                          20,850Total
      Expenses
                          
                          
                          1,018,088
                          
                          
                          
                          1,603,502NET
      LOSS
                          
                          $
                          (740,752
                          )
                          
                          $
                          (859,715
                          )





Liquidity
and Capital Resources




The
consolidated financial statements as of and for the year ending July 31, 2007
have been prepared assuming we continue as a going concern.




At July
31, 2007, we had an accumulated deficit of $5,078,725.




Cash and
cash equivalents at July 31, 2007 were $32,660 and $4,858 at July 31, 2006. Our
inventory decreased for the same period from $352,197 to $58,221 or
83.50%;




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.





Two
customers accounted for 63% and 30% of sales in 2007. One customer accounted for
59% of sales in 2006. One vendor accounted for 80% of cost of goods sold in
2007. One vendor accounted for 68% of cost of goods sold in 2006.





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.


In order
to become profitable, we will still need to secure additional debt or equity
funding. We hope to be able to raise additional funds from an offering of our
stock in the future. However, this offering may not occur, or if it occurs, may
not raise the required funding. There are no preliminary or definitive
agreements or understandings with any party for such financing. We cannot
predict when, if ever, that will happen.


15


PART
II - FINANCIAL INFORMATION




Item 1. Megola Inc. Audited
Consolidated Financial Statements


Year Ended July 31, 2007(Amounts expressed in US dollars)




MEGOLA,
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
expressed in US dollars)





July 31, 2007
                                          
                                          
                                          July 31, 2006(Audited)
                                          
                                          
                                          (Audited)ASSETSCash
                                          
                                          
                                          32,660
                                          
                                          
                                          
                                          4,858Inventory
                                          
                                          
                                          58,221
                                          
                                          
                                          
                                          352,197Prepaid
      expenses
                                          
                                          
                                          9,342
                                          
                                          
                                          
                                          -100,223
                                          
                                          
                                          
                                          357,055Loan
      receivable -net
      of allowance for bad debts of nil; ($150,145 in 2006) (Note
      17)
                                          
                                          
                                          122,085
                                          
                                          
                                          
                                          -Intangible
      Asset (note 4)
                                          
                                          
                                          1,350,000
                                          
                                          
                                          
                                          -Property
      and equipment,net
      of accumulated depreciation of $27,732 (2006-$22,625)
                                          
                                          
                                          8,207
                                          
                                          
                                          
                                          12,278(note
      5)1,580,515
                                          
                                          
                                          
                                          369,333LIABILITIESBank
      overdraft
                                          
                                          
                                          -
                                          
                                          
                                          
                                          48,841Note
      payable - (note 6)
                                          
                                          
                                          250,000
                                          
                                          
                                          
                                          -Accrued
      Expenses - (note 7)
                                          
                                          
                                          68,378
                                          
                                          
                                          
                                          85,448Accounts
      payable
                                          
                                          
                                          44,155
                                          
                                          
                                          
                                          290,930Distributor
      deposits
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,361Accrued
      interest
                                          
                                          
                                          25,822
                                          
                                          
                                          
                                          14,816Due
      to related parties (note 8)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          86,857Advances
      from Stockholders - (note 8)
                                          
                                          
                                          290,689
                                          
                                          
                                          
                                          -679,044
                                          
                                          
                                          
                                          531,253Going
      concern - (note 2)Commitments
      - (note 12)Subsequent
      Events - (note 16)STOCKHOLDERS'
      EQUITY (DEFICIENCY)Capital
      stock (note 9)
                                          
                                          
                                          48,486
                                          
                                          
                                          
                                          37,716Additional
      paid in capital
                                          
                                          
                                          5,934,612
                                          
                                          
                                          
                                          4,157,582Accumulated
      deficit
                                          
                                          
                                          (5,078,725
                                          )
                                          
                                          
                                          (4,337,973
                                          )Accumulated
      other comprehensive income (loss):Foreign
      currency translation adjustment
                                          
                                          
                                          (2,902
                                          )
                                          
                                          
                                          (19,245
                                          )901,471
                                          
                                          
                                          
                                          (161,920
                                          )1,580,515
                                          
                                          
                                          
                                          369,333





See
accompanying notes to audited consolidated financial statements





16





MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS





(Amounts
      expressed in US dollars)
                                
                                Year Ended
                                
                                
                                Year EndedJuly 31,
                                  2007
                                
                                
                                July 31,
                                  2006Income
      - sales
                                
                                
                                117,336
                                
                                
                                
                                296,287Cost
      of sales
                                
                                
                                344,092
                                
                                
                                
                                145,894GROSS
      PROFIT (LOSS)
                                
                                
                                (226,756
                                )
                                
                                
                                150,393Income
      - royalties
                                
                                
                                160,000
                                
                                
                                
                                447,500(66,756
                                )
                                
                                
                                597,893General
      and administrative
                                
                                
                                813,055
                                
                                
                                
                                1,315,885Write
      off of Intangible asset
                                
                                
                                -
                                
                                
                                
                                99,899Depreciation
                                
                                
                                5,107
                                
                                
                                
                                20,974Interest
                                
                                
                                27,334
                                
                                
                                
                                20,850Expense
      Recovery - (Note 18)
                                
                                
                                (171,500
                                )
                                
                                
                                -TOTAL
      EXPENSES
                                
                                
                                673,996
                                
                                
                                
                                1,457,608NET
      LOSS
                                
                                
                                (740,752
                                )
                                
                                
                                (859,715
                                )Foreign
      currency translation adjustment
                                
                                
                                16,343
                                
                                
                                
                                52,328COMPREHENSIVE
      LOSS
                                
                                
                                (724,409
                                )
                                
                                
                                (807,387
                                )Weighted
      average common shares outstanding (note 10)
                                
                                
                                47,502,906
                                
                                
                                
                                36,853,879Loss
      per share - basic and diluted
                                
                                
                                (0.02
                                )
                                
                                
                                (0.02
                                )





See
accompanying notes to audited consolidated financial statements


17





MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





(amounts
      expressed in US dollars)
                                            
                                            YEAR ENDEDJuly 31, 2007
                                            
                                            
                                            July 31, 2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss for the period
                                            
                                            
                                            (740,752
                                            )
                                            
                                            
                                            (859,715
                                            )Adjustments
      to reconcile net loss to net cash used in operating activities (note
      13)
                                            
                                            
                                            357,077
                                            
                                            
                                            
                                            706,569(383,675
                                            )
                                            
                                            
                                            (153,146
                                            )CASH
      FLOWS FROM FINANCING ACTIVITESAdvances
      from stockholders
                                            
                                            
                                            265,316
                                            
                                            
                                            
                                            -Increase
      in note payable
                                            
                                            
                                            250,000
                                            
                                            
                                            
                                            -Repayment
      of amount due to related parties
                                            
                                            
                                            (72,372
                                            )
                                            
                                            
                                            -Proceeds
      from issuance of investor loans
                                            
                                            
                                            -
                                            
                                            
                                            
                                            212,829Principal
      payments on investor loans
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (124,465
                                            )Cash
      flows from operating activities
                                            
                                            
                                            442,944
                                            
                                            
                                            
                                            88,364CASH
      FLOWS FROM INVESTING ACTIVITESPurchase
      of property and equipment
                                            
                                            
                                            (1,159
                                            )
                                            
                                            
                                            -Cash
      flows from investing activities
                                            
                                            
                                            (1,159
                                            )
                                            
                                            
                                            -EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                            
                                            
                                            18,533
                                            
                                            
                                            
                                            52,457NET
      INCREASE (DECREASE) IN CASH FOR THE YEAR
                                            
                                            
                                            76,643
                                            
                                            
                                            
                                            (12,325
                                            )NET
      CASH, beginning of year
                                            
                                            
                                            (43,983
                                            )
                                            
                                            
                                            (31,658
                                            )NET
      CASH, end of year
                                            
                                            
                                            32,660
                                            
                                            
                                            
                                            (43,983
                                            )NET
      CASH REPRESENTED BY:CASH
                                            
                                            
                                            32,660
                                            
                                            
                                            
                                            4,858BANK
      INDEBTEDNESS
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (48,841
                                            )NET
      CASH, end of year
                                            
                                            
                                            32,660
                                            
                                            
                                            
                                            (43,983
                                            )





See
accompanying notes to audited consolidated financial statements


18





Megola
Inc.


MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)


(Amounts
expressed in US dollars)


Year
ended July 31, 2007





AccumulatedOther
                
                
                AdditionalCommon
      Stock
                
                
                Comprehensive
                
                
                Paid
      In
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Income
      (Loss)
                
                
                Capital
                
                
                Deficit
                
                
                TotalsBalances,
      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
                
                
                
                -
                
                
                
                284,213Stock
      for Debt
                
                
                1,123,600
                
                
                
                1,124
                
                
                
                -
                
                
                
                111,236
                
                
                
                -
                
                
                
                112,360Net
      Loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (859,715
                )
                
                
                (859,715
                )Foreign
      Currency
                
                
                -
                
                
                
                -
                
                
                
                52,328
                
                
                
                -
                
                
                
                -
                
                
                
                52,328Balances,
      July 31, 2006
                
                
                37,716,029
                
                
                $
                37,716
                
                
                $
                (19,245
                )
                
                $
                4,157,582
                
                
                $
                (4,337,973
                )
                
                
                (161,920
                )Stock
      Issued For Services
                
                
                10,770,000
                
                
                
                10,770
                
                
                
                -
                
                
                
                427,030
                
                
                
                -
                
                
                
                437,800Stock
      to be Issued for Distribtuion Rights
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,350,000
                
                
                
                
                
                
                
                1,350,000Net
      Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (740,752
                )
                
                
                (740,752
                )Foreign
      Currency Translation Adjustment
                
                
                -
                
                
                
                -
                
                
                
                16,343
                
                
                
                -
                
                
                
                -
                
                
                
                16,343Balances,
      July 31, 2007
                
                
                48,486,029
                
                
                $
                48,486
                
                
                $
                (2,902
                )
                
                
                5,934,612
                
                
                $
                (5,078,725
                )
                
                $
                901,471





See
accompanying notes to audited consolidated financial statements


19


MEGOLA
INC.


Notes
to Consolidated Financial Statements for the Years ended July 31, 2007 and
2006


(Amounts
expressed in US dollars)





1.
            NATURE
      OF BUSINESS


Megola,
Inc. ("Megola" or "the Company") was incorporated in Ontario, Canada on
August28, 2000.
Megola was formed to sell physical water treatment devices to a wide range of
end-users in the United States, Canada and internationally under a license
granted by Megola GmbH in Germany.





The
Company presently distributes the following product lines: physical watertreatment;
water filtration; air purification; microbiological control; waste water
treatment and fire safety.





2.
            GOING
      CONCERN


These
consolidated financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the payment of liabilities in
the ordinary course of business. As shown in the accompanying consolidated
financial statements, Megola incurred recurring net losses of $740,752 and
$859,715 in the 2007 and 2006 fiscal years respectively, and has a working
capital deficiency of $578,821, negative cash flows from operations and an
accumulated deficit of $5,078,725 as at July 31, 2007. These conditions create
an uncertainty as to Megola's ability to continue as a going concern. At
present, the Company does not have sufficient resources to fund its current
working capital requirements. The Company's financing plans include obtaining
additional capital through various debt and/or equity financing arrangements to
service its current working capital requirements; any additional or unforeseen
obligations and to fund the implementation of future opportunities. Should the
Company be unable to continue as a going concern, it may be unable to realize
the carrying value of its assets and to meet its liabilities as they become due.
These consolidated financial statements do not include any adjustments for this
uncertainty.





3.
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES


(a) Basis of
presentation


These
consolidated financial statements are presented in U.S. dollars and have
beenprepared by
management in accordance with accounting principles generally accepted inthe United
States of America ("US GAAP") and the rules of the Securities Exchange
Commission "SEC").





(b)
Principles of consolidation


The
Company's consolidated financial statements include the accounts of Megola and
itswholly owned
subsidiary. All significant intercompany balances and transactions have been
eliminated on consolidation.





(c) Use
of estimates


The
preparation of the consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets andliabilities
and the disclosure of contingent assets and liabilities at the date of the
financialstatements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates arecomprised of
amortization and accrued expenses. These consolidated financial statements
have,in
management’s
opinion, been properly prepared within reasonable limits of materialityand within
the framework of the accounting policies summarized in these consolidated
financial statements.




20




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(d)
Foreign currency translation


Megola
determined that 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 consolidated financial statements. Translation
adjustments resulting from the process of translating the local currency
consolidated financial statements into U.S. dollars are included in determining
comprehensive loss. As of July 31, 2007, the exchange rate for the Canadian
Dollar was $1.00 U.S. for $1.07 Canadian (2006 - $1.00 U.S. for $1.13). The
annual average exchange rate for the 2007 fiscal year was $1.00 U.S. for $1.13
(2006 - $1.00 U.S. for $1.15). The Canadian economy strengthened considerably in
relation to the U.S. during the third and fourth quarters of 2007, and as a
result currency fluctuations have affected Megola's operations. In the future,
inflation rates and 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.





( e) Cash
equivalents


For the
purposes of the Consolidated Statement of Cash Flows, the Company considers
allhighly liquid
investments purchased with an original maturity of 90 days or less to be cash
equivalents





( f)
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 recognizes royalty revenue
as the Company is informed that such payments are due.





(g)
Intangible assets


Intangible
assets include distribution rights acquired from an independent party.
Intangibleassets with
an indefinite life are not amortized. Indefinite-lived intangible assets are
tested for impairment annually and will be tested for impairment between annual
tests if an event occurs or circumstances change that would indicate that the
carrying amount may be impaired. An impairment loss isrecognized
when the carrying amount of an asset exceeds the estimated undiscountedcash flows
used in determining the fair value of the asset. The amount of the
impairmentloss to be
recorded is calculated by the excess of the asset’s carrying value
over its fair value. Fair value is generally determined using a discounted cash
flow analysis.




21




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(h) Fair
value of financial instruments


The
Company’s
financial instruments consist of cash, loanreceivable,
bank overdraft, note payable, accrued expenses, accounts payable, and advances
from stockholders. The fair value of cash, bank overdraft, note payable, accrued
expenses and accounts payable approximates their carrying amount given short
period to receipt orpayment of
cash. It is management’s opinion that the
Company is not exposed to anysignificant
interest rate or credit risks arising from these financial
instruments.


Foreign
Currency Risk


The
company is exposed to currency risks due to potential variation of the
currencies in which it operates.


Principal
currencies include the United States dollar and Canadian Dollar. The company
monitors the foreign currency exposure regularly to minimize the foreign
currency risk exposure.


Liquidity Risk The company is
exposed to liquidity risk as its continued operations are dependant upon
obtaining additional capital to satisfy its liabilities as they come
due.





(i)
Allowance for doubtful accounts


Megola
does not require collateral from its customers with respect to accounts
receivable but performs periodic credit evaluations of such customers’ 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,
2007 and 2006, Megola had $nil and $150,145 respectively as an allowance for
doubtful accounts.





(j)
Inventory


Inventory
is valued at the lower of cost (determined on a first -in, first-out method) and
net realizable value. 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 net realizable 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,
2007 and 2006 impairment expense was $253,286 and $53,911, respectively related
to inventory impairments. Included in the impairment expense is $245,032 for
slow moving products. These products are in good condition and are still
expected to be sold.





( k)
Property and equipment


Property
and equipment are stated on the basis of historical cost less accumulateddepreciation.
Depreciation is provided using the straight-line method over the estimateduseful lives
of the assets, which range from 3 to 7 years. Depreciation expense for the years
ended July 31, 2007 and 2006 was $5,107 and $20,974, respectively.Amortization ofproperty and
equipment acquired and disposed of during the year is recorded at one half of
the indicated rates.





(l)
Impairment of long-lived assets


Long-lived
assets other than intangible 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.




22




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(m)
Comprehensive income (loss)





The
Company has adopted SFAS No. 130 Reporting Comprehensive Income. This
standardrequires
companies to disclose comprehensive income (loss) in their consolidated
financial statements. Inaddition to
items included in net income, comprehensive income (loss) includes itemscurrently
charged or credited directly to stockholders’ deficiency, such
as foreign currencytranslation
adjustments.





(n)
Concentration of credit risk





SFAS No.
105, "Disclosure of Information about Financial Instruments with
Off-BalanceSheet Risk
and Financial Instruments with Concentration of Credit Risk", requiresdisclosure of
any significant off-balance sheet risk and credit risk concentration. TheCompany does
not have significant off-balance sheet risk or credit
concentration.





(o)
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
andliabilities
are recognized for the future tax consequences attributable to differencesbetween the
financial statement carrying amounts of existing assets and liabilities and
theirrespective
tax basis. Deferred tax assets and liabilities are measured using enacted tax
ratesexpected to
apply to taxable income in the years in which those temporary differences
areexpected to
be recovered or settled. Under Statement 109, the effect on deferred taxassets and
liabilities of a change in tax rates is recognized in income in the period
thatincludes the
enactment date. There was no current or deferred income tax expense orbenefits for
the period ending July 31, 2007 and 2006.





(p) Net
earnings (loss) per common share





Basic
loss per share is calculated by dividing the loss for the year by the weighted
averagenumber of
common shares outstanding during the year. Diluted loss per share is
computedusing the
treasury stock method. Under this method, the diluted weighted averagenumber of
shares is calculated assuming the proceeds that arise from the exercise of
stockoptions and
other dilutive instruments are used to repurchase the Company’s shares attheir
weighted average market price for the period.





(q)
Share-based compensation





The
Company has adopted the requirements of FASB Statement of FinancialAccounting
Standards No. 123(R), “Share-Based
Payments", and Staff Accounting BulletinNo. 107, or
SAB 107, "Share-Based Payments". These pronouncements require that thefair value
method of accounting be applied to all share-based compensation payments toboth
employees and non-employees respectively.





The fair
value method of accounting is used to account for share based payments granted
todirectors,
officers, employees and others whereby the fair value of share based
paymentsgranted is
recorded as an expense in the consolidated financial statements.The expense
is based on the estimated fair value at the time of the grant andrecognized
over any vesting period.




23




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





The fair
value of share based payments granted to employees and non-employeesis determined
using the Black-Scholes option pricing model.





(r)
Recent accounting pronouncements





In
February 2006, the FASB issued Statement No.155, "Accounting for Certain
HybridFinancial
Instruments - Amendment to FASB No. 133 and 140" ("Statement 155").Statement 155
resolves certain issues addressed in Statement 133 and (a) permits fairvalue
remeasurement for any hybrid financial instrument that contains an embeddedderivative
that would otherwise require bifurcation; (b) clarifies which interest only
stripsand principal
only strips are not subject to the requirements of Statement 133; (c)establishes a
requirement to evaluate interests in securitized financial assets to
identifyinterests
that are freestanding derivatives or that are hybrid financial instruments
thatcontain an
embedded derivative requiring bifurcation; (d) clarifies that concentrations
ofcredit risk
in the form of subordination are not embedded derivatives; and (e) amendsStatement 140
to eliminate the prohibition on a qualifying special-purpose entity fromholding a
derivative financial instrument that pertains to a beneficial interest other
thananother
derivative financial instrument. The Company does not anticipate that theapplication
of Statement 155 will have an impact on the consolidated financial
statementsof the
Company.





In March
2006, the FASB issued Statement No.156, "Accounting for Servicing of
FinancialAssets—an amendment of
FASB Statement No. 140" ("Statement 156"). Statement 156requires an
entity to recognize a servicing asset or servicing liability each time it
undertakesan obligation
to service a financial asset by entering into a servicing contract and
requiresall
separately recognized servicing assets and servicing liabilities to be initially
measured atfair value,
if practicable. The statement permits the entity to choose either theamortization
method or the fair value measurement method for each class of separatelyrecognized
servicing assets and servicing liabilities. The statement further requires
separatepresentation
of servicing assets and servicing liabilities subsequently measured at fair
valuein
the statement of financial position and additional disclosures for all
separatelyrecognized
servicing assets and servicing liabilities. The Company does not anticipate
thatthe
application of Statement 156 will have an impact on the consolidated financial
statements of theCompany.





In July
2006, the Financial Accounting Standards Board ("FASB") published FASBInterpretation
No. 48 ("FIN No.48), Accounting for Uncertainty in Income Taxes, toaddress the
non comparability in reporting tax assets and liabilities resulting from a lack
ofspecific
guidance in FASB Statement of Financial Accounting Standards (SFAS) No.
109,Accounting
for Income Taxes, on the uncertainty in income taxes recognized in anenterprise's
consolidated financial statements. FIN No. 48 will apply to fiscal years
beginning afterDecember 15,
2006, with earlier adoption permitted. The adoption of FIN 48 is notexpected to
have a material effect on the Company's consolidated financial condition or
results of operations.





In
September 2006, the Financial Accounting Standards Board issued Statement
ofFinancial
Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." SFAS
No.




24




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(r)
Recent accounting pronouncements (continued)





157
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes
a fair value hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy. SFAS No. 157 is effective
for consolidated financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years, with early
adoption permitted. The Company does not expect the adoption of SFAS No. 157 to
materially impact its consolidated financial statements.





In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”. This statement
requires employers to recognize the over funded or under funded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not- for-profit organization. This statement also requires an employer to
measure the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. The provisions of SFAS No. 158 are
effective for employers with publicly traded equity securities as of the end of
the fiscal year ending after December 15, 2006. The adoption of this statement
is not expected to have a material effect on the Company’s future reported
financial position or results of operations.





In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (Topic 1N), “Quantifying
Misstatements in Current Year Consolidated Financial Statements” (“SAB No. 108”). SAB No.108
addresses how the effect of prior year uncorrected misstatements should be
considered when quantifying misstatements in current year consolidated financial
statements. SAB No. 108 requires SEC registrants (i) to quantify misstatements
using a combined approach which considers both the balance sheet and income
statement approaches; (ii) to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors; and (iii) to adjust their consolidated financial statements
if the new combined approach results in a conclusion that an error is material.
SAB No. 108 addresses the mechanics of correcting misstatements that include
effects from prior years. It indicates that the current year correction of a
material error that includes prior year effects may result in the need to
correct prior year consolidated financial statements even if the misstatement in
the prior year of years is considered immaterial. Any prior year consolidated
financial statements found to be materially misstated in years subsequent to the
issuance of SAB No. 108 would be restated in accordance with SFAS No. 154, “Accounting Changes
and Error Corrections”. Because the
combined approach represents a change in practice, the SEC staff will not
require registrants that followed an acceptable approach in the past to restate
prior years’
historical financial statements. Rather, these registrants can report the
cumulative effect of adopting the new approach as an adjustment to the current
year’s
beginning balance of retained earnings. If the new approach is adopted in a
quarter other than the first quarter, consolidated financial statements for
prior interim periods within the year of adoption may need to be restated. SAB
No. 108 is effective for fiscal years ending after November 15, 2006, which for
the Company would be its fiscal year beginning April 1, 2007. The implementation
of SAB No. 108 is not expected to have a material impact on the Company’s results of
operations and financial condition.




25




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(r)
Recent accounting pronouncements (continued)





In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”) – the fair value
option for financial assets and liabilities including an amendment of SFAS No.
115. This Statement ’ “ ”





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This
Statement retains the fundamental requirements in Statement 141 that the
acquisition method of accounting (which Statement 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company’s fiscal year beginning on or after
December 15, 2008.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS 160
changes the accounting for noncontrolling (minority) interests in consolidated
financial statements including the requirements to classify noncontrolling
interests as a component of consolidated stockholders’ equity, and the
elimination of “minority interest” accounting in results of operations with
earnings attributable to noncontrolling interests reported as part of
consolidated earnings. Additionally, SFAS 160 revises the accounting for both
increases and decreases in a parent’s controlling ownership interest. SFAS 160
is effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement
No. 133”.
This statement requires enhanced disclosures about an entity’s derivative and
hedging activities, thereby improving the transparency of financial reporting.
The provisions of SFAS No. 161 are effective for all entities where consolidated
financial statements are issued for fiscal years and interim periods beginning
after November 15, 2008. The adoption of this statement is not expected to have
a material effect on the Company’s future reported
financial position or results of operations.


26


MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





(r) Recent
accounting pronouncements (continued)





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles". This statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of non-governmental entities
that are presented in conformity with US GAAP. The provisions of SFAS No. 162
become effective 60 days following the SEC's approval of the amendment to AU
Section 411, "The Meaning of Presents Fairly in Conformity with Generally
Accepted Accounting Principles" by the Public Company Accounting Oversight
Board. The adoption of this statement is not expected to have a material effect
on the Company’s future reported
financial position or results of operations.





In May
2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
163, Accounting for Financial
Guarantee Insurance Contracts. The new standard clarifies how FASB
Statement No. 60, Accounting
and Reporting by Insurance Enterprises, applies to financial guarantee
insurance contracts issued by insurance enterprises, including the recognition
and measurement of premium revenue and claim liabilities. It also requires
expanded disclosures about financial guarantee insurance contracts. Statement
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the insurance enterprise’s risk-management
activities, which are effective the first period (including interim periods)
beginning after May 23, 2008. Except for the required disclosures, earlier
application is not permitted. The standard is not applicable to this
company.




4.            INTANGIBLE
ASSET


(i)
DISTRIBUTION RIGHTS





In
January 2007, the Company acquired exclusive rights to establish a distribution
network forthe Hartindo
line of fire safety products (“Hartindo”) from Pacific
Channel Ltd. (“PCL”), an unrelated
party. These rights were acquired for $1,350,000 to be paidby the
issuance of 30,000,000 common shares of the Company and are considered to have
an indefinite life. As at July 31, 2007 the shares had not been issued.
Consequently, the amount due is included in additional paid in capital.


These
shares were subsequently issued after year end (Note 16).





Per terms
of the distribution agreement, for each contract the company enters into, the
following applies:





(a)
            50%
      of all up-front fees received by the Company and 50% of all other forms of
      consideration received by the Company as a one-time payment for the grant
      of the distribution license shall be paid to PCL and 50% shall be retained
      by Megola


(b)
            50%
      of all other consideration received by the Company that is received by the
      Company other than as a percentage of Hartindo sales shall be paid to PCL
      with the balance of 50% to be retained by the
  Company


(c)
            Where
      the Company receives revenue from Hartindo sales made by Sales Agents, as
      a percentage of such Hartindo sales, the first 3% of the percentage
      payable to the Company on such sales shall be paid to PCL with any
      remaining balance to be retained by the
Company





All
payments are to be made quarterly within 30 days of the end each calendar
quarter.





This agreement, as amended
subsequent to year-end, shall remain in full force and effect so long as the
Company and its Hartindo dealers, sub-agents and/or sales representatives (the
“Megola
Group”)
purchase Hartindo products in the aggregate amounts specified below,
namely:




27




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2007 and
2006


(AMOUNTS EXPRESSED IN U.S.
DOLLARS)





4.
INTANGIBLE ASSETS


(i)
DISTRIBUTION RIGHTS (continued)





(a)
            If
      in the period up to January 2010, the Megola Group purchases, in the
      aggregate, a minimum of US $200,000 Hartindo Products, the distribution
      agreement shall be extended until January 31, 2011;
  and





(b)
            If
      in the period up to January 31, 2011, the Megola Group purchases, in the
      aggregate, a minimum of US $300,000 Hartindo products, the distribution
      agreement shall be extended until January 31, 2012;
  and





(c)
            If
      in the period up to January 31, 2012, the Megola Group purchases, in the
      aggregate, a minimum of US $400,000 Hartindo products, the distribution
      agreement shall be extended until January 31, 2013;
  and





(d)
            If
      in the period up to January 31, 2013, the Megola Group purchases, in the
      aggregate, a minimum of US $500,000 Hartindo products, the distribution
      agreement shall be extended until January 31, 2014; and






The
Company shall deliver to PCL on or before the end of February in each and every
year, a statement showing the aggregate Hartindo purchases made by the Megola
Group in the 12 month period ended January 31 in the prior year.





Failure
to meet any of the above conditions shall give PCL the right to terminate the
distribution agreement by a written notice to the company with the agreement
remaining in force until all payments owing by one party to another have been
made.





(ii)
BIOGUARD ULTRAVIOLET WATER TREATMENT SYSTEMS


As of
July 31, 2007 and 2006, Megola reflected impairment amounting to $NIL and
$99,899, respectively, on its long-term assets relating to specifically acquired
technology. The acquired technology which Megola could not demonstrate
effectively development of as of July 31, 2006 consisted of Bioguard Ultraviolet
Water Treatment Systems, models, technology and customer lists.





5. PROPERTY AND
EQUIPMENT





2007
                      
                      
                      2006Cost
                      
                      
                      Accumulated
      Amortization
                      
                      
                      Net
                      
                      
                      Net$
                      
                      
                      $
                      
                      
                      $
                      
                      
                      $Sports
      Ozone Machines
                      
                      
                      16,000
                      
                      
                      
                      8,566
                      
                      
                      
                      7,434
                      
                      
                      
                      9,714Office
      Furniture and Equipment
                      
                      
                      19,939
                      
                      
                      
                      19,166
                      
                      
                      
                      773
                      
                      
                      
                      2,564$
                      35,939
                      
                      
                      $
                      27,732
                      
                      
                      $
                      8,207
                      
                      
                      $
                      12,278





Amortization
for the year amounted to $5,107 ($20,974 in 2006)


28


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2007 and 2006


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





6.           NOTE
PAYABLE





Effective
July 25, 2007 Megola, FireStop USA, LLC ("FSU"), an unrelated party, and Pacific
Channel Ltd. ("PCL") have agreed that FSU will loan $250,000 to Megola under a
note payable and security agreement. FSU specified that no interest on the loan
will be due if the loan is repaid in full within six months. Any amounts owing
after six months will be subject to interest at 15% per annum. As security for
the loan, Megola pledged a first priority interest in the U.S. manufacturing
rights for the Hartindo line of products.


Subsequent
to the year-end, FSU assigned the loan to PCL with modifications as follows: the
security pledge to FSU was voided; the due date was extended to March 31, 2008
per agreement; PCL reserved the right to further extend the due date and
interest-free period at their sole discretion.





7.           ACCRUED
EXPENSES


The
composition of accrued expenses is as follows:





2007
                  
                  
                  2006Accrued
      Payroll Liabilities
                  
                  
                  42,681
                  
                  
                  
                  53,098Other
                  
                  
                  25,691
                  
                  
                  
                  32,350Total
      accrued liabilities
                  
                  $
                  68,372
                  
                  
                  $
                  85,448





8.           ADVANCES
FROM STOCKHOLDERS


In the
normal course of operations, the company borrows from its
stockholders.


These
advances are unsecured, bearing interest at 6%, have no fixed terms of
repayment, and the stockholders have waived their right to demand repayment
prior to August 1, 2008. During the year $86,857 owing at July 31, 2006 was
repaid by a stockholder.





9.          
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL





(a)
Common stock


Common
stock ($.001 par value per share): 200,000,000 shares are authorized, with 48,486,029
shares issued and outstanding at July 31, 2007 and 37,716,029 at July 31,
2006.


(b)
Additional Paid In Capital


Additional
Paid in Capital increased $1,350,000 due to Megola’s common stock being issued
for Distribution Rights that are contracted for before year-end but issued after
year-end. In addition it increased by $34,300 due to the issuance of shares for
legal services and by $392,730 for consulting fees (2006-$282,638).


The
services were recorded at fair market price of shares on transaction dates.
Stock issued for debt was $nil at July 31, 2007 (2006-$111,236).





10.         NET
LOSS PER SHARE





Net
earnings (loss) per share is calculated using the weighted average number of
common


shares
outstanding during the period, which was 47,502,906 (2006 - 36,853,879
).


29


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2007 and 2006


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





11.         SEGMENT
REPORTING


The
Company sells products in North America and The Peoples' Republic of China and
has


two
reportable geographic segments and three reportable product segments summarized
as follows:





North America
                      
                      
                      International
                      
                      
                      TotalYear
      ended July 31, 2007Sales
      and Royalties
                      
                      $
                      117,336
                      
                      
                      $
                      160,000
                      
                      
                      $
                      277,336Net
      loss
                      
                      $
                      (320,000
                      )
                      
                      $
                      (420,752
                      )
                      
                      $
                      (740,752
                      )Depreciation
                      
                      $
                      5,107
                      
                      
                      $
                      -
                      
                      
                      $
                      5,107Interest
      Expense
                      
                      $
                      27,334
                      
                      
                      $
                      -
                      
                      
                      $
                      27,334Total
      Assets
                      
                      $
                      1,211,315
                      
                      
                      $
                      369,200
                      
                      
                      $
                      1,580,515Year
      ended July 31, 2006Sales
      and Royalties
                      
                      $
                      296,287
                      
                      
                      $
                      447,500
                      
                      
                      $
                      743,787Net
      loss
                      
                      $
                      (180,540
                      )
                      
                      $
                      (679,175
                      )
                      
                      $
                      (859,715
                      )Depreciation
                      
                      $
                      -
                      
                      
                      $
                      20,974
                      
                      
                      $
                      20,974Interest
      Expense
                      
                      $
                      -
                      
                      
                      $
                      20,850
                      
                      
                      $
                      20,850Total
      Assets
                      
                      $
                      -
                      
                      
                      $
                      369,333
                      
                      
                      $
                      369,333





Breakdown of sales and royalties by product
      line





Air Treatment
                    
                    
                    Water Filtration
                    
                    
                    Fire Safety
                    
                    
                    TotalYear
      Ended July 31, 2007
                    
                    $
                    1,075
                    
                    
                    $
                    201,261
                    
                    
                    $
                    75,000
                    
                    
                    $
                    277,336Year
      Ended July 31, 2006
                    
                    $
                    156,195
                    
                    
                    $
                    587,592
                    
                    
                    $
                    -
                    
                    
                    $
                    743,787





12.         COMMITMENTS


The
Company is committed under a lease for office premises which expires on January
31,


2011.
Minimum lease payments are due as follows:





Year
      ended July 31, 2008
                    
                    $
                    25,400Year
      ended July 31, 2009
                    
                    
                    25,400Year
      ended July 31, 2010
                    
                    
                    25,400Year
      ended July 31, 2011
                    
                    
                    12,700Total
                    
                    $
                    88,900


30


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2007 and 2006


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





13.
CASH FLOW INFORMATION





(i)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES





2007
                        
                        
                        2006Depreciation
                        
                        
                        5,107
                        
                        
                        
                        20,974Asset
      impairment
                        
                        
                        -
                        
                        
                        
                        99,899Bad
      debt expense and increase in inventory reserve
                        
                        
                        245,032
                        
                        
                        
                        203,384Shares
      issued for consulting services
                        
                        
                        432,445
                        
                        
                        
                        284,213(Increase)
      decrease in accounts receivable
                        
                        
                        (121,725
                        )
                        
                        
                        247,975Decrease
      in other current assets
                        
                        
                        -
                        
                        
                        
                        11,762(Increase)
      decrease in inventory
                        
                        
                        45,646
                        
                        
                        
                        (323,905
                        )(Increase)
      decrease in prepaid expenses
                        
                        
                        (3,986
                        )
                        
                        
                        143,492Decrease
      in accounts payable
                        
                        
                        (57,395
                        )
                        
                        
                        (88,262
                        )Increase
      (decrease) in accrued expenses and other
                        
                        
                        (183,686
                        )
                        
                        
                        102,676Increase
      (decrease) in distributor deposits
                        
                        
                        (4,361
                        )
                        
                        
                        4,361357,077
                        
                        
                        
                        706,569





(ii)
SUPPLEMENTAL CASH FLOW INFORMATION





Non
      Cash Transactions:Stock
      issued for consulting fees
                    
                    $
                    402,800
                    
                    
                    $
                    -Stock
      issued for legal fees
                    
                    $
                    35,000
                    
                    
                    $
                    -Debt
      exchange for shares of common stock
                    
                    $
                    -
                    
                    
                    $
                    100,000Stock
      for accrued interest on debt
                    
                    $
                    -
                    
                    
                    $
                    12,360Interest
      paid
                    
                    $
                    -
                    
                    
                    $
                    -Income
      taxes paid
                    
                    $
                    -
                    
                    
                    $
                    -





14.
ECONOMIC DEPENDENCE





During
2007, two customers accounted for 63% and 30% of sales respectively (2006 – one
customer accounted for 59%) and one vendor accounted for 80% of purchases (2006
- 68%).





15.
INCOME TAXES


The
Company's deferred tax assets, in the amount of $1,042,200 consist entirely of
benefit from net operating loss (NOL) carry forwards.


The
Company’s
deferred tax assets are offset by a valuation allowance due to the uncertainty
of the realization of the net operating loss carry forwards. Net operating loss
carry forwards in the amount of $2,935,800 may be further limited by a change in
ownership and other provisions of the tax laws.





Income
taxes at the combined federal and state rates are as follows:





2007
                      
                      
                      2006Income
      tax benefit at the combined rate resulting from net operating
      loss carry forward
                      
                      
                      (35.5
                      )%
                      
                      
                      (35
                      )%Deferred
      income tax valuation allowance
                      
                      
                      35.5
                      %
                      
                      
                      35
                      %Actual
      tax rate
                      
                      
                      0
                      %


31


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2007 and 2006


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





16.         SUBSEQUENT
EVENTS





In August
2007, the Company issued 30,000,000 shares to fulfill its obligation as
described in


(Note
4).





On
October 23, 2007, the company amended the note payable agreement (see Note 6),
whereby the note payable to FireStop has been assigned to Pacific Channel
Limited (“PCL”) and the repayment date has been extended, interest free, until
March 31, 2008. As security for the loan, PCL holds the right to obtain the
equivalent value of any outstanding loan balance in restricted common shares of
the Company at the six-month average of market value.





On
November 13, 2007 the Company entered into a non-binding letter of intent with
6841309 Canada Inc. ("6CI") under which 6CI will have exclusive use of the
certain Hartindo fire safety products for an initial period of five years with a
five year option to renew at the discretion of 6CI. Megola agreed to supply 6CI
with the products covered by the letter of intent on an exclusive basis for the
purposes of use, application and resale. Megola further agreed to maintain
supply to meet market demands and to sell products at a reasonable wholesale
price. The obligation to provide regulatory approvals under health, safety and
environmental laws is vested with Megola.





On
November 15, 2007 Megola, together with MSE Enviro-Tech Corp. ("MEVT"), an
unrelated US company, entered into a non-binding memorandum of understanding
with Logistik Unicorp Inc. ("LUC") and CTT Group Inc. ("CTT"), both Canadian
corporations, under which LUC is granted exclusive use of the Hartindo fire
safety products for use in textile applications. The exclusivity is limited to
Canada, USA and Mexico. LUC is to provide marketing and industry expertise and
CTT is to provide technical and testing support. Megola and MVT agreed to
maintain supply to meet market demands and to sell products at a reasonable
wholesale price. The obligation to provide regulatory approvals under health,
safety and environmental laws is vested with Megola.





On
November 21, 2007 Megola, together with MEVT , entered into an exclusive
marketing and distribution agreement with Janus Products Corp. ("JPC"), an
unrelated Canadian corporation. Under the agreement, JPC will have exclusive
rights for the sale and distribution of a fire safety product for residential
markets in Canada and the United States. The initial term of the agreement is 5
years during which JPC will pay a royalty on sales. The agreement renews
automatically pending the satisfaction of certain minimum sales
requirements.





On
October 5, 2008 the company in cooperation with MSE Enviro-Tech Corp
entered into a Hartindo AF21 Product, Purchase, Sales, Distribution, Marketing,
and Service Agreement with WoodSmart Solutions, Inc. The basis terms and
conditions proposed are as follows:





1) Megola
will provide WoodSmart:


Hartindo AF21
Product


Use of Hartindo AF21 Product
Technology


The
option to obtain the exclusive use and rights of the Hartindo AF21 product for
use on or in any lumber, Oriented Strand Board (OSB), and plywood in North
America and:


The
option to obtain exclusive use and rights for the Enhanced Product for use on or
in any wood based materials in North
America


32


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2007 and 2006


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





16.
SUBSEQUENT EVENTS (continued)





2)
WoodSmart's Purchase Requirements include:





Annual Minimum 400,000 gallons within
first 12 months


Annual Minimum 550,000 gallons within
months 13-24


Annual Minimum 700,000 gallons within
months 25-36





WoodSmart retains exclusive use and
rights to the product as described in this agreement beginning the
37th monthand thereafter as long they purchase
1,500,000 gallons in each following 12 month period.


The first year begins 90 days after
execution of the agreement.





On
November 24, 2008 Megola entered into a Consulting Agreement with Regal Capital
Partners LLC (RCP) to assist and advise the company in identifying
investor relations and/or public relations and/or market relations organizations
which are engaged by Megola.





RCP was
to receive a commencement bonus of 1,500,000 restricted common shares of
Megola stock with Piggy Back registration rights. The shares are in lieu of
a $400,000 payment and are based on $ .0266 per share. Upon the effective date
Megola was to issue to RCP a total of 3,000,000 restricted common stock purchase
warrants as follows:





Vesting Date
                  
                  Exercise price
                  
                  
                  Warrants/Common SharesEffective
      Date
                  
                  $
                  0.15
                  
                  
                  
                  1,000,00090
      Days after effective date
                  
                  $
                  0.25
                  
                  
                  
                  1,000,000180
      Days after effective date
                  
                  $
                  0.40
                  
                  
                  
                  1,000,000





On
December 8, 2008, the sales/performance quotas in the agreement with PCL dated
January 12, 2007, have been moved forward starting January 31,
2010.





The
company also leased warehouse space and additional office space in Point Edward,
Ontario, Canada, commencing September of 2008. Required minimum lease payments
are as follows:





OfficeYear
      Ended
                        July
      31, 2009
                        
                        $
                        40,513Year
      Ended
                        July
      31, 2010
                        
                        $
                        44,196Year
      Ended
                        July
      31, 2011
                        
                        $
                        44,196Year
      Ended
                        July
      31, 2012
                        
                        $
                        44,196Year
      Ended
                        July
      31, 2013
                        
                        $
                        44,196Year
      Ended
                        July
      31, 2014
                        
                        $
                        3,683Total
                        
                        
                        $
                        220,980WarehouseYear
      Ended
                        July
      31, 2009
                        
                        $
                        16,500Year
      Ended
                        July
      31, 2010
                        
                        $
                        18,000Year
      Ended
                        July
      31, 2011
                        
                        $
                        18,000Year
      Ended
                        July
      31, 2012
                        
                        $
                        18,000Year
      Ended
                        July
      31, 2013
                        
                        $
                        18,000Year
      Ended
                        July
      31, 2014
                        
                        $
                        1,500Total
                        
                        
                        $
                        90,000


33


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2007 and 2006


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





16.
SUBSEQUENT EVENTS (continued)





The
company has also leased 4 vehicles commencing in August of 2008. Required
minimum lease payments are as follows:





Year
      Ended
                    July
      31, 2009
                    
                    $
                    34,340Year
      Ended
                    July
      31, 2010
                    
                    $
                    41,208Year
      Ended
                    July
      31, 2011
                    
                    $
                    41,208Year
      Ended
                    July
      31, 2012
                    
                    $
                    6,868Total
                    
                    
                    $
                    123,624





The
company entered into a consulting agreement with Matthew Sacco on August 1,
2008. He is to assist with establishing a distribution network of Megola’s
Hartindo product lines. The compensation in lieu of a cash payment of $30,000
was 1,000,000 shares of company stock.





17.
LOAN RECEIVABLE





The
      accounts receivable balance represents an amount owing by a supplier and
      will be offset against the Company’s future purchases of inventory. Since
      the amount will not be collected in the next 12 months, the balance has
      been classified as long-term accounts receivable. The fair value of the
      accounts receivable has been estimated by discounting future cash flows
      using an estimated rate of 6%. The fair value of accounts receivable is
      $115,174.





18.
      EXPENSE RECOVERY





This
      amount represents a write-off of a prior liability that arose from the
      acquisition of IP/Manufacturing Rights on February 9, 2005. The technology
      acquired proved not to be viable. The remaining amount payable under the
      contract was written off. Management plans to vigorously challenge any
      attempt to recover the remaining amount payable citing breach of contract
      by the other party.





19.      COMPARATIVE
FIGURES





Certain
amounts in the prior years’ consolidated
financial statements have been reclassified to conform to


the
current year presentation.


34


Item 2. Management's
Discussion and Plan of Operation


Management’s Discussion and Analysis of
Financial Condition and Operating Results


For the year ended July 31, 2007(Amounts expressed in US dollars)





MANAGEMENT'S
DISCUSSION AND PLAN OF OPERATION FORWARD-LOOKING STATEMENTS





This
Annual Report contains forward-looking statements about Megola, Inc.'s (the
Company” or “Megola”) business, financial condition and prospects that reflect
management's assumptions and beliefs based on information currently available.
We can give no assurance that the expectations indicated by such forward-looking
statements will be realized. If any of our management's assumptions should prove
incorrect, or if any of the risks and uncertainties underlying such expectations
should materialize, Megola's actual results may differ materially from those
indicated by the forward-looking statements.





The key
factors that are not within our control and that may have a direct bearing on
operating results include, but are not limited to, acceptance of our services,
our ability to expand our customer base, management’s ability to raise capital
in the future, the retention of key employees and changes in the regulation of
our industry.





There may
be other risks and circumstances that management may be unable to predict. When
used in this Annual Report, words such as, "believes," "expects," "intends,"
"plans," "anticipates," "estimates" and similar expressions are intended to
identify forward-looking statements, as defined in Section 21E of the Securities
Exchange Act of 1934, although there may be certain forward-looking statements
not accompanied by such expressions.





The safe
harbors of forward-looking statements provided by Section 21E of the Exchange
Act are unavailable to issuers of penny stock. As we issued securities at a
price below $5.00 per share, our shares are considered penny stock and such safe
harbors set forth under the Reform Act are unavailable to us.





Item 3.CONTROLS AND
PROCEDURES





Based on
our management's evaluation (with the participation of our chief executive
officer and chief financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act")) are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms and are also designed to
ensure that information required to be disclosed in the reports that we file or
submit under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, to allow
timely decisions regarding required disclosure. Based on the evaluation, which
disclosed deficiencies with respect to the Company's internal control procedures
over financial reporting, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are ineffective as of the end of the period covered by this report
due to limited resources and personnel. With additional funding the Company
intends to hire additional resources to assist with financial reporting
disclosures controls and procedures.





There
were no changes in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal year that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.


35


PART II -OTHER
INFORMATION





ITEM
1. LEGAL PROCEEDINGS





None





ITEM
2. CHANGES IN SECURITIES





None





ITEM
3. DEFAULTS UPON SENIOR SECURITIES.





None





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





None





ITEM
5. OTHER INFORMATION.





None





ITEM
6. EXHIBITS AND REPORTS ON S-8




Form:S-8   
Filing Date: August 21, 2006




Exhibit
Name and/or Identification of Exhibit Number





31
              Certification32
              Certification





SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this Report to be signed on its behalf by the undersigned
hereunto duly authorized.





MEGOLA,
      INC.(Registrant)By:
      /s/ Joel GardnerJoel
      GardnerPresident,
      CEO, Principal FinancialOfficer
      and Principal Accounting
Officer





Date:
January 12, 2009


36


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Shareholders of Megola Inc.




We have
audited the consolidated balance sheet of Megola Inc. (the “Company”) as at July
31, 2007 and the related consolidated statement of operations and comprehensive
loss, changes in stockholders’ equity (deficiency), and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.





We
conducted our audit in accordance with the 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
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of July 31,
2007 and the consolidated results of its operations and its cash flows for the
year then ended in accordance with generally accepted accounting principles in
the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in note 2 to the financial
statements, the continuance of the Company is dependent on its future
profitability and the ongoing support of its stockholders, affiliates and
creditors. This raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.


Since the
accompanying consolidated financial statements have not been prepared in
accordance with generally accepted accounting principles and standards in
Canada, they may not satisfy the reporting requirements of Canadian statutes and
regulations.




The
consolidated financial statements as at July 31, 2006 and for the year ended
July 31, 2006 were audited by another auditor who expressed an opinion without
reservation on those statements in their report dated February 14,
2007.





“SCHWARTZ LEVITSKY FELDMAN
LLP”





1167
Caledonia Road


Toronto,
Ontario, M6A 2X1 Canada





November
      21, 2008, except for note 16
              Chartered
      Accountantswhich
      is as of December 10, 2008
              Licensed
      Public Accountants


37