SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549





FORM
      10-KSB





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


Exchange
      Act of 1934





For
      the





fiscal
      year ended March 31, 2006.





o
      Transition Report
      pursuant to Section 13 or 15(d) of The Exchange Act


of
      1934





Commission
      File No. 0-21079





PHLO
      CORPORATION





(Exact
      name of small business issuer as specified in its charter)





Delaware
            11-3314168(State
                of or other jurisdiction
            (IRS
                Employer Identification No.)of
                incorporation or organization)





6001-21
                Argyle Forest Blvd.
              PMB
                #117
              Jacksonville,
                Florida
            32244-5705(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant’s
      telephone number, including area code: (973) 691-9012





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:





Common
      Stock, par value $.0001 per share





(Title
      of
      Class)





Check
      whether the issuer (1) filed all reports required to be filed by Sections 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B in this form, and no disclosure will be contained, to the best
      of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. x





Issuer
      had $1,544 in revenues for its most recent fiscal year.





The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant, computed by reference to the closing price of such stock as of
      July
      10, 2006, was approximately $2,721,603.





The
      outstanding number of shares of the issuer’s common stock as of July 13, 2006
      was 395,801,258 .





TABLE
      OF
      CONTENTS





Item
      Number


PagePART
                I1.
            Business2.
            Properties3.
            Legal
                Proceedings4.
            Submission
                of Matters to a Vote of Security HoldersPART
                II5.
            Market
                for the Registrant’s Common Equity and Related Shareholder Matters6.
            Management’s
                Discussion and Analysis or Plan of Operations7.
            Financial
                Statements and Footnotes8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure8A
            Controls
                and ProceduresPART
                III9.
            Directors
                and Executive Officers10.
            Executive
                Compensation11.
            Security
                Ownership of Certain Beneficial Owners and Management12.
            Certain
                Relationships and Related Transactions13.
            Exhibits14.
            Principal
                Accounting Fees and ServicesSignaturesCertifications





PART
      I





RISK
      FACTORS AND CAUTIONARY STATEMENTS





Forward-looking
      statements in this report are made pursuant to the "safe harbor" provisions
      of
      the Private Securities Litigation Reform Act of 1995. Actual results may differ
      substantially from such forward-looking statements. Forward-looking statements
      include underlying assumptions and other statements that are other than
      historical facts. Forward-looking statements involve risks and uncertainties
      that could cause actual results to differ materially from those expressed or
      implied by the statements, including, but not limited to, the following: the
      ability of the Company to provide for its obligations, to provide working
      capital needs from operating revenues, to obtain additional financing needed
      for
      any future acquisitions, to meet competitive challenges and technological
      changes, and other risks detailed in the Company's periodic report filings
      with
      the Securities and Exchange Commission.





Item
              1.
            BUSINESS




General





Phlo
      Corporation, a Delaware corporation incorporated in December 1995, and its
      affiliates (hereinafter collectively referred to as the "Company") is a
      manufacturer of beverages and liquids containing patented and patent-pending
      biotechnologies. The Company markets its products to institutional purchasers,
      such as colleges and universities and sports teams, and to distributors which
      offer the products for sale in high volume chain stores, such as supermarkets
      and drug and convenience stores. Additionally, the Company develops liquids
      with
      patented or patent-pending payloads for the U.S. Military, agencies of the
      United Nations, and humanitarian organizations. The Company is positioned as
      a
      biotechnology company which is using high volume distribution networks to
      commercialize its technology. Central to the Company’s strategic development
      plan is the development, acquisition and/or exclusive licensing of proprietary
      technology, nutraceutical, biotechnological and/or pharmaceutical in nature,
      which the Company initially plans to convey to consumers through the use of
      liquid formulations and beverage systems. The Company is focusing its technology
      acquisition efforts on those technologies related to preventing or ameliorating
      cancer, reducing the effects of aging, and enhancing cognition and personal
      performance. The Company is currently conducting discussions with major
      companies related to the distribution of the Company’s products or joint
      ventures pertaining to the Company’s technology and products related
      thereto.





The
      Company has licensed its Vitamin E phosphate/polyenylphosphatidylcholine
      (“VEP/PPC”) technology on an exclusive basis, worldwide, for all uses including
      nutraceutical, biotechnological, and pharmaceutical. The VEP/PPC technology
      has
      been shown to be effective in repairing cell damage in all human tissues and
      in
      protecting cells from damage related to oxidative stress and exposure to toxins.
      Cell injury related to oxidative stress is associated with aging, cancer,
      emphysema, heart disease, Alzheimer’s disease, alcoholic liver disease, and
      drug-induced tissue injury. The Company believes that, with clinical trials,
      VEP/PPC may have applications for treating such diseases.





During
      the year ended March 31, 2006, the Company announced that it has commenced
      initial sales to the athletic departments of colleges and universities of its
      AQUISTM Rapid Response Rehydration product line, which contains the Company’s
      MEDS (Micro-Encapsulation Delivery System) biologically-active delivery
      technology. This technology creates immediate absorption of the electrolyte
      payload into the bloodstream, beginning through the mucous membranes of the
      mouth. Subsequent to the fiscal year end, the Company completed its e-commerce
      capability.





Also
      during the fiscal year, the Company significantly reduced the size of the
      vesicles contained in its delivery system as a result of its
      new nano-technological capability. These nano-particles increase the
      effectiveness of AQUISTM and substantially increase the speed of delivery of
      electrolytes. Although pre-hydration is recommended, AQUISTM beverages create
      relatively immediate rehydration, causing a rapid “lift” in physical and mental
      performance by the consumer. The Company’s VEP/PPC technology is an integral
      part of its AQUISTM beverages, which creates potent cell protection and repair in
      addition to rapid rehydration. This is particularly important to athletes,
      who
      create significant cell damage during strenuous physical exertion. The Company
      has also completely revised the packaging of its new AQUISTM beverage products.







Financing
      Activities





During
      the fiscal year ended March 31, 2005, the Company raised an aggregate of
      $742,500, net of costs and fees, in the private placement of equity and in
      connection with a settlement agreement. The Company also received advances
      in
      the aggregate amount of $140,000 under the Company’s revolving credit
      facility.





Recent
      Developments





Subsequent
      to the end of the fiscal year, the Company announced that it has commenced
      initial sales to the athletic departments of colleges and universities of its
      AQUISTM Rapid Response Rehydration product line, which contains the Company’s
      MEDS (Micro-Encapsulation Delivery System) biologically-active delivery
      technology. This technology creates immediate absorption of the electrolyte
      payload into the bloodstream, beginning through the mucous membranes of the
      mouth. Subsequent to the fiscal year end, the Company announced that has
      commenced online sales through its website and has begun receiving orders
      online.





During
      the fiscal year, the Company improved the technology contained in its AQUISTM
beverages, by significantly reducing the size of the vesicles contained in
      its
      delivery system as a result of its enhanced nano-technology. These
      nano-particles increase the effectiveness of AQUISTM and substantially increase
      the speed of delivery of electrolytes. The Company’s VEP/PPC technology is an
      integral part of its AQUISTM beverages, which creates potent cell protection and
      repair in addition to rapid rehydration. This is particularly important to
      athletes, who create significant cell damage during strenuous physical exertion.
      To reflect the material improvements in its beverages, the Company has also
      completely revised the packaging of its new AQUISTM beverage
      products.





During
      the fiscal year, the Company’s Board of Director’s voted to amend the Company’s
      articles of incorporation to increase the number of authorized shares of Common
      Stock from 250,000,000 to 600,000,000. The board of directors’ vote shall be
      followed by shareholder approval of such increase by shareholders holding the
      majority of the shares entitled to vote on such matter through shareholder
      written consent and the issuance of an Information Statement to shareholders
      to
      inform them of the amendment to the Company’s articles of incorporation.





Product
      Overview





The
      Company’s AQUISTM Rapid Response Rehydration System ("AQUISTM") has been shown, in
      tests conducted by some of the world’s top scientists in the rehydration field,
      to be superior to current solutions formulated in accordance with the World
      Health Organization’s most advanced specifications. AQUISTM contains the
      Company’s MEDS (Micro-Encapsulation Delivery System) biologically-active
      delivery technology. This technology creates immediate absorption of the
      electrolyte payload into the bloodstream, beginning through the mucous membranes
      of the mouth. The Company’s VEP/PPC technology is an integral part of its AQUISTM
beverages, which creates potent cell protection and repair in addition to rapid
      rehydration. AQUISTM is being marketed initially to institutional purchasers
      (including the colleges and universities, sports teams, U.S. Military, foreign
      governments, agencies of the United Nations, and non-profit organizations,
      including any humanitarian organizations). There are two formulations of AQUISTM,
      one of which is directed to rehydration (available in Orange, Grape, Lemon-Lime
      and Tropical Punch flavors) and one of which addresses diarrhea caused by
      diseases such as dysentery and cholera (available in Strawberry flavor).
      Dehydration from these causes is a major problem for the U.S. Military,
      resulting in tremendous costs both in terms of dollars and loss of active
      personnel. These diseases also bring suffering and death to millions of people
      in many parts of the world today.





Marketing
      and Distribution





The
      Company markets its products to institutional purchasers, such as colleges
      and
      universities and sports teams, and to distributors who offer the products for
      sale in high volume chain stores, such as supermarkets and drug and convenience
      stores. Additionally, the Company develops products for use by the U.S. Military
      which are also suitable for sale to agencies of the United Nations, humanitarian
      organizations, allied foreign militaries, and other institutional purchasers.
      The Company is positioned as a biotechnology company which is using high volume
      distribution networks to commercialize its technology.







Industry
      Overview/Competition





The
      Company’s goal is to develop products which are proprietary (patented and
      patent-pending) and which serve a major perceived consumer need not currently
      being effectively addressed by other products. The Company’s AQUISTM Rapid
      Response Rehydration System is being marketed to institutional purchasers
      including colleges and universities, sports teams, the U.S. Military, U.N.
      agencies, foreign governments and other institutional purchasers. AQUISTM has
      been shown, in tests conducted by some of the world’s top scientists in the
      rehydration field, to be superior to current solutions formulated in accordance
      with the World Health Organization’s most advanced specifications. AQUISTM
beverages contains the Company’s MEDS (Micro-Encapsulation Delivery System)
      biologically-active delivery technology. This technology creates immediate
      absorption of the electrolyte payload into the bloodstream, beginning through
      the mucous membranes of the mouth. The Company has significantly reduced the
      size of the vesicles contained in its delivery system as a result of its
      new nano-technological capability. These nano-particles increase the
      effectiveness of AQUISTM and substantially increase the speed of delivery of
      electrolytes. Direct absorption begins immediately upon the drinking of AQUISTM.
      The Company’s VEP/PPC technology is also an integral part of its AQUISTM
beverages, which creates potent cell protection and repair in addition to rapid
      rehydration. Dehydration is an important issue in the athletic arena, for the
      U.S. Military (particularly in situations such as Iraq), and for humanitarian
      aid organizations around the world.





The
      Company operates in a highly competitive segment of the beverage industry.
      The
      segment is dominated by competitors with greater resources than the Company’s.
      In addition the Company competes for limited retail shelf space for its
      products. Moreover, sales to the U.S. Military may take significantly longer
      to
      achieve than consumer sales. The Company cannot be certain that it can
      successfully compete for sales to distributors or stores that purchase from
      larger, more established companies that have greater financial, sales and
      technical resources. However, the Company believes that its proprietary
      technology and its ability to incorporate such technology in good-tasting
      beverages as well as in a number of additional types of liquid formulations
      and
      topical preparations allows the Company to offer to its distributors and
      the ultimate purchaser unique, varied and effective products.





Manufacturing





The
      Company’s products are manufactured at independent co-packers. The Company
      believes that alternative sources of manufacturing exist in the event that
      the
      production capabilities of the facility currently used by the Company become
      insufficient or unavailable. However, there can be no assurances that
      alternative sources would be able to meet the requirements of the Company,
      and
      if the Company was unable to arrange for alternative co-packing in a timely
      manner, such failure could have a material adverse effect on the Company’s
      business, operating results and financial condition.





The
      Company currently produces its biotechnological payloads internally and
      purchases juices, concentrates, flavors, nutrients, labels, caps, bottles,
      boxes
      and other ingredients and packaging for its product lines from independent
      manufacturers. The products are delivered to an independent co-packer where
      the
      Company’s products are manufactured. Management believes that there are
      alternatives to all of its suppliers in the event the Company is compelled
      to
      purchase raw materials from other sources, although there can be no assurances
      that alternative sources would become available in a timely manner, in which
      case it could have a material adverse effect on the Company’s business,
      operating results and financial condition.





Trademarks





The
      Company has filed applications for registration in the United States for the
      trademarks and brand names related to its product lines. The Company believes
      that its trademarks and trade names are significant to the marketing and sale
      of
      its products and that the inability to utilize the same could have a material
      adverse effect on the Company’s business, results of operations and financial
      condition.





Management
      and Employees





As
      of
      March 31, 2006, the Company had two employees.





The
      Company has experienced no work stoppages and considers its employee relations
      to be satisfactory. The Company’s employees are not represented by a labor
      union.







Product
      Liability Insurance





The
      Company, like other manufacturers of products that are ingested, faces an
      inherent risk of exposure to product liability claims if, among other things,
      the use of its products results in injury. There can be no assurances that
      the
      amount and scope of any product liability insurance coverage will be adequate
      to
      protect the Company in the event that a product liability claim is successfully
      asserted against the Company.





Government
      Regulation





The
      production, distribution and sale of the Company’s products in the United States
      are subject to the Federal Food, Drug and Cosmetic Act, the Occupational Safety
      and Health Act, the Lanham Act, various environmental statutes, and various
      other federal, state and local statutes regulating the production,
      transportation, sale, safety, advertising, labeling and ingredients of such
      products. Certain states and localities prohibit, or may in the future enact
      legislation to prohibit, the sale of certain beverages unless a deposit or
      tax
      is charged for containers.




Item
                2.
              PROPERTIES.


The
      Company is currently subleasing office space for a three year term ending on
      March 31, 2007 for $9,018 per month. The Company considers its premises adequate
      for its purposes in the immediate future.




Item
                3.
              LEGAL
                  PROCEEDINGS.


The
      Company has been involved in a number of lawsuits related to claims arising
      through the normal course of business, including claims that have been reduced
      to judgments. These judgments and certain other claims as of March 31, 2006
      are
      as follows:





(a)  The
      Company is currently engaged in litigation with a contract research and
      development facility. The Company terminated its agreement with the R&D
      facility, asserting that the facility had breached its agreement with the
      Company and committed fraud, and the Company demanded payment from the R&D
      facility as required by the agreement. Moreover, the Company insisted that
      an
      independent scientific lab perform an audit of the work allegedly performed
      by
      the R&D facility for the Company (for which the Company has rendered
      substantial consideration, including $225,000 in cash). As a defensive measure,
      the R&D facility initiated legal action claiming breach of contract. The
      Company has asserted as counterclaims breach of contract, fraud, and negligence.
      As this litigation is in its initial stages, the Company can make no assurances
      with respect to the outcome of this matter.




(b)  The
      Securities and Exchange Commission instituted public administrative and cease
      and desist proceedings against Phlo Corporation (“Phlo”), its President James B.
      Hovis, and its Executive Vice President, Anne P. Hovis, on April 21, 2005,
      alleging violations by Phlo Corporation related to certain transfer agent
      regulations and related to the late filing of its required periodic reports.
      More specifically, the Division of Enforcement has alleged the violation by
      Phlo
      of Sections 17A(d)(1) and 17(b)(1) of the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”)


and
      Rules
      17Ad-2 (which requires transfer agents to turnaround within three business
      days
      of receipt at least 90% of all routine items received for transfer during a
      month) and 17Ad-5 (which requires transfer agents to respond within five
      business days to any written inquiry regarding the status of items presented
      for
      transfer within the preceding six months) thereunder. The Division of
      Enforcement also alleged that Anne Hovis aided and abetted such
      violations.





The
      Division also alleges that Phlo violated Section 13(a) of the Exchange Act,
      and
      Rules 13a-1 and 13a-13 thereunder (which require the filing of annual and
      quarterly reports with the SEC), and alleged that James Hovis aided and abetted
      such violations.





The
      Company disputed all allegations made by the Division of Enforcement (except
      for
      the fact that Phlo did not timely make certain periodic filings) and vigorously
      defended the SEC action. Additionally, the Company became completely current
      in
      its financial reporting prior to the issuance of an initial decision on this
      matter.





On
      February 17, 2006, an Initial Decision was rendered by the Administrative Law
      Judge (“ALJ”) in the matter. The ALJ determined that the registration Phlo’s
      public securities should not be
      revoked. He entered cease and desist orders with respect to Phlo and James
      Hovis
      against future violations of reporting requirements. With respect to alleged
      transfer agent violations, the ALJ revoked Phlo’s status as transfer agent and
      entered a cease and desist order against Phlo and Anne Hovis against future
      violations and barred Anne Hovis from future association with a transfer agent.
      The ALJ also assessed civil penalties against Phlo in the amount of $100,000,
      against James Hovis in the amount of $25,000, and against Anne Hovis in the
      amount of $50,000.





The
      Company has appealed the Initial Decision, which stays the sanctions imposed
      for
      the duration of the appeal. Among other things, the Company argued that the
      ALJ
      had no jurisdiction to impose a fine against James Hovis; that many of the
      ALJ’s
      findings of fact were wrong in light of the evidence presented; that fines
      against Anne Hovis and Phlo were unduly harsh in light of the evidence; and
      that
      the ALJ ignored the SEC’s burden of proof. All appeal briefs have been filed by
      both sides. The Company can make no assurances with respect to the outcome
      of
      this matter.





In
      addition to the claims referred to above, there are other lawsuits in which
      the
      Company is involved, but is unable to predict the outcome. In the opinion of
      management, based on currently available facts, and the aggregate
      liability


currently
      provided for within the accompanying financial statements, the ultimate
      resolution of such matters will not have a material adverse effect on the
      Company’s consolidated results of operations or financial position.




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


No
      matters were submitted to a vote of the holders of the Company’s common stock
      during its fiscal year ended March 31, 2006.





PART
      II


Item
                5.
              MARKET
                  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS


The
      common stock of the Company was first traded on the OTC Bulletin Board on the
      effectiveness of the Company’s Initial Public Offering on July 31, 1996, under
      the symbol "PYMB". On April 20, 1999, the Company changed its trading symbol
      to
      "PHLC" to reflect the change in the Company’s name to Phlo Corporation. The
      common stock of the Company is quoted and traded on the Pink
      Sheets.





The
      following table indicates the high and low bid prices for the common stock
      of
      the Company for the period April 1, 2005, to March 31, 2006, based upon
      information supplied by the NASDAQ system. Prices represent quotations between
      dealers without adjustments for retail markups, markdowns or commissions, and
      may not represent actual transactions.





There
      were no cash dividends declared on the common stock for the fiscal years ended
      March 31, 2006 and 2005.




Common
      Stock




Year
                  Ended 3/31/06
              
              Year
                  Ended 3/31/05Quarter
              
              High
              
              Low
              
              High
              
              LowFirst
                  Quarter
              
              $
              0.04
              
              $
              0.01
              
              $
              0.20
              
              $
              0.07Second
                  Quarter
              
              $
              0.20
              
              $
              0.008
              
              $
              0.15
              
              $
              0.07Third
                  Quarter
              
              $
              0.04
              
              $
              0.01
              
              $
              0.09
              
              $
              0.02Fourth
                  Quarter
              
              $
              0.06
              
              $
              0.03
              
              $
              0.04
              
              $
              0.02




On
      March
      31, 2006, the closing price of the Common Stock as reported on the Pink Sheets
      was $0.04. As of March 31, 2006, the Company had approximately 2,000 beneficial
      holders of record of its shares of Common Stock.





During
      the fiscal year ended March 31, 2006, the Company raised $712,500 in private
      placements, and issued 4,000,000 shares of common stock in exchange for
      services, each in reliance on various exemptions available under the Securities
      Act.







Item
                6.
              PHLO
                  CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATIONS


SAFE
      HARBOR STATEMENT





The
      Company has made, and may continue to make, various forward-looking statements
      with respect to its financial position, business strategy, and plans and
      objectives of management. Such forward-looking statements are identified by
      the
      use of forward-looking phrases such as "anticipates", "intends", "expects",
      "plans", "believe", "estimates", or words or phrases of similar import. These
      forward-looking statements are subject to numerous assumptions, risks, and
      uncertainties, and the statements looking forward beyond 2006 are subject to
      greater uncertainty because of the increased likelihood of changes in underlying
      factors and assumptions. Actual results could differ materially from those
      anticipated by the forward-looking statements.





The
      Company’s forward-looking statements represent its judgment only on the dates
      such statements are made. By making any forward-looking statements, the Company
      assumes no duty to update them to reflect new, changed, or unanticipated events
      or circumstances.





OVERVIEW





The
      following discussion of the Company’s financial condition as of March 31, 2006
      and results of operations for the year ended March 31, 2006 includes Phlo
      Corporation and its affiliates (collectively, the "Company") and should be
      read
      in conjunction with the consolidated financial statements and notes appearing
      elsewhere in this Form 10-KSB.





RESULTS
      OF OPERATIONS





The
      Company had $1,544 in revenue for the fiscal year ended March 31, 2006, as
      compared to no revenue for the fiscal year ended March 31, 2005. The selling,
      general and administrative expenses for the fiscal year ended March 31, 2006
      increased to $1,771,470 from $1,414,209 for the fiscal year ended March 31,
      2005, and research and development costs incurred decreased to $97,103 from
      $528,132 during the same period. The Company’s net loss increased slightly to
      $2,842,300 from $2,815,000 for the Company’s prior fiscal year. The cost of
      sales for the year ended March 31, 2006 was $4,565.





The
      Company’s proprietary biotechnology base (including its commercialization
      capabilities and ability to produce technological preparations related thereto),
      the products generated therefrom, and the access to major markets as a result
      thereof represent the core of the Company’s business plan, which emphasizes the
      building of major, long-term fundamental value. Although the process of
      executing this business plan requires significant time, the Company should
      be
      able to produce significantly greater positive operating results and greater
      shareholder value than would otherwise be possible.





RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      March
      2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for
      Conditional Asset Retirement Obligations, an interpretation of FASB Statement
      No. 143,” which requires an entity to recognize a liability for the fair value
      of a conditional asset retirement obligation when incurred if the liability’s
      fair value can be reasonably estimated. The Company is required to adopt the
      provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
      does not expect the adoption of this Interpretation to have a material impact
      on
      its consolidated financial position, results of operations or cash flows.




In
      May
      2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No.
      154,
“Accounting Changes and Error Corrections, a replacement of APB Opinion No.
      20
      and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior
      periods’ financial statements for changes in accounting principle, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS 154 also requires that retrospective application
      of a
      change in accounting principle be limited to the direct effects of the change.
      Indirect effects of a change in accounting principle, such as a change in
      non-discretionary profit-sharing payments resulting from an accounting change,
      should be recognized in the period of the accounting change. SFAS 154 also
      requires that a change in depreciation, amortization, or depletion method for
      long-lived, non-financial assets be accounted for as a change in accounting
      estimate effected by a change in accounting principle. SFAS 154 is effective
      for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Early adoption is permitted for accounting changes
      and
      corrections of errors made in fiscal years beginning after the date this
      Statement is issued. The Company does not expect the adoption of this SFAS
      to
      have a material impact on its consolidated financial position, results of
      operations or cash flows.








On
      February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
      Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
      instruments that have embedded derivatives to be accounted for as a whole
      (eliminating the need to bifurcate the derivative from its host) if the holder
      elects to account for the whole instrument on a fair value basis. SFAS 155
      also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





In
      March
      2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140. Statement 156
      requires that an entity recognize a servicing asset or servicing liability
      each
      time it undertakes an obligation to service a financial asset by entering into
      a
      service contract under certain situations. The new standard is effective for
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





LIQUIDITY
      AND CAPITAL RESOURCES





During
      the fiscal year ended March 31, 2006, the Company’s working capital deficit
      increased by $895,364 to $4,995,824. In addition, the Company’s Stockholders’
Deficiency increased from $4,461,781 to $4,975,610.





During
      the fiscal year ended March 31, 2006, and beyond, the Company is taking steps
      to
      reduce or eliminate the Stockholders’ Deficiency and to create a positive
      working capital position. The Company believes it is more likely than in prior
      years to raise substantial financing as a result of the prospects for national
      and global distribution of its products through joint venture undertakings
      with
      entities possessing marketing and distribution infrastructure and capabilities,
      the existence of products containing commercialized biotechnology, the prospects
      for numerous additional products based on the Company’s biotechnology
      foundation, and significantly increased scientific and commercialization
      capabilities. Finally, the Company has taken steps to convert certain existing
      debts into equity and will continue to pursue these steps.





While
      the
      Company has raised sufficient capital to meet its operating requirements in
      the
      past, additional financing is required in order to meet such operating
      requirements in the future. The Company can give no assurances that the
      necessary funding will be completed or, if completed, on terms favorable to
the
      Company.




There
      can
      be no assurance that management’s plans will be realized and therefore, until
      the present conditions referred to above are either removed or substantially
      improved, there is substantial doubt about the Company’s ability to continue as
      a going concern.





The
      Company's independent certified public accountants have stated in their report
      included in the Company's March 31, 2006 Form 10-KSB, that the Company has
      incurred operating losses in the last two years and that the Company is
      dependent upon management's ability to develop profitable operations. These
      factors among others may raise substantial doubt about the Company's ability
      to
      continue as a going concern.





CRITICAL
      ACCOUNTING POLICIES





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires estimates and
      assumptions that affect the reported amounts of assets and liabilities, revenue
      and expenses, and related disclosures of contingent assets and liabilities
      in
      the financial statements and accompanying notes. The U.S. Securities and
      Exchange Commission has defined a company’s most critical accounting policies as
      the ones that are most important to the portrayal of the Company’s financial
      condition and results of operations and which require the Company to make its
      most difficult and subjective judgments, often as a result of the need to make
      estimates of matters that are inherently uncertain. Based on this definition,
      the Company has identified the critical accounting policies and judgments below.
      Although the Company believes that the estimates and assumptions are reasonable,
      they are based upon information presently available. Actual results may differ
      significantly from these estimates under different assumptions or
      conditions.





REVENUE
      RECOGNITION





For
      revenue from product sales, the Company recognizes revenue in accordance with
      Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which
      superceded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
      STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met
      before revenue can be recognized: (1) persuasive evidence of an arrangement
      exists; (2) delivery has occurred; (3) the selling price is fixed and
      determinable; and (4) collectibility is reasonably assured. Determination of
      criteria (3) and (4) are based on management's judgments regarding the fixed
      nature of the selling prices of the products delivered and the collectibility
      of
      those amounts. Provisions for discounts and rebates to customers, estimated
      returns and allowances, and other adjustments are provided for in the same
      period the related sales are recorded. The Company defers any revenue for which
      the product has not been delivered or is subject to refund until such time
      that
      the Company and the customer jointly determine that the product has been
      delivered or no refund will be required. SAB 104 incorporates Emerging Issues
      Task Force 00-21 ("EITF 00-21"), MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS.
      EITF
      00-21 addresses accounting for arrangements that may involve the delivery or
      performance of multiple products, services and/or rights to use assets. The
      effect of implementing EITF 00-21 on the Company's consolidated financial
      position and results of operations was not significant.





STOCK
      BASED COMPENSATION





Prior
      to
      the January 1, 2006 adoption of the Financial Accounting Standards Board
      (“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the
      Company accounted for stock-based compensation using the intrinsic value method
      prescribed in Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. As
      permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS
      123”), stock-based compensation was included as a pro forma disclosure in the
      notes to the consolidated financial statements.





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS 123R, using the modified-prospective transition method. Under this
      transition method, stock-based compensation expense is recognized in the
      consolidated financial statements for granted, modified, or settled stock
      options. Compensation expense recognized included the estimated expense for
      stock options granted on and subsequent to January 1, 2006, based on the grant
      date fair value estimated in accordance with the provisions of SFAS 123R, and
      the estimated expense for the portion vesting in the period for options granted
      prior to, but not vested as of January 1, 2006, based on the grant date fair
      value estimated in accordance with the original provisions of SFAS 123. Results
      for prior periods have not been restated, as provided for under the
      modified-prospective method.





CONTINGENCIES





In
      the
      normal course of business, the Company is subject to certain claims and legal
      proceedings. The Company records an accrued liability for these matters when
      an
      adverse outcome is probable and the amount of the potential liability is
      reasonably estimable. The Company does not believe that the resolution of these
      matters will have a material effect upon its financial condition, results of
      operations or cash flows for an interim or annual period.





IMPACT
      OF
      INFLATION





The
      Company does not believe that inflation has had a material adverse effect on
      sales or income during the past periods. Future increases in supplies or other
      operating costs could adversely affect the Company’s operations; however, the
      Company believes it could increase prices to offset increases in costs of goods
      sold or other operating costs.





OFF-BALANCE
      SHEET ARRANGEMENTS





The
      Company does not maintain off-balance sheet arrangements, nor does it
      participate in non-exchange traded contracts requiring fair value accounting
      treatment.










**SECURITIES
      AND EXCHANGE COMMISSION**





**WASHINGTON,
      D.C. 20549**











**FINANCIAL
      STATEMENTS**





**MARCH
      31, 2006 AND 2005**











**FORMING
      A PART OF ANNUAL REPORT**


**PURSUANT
      TO THE SECURITIES EXCHANGE ACT OF 1934**








**PHLO
      CORPORATION**





**PHLO
      CORPORATION**





**Index
      to Financial Statements**





PageReport
                of Registered Independent Certified Public Accounting Firm
            
            F-3Consolidated
                Balance Sheet at March 31, 2006
            
            F-4Consolidated
                Statements of Losses for the years ended March 31, 2006 and
                2005
            
            F-5Consolidated
                Statements of Deficiency in Stockholders’ Equity for the years ended March
                31, 2006 and 2005
            
            F-6
                –
                F-7Consolidated
                Statements of Cash Flows for the years ended March 31, 2006 and 2005
            
            F-8 –
                F-9Notes
                to Consolidated Financial Statements
            
            F-10 –
                F-27










**RUSSELL
      BEDFORD STEFANOU MIRCHANDANI LLP**


**Certified
      Public Accountants**





**REPORT
      OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING
      FIRM**





Board
      of
      Directors


Phlo
      Corporation


Jacksonville,
      Florida





We
      have
      audited the consolidated balance sheet of Phlo Corporation and its affiliates
      (the “Company”), as of March 31, 2006, and the related consolidated statements
      of losses, deficiency in stockholders’ equity, and cash flows for each of the
      two years in the period ended March 31, 2006. These financial statements are
      the
      responsibility of the company’s management. Our responsibility is to express an
      opinion on these financial statements based upon our audit.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company at March 31,
      2006 and the results of its operations and its cash flows for each of the two
      years in the period ended March 31, 2006 in conformity with accounting
      principles generally accepted 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 B, the
      Company has suffered recurring losses from operations and the Company is
      experiencing difficulty in generating sufficient cash flow to meet it
      obligations and sustain its operations, which raises substantial doubt about its
      ability to continue as a going concern. Management’s plans in regard to these
      matters are also described in Note B. The accompanying statements do not include
      any adjustments that might result from the outcome of this
      uncertainty.


/s/ RUSSELL
              BEDFORD STEFANOU MIRCHANDANI LLPRussell
                Bedford Stefanou Mirchandani LLPCertified
                Public Accountants




McLean,
      Virginia


July
      6,
      2006


F-3


**PHLO
      CORPORATION AND AFFILIATES**





**CONSOLIDATED
      BALANCE SHEET**





**March
      31, 2006**


ASSETSCURRENT
                  ASSETSAccounts
                  receivable
              
              $
              1,267Settlement
                  receivable (Note H)
              
              
              45,000Other
                  receivable
              
              
              6,964Total
                  Current Assets
              
              
              53,231PROPERTY
                  AND EQUIPMENT, Net (Note C)
              
              
              7,443DEPOSITS
              
              
              12,771TOTAL
                  ASSETS
              
              $
              73,445LIABILITIES
                  AND DEFICIENCY IN STOCKHOLDERS’ EQUITYCURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              1,516,134Accrued
                  liabilities (Note E)
              
              
              2,906,421Notes
                  payable, current portion (Note G)
              
              
              626,500Total
                  Current Liabilities
              
              
              5,049,055TOTAL
                  LIABILITIES
              
              
              5,049,055COMMITMENTS
                  AND CONTINGENCIES (Note M)
              
              
              —DEFICIENCY
                  IN STOCKHOLDERS’ EQUITY (Note H)Preferred
                  stock, 15,000,000 authorized:Series
                  A convertible stock, $0.0001 par value, 500,000 Shares authorized,
                  issued
                  and outstanding (liquidation preference $100,000)
              
              
              50Series
                  B non-convertible stock, none issued and outstanding
              
              
              —Series
                  C convertible stock, $0.0001 par value, 3,000,000 shares authorized,
                  1,302,304 shares outstanding (liquidation preference
                  $13,023)
              
              
              130Series
                  C Convertible stock, 15,298 shares subscribed
              
              
              1Common
                  stock, $0.0001 par value, 250,000,000 shares authorized, 400,356,814
                  shares issued and outstanding
              
              
              40,036Common
                  stock, $0.0001 par value, 15,431,654 shares subscribed
              
              
              1,544Additional
                  paid-in capital
              
              
              15,576,583Accumulated
                  deficit
              
              
              (20,593,954
              )TOTAL
                  DEFICIENCY IN STOCKHOLDERS’ EQUITY
              
              
              (4,975,610
              )TOTAL
                  LIABILITIES AND DEFICIENCY IN STOCKHOLDERS’ EQUITY
              
              $
              73,445




The
      accompanying notes are an integral part of these consolidated financial statements.




F-4


**PHLO
      CORPORATION AND AFFILIATES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**FOR
      THE YEARS ENDED MARCH 31, 2006 AND 2005**





2006
            
            2005REVENUES,
                net
            
            $
            1,544
            
            $
            —COST
                OF SALES, net
            
            
            4,565
            
            
            —GROSS
                PROFIT
            
            
            (3,021
            )
            
            —SELLING,
                GENERAL AND ADMINISTRATIVE EXPENSESGeneral
                and administrative
            
            
            1,771,470
            
            
            1,414,209Research
                and development
            
            
            97,103
            
            
            528,132LOSS
                FROM OPERATIONS
            
            
            (1,871,594
            )
            
            (1,942,341
            )OTHER
                INCOME (EXPENSE)Finance
                cost
            
            
            (889,876
            )
            
            (804,052
            )Interest
                expense, net
            
            
            (80,830
            )
            
            (68,607
            )TOTAL
                OTHER EXPENSE
            
            
            (970,706
            )
            
            (872,659
            )Provision
                for income taxes
            
            
            —
            
            
            —NET
                LOSS
            
            $
            (2,842,300
            )
            $
            (2,815,000
            )Weighted
                Average Number of Shares Outstanding (Basic and Diluted) (Note
                I)
            
            
            331,684,698
            
            
            223,663,102Net
                Loss Per Share (Basic and Diluted)
            
            $
            (0.01
            )
            $
            (0.01
            )





The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-5





**PHLO
      CORPORATION AND AFFILIATES**





**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT**





**FOR
      THE YEARS ENDED MARCH 31, 2006 AND 2005**


**Series
                  A**
                **Preferred
                  Stock**
              
              **Series
                  B**
                **Preferred
                  Stock**
              
              **Preferred
                  C Stock**
                **Subscribed**
              
              **Series
                  C**
                **Preferred
                  Stock**
              
              **Common
                  Stock**
                **Subscribed****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**Balance
                  March 31, 2004
              
              
              500,000
              
              $
              50
              
              
              
              
              
              —
              
              
              15,298
              
              $
              1
              
              
              1,333,304
              
              $
              133
              
              
              12,395,534
              
              $
              1,239Conversion
                  of preferred C to common stock
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              (31,000
              )
              
              (3
              )
              
              —
              
              
              —Issuance
                  of common stock
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              3,790,665
              
              
              379Collateral
                  shares issued with debt
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Issuance
                  of shares in settlement of accrued expensesIssuance
                  of shares for financing activities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              781,819
              
              
              79Issuance
                  of common stock for services
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Warrants
                  issued for servicesWarrants
                  issued for financing activityRepayment
                  of line of credit
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Net
                  loss
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Balance
                  March 31, 2005
              
              
              500,000
              
              
              50
              
              
              —
              
              
              —
              
              
              15,298
              
              
              1
              
              
              1,302,304
              
              
              130
              
              
              16,968,018
              
              
              1,697Issuance
                  of common stock
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Subscribed
                  shares issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,536,364
              )
              
              (153
              )Collateral
                  shares issued with debt (Note F)Issuance
                  of shares for financing activitiesIssuance
                  of common stock for services
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Warrants
                  issued for servicesWarrants
                  issued for financing activity
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Repayment
                  of line of credit (Note F)
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Net
                  loss
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —Balance
                  March 31 ,2006
              
              
              500,000
              
              $
              50
              
              
              —
              
              
              —
              
              
              15,298
              
              $
              1
              
              
              1,302,304
              $
              
              130
              
              
              15,431,654
              
              $
              1,544





The
      accompanying notes are an integral part of these consolidated financial
      Statements.




F-6




**PHLO
        CORPORATION AND AFFILIATES**
 
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT -
        (Continued)**
 
 **FOR
        THE YEARS ENDED MARCH 31, 2006 AND 2005**
 
 Common
                  Stock
              
              Paid-In
              
              AccumulatedShares
              
              Amount
              
              Capital
              
              Deficit
              
              TotalBalance
                  March 31, 2004
              
              
              195,128,609
              
              $
              19,512
              
              $
              11,302,528
              
              $
              (14,936,654
              )
              $
              (3,613,191
              )Conversion
                  of preferred C to common stock
              
              
              3,100,000
              
              
              310
              
              
              (307
              )
              
              —
              
              
              —Issuance
                  of common stock
              
              
              6,000,000
              
              
              600
              
              
              649,994
              
              
              —
              
              
              650,973Collateral
                  shares issued with debt
              
              
              5,500,000
              
              
              550
              
              
              (550
              )
              
              —
              
              
              —Issuance
                      of shares in settlement of accrued expenses
              
              
              3,500,000
              
              
              350
              
              
              195,650
              
              
              —
              
              
              196,000Issuance
                  of shares for financing activity
              
              
              8,542,424
              
              
              855
              
              
              422,006
              
              
              
              
              
              422,940Issuance
                  of common stock for services
              
              
              5,000,000
              
              
              500
              
              
              149,500
              
              
              —
              
              
              150,000Warrants
                  issued for services
              
              
              
              
              
              
              
              
              3,738
              
              
              —
              
              
              3,738Warrants
                  issued for financing activity
              
              
              
              
              
              
              
              
              287,104
              
              
              —
              
              
              287,104Repayment
                  of line of credit
              
              
              
              
              
              —
              
              
              255,655
              
              
              —
              
              
              255,655Net
                  loss
              
              
              
              
              
              —
              
              
              —
              
              
              (2,815,000
              )
              
              (2,815,000
              )Balance
                  March 31,2005
              
              
              226,771,033
              
              
              22,677
              
              
              13,265,318
              
              
              (17,751,654
              )
              
              (4,461,781
              )Issuance
                  of common stock
              
              
              95,988,259
              
              
              9,599
              
              
              777,901
              
              
              —
              
              
              787,500Subscribed
                  shares issued
              
              
              1,536,364
              
              
              153
              
              
              —
              
              
              —
              
              
              —Collateral
                  shares issued with debt (Note F)
              
              
              13,700,000
              
              
              1,370
              
              
              (1,370
              )
              
              —
              
              
              —Issuance
                  of shares for financing activity
              
              
              58,361,158
              
              
              5,837
              
              
              851,475
              
              
              —
              
              
              857,312Issuance
                  of common stock for services
              
              
              4,000,000
              
              
              400
              
              
              79,600
              
              
              —
              
              
              80,000Warrants
                  issued for services
              
              
              —
              
              
              —
              
              
              377,455
              
              
              —
              
              
              377,455Warrants
                  issued for financing activity
              
              
              
              
              
              —
              
              
              20,000
              
              
              —
              
              
              20,000Repayment
                  of line of credit (Note F)
              
              
              
              
              
              —
              
              
              206,204
              
              
              —
              
              
              206,204Net
                  loss
              
              
              
              
              
              —
              
              
              —
              
              
              (2,842,300
              )
              
              (2,842,300
              )Balance
                  March 31, 2006
              
              
              400,356,814
              
              $
              40,036
              
              $
              15,576,583
              
              $
              (20,593,954
              )
              $
              (4,975,610
              )
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-7




**PHLO
        CORPORATION AND AFFILIATES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 **FOR
        THE YEARS ENDED MARCH 31, 2006 AND 2005**
 
 **2006**
              
              **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (2,842,300
              )
              $
              (2,815,000
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Common
                  stock reimbursement to officers (Note H)
              
              
              857,312
              
              
              422,940Common
                  stock issued in exchange for interest expense and other financing
                  expense
                  (Note F and H)
              
              
              26,042
              
              
              84,409Common
                  stock for services (Note H)
              
              
              80,000
              
              
              150,000Warrant
                  issued for services (Note H)
              
              
              377,455
              
              
              3,738Warrant
                  issued for financing expense (Note H)
              
              
              20,000
              
              
              287,104Depreciation
                  and amortization (Note C)
              
              
              2,465
              
              
              2,826Changes
                  in operating assets and liabilitiesPrepaid
                  expenses
              
              
              —
              
              
              400,000Inventory
              
              
              75,041
              
              
              (75,041
              )Accounts
                  receivable
              
              
              (1,267
              )
              
              —Security
                  deposit
              
              
              —
              
              
              (12,771
              )Accounts
                  payable
              
              
              232,820
              
              
              248,324Accrued
                  expenses and taxes
              
              
              289,932
              
              
              417,889NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (882,500
              )
              
              (885,582
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of equipment
              
              
              —
              
              
              (9,700
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              —
              
              
              (9,700
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from revolving note payable
              
              
              140,000
              
              
              175,000Proceeds
                  from issuance of equity securities (Note H)
              
              
              742,500
              
              
              650,973NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              882,500
              
              
              825,973NET
                  INCREASE (DECREASE) IN CASH
              
              
              —
              
              
              (69,309
              )CASH
                  - Beginning
              
              
              —
              
              
              69,309CASH
                  - Ending
              
              $
              —
              
              $
              —
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-8


PHLO
      CORPORATION AND AFFILIATES





CONSOLIDATED
      STATEMENTS OF CASH FLOWS, Continued





For
      the
      Years Ended March 31, 2006 and 2005





SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:





2006
            
            2005Cash
                paid for interest
            
            $
            —
            
            $
            —Cash
                paid for income taxes
            
            $
            —
            
            $
            —




Non-cash
      and financing activities:





During
      the fiscal years ended March 31, 2006 and 2005, the sale of Common Stock pledged
      as collateral for the repayment of advances pursuant to the credit facility
      reduced the outstanding principal balance by $172,658 and $155,387 respectively.
      Additionally, the Company issued shares of stock in reduction of $540 and
      $211,859 of accrued interest and accrued liabilities during the fiscal years
      ended March 31, 2006 and March 31, 2005, respectively.




The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-9





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005




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





A
      summary
      of the significant accounting policies applied in the preparation of the
      accompanying consolidated financial statements follows.





BUSINESS
      AND BASIS OF PRESENTATION





Phlo
      Corporation, a Delaware corporation incorporated in December 1995, and its
      affiliates (hereinafter collectively referred to as the "Company") is a
      manufacturer of beverages and liquids containing patented and patent-pending
      biotechnologies. The Company markets its products to institutional purchasers,
      such as colleges and universities and sports teams, and to distributors which
      offer the products for sale in high volume chain stores, such as supermarkets
      and drug and convenience stores. Additionally, the Company develops liquids
      with
      patented or patent-pending payloads for the U.S. Military, agencies of the
      United Nations, and humanitarian organizations.





The
      consolidated financial statements include the accounts of the Company and its
      majority-owned affiliates. Significant inter-company transactions and balances
      have been eliminated in consolidation.





CASH
      EQUIVALENTS





The
      Company considers all highly liquid debt instruments with original maturities
      of
      three months or less to be cash equivalents.





USE
      OF
      ESTIMATES




The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosures of contingent assets and liabilities
      at
      the date of the consolidated financial statements and the reported amounts
      of
      revenues and expenses during the reporting periods. Actual results could differ
      from those estimates.




INVENTORIES





Inventories
      are stated at the lower of cost or market. Costs, which include purchases,
      freight and packaging, raw materials, packing fees and finished products, are
      determined on the first-in, first-out basis. Non-saleable and obsolete
      inventories have been recorded at cost, or net realizable value, whichever
      is
      lower.





ADVERTISING
      EXPENSE





Advertising
      costs are expensed as incurred. Advertising costs of $108,318 and $32,173 were
      expensed during the years ended March 31, 2006 and 2005,
      respectively.




F-10




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





PROPERTY
      AND EQUIPMENT





Property
      and equipment are stated at cost, net of accumulated depreciation. Depreciation
      is computed using the straight-line method over the estimated useful lives
      of
      the assets, as follows: five to seven years for furniture and
      equipment.





Expenditures
      for maintenance and repairs are charged to expense as incurred. Expenditures
      for
      major renewals and betterments that extend the useful lives of property and
      equipment are capitalized and depreciated over the remaining useful lives of
      the
      asset. When assets are retired or sold, the cost and related accumulated
      depreciation are removed from the accounts and any resulting gain or loss is
      recognized in the results of operations.





REVENUE
      RECOGNITION





For
      revenue from product sales, the Company recognizes revenue in accordance with
      Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which
      superceded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
      STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be
      met


before
      revenue can be recognized: (1) persuasive evidence of an arrangement exists;
      (2)
      delivery has occurred; (3) the selling price is fixed and determinable; and
      (4)
      collectibility is reasonably assured. Determination of criteria (3) and (4)
      are
      based on management's judgments regarding the fixed nature of the selling prices
      of the products delivered and the collectibility of those amounts. Provisions
      for discounts and rebates to customers, estimated returns and allowances, and
      other adjustments are provided for in the same period the related sales are
      recorded. The Company defers any revenue for which the product has not been
      delivered or is subject to refund until such time that the Company and the
      customer jointly determine that the product has been delivered or no refund
      will
      be required. SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF
      00-21"), MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses
      accounting for arrangements that may involve the delivery or performance of
      multiple products, services and/or rights to use assets. The effect of
      implementing EITF 00-21 on the Company's consolidated financial position and
      results of operations was not significant.





The
      Company recognizes revenue upon acceptance of delivery of its product by its
      customers at agreed prices. Based on market conditions, the Company or its
      suppliers may choose to promote certain brands by offering free product or
      case
      volume discounts. The Company follows the guidance of Emerging Issues Task
      Force
      (EITF) Issue 01-9 "Accounting for Consideration Given by a Vendor to a
      Customer". Accordingly, the Company does not recognize revenue on free
      promotional product or discounts. Further, the Company recognizes as a cost
      of
      sale, the cost of free promotional product net of any available chargebacks
      to
      the suppliers.





RESEARCH
      AND DEVELOPMENT





The
      Company accounts for research and development costs in accordance with the
      Financial Accounting Standards Board's Statement of Financial Accounting
      Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs."
      Under SFAS 2, all research and development costs must be charged to expense
      as
      incurred. Accordingly, internal research and development costs are expensed
      as
      incurred. Third-party research and developments costs are expensed when the
      contracted work has been performed or as milestone results have been achieved.
      Company-sponsored research and development costs related to both present and
      future products are expensed in the period incurred. During the years ended
      March 31, 2006 and 2005, $97,103 and $528,132, respectively, in research and
      development costs were incurred by the Company.




F-11


PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





INCOME
      TAXES





Deferred
      income taxes are provided using the asset and liability method for financial
      reporting purposes in accordance with the provisions of Statements of Financial
      Accounting Standards No. 109, “Accounting for Income Taxes”. Under this method,
      deferred tax assets and liabilities are recognized for temporary differences
      between the tax bases of assets and liabilities and their carrying values for
      financial reporting purposes, and for operating loss and tax credit
      carryforwards. 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 removed or settled. The effect on
      deferred tax assets and liabilities of a change in tax rates is recognized
      in
      the consolidated statements of operations in the period that includes the
      enactment date.





FAIR
      VALUE OF FINANCIAL INSTRUMENTS





Statement
      of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
      Financial Instruments," requires disclosure of the fair value of certain
      financial instruments. The carrying value of cash and cash
      equivalents,


accounts
      receivable, accounts payable and short-term borrowings, as reflected in the
      balance sheets, approximate fair value because of the short-term maturity of
      these instruments.





LONG-LIVED
      ASSETS





The
      Company has adopted Statement of Financial Accounting Standards No. 144 ("SFAS
      144"). The Statement requires that long-lived assets and certain identifiable
      intangibles held and used by the Company be reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Events relating to recoverability may include
      significant unfavorable changes in business conditions, recurring losses, or
      a
      forecasted inability to achieve break-even operating results over an extended
      period. The Company evaluates the recoverability of long-lived assets based
      upon
      forecasted undiscounted cash flows. Should an impairment in value be indicated,
      the carrying value of intangible assets will be adjusted, based on estimates
      of


future
      discounted cash flows resulting from the use and ultimate disposition of the
      asset. SFAS No. 144 also requires assets to be disposed of be reported at the
      lower of the carrying amount or the fair value less costs to sell.





STOCK-BASED
      COMPENSATION





Prior
      to
      the January 1, 2006 adoption of the Financial Accounting Standards Board
      (“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the
      Company accounted for stock-based compensation using the intrinsic value method
      prescribed in Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. As
      permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS
      123”), stock-based compensation was included as a pro forma disclosure in the
      notes to the consolidated financial statements.




F-12


PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





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





Stock
      Based Compensation (Continued)





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS 123R, using the modified-prospective transition method. Under this
      transition method, stock-based compensation expense is recognized in the
      consolidated financial statements for granted, modified, or settled stock
      options. Compensation expense recognized included the estimated expense for
      stock options granted on and subsequent to January 1, 2006, based on the grant
      date fair value estimated in accordance with the provisions of SFAS 123R, and
      the estimated expense for the portion vesting in the period for options granted
      prior to, but not vested as of January 1, 2006, based on the grant date fair
      value estimated in accordance with the original provisions of SFAS 123. Results
      for prior periods have not been restated, as provided for under the
      modified-prospective method.





The
      Company has no awards of stock-based employee compensation outstanding at March
      31, 2006.





BASIC
      AND
      DILUTED LOSS PER SHARE





The
      Company computes earnings per share under Financial Accounting Standard No.
      128,
      "Earnings Per Share" (SFAS 128). Net loss per common share is computed by
      dividing net loss by the weighted average number of shares of common stock
      and
      dilutive common stock equivalents outstanding during the year. Dilutive common
      stock equivalents consist of shares issuable upon conversion of convertible
      preferred shares and the exercise of the Company's stock options and warrants
      (calculated using the treasury stock method). During the years ended March
      31,
      2006 and 2005, common stock equivalents are not considered in the calculation
      of
      the weighted average number of common shares outstanding because they would
      be
      anti-dilutive, thereby decreasing the net loss per common share. For the years
      ended March 31, 2006 and 2005, 164,446,882 potential shares and 155,651,394
      potential shares, respectively, were excluded from the shares used to calculate
      diluted earnings per share as their inclusion would reduce net loss per share.





LIQUIDITY





As
      reflected in the accompanying financial statements, the Company incurred net
      losses of $2,842,300 and $2,815,000 for the years ended March 31, 2006 and
      2005,
      respectively, and has an accumulated deficit of $20,593,954 as of March 31,
      2006. In addition, the Company’s current liabilities exceeded its current assets
      by $4,995,824 as of March 31, 2006.





COMPREHENSIVE
      INCOME (LOSS)





The
      Company adopted Statement of Financial Accounting Standards No. 130, "Reporting
      Comprehensive Income". SFAS No. 130 establishes standards for the reporting
      and
      displaying of comprehensive income and its components. Comprehensive income
      is
      defined as the change in equity of a business during a period from transactions
      and other events and circumstances from non-owner sources. It includes all
      changes in equity during a period except those


resulting
      from investments by owners and distributions to owners. SFAS No. 130 requires
      other comprehensive income (loss) to include foreign currency translation
      adjustments and unrealized gains and losses on available-for-sale securities.
      The Company does not have any items of comprehensive income in any of the
      periods presented.




F-13





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





SEGMENT
      INFORMATION





Statement
      of Financial Accounting Standards No. 131, "Disclosures about Segments of an
      Enterprise and Related Information" ("SFAS 131") establishes standards for
      reporting information regarding operating segments in annual financial
      statements and requires selected information for those segments to be presented
      in interim financial reports issued to stockholders. SFAS 131 also establishes
      standards for related disclosures about products and services and geographic
      areas. Operating segments are identified as components of an enterprise about
      which separate discrete financial information is available for evaluation by
      the
      chief operating decision maker, or decision-making group, in making decisions
      how to allocate resources and assess performance. The information disclosed
      herein materially represents all of the financial information related to the
      Company's principal operating segment.





CONCENTRATIONS
      OF CREDIT RISK





Financial
      instruments and related items, which potentially subject the Company to
      concentrations of credit risk, consist primarily of cash and cash equivalents
      and trade receivables. The Company places its cash and temporary cash
      investments with credit quality institutions. At times, such investments may
      be
      in excess of the FDIC insurance limit. The Company periodically reviews its
      trade receivables in determining its allowance for doubtful accounts.





RECLASSIFICATION





Certain
      reclassifications may have been made in prior year’s financial statements to
      conform to classifications used in the current year.





RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      March
      2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for
      Conditional Asset Retirement Obligations, an interpretation of FASB Statement
      No. 143,” which requires an entity to recognize a liability for the fair value
      of a conditional asset retirement obligation when incurred if the liability’s
      fair value can be reasonably estimated. The Company is required to adopt the
      provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
      does not expect the adoption of this Interpretation to have a material impact
      on
      its consolidated financial position, results of operations or cash flows.





In
      May
      2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No.
      154,
“Accounting Changes and Error Corrections, a replacement of APB Opinion No.
      20
      and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior
      periods’ financial statements for changes in accounting principle, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS 154 also requires that retrospective application
      of a
      change in accounting principle be limited to the direct effects of the change.
      Indirect effects of a change in accounting principle, such as a change in
      non-discretionary profit-sharing payments resulting from an accounting change,
      should be recognized in the period of the accounting change. SFAS 154 also
      requires that a change in depreciation, amortization, or depletion method for
      long-lived, non-financial assets be accounted for as a change in accounting
      estimate effected by a change in accounting principle. SFAS 154 is effective
      for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Early adoption is permitted for accounting changes
      and
      corrections of errors made in fiscal years beginning after the date this
      Statement is issued. The Company does not expect the adoption of this SFAS
      to
      have a material impact on its consolidated financial position, results of
      operations or cash flows.




F-14




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





RECENT
      ACCOUNTING PRONOUNCEMENTS (Continued)





On
      February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
      Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
      instruments that have embedded derivatives to be accounted for as a whole
      (eliminating the need to bifurcate the derivative from its host) if the holder
      elects to account for the whole instrument on a fair value basis. SFAS 155
      also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





In
      March
      2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140. Statement 156
      requires that an entity recognize a servicing asset or servicing liability
      each
      time it undertakes an obligation to service a financial asset by entering into
      a
      service contract under certain situations. The new standard is effective for
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





**NOTE
      B - GOING CONCERN MATTERS**





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. As shown in the accompanying consolidated
      financial statements, the Company had a net loss of $2,842,300 for the fiscal
      year ended March 31, 2006. As of March 31, 2006, the Company’s current
      liabilities exceeded its current assets by $4,995,824. In addition, the Company
      is delinquent in connection with various obligations including trade payables,
      accrued payroll taxes and related interest and penalties, and notes payable.
      These factors create an uncertainty as to the Company’s ability to continue as a
      going concern. The accompanying consolidated financial statements do not include
      any adjustments that might result if the Company is unable to continue as a
      going concern.





The
      continuation of the Company as a going concern is dependent upon the success
      of
      future financing and generating sufficient revenue through the successful
      marketing and expansion of its various product lines to generate future profits.
      Subsequent to the date of the financial statements, the Company is taking steps
      to reduce or eliminate the Stockholders' Deficiency and to create a positive
      working capital position. The Company believes it is more likely than in prior
      years to raise substantial financing as a result of the prospects for national
      and global distribution of its products through joint venture undertakings
      with
      entities possessing marketing and distribution infrastructure and capabilities,
      the existence of products containing commercialized biotechnology, the prospects
      for numerous additional products based on the Company’s biotechnology
      foundation, and significantly increased scientific and commercialization
      capabilities. Finally, the Company has taken steps to convert certain existing
      debts into equity and will continue to pursue these steps.




F-15




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      B - GOING CONCERN MATTERS (Continued)**





While
      the
      Company has raised sufficient capital to meet its operating requirements in
      the
      past, additional financing is required in order to meet such operating
      requirements in the future. The Company can give no assurances that the
      necessary funding will be completed or, if completed, on terms favorable to
      the
      Company.





There
      can
      be no assurance that management's plans will be realized and, therefore, until
      the present conditions referred to above are either removed or substantially
      improved, there is uncertainty about the Company's ability to continue as a
      going concern.





**NOTE
      C - PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following at March 31, 2006:





Furniture,
                fixtures and equipment
            
            $
            48,444Less:
                Accumulated depreciation
            
            
            (41,001
            )Net
            
            $
            7,443




Depreciation
      expense for the years ended March 31, 2006 and 2005 was $2,465 and
      $2,826,respectively.





**NOTE
      D - OTHER ASSETS AND LIABILITIES**





In
      the
      fiscal year ended March 31, 2004, the Company entered into an agreement with
      a
      company which is providing services to the Company related to the enhancement
      of
      the Company’s biotechnologies, including the supervision of further research and
      development, protocols, and testing pertaining to the enhancement and protection
      of the intellectual property related thereto and the commercialization,
      production, marketing and distribution of the products containing such
      biotechnologies. In conjunction therewith, the Company made payments thereto
      of
      $400,000 during the year ended March 31, 2004, $575,550 during the year ended
      March 31, 2005, and $881,600 during the year ended March 31, 2006, to be used
      for the activities set forth above. The Company had accounted for the payment
      as
      a prepaid expense. During the fiscal years ended March 31, 2006 and March 31,
      2005, all of the funds advanced had been expended. At March 31, 2006, the
      Company included a $47,935 payable to such company in its current liabilities.
      Additionally, the Company agreed to pay to the other party two percent of net
      revenues generated by the sale of products with respect to which the company
      provided services under the agreement during the term of the agreement, subject
      to certain limitations set forth therein.





**NOTE
      E - ACCRUED LIABILITIES**





Accrued
      liabilities at March 31, 2006 are as follows:





Accrued
                payroll, payroll taxes and penalties (Note M)
            
            $
            946,395Accrued
                expenses
            
            
            1,622,047Accrued
                interest
            
            
            337,979Total
            
            $
            2,906,421





Accrued
      expenses represents primarily on-going payment obligations and accrued research
      and development costs related to certain of its intellectual property and
      accruals made in prior years for legal contingencies.




F-16


PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      F - REVOLVING CREDIT FACILITY - NOTES PAYABLE**





In
      June,
      2002, the Company closed a revolving credit facility with a one-year term which
      provides for advances of up to a maximum principal amount of $250,000, at the
      option of the lender, at an interest rate of 10% per annum, with each advance
      payable within 30 days.





As
      of
      March 31, 2006, all principal and accrued interest under the facility has been
      paid in full.





At
      March
      31, 2005, the outstanding principal balance under the facility was $32,658.
      In
      April, 2005, an additional advance was authorized under the Company’s revolving
      credit facility of up to $150,000, $140,000 of which was advanced during the
      course of the fiscal year. Repayment of advances under the facility are secured
      by the Company’s assets and are guaranteed by two officers of the Company. In
      connection with this advance, the Company issued 13,700,000 shares of Common
      Stock in the fiscal quarter ended June 30, 2005, which serve as collateral
      to
      secure repayment of advances made to the Company under the facility and the
      meeting of all obligations of the Company under the facility loan documents.
      Also in connection with such advance, the Company granted to the Lender the
      option, after the expiration of a period of one year from such advance, to
      take
      title to 4,600,000 shares (or any portion thereof) of such stock collateral;
      agreed to deliver to the Lender, until such advance has been repaid, net
      proceeds received by the Company generated by the sale of its rehydration
      beverage of up to $50,000; and agreed to increase the interest rate with respect
      to the current advance and the outstanding principal balance on prior advances
      from 10% to 12%.





In
      connection with a January 2005 advance, the Company granted to the Lender the
      option, after the expiration of a period of one year from such advance, to
      take
      title to 1,212,121 shares (or any portion thereof) of such stock
      collateral.





The
      Company did not repay the advances by the maturity date. As a result thereof,
      the lender has exercised its rights provided by the loan documents to sell
      shares of stock that were previously issued and pledged as collateral for the
      repayment of advances pursuant to the credit facility. During the fiscal year,
      7,810,469 shares of Common Stock pledged as collateral, valued at $206,204,
      were
      used to pay down $172,658 of debt and $540 of related accrued interest and
      $13,480 of interest expense. Other financing expense of $12,562 was charged
      to
      operations in connection with this transaction.





Subsequent
      to March 31, 2006, the Lender paid $6,964 in excess proceeds from the
      liquidation of stock to the Company returned 7,500,000 shares of Common Stock
      which had served as collateral under the facility. (see Note N - Subsequent
      Events).




F-17




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      G - NOTES PAYABLE**





Debt
      as
      of March 31, 2006 consists of the following:





Note
                payable with interest rate of 15% per annum. The note matured
              on
                May, 2003. The holder had agreed to extend the maturity date of the
                note
                to
              June
                30, 2006.
            
            $
            80,000Note
                payable with interest at a rate of 10%. The note matured on December
                31,
                2000, when principal and unpaid interest were due. In consideration
                of
                this loan and two prior bridge loans, the Company agreed to issue
                shares
                of the Company's common and convertible preferred stock to the holder
                representing approximately 200,000 shares of common stock on a fully
                converted basis. The holder had agreed to extend the maturity date
                of the
                note to June 30, 2006.
            
            
            104,000Note
                payable in the original principal amount of $25,000 with interest
                at a
                rate of 10% per annum. The Note matured on July 2, 1999, when principal
                and unpaid interest was due. The note is currently in default, although
                partial payment has been made subsequent to the maturity date. No
                action
                has been taken against the Company to enforce the note. In connection
                with
                the note, the Company issued a warrant to purchase 5,000 shares of
                common
                stock at an exercise price of $0.04 per share.
            
            
            17,500Note
                payable with interest accruing at a rate of 10%. Principal and interest
                were due in February 2001. In conjunction with this financing, the
                Company
                issued a warrant to purchase 200,000 shares of common stock at a
                exercise
                price of $0.50 per share. The holder agreed to extend the maturity
                date of
                the note to June 30, 2006.
            
            
            100,000Note
                payable with interest at a rate of 10% per annum. Principal and interest
                were due in November 2000. In conjunction with this financing, the
                Company
                issued a warrant to purchase 300,000 shares of common stock at a
                exercise
                price of $0.50 per share. The Company, at its option, may pay the
                Note in
                common stock or equivalent. The Company has notified the holder that
                it
                has elected to pay the principal and interest due under the note
                by the
                issuance of 136,612 shares of common stock.
            
            
            150,000Note
                payable with interest accruing at a rate of 10% per annum. Principal
                and
                interest were due in June 2001. In conjunction with this financing,
                a
                warrant to purchase 50,000 shares of common stock at an exercise
                price of
                $0.50 per share is issuable to this holder. The note holder has agreed
                to
                extend the maturity date of the note to June 30, 2006 and in connection
                therewith, the Company has agreed to issue (but has not yet issued)
                a
                warrant to purchase 25,000 shares of common stock at an exercise
                price of
                $0.50 per share.
            
            
            50,000




F-18




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      G - NOTES PAYABLE (Continued)**





(Continued)Note
                payable in the original principal amount of $100,000, with an interest
                rate of 10% per annum. Principal and interest were due in July 2001.
                $50,000 of the loan was repaid in May, 2001. In conjunction with
                this
                financing, a warrant to purchase 100,000 shares of common stock at
                an
                exercise price of $0.50 per share is issuable to the holder. An additional
                warrant to purchase 12,500 shares of the Common Stock at the same
                exercise
                price is issuable as a result of the Company's exercising its option
                to
                extend to October 2001 the maturity date of the note with respect
                to
                $50,000 of principal and all of the interest payable pursuant to
                the note.
                The holder had agreed to extend the maturity date of the note to
                June 30,
                2006.
            
            
            50,000In
                April, 2001, the Company was loaned $40,000. A promissory note has
                not yet
                been issued, as that amount was only a partial funding of the transaction.
                The note will provide an interest rate of 10% and a term of 120 days.
                A
                warrant will be issuable in conjunction with this financing, however,
                the
                amount of shares of common stock purchasable pursuant to the warrant
                will
                be determined once the full amount of the financing is
                established.
            
            
            40,000Note
                payable in the original principal amount of $35,000, with an interest
                rate
                of 12% per annum. Principal and interest are due in February, 2006.
            
            
            35,000Total
            
            $
            626,500Less:
                current portion
            
            
            (
                626,500
            )Long-term
                portion
            
            $
            0,000





Aggregate
      maturities of long-term debt as of March 31, 2006 are as follows:




Fiscal
                Year
            
            Amount2007
            
            $
            626,500




**NOTE
      H - CAPITAL STOCK**





The
      Company has authorized 15,000,000 shares of preferred stock, with 500,000 shares
      designated as Series A convertible preferred stock with par value of $.0001
      per
      share; and 500,000 shares designated as Series B non-convertible preferred
      stock
      with par value of $0.0001 per share; and 3,000,000 shares designated as Series
      C
      convertible preferred stock with par value of $.0001 per share. The Company
      also
      has authorized 250,000,000 shares of common stock with par value $0.0001 per
      share.





SERIES
      A
      CONVERTIBLE PREFERRED STOCK





At
      March
      31, 2006, the Company has 500,000 shares of Series A Convertible Preferred
      Stock
      ("Series A Preferred") issued and outstanding. The Series A Preferred holders
      are entitled to one vote per share on all matters presented to the stockholders
      with certain exceptions as defined in the Certificate of Designation. In
      addition, the Series A Preferred is convertible into one share of common
      stock.





SERIES
      B
      NON-CONVERTIBLE PREFERRED STOCK





At
      March
      31, 2006, none of Series B Non-Convertible Preferred Stock ("Series B
      Preferred") was issued and outstanding. The Series B Preferred holders are
      entitled to one vote per share on all matters presented to the stockholders
      with
      certain exceptions as defined in the Certificate of Designation. In addition,
      the Series B Preferred is subject to certain redemption and liquidation
      provisions, as defined.





F-19




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      H - CAPITAL STOCK (Continued)**





SERIES
      C
      CONVERTIBLE PREFERRED STOCK





As
      of
      March 31, 2006, 1,302,304 shares of Series C Preferred Stock were issued and
      outstanding and 15,298 shares were subscribed in connection with a stock
      exchange transaction conducted by Phlo Corporation and the shareholders of
      a
      privately held beverage company. Each holder of the Series C Preferred Stock
      has
      the right to cast one vote for each share of Common Stock into which his or
      its
      Series C Preferred Stock is convertible. No dividends are currently payable
      with
      respect to Series C Preferred Stock. The holders of Series C Preferred Stock
      have a liquidation preference of $0.01 per shares plus all accrued but unpaid
      dividends, if any. Holders of the Series C Preferred Stock have no redemption
      rights. Each share of Series C Preferred Stock initially is convertible into
      100
      shares of Common Stock without the payment of any additional consideration
      at
      any time after September 30, 2001. However, the conversion rate is subject
      to
      adjustment in the case of certain corporate transactions or events, including
      stock splits and combinations; certain dividends and distributions;
      reclassification, exchange or substitution of the Common Stock; reorganizations,
      mergers consolidations or sale of assets; and the sale of shares of Common
      Stock
      at a price that is less than the then-effective Series C Conversion Price.
      In
      the event of a sale of shares of Common Stock at a price that is less than
      the
      then-effective Series C Conversion Price, then, in each such event, an
      adjustment to such conversion price is made to allow the holder of the Series
      C
      Preferred Stock to convert into shares of Common Stock at a rate greater than
      the rate effective immediately preceding such issuance.





COMMON
      STOCK





During
      the year ended March 31, 2005, the Company issued 3,100,000 shares of Common
      Stock upon conversion of 31,000 shares of Series C Convertible Preferred
      Stock.





During
      the year ended March 31, 2005, in consideration of $650,973, the Company agreed
      to issue an aggregate of 9,790,665 shares of Common Stock, 6,000,000 of which
      had been issued at March 31, 2005, and agreed to issue warrants to purchase
      250,000 shares of Common Stock at an exercise price of $0.02 per shares.
      Additionally, the Company agreed to issue 9,324,243 shares of Common Stock
      to
      officers of the Company in connection with such financings and the Company’s
      revolving credit line advances and in consideration of guarantees and supplying
      of shares of stock as collateral which were sold to satisfy the obligation
      of
      the Company, 8,542,424 shares of which were issued at March 31, 2005. The
      Company accounted for and charged to operation such shares in the amount of
      $422,940. Additionally, the Company issued 5,000,000 shares of Common Stock,
      valued at $150,000, in exchange for services related to the further development
      and enhancement of its intellectual property.





During
      the year ended March 31, 2005, the Company issued a warrant to purchase 100,000
      shares of common stock at an exercise price of $0.04 per share pursuant to
      an
      agreement related to the provision of marketing services. The warrant was valued
      at $3,738 using the Black Scholes method at the date of grant of the options
      based on the following assumptions:  (1) risk free interest rate
      of 3.5%; (2) dividend yield of 0%; (3) volatility factor of the
      expected market price of our common stock of 210%; and (4) an expected
      life of the warrant of 3 years.





During
      the year ended March 31, 2005, the Company issued a warrant to purchase
      3,300,000 shares of common stock at an exercise price of $0.09 per share,
      pursuant to an agreement by the grantee not convert any shares of preferred
      stock and not to exercise any warrants held by grantee for a period of one
      year.
      The warrant was valued at $287,104 using the Black Scholes method at the date
      of
      grant of the options based on the following
      assumptions:  (1) risk free interest rate of 3.5%;
      (2) dividend yield of 0%; (3) volatility factor of the expected market
      price of our common stock of 210%; and (4) an expected life of the
      warrant of 4 years. This amount has been charged to financing
      cost.




F-20


PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      H - CAPITAL STOCK (Continued)**





In
      connection with securing the repayment of two advances under the Company’s
      revolving credit facility made during the year ended March 31, 2005 (Note F),
      the Company issued a total of 5,500,000 shares of Common Stock. In connection
      with a June 2004 advance, the Company granted to the Lender the option, after
      the expiration of a period of one year from such advance, to take title to
      1,785,715 shares (or any portion thereof) of such stock collateral. Also, in
      June 2004, the Company issued 3,500,000 shares of Common Stock in exchange
      for
      the conversion by the Lender of $46,000 of accrued interest and the waiver
      of
      the $150,000 financing fee owed in connection with a prior advance. In
      connection with the January 2005 advance, the Company granted to the Lender
      the
      option, after the expiration of a period of one year from such advance, to
      take
      title to 1,212,121 shares (or any portion thereof) of such stock collateral.
      The
      Company did not repay the advances by the maturity date. As a result thereof,
      the lender exercised its rights to sell shares of stock that were previously
      issued and pledged as collateral for the repayment of advances pursuant to
      the
      credit facility. During the year ended March 31, 2005, 4,981,000 shares of
      Common Stock pledged as collateral, valued at $255,655, were used to pay down
      $155,387 of debt and $15,859 of related accrued interest. Other financing
      expense of $84,409 was charged to operations in connection with this
      transaction.





During
      the year ended March 31, 2006, the Company issued an aggregate of 1,536,364
      shares of Common Stock subscribed in prior years.





During
      the year ended March 31, 2006, the Company issued 4,000,000 shares of the Common
      Stock, valued at $80,000, in exchange for services rendered pursuant to existing
      agreements. The valuation of common stock issued for services was based upon
      the
      value of the services rendered, which did not differ materially from the fair
      value of the Company's common stock during the period the services were
      rendered. The Company also issued 2,060,606 shares of Common Stock to officers
      of the Company in connection with such agreements and in consideration of
      guarantees and supplying of shares of stock as collateral. The Company accounted
      for and charged to operation such shares in the amount of $20,606, which
      approximated the fair value of the Common Stock at the time the shares were
      issued.





During
      the year ended March 31, 2006, in conjunction with a settlement agreement
      providing for the payment to the Company of up to $75,000 and the provision
      of
      services to the Company, the Company issued 12,121,212 shares of Common Stock.
      As of March 31, 2006, the Company has received $30,000 pursuant to the
      settlement agreement and accounted for $45,000 as a common stock subscription
      receivable. The Company received the settlement in full subsequent to the date
      of the financial statements. The Company has recorded a financing cost of
      $51,515 related to 4,121,212 of these shares of Common Stock which were issued
      to officers of the Company in consideration of guarantees and supplying of
      stock
      as collateral in connection with such agreement.





During
      the year ended March 31, 2006, in consideration of $712,500, the Company issued
      an aggregate of 87,988,259 shares of Common Stock and warrants to purchase
      2,105,000 shares of Common Stock with a two-year term at an exercise price
      of
      $0.03 per share .
      Additionally, the Company issued 52,179,340 shares of Common Stock to officers
      of the Company in connection with these financings and the Company’s revolving
      credit line advances and in consideration of guarantees and supplying of shares
      of stock as collateral which were sold to satisfy the obligation of the Company.
      The Company accounted for and charged to operation such shares in the amount
      of
      $785,191.





During
      the fiscal year ended March 31, 2006, the Company issued previously-subscribed
      warrants to purchase an aggregate of 250,000 shares of Common Stock at an
      exercise price of $0.02 per share. The value of such warrants had been accounted
      for and charged to operations in the prior fiscal year.





F-21





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      H - CAPITAL STOCK (Continued)**





During
      the fiscal year ended March 31, 2006, in  consideration
      for extended payment terms relating to a Company obligation, the Company agreed
      to extend the expiration date of a warrant previously granted to the recipient
      from March 2005 to 2007. Additionally, the numbers of shares of the Common
      Stock
      purchasable pursuant to the warrant was increased from 200,000 shares to 750,000
      shares, and the warrant exercise price was decreased from $0.05 to $0.03. The
      warrant was valued at $20,000 using the Black Scholes method at the date of
      grant of the warrant based on the following assumptions: (1) risk free interest
      rate of 3.5%; (2) dividend yield of 0%; (3) volatility factor of the expected
      market price of the Common Stock of 222%; and (4) an expected life of the
      warrant of 2 years. This amount was charged to expense as a financing cost.





During
      the fiscal year ended March 31, 2006, the Company issued a warrant with a term
      of four and one-half years, to purchase 2,500,000 shares of the Common Stock
      at
      an exercise price of $0.025 per share and a warrant
      with a term of four and one-half years to purchase 9,900,000 shares of the
      Common Stock at an exercise price of $0.05 per share in connection with
      financing activities, services rendered, and the restructuring of existing
      warrants which included the raising of exercises prices on certain warrants.
      In
      connection therewith, the Company cancelled existing warrants to purchase an
      aggregate of 9,400,000 shares of common stock with terms of between 1 1⁄2 and 4 1⁄2
years and exercise prices of between $0.025 and $0.09 per share. The Company
      has
      recorded an expense of $122,023 for the warrants, representing the increase
      in
      fair value resulting from the modifications and the issuance of a new warrant.
      The assumptions used in the Black Scholes method at the date of grant of grant
      and modification are as follows:  (1) risk free interest rate
      of 4.8%; (2) dividend yield of 0%; (3) volatility factor of the
      expected market price of the Common Stock of 342%; and (4) an expected
      life of the warrant of 4.5 years.





During
      the fiscal year ended March 31, 2006, the Company issued a warrant to purchase
      750,000 shares of Common Stock at an exercise price of $0.05 per share for
      the
      provision of production-related and other services. The warrant was valued
      at
      $21,000 using the Black Scholes method at the date of grant of the warrant
      based
      on the following assumptions:  (1) risk free interest rate
      of 3.5%; (2) dividend yield of 0%; (3) volatility factor of the
      expected market price of the Common Stock of 222%; and (4) an expected
      life of the warrant of 2 years. This amount has been charged to expense.





During
      the fiscal year ended March 31, 2006, in consideration for services rendered,
      the Company issued a warrant with a term of three years, to purchase 2,000,000
      shares of the Common Stock at an exercise price of $0.03 per share; and a
      warrant, with a term of three years, to purchase 2,300,000 shares of the Common
      Stock at an exercise price of $0.05 per share. The warrants were valued at
      $234,432 using the Black Scholes method at the date of grant of the warrant
      based on the following assumptions:  (1) risk free interest rate
      of 4.7%; (2) dividend yield of 0%; (3) volatility factor of the
      expected market price of the Common Stock of 342%; and (4) an expected
      life of the warrant of 3 years. This amount has been charged to
      expense.




During
      the fiscal year ended March 31, 2006, the Company issued a warrant to purchase
      up to 3,000,000 shares of Common Stock at an exercise price of $0.02 per share.
      However, the holder’s right to exercise the warrant was contingent upon the
      attainment of certain sales-related performance goals within a specified time.
      The warrant never became exercisable with respect to any shares of Common Stock,
      and the warrant was cancelled during the fiscal year ended March 31, 2006.





During
      the fiscal year ended March 31, 2006, the Company’s Board of Director’s voted to
      amend the Company’s articles of incorporation to increase the number of
      authorized shares of Common Stock from 250,000,000 to 600,000,000. The board
      of
      directors’ vote shall be followed by shareholder approval of such increase by
      shareholders holding the majority of the shares entitled to vote on such matter
      through shareholder written consent and the issuance of an Information Statement
      to shareholders to inform them of the amendment to the Company’s articles of
      incorporation.


F-22


PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      H - CAPITAL STOCK (Continued)**





Cash
      Dividend





In
      September, 2003, the Company announced that the necessary actions had been
      authorized for the payment by one of the operating companies in the Company’s
      corporate group of a cash dividend to shareholders of the Company in the form
      of
      a pro rata interest in five percent (5%) of any qualifying net revenues
      generated by the future sales of the Company’s oral rehydration solution
      products to the United States Military ("Net Revenue Interest").





The
      Net
      Revenue Interest is payable to the beneficial owners of record of the Common
      Sock as the October 17, 2003 (the "Record Date"), on a quarterly basis, during
      a
      period of five years from the initial cash distribution. The pro rata share
      of
      the Net Revenue Interest of the Company’s shareholders shall be based on their
      beneficial ownership of the Common Stock as of March 15, 2004 (the "Certificate
      Exchange Date"). The dividend shall be paid out of funds that are legally
      available thereof in accordance with applicable law.





Shareholders
      were required to exchange certificates representing their Common Stock for
      certificates which indicate their eligibility to receive a pro rata share of
      the
      Net Revenue Interest (the "NRI Certificates") so long as the holder owns such
      shares. The Net Revenue Interest is proportionately reduced as and if
      shareholders sell or transfer the shares represented by the NRI
      Certificates.





To
      date,
      no cash dividends have been paid, and no assurances can be made with respect
      to
      whether such orders from the United States Military will actually materialize
      and with respect to the size or value of any such orders which are actually
      received.





**NOTE
      I - STOCK OPTIONS AND WARRANTS**





STOCK
      OPTIONS





In
      March
      1996, the Board of Directors of the Company adopted, and the stockholders of
      the
      Company approved the adoption of, the 1996 Stock Option Plan. The maximum number
      of shares of Common Stock with respect to which awards may be granted pursuant
      to the 1996 Plan is initially 2,000,000 shares. No options are outstanding
      under
      this plan.





The
      Company determined that the prior management did not validly (under the
      applicable provisions (including Section 157) of the General Corporation Law
      of
      the State of Delaware) issue any of the options to purchase an aggregate of
      1,613,333 shares of common stock which it had purportedly issued, and that,
      pursuant to Delaware law, these options are void. Therefore, the Company has
      removed such options from its records and shall not issue any shares of Common
      stock under such void options.





WARRANTS





The
      following table summarizes the changes in warrants outstanding and the related
      prices for the shares of the Company’s common stock issued to non-employees of
      the Company. These warrants were granted in lieu of cash compensation for
      services performed or non-compensatory warrants in connection with financing
      activities.





Warrants
                Outstanding
            
            
            
            
            
            Warrants
                ExercisableExercise
                Prices
            
            
            NumberOutstanding
            
            
            Weighted
                Average Remaining ContractualLife
                (Years)
            
            
            WeighedAverageExercisePrice
            
            
            NumberExercisable
            
            
            Weighted
              AverageExercise
                Price$
                0.01-0.05
            
            
            31,261,682
            
            
            2.50
            
            
            0.03
            
            
            31,261,682
            
            $
            0.030.25
            
            
            50,000
            
            
            1.30
            
            
            0.25
            
            
            50,000
            
            
            0.250.40-0.45
            
            
            875,000
            
            
            0.30
            
            
            0.41
            
            
            875,000
            
            
            0.4132,186,682
            
            
            2.50
            
            $
            0.04
            
            
            32,186,682
            
            $
            0.04


F-23


PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2005 AND 2004





**NOTE
      I - STOCK OPTIONS AND WARRANTS (Continued)**





Transactions
      involving warrants are summarized as follows:





Number
                of Warrants
            
            Weighted
                AveragePrice
                Per ShareOutstanding
                at March 31, 2004
            
            
            20,762,860
            
            $
            0.07Granted
            
            
            3,650,000
            
            
            0.08Exercised
            
            
            -
            
            
            -Cancelled
                or expired
            
            
            (1,021,666
            )
            
            0.17Outstanding
                at March 31, 2005
            
            
            23,391,194
            
            $
            0.06Granted
                (Note H)
            
            
            23,305,000
            
            
            0.04Exercised
            
            
            -
            
            
            -Cancelled
                or expired
            
            
            (14,509,512
            )
            
            0.07Outstanding
                at March 31, 2006
            
            
            32,186,682
            
            $
            0.04





**NOTE
      J - INCOME TAXES**





Financial
      Accounting Standard No. 109 requires the recognition of deferred tax liabilities
      and assets for the expected future tax consequences of events that have been
      included in the financial statement or tax returns. Under this method, deferred
      tax liabilities and assets are determined based on the difference between
      financial statements and tax bases of assets and liabilities using enacted
      tax
      rates in effect for the year in which the differences are expected to reverse.
      Temporary differences between taxable income reported for financial reporting
      purposes and income tax purposes are insignificant.





At
      March
      31, 2006, the Company has available for federal income tax purposes a net
      operating loss carryforward of approximately $11,864,000, expiring through
      the
      year 2026, that may be used to offset future taxable income. The Company has
      provided a valuation reserve against the full amount of the net operating loss
      benefit, since in the opinion of management based upon the earnings history
      of
      the Company, it is more likely than not that the benefits will not be
      realized.





Components
      of deferred tax assets as of March 31, 2006 are as follows:





Non
                current:Net
                operating loss carryforward
            
            $
            4,152,000Valuation
                allowance
            
            
            (4,152,000
            )Net
                deferred tax asset
            
            
            0





Further,
      the Company has not filed any federal, state or local income or franchise tax
      returns. Such failure may have a material adverse effect on the amount of any
      net operating loss carryforwards and the ability of the Company to use the
      net
      operating loss carryforwards and may subject the Company to fines.





F-24




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      K - BUSINESS CONCENTRATION**





The
      Company did not purchase more than 10% of its raw materials from any supplier
      for the fiscal years ended March 31, 2005 and 2006.





**NOTE
      L - RELATED PARTY TRANSACTIONS**





A
      shareholder of the Company holds notes issued by the Company between 1999 and
      2002 representing an aggregate outstanding principal balance of $419,000 at
      March 31, 2006 and $384,000 at March 31, 2005. (Note G).





**NOTE
      M - COMMITMENTS AND CONTINGENCIES**





PAYMENT
      OBLIGATIONS





The
      Company has various on-going payment obligations (primarily minimum royalties
      or
      payments) related to certain of its intellectual property, which payments are
      contingent on certain circumstances or performances by the obligees. Such
      payment obligations for the year ended March 31, 2006, were $40,000. The
      Company’s obligations for the subsequent fiscal year are expected to be
      $40,000.





LOAN
      GUARANTEE





Phlo
      Corporation is a guarantor of a loan obtained by an unrelated party in
      connection with a purchase agreement. In addition, payments of the loan are
      secured by the Company's assets. The amount outstanding on the loan at December
      31, 2003 was approximately $65,000. Payment of the loan is secured by shares
      of
      common stock owned by the unrelated party. The holder of the loan has initiated
      legal action against the primary obligor and Phlo Corporation as guarantor,
      claiming outstanding principal, interest and late fees in the aggregate amount
      of approximately $105,000. The Company believes that it no longer has any
      liability under the guaranty as a result of the actions or inactions of the
      lender, including the lender's failure to mitigate its damages by selling
      collateral pledged by the primary obligor at a time when the value of such
      collateral exceeded all amounts due.





LITIGATION





(a)  The
      Company is currently engaged in litigation with a contract research and
      development facility. The Company terminated its agreement with the R&D
      facillity, asserting that the facility had breached its agreement with the
      Company and committed fraud, and the Company demanded payment from the R&D
      facility as required by the agreement. Moreover, the Company insisted that
      an
      independent scientific lab perform an audit of the work allegedly performed
      by
      the R&D facility for the Company (for which the Company has rendered
      substantial consideration, including $225,000 in cash). As a defensive measure,
      the R&D facility initiated legal action claiming breach of contract. The
      Company has asserted as counterclaims breach of contract, fraud, and negligence.
      As this litigation is in its initial stages, the Company can make no assurances
      with respect to the outcome of this matter.




(b)  The
      Securities and Exchange Commission instituted public administrative and cease
      and desist proceedings against Phlo Corporation (“Phlo”), its President James B.
      Hovis, and its Executive Vice President, Anne P. Hovis, on April 21, 2005,
      alleging violations by Phlo Corporation related to certain transfer agent
      regulations and related to the late filing of its required periodic reports.
      More specifically, the Division of Enforcement has alleged the violation by
      Phlo
      of Sections 17A(d)(1) and 17(b)(1) of the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”) and
      Rules
      17Ad-2 (which requires transfer agents to turnaround within three business
      days
      of receipt at least 90% of all routine items received for transfer during a
      month) and 17Ad-5 (which requires transfer agents to respond within five
      business days to any written inquiry regarding the status of items presented
      for
      transfer within the preceding six months) thereunder. The Division of
      Enforcement also alleged that Anne Hovis aided and abetted such
      violations.





F-25




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      M - COMMITMENTS AND CONTINGENCIES (Continued)**





LITIGATION
      (Continued)





The
      Division also alleges that Phlo violated Section 13(a) of the Exchange Act,
      and
      Rules 13a-1 and 13a-13 thereunder (which require the filing of annual and
      quarterly reports with the SEC), and alleged that James Hovis aided and abetted
      such violations.





The
      Company disputed all allegations made by the Division of Enforcement (except
      for
      the fact that Phlo did not timely make certain periodic filings) and vigorously
      defended the SEC action. Additionally, the Company became completely current
      in
      its financial reporting prior to the issuance of an initial decision on this
      matter.





On
      February 17, 2006, an Initial Decision was rendered by the Administrative Law
      Judge (“ALJ”) in the matter. The ALJ determined that the registration Phlo’s
      public securities should not be
      revoked. He entered cease and desist orders with respect to Phlo and James
      Hovis
      against future violations of reporting requirements. With respect to alleged
      transfer agent violations, the ALJ revoked Phlo’s status as transfer agent and
      entered a cease and desist order against Phlo and Anne Hovis against future
      violations and barred Anne Hovis from future association with a transfer agent.
      The ALJ also assessed civil penalties against Phlo in the amount of $100,000,
      against James Hovis in the amount of $25,000, and against Anne Hovis in the
      amount of $50,000.





The
      Company has appealed the Initial Decision, which stays the sanctions imposed
      for
      the duration of the appeal. Among other things, the Company argued that the
      ALJ
      had no jurisdiction to impose a fine against James Hovis; that many of the
      ALJ’s
      findings of fact were wrong in light of the evidence presented; that fines
      against Anne Hovis and Phlo were unduly harsh in light of the evidence; and
      that
      the ALJ ignored the SEC’s burden of proof. All appeal briefs have been filed by
      both sides. The Company can make no assurances with respect to the outcome
      of
      this matter.





The
      Company is a party to certain other legal matters arising in the ordinary course
      of business. Management believes the ultimate disposition of these matters
      will
      not have a material adverse effect on the Company’s financial position or
      results of operations.





PAYROLL
      TAXES





The
      Company has not paid payroll taxes since the third quarter of 1999 totaling
      $372,225 at March 31, 2006. The Company has accrued estimated penalties and
      interest of $304,924 as of March 31, 2006.




LEASE





At
      March
      31, 2006, the Company is subleasing office space for a term ending March 31,
      2007 at a monthly rate of $9,018 with a fixed 4% annual increase. Rent expense
      for the years ended March 31, 2006 and 2005 was $149,409 and $178,812,
      respectively.




F-26




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2006 AND 2005





**NOTE
      N - SUBSEQUENT EVENTS**





Financing





As
      principal and accrued interest under the lending facility was paid in full
      at
      March 31, 2006, the Lender paid to the Company in the quarter ended June 30,
      2006, excess proceeds from the liquidation of stock collateral in the amount
      of
      $6,964 and returned to the Company 7,500,000 shares of Common Stock which had
      served as collateral under the facility.




Equity





In
      the
      quarter ended June 30, 2006, in consideration of $48,000, the Company issued
      2,944,444 shares of Common Stock and agreed to issue a warrant to purchase
      500,000 shares of Common Stock at an exercise price of $0.05 per
      share.





In
      the
      fiscal quarter ended June 30, 2006, the Company issued a previously-subscribed
      warrant to purchase 1,250,000 shares of Common Stock at an exercise price of
      $0.03.





F-27




Item
              8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING ANDFINANCIAL
                DISCLOSURE





By
      letter
      dated March 29, 2005, the Company was informed by its independent auditors,
      Sherb & Co. LLP (“Sherb”) that Sherb will “cease our services as your
      auditors”. The Company engaged Russell Bedford Stefanou Mirchandani LLP (“RBSM”)
      to serve as its new independent auditors. The Company filed Current Reports
      on
      Form 8-K with the SEC on April 7, 2005 and April 12, 2005, with respect to
      the
      foregoing.





Sherb’s
      reports on the Company’s consolidated financial statements as of and for the
      year ended March 31, 2003 did not contain an adverse opinion or disclaimer
      of
      opinion, nor were they qualified or modified as to audit scope or accounting
      principles. Such reports included an explanatory paragraph that disclosed that
      there was substantial doubt about the Company’s ability to continue as a
      going-concern.





During
      the year ended March 31, 2003 and the period between March 31, 2003 and April
      12, 2005, there were no disagreements between the Company and Sherb on any
      matter of accounting principles or practices, financial statement disclosure
      or
      auditing scope or procedure which, if not resolved to Sherb’s satisfaction,
      would have caused them to make reference to the subject matter of the
      disagreement in connection with their report for such periods, and there were
      no
      reportable events as defined in Item 304(a)(1)(v) of Regulation
      S-K.





ITEM
              8A.
            CONTROLS
                AND PROCEDURES





Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed by the Company in the reports
      that the Company files or submits under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms. Disclosure controls and procedures
      include, without limitation, controls and procedures designed to ensure that
      information required to be disclosed by the Company in the reports that the
      Company files under the Exchange Act is accumulated and communicated to the
      Company’s management, including its principal executive and financial officers,
      as appropriate to allow timely decisions regarding required
      disclosure.




*Evaluation
      of Disclosure and Controls and Procedures.* As of
      the end of the period covered by this Annual Report, the Company conducted
      an
      evaluation, under the supervision and with the participation of its chief
      executive officer and chief financial officer, of the Company’s disclosure
      controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act).
      Based on this evaluation, the Company’s chief executive officer and chief
      financial officer concluded that its disclosure controls and procedures are
      effective to ensure that information required to be disclosed by the Company
      in
      reports that the Company files or submits under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in
      Securities and Exchange Commission rules and forms.




*Changes
      in Internal Controls Over Financial Reporting.* There
      was no change in the Company’s internal controls, which are included within
      disclosure controls and procedures, during its most recently completed fiscal
      quarter that has materially affected, or is reasonably likely to materially
      affect, the Company’s internal controls.




PART
      III





ITEM
              9.
            DIRECTORS
                AND EXECUTIVE OFFICERS





DIRECTORS
      AND EXECUTIVE OFFICERS





The
      names
      and ages of the directors, executive officers, significant employees, and
      promoters of the Company are set forth below.




Name
            
            Age
            
            Position
              HeldJames B. Hovis
            
            57
            
            President & CEO, DirectorAnne P. Hovis
            
            46
            
            Executive Vice President, General
              Counsel,
                Secretary & Director










BACKGROUND
      OF EXECUTIVE OFFICERS AND DIRECTORS





James
      B.
      Hovis, President, Chief Executive Officer and a Director. Mr. Hovis is
      responsible for the overall management of the Company, including the product
      development, sales, marketing, distribution, production and financial functions.
      Additionally, Mr. Hovis directs the Company’s acquisition and financing
      activities. Previously, Mr. Hovis was engaged in the practice of corporate
      transactional law. Mr. Hovis has over 20 years of experience involving a wide
      range of corporate activity, both as a principal and as a professional
      representative or advisor, including all types of financings and refinancings
      (including debt and equity private placements), mergers, acquisitions (including
      product acquisitions and leveraged and management buyouts), divestitures, sales
      of assets or stock, restructurings and reorganizations. Additionally, his
      professional background has included a strong emphasis on developing business
      entities in a number of different industries, and he has been published in
      his
      areas of expertise. During the period from 1983 to the present, he has served
      on
      a number of boards of developing companies. Mr. Hovis is a graduate of Davidson
      College and received his J.D. degree from the T.C. Williams School of Law at
      the
      University of Richmond.





Anne
      P.
      Hovis, Executive Vice President, General Counsel, Secretary and a Director.
      Mrs.
      Hovis is responsible for managing the day-to-day administration of the Company
      and assists Messrs. Hovis in the overall management of the Company. She is
      also
      responsible for the legal affairs of the Company, including intellectual
      property protection, compliance with FDA regulations, securities filings,
      compliance with applicable laws, and negotiation of agreements with distributors
      and co-packers. Mrs. Hovis also assists Mr. Hovis in the Company’s transactional
      activities, including financings and acquisitions. Previously, Mrs. Hovis was
      an
      attorney with Anderson, Hibey & Blair, a Washington, D.C. based firm, where
      she specialized in corporate legal and international trade policy matters.
      Prior
      to this, Mrs. Hovis was an attorney with Lane & Mittendorf, where she
      participated in the firm’s corporate transactional (including stock and asset
      acquisitions and commercial lending facilities) and international trade
      practices. Mrs. Hovis has a B.A. from New York University and a J.D. degree
      from
      the Georgetown University Law Center.





COMPLIANCE
      WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934





Section
      16(a) of the Securities Exchange Act of 1934 requires the Company’s directors
      and executive officers, and persons who own more than ten percent (10%) of
      a
      registered class of the Company’s equity securities, to file with the Securities
      and Exchange Commission initial reports of ownership and reports of changes
      in
      ownership of common stock and other equity securities of the Company. Officers,
      directors and greater than ten percent shareholders are required by SEC
      regulation to furnish the Company with copies of all Section 16(a) forms they
      file.





To
      the
      Company’s knowledge, based solely on its review of the copies of such reports
      furnished to the Company during the year ended March 31, 2005, all Section
      16(a)
      filing requirements applicable to its officers, directors and greater than
      ten
      percent beneficial owners were satisfied, with the exception of two officers
      who
      did not timely file reports required by Section 16(a) with respect to certain
      transactions during the fiscal year. These officers are taking the steps
      necessary to make such filings. It is the Company’s intention to ensure, where
      possible, complete compliance according to this Section.





ITEM
              10.
            EXECUTIVE
                COMPENSATION.





The
      following table sets forth the compensation paid to the executive officers
      for
      the fiscal year ending March 31, 2006.





SUMMARY
      COMPENSATION TABLE




CompensationPayouts
              
              Annual
                  Compensation Awards
              
              
              
              
              
              
              
              Long-TermAwards(a)
              
              (b)
              
              (c)
              
              
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)OtherCompensation
                Name
                  and sation Principal Position
              
              Year
              
              Salary
              
              Bonus
              
              Other
                  Annual Compensation ($)
              
              Restricted
                  Stock Awards ($)
              
              Securities
                Under-
                  lying Options/ SARa (#)
              
              L/TIP
                Payouts
                  ($)
              
              All
                  ($)James
                  B. Hovis
                President
                  and CEO
              
              
              2005
              
              $
              421,508
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-2006
              
              $
              303,964
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-Anne
                  P. Hovis
              
              
              2005
              
              $
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-Exec.
                  Vice President General Counsel & Secretary
              
              
              2006
              
              $
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-









COMPENSATION
      OF DIRECTORS





The
      names
      of the directors of the Company as of March 31, 2006 are James B. Hovis and
      Anne
      P. Hovis. Each director of the Company is entitled to receive reasonable
      out-of-pocket expenses incurred in attending meetings of the Board of Directors
      of the Company. No payments were made to directors during the year ended March
      31, 2006, for services provided as a director.





STOCK
      OPTION PLANS AND AGREEMENTS





In
      March
      1996, the Board of Directors of the Company adopted, and the stockholders of
      the
      Company approved the adoption of, the 1996 Stock Plan (hereinafter called the
      "1996 Plan"). The purpose of the 1996 Plan is to provide an incentive and reward
      for those executive officers and other key employees in a position to contribute
      substantially to the progress and success of the Company, to closely align
      the
      interests of such employees with the interests of stockholders of the Company
      by
      linking benefits to stock performance and to retain the services of such
      employees, as well as to attract new key employees. In furtherance of that
      purpose, the 1996 Plan authorizes the grant to executives and other key
      employees of the Company and its subsidiaries of stock options, restricted
      stock, deferred stock, bonus shares, performance awards, dividend equivalent
      rights, limited stock appreciation rights and other stock-based awards, or
      any
      combination thereof. The 1996 Plan is expected to provide flexibility to the
      Company’s compensation methods, after giving due consideration to competitive
      conditions and the impact of federal tax laws.





The
      maximum number of shares of Common Stock with respect to which awards may be
      granted pursuant to the 1996 Plan is initially 2,000,000 shares. To date, no
      options have been granted under the 1996 Plan. Shares issuable under the 1996
      Plan may be either treasury shares or authorized but unissued shares. The number
      of shares available for issuance will be subject to adjustment to prevent
      dilution in the event of stock splits, stock dividends or other changes in
      the
      capitalization of the Company.





The
      1996
      Plan will be administered by a committee consisting of not less than two (2)
      members of the Board of Directors who are "disinterested" within the meaning
      of
      Rule 16b-3 promulgated under the Exchange Act and "outside directors" within
      the
      meaning of Section 162(m) of the Internal Revenue Code (including persons who
      may be deemed outside directors by virtue of any transitional rule which may
      be
      adopted by the Internal Revenue Service implementing such Section) (the
      "Committee"). The Board will determine the persons to whom awards will be
      granted, the type of award and, if applicable, the number of shares to be
      covered by the award. During any calendar year, no person may be granted under
      the 1996 Plan awards aggregating more than 100,000 shares (which number shall
      be
      subject to adjustment to prevent dilution in the event  of
      stock
      splits, stock dividends or other changes in capitalization of the
      Company).





TYPES
      OF
      AWARDS





Stock
      Options. Options granted under the 1996 Plan may be "incentive stock options"
      ("Incentive Options") within the meaning of Section 422 of the Internal Revenue
      Code or stock options which are not incentive stock options ("Non-Incentive
      Options" and, collectively with Incentive Options, hereinafter referred to
      as
      "Options"). The persons to whom Options will be granted, the number of shares
      subject to each Option granted, the prices at which Options may be exercised
      (which shall not be less than the fair market value of shares of common stock
      on
      the date of grant), whether an Option will be an Incentive Option or a
      Non-Incentive Option, the time or times and the extent to which Options may
      be
      exercised and all other terms and conditions of Options will be determined
      by
      the Committee.





Each
      Incentive Option shall terminate no later than ten (10) years from the date
      of
      grant, except as provided below with respect to Incentive Options granted to
      10%
      Stockholders (as hereinafter defined). No Incentive Option may be granted at
      any
      time after October 2006. Each Non-Incentive Option shall terminate not later
      than fifteen (15) years from the date of grant. The exercise price at which
      the
      shares may be purchased may not be less than the fair market value of shares
      of
      common stock at the time the Option is granted, except as provided below with
      respect to Incentive Options granted to 10% stockholders. Options granted to
      executive officers may not be exercised at any time prior to six (6) months
      after the date of grant.










The
      exercise price of an Incentive Option granted to a person possessing more than
      10% of the total combined voting power of all shares of stock of the Company
      or
      a parent or subsidiary of the Company (a "10% Stockholder") shall in no event
      be
      less than 110% of the fair market value of the shares of the common stock at
      the
      time the Incentive Option is granted. The term of an incentive Option granted
      to
      a 10% Stockholder shall not exceed five (5) years from the date of
      grant.





The
      exercise price of the shares to be purchased pursuant to each Option shall
      be
      paid (i) in full in cash, (ii) by delivery (i.e., surrender) of shares of the
      Company’s common stock owned by the optionee at the time of the exercise of the
      Option, (iii) in installments, payable in cash, if permitted by the Committee
      or
      (iv) any combination of the foregoing. The stock-for-stock payment method
      permits an optionee to deliver one (1) or more shares of previously-owned common
      stock of the Company in satisfaction of the exercise price of subsequent
      Options. The optionee may use the shares obtained on each exercise to purchase
      a
      larger number of shares on the next exercise. (The foregoing assumes an
      appreciation in value of previously acquired shares). The result of the
      stock-for-stock payment method is that the optionee can generally avoid
      immediate tax liability with respect to any appreciation in the value of the
      stock utilized to exercise the Option.





Shares
      received by an optionee upon exercise of a Non-Incentive Option may not be
      sold
      or otherwise disposed of for a period determined by the Board of Directors
      of
      the Company upon grant of the Option, which period shall be not less than six
      (6) months nor more than three (3) years from the date of acquisition of the
      shares (the "Restricted Period"), except that, during the Restricted Period
      (i)
      the optionee may offer the shares to the Company and the Company may, in its
      discretion, purchase up to all the shares offered at the exercise price and
      (ii)
      if the optionee’s employment terminates during the Restricted Period (except in
      limited instances), the optionee, upon written request of the Company, must
      offer to sell the shares to the Company at the exercise price within seven
      (7)
      business days. The Restricted Period shall terminate in the event of a Change
      in
      Control of the Company (as defined in the 1996 Plan), or at the discretion
      of
      the Board of Directors of the Company. After the Restricted Period, an optionee
      wishing to sell must first offer such shares to the Company at the fair market
      value.





Limited
      Stock Appreciation Rights. The Committee is authorized, in connection with
      any
      Option granted under the 1996 Plan, to grant to the holder of such Option a
      limited stock appreciation right ("LSAR"), entitling the holder to receive,
      within sixty (60) days following a Change in Control, an amount in cash equal
      to
      the difference between the exercise price of the Option and the market value
      of
      the common stock of the Company on the effective date of the Change in Control.
      The LSAR may be granted in tandem with an Option or subsequent to grant of
      the
      Option. The LSAR will only be exercisable to the extent that the related Option
      is exercisable and will terminate if and when the Option is
      exercised.





Restricted
      and Deferred Stock. An award of restricted stock or deferred stock may be
      granted under the 1996 Plan. Restricted stock is subject to restrictions on
      transferability and other restrictions as may be imposed by the Committee at
      the
      time of grant. In the event that the holder of restricted stock ceases to be
      employed by the Company during the applicable restrictive period, restricted
      stock that is at the time of cessation of employment subject to restrictions
      shall be forfeited and reacquired by the Company. Except as otherwise provided
      by the Committee at the time of grant, a holder of restricted stock shall have
      all of the rights of a stockholder including, without limitation, the right to
      vote restricted stock and the right to recover dividends thereon. An award
      of
      deferred stock is an award that provides for the issuance of stock upon
      expiration of a deferral period established by the Committee. Except as
      otherwise determined by the Committee, upon termination of employment of the
      recipient of the award during the applicable deferral period, all stock that
      is
      at the time of the termination of employment subject to deferral shall be
      forfeited. Until such time as the stock which is the subject of the award is
      issued, the recipient of the award has no rights as a stockholder.





Dividend
      Equivalent Awards. A dividend equivalent gives the recipient the right to
      receive cash or other property equal in value to the dividends that would be
      paid if the recipient held a specified number of shares of common stock of
      the
      Company. A dividend equivalent right may be granted as a component of another
      award or as separate award.





Bonus
      Shares and other Share Based Awards. The 1996 Plan authorizes the Committee
      to
      grant shares as a bonus, or to grant shares or other awards in lieu of
      obligations of the Company to pay cash under other plans or compensatory
      arrangements, upon such terms as shall be determined by the Committee. The
      1996
      Plan also authorizes the Committee to grant other forms of awards based upon,
      payable in, or otherwise related, in whole or in part, to, common stock,
      including, without limitation, convertible or exchangeable debentures or other
      debt securities, other rights convertible or exchangeable into shares, purchase
      rights for shares, awards contingent upon performance of the Company, and awards
      valued by reference to the book value of shares of common stock or awards
      determined by reference to the value of securities of, or the performance of,
      specified subsidiaries.











ITEM 11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT




The
      following table sets forth as of March 31, 2006, certain information with
      respect to the beneficial ownership of common stock and preferred stock by
      each
      person or entity known by the Company to be the beneficial owner of 5% or more
      of such shares, each officer and director of the Company, and all officers
      and
      directors of the Company as a group:




**Percentage**
            
            
            
            **Percentage
                (%)****Shares
                of**
            
            **(%)
                of**
            
            **Shares
                of**
            
            **of
                Total****Common
                Stock**
            
            **Common**
            
            **Preferred**
            
            **Combined****Name
                and Address of****Beneficial
                Owner (1)**
            
            **Owned**
            
            **Stock
                (2)**
            
            **Stock**
            
            **Vote
                (3)**James
                B. Hovis
            
            114,889,439(4)
            
            21.65%
            
            287,347(5)
            
            27.07%Anne
                P. Hovis
            
            114,889,439(6)
            
            21.65%
            
            327,347(7)
            
            27.82%Edward
                J. Mathias (8)
            
            7,750,451
            
            1.94%
            
            490,708.33
            
            10.52%(9)All
                officers and directors as a group (two persons)
            
            114,889,439
            
            21.65%
            
            327,347
            
            27.82%





(1)
      The
      address of each Stockholder shown above except as otherwise indicated is c/o
      Phlo Corporation, 6001-21 Argyle Forest Blvd., PMB #117, Jacksonville, Florida
      32244-5705.





(2)
      Based
      upon 400,356,814 shares of Common Stock outstanding as of March 31,
      2006.





(3)
      Based
      on 400,356,814 shares of Common Stock and 1,302,304.30 shares of Series C
      Preferred Stock outstanding as of March 31, 2006, and assuming a conversion
      rate
      of 100 shares of common stock for each share of Series C Preferred Stock. The
      percentages presented are based on conversion of all outstanding shares of
      Series C Preferred Stock into shares of common stock and, where applicable,
      the
      exercise of all warrants owned by the beneficial owner to purchase common
      stock.





(4)
      Includes 108,248,834 shares as to which Mr. Hovis has the sole voting
      power, and 6,640,605 shares as to which he shares the power to dispose with
      his
      wife, Anne P. Hovis.





(5)
      Includes 167,485 shares of Series C Preferred Stock as to which Mr. Hovis
      has the sole voting power and 119,862 shares as to which he shares the power
      to
      dispose with his wife, Anne P. Hovis.





(6)
      Includes 6,640,605 shares as to which Mrs. Hovis has sole voting power and
      108,248,834 shares as to which she shares the power to dispose with her husband,
      James B. Hovis.





(7)
      Includes 119,862 shares of Series C Preferred Stock as to which Mrs. Hovis
      has sole voting power, 167,485 shares as to which she shares the power to
      dispose with her husband, James B. Hovis, and 40,000 as to which Mrs. Hovis
      has indirect beneficial ownership as trustee under the Uniform Gift to Minors
      Act.





(8)
      Mr. Mathias’ address is c/o The Carlyle Group, 1001 Pennsylvania Avenue,
      N.W., Washington, D.C. 20004-2505





(9)
      Includes warrants to purchase 9,606,682 shares of common stock held by
      Mr. Mathias.


ITEM 12.
              CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS.


James
      B.
      Hovis and Anne P. Hovis are husband and wife.







ITEM
                13.
              EXHIBITS


(a)
      (2)
      Exhibits





A
      list
      and description of exhibits filed as part of this Form 10-KSB is provided in
      the
      attached Exhibit Index.





Item
      27.
      Exhibits.





3.01*
            
            Certificate
                of Incorporation of the Company.3.02*
            
            Amendment
                of Certificate of Incorporation.3.03****
            
            Certificate
                of Amendment of Certificate of Incorporation.3.04*
            
            By-Laws
                of the Company.3.05*
            
            Form
                of Certificate of Designation of Series A Preferred Stock.3.06*
            
            Form
                of Certificate of Designation of Series B Preferred Stock.4.01*
            
            Specimen
                Certificate for shares of Common Stock.4.04*
            
            Form
                of Underwriter’s Unit Purchase Option.10.02*
            
            1996
                Stock Plan.10.07*
            
            Employment
                Agreement by and between the Company and Robert J. Sipper dated April
                4,
                1996.10.12**
            
            Amendment
                No. 1 to Employment Agreement by and between the Company and Robert
                J.
                Sipper dated February 3, 1997.10.21***
            
            Asset
                Purchase Agreement by and between Company and The Brooklyn Brewery
                Corporation dated May 18, 1998.10.22***
            
            Agreement
                to Purchase and Market Brand Name and Recipes by and between Leroux
                Creek
                Food Corporation and the Company dated June 30, 1998.10.23****
            
            License
                Agreement between X-Treem Products Corporation and the Company dated
                December 1, 1998.10.24****
            
            Security
                Agreement between X-Treem Products Corporation and the Company dated
                December 1, 1998.10.25****
            
            Promissory
                Note, dated December 1, 1998, made by the Company in the amount of
                $100,000.10.26****
            
            Letter
                by Company, dated December 23, 1998, exercising Option.10.27****
            
            Promissory
                Note, dated December 23, 1999, made by the Company in the amount
                of
                $300,000.10.28****
            
            Bill
                of Sale dated December 1, 1998.









31.1
            
            Certification
                of President and Chief Executive Officer pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200232.1
            
            Certification
                of of Chief Executive Officer pursuant to18 U.S.C. section 1350,
                as
                adopted by Section 906 of the Sarbanes-Oxley Act of
                2002.*
            
            Incorporated
                by reference to Registrant’s Registration Statement on Form SB-2, and
                amendments thereto, Registration No. 333-3458 declared effective
                on July
                30, 1996.**
            
            Incorporated
                by reference to the Company’s Annual Report on Form 10-KSB for the fiscal
                year ended March 31, 1997 (File No. 0-21079).***
            
            Incorporated
                by reference to the Company’s Annual Report on Form 10-KSB for the fiscal
                year ended March 31, 1998 (File No. 0-21079).****
            
            Incorporated
                by reference to the Company’s Annual Report on Form 10-KSB for the fiscal
                year ended March 31, 1999 (File No. 0-21079).





(b)
      Reports on Form 8-K.





Form
      8-K,
      filed on April 7, 2005, to announce the termination of its independent auditors,
      Sherb & Co., LLP and the retention of its new independent auditors, Russell
      Bedford Stefanou Mirchandani LLP.





Form
      8-K/A, filed on April 12, 2005, amending the Form 8-K filed on April 7, 2005
      to
      attach the required letter of Sherb & Co. LLP and to respond
      thereto.





Item
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
      following table sets forth fees billed to the Company by its auditors during
      the
      fiscal years ended March 31, 2006 for: (i) services rendered for the audit
      of
      its annual financial statements and the review of its quarterly financial
      statements, (ii) services by its auditor that are reasonably related to the
      performance of the audit or review of its financial statements and that are
      not
      reported as Audit Fees, (iii) services rendered in connection with tax
      compliance, tax advice and tax planning, and (iv) all other fees for services
      rendered.





March
                31, 2006
            
            March
                31, 2005Audit
                Fees
            
            $
            102,000
            
            $
            40,500Audit
                related feesTax
                fees
            
            
            —
            
            
            —All
                other fees
            
            
            4,400
            
            
            —Total
                fees
            
            $
            106,400
            
            $
            40,400





AUDIT
      FEES. Audit fees consist of fees billed for professional services rendered
      for
      the audit of the Company’s consolidated financial statements and review of the
      interim consolidated financial statements included in quarterly reports and
      services that are normally provided by the Company’s principal accountants in
      connection with statutory and regulatory filings or engagements.





TAX
      FEES.
      Tax fees are fees billed for professional services for tax compliance, tax
      advice and tax planning.





ALL
      OTHER
      FEES. All other fees include fees for products and services other than the
      services reported above.





*Policy
      on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
      of
      Independent Auditors*





The
      Company is not required to and does not have a designated Audit Committee,
      and
      accordingly, the Company’s Board of Directors’ policy is to pre-approve all
      audit and permissible non-audit services provided by the independent auditors.
      These services may include audit services, audit-related services, tax services
      and other services. Pre-approval is generally provided for up to one year and
      any pre-approval is detailed as to the particular service or category of
      services and is generally subject to a specific budget. The independent auditors
      and management are required to periodically report to the Company’s Board of
      Directors regarding the extent of services provided by the independent auditors
      in accordance with this pre-approval, and the fees for the services performed
      to
      date. The Board of Directors may also pre-approve particular services on a
      case-by-case basis.





SIGNATURES





In
      accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      executed on this 13 th day of
      July, 2006.


PHLO
              CORPORATIONBy:
            /s/ James
              B.
              HovisJames B. Hovis
              President & Chief Executive
                Officer





In
      accordance with the Exchange Act, this report has been signed by the following
      persons on behalf of the registrant in the capacities and on the dates
      indicated





Signature
            
            Title
            
            Date/s/
                James B. Hovis
              
              James
                B. Hovis
            
            President
                & CEO
            
            July
                14, 2006/s/
                Anne P. Hovis
              
              Anne
                P. Hovis
            
            Exec.
                Vice President, General Counsel & Secretary
            
            July
                14, 2006