UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K


(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, 2008


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









(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  ̈ No x





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





Yes  ̈ No x




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




APPLICABLE
ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date:
78,486,029 at July 31, 2008.





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.
                    Management’s
      Discussion and Analysis or Plan of Operations
                    13Item
      7.
                    Financial
      Statements
                    16Item
      8.
                    Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    36Item
      8A.
                    Controls
      and Procedures
                    36Item
      8B.
                    Other
      Information
                    37PART
      IIIItem
      9.
                    Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance With Section 16(a) of the Exchange Act
                    37Item
      10.
                    Executive
      Compensation
                    39Item
      11.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    39Item
      12.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    40Item
      13.
                    Exhibits
                    40Item
      14.
                    Principal
      Accounting Fees and Services
                    40Signatures




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, 2008 35% 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, 2008 we had an accumulated deficit of $5,615,600. We had a net loss of
$536,875 in fiscal year 2008. 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, 2008 our revenues decreased from $277,336 for 2007 to
$36,399 for the year ended July 31, 2008.





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





For
fiscal year ended July 31, 2008 35% 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)





2% of our
sales were AirGuardian for fiscal year 2008.





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 2008.




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 2008.




7


IonClear
- Copper Ionization Systems





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




 ̈
            Swimming
      Pools ̈
            Hydrotherapy,
      heated pool & spas ̈
            Ornamental
      water gardens, fountains & ponds ̈
            Water
      storage tanks ̈
            Water
      cooling towers, water cooled heat exchangers, &
      evaporators(manufactured in China)




HARTINDO
LINE OF ANTI-FIRE PRODUCTS




HARTINDO
AF11E




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




Belonging
to the Halocarbon group of 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


8





•
Mattresses


• Porous
wall coverings / Partitions


• Exposed
wood surfaces prior to all decorative surface treatments


•
Corks


• Dried
flowers


• Soft
toys


•
Polypropylene backed carpets


• 100%
polyester


• Paper /
Cardboard





Standards
and Approvals:


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




Testing/Certifications;




o
            ASTM
      E84 (CLASS A) – surface burning characteristics of building
      materialso
            ASTM
      E84 (with Bluwood) (CLASS A) – various types of wood products – Douglas
      Fir, Southern Yellow Pine (SYP), SPF, plywood,
  etc...


o
            16
      CFR 1633 – open flame mattress flammability testo
            ASTM
      D 3201 – Hygroscopicity Test(compared to Dricon (pressure-treated
      wood))


o
            NFPA
      701- vertical burn test; flame propagation of textileso
            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;





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


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




9





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;




o
            NFPA
      701 – flame propagation of textileso
            NFPA
      2112 – flame resistant garments for protection of industrial personnel
      against flash fire


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




DECTAN


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




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




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




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




Testing/Certifications;




o
            ASTM
      B117 – continuous salt-spray test




For
fiscal year ended July 31, 2008 61% 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
$3,683 per month for a five-year term ending August 1, 2013. This facility
consists of an office and administration area. To the extent that we require
additional space in the near future, we believe that we will be able to secure
additional leased facilities at commercially reasonable rates.





Our
telephone number at the above location is 519-336-0628.





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





Item
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 20071st  Quarter
                      
                      $
                      0.08
                      
                      
                      $
                      0.042nd
      Quarter
                      
                      
                      0.08
                      
                      
                      
                      0.033rd
      Quarter
                      
                      
                      0.07
                      
                      
                      
                      0.044th
      Quarter
                      
                      
                      0.05
                      
                      
                      
                      0.03Fiscal 20081st  Quarter
                      
                      $
                      0.05
                      
                      
                      $
                      0.032nd
      Quarter
                      
                      
                      0.07
                      
                      
                      
                      0.033rd
      Quarter
                      
                      
                      0.07
                      
                      
                      
                      0.044th
      Quarter
                      
                      
                      0.05
                      
                      
                      
                      0.03





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





Unregistered
sales of common stock





Megola
has issued 78,486,029 unregistered shares as of July 31, 2008.





Reclassification





Certain
amounts presented at July 31, 2007 have been reclassified to conform to
presentation at July 31, 2008.





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




11





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





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





Holders


As of
July 31, 2008, we had 144 holders of record of our common stock.





Dividends





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





Reports
to 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. 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, 2008 with the year ended July 31, 2007.





During
the year ending July 31, 2008 our revenues decreased from $277,336 for 2007 to
$36,399 for the year ended July 31, 2008, a decrease of 86.88% over the prior
year. Our revenues for the year ended July 31, 2008 vs. year ended July 31, 2007
decreased due to a reduction in sales initiatives owing to a restructuring of
product offerings and staffing. Staff focus during this period was allocated to
new product acquisitions and reconfiguring of existing product lines. In order
to accommodate potential new product initiatives, the Company intends to
increase sales staff in the future.





Cost of
sales consists of direct manufacturing costs and applied overhead expenses for
our cost of raw materials to manufacture the ScaleGuard and other systems. Cost
of sales decreased to $32,592 and, as a percentage of revenues, decreased to
89.54% in the year ended July 31, 2008, as compared to $344,092 and 124.07% of
revenue for the year ended July 31, 2007. The overall decrease in the cost of
sales during 2008 is directly attributable to re-classing the year ended July
31, 2007 inventory to slow moving. In note 3(j) 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. Some have since been sold and are reflected in the $51,429 current
inventory. Future product sales of these slow moving items will have no
corresponding cost of sales due to the reduction entered above. During the year
ended July 31, 2008, $nil (2007-57.69 %) of our revenues were generated from
royalties. When royalty payments are received, we do not incur any cost of
sales.





General
and administrative (operating) expenses decreased 36.14% to $519,259 during 2008
from $813,055 in 2007. It is expected that in 2009 we will be required to issue
stock for services as we will require consultants to aid in our product
expansion and sales in new markets. It is hoped that with increased product
sales that such consultant fees will be payable with cash rather than
stock.





Interest
expense decreased 31.47% in 2008 to $18,732 from $27,334 in 2007, because of the
Company's decreased interest on stockholder loans.





Net
Income (Loss)





For the
reasons outlined above, we realized a net loss of $536,875 for the year ended
July 31, 2008 as compared to a net loss of $740,752 for the year ended July 31,
2007, a decrease of 27.52%.





2008
                              
                              
                              2007REVENUESales
                              
                              $
                              36,399
                              
                              
                              $
                              117,336Royalty
                              
                              
                              -
                              
                              
                              
                              160,000Total
      Revenue
                              
                              
                              36,399
                              
                              
                              
                              277,336COST
      OF SALES
                              
                              
                              32,592
                              
                              
                              
                              344,092SELLING
      and GENERAL ADMINISTRATIVE
                              
                              
                              519,259
                              
                              
                              
                              813,055DEPRECIATION
      and AMORTIZATION
                              
                              
                              2,691
                              
                              
                              
                              5,107EXPENSE
      RECOVERY
                              
                              
                              -
                              
                              
                              
                              (171,500
                              )INTEREST
                              
                              
                              18,732
                              
                              
                              
                              27,334Total
      Expenses
                              
                              
                              
                              
                              
                              
                              1,018,088NET
      LOSS
                              
                              $
                              (536,875
                              )
                              
                              $
                              (740,752
                              )




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.





Liquidity
and Capital Resources




The
consolidated financial statements as of and for the year ending July 31, 2008
have been prepared assuming we continue as a going concern.




At July
31, 2008, we had an accumulated deficit of $5,615,600.




Cash and
cash equivalents at July 31, 2008 were $nil and $32,660 at July 31, 2007. Our
inventory decreased for the same period from $58,221 to $51,429 or
11.67%;




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.





One
customer accounted for 61% of sales in 2008. Two customers accounted for 63% and
30% of sales in 2007. One vendor accounted for 100% of cost of goods sold in
2008. One vendor accounted for 80% of cost of goods sold in 2007.





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





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




15


PART
II - Item 7. Consolidated Financial Statements





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Shareholders of Megola, Inc.




We have
audited the consolidated balance sheets of Megola, Inc. (the “Company”) as at
July 31, 2008 and 2007 and the related consolidated statements of operations and
comprehensive loss, changes in stockholders’ equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our 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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





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.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of July 31,
2008 and 2007 and the consolidated results of its operations and its cash flows
for the years then ended in accordance with generally accepted accounting
principles in the United States of America.





The
accompanying consolidated financial statements 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. This raises substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





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




“SCHWARTZ LEVITSKY
      FELDMAN LLP”Toronto, Ontario,
      CanadaMay
      1, 2009
                      Chartered
      AccountantsLicensed
      Public
Accountants




16





MEGOLA,
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
expressed in US dollars)





July 31,
                                  
                                  
                                  July 31,2008
                                  
                                  
                                  2007(Audited)
                                  
                                  
                                  (Audited)ASSETSCash
                                  
                                  
                                  -
                                  
                                  
                                  
                                  32,660Inventory
                                  
                                  
                                  51,429
                                  
                                  
                                  
                                  58,221Prepaid
      expenses
                                  
                                  
                                  113
                                  
                                  
                                  
                                  9,34251,542
                                  
                                  
                                  
                                  100,223Long-term
      receivable -net of allowance for bad debts of nil; (nil in
      2007)(note 17)
                                  
                                  
                                  116,872
                                  
                                  
                                  
                                  122,085Intangible
      asset (note 4)
                                  
                                  
                                  1,350,000
                                  
                                  
                                  
                                  1,350,000Property
      and equipment,net of accumulated depreciation of $30,381
      (2007-$27,732)(note 5)
                                  
                                  
                                  5,558
                                  
                                  
                                  
                                  8,2071,523,972
                                  
                                  
                                  
                                  1,580,515LIABILITIESBank
      overdraft
                                  
                                  
                                  1,291
                                  
                                  
                                  
                                  -Accrued
      expenses - (note 7)
                                  
                                  
                                  99,356
                                  
                                  
                                  
                                  68,378Accounts
      payable
                                  
                                  
                                  57,577
                                  
                                  
                                  
                                  44,155Accrued
      interest
                                  
                                  
                                  25,821
                                  
                                  
                                  
                                  25,822Advances
      from stockholders - (note 8)
                                  
                                  
                                  386,284
                                  
                                  
                                  
                                  290,689570,329
                                  
                                  
                                  
                                  429,044Note
      payable (note 6)
                                  
                                  
                                  585,670
                                  
                                  
                                  
                                  250,0001,155,999
                                  
                                  
                                  
                                  679,044Going
      concern - (note 2)Commitments
      - (note 11)Subsequent
      events - (note 16)STOCKHOLDERS'
      EQUITYCapital
      stock (note 9)
                                  
                                  
                                  78,486
                                  
                                  
                                  
                                  48,486Additional
      paid in capital (note 9)
                                  
                                  
                                  5,904,612
                                  
                                  
                                  
                                  5,934,612Deficit
                                  
                                  
                                  (5,615,600
                                  )
                                  
                                  
                                  (5,078,725
                                  )Accumulated
      other comprehensive loss:Foreign
      currency translation adjustment
                                  
                                  
                                  475
                                  
                                  
                                  
                                  (2,902
                                  )367,973
                                  
                                  
                                  
                                  901,4711,523,972
                                  
                                  
                                  
                                  1,580,515





See
accompanying notes to audited consolidated financial statements




17


MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(Amounts
expressed in US dollars)





YearEnded
                                                                                    
                                                                                    
                                                                                    YearEndedJuly31,
                                                                                    
                                                                                    
                                                                                    July31,2008
                                                                                    
                                                                                    
                                                                                    2007Income -
    sales
                                                                                    
                                                                                    
                                                                                    36,399
                                                                                    
                                                                                    
                                                                                    
                                                                                    117,336Cost of
    sales
                                                                                    
                                                                                    
                                                                                    32,592
                                                                                    
                                                                                    
                                                                                    
                                                                                    344,092GROSS PROFIT
      (LOSS)
                                                                                    
                                                                                    
                                                                                    3,807
                                                                                    
                                                                                    
                                                                                    
                                                                                    (226,756
                                                                                    )Income - royalties (note
      13)
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    160,0003,807
                                                                                    
                                                                                    
                                                                                    
                                                                                    (66,756
                                                                                    )General and
      administrative
                                                                                    
                                                                                    
                                                                                    519,259
                                                                                    
                                                                                    
                                                                                    
                                                                                    813,055Depreciation
                                                                                    
                                                                                    
                                                                                    2,691
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,107Interest
                                                                                    
                                                                                    
                                                                                    18,732
                                                                                    
                                                                                    
                                                                                    
                                                                                    27,334Expense
      recovery
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (171,500
                                                                                    )TOTAL
    EXPENSES
                                                                                    
                                                                                    
                                                                                    540,682
                                                                                    
                                                                                    
                                                                                    
                                                                                    673,996NET LOSS
                                                                                    
                                                                                    
                                                                                    (536,875
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (740,752
                                                                                    )Foreign currency translation
      adjustment
                                                                                    
                                                                                    
                                                                                    3,377
                                                                                    
                                                                                    
                                                                                    
                                                                                    16,343COMPREHENSIVE
      LOSS
                                                                                    
                                                                                    
                                                                                    (533,498
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (724,409
                                                                                    )Weighted average common shares
      outstanding
                                                                                    
                                                                                    
                                                                                    77,253,152
                                                                                    
                                                                                    
                                                                                    
                                                                                    47,502,906Loss per share - basic and
      diluted
                                                                                    
                                                                                    
                                                                                    (0.01
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (0.02
                                                                                    )




See
accompanying notes to audited consolidated financial statements




18




MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
expressed in US dollars)





YEARENDED
                
                
                YEARENDEDJuly31,2008
                
                
                July31,2007CASH FLOWS FROM OPERATING
      ACTIVITIESNet loss for the
      period
                
                
                (536,875
                )
                
                
                (740,752
                )Adjustments to reconcile net loss
      to net cash used in operating activities (note 12)
                
                
                63,281
                
                
                
                362,432(473,594
                )
                
                
                (378,320
                )CASH FLOWS FROM FINANCING
      ACTIVITESIncrease in bank
      indebtedness
                
                
                1,291
                
                
                
                -Advances from
      stockholders
                
                
                88,843
                
                
                
                265,316Increase in notes
      payable
                
                
                344,850
                
                
                
                250,000Repayment of amount due to related
      parties
                
                
                -
                
                
                
                (72,372
                )Cash flows from financing
      activities
                
                
                434,984
                
                
                
                442,944CASH FLOWS FROM INVESTING
      ACTIVITESPurchase of property and
      equipment
                
                
                -
                
                
                
                (1,159
                )Cash flows from investing
      activities
                
                
                -
                
                
                
                (1,159
                )EFFECT OF EXCHANGE RATE CHANGES ON
      CASH
                
                
                5,950
                
                
                
                13,178NET INCREASE (DECREASE) IN CASH
      FOR THE YEAR
                
                
                (32,660
                )
                
                
                76,643NET CASH, beginning of
      year
                
                
                32,660
                
                
                
                (43,983
                )NET CASH, end of
      year
                
                
                -
                
                
                
                32,660




See
accompanying notes to audited consolidated financial statements




19




MEGOLA,
INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


(Amounts
expressed in US dollars)


Year
ended July 31, 2008





AccumulatedOther
                        
                        
                        AdditionalCommon
      Stock
                        
                        
                        Comprehensive
                        
                        
                        Paid
      In
                        
                        
                        AccumulatedShares
                        
                        
                        Amount
                        
                        
                        Income
      (Loss)
                        
                        
                        Capital
                        
                        
                        Deficit
                        
                        
                        TotalsBalances,
      July 31, 2006
                        
                        
                        37,716,029
                        
                        
                        $
                        37,716
                        
                        
                        $
                        (19,245
                        )
                        
                        $
                        4,157,582
                        
                        
                        $
                        (4,337,973
                        )
                        
                        
                        (161,920
                        )Stock
      Issued For Services
                        
                        
                        10,770,000
                        
                        
                        
                        10,770
                        
                        
                        
                        -
                        
                        
                        
                        427,030
                        
                        
                        
                        -
                        
                        
                        
                        437,800Stock
      Issued for Distribution Rights
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,350,000
                        
                        
                        
                        -
                        
                        
                        
                        1,350,000Net
      Loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (740,752
                        )
                        
                        
                        (740,752
                        )Foreign
      Currency Translation Adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        16,343
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        16,343Balances,
      July 31, 2007
                        
                        
                        48,486,029
                        
                        
                        $
                        48,486
                        
                        
                        $
                        (2,902
                        )
                        
                        
                        5,934,612
                        
                        
                        $
                        (5,078,725
                        )
                        
                        $
                        901,471Stock
      for Distribution Rights
                        
                        
                        30,000,000
                        
                        
                        
                        30,000
                        
                        
                        
                        -
                        
                        
                        
                        (30,000
                        )
                        
                        
                        -
                        
                        
                        
                        -Net
      Loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (536,875
                        )
                        
                        
                        (536,875
                        )Foreign
      Currency Translation Adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,377
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,377Balances,
      July 31, 2008
                        
                        
                        78,486,029
                        
                        
                        $
                        78,486
                        
                        
                        $
                        475
                        
                        
                        
                        5,904,612
                        
                        
                        $
                        (5,615,600
                        )
                        
                        $
                        367,973




See
accompanying notes to audited consolidated financial statements




20


MEGOLA,
INC.


Notes
to Consolidated Financial Statements for the Years ended July 31, 2008 and
2007


(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 $536,875 and
$740,752 in the 2008 and 2007 fiscal years respectively, and has a working
capital deficiency of $518,787, negative cash flows from operations and a
deficit of $5,615,600 as at July 31, 2008. 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, 2008 and 2007


(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, 2008, the exchange rate for the Canadian
Dollar was $1.00 U.S. for $1.02 Canadian (2007 - $1.00 U.S. for $1.07). The
annual average exchange rate for the 2008 fiscal year was $1.00 U.S. for $1.00
(2007 - $1.00 U.S. for $1.07). The Canadian economy strengthened considerably in
relation to the U.S. during the third and fourth quarters of 2008, and as a
result currency fluctuations have affected Megola's operations. In the future,
inflation rates and the devaluation or valuation of the Canadian Dollar in
relation to the U.S. dollar may have significant effects on Megola's
consolidated financial statements.





(e) Cash
equivalents


For the
purposes of the Consolidated Statement of Cash Flows, the Company considers
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)
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.




22


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(h)
Financial Instruments





Fair
Value


The
Company’s financial instruments consist of long-term receivable, bank
overdraft, note payable, accrued expenses, accounts payable, accrued interest
and advances from stockholders. The fair value of  bank overdraft,
note payable, accrued expenses, accounts payable and accrued interest
approximates their carrying amount given short period to receipt or payment
of cash. The fair value of long-term receivable is disclosed in note
17.  It is management’s opinion that the Company is not exposed to
any significant interest rate or credit risks arising from these financial
instruments.




Foreign
Currency Risk


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


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




Liquidity
Risk


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





(i)
Allowance for doubtful accounts


Megola
does not require collateral from its customers with respect to accounts
receivable but performs periodic credit evaluations of such customers’ financial
conditions. Megola determines any required allowance by considering a number of
factors including lengths of time accounts receivable are past due and Megola’s
previous loss history. Megola provides reserves for accounts receivable when
they become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts. As of July 31,
2008 and 2007, Megola had $nil and $nil respectively as an allowance for
doubtful accounts.





(j)
Inventory


Inventory
is valued at the lower of cost (determined on a first -in, first-out method) and
net realizable value.   Megola records provisions to write down
its inventory for estimated obsolescence or unmarketable inventory equal to the
difference between cost of the inventory and its estimated net realizable value
based on assumptions about future market demand and market conditions. If future
demand or market conditions are less favorable than currently expected,
additional inventory provisions may be required. During the fiscal years ended
July 31, 2008 and 2007 impairment expense was $nil and $253,286, respectively
related to inventory impairments. Included in the impairment expense in 2007 is
$245,032 for slow moving products. These products are in good condition and are
still expected to be sold.





(k)
Property and equipment


Property
and equipment are stated on the basis of historical cost less
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, 2008 and 2007 was
$2,691 and $5,107, respectively. Depreciation of property and equipment acquired
and disposed of during the year is recorded at one half of the indicated
rates.





(l)
Impairment of long-lived assets


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




23


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(m)
Comprehensive income (loss)





The
Company has adopted SFAS No. 130 Reporting Comprehensive Income. This
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.





(n)
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.





(o)
Income taxes





Megola
accounts for income taxes under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes.". Under Statement 109, deferred tax
assets 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, 2008 and 2007.





(p) 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.





(q)
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.




24




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





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





(r)
Recent accounting pronouncements





In
February 2006, the FASB issued Statement No.155, "Accounting for Certain
Hybrid Financial Instruments - Amendment to FASB No. 133 and 140"
("Statement 155"). Statement 155 resolves certain issues addressed in
Statement 133 and (a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that would
otherwise require bifurcation; (b) clarifies which interest only strips and
principal only strips are not subject to the requirements of Statement 133;
(c) establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain an embedded derivative
requiring bifurcation; (d) clarifies that concentrations of credit risk in
the form of subordination are not embedded derivatives; and (e)
amends Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. The adoption of statement No.155, did not have an impact on the
consolidated financial statements of the Company.





In March
2006, the FASB issued Statement No.156, "Accounting for Servicing of
Financial Assets—an    amendment of FASB Statement No.
140" ("Statement 156"). Statement 156 requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract
and requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable. The
statement permits the entity to choose either the amortization method or
the fair value measurement method for each class of separately recognized
servicing assets and servicing liabilities. The statement further requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position
and additional disclosures for all separately recognized servicing assets
and servicing liabilities. The adoption of statement No.156, did not have an
impact on the consolidated financial statements of the Company.





In July
2006, the Financial Accounting Standards Board ("FASB") published
FASB Interpretation No. 48 ("FIN No.48), Accounting for Uncertainty in
Income Taxes, to address the non comparability in reporting tax assets
and   liabilities resulting from a lack of specific guidance
in FASB Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes, on the uncertainty in income taxes
recognized in an enterprise's consolidated financial statements. FIN No. 48
will apply to fiscal years beginning after December 15, 2006, with earlier
adoption permitted. The adoption of  FIN No.48, did not have an impact
on the consolidated financial statements of the Company.




25


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(r)
Recent accounting pronouncements (continued)




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





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





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




26


MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





(r)
Recent accounting pronouncements (continued)





In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”) – the fair value option
for financial assets and liabilities including an amendment of SFAS No. 115.
This Statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This statement is
expected to expand the use of fair value measurement objectives for accounting
for financial instruments. This statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007, and interim
periods within those fiscal years. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of FASB Statement No. 157, “Fair
Value Measures”. The company is currently evaluating the impact of SFAS 159 on
its consolidated financial statements.





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





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





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




27




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2008 and
2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





(r)
Recent accounting pronouncements (continued)





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





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




4.
            INTANGIBLE
      ASSETDISTRIBUTION
      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 to be 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:




28




MEGOLA,
INC.





NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED JULY 31, 2008 and
2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





4.
INTANGIBLE ASSET (continued)


DISTRIBUTION RIGHTS (continued)





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





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





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





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





(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.




5.
            PROPERTY AND
      EQUIPMENT





2008
                  
                  
                  2007Cost
                  
                  
                  Accumulated
                    Depreciation
                  
                  
                  Net
                  
                  
                  Net$
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $Sports
      Ozone Machines
                  
                  
                  16,000
                  
                  
                  
                  10,858
                  
                  
                  
                  5,142
                  
                  
                  
                  7,434Office
      Furniture and Equipment
                  
                  
                  19,939
                  
                  
                  
                  19,523
                  
                  
                  
                  416
                  
                  
                  
                  773$
                  35,939
                  
                  
                  $
                  30,381
                  
                  
                  $
                  5,558
                  
                  
                  $
                  8,207





Amortization
for the year amounted to $2,691 ($5,107 in 2007).




29




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





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.





7.
            ACCRUED
      EXPENSES


The
composition of accrued expenses is as follows:





2008
                    
                    
                    2007Accrued
      Payroll Liabilities
                    
                    
                    60,865
                    
                    
                    
                    42,684Other
                    
                    
                    38,491
                    
                    
                    
                    25,694Total
      accrued liabilities
                    
                    $
                    99,356
                    
                    
                    $
                    68,378





8.
            ADVANCES
      FROM STOCKHOLDERS


Included
in the balance are advances in the amount of $315,480 unsecured, bearing
interest at 6% and are due on demand.


Also
included in the balance is an advance from a company related by common ownership
in the amount $70,804. The loan bears interest at 7.75% per annum and is due on
demand. Interest accrued on the loans, for the year ended July 31, 2008, is
$18,800 ($28,900 in 2007).





9.
            CAPITAL
      STOCK AND ADDITIONAL PAID IN
CAPITAL





(a)
Common stock


Common
stock ($.001 par value per share): 200,000,000 shares are authorized, with
78,486,029 shares issued and outstanding at July 31, 2008 and 48,486,029 at July
31, 2007.


On August
15 2007, Megola issued 30,000,000 shares for Distribution Rights valued at
$1,350,000.


(b)
Additional paid in capital


Additional
paid in capital decreased $30,000 due to Megola’s common stock being
reclassified for the acquisition of distribution rights at year-ended July 31,
2007.




30




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





9.
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL (continued)





(c) The
Company has a Stock Incentive Plan for employees and consultants. There were no
shares issued under the plan during the year ending July 31, 2008. In the year
ending July 31, 2007, the Company issued 10,270,000 restricted common stock for
consulting fees valued at $412,800.


500,000
shares of the Company’s common stock, to a legal counsel, valued at $25,000 were
issued outside of the Stock Incentive Plan.




10.
            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, 2008Sales
      and Royalties
                      
                      $
                      36,399
                      
                      
                      $
                      -
                      
                      
                      $
                      36,399Net
      loss
                      
                      $
                      (536,875
                      )
                      
                      $
                      -
                      
                      
                      $
                      (536,875
                      )Depreciation
                      
                      $
                      2,691
                      
                      
                      $
                      -
                      
                      
                      $
                      2,691Interest
      Expense
                      
                      $
                      18,732
                      
                      
                      $
                      -
                      
                      
                      $
                      18,732Total
      Assets
                      
                      $
                      1,523,972
                      
                      
                      $
                      -
                      
                      
                      $
                      1,523,972Year
      ended July 31, 2007Sales
      and Royalties
                      
                      $
                      117,336
                      
                      
                      $
                      160,000
                      
                      
                      $
                      277,336Net
      loss
                      
                      $
                      (320,000
                      )
                      
                      $
                      (420,752
                      )
                      
                      $
                      (740,752
                      )Depreciation
                      
                      $
                      5,107
                      
                      
                      $
                      -
                      
                      
                      $
                      5,107Interest
      Expense
                      
                      $
                      27,334
                      
                      
                      $
                      -
                      
                      
                      $
                      27,334Total
      Assets
                      
                      $
                      1,211,315
                      
                      
                      $
                      369,200
                      
                      
                      $
                      1,580,515





Breakdown of sales and
royalties by product line





Air
      Purification
                  
                  
                  Physical
                    Water
                    Treatment
                  
                  
                  Fire
      Safety
                  
                  
                  TotalYear
      Ended July 31, 2008
                  
                  $
                  1,525
                  
                  
                  $
                  12,620
                  
                  
                  $
                  22,254
                  
                  
                  $
                  36,399Year
      Ended July 31, 2007
                  
                  $
                  1,075
                  
                  
                  $
                  201,261
                  
                  
                  $
                  75,000
                  
                  
                  $
                  277,336


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





11.
            COMMITMENTS


The
Company is committed under a lease for office premises which expires on January
31, 2011.
Minimum lease payments are due as follows:





Year
      ended July 31, 2009
                    
                    
                    24,806Year
      ended July 31, 2010
                    
                    
                    24,806Year
      ended July 31, 2011
                    
                    
                    12,403Total
                    
                    $
                    62,015




31




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





12.
CASH FLOW INFORMATION





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





2008
                        
                        
                        2007$
                        
                        
                        $Depreciation
                        
                        
                        2,691
                        
                        
                        
                        5,107Bad
      debt expense and increase in inventory reserve
                        
                        
                        -
                        
                        
                        
                        245,032Shares
      issued for consulting services
                        
                        
                        -
                        
                        
                        
                        437,800(Increase)
      decrease in long-term receivable
                        
                        
                        5,604
                        
                        
                        
                        (121,725)Decrease
      in inventory
                        
                        
                        6,792
                        
                        
                        
                        45,646(Increase)
      decrease in prepaid expenses
                        
                        
                        9,542
                        
                        
                        
                        (3,986)Increase
      (decrease) in accounts payable
                        
                        
                        1,148
                        
                        
                        
                        (57,395)Increase
      (decrease) in accrued expenses
                        
                        
                        37,504
                        
                        
                        
                        (183,686)Decrease
      in distributor deposits
                        
                        
                        -
                        
                        
                        
                        (4,361)63,281
                        
                        
                        
                        362,432





(ii)
SUPPLEMENTAL CASH FLOW INFORMATION





Non
      Cash Transactions:Stock
      issued for consulting fees
                    
                    $
                    -
                    
                    
                    $
                    402,800Stock
      issued for legal fees
                    
                    $
                    -
                    
                    
                    $
                    35,000Stock
      issued for distribution rights
                    
                    $
                    1,350,000
                    
                    
                    $Interest
      paid
                    
                    $
                    -
                    
                    
                    $
                    -Income
      taxes paid
                    
                    $
                    -
                    
                    
                    $
                    -




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.




14.
ECONOMIC DEPENDENCE





During
2008, one customer accounted for 61% of sales respectively (2007 – two customers
accounted for 63% and 30%) and one vendor accounted for 100% of purchases (2007
- 80%).





15.
INCOME TAXES


The
Company's deferred tax assets, in the amount of $1,230,100 ($1,042,200 in 2007)
consist entirely of benefit from net operating loss (NOL) carry
forwards.


The
Company’s deferred tax assets are offset by a valuation allowance due to the
uncertainty of the realization of the net operating loss carry forwards. Net
operating loss carry forwards in the amount of $3,465,072($2,935,800 in 2007)
may be further limited by a change in ownership and other provisions of the tax
laws.





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




32




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





15.
INCOME TAXES (continued)





2008
                  
                  
                  2007Income
      tax benefit at the combined rate resulting from net operating loss carry
      forward
                  
                  
                  (35.5
                  )%
                  
                  
                  (35
                  )%Deferred
      income tax valuation allowance
                  
                  
                  35.5
                  %
                  
                  
                  35
                  %Actual
      tax rate
                  
                  
                  0
                  %
                  
                  
                  0
                  %





16.
            SUBSEQUENT
      EVENTS





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





1) Megola
will provide WoodSmart:


Hartindo
AF21 Product


Use of
Hartindo AF21 Product Technology


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


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





2)
WoodSmart's Purchase Requirements include:





Annual
Minimum 400,000 gallons within first 12 months


Annual
Minimum 550,000 gallons within months 13-24


Annual
Minimum 700,000 gallons within months 25-36





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


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





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





RCP
received a commencement bonus of 1,500,000 restricted common shares of Megola
stock with Piggy Back registration rights. The shares are in lieu of a $400,000
payment and are based on $ .266 per share. Upon the effective date Megola was to
issue to RCP a total of 3,000,000 restricted common stock purchase warrants as
follows:





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


These warrants have not been exercised
and have since lapsed.




33




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





16.
SUBSEQUENT EVENTS (continued)





(iii) On
December 8, 2008, the sales/performance quotas in the agreement with PCL dated
January 12, 2007 (see note 4), have been moved forward starting January 31,
2010.





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





OfficeYear
      Ended
                      
                      July
      31, 2009
                      
                      $
                      39,565Year
      Ended
                      
                      July
      31, 2010
                      
                      $
                      43,162Year
      Ended
                      
                      July
      31, 2011
                      
                      $
                      43,162Year
      Ended
                      
                      July
      31, 2012
                      
                      $
                      43,162Year
      Ended
                      
                      July
      31, 2013
                      
                      $
                      43,162Year
      Ended
                      
                      July
      31, 2014
                      
                      $
                      3,597Total
                      
                      
                      
                      $
                      215,810WarehouseYear
      Ended
                      
                      July
      31, 2009
                      
                      $
                      16,114Year
      Ended
                      
                      July
      31, 2010
                      
                      $
                      17,579Year
      Ended
                      
                      July
      31, 2011
                      
                      $
                      17,579Year
      Ended
                      
                      July
      31, 2012
                      
                      $
                      17,579Year
      Ended
                      
                      July
      31, 2013
                      
                      $
                      17,579Year
      Ended
                      
                      July
      31, 2014
                      
                      $
                      1,465Total
                      
                      
                      
                      $
                      87,895





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





Year
      Ended
                        
                        July
      31, 2009
                        
                        $
                        33,536Year
      Ended
                        
                        July
      31, 2010
                        
                        $
                        40,244Year
      Ended
                        
                        July
      31, 2011
                        
                        $
                        40,244Year
      Ended
                        
                        July
      31, 2012
                        
                        $
                        6,707Total
                        
                        
                        
                        $
                        120,731





(vi) The
company entered into a consulting agreement with Matthew Sacco on August 1,
2008. He is to assist with establishing a distribution network of Megola’s
Hartindo product lines. The compensation in lieu of a cash payment of $30,000
was 1,000,000 shares of company stock issued on August 14, 2008.





(vii) On
January 19, 2009 the Company entered into a Distributorship and Sales Agency and
Royalty Agreement with Vulcan Technologies, LLC, an unrelated party, for the
Hartindo line of Anti-Fire Products (Product) which will include, but not be
limited to, the following:





 ̈
            Vulcan
      is granted exclusive distribution/sales representative rights for the
      Product in the countries of Canada and Mexico to the railroad industry
      (the “Railroad Industry”) for a ten (10) year
  term.





 ̈
            Vulcan
      is granted co-exclusive distribution/sales representative rights in the
      United States of America (the “U.S.”), to the railroad industry (the
      “Railroad Industry”) for a ten (10) year
term.





 ̈
            In
      consideration of its appointments set forth in the Agreement, Vulcan
      agrees to pay Megola the sum of Seven Hundred Fifty Thousand ($750,000.00)
      USD dollars, as follows:




34




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





16.
SUBSEQUENT EVENTS (continued)





o
            a
      partial payment of $400,000 to Megola due five (5) business days after the
      execution and delivery of this Agreement by all parties,
    and;


o
            a
      payment of $350,000 ninety (90) days following the date of this Agreement,
      provided, however, that such payment shall only be due and owing at that
      time if Woodsmart, under the Woodsmart Contract, and Janus, under the
      Janus Contract and any other distribution means by Megola has purchased no
      less than 100,000 gallons of Hartindo AF21, in its fully diluted
      form.





 ̈
            Vulcan
      shall pay to Megola a commission payment equal to twenty-five (25%)
      percent of Vulcan’s profit on Products purchased (the “Vulcan Commission”)
      by any party in the Railroad
Industry.





 ̈
            Vulcan
      commits to generate aggregate gross sales of the Hartindo Products in the
      Railroad Industry of no less than $3 Million USD on or before the second
      anniversary of this Agreement, and, thereafter, agrees to increase such
      aggregate gross sales by fifteen (15%) percent for each year thereafter,
      commencing with the third year of the
term.




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





Year
      Ended
                        
                        July
      31, 2009
                        
                        $
                        2,357Year
      Ended
                        
                        July
      31, 2010
                        
                        $
                        9,427Year
      Ended
                        
                        July
      31, 2011
                        
                        $
                        9,427Year
      Ended
                        
                        July
      31, 2012
                        
                        $
                        7,071Total
                        
                        
                        
                        $
                        28,282




(ix) On
April 20, 2009, Megola extended an offer to shareholders to exchange twenty five
(25) common shares of the Company's Common Stock for one (1) share of the
Company's newly created Series 'A' Convertible Preferred Stock, valued at $5.00
per share. Holders of Series A Convertible Preferred Stock shall have
one-hundred (100) votes for each full share Series A Convertible Preferred
Stock. No conversion of Series A Convertible Preferred Stock to Common Stock can
occur until after a holding period of twelve (12) months from May 29, 2009. The
Company also announced that each Preferred Shareholder shall also be granted
Warrants to purchase up to ten (10) common shares of Megola, Inc. stock at a
price of $0.45 for every one (1) Series A Convertible Preferred Stock
held.




(x)On April 23, 2009, Megola announced an offer to
the Company's Creditors to exchange any or all of the company's outstanding debt
for Megola Series B Convertible Preferred Stock. Creditors will receive one (1)
share of the Company's Series B Convertible Preferred Stock for every ten
dollars ($10) of debt exchanged. The purpose of this exchange offer is to
replace the company's long-term debt with long-term equity investment in Megola
through our Series B Convertible Preferred Stock. The holders of Series B
Convertible Preferred Stock shall have no voting rights. No conversion of Series
B Convertible Preferred Stock to Common Stock can occur until after a holding
period of twelve (12) months from time of debt conversion. Thereafter, Creditor
has the option to convert the Series B Convertible Preferred Stock into Common
Stock.




35




MEGOLA,
INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JULY 31, 2008 and 2007


(AMOUNTS
EXPRESSED IN U.S. DOLLARS)





16.
SUBSEQUENT EVENTS (continued)




(xi) On
April 30, 2009, $22,000 of customer deposits included in accounts payable has
been settled in stock.




(xii)On May 1, 2009, Megola announced the signing
of a Distribution and Sales Agency Agreement with Innovative Composites Inc.
(ICI) for the Hartindo line of Anti-Fire Products. ICI will provide Megola with
purchase orders and/or contracts for Hartindo products sales of not less than
200,000 gallons or USD $2 Million on annual basis in the first 18 months. ICI
will also increase the total orders of Hartindo products by no less than 15%
annually thereafter for a period of 5 years. ICI will become an Agent for
commercialization of the Hartindo anti-fire product line on behalf of MEGOLA and
will manage the entire commercialization process. ICI will provide Megola with a
$100,000 (CAD) deposit upon execution of this Agreement which will be used to
secure Hartindo product. ICI acknowledges that MEGOLA has entered into
Agreements and Discussions with various Customers and Sales, Marketing and
Distribution groups prior to entering into this Agreement and those entities
shall be exempt from this agreement.




17.
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 $110,258.




18.
COMPARATIVE FIGURES





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




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




None—Not
Applicable




Item 8A. CONTROLS AND
PROCEDURES





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, 2008. Based
upon such evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of July 31, 2008, the Company’s disclosure controls and
procedures were ineffective. This conclusion by the Company’s Chief Executive
Officer and Chief Financial Officer does not relate to reporting
periods after July 31, 2008.




36


Management’s Report on
Internal Control Over Financial Reporting
 
 Under the
supervision and with the participation of our management, including our Chief
Executive Officer/ Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of July 31,
2008, based on the framework stated by the Committee of Sponsoring Organizations
of the Treadway Commission. Furthermore, due to our financial situation, we will
be implementing further internal controls as we become operative so as to fully
comply with the standards set by the Committee of Sponsoring Organizations of
the Treadway Commission.
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control
system was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes, in accordance with generally accepted accounting principles. Because
of inherent limitations, a system of internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
 
 Based on
its evaluation as of July 31, 2008, our management concluded that our internal
controls over financial reporting were ineffective as of July 31, 2008. A
material weakness is a deficiency, or a combination of control deficiencies, in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely
basis.
  The
material weakness relates to the lack of segregation of duties in that our CEO
and CFO are the same person.  In the preparation of
audited financial statements, footnotes and financial data all of our
financial reporting is carried out by our Chief Financial Officer, and we do not
have an audit committee or independent CEO to monitor or review the work
performed.   The lack of segregation of duties results
from lack of a separate Chief Financial Officer with accounting technical
expertise necessary for an effective system of internal control.  In
addition, we lack sufficient resources to perform the internal audit
function.  In order to mitigate this material weakness to the fullest
extent possible, all financial reports are reviewed by an outside accountant
that is not our audit firm. All unexpected results are investigated. At any
time, if it appears that any control can be implemented to continue to mitigate
such weaknesses, it is immediately implemented. The Company is in the process of
complying with SOX 404 during 2009 and will be implementing additional internal
controls over accounting and financial reporting.
 
 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
 
 There
were no changes in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal year that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
 
 Item
8B.  Other Information
 
 None.
 
 PART
III - OTHER INFORMATION
 
 Item
9. 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.
  37
  The
names, ages and positions of the Company's directors and executive officers are
as follows:
 
 Name
                  
                  Age
                  
                  PositionJoel
      Gardner
                  
                  40
                  
                  Chief Executive Officer/President/DirectorDaniel
      Gardner
                  
                  37
                  
                  TreasurerSufan
      Siauw
                  
                  40
                  
                  DirectorWillard
      Brown
                  
                  52
                  
                  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.
 
 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.
 
 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.
  38
  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 2006
beneficial owners complied with Section 16(a) filing requirements applicable to
them.
 
 Item
10. Executive Compensation
 
 The
following sets forth summary information concerning the compensation received
for services rendered to us during the fiscal year ended July 31, 2009 by our
Chief Executive Officer; received $ 1 CAD for calendar year 2008. No other
executive officers received aggregate compensation during our last fiscal year
that exceeded, or would exceed on an annualized basis, $100,000.
  EXECUTIVE
COMPENSATION
 
 Particulars
of compensation awarded to, earned by or paid to:
 
 (a)
              Our
      company’s Chief Executive Officer (CEO) received an annual salary of $1
      CAD for calendar year ended December 31, 2008, however, he expects he will
      be compensated in stock and/or cash sometime in
  2009.
  Employment
Contracts or Arrangements
 
 We do not
have employment agreements. We have no agreements to pay any of our officers any
compensation, except as set forth above,
  Board
Compensation
 
 Members
of our board of directors do not receive cash compensation for their services as
directors; however, Directors are reimbursed for reasonable expenses incurred in
attending board or committee meetings. Megola currently does expect to give
director compensation in the future.
  Advisory
Board
 
 Megola
Inc. has formed an Advisory Board that consist of individuals that it believes
to be an important group of people that will play an integral role in assisting
Megola in the overall growth of the company. The Company will turn, from time to
time, to its Advisory Board for direction and advice on certain business matters
of the company. Nothing has been compensated to these individuals but maybe
figured into the future.
 
 PART
III - Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
 
 The
following tables set forth the ownership, as of the fiscal year end, of our
common stock by each person known by us to be the beneficial owner of more than
5% of our outstanding common stock, our directors, and our executive officers
and directors as a group. To the best of our knowledge, the persons named have
sole voting and investment power with respect to such shares, except as
otherwise noted. There are not any pending or anticipated arrangements that may
cause a change in control of our company. The business address for all persons
is 446 Lyndock St #102, Corunna, ON, Can., N0N1G0.
  39
 
 Name of Beneficial Owner
                                
                                Amount and
                                  Nature of
                                  Beneficial
                                  Ownership
                                
                                
                                Percentage
                                  of Class(1)Joel
      Gardner and affiliates
                                
                                
                                8,721,372
                                )
                                
                                
                                11.1
                                %
  All
executive officers and directors as a group-4 persons have 9,718,072 shares
or 12.38%
  (1) Based
on 78,486,029 shares of common stock issued and outstanding as of July 31, 2008.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as otherwise indicated, we believe that
the beneficial owners of the common stock listed above, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
 
 Item
12. Certain Relationships and Related Transactions, and Director
Independence
 
 Included
in the balance are advances in the amount of $315,480 unsecured, bearing
interest at 6% and are due on demand. Also
included in the balance is an advance from a company related by common ownership
in the amount $70,804.  The loan bears interest at 7.75% per annum and
is due on demand.
 
 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.
 
 PART
III - Item 13. Exhibits
 
 Form:
8-K Filing Date
October 31, 2007
 
 Form:
8-K Filing Date
November 16, 2007
 
 Form:
8-K Filing Date
November 26, 2007
 
 Form:
8-K Filing Date
December 3, 2007
 
 Exhibit
Name and/or Identification of Exhibit Number
 
 31
                Certification32
                Certification
 
 PART
III - Item 14. Principal Accounting Fees and Services
 
 Our Board
of Directors unanimously approved 100% of the fees paid to the principal
accountant for audit-related, tax and other fees. Our Board of Directors
pre-approves all non-audit services to be performed by the auditor.
 
 The
percentage of hours expended on the principal accountant's engagement to audit
our financial statements for the most recent fiscal year that were attributed to
work performed by persons other than the principal accountant's full-time,
permanent employees was $0.
  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
 
 Dated:
June 26, 2009
 
 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
                                
                                
                                
                                June
      26, 2009Joel Gardner
                                
                                Chief
      Executive Officer, and Director
                                  (Principal
      Executive Officer and Principal
                                  Financial
      Officer and Principal Accounting
                                  Officer)/s/ Daniel Gardner
                                
                                
                                
                                June
      26, 2009Daniel Gardner
                                
                                Treasurer
      and Director/s/ Sufan Siauw
                                
                                
                                
                                June
      26, 2009Sufan Siauw
                                
                                Director/s/ Willard Brown
                                
                                
                                
                                June
      26, 2009Willard Brown
                                
                                Director
  41