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, 2007.
 
 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
                  #117Jacksonville,
                  Florida
              32244-5705(Address
                  of Principal Executive Offices)
              (Zip
                  Code)




Registrant’s
      telephone number, including area code: (904) 505-3834





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 xNo 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 $31,393 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
      9, 2007, was approximately $10,116,225.





The
      outstanding number of shares of the issuer’s common stock as of July 9, 2007 was
      661,393,776.









TABLE
      OF
      CONTENTS




Item
                  Number
              
              PagePART
                  I1.
                  Business
              
              
              12.
                  Properties
              
              
              43.
                  Legal Proceedings
              
              
              44.
                  Submission of Matters to a Vote of Security Holders
              
              
              5PART
                  II5.
                  Market for the Registrant’s Common Equity and Related Shareholder Matters
              
              
              66.
                  Management’s Discussion and Analysis or Plan of Operations
              
              
              77.
                  Financial Statements and Footnotes
              
              
              F-28.
                  Changes in and Disagreements with Accountants on Accounting and
                  Financial
                  Disclosure
              
              
              118A
                  Controls and Procedures
              
              
              11PART
                  III9.
                  Directors and Executive Officers
              
              
              1110.
                  Executive Compensation
              
              
              1211.
                  Security Ownership of Certain Beneficial Owners and Management
              
              
              1512.Certain
                  Relationships and Related Transactions
              
              
              1613.Exhibits
              
              
              1614.
                  Principal Accounting Fees and Services
              
              
              17SignaturesCertifications










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. 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.





During
      the fiscal year ended March 31, 2007, the Company announced that it has
      commenced shipments of its ready-to-drink version of its performance/vitality
      beverage to fill orders of the product. Initial shipments were primarily to
      accounts in the Northern California area. Subsequent to the fiscal year end,
      the
      Company announced that, as a result of the excellent response to the
      ready-to-drink product from the initial test markets in this region, the Company
      had commenced shipments of the beverages as part of a roll-out of the beverage
      line in Northern California to a significant account base. The roll-out will
      be
      to accounts (both on and off premises) in all channels of distribution,
      including independent grocers, independent convenience stores, mass
      merchandisers, chain grocers, chain convenience stores, and chain drug
      stores.





The
      Company’s performance and vitality beverage product (available in Orange, Grape,
      Lemon-Lime and Tropical Punch flavors) features the Company’s Instant Nano
      Hydration (through nano-encapsulation) and Cell Armor technologies, providing
      instant, direct delivery of rehydration and cell-repair-and-protection payloads
      into the bloodstream beginning through the membranes of the mouth. In addition,
      the Company’s nano-encapsulation technology prevents the destruction of its
      active payloads in the stomach. These Instant Nano Hydration and Cell Armor
      technologies help provide sustained wellness necessary for life’s performances
      and vigorous longevity.





1





Financing
      Activities





During
      the fiscal year ended March 31, 2007, the Company raised an aggregate of
      $443,800, net of costs and fees, in the private placement of equity and in
      connection with a settlement agreement. The Company also issued promissory
      notes
      in the aggregate principal amount of $455,000.





Recent
      Developments





During
      the fiscal year ended March 31, 2007, the Company announced that it has
      commenced shipments of its ready-to-drink version of its performance/vitality
      beverage to fill orders of the product. Initial shipments were primarily to
      accounts in the Northern California area. Subsequent to the fiscal year end,
      the
      Company announced that, as a result of the excellent response to the
      ready-to-drink product from the initial test markets in this region, the Company
      had commenced shipments of the beverages as part of a roll-out of the beverage
      line in Northern California to a significant account base. The roll-out will
      be
      to accounts (both on and off premises) in all channels of distribution,
      including independent grocers, independent convenience stores, mass
      merchandisers, chain grocers, chain convenience stores, and chain drug stores.





Also
      during the fiscal year ended March 31, 2007, the Company significantly advanced
      its methods of producing its technological preparations and its delivery systems
      (including micro and nano scale carriers) to the point of allowing the Company
      to quickly and economically produce high volumes for finished product purposes.





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 (which written consent has not yet occurred
      as of March 31, 2007) 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 performance and vitality beverage product (available in Orange, Grape,
      Lemon-Lime and Tropical Punch flavors) features the Company’s Instant Nano
      Hydration (through nano-encapsulation) and Cell Armor technologies, providing
      instant, direct delivery of rehydration and cell-repair-and-protection payloads
      into the bloodstream beginning through the membranes of the mouth. In addition,
      the Company’s nano-encapsulation technology prevents the destruction of its
      active payloads in the stomach. These Instant Nano Hydration and Cell Armor
      technologies help provide sustained wellness necessary for life’s performances
      and vigorous longevity.





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 all channels of distribution (both on and off premises), including
      independent grocers, independent convenience stores, mass merchandisers, chain
      grocers, chain convenience stores, and chain drug stores. The Company is
      positioned as a biotechnology company which is using high volume distribution
      networks to commercialize its technology.





During
      the fiscal year ended March 31, 2007, the Company announced that it has
      commenced shipments of its ready-to-drink version of its performance/vitality
      beverage to fill orders of the product. Initial shipments were primarily to
      accounts in the Northern California area. Subsequent to the fiscal year end,
      the
      Company announced that, as a result of the excellent response to the
      ready-to-drink product from the initial test markets in this region, the Company
      had commenced shipments of the beverages as part of a roll-out of the beverage
      line in Northern California to a significant account base. The roll-out will
      be
      to accounts (both on and off premises) in all channels of distribution,
      including independent grocers, independent convenience stores, mass
      merchandisers, chain grocers, chain convenience stores, and chain drug stores.





2




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 through (initially) the use of
      beverage products and liquids.





The
      Company’s performance and vitality beverage product features the Company’s
      Instant Nano Hydration (through nano-encapsulation) and Cell Armor technologies,
      providing instant, direct delivery of rehydration and cell-repair-and-protection
      payloads into the bloodstream beginning through the membranes of the mouth.
      In
      addition, the Company’s nano-encapsulation technology prevents the destruction
      of its active payloads in the stomach. These Instant Nano Hydration and Cell
      Armor technologies help provide sustained wellness necessary for life’s
      performances and vigorous longevity.





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. 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 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.





3




Management
      and Employees





As
      of
      March 31, 2007, the Company had one employee.





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 leasing office space for a one year term ending on January
      31, 2008 for $6,150 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, 2007
      are
      as follows:





(a)  During
      the fiscal year ended March 31, 2007, the Company was 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. Phlo Corporation
      is not a party to this litigation, was not a party to the contract at issue,
      and
      no claims have been made against Phlo. 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 wrongful termination. The Company
      has
      asserted as counterclaims breach of contract, fraud, and negligence. The Company
      did not continue to dedicate additional financial resources to the defense
      of
      the claims and the prosecution of its counterclaims as (i) Advanced
      Bio-Delivery, the operating entity involved in this litigation, has been
      dissolved by operation of the provisions of its operating agreement and is
      no
      longer conducting business and (ii) the Company believes that the R&D
      facility moved all of its assets to another company in violation of its
      agreement with the Company, rendering any potential success with a counterclaim
      effectively meaningless. As a result, a judgment was entered against the Company
      in this matter in the amount of $248,807 plus attorneys fees and expenses in
      the
      amount of $134,762.




4





(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 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 of 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 appealed the Initial Decision to the full Commission, which eliminated
      all fines against the Company and James Hovis. The Company argued on appeal,
      among other things, that the ALJ had no jurisdiction to impose a fine against
      Mr. Hovis; that many of the ALJ’s findings were wrong in light of the evidence
      presented; that fines against Anne Hovis and the Company were unduly harsh
      in
      light of the evidence; and that the ALJ ignored the SEC’s burden of proof. As a
      result, the full Commission vacated the fines imposed by the ALJ against the
      Company and Mr. Hovis. The Commission increased the fine against Anne Hovis
      from
      $50,000 to $100,000. However, the appeal to the full Commission resulted in
      a
      net decrease of $75,000 in the aggregate fines assessed against the parties.





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, 2007.





5




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, 2007, 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, 2007 and 2006.


Common
                  StockYear
                  Ended 3/31/07
              
              Year
                  Ended 3/31/06Quarter
              
              
              High
              
              
              Low
              
              
              High
              
              
              LowFirst
                  Quarter
              
              $
              0.051
              
              $
              0.013
              
              $
              0.04
              
              $
              0.01Second
                  Quarter
              
              $
              0.018
              
              $
              0.007
              
              $
              0.20
              
              $
              0.008Third
                  Quarter
              
              $
              0.033
              
              $
              0.006
              
              $
              0.04
              
              $
              0.01Fourth
                  Quarter
              
              $
              0.058
              
              $
              0.018
              
              $
              0.06
              
              $
              0.03




On
      March
      30, 2007, the closing price of the Common Stock as reported on the Pink Sheets
      was $0.02. As of March 31, 2007, the Company had approximately 2,000 beneficial
      holders of record of its shares of Common Stock.





During
      the fiscal year ended March 31, 2007, the Company raised $433,800 in private
      placements, and issued 17,711,073 shares of common stock in exchange for
      services, each in reliance on various exemptions available under the Securities
      Act.




6





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 2007 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, 2007
      and results of operations for the year ended March 31, 2007 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 $31,393 in revenue for the fiscal year ended March 31, 2007, as
      compared to $1,544 in revenue for the fiscal year ended March 31, 2006. The
      selling, general and administrative expenses for the fiscal year ended March
      31,
      2007 decreased to $1,577,969 from $1,771,470 for the fiscal year ended March
      31,
      2006, and research and development costs incurred increased to $317,421 from
      $97,103 during the same period. The Company’s loss from operations increased
      slightly to $1,887,587 from $1,871,594 for the Company’s prior fiscal year,
      while the Company’s net loss increased to $3,550,050 from $2,842,300 for the
      Company’s prior fiscal year, primarily as a result of an increase in non-cash
      financing costs. The cost of sales for the year ended March 31, 2007 was $23,590
      as compared with $4,565 for the year ended March 31, 2006.





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.





7




RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements* , which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (“GAAP”), and expands disclosures about
      fair value measurements. The Company will be required to adopt SFAS 157
      effective for the fiscal year beginning April 1, 2008. The requirements of
      SFAS 157 will be applied prospectively except for certain derivative instruments
      that would be adjusted through the opening balance of retained earnings in
      the
      period of adoption. The Company is currently evaluating the impact of the
      adoption of SFAS 157 on the Company’s consolidated financial statements, and the
      management believes that the adoption of SFAS 157 will not have a significant
      impact on the Company’s consolidated results of operations or financial
      position.





In
      September 2006, the SEC issued Staff Accounting Bulletin 108, *Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in
      Current Year Financial Statements* (‘SAB
      108’).  SAB 108 provides interpretive guidance on how the effects of the
      carryover or reversal of prior year financial statement misstatements should
      be
      considered in quantifying a current year misstatement.  SAB 108 is
      effective for financial statements covering the first fiscal year ending after
      November 15, 2006.  The Company does not anticipate any material impact to
      its financial condition or results of operations as a result of the adoption
      of
      SAB 108.




In
        September 2006, the FASB issued its Statement of Financial Accounting Standards
        158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
        Plans”. This Statement improves financial reporting by requiring an employer to
        recognize the overfunded or underfunded status of defined benefit postretirement
        plan (other than a multiemployer plan) as an asset or liability in its statement
        of financial position and to recognize changes in that funded status in the
        year
        in which the changes occur through comprehensive income of a business entity
        or
        changes in unrestricted net assets of a not-for-profit organization. This
        Statement also improves financing reporting by requiring an employer to measure
        the funded status of a plan as of the date of its year-end statement of
        financial position, with limited exceptions. The effective date for am employer
        with publicly traded equity securities is as of the end of the fiscal year
        ended
        after December 15, 2006. The Company does not expect that the adoption of
        this
        standard will have a material impact on its financial position, operations
        or
        cash flows.
 
 In
        December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
        Payment Arrangement (“FSP 00-19-2”) which addresses accounting for registration
        payment arrangements. FSP 00-19-2 specifies that the contingent obligation
        to
        make future payments or otherwise transfer consideration under a registration
        payment arrangement, whether issued as a separate agreement or included as
        a
        provision of a financial instrument or other agreement, should be separately
        recognized and measured in accordance with FASB Statement No. 5, Accounting
        for
        Contingencies. FSP 00-19-2 further clarifies that a financial instrument
        subject
        to a registration payment arrangement should be accounted for in accordance
        with
        other application generally accepted accounting principles without regard
        to the
        contingent obligation to transfer consideration pursuant to the registration
        payment arrangement. For registration payment arrangement and financial
        instruments subject to those arrangements that were entered into prior to
        the
        issuance of EITF 00-19-2, this guidance shall be effective for financial
        statements issued for fiscal years beginning after December 15, 2006 and
        interim
        periods within those fiscal years. The Company does not expect that the adoption
        of this standard will have a material impact on its financial position,
        operations or cash flows.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
      companies with an option to report selected financial assets and liabilities
      at
      fair value, and establishes presentation and disclosure requirements designed
      to
      facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities. The new guidance is
      effective for fiscal years beginning after November 15, 2007. The Company is
      currently evaluating the potential impact of the adoption of SFAS No. 159 on
      its
      financial position and results of operations.





LIQUIDITY
      AND CAPITAL RESOURCES





During
      the fiscal year ended March 31, 2007, the Company’s working capital deficit
      increased by $666,780 to $5,662,604. In addition, the Company’s Stockholders’
Deficiency increased from $4,975,610 to $5,645,040.





During
      the fiscal year ended March 31, 2007, 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
      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, 2007 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.





8




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.





9




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.





10




**SECURITIES
      AND EXCHANGE COMMISSION**





**WASHINGTON,
      D.C. 20549**











**FINANCIAL
      STATEMENTS**





**MARCH
      31, 2007 AND 2006**











**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, 2007
            
            
            F-4Consolidated
                Statements of Losses for the years ended March 31, 2007 and
                2006
            
            
            F-5Consolidated
                Statements of Deficiency in Stockholders’ Equity for the years ended March
                31, 2007 and 2006
            
            
            F-6
                - F-7Consolidated
                Statements of Cash Flows for the years ended March 31, 2007 and 2006
            
            
            F-8
                - F-9Notes
                to Consolidated Financial Statements
            
            
            F-10
                - F-28










**RBSM,
      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, 2007 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, 2007. 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 audits 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 audits
      provide 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,
      2007 and the results of its operations and its cash flows for each of the two
      years in the period ended March 31, 2007 in conformity with accounting
      principles generally accepted in the United States of America.





As
      discussed in Note A to the consolidated financial statements, the Company
      adopted the provisions of Statement of Financial Accounting Standards No.
      123(R), “Share-Based Payment,” effective January 1, 2006.





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/RBSM,
                LLP
              RBSM,
                LLP
              Certified
                Public Accountants





McLean,
      Virginia


July
      13,
      2007





F
          - 3





**PHLO
      CORPORATION AND AFFILIATES**





**CONSOLIDATED
      BALANCE SHEET**





**March
      31, 2007**




ASSETSCURRENT
                  ASSETSCash
              
              $
              42,720Accounts
                  receivable
              
              
              1,231Inventory
                  (Note A)
              
              
              38,417Total
                  Current Assets
              
              
              82,368PROPERTY
                  AND EQUIPMENT, Net (Note C)
              
              
              4,978DEPOSITS
              
              
              12,586TOTAL
                  ASSETS
              
              $
              99,932LIABILITIES
                  AND DEFICIENCY IN STOCKHOLDERS’ EQUITYCURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              1,872,994Accrued
                  liabilities (Note E)
              
              
              3,245,478Notes
                  payable, current portion (Note G)
              
              
              626,500Total
                  Current Liabilities
              
              
              5,744,972TOTAL
                  LIABILITIES
              
              
              5,744,972COMMITMENTS
                  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 Sharesauthorized,
                  issued and outstanding (liquidation preference $100,000)
              
              
              50Series
                  B non-convertible stock, 500,000 Shares authorized,none
                  issued and outstanding
              
              
              --Series
                  C convertible stock, $0.0001 par value, 3,000,000 sharesauthorized,
                  1,240,565 shares issued and outstanding(liquidation
                  preference $12,406)
              
              
              124Series
                  C Convertible stock, 15,298 shares subscribed
              
              
              1Common
                  stock, $0.0001 par value, 250,000,000 shares authorized,592,884,934
                  shares issued and outstanding
              
              
              59,288Common
                  stock, $0.0001 par value, 14,131,654 shares subscribed
              
              
              1,414Additional
                  paid-in capital1
              
              
              8,438,087Accumulated
                  deficit
              
              
              (24,144,004
              )TOTAL
                  DEFICIENCY IN STOCKHOLDERS’ EQUITY
              
              
              (5,645,040
              )TOTAL
                  LIABILITIES AND DEFICIENCY IN STOCKHOLDERS’ EQUITY
              
              $
              99,932




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




F
          - 4




**PHLO
      CORPORATION AND AFFILIATES**





**CONSOLIDATED
      STATEMENTS OF LOSSES**





**FOR
      THE YEARS ENDED MARCH 31, 2007 AND 2006**


2007
              
              2006REVENUES,
                  net
              
              $
              31,393
              
              $
              1,544COST
                  OF SALES, net
              
              
              23,590
              
              
              4,565GROSS
                  PROFIT
              
              
              7,803
              
              
              (3,021
              )SELLING,
                  GENERAL AND ADMINISTRATIVEEXPENSESGeneral
                  and administrative
              
              
              1,577,969
              
              
              1,771,470Research
                  and development
              
              
              317,421
              
              
              97,103Total
                  expenses
              
              
              1,895,390
              
              
              1,868,573LOSS
                  FROM OPERATIONS
              
              
              (1,887,587
              )
              
              (1,871,594
              )OTHER
                  EXPENSEFinance
                  cost
              
              
              (1,593,353
              )
              
              (889,876
              )Interest
                  expense, net
              
              
              (
                  69,110
              )
              
              (80,830
              )TOTAL
                  OTHER EXPENSE
              
              
              (1,662,463
              )
              
              (970,706
              )Loss
                  before provision for income taxes
              
              $
              (3,550,050
              )
              $
              (2,842,300
              )Provision
                  for income taxes
              
              
              --
              
              
              --NET
                  LOSS
              
              $
              (3,550,050
              )
              $
              (2,842,300
              )Weighted
                  Average Number of Shares Outstanding(Basic
                  and Diluted) (Note I)
              
              
              500,605,553
              
              
              331,684,698Net
                  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 DEFICIENCY IN STOCKHOLDERS’ EQUITY**





**FOR
      THE YEARS ENDED MARCH 31, 2007 AND 2006**






Series
                  A
              
              Series
                  C
              
              Preferred
                  C Stock
              
              
              
              Common
                  StockPreferred
                  Stock
              
              Preferred
                  Stock
              
              Subscribed
              
              Common
                  Stock
              
              SubscribedShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              AmountBalance
                  March 31, 2005
              
              
              500,000
              
              $
              50
              
              
              1,302,304
              
              $
              130
              
              
              15,298
              
              $
              1
              
              
              226,771,033
              
              $
              22,677
              
              
              16,968,018
              
              $
              1,697Issuance
                  of common stock for cash
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              95,988,259
              
              
              9,599
              
              
              --
              
              
              --Subscribed
                  shares issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,536,364
              
              
              153
              
              
              (1,536,364
              )
              
              (153
              )Collateral
                  shares issued with debt (Note F)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,700,000
              
              
              1,370Issuance
                  of shares for financing activities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              58,361,158
              
              
              5,837Issuance
                  of common stock for services
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              4,000,000
              
              
              400
              
              
              --
              
              
              --Warrants
                  issued for servicesWarrants
                  issued for financing activityRepayment
                  of line of credit (Note F)
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              --
              
              
              --Net
                  loss
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              --
              
              
              --Balance
                  March 31, 2006
              
              
              500,000
              
              
              50
              
              
              1,302,034
              
              $
              130
              
              
              15,298
              
              
              1
              
              
              400,356,814
              
              
              40,036
              
              
              15,431,654
              
              
              1,544Issuance
                  of common stock for cash
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              52,602,765
              
              
              5,261
              
              
              --
              
              
              --Subscribed
                  shares issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,300,000
              
              
              130
              
              
              (1,300,000
              )
              
              (130
              )Collateral
                  shares canceled (Note F)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,500,000
              )
              
              (750
              )Issuance
                  of shares for financing activities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              75,412,172
              
              
              7,540Issuance
                  of common stock for services
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              17,711,073
              
              
              1,771
              
              
              
              
              
              --Warrants
                  issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              --
              
              
              --Repayment
                  of notes payable and interest (Note F)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22,750,000
              
              
              2,275Beneficial
                  conversion feature of notes payable
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              --
              
              
              --
              
              
              
              
              
              --Cash
                  contribution to capitalConversion
                  of preferred stock
              
              
              
              
              
              
              
              
              (61,739
              )
              
              (6
              )
              
              
              
              
              
              
              
              30,252,110
              
              
              3,025Net
                  loss
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --
              
              
              
              
              
              --Balance
                  March 31, 2007
              
              
              500,000
              
              $
              50
              
              
              1,240,565
              
              $
              124
              
              
              15,298
              
              $
              1
              
              
              592,884,934
              
              $
              59,288
              
              $
              14,131,654
              
              $
              1,414






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




F
          - 6





**PHLO
      CORPORATION AND AFFILIATES**





**CONSOLIDATED
      STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY -
      (Continued)**





**FOR
      THE YEARS ENDED MARCH 31, 2007 AND 2006**


Paid-In
              
              AccumulatedCapital
              
              Deficit
              
              TotalBalance
                  March 31, 2005
              
              $
              13,265,318
              
              $
              (17,751,654
              )
              $
              (4,461,781
              )Issuance
                  of common stock for cash
              
              
              777,901
              
              
              --
              
              
              787,500Subscribed
                  shares issued
              
              
              --
              
              
              --
              
              
              --Collateral
                  shares issued with debt (Note F)
              
              
              (1,370
              )
              
              --
              
              
              --Issuance
                  of shares for financing activity
              
              
              851,475
              
              
              --
              
              
              857,312Issuance
                  of common stock for services
              
              
              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
              
              
              15,576,583
              
              
              (20,593,954
              )
              
              (4,975,610
              )Issuance
                  of common stock for cash
              
              
              428,539
              
              
              --
              
              
              433,800Subscribed
                  shares issued
              
              
              --
              
              
              --
              
              
              --Collateral
                  shares canceled (Note F)
              
              
              750
              
              
              --
              
              
              --Issuance
                  of shares for financing activity
              
              
              1,502,564
              
              
              --
              
              
              1,510,104Issuance
                  of common stock for services
              
              
              265,093
              
              
              --
              
              
              266,864Warrants
                  issued for services
              
              
              119,842
              
              
              --
              
              
              119,842Repayment
                  of notes payable
                and
                  interest (Note F)
              
              
              454,485
              
              
              --
              
              
              456,760Beneficial
                  conversion feature of notes payable
              
              
              83,250
              
              
              --
              
              
              83,250Cash
                  contribution to capital
              
              
              10,000
              
              
              --
              
              
              10,000Conversion
                  of preferred stock
              
              
              (3,019
              )
              
              --
              
              
              --Net
                  loss
              
              
              --
              
              
              (3,550,050
              )
              
              (3,550,050
              )Balance
                  March 31, 2007
              
              $
              18,438,087
              
              $
              (24,144,004
              )
              $
              (5,645,040
              )




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, 2007 AND 2006**




2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (3,550,050
              )
              $
              (2,842,300
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Common
                  stock reimbursement to officers (Note H)
              
              
              1,510,104
              
              
              857,312Common
                  stock issued in exchange for interestexpense
                  and other financing expense (Note F and H)
              
              
              1,760
              
              
              26,042Common
                  stock for services (Note H)
              
              
              266,864
              
              
              80,000Warrant
                  issued for services (Note H)
              
              
              119,842
              
              
              377,455Beneficial
                  conversion feature of notes payables (Note F)
              
              
              83,250
              
              
              --Warrant
                  issued for financing expense (Note H)
              
              
              --
              
              
              20,000Depreciation
                  and amortization (Note C)
              
              
              2,465
              
              
              2,465Changes
                  in operating assets and liabilitiesInventory
              
              
              (38,417
              )
              
              75,041Accounts
                  receivable
              
              
              36
              
              
              (1,267
              )Settlement
                  receivable
              
              
              55,000
              
              
              --Other
                  receivable
              
              
              6,964
              
              
              --Security
                  deposit
              
              
              (8,486
              )
              
              --Accounts
                  payable
              
              
              356,860
              
              
              232,820Accrued
                  expenses and taxes
              
              
              347,728
              
              
              289,932NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (846,080
              )
              
              (882,500
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from notes payable (Note F)
              
              
              455,000
              
              
              --Proceeds
                  from revolving note payable
              
              
              --
              
              
              140,000Proceeds
                  from issuance of equity securities (Note H)
              
              
              433,800
              
              
              742,500NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              888,800
              
              
              882,500NET
                  INCREASE IN CASH
              
              
              42,720
              
              
              --CASH
                  - Beginning
              
              
              --
              
              
              --CASH
                  - Ending
              
              $
              42,720
              
              $
              --





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, 2007 and 2006











SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:


2007
              
              2006Cash
                  paid for interest
              
              $
              --
              
              $
              --Cash
                  paid for income taxes
              
              $
              --
              
              $
              --





Non-cash
      financing activities:





During
      the fiscal year ended March 31, 2007, Common Stock pledged as collateral for
      the
      repayment of promissory notes and foreclosed upon in repayment thereof reduced
      the outstanding principal balance of the notes by $455,000. During the fiscal
      year ended March 31, 2006, the sale of Common Stock pledged as collateral for
      the repayment of advances pursuant to a credit facility reduced the outstanding
      principal balance by $172,658. Additionally, the Company issued shares of stock
      in reduction of $1,760 of interest expense during the fiscal year ended March
      31, 2007, and $540 of accrued interest and accrued liabilities during the fiscal
      year ended March 31, 2006.








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,
      2007 AND 2006








**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.





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, 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.





Components
      of inventories as of March 31, 2007 are as follows:


Raw
                  Materials
              
              $
              22,933Finished
                  Goods
              
              
              15,484Total
              
              $
              38,417




ADVERTISING
      EXPENSE





Advertising
      costs are expensed as incurred. Advertising costs of $13,707 and $108,318 were
      expensed during the years ended March 31, 2007 and 2006,
      respectively.





F
          - 10




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006








**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 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, 2007 and 2006, $317,421 and $97,103, respectively, in research and
      development costs were incurred by the Company.





F
          - 11




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006








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





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.





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.





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.





The
      Company has no awards of stock-based employee compensation outstanding at the
      date of adoption of SFAS 123R or at March 31, 2007 and 2006.




F
          - 12




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006








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





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,
      2007 and 2006, 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, 2007 and 2006, 657,247,035 potential shares and 678,311,662
      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 $3,550,050 and $2,842,300 for the years ended March 31, 2007 and
      2006,
      respectively, and has an accumulated deficit of $24,144,004 as of March 31,
      2007. In addition, the Company’s current liabilities exceeded its current assets
      by $5,662,604 as of March 31, 2007.





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
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements* , which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (“GAAP”), and expands disclosures about
      fair value measurements. The Company will be required to adopt SFAS 157
      effective for the fiscal year beginning April 1, 2008. The requirements of
      SFAS 157 will be applied prospectively except for certain derivative instruments
      that would be adjusted through the opening balance of retained earnings in
      the
      period of adoption. The Company is currently evaluating the impact of the
      adoption of SFAS 157 on the Company’s consolidated financial statements, and the
      management believes that the adoption of SFAS 157 will not have a significant
      impact on the Company’s consolidated results of operations or financial
      position.





F
          - 13




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006








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





RECENT
      ACCOUNTING PRONOUNCEMENTS (Continued)





In
      September 2006, the SEC issued Staff Accounting Bulletin 108, *Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in
      Current Year Financial Statements* (‘SAB
      108’).  SAB 108 provides interpretive guidance on how the effects of the
      carryover or reversal of prior year financial statement misstatements should
      be
      considered in quantifying a current year misstatement.  SAB 108 is
      effective for financial statements covering the first fiscal year ending after
      November 15, 2006.  The Company does not anticipate any material impact to
      its financial condition or results of operations as a result of the adoption
      of
      SAB 108.





In
      September 2006, the FASB issued its Statement of Financial Accounting Standards
      158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans”. This Statement improves financial reporting by requiring an employer to
      recognize the overfunded or underfunded status of defined benefit postretirement
      plan (other than a multiemployer plan) as an asset or liability in its statement
      of financial position and to recognize changes in that funded status in the
      year
      in which the changes occur through comprehensive income of a business entity
      or
      changes in unrestricted net assets of a not-for-profit organization. This
      Statement also improves financing reporting by requiring an employer to measure
      the funded status of a plan as of the date of its year-end statement of
      financial position, with limited exceptions. The effective date for am employer
      with publicly traded equity securities is as of the end of the fiscal year
      ended
      after December 15, 2006. The Company does not expect that the adoption of this
      standard will have a material impact on its financial position, operations
      or
      cash flows.





In
      December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
      Payment Arrangement (“FSP 00-19-2”) which addresses accounting for registration
      payment arrangements. FSP 00-19-2 specifies that the contingent obligation
      to
      make future payments or otherwise transfer consideration under a registration
      payment arrangement, whether issued as a separate agreement or included as
      a
      provision of a financial instrument or other agreement, should be separately
      recognized and measured in accordance with FASB Statement No. 5, Accounting
      for
      Contingencies. FSP 00-19-2 further clarifies that a financial instrument subject
      to a registration payment arrangement should be accounted for in accordance
      with
      other application generally accepted accounting principles without regard to
      the
      contingent obligation to transfer consideration pursuant to the registration
      payment arrangement. For registration payment arrangement and financial
      instruments subject to those arrangements that were entered into prior to the
      issuance of EITF 00-19-2, this guidance shall be effective for financial
      statements issued for fiscal years beginning after December 15, 2006 and interim
      periods within those fiscal years. The Company does not expect that the adoption
      of this standard will have a material impact on its financial position,
      operations or cash flows.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
      companies with an option to report selected financial assets and liabilities
      at
      fair value, and establishes presentation and disclosure requirements designed
      to
      facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities. The new guidance is
      effective for fiscal years beginning after November 15, 2007. The Company is
      currently evaluating the potential impact of the adoption of SFAS No. 159 on
      its
      financial position and results of operations.





F
          - 14




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006








**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 $3,550,050 for the fiscal
      year ended March 31, 2007. As of March 31, 2007, the Company’s current
      liabilities exceeded its current assets by $5,662,604. 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
      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 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, 2007:




Furniture,
                  fixtures and equipment
              
              $
              12,327Less:
                  Accumulated depreciation
              
              
              (7,349
              )Net
              
              $
              4,978





Depreciation
      expense for the years ended March 31, 2007 and 2006 was $2,465 and $2,465,
      respectively.





F
          - 15





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





**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
      $881,600 during the fiscal year ended March 31, 2006, and $42,576 during the
      year ended March 31, 2007, to be used for the activities set forth above. The
      Company accounted for the payments as a prepaid expense. At March 31, 2007,
      all
      of the funds advanced had been expended. At March 31, 2007, the Company included
      a $66,227 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, 2007 are as follows:





Accrued
                payroll, payroll taxes and
              penalties
                (Note M)
            
            $
            1,020,541Accrued
                expenses
            
            
            1,819,608Accrued
                interest
            
            
            405,329Total
            
            $
            3,245,478





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,
      2007 AND 2006








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





1)  During
      the fiscal year ended March 31, 2007, the Company issued promissory notes in
      the
      aggregate principal amount of $455,000, providing for an interest rate of 10%
      per annum (the “Notes”). The Notes provided for a first maturity date 15 days
      after the making of the Note and a second maturity date 180 days after the
      making of the Note for the repayment of outstanding principal and accrued but
      unpaid interest under each Note (the “Outstanding Balance”). Repayment of the
      Notes was personally guaranteed by two officers of the Company. Additionally,
      22,750,000 shares of Common Stock were pledged as collateral to secure repayment
      of all obligations of the Company under the Notes. As of March 31, 2007, the
      holders of all of the Notes (aggregating $455,000 in outstanding principal)
      demanded payment under the Notes on the first maturity date. The Company did
      not
      repay the Outstanding Balance under those Notes. The holders subsequently
      foreclosed upon and took title to an aggregate of 22,750,000 shares of the
      Common Stock which had been pledged as collateral to secure all of the Company’s
      obligations thereunder pursuant to the terms of the Notes in full settlement
      of
      the Company’s obligations thereunder. As the foreclosure on the pledged
      collateral in repayment of outstanding principal and accrued interest of $1,760
      resulted in a discount to the fair value of the common stock, the Company has
      recorded a “beneficial conversion feature” of $83,250, which has been charged to
      operations.





2)  In
      June,
      2002, the Company closed a revolving credit facility which provided 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.
      Repayment of advanced under the facility were secured by the Company’s assets
      and were guaranteed by two officers of the Company. In connection with certain
      advances under this facility, the Company issued 13,700,000 shares of Common
      Stock in the first quarter of the fiscal year ended March 31, 2006, which served
      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 related
      loan documents. The Company did not repay the advance by the maturity date.
      As a
      result thereof, the lender 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 ended March 31, 2006, 7,810,469 shares of Common Stock pledged as
      collateral, valued at $206,204, were used to pay $172,658 of principal 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. At March 31, 2006, the Company had repaid in full the outstanding
      balance of principal and accrued interest under the facility.





During
      the fiscal year ended March 31, 2007, the Lender paid to the Company $6,964
      in
      excess proceeds from the liquidation of stock and returned to the Company
      7,500,000 shares of Common Stock which were issued in prior years and had served
      as collateral under the facility. The return of these shares reduced the number
      of the Company’s outstanding shares of Common Stock.





F
          - 17




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





**NOTE
      G - NOTES PAYABLE**





Debt
      as
      of March 31, 2007 consists of the following:





Note
                payable to a related party (Note L) with interest rate of 15% per
                annum.
                The note maturedon
                May, 2003. The holder had agreed to extend the maturity date of the
                note
                toJune
                30, 2007.
            $80,000Note
                payable to a related party (Note L) 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, 2007.
            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 to a related party (Note L) 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 an exercise price of $0.50 per share. The holder
                agreed to
                extend the maturity date of the note to June 30, 2007.
            100,000





Note
                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 an
                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 to a related party (Note L) 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, 2007. In connection with a prior extension of the maturity
                date, 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,
      2007 AND 2006








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





(Continued)Note
                payable to a related party (Note L) 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, 2007.
            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 to a related party (Note L) in the original principal amount
                of
                $35,000, with an interest rate of 12% per annum. Principal and interest
                were due in February, 2006. The holder has agreed to extend the maturity
                date of the note to June 30, 2007.
            35,000Total
            $ 
                 626,500Less:
                current portion
            (626,500)Long-term
                portion
            $_______





Aggregate
      maturities of long-term debt as of March 31, 2007 are as follows:




Fiscal
                  Year
              
              
              Amount2008
              
              $
              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 $.0.0001
      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 $.0.0001 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, 2007, 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.





F
          - 19




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





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





SERIES
      B
      NON-CONVERTIBLE PREFERRED STOCK





At
      March
      31, 2007, 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.





SERIES
      C
      CONVERTIBLE PREFERRED STOCK





As
      of
      March 31, 2007, 1,240,565 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 was 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. At March 31, 2007,
      as a
      result of the foregoing applicable adjustments, each share of Series C Preferred
      Stock is convertible into 490 shares of Common Stock. During the fiscal year
      ended March 31, 2007, holders converted 61,739 shares of Series C Preferred
      Stock into 30,252,110 shares of Common Stock.




COMMON
      STOCK





Year
      Ended March 31, 2006





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.





F
          - 20




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





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





During
      the year ended March 31, 2006, in conjunction with a settlement agreement
      providing for the payment to the Company of $ 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 had received $30,000 pursuant to the
      settlement agreement and accounted for $45,000 as a common stock subscription
      receivable. The Company recorded a financing cost of $51,515 related to
      4,121,212 shares included in 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 fiscal year ended
      March
      31, 2007, by agreement of the parties, the Company received $55,000 in full
      payment pursuant to the settlement agreement. The additional $10,000 was as
      a
      cash contribution to capital.





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.





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.





F
          - 21




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





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





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.




Year
      Ended March 31, 2007





During
      the year ended March 31, 2007, the Company issued 1,300,000 shares of Common
      Stock subscribed in a prior year.





During
      the fiscal year ended March 31, 2007, the Company issued a previously-subscribed
      warrant to purchase 1,250,000 shares of Common Stock at an exercise price of
      $0.03 per share. The value of such warrants had been accounted for and charged
      to operations in the prior fiscal year.





During
      the year ended March 31, 2007, the Company issued 16,711,073 shares of the
      Common Stock, valued at $228,864, 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 13,697,238 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 which were sold to
      satisfy obligations of the Company. The Company accounted for and charged to
      operation such shares in the amount of $194,908, which approximated the fair
      value of the Common Stock at the time the shares were issued.





During
      the fiscal year ended March 31, 2007, in  consideration
      for extended payment terms relating to a Company obligation, the Company issued
      1,000,000 shares of Common Stock, valued at $38,000, and a warrant to purchase
      up to 6,000,000 shares of Common Stock at an exercise price of $0.03 and with
      a
      term of five years. The right to purchase 3,000,000 shares of Common Stock
      pursuant to the warrant vested immediately on the issuance of the warrant.
      The
      right to purchase the additional 3,000,000 may vest upon the completion of
      certain performances by





F
          - 22





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





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





the
      holder. The warrant was valued at $111,921 using the Black Scholes method at
      the
      date of grant of the warrant based on the following assumptions: (1) risk free
      interest rate of 4.75%; (2) dividend yield of 0%; (3) volatility factor of
      the
      expected market price of the Common Stock of 325%; and (4) an expected life
      of
      the warrant of two years. This amount was charged to expense as a financing
      cost. The Company also issued 818,182 shares of Common Stock to officers of
      the
      Company in connection with such agreement and in consideration of supplying
      of
      shares of stock as collateral which were sold to satisfy obligations of the
      Company. The Company accounted for and charged to operation such shares in
      the
      amount of $31,192, which approximated the fair value of the Common Stock at
      the
      time the shares were issued.





During
      the fiscal year ended March 31, 2007, the Company issued 30,252,110 shares
      of
      Common Stock to shareholders upon their conversion of 61,739 shares of Series
      C
      Convertible Preferred Stock.





During
      the fiscal year ended March 31, 2007, in connection with securing the repayment
      of principal and interest under promissory notes issued by the Company during
      the fiscal year in the aggregate principal amount of $455,000 (Note F), the
      Company issued a total of 22,750,000 shares of Common Stock. The Company did
      not
      repay the notes by the maturity date. As a result thereof, the lenders exercised
      their respective rights under the loan documents to foreclose upon and take
      title to the collateral shares in full satisfaction of the Company’s obligations
      under the notes, including $455,000 of principal and $1,760 of accrued interest.
      The Company also issued 18,613,636 shares of Common Stock to officers of the
      Company in connection with the notes and related agreements and in consideration
      of guarantees and supplying of shares of stock as collateral which were sold
      to
      satisfy obligations of the Company. The Company accounted for and charged to
      operation such shares in the amount of $440,937, which approximated the fair
      value of the Common Stock at the time the shares were issued.





During
      the year ended March 31, 2007, in consideration of $433,800, the Company issued
      an aggregate of 52,602,765 shares of Common Stock and warrants to purchase
      13,611,665 shares of Common Stock with terms of two to three years at exercise
      prices ranging from $0.02 to $0.05 per share .
      Additionally, the Company issued 42,283,071 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
      $843,067.





During
      the fiscal year ended March 31, 2007, the Company issued warrants to purchase
      an
      aggregate of 1,087,500 shares of Common Stock at an exercise price of $0.03
      per
      share related to financing activity and the provision of services. The warrants
      were valued at $7,921 using the Black Scholes method at the date of grant of
      the
      warrant based on the following assumptions:  (1) risk free
      interest rate of 5%; (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 two years. This amount has been
      charged to expense.





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 (which written consent has not yet occurred
      as of March 31, 2007) and the issuance of an Information Statement to
      shareholders to inform them of the amendment to the Company’s articles of
      incorporation.





F
          - 23





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





**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 as of March 31, 2007.





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 were non-compensatory warrants issued in connection with
      financing activities.




Warrants
                Outstanding
            
            
            
            Warrants
                ExercisableExercise
                Prices
            
            
            NumberOutstanding
            
            
            Weighted
                Average Remaining Contractual Life(Years)
            
            
            Weighed
                Average ExercisePrice
            
            
            NumberExercisable
            
            
            Weighted
                Average ExercisePrice$ 
                 0.02-0.025
            
            
            5,750,000
            
            
            2.9
            
            
            0.02
            
            
            5,750,000
            
            $
            0.020.03
            
            
            18,524,165
            
            
            2.6
            
            
            0.03
            
            
            15,524,165
            
            
            0.030.04
            
            
            100,000
            
            
            2.7
            
            
            0.04
            
            
            100,000
            
            
            0.040.05
            
            
            16,950,000
            
            
            2.7
            
            
            0.05
            
            
            16,950,000
            
            
            0.050.25
            
            
            50,000
            
            
            0.3
            
            
            0.25
            
            
            50,000
            
            
            0.2541,374,165
            
            
            2.7
            
            $
            0.04
            
            
            38,374,165
            
            $
            0.04




F
          - 24





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





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





Transactions
      involving warrants are summarized as follows:





Number
                of Warrants
            
            Weighted
                AveragePrice
                Per ShareOutstanding
                at March 31, 2005
            
            
            23,391,194
            
            $
            0.06Granted
            
            
            23,305,000
            
            
            0.04Exercised
            
            
            -
            
            
            -Cancelled
                or expired
            
            
            (14,509,512
            )
            
            0.07Outstanding
                at March 31, 2006
            
            
            32,186,682
            
            $
            0.04Granted
                (Note H)
            
            
            20,419,165
            
            
            0.03Exercised
            
            
            -
            
            
            -Cancelled
                or expired
            
            
            (11,231,682
            )
            
            0.04Outstanding
                at March 31, 2007
            
            
            41,374,165
            
            $
            0.04Exercisable
                at March 31, 2007
            
            
            38,374,165
            
            $
            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, 2007, the Company has available for federal income tax purposes a net
      operating loss carryforward of approximately $13,387,000, expiring through
      the
      year 2027 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.
      The valuation allowance increased by approximately $533,000 during the year
      ended March 31, 2007.





Components
      of deferred tax assets as of March 31, 2007 are as follows:





Non
                current:Net
                operating loss carryforward
            
            $
            4,685,000Valuation
                allowance
            
            
            (4,685,000
            )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
          - 25





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





**NOTE
      K - BUSINESS CONCENTRATION**





One
      customer accounted for 80% of the Company’s sales for the year ended March 31,
      2007. The Company purchased 66% of its raw materials from three vendors during
      the year ended March 31, 2007. The Company did not purchase more than 10% of
      its
      raw materials from any supplier for the fiscal years ended 2006.




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.





**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, 2007 and March 31, 2006. (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, 2007, 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)  During
      the fiscal year, the Company was 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. Phlo Corporation is not a party to this
      litigation, was not a party to the contract at issue, and no claims have been
      made against Phlo. 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 wrongful termination. The Company has asserted as counterclaims
      breach of contract, fraud, and negligence. The Company did not continue to
      dedicate additional financial resources to the defense of the claims and the
      prosecution of its counterclaims as (i) Advanced Bio-Delivery, the operating
      entity involved in this litigation, has been dissolved by operation of the
      provisions of its operating agreement and is no longer conducting business
      and
      (ii) the Company believes that the R&D facility moved all of its assets to
      another company in violation of its agreement with the Company, rendering any
      potential success with a counterclaim effectively meaningless. As a result,
      a
      judgment was entered against the Company in this matter in the amount of
      $248,807 plus attorneys fees and expenses in the amount of $134,762.




F
          - 26





PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006





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








LITIGATION
      (Continued)





The
      Company had accrued $255,891 as of March 31, 2006, and has accrued the
      additional liability of $127,678 during the year ended March 31,
      2007.




(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 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 appealed the Initial Decision to the full Commission, which eliminated
      all fines against the Company and James Hovis. The Company argued on appeal,
      among other things, that the ALJ had no jurisdiction to impose a fine against
      Mr. Hovis; that many of the ALJ’s findings were wrong in light of the evidence
      presented; that fines against Anne Hovis and the Company were unduly harsh
      in
      light of the evidence; and that the ALJ ignored the SEC’s burden of proof. As a
      result, the full Commission vacated the fines imposed by the ALJ against the
      Company and Mr. Hovis. The Commission increased the fine against Anne Hovis
      from
      $50,000 to $100,000. However, the appeal to the full Commission resulted in
      a
      net decrease of $75,000 in the aggregate fines assessed against the
      parties.





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.





F
          - 27




PHLO
      CORPORATION AND AFFILIATES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


MARCH
      31,
      2007 AND 2006




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





PAYROLL
      TAXES





The
      Company has not paid payroll taxes since the third quarter of 1999 totaling
      $399,650 at March 31, 2007. The Company has accrued estimated penalties and
      interest of $351,645 as of March 31, 2007.




LEASE





At
      March
      31, 2007, the Company is leasing office space for a term ending January 31,
      2008
      at a monthly rate of $6,150. Rent expense for the years ended March 31, 2007
      and
      2006 was $138,049 and $149,409, respectively.








**NOTE
      N - SUBSEQUENT EVENTS**





Subsequent
      to March 31, 2007, the Company issued 2,190,665 shares of Common Stock
      previously subscribed.





Subsequent
      to March 31, 2007, in connection with agreements for various services and
      pertaining to the provision of credit terms, the Company issued 37,469,696
      shares of Common Stock.





Subsequent
      to March 31, 2007, in consideration of $187,500, the Company issued 28,848,481
      shares of Common Stock and warrants to purchase 3,000,000 shares of Common
      Stock
      at an exercise price of $0.05 per share.





F
          - 28





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





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
              58
              President
                  & CEO, DirectorAnne
                  P. Hovis
              47
              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.





11




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 Mr. Hovis in the overall management of the Company. She is also
      responsible for the legal affairs of the Company, including intellectual
      property protection, securities filings, 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, 2007, 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, 2007.





SUMMARY
      COMPENSATION TABLE


Compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                Long-TermPayouts
                
                Annual
                    Compensation Awards
                
                
                
                
                
                
                
                Awards(a)
                
                (b)
                
                (c)
                
                
                
                (d)
                
                (e)
                
                (f)
                
                (g)
                
                (h)OtherAnnual
                
                
                
                SecuritiesOther
                      Name and
                
                
                
                
                
                
                
                Restricted
                
                Stock
                
                Underlying
                
                L/TIPCompensation
                
                
                
                
                
                
                
                Compensation
                
                Awards
                
                Options/
                
                Payouts
                
                AllPrincipal
                    Position
                
                Year
                
                Salary
                
                Bonus
                
                ($)
                
                ($)
                
                SARa
                    (#)
                
                ($)
                
                ($)James
                    B. HovisPresident
                    and CEO
                
                
                2006
                
                $
                303,964
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-2007
                
                $
                245,871
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-Anne
                    P. Hovis
                
                
                2006
                
                $
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-Exec.
                    Vice President
                
                
                2007
                
                $
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-
                
                
                -0-General
                    Counsel &Secretary


12





COMPENSATION
      OF DIRECTORS





The
      names
      of the directors of the Company as of March 31, 2007 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, 2007, 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.




13




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.





14




Item
      11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
      following table sets forth as of March 31, 2007, 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
                  TotalName
                    and Address of
              
              Common
                  Stock
              
              Common
              
              Preferred
              
              CombinedBeneficial
                    Owner (1)
              
              Owned
              
              Stock
                  (2)
              
              Stock
              
              Vote(3)James
                  B. Hovis
              
              
              210,459,457
              (4)
              
              35.50
              %
              
              237,347
              (5)
              
              27.22
              %Anne
                  P. Hovis
              
              
              210,459,457
              (6)
              
              35.50
              %
              
              287,347
              (7)
              
              29.25
              %Edward
                  J. Mathias (8)
              
              
              7,750,451
              
              
              1.31
              %
              
              490,708.33
              
              
              20.67
              %All
                  officers anddirectors
                  as a group(two
                  persons)
              
              
              210,459,457
              
              
              35.50
              %
              
              287,347
              
              
              29.25
              %




(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 592,884,934 shares of Common Stock outstanding as of March 31,
      2007.





(3)
      Based
      on 592,884,934 shares of Common Stock and 1,240,565 shares of Series C Preferred
      Stock outstanding as of March 31, 2007, and assuming a conversion rate of 490
      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, if applicable, the
      exercise of all warrants owned by the beneficial owner to purchase common
      stock.





(4)
      Includes 156,033,843 shares as to which Mr. Hovis has the sole voting power,
      and
      54,425,614 shares as to which he shares the power to dispose with his wife,
      Anne
      P. Hovis.





(5)
      Includes 117,485 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 54,425,614 shares as to which Mrs. Hovis has sole voting power and
      156,033,843 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, 117,485 shares as to which she shares the power to dispose
      with her husband, James B. Hovis, and 50,000 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.





15





Item
      12.
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.





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




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, 2007.





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 Corporationand
                    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.




16


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 to 18 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.





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, 2007 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, 2007
            
            March
                31, 2006Audit
                Fees
            
            $
            39,100
            
            $
            102,000Audit
                related feesTax
                fees
            
            
            -
            
            
            -All
                other fees
            
            
            
            
            
            4,400Total
                fees
            
            $
            39,100
            
            $
            106,400





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.





17




*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, 2007.


PHLO
                  CORPORATION
                
                
                By:
                  /s/ James B. Hovis
                
                James
                    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
              
              President
                  & CEO
              
              July
                  13, 2007James
                  B. Hovis/s/
                  Anne P. Hovis
              
              Exec.
                  Vice President, General
              
              July
                  13, 2007Anne
                  P. Hovis