UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-KSB


(Mark
One)




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


For the
Fiscal Year Ended: July 31, 2010


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)




(Address
of Principal Executive Offices) (Zip Code)




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 x  No  ̈





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:
33,570,455 at July 31, 2010.








TABLE
OF CONTENTS





PART
      IItem
      1.
                    Description
      of Business
                    
                    4Item
      2.
                    Description
      of Property
                    
                    10Item
      3.
                    Legal
      Proceedings
                    
                    10Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    
                    10PART
      IIItem
      5.
                    Market
      for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchases of Equity Securities
                    
                    11Item
      6.
                    Selected
      Consolidated Financial Data
                    
                    13Item
      7.
                    Management’s
      Discussion and Analysis or Plan of Operations
                    
                    13Item
      7A
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    15Item
      8
                    Financial
      Statements and Supplementary Data
                    
                    16Item
      9.
                    Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    
                    35Item
      9A(T).
                    Controls
      and Procedures
                    
                    35Item
      9B.
                    Other
      Information
                    
                    36PART
      IIIItem
      10.
                    Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance With Section 16(a) of the Exchange Act
                    
                    36Item
      11.
                    Executive
      Compensation
                    
                    37Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    38Item
      13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    
                    40Item
      14.
                    Principal
      Accounting Fees and Services
                    
                    40PART
      IVItem
      15.
                    Exhibits
                    
                    40Signatures
                    
                    41


2





The
statements contained in this Report that are not historical facts are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our financial condition, results
of operations and business, which can be identified by the use of
forward-looking terminology, such as “estimates,” “projects,” “plans,”
“believes,” “expects,” “anticipates,” “intends,” or the negative thereof or
other variations thereon, or by discussions of strategy that involve risks and
uncertainties.  Management wishes to caution the reader of the
forward-looking statements that such statements, which are contained in this
Report, reflect our current beliefs with respect to future events and involve
known and unknown risks, uncertainties and other factors, including, but not
limited to, economic, competitive, regulatory, technological, key employee, and
general business factors affecting our operations, markets, growth, services,
products, licenses and other factors discussed in our other filings with the
Securities and Exchange Commission, and that these statements are only estimates
or predictions.  No assurances can be given regarding the achievement
of future results, as actual results may differ materially as a result of risks
facing us, and actual events may differ from the assumptions underlying the
statements that have been made regarding anticipated events.  Factors
that may cause our actual results, performance or achievements, or industry
results, to differ materially from those contemplated by such forward-looking
statements include, without limitation:





 ̈
            The availability of additional
      funds to successfully pursue our business
  plan;


 ̈
            The cooperation of industry
      service partners that have signed agreements with
    us;


 ̈
            Our ability to market our
      services to current and new customers and generate customer demand for our
      products and services in the geographical areas in which we
      operate;


 ̈
            The ability to comply with
      provisions of our financing
agreements;


 ̈
            The highly competitive nature
      of our industry;


 ̈
            Our ability to retain key
      personnel;


 ̈
            Our ability to maintain
      adequate customer care and manage our churn
  rate;


 ̈
            Our ability to maintain,
      attract and integrate internal management, technical information and
      management information
systems;


 ̈
            Our ability to manage rapid
      growth while maintaining adequate controls and
      procedures;


 ̈
            The availability and
      maintenance of suitable vendor relationships, in a timely manner, at
      reasonable cost;


 ̈
            General economic
      conditions.





These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause our actual results to be materially different from
any future results expressed or implied by us in those statements.




These
risk factors should be considered in connection with any subsequent written or
oral forward-looking statements that we or persons acting on our behalf may
issue. All written and oral forward looking statements made in connection with
this Report that are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by these cautionary
statements.  Given these uncertainties, we caution investors not to
unduly rely on our forward-looking statements. We do not undertake any
obligation to review or confirm analysts’ expectations or estimates or to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date of this document or to reflect the
occurrence of unanticipated events. Further, the information about our
intentions contained in this document is a statement of our intention as of the
date of this document and is based upon, among other things, the existing
regulatory environment, industry conditions, market conditions and prices, the
economy in general and our assumptions as of such date. We may change our
intentions, at any time and without notice, based upon any changes in such
factors, in our assumptions or otherwise.


3




PART
I




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, 2010 2% 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.


4


At July
31, 2010 we had an accumulated deficit of $7,830,207. We had a net loss of
$1,956,432 in fiscal year 2010. 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, 2010 our revenues decreased from $516,968 for 2009 to
$336,822 for the year ended July 31, 2010.





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 ScaleGuard
electronic conditioner for 3 months. The exchanger was cleaned as per its
regular maintenance and the ScaleGuard system
was installed. The operators said they would know within 4 weeks if the
ScaleGuard system
was keeping the exchanger from fouling as the performance of the exchanger
to cool the product was well documented. After 4 weeks there was no loss of
cooling. Normally after an 8 week period this exchanger would lose almost all of
its ability to cool. However with the ScaleGuard system
installed in this exchanger never needed descaling and had only lost one
degree of cooling over the next 21 months (90 weeks). It was approximated that
the refinery saved $60,000 in costs during the time that
the ScaleGuard 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
              Tim
      Horton’sNova
      Chemicals
              Kentucky
      Fried ChickenThe
      Great Hall of the People (the national assembly of China)
              Zurn
      IndustriesMengniu
      Dairy Group
              Royal
      PlasticsRunan
      Mu Gong Shan Group
              TRW
      AutomotiveZhoushan
      Gang Ming Foodstuff Industries
              ParmalatZhong
      Mei Coal Mining Company
              FritoLayZhujiang
      Brewery
              HoneywellCountry
      Fresh Dairy
              DuPont
      CanadaColgate
      University





For
fiscal year ended July 31, 2010 2% of our revenues were generated from sales of
ScaleGuard products under our agreement with Megola GmbH (Germany).





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)


6





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)





We did
not have any sales for AirGuardian for fiscal year 2010.





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 2010.




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




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 2010.




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)


7





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 vaporizing 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


• a Clean
Agent, leaving no residue


• 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.





HARTINDO
AF21




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




Hartindo
AF21 is a colorless 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 fiber 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).


8





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





Hartindo
AF31 is


• an
"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.


9





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, 2010 98% of our revenues were generated from sales of
Hartindo Fire Products.





Employees





We
currently have 5 full-time employees and 1 part-time employee.





Item
2. 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
$3,867 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
3. LEGAL PROCEEDINGS





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





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





None


10





PART
II





Item
5. Market for Common Equity and Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities





Market
for Securities





Our
common stock currently trades on The Pink Sheets under the symbol
MGOA.   The high and low closing price for each quarterly period of
our last two fiscal years is listed below:




High
                      
                      
                      LowFiscal 20091st  Quarter
                      
                      $
                      0.05
                      
                      
                      $
                      0.022nd
      Quarter
                      
                      
                      0.05
                      
                      
                      
                      0.023rd
      Quarter
                      
                      
                      0.05
                      
                      
                      
                      0.014th
      Quarter
                      
                      
                      0.05
                      
                      
                      
                      0.02Fiscal 20101st  Quarter
                      
                      $
                      0.04
                      
                      
                      $
                      0.012nd
      Quarter
                      
                      
                      0.69
                      
                      
                      
                      0.133rd
      Quarter
                      
                      
                      0.61
                      
                      
                      
                      0.264th
      Quarter
                      
                      
                      0.51
                      
                      
                      
                      0.08





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





Unregistered
sales of common stock





Not
applicable





Reclassification





Certain
amounts presented at July 31, 2009 have been reclassified to conform to
presentation at July 31, 2010.





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.


11





Holders


As of
July 31, 2010, we had 157 holders of record of our common stock, 82 holders of
record of our Preferred Series A, and 3 holders of our Preferred Series B
stock.  As of July 31, 2010, we had 1,008 NOBO’s on
record.





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.


12




Item
6.  Selected Consolidated Financial Data





Not
required.





Item
7. Management's Discussion and Analysis or Plan of Operation.





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





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.





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, 2010 with the year ended July 31, 2009.





During
the year ending July 31, 2010 our revenues decreased from $516,968 for 2009 to
$336,822 for the year ended July 31, 2010, a decrease of 34.85% over the prior
year. Our revenues for the year ended July 31, 2010 vs. year ended July 31, 2009
decreased due to a royalty payment based on a North American Distribution
Agreement from 2009.





Cost of
sales consists of direct manufacturing costs and applied overhead expenses for
our cost of raw materials to manufacture the ScaleGuard, Hartindo and other
systems. Cost of sales increased to $99,254 and, as a percentage of revenues,
increased to 327.52% in the year ended July 31, 2010, as compared to $23,216 and
19.84% of revenue for the year ended July 31, 2009. The overall increase in the
cost of sales during 2010 is due to the increase of actual sales with no royalty
payments collected in which royalty payments do not incur any costs of sales. In
note 3(k) we indicated a reduction to inventory during the year-end July 31,
2007. Even though these items have been slow to move, they are still salable and
there is little concern with obsolescence. 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, 2010, $nil (2009-$400,000) of our
revenues were generated from royalties based on a North American Distribution
Agreement. When royalty payments are received, we do not incur any cost of
sales.





General
and administrative (operating) expenses increased 21.41% to $878,425 during 2010
from $723,502 in 2009. The overall increase in general and administrative
(operating) expenses is due to consulting fees that aided in our product
expansion and sales.





Interest
expense decreased 77.12% in 2010 to $5,481 from $23,960 in 2009, because of the
Company's decreased interest on stockholder loans during the year.





It is the
opinion of the management that the Intangible Asset – Distribution Rights
acquired at May 2007 through the issuance of 30,000,000 common shares is fully
impaired and that the fair market value of the asset should be written off due
to the low level of sales attributed to the asset. Our sales forecast for year
ended July 31, 2010 based on contractually binding agreements entered into was
$5.2 million while actual sales were $ 336,822. The considerable
underperformance by our distribution groups relative to their committed
obligations under Agency Agreements and the subsequent expiry of these
agreements leaves the fair market value of the Intangible Asset in question and
as a result viewed as fully impaired.





Accumulated
other comprehensive loss decreased 71.52% in 2010 to $26,428 from $92,802, which
is directly attributable to the foreign currency translation
adjustment.





Net
Income (Loss)





For the
reasons outlined above, we realized a net loss of $1,956,432 for the year ended
July 31, 2010 as compared to a net loss of $258,175 for the year ended July 31,
2009, an increase of 657.79%.





2010
                            
                            
                            2009REVENUESales
                            
                            $
                            336,822
                            
                            
                            $
                            116,968Royalty
                            
                            
                            -
                            
                            
                            
                            400,000Total
      Revenue
                            
                            
                            336,822
                            
                            
                            
                            516,968COST
      OF SALES
                            
                            
                            99,254
                            
                            
                            
                            23,216SELLING
      and GENERAL ADMINISTRATIVE
                            
                            
                            878,425
                            
                            
                            
                            723,502IMPAIRMENT
      of INTANGIBLE ASSET
                            
                            
                            1,350,000
                            
                            
                            
                            -DEPRECIATION
      and AMORTIZATION
                            
                            
                            5,427
                            
                            
                            
                            4,465INTEREST
                            
                            
                            5,481
                            
                            
                            
                            23,960Total
      Expenses
                            
                            
                            2,239,333
                            
                            
                            
                            751,927Other
      income
                            
                            
                            (45,333
                            )
                            
                            
                            -NET
      LOSS
                            
                            $
                            (1,956,432
                            )
                            
                            $
                            (258,175
                            )


14





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.





On
January 19, 2009 the Company entered into a Distributorship, Sales Agency and
Royalty Agreement with Vulcan Technologies LLC.  Vulcan is granted
exclusive distribution and sales rights for the Hartindo line of anti-fire
products in Canada and Mexico as well as co-exclusive rights similarly in the
United States for the Railroad Industry for a ten year term.  Megola
receives payments as follows.  A payment of $400,000 within five days of
the execution of the Agreement (funds have been received) and an additional
$350,000 due 90 days following the date of this Agreement, provided that, under
various existing contracts, Megola has purchased no less than 100,000 gallons of
Hartindo AF21 in its fully diluted form.


Vulcan
will also pay a commission payment of 25% of Vulcan’s profits on products sold
by any party in the Railroad Industry.  They also commit to generating no
less than $3 million on or before the second anniversary of the Agreement. 
They also commit to a 15% increase in gross sales for each year
thereafter.





Liquidity
and Capital Resources




The
consolidated financial statements as of and for the year ending July 31, 2010
have been prepared assuming we continue as a going concern.




At July
31, 2010, we had an accumulated deficit of $7,830,207.




Cash and
cash equivalents at July 31, 2010 were $nil and $nil at July 31, 2009. Our
inventory decreased for the same period from $241,023 to $209,334 or
13.15%;




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.





During
2010, three customers accounted for 96% of sales respectively (2009 – one
customer accounted for 70%) and two vendors accounted for 97% of purchases (2009
- 99%).





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.




Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk





Not
required.


15




Item
8.  Financial Statements and Supplementary Data.





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and
 Stockholders
of Megola, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Megola, Inc as of July
31, 2010 and 2009, and the related consolidated statements of operations and
comprehensive loss, changes in stockholders’ equity (deficiency), and cash flows
for each of the years then ended. Megola, Inc.’s management is responsible for
these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits 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 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Megola, Inc. as of July 31, 2010
and 2009, and the results of its operations and its cash flows for each of the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
 
 The
accompanying financial statements referred to above have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the continuance of the Company is dependent
on its future profitability and the ongoing support of its stockholders,
affiliates and creditors. Management’s plans as to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty
 
 Jewett,
Schwartz, Wolfe & Associates
  /s/Jewett, Schwartz, Wolfe &
      AssociatesHollywood,
      FloridaNovember
      15, 2010




16





MEGOLA,
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
expressed in US dollars)





July
      31,
                      
                      
                      July
      31,2010
                      
                      
                      2009(Audited)
                      
                      
                      (Audited)ASSETSInventory
                      
                      $
                      209,334
                      
                      
                      $
                      241,023Prepaid
      expenses
                      
                      
                      13,595
                      
                      
                      
                      41,482Accounts
      receivable
                      
                      
                      7,855
                      
                      
                      
                      -Total
      Current Assets
                      
                      
                      230,784
                      
                      
                      
                      282,504Long-term
      receivable
                      
                      
                      -
                      
                      
                      
                      128,754Intangible
      asset
                      
                      
                      -
                      
                      
                      
                      1,350,000Property
      and equipment, net
                      
                      
                      7,389
                      
                      
                      
                      12,424TOTAL
      ASSETS
                      
                      $
                      238,173
                      
                      
                      $
                      1,773,682LIABILITIESBank
      overdraft
                      
                      $
                      20,729
                      
                      
                      $
                      74,737Accrued
      expenses
                      
                      
                      168,992
                      
                      
                      
                      76,393Accounts
      payable
                      
                      
                      64,231
                      
                      
                      
                      45,822Accrued
      interest
                      
                      
                      -
                      
                      
                      
                      25,821Loans
      payable
                      
                      
                      1,134
                      
                      
                      
                      -Advances
      from stockholders
                      
                      
                      115,437
                      
                      
                      
                      -Total
      Current Liabilities
                      
                      
                      370,523
                      
                      
                      
                      222,773Convertible
      Debenture
                      
                      
                      20,000
                      
                      
                      
                      -Total
      Liabilities
                      
                      
                      390,523
                      
                      
                      
                      222,773Commitments
      and Contingencies
                      
                      
                      -
                      
                      
                      
                      -STOCKHOLDERS'
      EQUITYCapital
      stock: (note 8)Common,
      $0.001 par value; 200,000,000 shares authorized, 33,570,455 and 33,187,419
      issued and outstanding in 2010 and 2009 respectively
                      
                      
                      33,570
                      
                      
                      
                      33,187Preferred
      "A", $0.001 par value; 3,500,000 shares authorized, 1,092,225 and
      $1,911,940 issued and outstanding in 2010 and 2009
      respectively
                      
                      
                      1,092
                      
                      
                      
                      1,912Preferred
      "B", $0.001 par value; 1,500,000 shares authorized, 47,561 and 137,885
      issued and outstanding in 2010 and 2009 respectively
                      
                      
                      47
                      
                      
                      
                      138Additional
      paid in capital (note 8)
                      
                      
                      7,761,917
                      
                      
                      
                      7,481,774Deficit
                      
                      
                      (7,830,207
                      )
                      
                      
                      (5,873,775
                      )Accumulated
      other comprehensive loss:Foreign
      currency translation adjustment
                      
                      
                      (118,769
                      )
                      
                      
                      (92,327
                      )Total
      Stockholders' Equity
                      
                      
                      (152,350
                      )
                      
                      
                      1,550,909TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      
                      238,173
                      
                      
                      
                      1,773,682





See
accompanying notes to audited consolidated financial statements


17





MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(Amounts
expressed in US dollars)





Year Ended
                                            
                                            
                                            Year EndedJuly 31,
                                            
                                            
                                            July 31,2010
                                            
                                            
                                            2009Income
      - sales
                                            
                                            $
                                            336,822
                                            
                                            
                                            $
                                            116,968Cost
      of sales
                                            
                                            
                                            99,254
                                            
                                            
                                            
                                            23,216GROSS
      PROFIT (LOSS)
                                            
                                            
                                            237,568
                                            
                                            
                                            
                                            93,752Income
      - royalties (note 12)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            400,000237,568
                                            
                                            
                                            
                                            493,752General
      and administrative
                                            
                                            
                                            878,425
                                            
                                            
                                            
                                            723,502Impairment
      of intangible asset
                                            
                                            
                                            1,350,000
                                            
                                            
                                            
                                            -Depreciation
                                            
                                            
                                            5,427
                                            
                                            
                                            
                                            4,465Interest
                                            
                                            
                                            5,481
                                            
                                            
                                            
                                            23,960TOTAL
      EXPENSES
                                            
                                            
                                            2,239,333
                                            
                                            
                                            
                                            751,927Other
      income
                                            
                                            
                                            (45,333
                                            )
                                            
                                            
                                            -TOTAL
      OTHER INCOME
                                            
                                            
                                            (45,333
                                            )
                                            
                                            
                                            -NET
      LOSS
                                            
                                            
                                            (1,956,432
                                            )
                                            
                                            
                                            (258,175
                                            )Foreign
      currency translation adjustment
                                            
                                            
                                            (26,442
                                            )
                                            
                                            
                                            (92,802
                                            )COMPREHENSIVE
      LOSS
                                            
                                            $
                                            (1,982,874
                                            )
                                            
                                            $
                                            (350,977
                                            )Weighted
      average common shares outstanding
                                            
                                            
                                            7,245,347
                                            
                                            
                                            
                                            1,497,325Loss
      per share - basic and diluted
                                            
                                            
                                            (0.270
                                            )
                                            
                                            
                                            (0.172
                                            )





See
accompanying notes to audited consolidated financial statements


18





MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF CASHFLOWS


(Amounts
expressed in US dollars)


YEAR ENDEDJuly 31, 2010
                                                
                                                
                                                July 31, 2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss for the period
                                                
                                                
                                                (1,956,432
                                                )
                                                
                                                
                                                (258,175
                                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Non-cash operationg
      transactionsDepreciation
                                                
                                                
                                                5,035
                                                
                                                
                                                
                                                4,465Impairment
      of intangible asset
                                                
                                                
                                                1,350,000
                                                
                                                
                                                
                                                -Shares
      issued for rent
                                                
                                                
                                                27,887
                                                
                                                
                                                
                                                48,802Shares
      issued for services
                                                
                                                
                                                114,000
                                                
                                                
                                                
                                                75,000Write
      off of receivable
                                                
                                                
                                                120,899
                                                
                                                
                                                
                                                -Write
      off accrued interest
                                                
                                                
                                                (25,821
                                                )
                                                
                                                
                                                -Cash used by operating
      activitiesLong
      term receivable
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (11,881
                                                )Inventory
                                                
                                                
                                                31,689
                                                
                                                
                                                
                                                (189,594
                                                )Prepaid
      expenses
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (41,369
                                                )Accounts
      payable
                                                
                                                
                                                18,406
                                                
                                                
                                                
                                                16,737Accrued
      expenses
                                                
                                                
                                                92,599
                                                
                                                
                                                
                                                (22,963
                                                )Distributor
      deposit
                                                
                                                
                                                -
                                                
                                                
                                                
                                                22,000Cash
      flows from operating activites
                                                
                                                
                                                (221,738
                                                )
                                                
                                                
                                                (356,978
                                                )CASH
      FLOWS FROM FINANCING ACTIVITESIncrease
      in bank indebtedness
                                                
                                                
                                                (54,008
                                                )
                                                
                                                
                                                73,446Advances
      from stockholders
                                                
                                                
                                                282,189
                                                
                                                
                                                
                                                336,112Convertible
      deventure
                                                
                                                
                                                20,000
                                                
                                                
                                                
                                                -Principal
      payments on notes payable
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (134,051
                                                )Cash
      flows from financing activities
                                                
                                                
                                                248,181
                                                
                                                
                                                
                                                275,507CASH
      FLOWS FROM INVESTING ACTIVITESPurchase
      of property and equipment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (11,331
                                                )Cash
      flows from investing activities
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (11,331
                                                )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                                
                                                
                                                (26,443
                                                )
                                                
                                                
                                                92,802NET
      INCREASE (DECREASE) IN CASH FOR THE YEAR
                                                
                                                
                                                26,443
                                                
                                                
                                                
                                                -NET
      CASH, beginning of year
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -NET
      CASH, end of year
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -SUPPLEMENTAL
      CASH FLOW INFORMATIONInterest
      paid
                                                
                                                
                                                5,481
                                                
                                                
                                                
                                                23,960Income
      taxes paid
                                                
                                                
                                                -
                                                #
                                                
                                                
                                                -NONCASH
      INVESTING AND FINANCING ACTIVITIES:Conversion
      of debt into preferred stock
                                                
                                                
                                                165,617
                                                #
                                                
                                                
                                                1,378,850Issuance
      of stock for services rendered
                                                
                                                
                                                114,000
                                                #
                                                
                                                
                                                75,000





See
accompanying notes to audited interim consolidated financial
statements


19




Megola,
Inc.


CONSOLIDATED
INTERIM STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) - audited


(Amounts
expressed in US dollars)





Common Stock
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Preferred Stock Series "A"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Preferred Stock Series "B"Shares
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Amount
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Shares
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Amount
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Shares
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              AmountBalances,
      July 31, 2008
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,569,721
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              1,570
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              -Stock
      for services
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              50,000
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              50
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Common  converted
      to Preferred "A"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (955,972
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (956
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,911,940
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,912Debt
      converted to Preferred "B"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              137,885
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              138Stock
      WarrantsNet
      Loss
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Foreign
      CurrencyTranslation
      Adjustment
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Balances,
      July 31, 2009
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              663,749
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              664
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,911,940
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              1,912
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              137,885
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              138Stock
      for services
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              64,000
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              64
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              5,000
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              5Common  converted
      to Preferred "A"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (23,668
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (24
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              47,400
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              47Debt
      converted to Preferred "B"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              16,561
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              16Preferred
      "A" converted to common
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              21,677,875
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              21,678
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (867,115
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (867
                                                                                                                                                                                                              )Preferred
      "B" converted to common
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              11,188,500
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              11,188
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (111,885
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (112
                                                                                                                                                                                                              )Net
      Loss
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Foreign
      CurrencyTranslation
      Adjustment
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Balances,
      July 31, 2010
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              33,570,455
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              33,570
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,092,225
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              1,092
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              47,561
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              47Comprehensive
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Paid
      In
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              AccumulatedIncome (Loss)
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Capital
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Deficit
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              TotalsBalances,
      July 31, 2008
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              475
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              5,981,528
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (5,615,600
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              367,973Stock
      for services
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              74,950
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              75,000Common  converted
      to Preferred "A"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (956
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Debt
      converted to Preferred "B"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,378,712
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,378,850Stock
      Warrants
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              80,063
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              80,063Net
      Loss
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (258,174
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (258,174
                                                                                                                                                                                                              )Foreign
      CurrencyTranslation
      Adjustment
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (92,802
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (92,802
                                                                                                                                                                                                              )Balances,
      July 31, 2009
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (92,327
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              7,514,297
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (5,873,774
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              1,550,910Stock
      for services
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              113,931
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              114,000Common  converted
      to Preferred "A"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (24
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (1
                                                                                                                                                                                                              )Debt
      converted to Preferred "B"
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              165,584
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              165,600Preferred
      "A" converted to common
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (20,811
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Preferred
      "B" converted to common
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (11,076
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Stock
      Warrants
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -Net
      Loss
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (1,956,432
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (1,956,432
                                                                                                                                                                                                              )Foreign
      CurrencyTranslation
      Adjustment
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (26,428
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (26,428
                                                                                                                                                                                                              )Balances,
      July 31, 2010
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (118,755
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              7,761,901
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (7,830,206
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (152,350
                                                                                                                                                                                                              )


See
accompanying notes to audited interim consolidated financial
statements


20





MEGOLA,
INC.


Notes
to Consolidated Financial Statements for the Years ended July 31, 2010 and
2009


(Amounts
expressed in US dollars)





1.
            NATURE
      OF BUSINESS


Megola,
Inc. ("Megola" or "the Company") was incorporated in Ontario, Canada on
August 28, 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
water treatment; 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 $1,956,432 and
$258,175 in the 2010 and 2009 fiscal years respectively, and  negative
cash flows from operations and a deficit of $7,830,207 as at July 31, 2010.
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.


Management
has undertaken the following initiatives that it believes will be instrumental
in leading to better management of cash flows and more profitable
operations:


•  Outsourcing of much of the
manufacturing activities has been established along with appropriate analysis
ensuring cost competitiveness to minimize capital outlay and provide for rapid
potential growth in production levels


•  Establishment of policies and
procedures for production processes to ensure timely delivery of product to
distribution groups and customers


•  Established relationships with
Distribution groups that can provide the necessary expertise in
commercialization of the Company’s entire product line to ensure maximum market
penetration


•  Signing of Definitive
Sales and Agency Agreements, pertaining to the distribution rights, that have
purchase/sale order requirements expected to generate substantial sales in the
next five years


•  Requirement for cash deposit
with sales orders to minimize drain on working capital





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES


(a) Basis
of presentation


These
consolidated financial statements are presented in U.S. dollars and have
been prepared by management in accordance with accounting principles
generally accepted in the 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
its wholly 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 and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Significant estimates are comprised of
depreciation, accrued expenses, impairment of intangible asset, and
recoverability of deferred tax asset. These consolidated financial statements
have, in management’s opinion, been properly prepared within reasonable
limits of materiality and within the framework of the accounting policies
summarized in these consolidated financial statements.


21


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2010 and 2009


(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, 2010, the exchange rate for the Canadian
Dollar was $1.00 U.S. for $.9725 Canadian (2009 - $1.00 U.S. for $.9281). The
annual average exchange rate for the 2010 fiscal year was $1.00 U.S. for $.9532
(2009 - $1.00 U.S. for $.8508). The Canadian economy strengthened considerably
in relation to the U.S. during the fiscal year of 2010, 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. During the year-ended July 31, 2010 the company incurred an
aggregated foreign currency translation loss of $118,769.





(e) Cash
equivalents


For the
purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly 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)
Shipping and Handling


Megola
provides all customers the option of having product delivered or making their
own shipping arrangements. All shipping and handling costs are disclosed in the
pricing estimate. Megola contacts its primary shipping facility for shipping
costs at the time orders are received and provides to customer in the pricing
estimate.





(h)
Intangible assets


Intangible
assets include distribution rights acquired from an independent party.
Intangible assets 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 is recognized when the carrying amount of an
asset exceeds the estimated undiscounted cash flows used in determining the
fair value of the asset. At year end the management has performed an impairment
analysis and determined that an impairment allowance is not required. The amount
of the impairment loss 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.


It is the
opinion of the management that the Intangible Asset – Distribution Rights
acquired at May 2007 through the issuance of 30,000,000 common shares is fully
impaired and that the fair market value of the asset should be written off due
to the low level of sales attributed to the asset. Our sales forecast for year
ended July 31, 2010 based on contractually binding agreements entered into was
$5.2 million while actual sales were $ 336,822. The considerable
underperformance by our distribution groups relative to their committed
obligations under Agency Agreements and the subsequent expiration of these
agreements leaves the fair market value of the Intangible Asset in question and
as a result viewed as fully impaired.


22


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2010 and 2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(i)
Financial Instruments





Fair
Value of Financial Instruments


The
carrying amounts reported in the balance sheet for cash, accounts receivable and
payable approximate fair value based on the short-term maturity of these
instruments.




Fair
value of certain of the Company’s financial instruments including cash and cash
equivalents, inventory, account payable, accrued expenses, notes payables, and
other accrued liabilities approximate cost because of their short maturities.
The Company measures and reports fair value in accordance with ASC 820, “Fair
Value Measurements and Disclosure” defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles and expands disclosures about fair value investments.




Fair
value, as defined in ASC 820, is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value of an asset should reflect
its highest and best use by market participants, principal (or most
advantageous) markets, and an in-use or an in-exchange valuation premise. The
fair value of a liability should reflect the risk of nonperformance, which
includes, among other things, the Company’s credit risk.




Valuation
techniques are generally classified into three categories: the market approach;
the income approach; and the cost approach. The selection and application of one
or more of the techniques may require significant judgment and are primarily
dependent upon the characteristics of the asset or liability, and the quality
and availability of inputs. Valuation techniques used to measure fair value
under ASC 820 must maximize the use of observable inputs and minimize the use of
unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and
resulting measurement as follows:




Level
1




Quoted
prices (unadjusted) in active markets that are accessible at the measurement
date for identical assets or liabilities;




2




Quoted
prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the asset or liability;
and inputs that are derived principally from or corroborated by observable
market data for substantially the full term of the assets or liabilities;
and




Level
3




Unobservable
inputs for the asset or liability that are supported by little or no market
activity and that are significant to the fair values.




Fair
value measurements are required to be disclosed by the Level within the fair
value hierarchy in which the fair value measurements in their entirety fall.
Fair value measurements using significant unobservable inputs (in Level 3
measurements) are subject to expanded disclosure requirements including a
reconciliation of the beginning and ending balances, separately presenting
changes during the period attributable to the following: (i) total gains or
losses for the period (realized and unrealized), segregating those gains or
losses included in earnings, and a description of where those gains or losses
included in earning are reported in the statement of income.


23


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2010 and 2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





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.




(j)
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. Megola requires
payment in full for most orders, which minimizes collection requirements.
Certain customers are able to provide us with a deposit of 50% up front with the
balance due on shipping. Our standard procedures related to any delayed payments
are to follow up within 10 days with a friendly reminder phone call and a letter
in 30 days. After 60 days, we will have a letter drafted by our lawyer go out
demanding payment in full along with any outstanding interest charges. Failure
to make payment in the next 15 days will result in the account being forwarded
to a collection agency for recovery. Receivables will be classified as doubtful
after 120 days and written off as Bad Debt. Interest charges will start to
accumulate on the 30th day
following the Invoice for any unpaid balances at a rate of 18% per annum
calculated daily.


As of
July 31, 2010 and 2009, Megola had $120,022 and $nil respectively as an
allowance for doubtful accounts.





(k)
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, 2010 and 2009 impairment expense was $nil and $nil, respectively
related to inventory impairments. In the year ending July 31, 2007, 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.




(l)
Property and equipment


Property
and equipment are stated on the basis of historical cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets, which range from 3 to
7 years. Depreciation expense for the years ended July 31, 2010 and 2009 was
$5,427 and $4,465, respectively. Depreciation of property and equipment acquired
and disposed of during the year is recorded at one half of the indicated
rates.





(m)
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.





(n)
Comprehensive income (loss)





The
Company has adopted SFAS No. 130 Reporting Comprehensive Income. This
standard requires companies to disclose comprehensive income (loss) in
their consolidated financial statements. In addition to items included in
net income, comprehensive income (loss) includes items currently charged or
credited directly to stockholders’ deficiency, such as foreign
currency translation adjustments.


24


MEGOLA,
INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2010 and 2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(o)
Concentration of credit risk





SFAS No.
105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of
Credit Risk", requires disclosure of any significant off-balance sheet risk
and credit risk concentration. The Company does not have significant
off-balance sheet risk or credit concentration.





(p)
Income taxes





Megola
accounts for income taxes under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes.". Under Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. There was no current or deferred income tax expense
or benefits for the period ending July 31, 2010 and 2009.





(q) Net
earnings (loss) per common share





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





(r)
Share-based compensation





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





The fair
value method of accounting is used to account for share based payments granted
to directors, officers, employees and others whereby the fair value of
share based payments granted 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 and recognized over any vesting period.





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





(s)
Recent accounting pronouncements




Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting
Principles




In May
2010, the FASB issued Accounting Standard Update No. 2010-19 “Foreign Currency”.
(“ASU No. 2010-19”). ASU 2010-19, codifies the SEC staff announcement made at
the March 18, 2010, EITF meeting. The ASU “provides the SEC staff’s views on
certain foreign currency issues related to investments in Venezuela.” These
issues relate to Venezuela’s highly inflationary status. The ASU became
effective on March 18, 2010. The adoption of this guidance has not had and is
not expected to have a material impact on the Company’s consolidated financial
statements.


25





MEGOLA,
INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2010 and 2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





In April 2010, the FASB issued
Accounting Standard Update No. 2010-18. “Receivables” (Topic 310). ASU
No.2010-18 provides guidance on accounting for acquired loans that have evidence
of credit deterioration upon acquisition. Paragraph 310-30-15-6 allows acquired
assets with common risk characteristics to be accounted for in the aggregated as
a pool. Upon establishment of the pool, the pool becomes the unit of accounting.
When loans are accounted for as a pool, the purchase discount is not allocated
to individual loans; thus all of the loans in the pool accrete at a single pool
rate (based on cash flow projections for the pool). Under subtopic 310-30, the
impairment analysis also is performed on the pool as a whole as opposed to each
individual loan. Paragraphs 310-40-15-4 through 15-12 establish the criteria for
evaluating whether a loan modification should be classified as a troubled debt
restructuring. Specifically paragraph 310-40-15-5 states that “a restructuring
of a debt constitutes a troubled debt restructuring for purposes of this
subtopic if the creditor for economic or legal reasons related to the debtor’s
financial difficulties grants a concession to the debtor that it would not
otherwise consider.” The ASU is effective for modification of loans accounted
for within pools under subtopic 310-30 occurring in the first interim or annual
period ending on or after July 15, 2010. The amendments are to be applied
prospectively. Early application is permitted. The adoption of this guidance has
not had and is not expected to have a material impact on the Company’s
consolidated financial statements.





In April 2010, the FASB issued
Accounting Standard Update No. 2010-17. “Revenue Recognition-Milestone Method”
(Topic 605) ASU No.2010-17 provides guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue
recognition for research or development transactions. An entity often recognizes
these milestone payments as revenue in their entirety upon achieving a specific
result from the research or development efforts. A vendor can recognize
consideration that is contingent upon achievement of a milestone in its entirety
as revenue in the period in which the milestone is achieved only if the
milestone meets all criteria to be considered substantive. Determining whether a
milestone is substantive is a matter of judgment made at the inception of the
arrangement. The ASU is effective for fiscal years and interim periods within
those fiscal years beginning on or after June 15, 2010. Early application is
permitted. Entities can apply this guidance prospectively to milestones achieved
after adoption. However, retrospective application to all prior periods is also
permitted. The adoption of this guidance has not had and is not expected to have
a material impact on the Company’s consolidated financial
statements.





In April 2010, the FASB issued
Accounting Standard Update No. 2010-13 “Stock Compensation” (Topic 718). ASU
No.2010-13 provides amendments to Topic 718 to clarify that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity. The amendments in
this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010. The amendments in this
Update should be applied by recording a cumulative-effect adjustment to the
opening balance of retained earnings. The cumulative-effect adjustment should be
calculated for all awards outstanding as of the beginning of the fiscal year in
which the amendments are initially applied, as if the amendments had been
applied consistently since the inception of the award. The cumulative-effect
adjustment should be presented separately. Earlier application is permitted. The
adoption of this guidance has not had and is not expected to have a material
impact on the Company’s consolidated financial statements.





In April 2010, the FASB issued
Accounting Standard Update No. 2010-12. “Income Taxes” (Topic 740). ASU
No.2010-12 amends FASB Accounting Standard Codification subtopic 740-10 Income
Taxes to include paragraph 740-10-S99-4. On March 30, 2010 The President signed
the Health Care & Education Affordable Care Act reconciliation bill that
amends its previous Act signed on March 23, 2010. FASB Codification topic 740,
Income Taxes, requires the measurement of current and deferred tax liabilities
and assets to be based on provisions of enacted tax law. The effects of future
changes in tax laws are not anticipated.” Therefore, the different enactment
dates of the Act and reconciliation measure may affect registrants with a
period-end that falls between March 23, 2010 (enactment date of the Act), and
March 30, 2010 (enactment date of the reconciliation measure). However, the
announcement states that the SEC would not object if such registrants were to
account for the enactment of both the Act and the reconciliation measure in a
period ending on or after March 23, 2010, but notes that the SEC staff “does not
believe that it would be appropriate for registrants to analogize to this view
in any other fact patterns.” The adoption of this guidance has not had and is
not expected to have a material impact on the Company’s consolidated financial
statements.


26


MEGOLA,
INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2010 and 2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





4.
            INTANGIBLE
      ASSET


DISTRIBUTION
RIGHTS




In
January 2007, the Company acquired exclusive rights to establish a distribution
network for the Hartindo line of fire safety products (“Hartindo”) from
Pacific Channel Ltd. (“PCL”), an unrelated party. These rights were acquired for
$1,350,000 were paid by the issuance of 30,000,000 common shares of the
Company and are considered to have an indefinite life.


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




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




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:





(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





(e)
            If
      in the period up to January 31, 2014, the Megola Group purchases, in the
      aggregate, a minimum of US $750,000 Hartindo products, the distribution
      agreement shall be extended for 25 years from January 31, 2014, or for
      such longer period as the Company retains the Hartindo product marketing
      rights for Canada, without any further performance conditions to be
      met.





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.  In December 2008, the sales/performance quotas in the agreement
with PCL have been moved forward starting January 31, 2010.


It is the
opinion of the management that the Intangible Asset – Distribution Rights
acquired at May 2007 through the issuance of 30,000,000 common shares is fully
impaired and that the fair market value of the asset should be written off due
to the low level of sales attributed to the asset. Our sales forecast for year
ended July 31, 2010 based on contractually binding agreements entered into was
$5.2 million while actual sales were $ 336,822. The considerable
underperformance by our distribution groups relative to their committed
obligations under Agency Agreements and the subsequent expiry of these
agreements leaves the fair market value of the Intangible Asset in question and
as a result viewed as fully impaired.


27


MEGOLA,
INC.


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2010 and
2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





5.
            PROPERTY
      AND EQUIPMENT





2010
                                  
                                  
                                  2009Cost
                                  
                                  
                                  Accumulated
                                    Depreciation
                                  
                                  
                                  Net
                                  
                                  
                                  Net$
                                  
                                  
                                  $
                                  
                                  
                                  $
                                  
                                  
                                  $Sports
      Ozone Machines
                                  
                                  
                                  16,000
                                  
                                  
                                  
                                  15,406
                                  
                                  
                                  
                                  594
                                  
                                  
                                  
                                  2,874Office
      Furniture and Equipment
                                  
                                  
                                  31,846
                                  
                                  
                                  
                                  25,051
                                  
                                  
                                  
                                  6,795
                                  
                                  
                                  
                                  9,550$
                                  47,846
                                  
                                  
                                  $
                                  40,457
                                  
                                  
                                  $
                                  7,389
                                  
                                  
                                  $
                                  12,424





Depreciation
expense for the years ended July 31, 2010 and 2009 was $5,427 and $4,465,
respectively.


Difference
between the change in accumulated depreciation from 2009 to 2010 and
depreciation expense recorded is due to the effects of foreign currency
translation.




6.
            NOTE
      PAYABLE





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.  No interest has been accrued or paid on
the loan for the year ended July 31, 2008.


On March
1, 2008, FSU assigned the loan to PCL with modifications as follows: the
security pledge to FSU was voided; the due date was extended to December 31,
2009 per agreement; PCL reserved the right to further extend the due date and
interest-free period at their sole discretion.


On October 22, 2007,Megola signed a note and security
agreement with PCL to obtain additional funding in the amount of $292,980.
Megola, upon receipt of the loan, will incur no interest should the loan be
repaid after specified time period. Any amounts still owing after the period,
unless such date is extended by PCL, will be subject to a 15% rate of interest.


The due
date on the entire amounts loaned will be December 31, 2009.


As
security for the loan, Megola has pledged to PCL the right to revoke Megola’s
Licensing Agreement to the Hartindo line of products. No interest has been
accrued or paid on the loan for the year ended July 31, 2008.


During
the year, PCL assumed several vendor invoices on behalf of the company in the
amount of $42,690.  The amount is non-interest bearing and PCL waived
their right to demand payment before January 1, 2010.  PCL reserved
the right to further extend the due date and interest-free period at their sole
discretion.  The amount of imputed interest for the year ended July
31, 2008 is not material.




On April
30, 2009, Megola satisfied this entire note by issuing Preferred B stock in
exchange for the debt.





7.
            ACCRUED
      EXPENSES





The
composition of accrued expenses is as follows:





2010
                              
                              
                              2009Accrued
      Payroll Liabilities
                              
                              
                              144,369
                              
                              
                              
                              50,393Other
                              
                              
                              24,623
                              
                              
                              
                              26,000Total
      accrued liabilities
                              
                              $
                              168,992
                              
                              
                              $
                              76,393





8.
            CAPITAL
      STOCK AND ADDITIONAL PAID IN
CAPITAL





(a)
Common stock


Common
stock ($.001 par value per share): 200,000,000 shares are authorized, with
33,570,455 shares issued and outstanding at July 31, 2010 and 33,187,419 at July
31, 2009.


28


MEGOLA,
INC.


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2010 and
2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





8.
            CAPITAL
      STOCK AND ADDITIONAL PAID IN CAPITAL
(continued)





On August
5, 2009, Megola issued 3,200,000 shares of its common stock, for consulting
services, under an agreement valued at $64,000.  These shares were
affected by the 1:50 reverse split that took place on November 25, 2009 and were
converted into 64,000 shares.





On
September 28, 2009, Megola’s common stock decreased by 41,500 shares, due to a
tender offer to the company’s Series A Convertible Preferred
stock.  These shares were submitted for tender prior to the deadline
of June 15, 2009; however, an error was made in the transmittal of the request
and subsequently was not processed until this time. These shares were affected
by the 1:50 reverse split that took place on November 25, 2009 and were
converted into 830 shares.





On
November 25, 2009 Megola approved a corporate action of a reverse 1:50 stock
split.  The Management and Board of Directors of Megola Inc. have
reviewed the recent activity and events of the company and feel that the
company's common stock is vastly undervalued. Megola has therefore initiated a
comprehensive plan to increase the share value of the common stock.





On
January 21, 2010, Megola’s common stock decreased by 1,143,500 shares, due to a
tender offer to the company’s Series A Convertible Preferred
stock.  These shares were submitted late due to a late conversion
instruction provided to the transfer agent.  These shares were
affected by the 1:50 reverse split that took place on November 25, 2009 and were
converted into 22,838 shares.





On May
29, 2010, all Preferred series A stock were eligible for conversion back to
common stock. During the period of May 29, 2010 to July 31, 2010, 867 shares of
Preferred series A stock were converted into 21,678 shares of common stock. One
share of Series A Convertible Preferred Stock was received for each 25 shares of
common tendered.





During
the period of May 1, 2010 to July 31, 2010, all Preferred series B stock were
eligible for conversion back to common stock.  111,885 shares of
Preferred series B stock were converted into 11,188,500 shares of common
stock.





The
shareholder of each common share is entitled to one vote.  Megola’s
common stock currently has no additional rights or
privileges.





b)
Preferred “A”





On April
24, 2009, the company offered all common shareholders of record the opportunity
to tender their shares in exchange
for the company’s Series A Convertible Preferred stock.  As of the offer
expiration date, June 15, 2009, 47,798,610
common shares had been tendered.  One share of Series A Convertible
Preferred Stock was received for each 25
shares of common tendered.  There is a mandatory holding period for the
Series A Convertible that expires May 29,
2010, before shareholders can then convert back to common shares.  The
stated value of the Series A Convertible
is $5. per share or $.20 per common share.  On May 29, 2010 Preferred A
shareholders may convert their
shares back to common at $.20 per common share or market, whichever is less.  Each
Preferred Series A still represents
25 shares of common.  The holders of Series A Convertible Preferred Stock
have 100 votes for each full share
Series A Convertible Preferred Stock.




Each
Series A Preferred also has a warrant attached which allows the owner to
purchase 10 common shares at $.45 per
share.  The warrant applies only to shareholders that have not yet
converted their Preferred A shares back to common on
the date they exercise their warrants.  These warrants expire on May 29,
2011.




On
September 28, 2009, the company’s Series A Convertible Preferred stock increased
by 1,660 shares and common stock
decreased by 41,500 shares, due to a tender offer for the company’s Series A
Convertible Preferred stock.  These
shares were submitted for tender prior to the deadline of June 15, 2009;
however, an error was made in the
transmittal of the request and subsequently was not processed until this
time.


29


MEGOLA,
INC.


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2010 and
2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)




8.
            CAPITAL
      STOCK AND ADDITIONAL PAID IN CAPITAL
(continued)





On
January 21, 2010, the company’s Series A Convertible Preferred stock increased
by 45,740 shares and common stock decreased by 22,838 shares, due to a tender
offer to the company’s Series A Convertible Preferred stock.  These
shares were submitted late due to a late conversion instruction provided to the
transfer agent.





On May
29, 2010, all Preferred series A stock were eligible for conversion back to
common stock. During the period of May 29, 2010 to July 31, 2010, 867,115 shares
of Preferred series A stock were converted into 21,677,875 shares of common
stock. One share of Series A Convertible Preferred Stock was received for each
25 shares of common tendered.





(c)
Preferred “B”





On April
24 2009, Megola offered to exchange selected Debt for shares of a newly created
Series B Convertible Preferred Stock, priced at $10.00 per share. The holders of
Series B Convertible Preferred Stock shall have the right to convert the Series
B Convertible Preferred Stock into Debt at a later time subject to certain
conditions.  No conversion of Series B Convertible Preferred Stock to Debt
can occur until after a holding period of twelve (12) months from date of
conversion.  Thereafter, at your option, you may convert the Series B
Convertible Preferred Stock into common stock.  For purposes of conversion,
the value of each share of Series B Convertible Preferred Stock will be deemed
to be $10.00.  The number of shares of common shares to be received upon a
conversion will be based on a value of $0.10 per share or the value of the
market bid price at the time of conversion, whichever is less.
That value will be based on the average closing bid price of the common stock
for each of the ten (10) consecutive trading days immediately prior to the date
of conversion.





On
January 29, 2010, Megola issued 16,561 shares of its Preferred B
stock.  The stock was issued in return for stockholder
loan.





During
the period of May 1, 2010 to July 31, 2010, all Preferred series B stock were
eligible for conversion back common
stock.  111,885 shares of Preferred series B stock were converted into
11,188,500 shares of common stock.





On June
1, 2010, Megola issued 5,000 shares of its Preferred B stock, for professional
fees, under an agreement, valued at $50,000.





(d)
Additional paid in capital





From the
year ended July 31, 2010 additional paid in capital increased by $280,143 due to
the company issuing common stock for services, common stock being converted to
Preferred “A”, debt converted to Preferred “B”, issuing  Preferred “B”
stock for services, and common stock being decreased due to the reverse 1:50
stock split.





(e)


The
Company has a Stock Incentive Plan for employees and
consultants.  There were no shares issued under the plan
during the year ended July 31, 2010.








9.
            SEGMENT
      REPORTING





The
Company sells products in North America and Asia and has two reportable
geographic segments and three reportable product segments summarized as
follows:





North America
                          
                          
                          Asia
                          
                          
                          TotalYear
      ended July 31, 2010Sales
      and Royalties
                          
                          $
                          336,822
                          
                          
                          $
                          -
                          
                          
                          $
                          336,822Net
      loss
                          
                          $
                          (1,956,432
                          )
                          
                          $
                          -
                          
                          
                          $
                          (1,956,432
                          )Depreciation
                          
                          $
                          5,427
                          
                          
                          $
                          -
                          
                          
                          $
                          5,427Interest
      Expense
                          
                          $
                          5,481
                          
                          
                          $
                          -
                          
                          
                          $
                          5,481Total
      Assets
                          
                          $
                          238,173
                          
                          
                          $
                          -
                          
                          
                          $
                          238,173Year
      ended July 31, 2009Sales
      and Royalties
                          
                          $
                          516,968
                          
                          
                          $
                          
                          
                          $
                          516,968Net
      loss
                          
                          $
                          (258,174
                          )
                          
                          $
                          
                          
                          $
                          (258,174
                          )Depreciation
                          
                          $
                          4,465
                          
                          
                          $
                          -
                          
                          
                          $
                          4,465Interest
      Expense
                          
                          $
                          23,960
                          
                          
                          $
                          -
                          
                          
                          $
                          23,960Total
      Assets
                          
                          $
                          1,773,682
                          
                          
                          $
                          
                          
                          $
                          1,773,682


30





Breakdown of sales and
royalties by product line





Physical WaterTreatment
                                                                          
                                                                          
                                                                          Fire Safety
                                                                          
                                                                          
                                                                          TotalYear
      Ended July 31, 2010
                                                                          
                                                                          $
                                                                          7,349
                                                                          
                                                                          
                                                                          $
                                                                          329,473
                                                                          
                                                                          
                                                                          $
                                                                          336,822Year
      Ended July 31, 2009
                                                                          
                                                                          $
                                                                          2,826
                                                                          
                                                                          
                                                                          $
                                                                          514,142
                                                                          
                                                                          
                                                                          $
                                                                          516,968


There
were no sales for air purification, water filtration, microbiological control
and waste water treatment.





10.
            COMMITMENTS





(i)
The Company leased warehouse space and additional office space in Point Edward,
Ontario, and Canada that commenced September of 2008.  Required
minimum lease payments are as follows:





OfficeYear
      Ended
                            
                            July
      31, 2011
                            
                            $
                            42,981Year
      Ended
                            
                            July
      31, 2012
                            
                            $
                            42,981Year
      Ended
                            
                            July
      31, 2013
                            
                            $
                            42,981Year
      Ended
                            
                            July
      31, 2014
                            
                            $
                            3,582Total
                            
                            
                            
                            $
                            132,525WarehouseYear
      Ended
                            
                            July
      31, 2011
                            
                            $
                            17,505Year
      Ended
                            
                            July
      31, 2012
                            
                            $
                            17,505Year
      Ended
                            
                            July
      31, 2013
                            
                            $
                            17,505Year
      Ended
                            
                            July
      31, 2014
                            
                            $
                            1,459Total
                            
                            
                            
                            $
                            53,974





(ii) The
Company has also leased 4 vehicles that commenced in August of
2008.  Required minimum lease payments are as follows:





Year
      Ended
                        
                        July
      31, 2011
                        
                        $
                        40,075Year
      Ended
                        
                        July
      31, 2012
                        
                        $
                        6,679Total
                        
                        
                        
                        $
                        46,754





(iii)An
additional vehicle was leased in April of 2009. Required minimum lease payments
are as follows:





Year
      Ended
                        
                        July
      31, 2011
                        
                        $
                        9,388Year
      Ended
                        
                        July
      31, 2012
                        
                        $
                        7,041Total
                        
                        
                        
                        $
                        16,429


31





MEGOLA,
INC.


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2010 and
2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





11.
            CONTINGENCIES





On March
30, 2010, the Company entered in a Master Distributor agreement with CY Holding
Company. Through this agreement the Company acquired exclusive rights to sell
the equipment of CY Holding Company in North America.  This agreement
is contingent on the minimum annual sales of 10,000 – 20,000 units during any
calendar twelve month period. As of July 31, 2010, the Company had not sale any
units related to CY Holding’s equipment.





12.
            CONVERTIBLE
      NOTES PAYABLE





On July
16, 2010, a third party loaned the Company $20,000. The loan bears a rate of
interest of 9% per annum and is payable on April 6, 2011 or such earlier date as
this Debenture is required or permitted to be repaid as provided hereunder (the
“Maturity Date”), and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Debenture at the rate of 9% per
annum, payable on the Maturity Date, unless the Debenture is converted to
shares of common stock in accordance with the terms and conditions herein.. The
holder of the note has the right to convert the note into common stock of the
Company at a price of $0.01 per share of common stock or a price of seventy
percent (70%) of the average of the two lowest volume weighted average prices
(“VWAPs”), determined on the then current trading market for the Company’s
common stock, for ten (10) trading days prior to conversion (the “Set Price”),
at the option of the Holder, in whole at any time and from time to
time.





13.
            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. There was no royalty income received during the fiscal year due to the
manufacturer moving its facilities to a new location in Southeast Asia, thereby
not producing or selling any additional units.





On
January 19, 2009 the Company entered into a Distributorship, Sales Agency and
Royalty Agreement with Vulcan Technologies LLC.  Vulcan is granted
exclusive distribution and sales rights for the Hartindo line of anti-fire
products in Canada and Mexico as well as co-exclusive rights similarly in the
United States for the Railroad Industry for a ten year term.  Megola
receives payments as follows.  A payment of $400,000 within five days of
the execution of the Agreement (funds have been received) and an additional
$350,000 due 90 days following the date of this Agreement
provided that, under various existing contracts, Megola has purchased no less
than 100,000 gallons of Hartindo AF21 in its fully diluted form.


Vulcan
will also pay a commission payment of 25% of Vulcan’s profits on products sold
by any party in the Railroad Industry.  They also commit to generating no
less than $3 million on or before the second anniversary of the Agreement. 
They also commit to a 15% increase in gross sales for each year
thereafter.





14.
            RESEARCH
      AND DEVELOPMENT





In 2009,
Megola had $12,527 in research and development related expenditures. Much work
had been completed in furthering the potential marketability of the Hartindo
product line. In 2010, expenses were significantlyreduced
to $7,369
due to such initiatives being directly undertaken by our distribution
groups.





15.
            CONCENTRATIONS





During
2010, three customers accounted for 96% of sales respectively (2009 – one
customer accounted for 70%) and two vendors accounted for 97% of purchases (2009
- 99%).





During
2010, 36% of the recognized sales were related to the Hartindo product line, and
27% were related to technical and administrative revenue. As of July 31, 2010,
the Company only had one main supplier of the Hartindo raw materials needs for
the Hartindo product line.


32


MEGOLA,
INC.


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2010 and
2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





16.
            INCOME
      TAXES





Deferred
income taxes arise from timing differences resulting from income and expense
items reported for financial accounting and tax purposes in different periods. A
deferred tax asset valuation allowance is recorded when it is more likely than
not that deferred tax assets will not be realized. A valuation allowance of 100%
of the deferred tax assets was made; there are no deferred taxes as of July 31,
2010. There was no income tax expense for the years ended July 31, 2010 and 2009
due to the Company’s net losses.


The
Company’s tax benefit differs from the “expected” tax benefit for the years
ended July 31, 2010 and 2009, which is computed by applying the Federal
Corporate tax rate of 35% to loss before taxes), as follows:





Through July
                      31, 2010
                    
                    
                    Through July
                      31, 2009Computed
      “expected” tax   benefit
                    
                    $
                    2,740,572
                    
                    
                    
                    2,055,821Less;
      benefit of operating loss carryforwards
                    
                    
                    2,740,572
                    
                    
                    
                    2,055,821$
                    -
                    
                    
                    
                    -





17.
            EARNING
      PER SHARE





Basic
earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised or equity awards vest resulting in the issuance of common stock or
conversion of notes into shares of the Company’s common stock that could
increase the number of shares outstanding and lower the earnings per share of
the Company’s common stock.  This calculation is not done for periods
in a loss position as this would be antidilutive.  As of July 31,
2010, there were no stock options or stock awards that would have been included
in the computation of diluted earnings per share that could potentially dilute
basic earnings per share in the future.  The information related to
basic and diluted earnings per share is as follows:





Ended July 31,2010
                  
                  
                  2009Numerator:Continuing
      operations:Income
      from continuing operations
                  
                  $
                  (1,956,432
                  )
                  
                  $
                  (
      258,175
                  )Effect
      of dilutive convertible debt
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  (1,956,832
                  )
                  
                  $
                  (258,175
                  )Discontinued
      operationsLoss
      from discontinued operations
                  
                  
                  —
                  
                  
                  
                  —Net
      income (loss)
                  
                  $
                  (1,956,432
                  )
                  
                  $
                  ( 258,175
                  )Denominator:Weighted
      average number of shares outstanding – basic and diluted
                  
                  
                  7,245,347
                  
                  
                  
                  1,497,325EPS:Basic:Continuing
      operations
                  
                  $
                  (
      .270
                  )
                  
                  $
                  (
      .17
                  )Discontinued
      operations
                  
                  
                  0.00
                  
                  
                  
                  0.00Net
      income/(loss)
                  
                  $
                  (1,956,432
                  )
                  
                  $
                  ( 258,175
                  )DilutedContinuing
      operations
                  
                  $
                  (
      .270
                  )
                  
                  $
                  (
      .17
                  )Discontinued
      operations
                  
                  
                  0.00
                  
                  
                  
                  0.00Net
      income/(loss)
                  
                  $
                  (1,956,432
                  )
                  
                  $
                  ( 258,175
                  )


33


MEGOLA,
INC.


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2010 and
2009


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





18.
            LONG
      TERM 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 long-term receivable has
been estimated by discounting future cash flows using an estimated rate of 6%.
The fair value of long-term receivable is $121,466.





On April
9, 2010, the Board of Directors of Pacific Channel Limited and majority of
shareholders have passed resolution to dissolve the company effectively
immediately, therefore the outstanding receivable is deemed uncollectible and a
corresponding adjusting entry to bad debt expense has been entered.





19.
            RELATED
      PARTY TRANSACTIONS





During
the year ended July 31, 2010, the Company had the following material related
party transactions:





A.
            Joel
      Gardner, the Company’s Chief Executive officer, lend the Company $282,189,
      and converted $165,617 into 16,561 shares of preferred B stock during the
      year ended July 31, 2010. As of July 31, 2010, the Company owed Joel
      Gardner $116,572.





B.
            New
      Fire Solutions, Inc., is a company owned by one of the Company’s
      directors, and it accounted for 42% of the Megola’s annual sales during
      the year ended July 31, 2010.





20.
            SUBSEQUENT
      EVENTS





On August
31, 2010, Megola (“Company”) entered into a Securities Purchase Agreement with
Asher Enterprises, Inc. (“Buyer”).





The basic
parameters of the Agreement with Asher Enterprises, Inc. will include, but not
be limited to, the following:




A.
            The Company and the Buyer is
      executing and delivering this Agreement in reliance upon the exemption
      from securities registration afforded by the rules and regulations as
      promulgated by the United States Securities and Exchange Commission (the
      “SEC”) under the Securities Act of 1933, as amended (the “1933
      Act”);





B.
            Buyer desires to purchase and the
      Company desires to issue and sell, upon the terms and conditions set forth
      in this Agreement an 8% convertible note of the Company, in the form
      attached hereto as Exhibit A, in the aggregate principal amount of
      $45,000.00 (together with any note(s) issued in replacement thereof or as
      a dividend thereon or otherwise with respect thereto in accordance
      with the terms thereof, the “Note”), convertible into shares of common
      stock of the Company (the “Common Stock”), upon the terms and subject to
      the limitations and conditions set forth in such
    Note.





C.
            The Buyer wishes to purchase,
      upon the terms and conditions stated in this Agreement, such principal
      amount of Note as is set forth immediately below its name on the signature
      pages hereto




On
September 3, 2010, the corporation approved the conversion, thru RBC Dominion
Securities, of 7,031,800 restricted common shares of Megola Inc. (MGON) to
70,318 shares of Megola Inc Series B Preferred Stock.





On
September 8, 2010, Megola announced that the company had opened a brokerage
account with Glendale Securities for the purpose of initiating a stock buyback
plan.





On
September 9, 2010, Megola received a request from TD AMERITRADE Clearing Inc. to
reverse a conversion and transfer that was done per their request by the
transfer agent.  As the conversion and transfer from Megola Series ‘A’
Preferred stock to Megola Common stock was done without the authorization of
their client TD AMERITRADE Clearing Inc. asked for consent to reverse the
transaction and revert the Common Shares back to Preferred Series A Shares.
Megola has given consent for 1,000,000 Common Shares to be reverted back to the
original 40,000 shares of Series ‘A’ Preferred stock into the name of their
client.


34


As of
September 17, 2010 Megola has purchased 143,000 of common stock of Megola Inc.
(MGON) and will return shares to treasury.





21.
            COMPARATIVE
      FIGURES


Certain
amounts in the prior years’ consolidated financial statements have been
reclassified to conform to the current year presentation.





Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None—Not
Applicable




Item
9A(T). Controls and Procedures.





Evaluation of Disclosure
Controls and Procedures





We
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) at July 31, 2010. This evaluation was carried out under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, at July 31, 2010, our disclosure
controls and procedures are effective.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.





The
Company has established disclosure controls and procedures to ensure that
information disclosed in this annual report on Form 10-K was properly recorded,
processed, summarized and reported to the Company’s Board of Directors. A
control system, no matter how well conceived or operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.





Internal Control Over
Financial Reporting





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework stated by the Committee of Sponsoring Organizations of the Treadway
Commission.





The
Company’s Chief Executive Officer and Chief Financial Officer has evaluated
the effectiveness of the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of July 31,
2010 and for the fiscal year ending July 31, 2010 covered by this Annual
Report on Form 10-K. Based upon such evaluation, the Chief Executive Officer and
Chief Financial Officer has concluded that, as of July 31, 2010 and for the
fiscal year ending July 31, 2010, the Company’s disclosure controls and
procedures were not effective as required under Rules 13a-15(e) and 15d-15(e)
under the Exchange Act. This conclusion by the Company’s Chief Executive
Officer and Chief Financial Officer does not relate to reporting
periods after July 31, 2010.





This
annual report does not include an attestation report of the Company s registered
public accounting firm regarding internal control over financial reporting.
Management s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this Annual Report on Form 10-K.





Changes in Internal Control
Over Financial Reporting





No change in the Company s internal
control over financial reporting occurred during the year ended July 31, 2010,
that materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.


35


Item
9B.  Other Information





None.





PART
III - OTHER INFORMATION





Item
10. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act





Each of
our directors’ serves for a term of one year or until the successor is elected
at our annual shareholders' meeting and is qualified, subject to removal by our
shareholders. Each officer serves, at the pleasure of our board of directors,
for a term of one year and until the successor is elected at the annual meeting
of the board of directors and is qualified.





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





Name
                    
                    Age
                    
                    PositionJoel
      Gardner
                    
                    43
                    
                    Chief
      Executive Officer/President/DirectorCraig
      Wagenschutz
                    
                    52
                    
                    Chief
      Financial OfficerDaniel
      Gardner
                    
                    39
                    
                    TreasurerSufan
      Siauw
                    
                    42
                    
                    DirectorWillard
      Brown
                    
                    53
                    
                    Director





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





Craig
Wagenschutz joined Megola as CFO in January 2009.  He is responsible
for the development and implementation of company financial systems and
processes as well as business plans and strategies, revenue models and
budgeting. Mr. Wagenschutz will also work directly with the company's SEC
Auditing firm to ensure financial compliancy of quarterly and year-end filings.
A graduate of Adrian College with a BA in accounting, Mr. Wagenschutz became a
licensed CPA in 1984 and founded Wagenschutz & Associates CPA Firm in 1988.
He is a current member of the Michigan Association of CPAs and the American
Institute of CPAs.





Daniel
Gardner joined Megola in January 2005 in the role of General Manager and was
appointed Treasurer in September 2006.  He is responsible for daily
business operations as well as working to implement business plans, marketing
strategies, and product development. He is also a key figure in the area of
investor relations on the public side of the company.





Willard
"Buzz'' Brown joined Megola as director in October 2000.  He brings
over 20 years of business management knowledge to Megola. Currently, he is
President and Owner of J&C Ice Technologies, Inc., a distributor for Zamboni
in the mid-Atlantic region. In addition, Buzz also owns and operates Island
Style Construction Company in Nantucket, a custom home-building construction
company.   Mr. Brown is a graduate of St. Lawrence
University.





Sufan
Siauw is currently the Chief Technology Officer of Dalian Bingshan H2O3
Environmental Solutions Co. Ltd., a Chinese ozone water treatment system
manufacturer that is part of the Bingshan Group, one of China's largest
diversified conglomerates, consisting of 46 different companies.




Family
Relationships




Joel
Gardner, CEO/President and Daniel Gardner, Treasurer, are
brothers.


36


Legal
Proceedings


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




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





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





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





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





Code
of Ethics





We do not
currently have a Code of Ethics applicable to our principal executive, financial
or accounting officer.





Compliance with Section 16(a) of the Exchange Act





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers, and persons who beneficially own more than 10% of a
registered class of our equity securities, to file reports of beneficial
ownership and changes in beneficial ownership of our securities with the SEC on
Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes of
Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial
Ownership of Securities). Directors, executive officers and beneficial owners of
more than 10% of our Common Stock are required by SEC regulations to furnish us
with copies of all Section 16(a) forms that they file. Based solely on review of
the copies of such forms furnished to us, or written representations that no
reports were required, we believe that for the fiscal year ended July 31 2009
beneficial owners complied with Section 16(a) filing requirements applicable to
them.





Item
11. Executive Compensation


The
following table sets forth the compensation paid to our executive officers
during fiscal year ended July 31, 2009 and 2010 (collectively, the “Named
Executive Officers”):





Summary Compensation
Table





Non-Equity
                                                                  
                                                                  
                                                                  Non-QualifiedName
      and
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Incentive
                                                                  
                                                                  
                                                                  Deferred
                                                                  
                                                                  
                                                                  AllPrincipal
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Stock
                                                                  
                                                                  
                                                                  Option
                                                                  
                                                                  
                                                                  Plan
                                                                  
                                                                  
                                                                  Compensation
                                                                  
                                                                  
                                                                  OtherPosition
                                                                  
                                                                  Year
                                                                  
                                                                  Salary
                                                                  
                                                                  
                                                                  Bonus
                                                                  
                                                                  
                                                                  Awards
                                                                  
                                                                  
                                                                  Awards
                                                                  
                                                                  
                                                                  Compensation
                                                                  
                                                                  
                                                                  Earnings
                                                                  
                                                                  
                                                                  Compensation
                                                                  
                                                                  
                                                                  Total($)
                                                                  
                                                                  
                                                                  ($)
                                                                  
                                                                  
                                                                  ($)
                                                                  
                                                                  
                                                                  ($)
                                                                  
                                                                  
                                                                  ($)
                                                                  
                                                                  
                                                                  ($)
                                                                  
                                                                  
                                                                  ($)
                                                                  
                                                                  
                                                                  ($)Joel
      Gardner
                                                                  
                                                                  2009
                                                                  
                                                                  
                                                                  1
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  1President/CEO
                                                                  
                                                                  2010
                                                                  
                                                                  
                                                                  1
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  1


37


Compensation
Agreements




We have
the no compensation agreements with our executive officers.




Summary Equity Awards
Table




The
following table sets forth certain information for our executive officers
concerning unexercised options, stock that has not vested, and equity incentive
plan awards as of July 31, 2010.




OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END


Name
                
                Number of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  (#)
                  Exercisable
                
                
                Number of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  (#)
                  Unexercisable
                
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number of
                  Securities
                  Underlying
                  Unexercised
                  Unearned
                  Options (#)
                
                
                Option
                  Exercise
                  Price
                  ($)
                
                
                Option
                  Expiration
                  Date
                
                
                Number
                  of
                  Shares
                  or Units
                  of Stock
                  That
                  Have
                  Not
                  Vested
                  (#)
                
                
                Market
                  Value of
                  Shares or
                  Units of
                  Stock That
                  Have Not
                  Vested
                  ($)
                
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number
                  Of
                  Unearned
                  Shares,
                  Units or
                  Other Rights
                  That Have
                  Not Vested
                  (#)
                
                
                Equity Incentive
                  Plan Awards:
                  Market or Payout
                  Value of
                  Unearned
                  Shares, Units or
                  Other Rights
                  That Have Not
                  Vested
                  ($)Joel
      Gardner
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0





Director Compensation
Table





Change
      inPensionValue
      andNon-Equity
                                            
                                            
                                            Non-QualifiedFees Earned
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            Incentive
                                            
                                            
                                            Deferredor Paid
                                            
                                            
                                            Stock
                                            
                                            
                                            Option
                                            
                                            
                                            Plan
                                            
                                            
                                            Compensation
                                            
                                            
                                            All OtherName
                                            
                                            in Cash
                                            
                                            
                                            Awards
                                            
                                            
                                            Awards
                                            
                                            
                                            Compensation
                                            
                                            
                                            Earnings
                                            
                                            
                                            Compensation
                                            
                                            
                                            Total($)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)Sufan
      Siauw
                                            
                                            $
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0Joel
      Gardner
                                            
                                            $
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0Willard
      Brown
                                            
                                            $
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0





Advisory
Board





Megola
Inc. has formed an Advisory Board that consist of individuals that it believes
to be an important group of people that will play an integral role in assisting
Megola in the overall growth of the company. The Company will turn, from time to
time, to its Advisory Board for direction and advice on certain business matters
of the company. Nothing has been compensated to these individuals but maybe
figured into the future.


38


Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.





As of the
date of this Annual Report, the following table sets forth certain information
with respect to the beneficial ownership of our common stock by each stockholder
known by us to be the beneficial owner of more than 5% of our common stock and
by each of our current directors and executive officers. Each person has sole
voting and investment power with respect to the shares of common stock, except
as otherwise indicated. Beneficial ownership consists of a direct interest in
the shares of common stock, except as otherwise indicated. As of the date of
this Annual Report, there are 33,570,455 shares of common stock issued and
outstanding.





The
following tables set forth the ownership, as of the date of this prospectus, of
our common stock by each person known by us to be the beneficial owner of more
than 5% of our outstanding common stock, our directors, and our executive
officers and directors as a group. To the best of our knowledge, the persons
named have sole voting and investment power with respect to such shares, except
as otherwise noted. There are not any pending or anticipated arrangements that
may cause a change in control.




The
information presented below regarding beneficial ownership of our voting
securities has been presented in accordance with the rules of the Securities and
Exchange Commission and is not necessarily indicative of ownership for any other
purpose. Under these rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares the power to vote or direct the voting of
the security or the power to dispose or direct the disposition of the security.
A person is deemed to own beneficially any security as to which such person has
the right to acquire sole or shared voting or investment power within 60 days
through the conversion or exercise of any convertible security, warrant, option
or other right. More than one person may be deemed to be a beneficial owner of
the same securities. The percentage of beneficial ownership by any person as of
a particular date is calculated by dividing the number of shares beneficially
owned by such person, which includes the number of shares as to which such
person has the right to acquire voting or investment power within 60 days, by
the sum of the number of shares outstanding as of such date plus the number of
shares as to which such person has the right to acquire voting or investment
power within 60 days. Consequently, the denominator used for calculating such
percentage may be different for each beneficial owner. Except as otherwise
indicated below and under applicable community property laws, we believe that
the beneficial owners of our common stock listed below have sole voting and
investment power with respect to the shares shown. The business address of the
shareholders is 704 Mara Street, Suite 111, Point Edward, ON N7V
1X4.





Holder
of Preferred Series A





Amount and
                                Nature ofName of Beneficial Owner
                              
                              Beneficial
                                Ownership
                              
                              
                              Percentage
                                of Class(A)Joel
      Gardner and affiliates
                              
                              
                              604,054
                              
                              
                              
                              55
                              %Craig
      Wagenschutz and affiliates
                              
                              
                              12,402
                              
                              
                              
                              0.01
                              %Willard
      Brown
                              
                              
                              29,780
                              
                              
                              
                              0.02
                              %Dan
      Gardner and affiliates
                              
                              
                              2,133
                              
                              
                              
                              0.00
                              %All
      officers and directors as a group [4 persons]
                              
                              
                              648,369
                              
                              
                              
                              55.03
                              %





The above
is based on 1,092,225 shares of Preferred Series A Stock issued and outstanding
as of July 31, 2010. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as otherwise indicated, we
believe that the beneficial owners of the Preferred Series A Stock listed above,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.




Holder
of Preferred Series B





Amount and
                                  Nature ofName of Beneficial Owner
                                
                                Beneficial
                                  Ownership
                                
                                
                                Percentage
                                  of Class(B)Joel
      Gardner and affiliates
                                
                                
                                16,561
                                
                                
                                
                                34
                                %





The above
is based on 47,561 shares of Preferred Series B Stock issued and outstanding as
of July 31, 2010. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission.  Preferred Series B
Stock does not include voting power with respect to securities.


39


Item
13. Certain Relationships and Related Transactions, and Director
Independence





Director
Independence





We are
not subject to the listing requirements of any national securities exchange or
national securities association and, as a result, we are not at this time
required to have our board comprised of a majority of “independent directors.”
Currently, we have only one director and we believe that such directors
currently does not meet the definition of "independent" as promulgated by the
rules and regulations of Nasdaq.




Item
14.  Principal Accountant Fees and Services.





The
aggregate fees billed by our principal accountant for each of the last two
fiscal years for Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees are
as follows:





Fiscal Year Ended July 31,2010
                  
                  
                  2009Audit
      Fees
                  
                  $
                  26,000
                  
                  
                  $
                  26,000Audit-Related
      Fees
                  
                  $
                  6,000
                  
                  
                  $
                  6,000Tax
      Fees
                  
                  $
                  -
                  
                  
                  $
                  -All
      Other Fees
                  
                  $
                  -
                  
                  
                  $
                  -





PART
IV - Item 15. Exhibits




Form:  8-K  File
Date December 15, 2009


Form:  8-K  File
Date April 5, 2010


Form:  8-K  File
Date April 13, 2010


Form:  8-K  File
Date July 2, 2010


Form:  8-K  File
Date July 21, 2010





The
following exhibits are filed with this Annual Report on Form 10-K:





Exhibit
      No.
              
              Description
      of Exhibit31.1
              
              CEO
      Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
              
              CFO
      Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
              
              CEO
      Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
              
              CFO
      Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


40


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





Date:
Dated: November 15, 2010





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:





Signature
                
                Title
                
                Date/s/
      Joel Gardner
                
                
                
                November
      15, 2010Joel
      Gardner
                
                Chief
      Executive Officer, and Director
                  (Principal
      Executive Officer and Principal
                  Accounting
      Officer)/s/
      Craig Wagenschutz
                
                
                
                November
      15, 2010Craig
      Wagenschutz
                
                Chief
      Financial Officer/s/
      Daniel Gardner
                
                
                
                November
      15, 2010Daniel
      Gardner
                
                Treasurer
      and Director/s/
      Sufan Siauw
                
                
                
                November
      15, 2010Sufan
      Siauw
                
                Director/s/
      Willard Brown
                
                
                
                November
      15, 2010Willard
      Brown
                
                Director


41